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October 31, 2000

School Official Provides Information to Auditor to Resolve Sum-In-Lieu

Will the School System Finally Receive All the Money Promised by IDB-Financed Businesses?

by Edmund Tsang

According to a staffer in the business office of the Mobile County Public School System (MCPSS), information about income derived from sums-in-lieu of school property tax received from companies that are financed by bonds issued by industrial develop boards (IDB) has been forwarded to Jo Chateau, who has been retained by the IDBs in Mobile to resolve an issue that remains unresolved since 1993, when the then-business manager of MCPSS reported at a school board meeting that few of the promised sum-in-lieu payments had actually arrived at the school.

Prior to January 1993, industries financed by IDB bonds were exempt from all property taxes, including school property tax, over the period of the bonds, as a inducement to encourage business to move to or expand operations in Alabama. But between 1989 and 1992 when Alabamaís Tax Reform Act became effective, which ended the power of IDBs to grant school tax exemption, IDBs in Mobile began requiring businesses financed by their bonds to make "sum-in-lieu" payments. However, unlike common, standard contracts, these IDB contracts made no mention of how and when the companies were to make the payments. Furthermore, some contracts written prior to 1989 refer to "service payments" in lieu of property tax. A count by The Harbinger in September 2000 indicates that eight companies had yet to make a single payment to the public school system, even though the IDB contracts of these companies included reference to in-lieu payments.

In June 2000, Ms. Chateau told The Harbinger that she was about to begin the task and had even read some materials already. But if history is an indication, there is no guarantee that the current effort to get an accounting of the delinquent payments would be any more successful than past attempts, all the way back to fall 1991 by then school superintendent Dr. Doug Magann. Nor is it clear how much the sum-in-lieu payments can contribute to a school budget that totals about $440 million in the 2000-01 fiscal year.

First Try

In January 1993 Dr. Magann told a Harbinger reporter that he began to examine the "sum-in-lieu" issue in fall 1991, when the public school system was facing a financial crisis, and he sent a school-system employee to the County Courthouse to locate and examine IDB contracts. Magann said he was disturbed by the "loose language" in the IDB contracts that made no mention of the method or enforcement of payments. Magann even petitioned the help of Mobile County Revenue Commissioner Freda Roberts, who agreed to help. Magann told Roberts that he would forward to her a report about the payments due the school system.

But Magann said he was then told to stop his pursuit, lest it jeopardize the fund-strapped school system. Magann said he was sure the local banks would deny a loan extension to prevent the school system from declaring bankruptcy, had he "turned over that rock [sum-in-lieu payments]," he told a Harbinger reporter in January 1993. He was terminated in 1992 by the school board in a controversial vote along racial lines, in which the two minority board members charged that the white majority board members met without them to plan Magannís ouster.

Ms. Roberts believed Magann may have been told to back off his collection efforts. "The report he promised [on sums-in-lieu] never came," she told a Harbinger reporter in January 1993. Ms. Robert also said then that she asked the County for help on the sum-in-lieu issue to assist the public schools, but "the County Commission told me to do my job" and not try to find the payments. (Harbinger, Vol. XI, No. 7; Jan. 12-25, 1993.)

Charles Ratcliff, then business manager of MCPSS, told The Harbinger that his office examined microfilm and other records of many IDB contracts to compile a list, but the task proved too complex. Nevertheless, Ratcliff put together a presentation during a school board meeting in March 1993 to inform the school commissioners that only two out of seventeen companies that he identified had sent sum-in-lieu payments to the school system.

Scattered Records

One of the companies identified by Ratcliff in 1993 was Tonsmeire Construction Corp where "payments we feel are due the School System but with some question due to contract wording." The lease agreement between the City of Mobile IDB and Tonsmeire Construction Corporation, dated April 1981, stated that "The Company will pay...Tax Equivalent Rent in such amounts and at such times as shall be equivalent to the ad valorem taxes which would be levied by all taxing authorities...if it were privately-owned business property fully subject to ad valorem taxation." (See excerpts from contract.) Later events would show that Ratcliff was correct in his analysis even though the in-lieu property-tax payments went mostly to the Mobile Countyís general fund and to the IDB itself, and little to the school system.

