BAY MINETTE — The school board will accept an IRS penalty, rather than fight the government.

“I want to assure you, that no one did anything wrong,” said Superintendent Alan Lee. “All the money was handled properly, the IRS just looked at it differently than we did.”

District financial director John Wilson said the disagreement began during a routine Internal Revenue Service audit and centers around a line of credit the district got during dire economic times. In 2009, the district only had around $750,000 in the bank as it waited for tax revenues. It was not enough to cover the monthly payroll of $16.5 million.

“The district entered into a line of credit with Regions Bank for $35 million,” said Wilson. “According to the IRS, the money must be spent on certain things — which it was. It also has to be spent within a certain time frame.

“The IRS felt we were obligated to spend the entire $35 million. But since it was a line of credit, we only drew down what we needed, as we needed it. At one point, we had a maximum of $24 million (borrowed).”

Since the district did not use, or spend, the entire $35 million during the allotted time, the IRS ruled the school district didn’t meet the “safe harbor” criteria and compromised the tax-free status. The federal government felt the district should have to pay.

School officials were expecting fines and penalties to be at least $60,000 and as high as $100,000.  They were pleasantly surprised when the IRS offered to settle the matter for $10,937.

“That’s cheaper than the attorney fees would be to try to fight it,” said Lee. “So I recommend we accept the settlement.”

Wilson said that if the district ever entered into a line of credit again, it would be handled differently.

But that likelihood is slim. Over the past three years, Lee and district officials have worked hard to slash expenditures. The efforts, combined with the 1-cent sales tax, have allowed the district to increase the general fund balance to the point that they nearly have two months payroll set back.

From the low point in 2009, the district slowly built up the “rainy day” fund to $1.1 million in 2010.  The figure skyrocketed to $19.4 million in 2011 and up to $26.1 million this year.

With voters renewing the Penny Tax for another five years, school officials will be able to keep the general fund at a comfortable balance and start putting more money back in the classrooms.