2006 Headlines from The Bond Buyer...
Every month, CDFA provides the development finance industry with access to the headlines and top stories from that month's editions of The Bond Buyer. The Bond Buyer is a daily newspaper serving the bond finance industry. CDFA and The Bond Buyer have developed this strategic partnership as a way of education and highlighting the importance of municipal bond finance. CDFA Members can also receive discounts on new subscriptions to The Bond Buyer. >>>LEARN MORE>
Click on the Month/Year for the desired articles.
December 2006
Seminole Tribe Receives Negative IRS Rulings
Posted on Friday, December 08, 2006
By Alison L. Mcconnell
Be Wary Of Bid-Rigging, Players Warn
Posted on Wednesday, December 13, 2006
By Matthew Hanson
Enforcement: Court Documents Show What Bid-Rigging Looks Like
Posted on Tuesday, December 19, 2006
By Matthew Hanson
California Cities Eye Renewable Energy Utilities
Posted on Friday, December 15, 2006
By Jackie Cohen
Enforcement in Limelight
Posted on Tuesday, December 26, 2006
By Alison L. McConnell
Seminole Tribe Receives Negative IRS Rulings
Posted on Friday, December 08, 2006
Source: Bond Buyer
By Alison L. Mcconnell
Tax-exempt bond proceeds lent by the Capital Trust Agency to the Seminole Tribe of Florida were improperly used to finance a hotel and convention center because those facilities do not represent essential government functions, according to an Internal Revenue Service technical advice memorandum.
Two TAMs were disclosed Wednesday as part of a material-event notice issued by the agency and the tribe. The memos apply to $345 million of Series 2002 revenue bonds, which have been preliminarily declared taxable by the IRS' tax-exempt bond office. Proceeds from the sale, along with other funds, financed the Hard Rock Hotel and Casino, as well as related convention center facilities, in Hollywood, Fla.
The agency's counsel, Neil P. Arkuss of Edwards Angell Palmer & Dodge LLP in Boston, was traveling and unavailable for comment yesterday. IRS officials declined to discuss the case.
Merrill Lynch & Co. and JPMorgan underwrote the Seminoles' 2002 deal, which consisted of $290.6 million of Series A bonds, $25 million of Series B bonds, and $29.4 million of Series C bonds.
Orrick, Herrington & Sutcliffe LLP was special tax counsel and "has not withdrawn or modified its opinion" since the bonds were issued, according to Wednesday's notice, filed with the nationally recognized municipal securities information repositories. Orrick attorneys declined to comment on the notice and the TAMs.
The tax-exempt tribal finance sector, while relatively small compared to other areas of the municipal market in terms of issuers and volume, has seen plenty of contentious debate in recent years over what some Indian tribes, issuers, and attorneys call an unfair, even biased interpretation of existing statutes by the IRS' tax-exempt bond office, which audits municipal bond deals.
Tax code rules, laid out in Section 7871, treat tribes as states for purposes of tax-exempt bond issuance, provided that all bonds are issued in the exercise of an "essential government function." Tribes have been at odds with the IRS over whether golf courses, hotels, convention centers, casinos, and other facilities qualify under that requirement.
For conduit financings, in which a state or local government or municipal authority sells tax-exempt bonds and loans the proceeds to a tribe, the rules are not quite as clear. IRS enforcement personnel have historically taken the stance that conduit financings must also be done for an essential government purpose of the tribe. The tax-exempt bond office has also argued that, in accordance with the legislative history that generated the current regulations, tribes must not use tax-exempt bonds to finance activities that are commercial or industrial in nature.
The agency has said its chief counsel division will soon propose regulations that are expected to support that view, limiting tribal finance to noncommercial and non-industrial activities customarily performed by state and local governments, including roads, schools, and government buildings. An activity would qualify as an essential government function if there are "numerous" state and local issuers with general taxing powers conducting the activity and financing it with tax-exempt bond -- issuers that have been doing so "for many years," according to a notice of proposed rulemaking issued by the agency in August.
The TAMs, which are also issued by the IRS' office of chief counsel rather than the enforcement division, appear to support field agents' and managers' interpretations of the current regulations. The first memo concludes that the conduit financing will only work if the tribe is using financing an activity that qualifies as an essential government function, regardless of whether it issued bonds or borrowed the proceeds.
