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A much anticipated Tax Increment Financing (TIF) audit settlement has been reached as Gaylord’s City Council recently agreed to accept a $377,821 penalty for various violations.

City Attorney Doug Nesvig and Sibley County Attorney Dave Schauer stipulated the settlement agreement which was unanimously approved November 1st by council members and November 6th by Gaylord’s Economic Development Authority (EDA). The agreement was approved by Judge Tom McCarthy last Tuesday.

Gaylord has a history of establishing TIF districts which are used to entice business development (see panel on right). In March of 2005, the Office of the State Auditor determined that the City had unauthorized, improperly and inadequately documented expenditures for TIF Districts established from 1991 to 2002. The violations carried a maximum penalty of more than $4 million.

Why the City of Gaylord was audited is unknown, according to City Attorney Doug Nesvig.

Initially, the Office of the State Auditor listed 13 areas of non-compliance. Five of those areas were withdrawn after City Administrator Lonny Johnson submitted a response to the State Auditor. Johnson’s report explained why certain acts of non-compliance by Gaylord’s (EDA) were conducted.

For the past several months, Nesvig and City staff have been researching documents in an attempt to satisfy the outstanding non-compliance issues. According to Nesvig, this involved going through numerous documents and journal entries.

Nesvig said the process took time because of a change in the City’s accounting system. This resulted in “inconsistent codes” but all the records were there, Nesvig explained.

“The City and EDA records were extremely well kept,” Nesvig said. “It was a time consuming job but we could find every dime. We never saw any wrongdoing in the process.”

Nesvig added that all expenditures were proper but just didn’t comply with TIF requirements. Because it is TIF money, the City needs to be very particular on how it is used, he said.

Eventually, Nesvig and City staff were able to produce records that satisfied most of the documentation violations.

The largest non-compliance issue remaining involved a TIF district established for the Gold Leaf Inn & Suites. According to Nesvig, TIF was not allowed in this case because a motel is not a building specified in the TIF act. There was a similar non-compliance issue with the FSA office. According to Nesvig, the motel TIF district will have to be decertified.

Nesvig stressed that there was no wrong doing among any individuals. “The EDA simply didn’t follow all the TIF rules,” he said.

In his response to the Office of the State Auditor, Johnson explained that certain acts of the EDA were done on the advice of the City’s professional consultants. “It wasn’t all the fault of past City Administrators or members of the EDA,” Johnson said.

Nesvig said the advice from its professional consultants was only part of the problem. “There is enough blame to go around,” he said.

Johnson said he has no knowledge of any insurance the City may have to cover the penalty fee. As far as recourse against the financial consultants, Nesvig said that is yet to be determined.

The City has contained its spending during the course of the audit. According to Johnson, bonding has been restricted because the audit may have affected the City’s credit rating which has improved in recent years.

A six month moratorium is attached to the penalty, according to Nesvig. During this time, the City can’t create new TIF districts or add to a district. The Lakeview nursing home is exempt from this stipulation, he explained. The City Council is considering selling Lakeview Homes and TIF is part of the current proposal.

Along with abiding to the moratorium, the City must recertify non-complying TIF Districts and look at its bookkeeping procedures, according to Nesvig. He said the City needs to become more aware of TIF expenditures because they carry special consideration.

The $377,821 fine will be split up between Sibley County and the Sibley East School District. According to County Attorney Dave Schauer, Sibley County will receive 61% of the fine and the school 39%. These percentages were derived by using tax extension rates for the county and school from 1991 to 2005, Schauer explained.

Mayor Doug Quast said he is glad a settlement has been reached but believes the fine is “still pretty stiff.” “We took well paid professional advice that led us into suspect TIF districts,” Quast said.