A couple of sore points between Mobile city and county government turned raw this week, with County Commissioner Connie Hudson charging that the city owes millions of dollars to the county, including months of back rent on its space in Government Plaza, and that the shortfall could impact the county’s ability to budget and give raises.
Amid the finger-pointing, the city’s finance director argued that the city owes little to nothing to the county at this point, and described it as “purely a contractual issue that has to be worked out.”
“We would love nothing better than to get this behind us,” said Finance Director Paul Wesch.
At the end of the County Commission’s discussion meeting on Thursday, Hudson brought up two issues connected to the city’s collection of county tax revenue. They were problems “we’ve been apprised of for quite some time,” she said, but the uncertainty had come to a point where “It leaves us in a state of not being able to properly plan as we go forward.”
Money, data, transparency
Historically, the city has collected sales, use and lodging taxes from many businesses inside and outside the city and then forwarded the county’s share to the Mobile County License Commission, which also administers a school sales and use tax in county areas outside Prichard and Mobile. The city also forwards information on what money is coming from what sources, which the license commissioner’s office needs to determine where the revenue should go.
“It is a very complicated subject,” License Commissioner Nick Matranga told the County Commissioner on Thursday. Speaking at Hudson’s request, he said things had gone off the rails in January, as the city switched to new software that wasn’t set up to manage such transactions or provide the necessary reports.
Matranga said the city was supposed to make transfers on the 20th of each month. But the county didn’t get payments for January, February and March until April. Payments for May, June and July arrived as two lump sums. “Their system was not made to split it up like the previous system,” he said.
The lack of data compounds the problem, Matranga said: Even as his office receives the money, it can’t determine with confidence where it needs to go. Furthermore, he said, there’s been a loss of transparency when it comes to his ability to verify that the amounts are correct.
“We have no way of actually verifying how true that is,” he said. “My staff can’t go in there to reconcile it like they used to do.”
Matranga made a point of praising Rebecca Christian, the city’s deputy comptroller who has been leading the effort to resolve the problem. But, responding to Hudson’s questions about what should be done, he said the new system needs to be fixed so that it works like the old one, or the county may have to call for an audit to verify that the numbers are what they should be.
Meanwhile, he agreed with Hudson’s argument that it was difficult for the county to build a 2017-18 budget that includes money it’s unsure about. “I would not try to budget it, if you don’t know it’s there,” he said.
Hudson said she thinks at this point the county is owed $4 million to $4.5 million. “That could impact a lot of expenditures … not the least of which is being able to give raises.”
Wesch agreed that the ruckus started with a software change. When Mayor Sandy Stimpson came into office in 2013, Wesch said, his administration inherited a patchwork of antiquated software systems used by various departments. Some hadn’t been upgraded in decades. In search of lower cost and higher efficiency, the city searched for a unified system to manage city data, and in 2014 began implementing one made by Tyler Technologies.
Since then, the Tyler name has come up regularly in city discussions, and generally in a positive way: There have been teething problems, as it has been brought to one department after another, but there’s usually been a sense that having a modern, unified system has been a substantial step forward.
“Revenue was implemented in January,” Wesch said. “As we started to implement, we found all kinds of issues.”
A couple of big ones: Alabama is relatively unusual in allowing local variations in sales tax. The city-county collection relationship used in Mobile, and the ability to generate reports on it, also were stumbling blocks.
However, Wesch said, efforts to iron out those kinks have just about been finished. “Now we’re in pretty good shape,” he said.
A flood of information has gone out in recent days, Wesch said on Friday. Matranga, speaking on Thursday, said his office had indeed received a mass of data recently, but that it would take some time to establish that it was everything needed, and to process it.
As for the question of whether the city was sitting on county money at this point, Wesch said it wasn’t. The License Commissioner’s office might not be ready to disburse it, he said, but at least it has it.
“He’s not owed probably any money at this point,” Wesch said, referencing Matranga. “Or if it is, it’s probably a very small amount.”
When the rent is due
The second bone of contention is the city’s rent on its space in Government Plaza. Hudson said Thursday that at the end of February the city abruptly stopped making its $114,000 monthly payments. On rent alone, she said, the city is more than half a million dollars in arrears.
Wesch said there was nothing abrupt about it: The city has been chafing for years and there hasn’t been any secret about it.
“We could never get that done. That discussion went on for three years,” he said. “We want the discussion to get to a resolution, so we’re withholding the rent.”
It goes back to that agreement under which the city collects some tax revenue for the county. The Memorandum of Understanding (MOU) gives the city a five percent administrative fee for handling the county collections – and the city has used that money to pay its rent and related expenses.
“That worked,” Wesch said of the agreement, which has been in place for more than 25 years. “That lasted for a long time.”
But the status quo was rocked a few years ago. According to a letter sent by Wesch to County Administrator John Pafenbach last year, the county revenue commissioner, then Kim Hastie, began encouraging county businesses to use an alternate system, ONE SPOT, to pay their taxes.
“The MOU was breached in August 2014,” Wesch wrote in the letter, dated Aug. 16, 2016.
Breach or not – and that is subject to varying opinions — the resulting shift in revenue was real. As more payers have switched to ONE SPOT, less and less money has flowed through the city, and so the city’s administrative fee has dropped as well. It has dropped so far that it’s now lower than the rent bill.