Sources said yesterday that the first TAM is nearly identical to a memo issued recently for the Cabazon Band of Mission Indians, which sought advice about a 2003 hotel and convention center deal that is also under IRS audit.
The second Seminole TAM concludes that "the operation and construction of the project" -- the hotel and convention center -- is not an exercise of an essential government function.
"The tribe has presented evidence that over the period beginning in 1995 state and local governments used [munis] to finance 15 large, urban hotels connected to convention centers," the TAM said. "Although hotels of this type may be comparable...we do not find ownership and operation of such large urban facilities to be either sufficiently prevalent or longstanding...to be considered an essential government function."
Additionally, "although the tribe observes that there are a small number of state park lodges with considerably more guest rooms, very few approach the size and amenities of the project," the IRS ruled. "Accordingly, we do not find the project comparable to such state park lodges."
All of the 2002 bonds were redeemed last year. The tribe disclosed in October 2005 that the IRS had opened examinations of $74 million of Series 2003 bonds and $50 million of its Series 2004 notes, which were also used to finance facilities at the Hollywood complex. The status of those audits is unclear. From here, the tribe and the agency can attempt to negotiate a settlement with the tax-exempt bond office or appeal the adverse determination with the IRS Office of Appeals.
"I think this proves that [TEB field manager Charles Anderson]'s not racist," former TEB director W. Mark Scott, a partner with Vinson & Elkins LLP, said yesterday, referencing a report submitted to Congress earlier this year that argued TEB's treatment of tribes was manifestly unfair. "Regardless of whether you agree or disagree with the result, this shows that examination function was correct in raising the issues."
Market sources and reports have indicated that there were other problems with the deal beyond the qualification of the tribe's bond-financed activities as essential government functions.
"There were questions as to the amount of private use, the overall management of the facility, and concerns about the amount of fees being paid," one source familiar with the audits said yesterday.
The IRS' preliminary adverse determination on the 2002 bonds, sent more than two years ago, iterated some of those concerns: "The level of issuance costs (approximately 9.62% of the proceeds) that appear to be financed with proceeds of the bonds in this transaction, as well as other information developed concerning certain additional fees paid to transaction participants, may result in the bonds consisting of private-activity bonds," the agency asserted.
The Baltimore Sun has reported that David Cordish, the Baltimore-based developer whose company, Power Plant Entertainment, was paid as a financial adviser in the deal, is receiving millions of dollars in fees every year as part of his contract with the tribe. The Seminoles filed suit in Florida circuit court earlier this year to overturn that contract, arguing that Power Plant would earn more than $2 billion, risk-free, over 10 years for developing the Hard Rock complexes in Hollywood and Tampa.
The Seminole TAMs -- taken with a recent private letter ruling issued by IRS chief counsel for an unidentified tribe -- are also significant because they adopt the line of reasoning the IRS is expected to propose in its new regulations for tribal bonds.
Thomas D. Vander Molen of Dorsey & Whitney LLP in Minneapolis said it was interesting that the IRS is effectively saying "this is already, in their opinion, the proper interpretation of the law."
"You have a poorly worded statute with contradictory legislative history, the IRS on the exam side getting themselves in a lather over these deals, proposed regs that take a conservative position, all with the result that practitioners are running around wondering, 'What the heck are we supposed to do?' " said David Caprera of Kutak Rock LLP in Denver.
(c) 2006 The Bond Buyer and SourceMedia, Inc. All rights reserved.
http://www.bondbuyer.com http://www.sourcemedia.com
Be Wary Of Bid-Rigging, Players Warn
Posted on Wednesday, December 13, 2006
Source: Bond Buyer
By Matthew Hanson
To help guard against being involved in deals where bids are rigged or yields are manipulated by the parties of a deal, issuers should take several steps, a lawyer and swap provider told members of the muni market yesterday in the final panel of The Bond Buyer's 4th Annual Metro Finance Conference.
It might take several years until we see the results of the investigations now being conducted by the Justice Department and the Securities and Exchange Commission, they said. In the meantime, issuers can educate themselves about how they can avoid being used for an easy buck.
First, issuers should research the backgrounds of the professionals they use, said Peter Shapiro, managing director at Swap Financial Group LLC. They should seek out more than the mandatory three bids and obtain reasonable estimates well ahead of when they take official bids.
