Build America bonds draw IRS scrutiny

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El Paso County secutity officer Melvin Jackson monitors the county building at 27. E. Vermijo Ave.

El Paso County secutity officer Melvin Jackson monitors the county building at 27. E. Vermijo Ave.

The financing package created by the county to fund the purchase of part of the former Intel campus may carry some risks not normally associated with municipal bond issues.

The $49.5 million deal will be financed in part by Build America bonds, which were authorized by the Obama administration in 2009.

Unlike most municipally issued securities, these bonds are not tax-exempt, and appeal to a wider range of investors than traditional purchasers of tax-free municipals because they offer higher yields. Also, the federal government rebates 35 percent of the annual interest cost to the issuer, making them more affordable to local governments.

The Wall Street Journal reported this week that the IRS has launched investigations into a number of local government issuers of BABs.

“The IRS has said it was concerned that BABs may be being priced incorrectly, in some cases increasing the cost of subsidies from Washington,” the newspaper reported. “The IRS has started sending questionnaires to every agency that has sold a BABs and … confirmed that it has opened audits into fewer than 10 sales.”

If the IRS finds that an issuer has “incorrectly” priced a BABs package, the federal government may demand that any previously paid subsidies be returned.

BABs issuers must also be careful that they do not find themselves owing money to the federal government. In such instances, the government has unilaterally reduced subsidy payments to municipal governments.

BABs subsidies to El Paso County stemming from the bond issue will be substantial, amounting to as much as $1.6 million annually.

By a 5-0 vote Tuesday, the El Paso County Commission approved the purchase of “Corporate Ridge Administration Building # 1” in the former Intel complex on Garden of the Gods Road. The complex deal carries a price tag of $49.5 million.

The three-story, 289,256-square-foot building, which includes adjacent parking and storage structures, will house the County Health Department, the Department of Human Services, the Clerk and Recorder, the Treasurer, the Office of Emergency Management, and the Pikes Peak Workforce Center.

The purchase was driven by the dangerously deteriorated condition of several aging County buildings, particularly those housing the Health department and the department of Human Services.

The commissioners rejected requests by El Paso County Trustee Tom Mowle and State Rep. Mike Merrifield to postpone consideration of the issue for at least two weeks to allow for more public input.

County Administrator Jeff Greene characterized the deal as a “remarkable bargain” for the County, and one which will be completely financed by new and existing revenue streams. There will be no anticipated impact on the County’s general fund, and no tax increases will be necessary.

The deal’s cost includes $13.5 million in energy performance upgrades for existing county buildings which are designed to produce annual savings of $700,000. Those savings, as well as state, federal, and existing county revenues, will be used to service $3.2 million in annual debt payments.

The bonds will not be issued by the county, but by the County Facilities Corporation, which will own the property. The county will enter into a lease-purchase agreement with the facilities corporation.

This convoluted legal structure is necessary in order to issue what amounts to long-term debt without voter approval.

Such approval is sometimes difficult to obtain, as county officials learned six years ago when voters declined to approve bonds to build an addition to the jail and a new courthouse.

The then-commissioners restructured the deal, issued certificates of participation, and built the facilities anyway.

County officials are confident that they’ve structured their latest deal to avoid any pitfalls.

“I had a very, very pointed conversation with our underwriters (George K. Baum & Co.) and our bond counsel (Kutak Rock) this week,” said Nicola Sapp, the county’s finance and budget director. “They absolutely assured me that we would not be pricing the issue incorrectly.”

And, Sapp added, the county will not find itself in the position of owing money to the feds.

“This isn’t our first rodeo,” she remarked crisply.

One Response to Build America bonds draw IRS scrutiny

  1. “This convoluted legal structure is necessary in order to issue what amounts to long-term debt without voter approval.”

    … and this is a good thing? YIKES!

    Steve Patch
    June 14, 2010 at 11:14 am