At the end of the bond period, Tonsmeire Construction Corporation decided to purchase the leased property, and it signed an agreement with the City of Mobile IDB in January, 1995 because "the parties are desirous of settling accounts with respect to the payment of the Tax Equivalent Rent." According to the 1995 agreement, both the City of Mobile IDB and Tonsmeire Construction Corporation agreed that $6,976 per year of Tax Equivalent Rent was paid to Mobile County from 1981 to 1986, and 1989 to 1991, and that $6,750 was paid to the Mobile County School Board in 1992 and $6,750 was paid to the City of Mobile IDB in 1994. The agreement also stipulated that Tonsmeire Construction Corporation would pay another $23,000 to the City of Mobile IDB to settle the years between 1981 to 1995 that the two parties could not agree upon regarding payment of Tax Equivalent Rent.

Magann said it was difficult to get a true accounting, because the IDB contracts were "scattered" and difficult to locate, and some probably were not even in the public domain. A case in point is Gulf Lumber, which was on a list compiled by The Harbinger based on information provided by Mr. Ratcliff, a court record search, and minutes of IDB meetings to identify those IDB-financed companies that had not yet made one single sum-in-lieu payment to the school. The minutes of the November 26, 1990 meeting of the IDB directors states: "Gulf Lumber is requesting an inducement resolution for a $2,000,000 issue for improvements to their existing mill. AmSouth Bank is the Trustee...The company will make a service payment equal to the local school tax portion." The Harbinger was unable to locate a lease contract for this project at the probate court.

Loretta M. Byrd, speaking for Gulf Lumber, said the company did not pursue the bond issue mentioned in the November 1990 minutes, but it received IDB financing in 1985, thus supporting Magannís assertion that not all IDB contracts could be found in the probate court, since school employees as well as Harbinger staff carried out independent searches of records at the probate court and did not find the 1985 contract with Gulf Lumber.

Ms. Byrd said in a telephone interview in October that Gulf Lumber received only exemption from sales tax associated with construction materials in the 1985 contract and began paying ad valorem taxes when construction of project was completed. "When I joined Gulf Lumber in 1989," she said, "I know we were already paying ad valorem taxes." She added that the property was assessed and "lease-hold improvement tax" was paid to the county tax commissionerís office.

The case of Gulf Lumberís paying ad valorem tax as described by Ms. Byrd contradicts the benefits of IDB financing to attract businesses to locate to or expand operations in Alabama, which exempt not only sales tax during the construction phase, but also the ad valorem taxes to the city, county, state, and school system during the length of the bond period. Because Gulf Lumber seems to contradict the normal IDB process, a request was made to Ms. Byrd to view the IDB-Gulf Lumber contract. Ms. Byrd said last week that the contract could not be located because they recently moved their office.

The Harbinger asked Jo Chateau, the auditor hired to examine the IDB issue, in June 2000, what materials she would examine for the audit. Ms Chateau referred the inquiry to Jim Apple of the Mobile Area Chamber of Commerce and suggested a conference call to discuss the details of the audit. Several attempts to reach Mr. Apple since June, including a telephone call last week, to arrange for such a conference call with Ms. Chateau were unsuccessful by press time.

Less Ambiguous Evidence

The IDB contract with OíNeal Steel, Inc., which The Harbinger identifies as one company delinquent on sum-in-lieu payments, is very specific about the school tax. Section 11.10. of the September, 1990 contract states: "the Lessee shall pay the following amounts (the "Service Payments") during the Lease Term: (a) On or before October 1, 1991, and on or before October 1 of each year thereafter during the Lease Term, the sum equal to (i) the amount presently payable as local property taxes with respect to the Project as presently existing and (ii) the amount which would be payable as local property taxes for public school purposes."