And they should be wary of brokers and advisers who also do work for those submitting the bids, he said.
"If the firm that is supposed to be assisting you is also, at the same time, knocking on the doors of people who are seeking your business and seeking the business of them, it's likely to color their judgment," Shapiro said. "This about it this way: how many issuers are there in the county? Tens of thousands. How many major dealers are there? There are really are only 10 or 12."
So, when it comes to thinking about repeat clients, the big banks, insurance companies, and other investment product providers are much more likely to provide future business than a state or local government that is in the market only now and again, he said.
One of the reasons government officials might not have paid such close attention to these issues in the past is that they have little vested interest in how much of their deal is rebated to the federal government, said Bruce Serchuk, partner at Nixon Peabody LLP. But he added that they would likely be expected to take greater care, as regulators sort through the piles of documents they will have collected in the two ongoing investigations.
Dozens of firms have been subpoenaed in the Justice Department's criminal investigation, which seeks information back as far as 1992, and the SEC's parallel civil probe, reaching back to 2000. The two investigations stem from SEC inquiries and Internal Revenue Service audits during the last six years that found problems with bond and investment yields in the muni market as well as the Justice Department's criminal Philadelphia corruption case.
Subpoena recipients so far have include broker-dealers, investment and derivatives brokers and providers, bond insurers, and other insurance companies. On Dec. 15, the Federal Bureau of Investigation raided three firms - California-based CDR Financial Products, the Investment Management Advisory Group Inc., in the suburbs of Philadelphia, and Sound Capital Management Inc., based in Minnesota - to obtain documents for the investigations.
The subpoenas covered a range of derivatives and investment products, including guaranteed investment contracts, or GICs, in which issuers re-invest the proceeds from a bond sale to earn a specified return until they need to use the funds. Justice's investigation revolves around anti-competitive practices such as collusion, bid rigging and price fixing.
The SEC appears to be concerned with securities law violations, including the failure to disclose fees or activities that would jeopardize the tax-exempt status of the bonds.
In its enforcement cases, the IRS was concerned that some GIC providers, often banks and insurers, were overcharging issuers for GICs or other investment products. This would artificially lower or "burn" investment yields below the bond yield. The spread between the investment and bond yields was then passed to the investment provider, rather than rebated to the federal government as required by the tax laws.
The IRS has also expressed concern about firms using credit enhancement and derivatives products to artificially manipulate bond yields.
Since news of the subpoenas first came to light, market participants have voiced their concern over the negative light that the probes could cast on the municipal market. In the investment arena, they echo the problems of the yield-burning scandals of the late 1990s.
The controversy over yield-burning led to a global settlement in 2000 in which17 broker-dealers paid a combined $138.3 million to settle SEC charges in connection with the practice.
The current investigations could prove to carry an even higher price if any wrongdoing is found. Unlike the yield-burning probes, the current controversy involves a criminal investigation. Indeed, a federal grand jury has already been called in New York.
Ralph Giordano, chief of the New York office of the Justice Department's antitrust division, and trial attorney Rebecca Meiklejohn are leading the grand jury investigation. The Bond Buyer first contacted them on Nov. 20, but they declined to comment.
Shapiro pointed to court transcripts from the early 1990s that showed exactly how Stifel, Nicholas & Co. worked to rig two separate GIC deals - one for Sakura Global Capital Inc. and one for AIG. The transcripts describe elaborate schemes in which false bidders were arranged and Sakura and AIG got the contracts. Stifel, in return, received substantial payments from Sakura and AIG.
(c) 2006 The Bond Buyer and SourceMedia, Inc. All rights reserved.
http://www.bondbuyer.com http://www.sourcemedia.com
Enforcement: Court Documents Show What Bid-Rigging Looks Like
Posted on Tuesday, December 19, 2006
Source: Bond Buyer
By Matthew Hanson
So, what exactly does it look like when bids are rigged for a swap or re-investment contract?
Participants from all corners of the municipal market have compared the current Justice Department and Securities and Exchange Commission investigations to past inquiries. Swap Financial Group LLC's Peter Shapiro says two specific cases are prime examples of issuers being taken for a ride.
