The city owes $4,697,528 in taxes to the IRS and state after it became the victim of an embezzlement scheme
TRENTON -- Trenton's plan to float a bond to repay the state and federal government $4.7 million in unpaid payroll taxes was given the initial go-ahead by City Council Thursday night.
Between Aug. 15 and Jan. 15, the city's payroll provider, Innovative Payroll Services, failed to pay $4,697,528 in taxes to the Internal Revenue Service ($4,076,845) and the state ($574,256) that had been withheld from employees' paychecks.
Authorities allege that IPS' former CEO and president, John Scholtz, began withdrawing funds from a company trust fund for his own use. He was charged in March with wire fraud, fraud against a local government receiving federal funds and money laundering.
"The emergency appropriation is the only mechanism by which these obligations can be paid without creating a budget deficit in the amount of approximately $4,680,000," Terry McEwen, the city's business administrator said.
Thursday's votes were the first step in a multi-step process, he said.
Council approved two measures in 5-2 votes: one to authorize the emergency appropriation and another allowing the city to go before the state Local Finance Board on May 11 for the $4,725,000 refunding bond ordinance.
The Local Finance Board would set the terms of the bond -- including whether it would be for a three- or five-year period -- and if approved, the ordinance would come back before City Council for a second reading and vote.
Council members Phyllis Holly-Ward and George Muschal voted "no" on both, while Councilwoman Marge Caldwell-Wilson said she voted "yes" only because she wanted to see what the terms would be.
McEwen said the state has requested that payment be made within 30 days.
"The City of Trenton remains hopeful that these monies will be recouped through the legal proceedings at some future date, but the outstanding tax obligation remains now and must be paid now," he said. "Any future money recouped will simply refund the City of Trenton for this expenditure. And let's remember, the City of Trenton was the victim here."
He said that, in the meantime, the city has been aggressively working with the state and IRS to have the penalties and interest waived or reduced since the bond ordinance would only cover the actual cost of tax obligations.
There was a third vote to introduce the bond ordinance on first reading, but that was rejected 4-3. Caldwell-Wilson joined Holly-Ward and Muschal in the dissenting votes.
Muschal said there are still too many unanswered questions about how the city even got in the mess it's in and requested that a public meeting be held. Since Trenton was only one of 50 clients Scholtz allegedly defrauded, Muschal believes that the city's chances of recouping all the money are slim to none.
"I don't want to leave taxpayers in the blind hope that there's a chance we're going to be bringing money back," he said.
During an earlier public comment period, resident Dan Dodson echoed Muschal's concerns.
"We don't know how it happened, we don't know what controls were in place, we don't know what controls have been put in place since, we don't know what other areas of our money are at risk," he said. "And I think now that we're suffering from an almost $5 million theft of taxpayer money, that the taxpayers of Trenton deserve an in-depth explanation."
Dodson also said that the term of the bond should be no more than two or three years.
"Short-term problems, short-term shortfalls like this should be funded by short-term debts," he said. "There is no reason to think that a problem caused by a current administration ought to extend into future administrations and future taxpayers and future citizens. This is the current citizens of Trenton's problems. We should pay the penalty, not taxpayers 15 years from now."
Cristina Rojas may be reached at crojas@njadvancemedia.com. Follow her on Twitter @CristinaRojasTT. Find NJ.com on Facebook.