Flood victim threatens lawsuit over alleged misspent recovery funds

A Cedar Rapids flood victim, concerned about the distribution of tax revenue earmarked for flood recovery, has put the city on notice that she intends to file a lawsuit.

Notice of demoltion at a home in Cedar Rapids' Time Check neighborhood (photo by Lynda Waddington/The Iowa Independent).

Kathy Potts, a former chairwoman of the Republican Party of Linn County who has made unsuccessful bids for the state House and Cedar Rapids City Council, made the letter she wrote to city officials publicly available Monday. She believes that the city made clear through both ballot language and press releases their intent for the revenues from a 1-percent local option sales tax, and that now city officials are attempting to circumvent promises made to flood victims and voters.

“Enough is enough,” wrote Potts. “Today is the day that I have decided to file a lawsuit against the City Council and your misappropriations of the [Local Option Sales Tax] revenue.”

The tax, which was approved by voters throughout Linn County in the spring of 2009, was a special revenue outlet designed by the state legislature for counties that had been given a presidential disaster declaration in 2008. Unlike other local option taxes, the municipalities and unincorporated areas within Linn County each developed their own earmarks for the proposed revenue, which had to then be approved by voters.

Potts and other flood victims upset with the city’s handling of the LOST revenues, point to the wording of the ballot approved by Cedar Rapids voters on March 3, 2009. According to the text of the ballot, the city’s intention was to use 10 percent of the revenue for “property tax relief” and the remaining 90 percent for “the acquisition and rehabilitation of flood damaged housing caused by the flooding of 2008, and matching funds for federal flood dollars to assist with flood recovery or flood protection.”

On Feb. 20, 2009 — just days before Cedar Rapids residents were to vote on the local option tax — city officials issued a press release that explicitly confirming for jittery residents that the “number one priorities are buying out significantly flood-damaged homes and rebuilding and repairing all the other flooded homes.”  City Councilmen Chuck Wieneke and Justin Shields, as well as former Mayor Kay Halloran, were quoted in the release regarding use of the revenues for flooded properties.

Cedar Rapids Local Option Sales Tax Election Sample Ballot, March 3, 2009.

“That’s what everyone thought. That’s what we were told and we trusted that it was true,” Potts told The Iowa Independent during an interview. “We were told that the tax revenues would be used to either buyout or restore flooded homes, but that isn’t what has happened.”

In addition to her letter to city officials, Potts included e-mail correspondence with Drew Casey, who has served a brief stint as acting city manager earlier this year. In that correspondence, Casey says 10 percent, or $1.7 million, of the local option tax funds have been obligated for the fiscal year 2011 budget. The items that have been obligated in that budget, according to Casey, include “utilities for temporary offices, flood recovery director expenses, grant programming, legislative cost, [and] city personnel for flood recovery.”

Potts distributed that information to several state legislators and asked for their guidance on what citizens could do to ensure that the local option tax funds were being distributed correctly. State Rep. Renee Schulte, a Cedar Rapids Republican, forwarded a two-paragraph response from Tony Phillips, an Iowa House Republican research analyst:

The Legislature’s only role in this was the passage of SF 44 which sped up the process for cities in a disaster declared area to have a vote on a local option sales tax. It is important to note that House Republicans foresaw this exact program and offered amendment H- 1007 which would have limited the use of the funds to disaster recovery. That amendment was defeated by House Democrats.

… Clearly what the public voted on was 10% for property tax relief and 90% for acquisition and rehabilitation of flood damaged housing and to leverage federal funds. Matt Hinch checked with revenue and other than the requirement for the revenue purpose statement on the ballot, there’s no mechanism to challenge the use of funds for uses not identified on the ballot. It would take another referendum to get rid of the new tax. It may ultimately take the threat of a lawsuit for the city council to consider otherwise if they are in fact using the funds outside of the apportionment identified on the ballot.

According to follow-up correspondence from Cedar Rapids City Councilman Kris Gulick sent to Potts, the expenditures highlighted by Casey were appropriate use of the 10 percent of local option tax revenues allotted for property tax relief because such expenses would have been paid by property tax increases had there not been LOST revenues available for that purpose.

Within the past week, city officials announced a new disaster recovery program that allows homeowners up to $10,000 to replace personal possessions lost in the 2008 flood. The city expects the program to assist about 1,400 residents within the designated greenway, construction and revitalization zones. Although this allows city residents that had previously been barred by geography from receiving disaster assistance to receive funds, the wording of the program limits distribution only to homeowners and not renters. Roughly $10.5 million in revenue from the local option sales tax will be used to fund the program.

On Tuesday six of the seven members on a citizen oversight committee for the tax revenue determined that such a use is not appropriate based on ballot language passed by voters. The Oversight Committee, which was established by the City Council, can essentially only offer guidance and has no authority to stop any action approved by the council.  City officials acknowledge that the program is a broad reading of the portion of the ballot language that addresses matching federal funds, but argue that such a program falls within the “spirit” of what voters approved.

Documents available through the Iowa Department of Revenue indicate that city councils or other eligible municipalities can pass an ordinance to change use of local option tax revenue. But according to a spokeswoman in the Cedar Rapids City Clerk’s office, no ordinance has been passed by the City Council in 2009 or 2010 that would have changed the distribution of the local option sales tax revenues from what was originally listed on the ballot.

In the months following the historic June 2008 floods, some of the hardest hit residential areas of the city were placed in certain zones that restricted home owners’ access to recovery funds. The zones — known as greenway, construction and revitalization — were being discussed by city officials months prior to the special local option tax being approved by the legislature.

In early December 2008, a private firm contracted by the city — Sasaki Associates Inc. — presented officials with the “Framework Plan for Reinvestment and Revitalization,” which included references to a “green” area. On Dec. 10, 2008, the city approved a resolution to create a “Preferred Voluntary Acquisition Plan,” which detailed the three zones. The plan itself, which established the zones, was adopted by the City Council on Feb. 25, 2009 — one week before voters approved the local option sales tax.

“I just don’t think that’s what the people of Cedar Rapids voted for,” Potts said. “We didn’t approve the local option tax to help only certain areas of the city. We passed it to aide all flood victims throughout the city. When the people cast their ballot, they were thinking about those residents in the hardest-hit areas of the city — the same residents that have been denied these funds by city officials.”

Although Potts’ letter to the city makes clear that her intention is to file a lawsuit, there is no current lawsuit forthcoming. She has circulated the information she has collected to various advocacy groups and legal teams in hopes that someone will be willing to launch a formal suit.

The local option sales tax has brought $19.5 million to the Cedar Rapids thus far and is expected to provide $78 million in total revenue. To date, only about $270,500 has been spent.

(Editor’s note: Kathy Potts has been an unpaid guest blogger on Essential Estrogen, reporter Lynda Waddington’s personal website. Waddington was one of several local journalists who received an e-mail message from Potts that included the text of her letter.)