In 2002, former Stifel, Nicolaus & Co. investment banker Robert Cochran paid $220,000 to settle SEC securities fraud and other civil allegations against him, stemming from undisclosed payments he obtained for Stifel on deals for two Oklahoma-based issuers in the early 1990s.
Cochran previously paid $100,000 in 1999 to settle securities fraud charges filed against him by the SEC involving a refunding deal for the Sisters of St. Mary's Health Care Obligated Group. He was convicted on similar criminal charges, but the Tenth Circuit Court of Appeals later overturned the conviction.
The cases that came out of the deals focused primarily on whether or not Cochran and his associates properly disclosed the complicated payments they received for their companies. The cases were settled, meaning no official wrongdoing was found. But the commission's findings in court transcripts offer a peek into just how participants on a deal can work to rig bids for re-investment contracts, Shapiro, a managing director at Swap Financial, told participants at The Bond Buyer's 4th Annual Metro Finance Conference last week.
When the Oklahoma Turnpike Authority issued $568 million of revenue bonds in 1989, it looked to enter a guaranteed investment contract, giving it a set rate of return until it needed to draw on the proceeds. Stifel was a member of the underwriting syndicate and Pacific Matrix acted as the "finder" for re-investment of the bonds.
Cochran and Pacific conspired to rig the bidding process to Swap Financial Group, according to the commission's findings in a case against Pacific. The two did so by giving AIG a "last look" at its competitors' bids for the contract, documents state.
Cochran arranged to call Pacific Matrix once he learned of the highest submitted bid. He would ask for "Wayne," at which point a certain person at Pacific would take the call without raising the suspicions of others.
This person would then relay the amount that AIG would have to beat to get the contract.
Then, in May 1992, the OTA issued about $608 million of refunding bonds, planning to enter a forward, another kind of re-investment contract. Stifel was one of the book-runners and Pacific acted as "finder." This time, they gave the forward to Sakura Global Capital Inc., according to court documents.
Early on the morning that bids were to be taken, the firms arranged for three firms that were not typically "first-tier players" to submit bids. The firms were assured they would not be awarded the contract if they submitted bids below a certain level, records showed, and Sakura was able to then win the forward relatively uncontested.
While inquiries into these deals resulted only in settlement payments, they still serve as lessons to borrowers who want to avoid being part of such deals.
(c) 2006 The Bond Buyer and SourceMedia, Inc. All rights reserved.
http://www.bondbuyer.com http://www.sourcemedia.com
California Cities Eye Renewable Energy Utilities
Posted on Friday, December 15, 2006
Source: Bond Buyer
By Jackie Cohen
Over two dozen California communities are striving to create publicly financed renewable-energy generation facilities to supplement, if not replace, electricity provided by investor-owned utilities Southern California Edison and its northern neighbor, Pacific Gas & Electric.
With revenue bond issues coming as early as next year, potentially totaling in the billions of dollars, these efforts all piggyback on ongoing amendments to California's Public Utilities Code.
A 2002 amendment sponsored by state Sen. Carole Midgen, D-San Francisco, authorized municipalities to aggregate energy supplies and sell them to customers, a process known as community choice aggregation.
Under CCA, a municipality can create a publicly owned electricity supplier that would rely on the existing power delivery infrastructure and customer service architecture already owned and operated by PG&E and SCE.
The first step in forming a CCA enterprise involves passing ordinances at the local level that create the authority to oversee the new energy utility. So far, only two communities have achieved this: San Francisco and the San Joaquin Valley Joint Powers Authority.
The next step involves local ordinances dictating an implementation plan for a CCA and the entity filing an application with the state's Public Utilities Commission. "So far, no one has filed directly with us," Public Utilities Commission spokesman Tom Hall said.
CCA requires that all customers of the existing utilities receive notification of the option to switch their energy source to the publicly owned provider. Even if customers switch to the alternative provider, the existing utilities PG&E and SCE would still deliver the energy and bill the customers.
A portion of the revenues generated from the monthly billing would go to the CCA provider and that money would ultimately pay for debt service on revenue bonds issued to finance the initial infrastructure investment.
That initial investment may rely on contracts with service providers, which in turn could invest additional money into the project in a public-private partnership to build an electrical utility.
If the electrical utility is to provide renewable energy, the requisite infrastructure is more complicated than building a more traditional power plant.
