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Payday Blues

And I won’t tell ’em at the bank

What I’m gonna do with all my dough

I’ll just smile and tell ’em thanks

For it’s better that they shouldn’t know.

“Payday Blues,” Dan Hicks 1973

The City of Trenton is having some Payday Blues of its own. And the Administration apparently thinks it’s better that we shouldn’t know.

A few news reports over the last several days – the first ones broke last Friday evening, so you know someone wanted to bury the news – have been reporting that the City has been consulting with the Mercer County Prosecutors Office (MCPO) about possible shenanigans involving the City’s outside payroll service. The Trentonian’s David Foster has written a pair of stories (the second one appeared yesterday) narrating that as much as $8 Million Dollars paid by Trenton to Innovative Payroll Services (IPS), intended to cover employee payroll taxes to the State of New Jersey, has gone missing. That’s a problem.

How big a problem? Cristina Rojas explained in her Trenton Times story last Friday that “Under the [City’s] proposed $216.4 million budget for the 2016 fiscal year, salaries make up 38.1 percent.” That would mean that the City’s payroll is  approximately $82 Million annually. At an average NJ tax rate (none of the articles have yet suggested that any Federal tax payments are missing) of 3.5%, that would suggest that state taxes are unpaid for approximately $228 Million of city payroll.

To put it another way, if the figure of $8 Million is correct, and if it represents only unpaid New Jersey income taxes, then that means that the City hasn’t paid the state in about three years. Uh huh. Yeah. Do the math.

I can only hope that some of these numbers are incorrect! I sure to hope to read that the amount of missing money is lower than $8 Million. Or that the sum also represents payments not made to the Federal government as well. Or that the sum includes payments for employee pensions as well. It’s mind-boggling to think that something like this has been going on for THREE YEARS without anyone noticing. Not anyone in the City, nor anyone in the State.

In David Foster’s Friday story, he wrote “A spokesman for the New Jersey Department of Treasury declined to provide how much money the city owes the state in payroll taxes. Sources said the department reached out to the city to inquire about nonpayment of taxes.” It sounds like the Treasury Department may have first gotten this ball moving. Is it possible that the State didn’t notice any payment of payroll taxes attributable to the City of Trenton for three years? It’s hard to conceive. However, it’s certainly possible to imagine that the City may have not noticed, considering the incredible amount of chaos, carnage and disruption City Hall has experienced over the last half-dozen years.

Outside payroll services are used by companies large and small, as well as governmental entities. ADP is the largest and most well-known; on its website it describes itself as a 60-year-old worldwide company serving more than 610,000 clients. IPS is a good deal younger and a good deal smaller. According to its website, the West Berlin, NJ, company has been around since 2006. According to the Trentonian, IPS “has provided payroll services to the city since May 2009, when former Mayor Douglas Palmer’s administration added a last-minute resolution on the agenda to award the contract that council unanimously approved, according to the city’s meeting minutes. When reached by phone last Friday, Palmer did not recall the company nor the owner.”

Up until today, everything about this case is pretty much pure speculation. No one is saying Nothing! Nothing has been confirmed by anyone on the record. Last week, the MCPO told The Times “At this point in time, we are waiting for the city to provide us with additional information.” A spokesperson for the  Treasury Department declined to comment, deferring to the City. Trenton’s press officer, Michael Walker, also declined to comment.

Trenton’s City Council discussed the matter last Thursday night, in a closed Executive session. It appears the Councilmembers did so in violation of Open Public Meeting rules. Member Phyllis Holly-Ward was quoted last week in Ms. Rojas’ article saying that the closed session was authorized for one matter, but the IPS issue was brought up by Council President Zachary Chester and City Attorney Marc McKithen without notice to the other Members. According to Holly-Ward, “It’s a very serious subject. It appears that it was an intent to hide it from the public and press.”

Well, the press and the public have the story now, and there are a lot of questions. Understanding that the matter may now be a criminal investigation by the Mercer Prosecutor’s (at least!) Office, there’s obviously a lot that cannot be discussed. Yesterday in the Trentonian we read that IPS’s president John Scholtz has lawyered up. He won’t be talking.

But there is still a lot that can be said, and a lot that should be done, by the City of Trenton.

Without getting into particulars about IPS, the City should announce what steps it is making to change payroll services.

The City and/or State should reassure City employees and taxpayers – to the extent that they can – that even if required tax payments to the State have not been made for several months or even years, that individual employees will not be held liable for those missing payments.

The City should immediately disclose the scope of the problem; if not to talk about the amount at stake, at least to the extent of acknowledging if this problem is limited to payments missing to the State of New Jersey only, or to the Federal government. Are we talking about income tax withholding only, or also pension payments.

The crucially important thing to be done is to level with the City’s employees and let them know they will not be personally on the hook for any missing taxes.Beyond that, there are many, many other questions that need to be answered.

First and most important, was IPS bonded for any failure of service? The IPS website statesIPS is proud to be SAS70 certified. What does this mean to you? It means IPS has taken the extra step in ensuring our clients piece of mind and security that our practices have been audited and found in compliance with industry standards.” But that only speaks to auditing of financial books and records; the website is silent as to whether IPS is bonded. As one example, another NJ-based payroll service [selected by this writer at random] explicitly states on its website, “PTM provides clients of Advanced Payroll Solutions, LLC (“Advanced Payroll”) with a Fifty Million Dollar ($50,000,000) fidelity bond. Payroll clients are covered by this bond, as PTM electronically moves the tax monies to the authorities on their behalf.”[Emphasis mine – KM]

I don’t see anything about bonding on the IPS website. How exposed were they, and now Trenton, to losses?

