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City fined $94,000 for accounting 'disagreement'

An accounting dispute will cost the city of Cottage Grove nearly $100,000.

The city was recently fined $94,068 after a 2012 state audit of several of the city's tax increment financing (TIF) districts included four findings of noncompliance with state TIF law.

The audit concluded the city did not properly comply with a state law when it borrowed money from one city fund to pay for infrastructure improvements in the city's business park 11 years ago, according to a memorandum from Ron Batty, the city's Economic Development Authority attorney.

"We've been audited before and it's never been an issue," Mayor Myron Bailey said. "This was just an anomaly."

In 2000, the city, in an effort to develop the business park near Highway 61 and Jamaica Avenue, established TIF District 1-10. A TIF district is a public financing method for redevelopment that is paid for with future increased property tax revenue.

"At the time we spent a lot of money up front," said City Finance Director Robin Roland, who was not with the city of Cottage Grove when the "accounting difference" occurred.

The city borrowed money for the project from an internal fund with the expectation that the loan would be repaid with the increased tax revenue generated by the development. At that time, no formal resolution was needed to authorize the transfer of internal funds to the TIF district.

However, state law changed in August 2001 to require a resolution for such transfers but it also "ratified and approved" previous loans, grandfathering all interfund transactions made prior to that.

The city continued to follow its pre-August 2001 practices and never made a formal resolution acknowledging a transfer the following year.

"The laws changed between 2001 and 2012 when we were audited," Roland said. "(The state auditor) wanted to apply the accounting rules of today to a situation that happened 13 years ago. We think we did it right and it wasn't extra TIF money. It was TIF money the city was due."

City Administrator Ryan Schroeder said a resolution was not approved by the City Council in 2002 because the city did not need one in past years and was unaware of the new law.

"We weren't aware of the change," he said, adding that city officials try to stay on top of new state laws, but there are many each year and this one went unnoticed.

The city contested the auditor's finding so the case was sent to the Washington County Attorney's Office. The county attorney's office concluded there was a violation in 2002 and issued a final notice of noncompliance in July 2012.

In an attempt to reach a compromise, the county attorney's office offered to settle with the city for $94,068, instead of the $188,137 that the state auditor's office recommended.

"It's disappointing even though staff still believes we, as a city, are in the right," Bailey added. "But, we would spend more money fighting (the case) so the better alternative is to go ahead and pay the negotiated price and spare taxpayer dollars."

Schroeder said the fine will be paid with city revenue from developer fees, not property tax revenue.

The settlement, which was resolved last month, was added to the council's June 19 agenda only a day before the meeting. Schroeder said the late addition was the result of when the city and county were able to reach the agreement, as well as the inability to delay approval until a future council meeting.

Council members said nothing about the fine during the meeting but approved the settlement agreement 4-0; Justin Olsen was absent. The full council was aware of the issue because a closed session had been held previously to discuss the litigation, Schroeder said.

The fine is a "disappointment," Schroeder said, but he noted that it represented less than 1 percent of the city's TIF district revenue over the last 15 years.