"Building renewable is like a power plant that's spread out all over the place, and thus more logistically complex. The footprint is at multiple sites, spread across multiple properties -- it's like rolling out a network of solar panels," said Paul Fenn, executive director of Local Power, a renewable energy advocacy group that contributed to drafting San Francisco's CCA implementation plan.
Nearly all of the renewable energy infrastructure proposed for California's CCA efforts thus far have involved solar panels, but San Francisco's Public Utilities Commission is powering its own operations through recycling methane from waste matter. Windmills are another form of renewable energy generation.
While the formal definition of CCA doesn't entail renewable energy sources, the acronym has gotten greener over time, especially with the influence of other state Public Utilities Code amendments, including a requirement that all 20% of California utilities' energy come from alternative sources by 2010.
In August, Gov. Arnold Schwarzenegger signed into law a requirement that all homebuilders make solar energy capabilities available to customers by the beginning of 2011.
Already, utility customers can effectively recoup 50% off the costs of implementing alternative energy delivery in the home and workplace through tax exemptions on the state and federal level, according to Mark Stout, a solar energy consultant with Unlimited Energy.
The firm is helping Fresno and a dozen other municipalities in the middle of the state that officially banded together last month to form the San Joaquin Valley Joint Powers Authority.
While many say the venture has progressed the furthest of any CCA effort in the state, this joint-powers agency, or JPA, is hoping to launch a lower-cost alternative to PG&E providing both renewable and more traditional types of energy.
"We're preparing a permit application to file with the California state energy commission in April, and if the timeline sticks, we'll be in the market for about $600 million in revenue bonds by October 2008, because we've got substantial infrastructure already in place," said David Orth, general manager of the Kings River Conservation District, the largest of the constituents within the San Joaquin Valley JPA.
A potentially similar sized JPA is in a much earlier stage of planning within SCE territory surrounding, but not including, Los Angeles.
Representatives from the 10 cities comprising the Southern California Cities Joint Powers Consortium are still trying to get the topic of CCA onto the meeting agendas of their respective local governments, said the group's executive director, former Culver City Council member Albert Vera.
Marin County and its 11 constituent cities north of San Francisco have been discussing CCA within their respective local governments and conducting feasibility studies on forming a joint-powers authority for providing energy at a lower cost than PG&E.
"We'd like to make a decision in the fall of 2007, and if the decision is favorable then we could go forward in 2008 and hopefully sell revenue bonds that year," said Dawn Wise, sustainability planner at the Marin County Community Development Agency.
The agency has been working with numerous consultants, including the boutique investment banking firm GFP Broker-Dealer Inc., and expects to release another study next summer that will include cost estimates and the target amount of revenue bond issuance.
"Ultimately, we'd like to get to 100% renewable energy but our goal is to get 51% renewable by 2017 because our load in Marin County is around 300 megawatts," Wise said. Marin County wants to keep rates similar to or less than those of PG&E while enabling the CCA to pay for itself, she said.
About $100 million in revenue bonds could come from the eastern suburbs of San Francisco, where the cities of Berkeley, Emeryville, and Oakland are crafting a JPA for providing renewable energy to residents of the area.
"We're working on the business plan, and once it's complete the joint powers authority would go forward," said Neil De Snoo, energy officer for Berkeley. "We'd issue revenue bonds backed by the utility rates, but we wouldn't request the proceeds of the bonds until probably 2011, but there would be a mix of different investment resources coming into this."
De Snoo said the JPA wants to work with PG&E in order to use the privately owned utility's distribution and customer service platform. The publicly owned CCA utility would supply renewable energy, initially all on a contract basis, to go across PG&E's infrastructure.
'The renewable energy services would come from both owned and purchased resources," De Snoo said.
Across the bay, the San Francisco Board of Supervisors will likely hold an educational hearing on CCA implementation in a committee meeting during the third week of January.
"The disappointment is that this didn't get scheduled for this year. This city agrees on the need for renewable energy, and so 2007 is make-it-work time," a spokesperson for San Francisco Supervisor Tom Ammiano said. Ammiano is a sponsor of enacted and pending CCA legislation.
The spokesperson confirmed that after the supervisors approve an implementation plan for CCA, Ammiano would ask for $600 million in revenue bonds to finance the project.
