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City Council expense funds questioned

Sun Staff

As part of their months-long investigation into the Baltimore City Council, federal prosecutors are examining an unusual expense account system that pays council members $5,000 a year with no oversight and permits them to pocket money they don't spend on city business.

The expense accounts, which cost taxpayers almost $100,000 a year, have been used by the council for at least 20 years, with few taking notice. But in recent months, the accounts have drawn the attention of U.S. Attorney Thomas M. DiBiagio, whose office began a grand jury investigation of the 19 council members' finances in September.

DiBiagio won a guilty plea this month from former Baltimore Police Commissioner Edward T. Norris, who violated tax laws by failing to report as income money from an off-the-books city expense account he used for personal luxuries.

Now DiBiagio is looking at the council's handling of the largely unregulated expense accounts, according to a federal subpoena, council members and their attorneys.

In addition to attracting the scrutiny of prosecutors, the council's expense accounts are raising the eyebrows of groups that monitor government spending and the fiscal watchdogs of the city and state.

"I've never heard of such a system," said Mike Taylor, past president of the National Association of Local Government Auditors. "To me, it doesn't make good business sense. Just saying, 'What you don't spend you can keep for yourself' seems kind of odd."

Each council member gets a $1,250 check every three months to cover incidental expenses. City documents say the money can be spent on "travel, transportation, gifts, entertainment, etc.," but the city sets no other guidelines and does not require members to show receipts to city financial officials.

Those checks are in addition to the $48,000 annual salary of each member and the approximately $80,000 a year each gets for office operations.

That money that goes for staff, phone bills and other items, and is kept in a city account, according to traditional budget procedures.

Unlike their counterparts in New York City, Chicago and several other cities, Baltimore council members are not required to submit receipts before they are reimbursed for business expenses. Instead, they receive quarterly cash advances and sign annual forms swearing that they used the money for business expenses.

If a council member reports spending less than the $5,000, the city does not require repayment but reports the difference to the Internal Revenue Service as income.

System defended

Council members defend the expense account system as a long-standing practice and say they spend the money only on legitimate council business, although some said they do not keep records.

"I don't have anything to hide," said City Council President Sheila Dixon, who as head of the legislative body receives an $80,000-a-year salary, more than $500,000 a year to run her office and a $7,000 expense account. "These perks are perks that everyone has gotten over the years."

Council members declined The Sun's request that they disclose receipts and records of how they spent the money, saying they were following the advice of their attorneys.

The Maryland attorney general's office said those documents are public records, but city Solicitor Thurman W. Zollicoffer Jr. said he won't force council members to reveal them because they might want to assert their Fifth Amendment right to not incriminate themselves.

"I am not going to step on anyone's rights during a criminal investigation," he said.

Last year, two council members - Nicholas C. D'Adamo Jr. and Keiffer J. Mitchell Jr. - reported less than $5,000 in business expenses. The city reported the unused portion as income to the IRS. Both logged their expenses to the penny, D'Adamo listing $2,832.45 and Mitchell reporting $1,257.22.

"My parents always said two people you never want working against you are the IRS or the FBI," D'Adamo said.

Six council members reported exactly $5,000 in business expenses, and eight reported more than that. Three council members, Kwame Osayaba Abayomi, Edward L. Reisinger and Agnes Welch, received the money but did not fill out a required section of the form asking how much they spent, instead checking a box saying it was more than $5,000.

The IRS requires expense money to be reported as taxable income if employees do not provide their employers with receipts or a detailed accounting of how they spend the money, said Jim DuPree, a spokesman for the IRS in Maryland.

"If you don't report how you spend the money to your employer, then it should show up on your W-2 forms as taxable income," said DuPree, who was speaking generally and declined to comment directly on Baltimore's handling of expense accounts.

Four accountants interviewed by The Sun said the city's system appears to violate federal tax laws. They said all council members should be paying taxes on the entire $5,000 because they don't explain to the city or the IRS how they use the money.

"The employee can't just say, 'I spent the money.' They have to tell their employer how they spent the money," said Gilbert Garczynski Jr. of Parkville, a tax specialist for 15 years.

City Comptroller Joan M. Pratt and state Comptroller William Donald Schaefer criticized the system.

City review urged

"The city should review the documents to see how the money is spent and see if any money should be given back," Pratt said.

Schaefer said he didn't remember anything similar when he was council president in the 1960s. "Back then, all we got was two or three sheets of postage stamps, not $5,000," Schaefer said. "If they spend that money, they ought to have receipts for it. But to just take the money and put in it in their checking accounts, that's income."

