A recent published report brought to light the fact that a Wisconsin group has been doing billions of dollars in tax-free debt deals.
As reported Oct. 14 by the Milwaukee Journal Sentinel, the Public Finance Authority — a government entity comprised of the City of Lancaster and counties of Adams, Bayfield, Marathon and Waupaca — was empowered by Gov. Scott Walker and Republican lawmakers in the 2011 state budget to refinance projects, purchase bonds and delegate some of its powers to its officers or board members. (Creation of such entities had been legalized in 2010, when Gov. Jim Doyle and Democrats held power in Madison.)
The Finance Authority has completed 238 bond deals around the country totaling $8.3 billion, for projects ranging from a conference center and parking garage to charter schools and a massive shopping mall and entertainment complex in New Jersey, the Journal Sentinel reported. One project was in the U.S. Pacific island territory of Guam.
Only $168 million of the deals — or about 2 percent — have been in Wisconsin.
Many of the bond offerings were sold to sophisticated investors and did not receive a credit rating from an independent agency that would assess how risky they were. State lawmakers are now asking why the Finance Authority should have powers such as the ability to issue bonds for projects that are outside Wisconsin.
“I’m skeptical of the public benefit,” said Rep. Scott Allen, R-Waukesha, who voted against the state budget in large part because of Finance Authority provisions. “It doesn’t make sense to have a local public agency created by Wisconsin taxpayers and the Wisconsin Legislature that doesn’t provide public benefit to the people of Wisconsin.”
We share Rep. Allen’s skepticism.
In question is whether one of the Finance Authority’s bond deals produces the kind of public benefit needed to qualify for tax-free status from the federal government.
In July, the Internal Revenue Service told the Finance Authority of its proposed conclusion that the bonds for a Dallas luxury tower development shouldn’t be exempt from federal taxes.
The investors who had bought the bonds had done so expecting that the interest they would be paid on them would be free from federal income taxes. The Finance Authority’s outside attorney, the San Francisco firm of Orrick, Herrington & Sutcliffe, concluded the bonds should be tax free.
Mark O’Connell, the executive director of the Wisconsin Counties Association — one of the Finance Authority’s sponsoring groups — insists that the Finance Authority has no legal risk from a potential investor lawsuit and that the group will be successful in challenging the IRS finding.
If you’re a resident of Lancaster or one of the four counties which established the Public Finance Authority, you’d better hope Mr. O’Connell is right. If he’s wrong, and the IRS ruling is upheld, it would appear to open the door to the bond-buying investors filing suit, since they were promised a tax-free return on their investment. That would bring the liability into your city, your county.
The deal we found the most unsettling involved the University of Kansas, which borrowed nearly $330 million through the authority for a science building, dormitory and student union. If the university had used a Kansas agency to borrow the money, it would have needed the approval of that state’s legislature, the Wichita Eagle has reported.
The Public Finance of Authority of Wisconsin shouldn’t be involved in doing an end run around Kansas state law. We wouldn’t want outsiders helping one of our institutions circumvent state law; our Legislature shouldn’t be facilitating such bad-faith negotiations in another state.
Furthermore, Wisconsin governmental agencies should serve interests in Wisconsin, and only in Wisconsin. The tax dollars of Wisconsinites shouldn’t be going toward something which is of minimal or no value to anyone in the Badger State.