That would pay for renewable energy generation and sourcing, as the CCA program would still rely on PG&E's distribution and customer service platform.
The goal of San Francisco's CCA project is to create enough renewable energy generation to produce 360 megawatts of power, in a generation facility covered in solar panels.
In addition to bond financing, San Francisco is encouraging additional investment from the renewable energy supplier that would be chosen by the city's Public Utilities Commission.
(c) 2006 The Bond Buyer and SourceMedia, Inc. All rights reserved.
http://www.bondbuyer.com http://www.sourcemedia.com
Enforcement in Limelight
Posted on Tuesday, December 26, 2006
Source: Bond Buyer
By Alison L. McConnell
With the Justice Department conducting the widest-ever criminal investigation of alleged illegal behavior in the municipal bond market, enforcement issues are expected to occupy center stage all year long.
At the same time, after significant transition in 2006, the Internal Revenue Service's tax-exempt bond office - the front line of federal enforcement against deals that line the pockets of underhanded market players - faces a second round of upheaval in the impending departure of a longtime senior staffer who has been a force to be reckoned with for years. Filling his shoes, and other key vacancies, could prove to be TEB's greatest challenge in 2007, according to sources.
The tax-exempt bond office, which closed 495 audits and 60 voluntary closing agreements this fiscal year, examines issues of municipal bonds for problems associated with compliance with federal tax code rules. It employs 67 people, 47 of whom are field agents.
Derek Knight and Karen Skinder, two of TEB's five group managers, are thought to be top candidates for the position of field operations manager, currently held by Charles Anderson, who has been with the IRS for more than three decades and has served in the role since TEB was formed six years ago. Anderson is scheduled to retire Jan. 4 but his replacement is not likely to be named for some time.
Market sources indicated that the task of replacing him is critical for TEB director Clifford Gannett, who himself was part of the personnel transition experienced by the office this year. Gannett took over as acting director when W. Mark Scott left the IRS late in 2005. A 23-year agency veteran, Gannett had previously headed up TEB's office of outreach, planning, and review - now the office of compliance and program management, or CPM - and in June was formally promoted to director.
Steven A. Chamberlin is currently acting director of CPM, and the IRS is conducting internal searches to fill that position and Anderson's on a permanent basis.
Market participants say the selection of strong managers for field operations and CPM is of major importance, particularly since the TEB office is relatively small, with a correspondingly modest budget.
"TEB, since its inception, has relied upon the skill and depth of its management team to compensate for what it lacked in resources," said Jeremy A. Spector, a partner with Blank Rome LLP in Philadelphia. "To maintain its hard-earned momentum, TEB would be best served by addressing its personnel issues on a priority basis. [The office] is fortunate to have talented candidates within its ranks. Delays in the selection process could eventually hamper operations."
While the actual processing of cases should not be affected significantly in 2007, "the transition is important from the perspective of setting the tone or direction of the office moving forward," said former director Scott, now a partner with Vinson & Elkins LLP here.
National Association of Bond Lawyers president Carol L. Lew, a partner with Stradling Yocca Carlson Rauth in Newport Beach, Calif., said attorneys have the "utmost confidence" in Gannett's and his staff's ability to find and retain good people for positions at TEB.
"Although we will miss Charlie and wish him the best in his retirement, we look forward to working with Cliff and Charlie's successor on efforts that further our mutual mission of encouraging compliance through education," Lew said.
The second round of staff transition will come in 2007 as TEB continues to ramp up its enforcement efforts against "bad players" in the market. Anderson, Chamberlin, Gannett, and tax law specialist Michael J. Muratore asserted at a press briefing last month that TEB has made significant inroads in its audits of abusive transactions and the professionals behind them.
In addition to the audit work, agency officials are shifting their focus to the professionals behind such deals with an eye to assessing Section 6700 penalties. That section of the tax code allows the IRS to apply monetary penalties to individuals or firms that participate in abusive transactions.
Market participants may see relatively new twists in 2007 in terms of tax problems with deals, according to Anderson. He has repeatedly stated that arbitrage schemes have moved from the investment-yield side of bond issues, where parties historically overpriced U.S. Treasuries and other securities purchased with bond proceeds for investment escrows to keep the yields down on those escrows.
