On the first day of his administration, Mayor Sandy Stimpson says his Executive Director of Finance Paul Wesch walked into his new office to find a pile of letters from the Internal Revenue Service indicating that outgoing Mayor Sam Jones’ administration misused a tax-free bond, something that could’ve cost the city as much as $45 million.

“There was about a 5-inch file with a cover letter (outlining) the allegations of malfeasance over bond allocations,” Stimpson said in a phone interview. “Mayor Jones did not spend all the money as outlined in the contracts.”

Records provided by the city of Mobile show a decades-long practice of carrying over tax-free bond balances from year to year, which put the city on the wrong end of a 2013 IRS investigation into the issuance of a 2006 bond worth roughly $64 million.

The initial correspondence, addressed to then-finance director Barbara Malkove in August 2013, outlined the IRS’ intention to examine the 2006 bond issue as part of a routine check for compliance issues.

“The primary purpose of this examination will be to ascertain the compliance of your debt issuance with the federal tax requirements applicable to tax-exempt financings,” the letter reads. “At this time, we have no reason to believe that your debt issuance fails to comply with any of the applicable tax requirements.”

The bonds were issued on July 26, 2006 “for the purpose of financing the cost of capital improvements for the city, refunding certain outstanding obligations and paying the expenses of issuance,” the IRS documents read.

The IRS would later send a Notice of Proposed Issue to the city in 2015, outlining the problems it found with the 2006 bond issue based upon the previous administration’s failure to properly allocate bond money. In essence, the IRS told city leaders that because the bond and previous bonds had not been fully allocated, the 2006 bond would be considered taxable and the city would be on the hook for paying back the taxes and interest on it, worth close to $45 million.
At issue for the IRS, according to the NOPI, is remaining money left unspent in the 2006 bonds and previous bonds as well.

The IRS concluded that remaining money from a previous bond, referred to as series 2000, could’ve been used for the same purpose as the 2006 bond issue, which made the $63 million bond taxable, according to the documents.

“The Service has considered that the Issuer’s expectations and actions as of the issue date of the bonds were not reasonable and a prudent person in the same circumstances would have made further inquiry into the remaining capital project funds of the Series 2000 before they were 100 percent refunded with new money,” the documents state. “That inquiry would have shown that the capital project funds for several prior obligations were still outstanding, more than 10 years later. The Issuer should then have evaluated the needs for the governmental purpose of the Series 2000; made inquiries as to the capital projects still to receive bond proceeds; and assigned a portion of the capital project fund to defease the Series 2000. A prudent person’s decision to use a portion of the capital project fund of the Series 2000 to defease the obligations is supported by the fact that the capital project fund is still outstanding on the call date (Feb. 15, 2010) and even at (Sept. 30, 2014.)”

Former Mayor Sam Jones, who is challenging Stimpson in the Aug. 22 mayoral election, did not return a call seeking comment for this story. Lagniappe has reached out to Malkove as well and will update the story with new information as it becomes available.

Bonds issued under former Mayor Mike Dow were also investigated, according to IRS documents, as the city’s failure to fully allocate bonds goes back more than 19 years. The statute of limitations on two bonds — one in 1998 and one in 2001 — had expired and the IRS dropped those investigations. Dow said he didn’t have enough information to comment at this time.

The city eventually settled the investigation after three years and $300,000 in legal fees, Stimpson said. While the IRS had initially asked for a $9.2 million penalty to settle the dispute, Stimpson said the city was able to negotiate a “nominal” fee. He did not disclose how much the city paid because the amount was confidential. It appears the settlement was one half of one percent of what the IRS originally asked for, according to a story in Bond Buyer.

As for why he waited until a year after the settlement and just about a week before the mayoral election to make the issue public, Stimpson said he wanted to give citizens a full picture of the city’s financial outlook to counter claims Jones has made on the campaign trail taking credit for the city’s currently positive financial position. The issue was settled a year ago and Stimpson said he thought then it might be best for the city to simply move on, but feels Jones’ claims about the sound financial shape he left the city in four years ago required the matter to be brought to light.

“I didn’t want to air a bunch of dirty laundry,” Stimpson said, adding, “We wanted to be forward-focusing.”

He went on to say the city was able to talk the IRS out of levying the $9 million fine by arguing that the people being punished were the taxpayers of Mobile and not the people who had actually failed to properly handle the bonds. He said they were able to show the city’s financial stewardship had improved and that also played into the much smaller settlement.

“We argued that not punishing the perpetrators but punishing the taxpayers was grounds for appeals,” Stimpson said.

Stimpson also mentioned that when his administration took over, all the files in the finance director’s office, other than the one stack on her desk, were gone and her computer’s hard drive had been erased.