When the Office of State Auditor found the City of Stillwater to be in violation of state Tax Increment Financing (TIF) laws over a controversial $80,000 “donation” of TIF funds the city made to a lobbying group this summer, Stillwater City Attorney Dave Magnuson convinced the City Council to challenge the Auditor’s ruling. This week, the State Auditor slapped down Magnuson’s novel legal arguments, citing numerous inconsistencies in the City’s earlier statements, and again ruled that the $80,000 lobbying expense to the Coalition for the St. Croix River Crossing “is not a qualified expenditure of tax increment” from the city’s TIF District No. 1.
In an October 21 letter, Assistant State Auditor Arlin Waelti informed Mayor Ken Harycki and the City Council that the matter is being forwarded to the Washington County Attorney for enforcement.
The matter came before the State Auditor as a result of complaints filed by myself and Stillwater historian Don Empson.
Harycki, who has been the driving force behind the $80,000 donation to the Coalition that he co-chairs, last month vowed to take the money from other city funds if they failed to convince the State Auditor of the propriety of using TIF monies.
The Coalition returned the $80,000 to the city in September. However, city officials balked at complying with the State Auditor’s initial ruling when it found out that under state statutes governing the use of TIF funds, a large portion of the money would be diverted to the county and school district rather than back to the City’s TIF fund as a penalty for the City’s misappropriation of them. No one seemed certain how much the City would lose. Figures ranging from $40,000 to $60,000 were thrown around during discussion of the matter at a special city council meeting September 13.
“I think they didn’t get it right,” Magnuson told the city council. But the OSA clearly ruled that it was Magnuson’s who didn’t get it right.
In its response to the OSA, which Magnuson wrote, the city argued that the $80,000 was not a donation after all, but rather, a “pass-through to lobbyists under an implied contract with the nonprofit.”
The OSA strongly disagreed.
“The City is wrong on the facts,” wrote Waelti. “During the OSA’s review of this matter, the City and the Coalition repeatedly and consistently described the City’s payment to the Coalition as a “donation.” The Coalition’s Executive Director, the City Administrator, and the City Attorney each described the payment as a “donation.” In addition, the City Administrator and the City Attorney each specifically denied that the City had a contract with the Coalition.”
Furthermore, Waelti noted, “The City did not pay the Coalition based upon invoices submitted by the Coalition for services rendered to the City. The city’s payment to the Coalition was purely gratuitous … Minnesota law generally requires a written itemization of claims prior to payment, and the vendor must declare that the money is owed and no part of it has been paid. The lack of supporting documentation for expenditures has historically resulted in OSA findings of noncompliance with the TIF Act. The City’s $80,000 payment was not made in response to a claim/invoice for services rendered. It was a donation, and the City has no assurance of what, if anything, it might receive from the Coalition in return.”
The City argued that it doesn’t always have contracts with lobbyists, but the OSA noted that “is also contrary to the City’s own prior conduct. According to reports the City provided to the OSA, the City has expended $728,193 for contracted lobbyists from 1996-2008.”
Waelti wrote that “The City fails in its efforts to re-characterize the donation as a pass-through to lobbyists.” But even if the OSA were to accept that argument, he continued, that action “would thwart Minnesota’s lobbying disclosure laws.” The Coalition’s executive director, Mike Wilhelmi, is a registered lobbyist for the Coalition but not the City, and the Coalition has declared all contracts with its lobbyists to be “non-public, trade secret” documents. “Under the City’s new theory,” Waelti states, “a city could hire lobbyists through another entity, and the lobbyist would never need to report that the lobbying was being done on the City’s behalf.”
The OSA also took issue with Magnuson’s contention that lobbying for the new bridge would benefit the TIF District from which the $80,000 was taken, even though the bridge is nowhere near the TIF District or even in the city, because the old lift bridge that it will replace is in the district.
“First, the City tries to divert attention from the construction of a new St. Croix River bridge located outside the City to the closing of the Historic Lift Bridge,” Waelti writes. “However, the Coalition’s stated lobbying effort is to obtain an exemption from the Federal Wild [and Scenic] Rivers Act to allow construction of the new bridge. No change in the Wild [and Scenic] Rivers Act is needed to close the Lift Bridge. Therefore, the closing of the lift bridge does not require the Coalition’s services.”
Waelti went to point out that the City’s contention that the new bridge would bring other benefits to the TIF District is off base too.
“Such an expansive use of tax increment for activities outside a city’s boundaries would be unprecedented and is not authorized by the TIF Act.”
Waelti also rejected Magnuson’s “attempts to equate lobbying efforts by the nonprofit Coalition for a new bridge located outside the City with promoting developments within a district.”
“The Coalition claimed that its efforts were attempting to influence federal legislative action by obtaining a change in the Federal Wild [and Scenic] Rivers Act—lobbying activity at the national level.” However, TIF law “to promote developments within a district does not extend to attempts to influence federal elected officials. A donation of tax increment to a nonprofit corporation that states it is lobbying to change federal law so a bridge can be constructed outside Tif District 1 is not a qualified expenditure of tax increment from the City’s TIF District No. 1.”
“The City failed to resolve the OSA’s finding of noncompliance,” Waelti concludes. As a result, this matter is being forwarded to the Washington County Attorney as required” by state law.
Read the Office of State Auditor’s final ruling letter here.