Another company identified by The Harbinger as delinquent in their in-lieu payments is The Belcher Company of Alabama, Inc. Its 1982 lease agreement with the City of Mobile IDB states, in Section 5.15 Payments in Lieu of Taxes: "Beginning of November 1, 1982, in addition to the Lease Payments hereunder for the use and occupancy of the Project, the Company will pay to the hereinafter identified taxing authorities...payment in lieu of taxes ("Payments In Lieu of Taxes") in such amounts and at such times as shall be equivalent to the aggregate ad valorem taxes which would be levied by all taxing authorities against or with respect to the Project if it were then privately-owned business property fully subject to ad valorem taxation."

Robert Meador Warehousing and Distribution, Inc., also identified by The Harbinger as a company not making in-lieu payments to the school system, had a $1 million financing from IDB of the City of Mobile in 1985. Its lease agreement states, in Section 5.10 Municipal Service Fee, "The Lessee will, nevertheless, pay to the appropriate taxing authorities on or before December 31 in each year during the term hereof beginning with 1986, a municipal service fee in an amount equal to the full amount of ad valorem property taxes that would otherwise be payable with respect to the Project if the Project were fully subject to ad valorem taxation."

Another 1985 contract, with J. William Blevins, contained identical language regarding paying a "Municipal Service Fee." J.William Blevins is also on the Harbinger list of delinquent in-lieu payments to the school system. When contacted by a Harbinger reporter in 1994, Bill Blevins said, "Iíve never received a notice" about the in-lieu payments. He added that he was not "aware of the language in the contract. Iíll have to look at the contract." J. Williams Blevins was among the companies identified by Mr. Ratcliff of the school system as "all with initial payments due prior to 3/1/93" and with "payments which we feel are due the school system but with some question due to contract wording."

Other Tries for an Accounting

N.Q. Adams, a former school commissioner as well as chairman of the finance committee of the school system between 1989 to 1993, until he decided not to run for re-election in 1994, told the Harbinger in 1993 that he too was researching the sum-in-lieu issue. He said no one attempted to block school superintendent Dr. Magann from pursuing the sum-in-lieu matter. Adams was also a director of the Mobile IDB until November 1992, and until he retired in 1993, a president for the southern region of AmSouth Bank, which would have been the trustee bank for Gulf Lumber in its IDB request with the City of Mobile IDB, had Gulf Lumber moved forward. Adams was identified by the minutes of the City of Mobile IDB as being present at meetings when a total of eleven contracts were approved with sum-in-lieu promises but that had not made any payment to the school by March 1993. Adam was also identified by minutes as present at the November 1991 meeting of IDB directors where a committee was appointed to determine the status of sum-in-lieu matters. When asked in 1993 about the status of the committee investigation, Adams said he was still doing research on it.

Walter Hovell, former CEO with Mobile Gas Service Corp. and Mobilian of the Year in 1993, also tried to get an accounting. The last time Mr. Hovell was contacted by the Harbinger before he stepped down as president of the City of Mobile IDB was in March 1994. Through his secretary, Hovell said he was "still working on completing the report. It is in the best interest not to discuss it until the report is completed." J. Bruce Jones, a former vice-president of Alabama Power, was the next head of the City of Mobile IDB, but he too was no closer in producing the report on sum-in-lieu by the time he stepped down as its president. In March 1996, he told The Harbinger that he still had "nothing to report." Collecting the sum-in-lieu payments "prove to be an arduous task," Jones told The Harbinger then. "It took a few years for this matter to get to where we are today, so it might require a few more years to achieve success."

Charles Ratcliff of the school system also tried, with the help of the school board attorney Robert Campbell. They wrote to the IDB requesting "endorsement" so that the school system could directly collect from the delinquent companies. Ratcliff told The Harbinger that by the time he retired from MCPSS the IDB had turned down the request.


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