Second, what kind of confirmation would be sent by IPS to Trenton of its periodic tax deposits? A 2013 article in the Baltimore Sun, reporting on a similar failure by a Maryland payroll company to make tax payments quotes the local US Attorney on the importance of monitoring one’s payroll service:

“You need to verify that the payments are made as if they were made by a bookkeeper in [your] own office,” said Rod J. Rosenstein, the U.S. attorney for Maryland. “The first time the payments are not made on time, it’s a pretty good idea to get a new payroll company.”

The IRS last year started requiring payroll service providers when hired — and quarterly thereafter — to remind the employer that it is ultimately responsible for tax withholdings, said Pete Isberg, president of the National Payroll Reporting Consortium, whose members include the largest payroll service providers.

Payroll service providers also must tell customers they can check online to make sure their withholdings have been forwarded to the U.S. Treasury Department, he said.   [Emphasis mine – KM]

Employers can do this through the government’s Electronic Federal Tax Payment System at eftps.gov. The site will post when the government receives the taxes, usually a day after receipt, experts said.

This article talked about a Maryland vendor, and procedures involving US tax payments. But the principle is still valid for us: How vigilant was the City of Trenton in verifying that its payroll service was making the required payments on its behalf since 2009?

However this story unfolds, it will likely take a long time to resolve. An example of that comes from my industry. In 2008, the Axium entertainment payroll service failed, filing bankruptcy liquidation while it, too, owed, large amounts of back taxes, estimated at the time in the tens of millions of dollars. From January of 2008, it took until June 2014 for criminal charges to be filed. John Visconti was charged at that time in Federal court with tax evasion, “accused of taking millions of dollars from the company he led and failing to report it to the U.S. Internal Revenue Service as income,” as reported in Bloomberg Business. As of that time, the Axium company bankruptcy was also described as “still pending.”

IPS is much smaller than Axium was. But it is clear that these things take years to resolve. This one will be no different. There will be investigations. A company may fail. People may lose their jobs. Some may go to jail.

The matter of IPS and Trenton is just beginning. It’s not going to end soon. Without compromising confidential information of an investigation just beginning, the City of Trenton and the State of New Jersey need to publicly and immediately acknowledge the problem and disclose what it can.

Most pressing, the City needs to reassure its employees that they will not be held liable for any missing income tax payments on their behalf. Right now.

UPDATE: 2/11/16 3:50 PMThe Mercer County Prosecutors Office announced the launch of a criminal investigation this afternoon. Still no word on any kind of announcement to City employees about any possible personal exposure for unpaid taxes, nor any word on whether IPS was bonded.

PTM provides clients of Advanced Payroll Solutions, LLC (“Advanced Payroll”) with a Fifty Million Dollar ($50,000,000) fidelity bond. Advanced Payroll Clients are covered by this bond, as PTM electronically moves the tax monies to the authorities on their behalf. – See more at: http://www.advpayrollsolutions.com/bonding.html#sthash.3U7dUwGk.dpuf
PTM provides clients of Advanced Payroll Solutions, LLC (“Advanced Payroll”) with a Fifty Million Dollar ($50,000,000) fidelity bond. Advanced Payroll Clients are covered by this bond, as PTM electronically moves the tax monies to the authorities on their behalf. – See more at: http://www.advpayrollsolutions.com/bonding.html#sthash.3U7dUwGk.dpuf
PTM provides clients of Advanced Payroll Solutions, LLC (“Advanced Payroll”) with a Fifty Million Dollar ($50,000,000) fidelity bond. Advanced Payroll Clients are covered by this bond, as PTM electronically moves the tax monies to the authorities on their behalf. – See more at: http://www.advpayrollsolutions.com/bonding.html#sthash.3U7dUwGk.dpuf
PTM provides clients of Advanced Payroll Solutions, LLC (“Advanced Payroll”) with a Fifty Million Dollar ($50,000,000) fidelity bond. Advanced Payroll Clients are covered by this bond, as PTM electronically moves the tax monies to the authorities on their behalf. – See more at: http://www.advpayrollsolutions.com/bonding.html#sthash.3U7dUwGk.dpuf
PTM provides clients of Advanced Payroll Solutions, LLC (“Advanced Payroll”) with a Fifty Million Dollar ($50,000,000) fidelity bond. Advanced Payroll Clients are covered by this bond, as PTM electronically moves the tax monies to the authorities on their behalf. – See more at: http://www.advpayrollsolutions.com/bonding.html#sthash.3U7dUwGk.dpuf
PTM provides clients of Advanced Payroll Solutions, LLC (“Advanced Payroll”) with a Fifty Million Dollar ($50,000,000) fidelity bond. Advanced Payroll Clients are covered by this bond, as PTM electronically moves the tax monies to the authorities on their behalf. – See more at: http://www.advpayrollsolutions.com/bonding.html#sthash.3U7dUwGk.dpuf

1 comment to Payday Blues

  • ed.w

    You have to wonder, IF someone looked into it, that the culture of city hall either induced a financial incentive to look the other way or a level of fear to expose this. I will be looking forward to the investigations report, if there is ever going to be one.