County figures for October 2016 show $3.8 million in county tax revenue coming in from ONE SPOT, with just $950,000 coming through the city. The city’s 5 percent cut was just over $40,000.
From the city’s perspective that’s painful and from unfair. The city has argued that it has gone above and beyond in continuing to pay the full amount as its commission has decreased. Hudson has no sympathy. “It was the county giving the city money to pay the county,” she said. Five percent was generous, she added, arguing that the state or a third party might do it with less of a commission.
Wesch says that Hastie promoting ONE SPOT was “clearly” a breach of the deal, in that it undercut the city’s revenue. Hudson says no way, because the License Commissioner wasn’t even a party to the MOU.
“Our lawyers, they don’t share that opinion,” she said. She went on to say that ONE SPOT isn’t a county system at all – it’s actually a state system, implemented and promoted out of Montgomery, so blaming its use on the county is a canard. The state Department of Revenue says it “provides a single point of filing for all state-administered local sales, use, rental and lodgings taxes, as well as, non-state administered sales, use and rental taxes.”
“Any contention that we’re in breach of contract is, I believe, completely invalid,” Hudson said. “I know that when you don’t pay your rent, you’re in breach of contract. When you’re supposed to pay on the 20th of the month and you don’t, you’re in breach of contract.”
Hudson maintains that the city has gotten a sweet deal on rent, paying less than $1 per square foot, while “the county has paid for all major capital repairs” including $3 million on the chronically leaky roof alone.
Back in August 2016, Wesch made a proposal: “First, the City and County will amend the lease to reduce the city’s rent to $1 per year, with the City continuing to pay its pro rata share of operational costs. Next, the City will agree to terminate the MOU and release the County to pursue other collection arrangements.”
More recently, in June, Chief Assistant City Attorney Florence Kessler sent a somewhat sweeter proposal to County Attorney Jay Ross: The city’s rent payment should be its 5 percent of county tax collections, whatever that works out to be, and the city would continue to pay its share of operating costs.
In July, Ross sent a counter-offer to Kessler: The city would pony up its back rent at the full rate; future rent would be set at 5 percent of tax collections or $50,000 a month, whichever is higher; the city would pay all capital maintenance and repair costs for its part of the buiding, and half for common areas; and the city would continue to pay its share of operating costs.
As of this week, that’s the last word. Asked on Thursday if he’d gotten a response, Ross said: “I have asked some key people to tell us when they’re going to respond. I have not had any answer.”
Thus far, no one has called for arbitration or a lawsuit. Hudson has raised the possibility of an audit, and Wesch said Friday “we certainly would not oppose that.”
Hudson maintains there’s a sense of urgency: The county is working up its budget, and the financial director wants to know if it’s time to “put in zeroes” for some revenue lines.
“We’re getting into a pickle,” said Hudson.
If revenue trends continue, with ONE SPOT taking over more and more of the money that used to flow through city hands, maybe the time will come when the city and county simply need to part ways on tax collection. Asked when she thinks that time might come, Hudson said, “I would say, right now … We need to make other arrangements for collection.” And the terms of the lease agreement on Government Plaza also need to be separately renegotiated, she said.
But on Thursday, Hudson’s fellow commissioners were reserved in their response to Hudson’s call for action.
Commission President Merceria Ludgood said she’d been in communication with Stimpson, and wasn’t convinced the city had crossed any lines. She said her impression was not that the city deliberately was withholding any money, but it was having trouble calculating what it should pay.
“Until they tell me ‘We’re not paying,’ I assume they’re trying to figure out what it is that they owe. That’s not what I’ve heard,” Ludgood said.
“I think they’re dancing as fast as they can to get it done,” she said of the city’s software teething problems. She later added, “We’ve had our own software nightmares.”
However, Ludgood did not entirely discount the gravity of the situation. As Matranga spoke about the accounting transparency issue, he commented at one point that “I don’t know what I don’t know.”
“Okay that’s kind of scary,” said Ludgood.
She said she’d like a more detailed breakdown of the county’s issues and options, and also planned to get updates from the mayor’s office, so that by the time the commission meets at the end of the month she’ll have a firmer understanding of whether action is needed, and what that might be. “We’ll have something to talk about,” she said of a meeting set for Aug. 28.
Commissioner Jerry Carl was likewise reserved in his response. At one point, he suggested it might not matter that much to taxpayers whether the money to run Government Plaza comes out of their right pocket or their left pocket. The best action, he suggested, was negotiation. “We’ve got to sit down one-on-one,” he said.
Hudson said her decision to bring up the issue now was “absolutely not” motivated by the fact that Mobile has a municipal election less than two weeks away.
“The county will work with any individual who wins that office,” she said.
Her motivation is the sense that time is running out as budget season looms, she said.
Wesch said the city didn’t feel pressure on that front.
“We don’t want to be artificially constrained by a budget year, when this has gone on for three years over four budgets,” he said. “We intend to continue the conversation.” The city and the county cooperate productively on matter large and small, he said, and will continue to do so.
“The mayor has met with the president of the commission, and those conversations are very constructive,” said George Talbot, Stimpson’s director of communications. He too said the talks will continue.
Asked if the city administration was building rent payments into its own upcoming budget, Wesch gave a hint at how the conversation might go.
“No, we’re not,” he said.