MacIver News Service | April 5, 2018
By M.D. Kittle
MADISON, Wis. – There will likely be no legislative audit of a shadowy, quasi-public bonding house that sought greater authority in the closing days of last year’s budget debate, according to the state lawmaker who requested the financial review.
Meanwhile, the Public Finance Authority, which has been the subject of an Internal Revenue Service investigation, reportedly is at the center of another high-risk public development deal, this time a troubled Illinois hotel and convention center.
In September, state Rep. Scott Allen (R-Waukesha) called for an audit of the PFA.
Allen tells MacIver News Service that the Legislative Audit Committee will not conduct a performance audit of the conduit bond agent. Committee co-chairwoman, Rep. Samantha Kerkman (R-Salem Lakes) said the committee has chosen other projects to focus on.
“This program (the PFA) doesn’t spend taxpayer dollars,” Allen said. “I can appreciate that, but at the same time this is an organization created nearly eight years ago that has had no performance audit.”
Kerkman’s office did not return a call Wednesday seeking comment.
The PFA, created in 2010 through bipartisan legislation, connects investors to tax-exempt “conduit bonds” for “public benefit projects.” The authority handles high-risk bond deals, not for the investment faint-of-heart. Some of the projects financed by those bonds have come under scrutiny by government oversight agencies.
Allen and other critics are concerned about the Public Finance Authority’s minuscule footprint in the state that gave it life – and the “unusual power” to issue municipal bonds nationally.
As of last year, the PFA, the domain of a California entity, did not have a single employee in Wisconsin.
“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 told MacIver News in September.
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.
For a quiet, quasi-public agency, the PFA has been in the spotlight in recent months.
In July, the IRS released a preliminary ruling, concluding 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.
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.
In its ruling, the IRS said the zero coupon bonds should be taxable rather than tax exempt.
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.
A spokesman for the firm said he could not comment on the status of the IRS investigation or another matter involving the Securities and Exchange Commission.
The IRS did not return an email seeking comment, but an agency spokesman in November told MacIver News Service that “federal law prohibits the IRS from discussing specific taxpayers.”
In August, the Dallas Morning News reported that the Securities and Exchange Commission had asked the PFA to provide all documentation related to the Dallas development.
Agents there have not returned multiple requests for comment.
“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.
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’ 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.”
Most recently, the PFA stepped into a hot mess in Lombard, Ill., where a federal court bankruptcy deal restructuring $190 million in hotel development debt left bondholders taking a bath in investment losses.
As Bond Buyer reported last month, the Chicago suburb lost its investment grade rating after reneging on its appropriation pledge.
A federal court signed off on a bond exchange in the Lombard Public Facilities Corp.’s Chapter 11 reorganization plan for $140 million of new 50-year, tax-exempt debt.
“The bankruptcy court’s approval was contingent on the execution of the bond exchange through the Wisconsin-based Public Finance Authority,” the article states.
“Lombard established the corporation to issue the bonds and manage plans for the Westin Lombard Yorktown Center with village support through a tax rebate agreement and its appropriation pledge.”
Allen, the Waukesha lawmaker calling for a performance audit of the PFA, said the agency’s involvement in controversial projects underscores the need for review.