At least as far back as 1983, the city gave council members each about $2,000 a year for incidental expenses, said former Councilman Joseph T. "Jody" Landers III. He said he reported the entire amount to the IRS as income.

Legal experts said prosecutors could be building a case that council members failed to report the money as taxable income. But some cautioned that the amounts are so small that a grand jury might not consider it worthy of a federal case.

Andrew C. White, a former federal prosecutor, said DiBiagio's office would be justified in examining the council's records.

But DiBiagio would have a hard time proving that council members made false statements on their tax returns, White said, especially if they do not keep records.

"If the records are not kept in an appropriate way, that's not proof of tax evasion," White said

The U.S. attorney's office, which refuses to comment on the investigation, subpoenaed all 19 council members in September for five years' worth of financial information. Since then, prosecutors have specifically requested records related to the expense accounts, council members said.

Council members said they handle their $1,250 quarterly expense checks in different ways. Some deposit them in personal checking accounts. Others set up separate accounts.

Councilman Bernard C. "Jack" Young said he created a checking account for the expense money. Last year, he reported receiving $5,000 from the city and spending $5,150. He said he gave some of the money to churches, bought public service advertisements in church bulletins and community newsletters, and helped needy people pay for rent, utilities and tuition. He would not provide specific examples or show records.

"We haven't done anything wrong," Young said. "We're not spending it on ourselves. It shouldn't be reported as income to the IRS. Hell, no."

Councilwoman Pamela V. Carter said she does not keep a separate account. "I keep it in my checking account so I don't have to keep up with two" accounts, she said.

Annual form

Several council members contend that the city never made it clear that they must keep records. But they sign a form every year on which they promise to personally maintain records, although they're not required to show them to the city.

The form reads: "Actual business expenditures are substantiated by receipts, invoices, canceled checks, bank statements, daily logs, appointment calendars, etc., which I maintained and will retain in the event of future examination."

City Councilwoman Rochelle "Rikki" Spector said she has not kept records of how she spent the money. She mingled it with personal money in a checking account, she said.

"I did not keep receipts, but I'm certain if I go through all the charges in my checkbook I can pull out $20,000 in expenses," Spector said. "My council expenses in a year's time are close to $15,000 to $18,000 a year."

Her estimates differ from the amounts she reported on the annual forms she files with the city, on which she said she had $5,100 in business expenses last year, $5,100 in 2002 and $5,750 in 2001.

Councilwoman Helen L. Holton, an accountant, said, "I do not use this money for my own personal expenses. ... This money is for community events, tickets, T-shirts, things you're doing for kids in the community and nonprofit groups that are doing things."

James Browning, executive director of the watchdog group Common Cause Maryland, said it is inappropriate for council members to dole out expense money without oversight.

"If council people want to help their constituents, they should make formal requests," Browning said. "It shouldn't be part of some slush fund.

"It sounds like the council is being asked to police itself, and given their track record, they're not qualified to do that," he said, referring to rulings in October by the city's ethics board that council members broke ethics rules by hiring siblings and accepting free parking passes from a company doing business with the city.

The lack of oversight of Baltimore's council expense accounts contrasts with the system used by Mayor Martin O'Malley. Like mayors before him, O'Malley keeps his expense money in a city account, not a personal checking account.

Mayor submits receipts

He submits American Express credit card receipts to the city and returns unused portions of his $15,000 annual expense allotment to the city's general fund at the end of the year, city officials said. Last year the mayor spent $12,360 on travel, food, gifts and other expenses.

O'Malley said it is not his place to call for more fiscal oversight of the council's expense account system.

"They're a separate branch of government," O'Malley said. "I think traditionally there's been some deference and respect to people who have been elected independently. ... They're all adults, and they're responsible for keeping proper records and reporting it properly."

Council members in other Maryland jurisdictions, including Baltimore, Anne Arundel, Howard, Montgomery and Price George's counties, do not have expense accounts. They must provide receipts to financial officials before being reimbursed.

Baltimore County Councilman T. Bryan McIntire and several officials from other jurisdictions said they were surprised by the city's system. "It's certainly a loose way to do business," McIntire said. "It's irresponsible, almost. Absurd."

City Finance Director Peggy J. Watson said she doesn't know why the city does not report the whole $5,000 each council member receives to the IRS as taxable income or require council members to file receipts to get reimbursements, as she and other city employees are required to do.

But she said council members have no excuse for failing to keep records on how they spend the money.

"Bad on them," she said. "This kind of position requires you to be engaged in the process. You have to step up to the plate and take responsibility for things."

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