MacIver News Service | Nov. 10, 2017
By M.D. Kittle
MADISON, Wis. – The Internal Revenue Service is investigating the bonds issued by a shadowy Wisconsin bonding house that sought greater authority through legislation during the last days of this year’s budget debate.
A former IRS director tells MacIver News Service the probe and its finding against the Public Finance Authority is most unusual, that there appears to be “something funny about the whole income streams” of the development deal dependent on the bonds.
In July, the IRS issued its preliminary ruling, concluding the the $26.5 million of bonds issued by the Public Finance Authority for the Statler Hilton development project in Dallas are taxable, according to the Dallas Morning News.
That’s a critical finding against the PFA, described as a “bonding house of last resort.” The agency, created in 2010 through Wisconsin legislation, connects investors to tax-exempt “conduit bonds” for “public benefit projects.”
The bonds were issued in August 2016 “to provide funds to finance the cost of the acquisition of a portion of the Economic Development Tax Increment Financing grant” pinning up the project, according to the official statement prepared on behalf of the local government following the issuance of the bond.
Centurion American, the developers for the Dallas revitalization project, plan to convert an abandoned building into a luxury hotel, movie theater and restaurant complex. It has been described as an unusually complex financing deal, involving transfers to several entities, connected to Centurion American’s owner. The business and several subsidiaries are involved in scores of planned residential community projects with a combined value of about $2 billion, according to The Bond Buyer.
The PFA and its attorney, San Francisco-based Orrick, Herrington and Sutcliffe, told the publication in August that they disagree with the IRS’ preliminary findings, and are challenging the tax-class ruling.
“Our team on this matter is declining any comment on the topic right now,” firm spokesman Howard Mintz said in an email Thursday to MacIver News Service.
The IRS isn’t talking.
“Federal law prohibits the IRS from discussing specific taxpayers,” IRS spokesman Dean Patterson said in an email this week to MacIver News.
The IRS began auditing the bonds in January, less than five months after they were issued, the Bond Buyer reported.
That’s remarkably fast, according to Mark Scott, former director of the IRS’ Office of Tax Exempt Bonds.
“They never open investigations that quickly. It’s not done,” Scott said this week in an interview with MacIver News Service.
Generally speaking, the bond compliance expert said, the agency doesn’t look at a municipal bonding projects until three or five years down the road. He suspects the problem has more to do with the transaction than the authority to do the deal.
“There’s some suspicious activities going on here,” Scott said. “I hadn’t finished my analysis, but there’s something funny about the whole income streams.”
The Dallas Morning News in August reported that the Securities and Exchange Commission earlier this year had asked the Public Finance Authority to provide all documentation related to the Dallas development.
Reached for comment this week, an SEC official said the agency would respond to MacIver News Service’s request for information regarding the PFA-related investigation. As of Thursday evening, the SEC had not responded.
“The SEC has, in the past, charged transaction participants with securities fraud for misleading investors about the tax-exempt status of their bonds,” The Bond Buyer noted in its piece.
The Public Finance Authority came under fire in the closing days of Wisconsin’s extended budget-writing process, when lawmakers slipped in a provision that would have expanded the authority’s powers. Under the measure, the PFA would have been granted the ability to take private property through eminent domain.
Gov. Scott Walker vetoed the expanded powers provision, at the request of three conservative senators who threatened to vote against the overdue 2017-19 budget unless Walker removed the PFA language.
The Dallas deal is indicative of the PFA’s portfolio in that it has nothing to do with Wisconsin.
As MacIver News Service first reported, the Wisconsin-based financing agency has done very little business in the Badger State. Instead, it has built a multi-billion dollar tax-exempt and taxable conduit bonds business by brokering deals like a $30 million bond deal for Planned Parenthood Federation of America’s national headquarters in New York City.
In 2016, the University of Kansas bypassed the state Legislature in securing nearly $327 million in bonds for a slate of building projects.
Instead of seeking approval from lawmakers, the university appealed to the quasi-public PFA.
The University of Kansas’s end-around the Legislature and the Kansas Development Finance Authority didn’t sit well with lawmakers, who blasted the arrangement as “circumventing legislative oversight and escaping the public view.”
State Rep. Scott Allen (R-Waukesha) voted against the Assembly version of the state budget because it included the expanded powers for the PFA. He then called on the Legislature’s audit committee to perform an audit of the agency.
Wisconsin gave the agency the “unusual power” to issue municipal bonds anywhere in the country.
It does all of this without a single employee in Wisconsin, PFA officials told Allen. The lawmaker said the bond issuer contracts any of its required services.
Allen told MacIver News that he wants to gather as much information on the PFA as possible to build a case for an audit. He says the most compelling reason for the Legislature to take a closer look at the PFA is because it has not done so since the agency’s launch seven years ago.
“When it was suggested that less than 2 percent of their work is being done in Wisconsin, I have to question why the Legislature created it in first place. It wasn’t to do work in Kansas or Idaho or Nevada or elsewhere,” Allen said.
You could add Dallas to the list.