Tax code regulations stipulate that earnings on investments exceeding the underlying bonds' yield by a certain percentage must be rebated to the federal government. By inflating prices, firms were able to artificially lower, or "burn," investment yields down within a permissible range, while keeping the profits.
MORE SCHEMES
Now the IRS is discovering more and more schemes on the bond yield side, namely via pricing irregularities with swaps and other hedges, credit enhancements and bond insurance, and issue price.
The IRS is also concerned about bond yield manipulation via "flipping," in which an underwriter sells bonds to an institutional investor who sells them almost immediately to another investor, potentially making it difficult to calculate bonds' issue price and therefore their yield.
Flipping may turn out to be "a big issue, and have already sent out several adverse letters on this," Anderson said.
Gannett said late last month the IRS is indeed seeing increased sophistication on the part of those who craft, promote, and profit from abusive transactions. The common theme? Certain market players are devising new ways to mask excess arbitrage earnings through the manipulation of bond yields and divert those profits to deal participants in post-issuance or secondary transactions.
In one such case, IRS officials said in May that they had unearthed a "systematic kickback scheme" involving several major credit enhancers and brokers of guaranteed investment contracts, or GICs.
The scheme involved qualified guarantees for unloaned proceeds from so-called lease-to-own bond deals. Officials found evidence of wire transfers between deal participants that they believe represented diversions of arbitrage that should have been rebated to the federal government.
Those deal participants are thought to include Beverly Hills, Calif.-based CDR Financial Products, a boutique financial products firm that provides a range of swap advisory services to municipal clients, and French bank Soci?t? G?n?rale. CDR, then Chambers Dunhill Rubin & Co., served as structuring agent, GIC broker, and in other roles in about 20 lease-to-own transactions in the late 1990s through 2005. SocGen provided credit enhancements as liquidity provider, forward agreement purchaser, and investment agreement provider in the deals.
CDR was one of three firms raided on Nov. 15 by Federal Bureau of Investigation and Justice Department officials as part of the department's criminal antitrust investigation. A spokesman for the firm declined to comment, but CDR has argued that the lease-to-own program, operated in part by Freddie Mac, was a valuable and viable effort to help low-income residents get into housing.
"CDR was paid fees by credit enhancers for advising them with respect to the risks of entering into forward commitments to purchase 30-year mortgages at a preset prices and interest rate," the firm told The Bond Buyer in June. "CDR is not aware of any scheme to pay any amounts not earned for services rendered in connection with any lease-to-own transaction."
The Justice Department investigation, which could cover some of the alleged problems found in the lease-to-own deals, is being conducted by department officials, including U.S. attorneys, the IRS' criminal investigation division, and the FBI. The probe is purportedly focused on price fixing, bid-rigging, and other anti-competitive practices in the muni market in connection with GICs, other investment vehicles, and derivatives transactions entered into the past 14 years.
Roughly two-dozen firms are thought to have been subpoenaed by a federal grand jury. The probe grew out of a criminal referral made by the TEB office several years ago, as well as Securities and Exchange Commission inquiries.
The SEC is conducting a parallel civil investigation into potential securities fraud issues related to the alleged anticompetitive practices and has subpoenaed at least seven firms for similar records dating back to 2000.
A FEW BAD ACTORS
To comply with subpoenas, firms had until Dec. 18 to submit documentation of every investment contract or derivative transaction entered into in connection with munis during the two time periods. Truckloads of records must now be examined by Justice and SEC officials, and the federal grand jury's proceedings could take years, according to sources.
"The investigations are not expected to be swift. In the meantime, the industry is being unfairly tarred by the actions of relatively few bad actors," said Blank Rome's Spector, who serves as chair of the American Bar Association tax-exempt financing committee's subcommittee on enforcement.
NABL's Lew said it is difficult to project the timing of a resolution since little public information about the proceedings is available.
"The significance of the potential charges will likely be considered by most counsel in advising issuers as to the investment of bond proceeds," she said. "This type of potential misconduct occurs in various parts of the economy. It is unfortunate that it has impacted the municipal finance community. We believe that effective enforcement efforts will resolve the issues."
At this point, it is unclear how industry participants will respond to the investigations and their consequences, but in the meantime issuers should make sure they have adequate internal controls in place, according to Vinson & Elkins's Scott.
NABL will hold a teleconference in the first six weeks of the new year to discuss the investigations and help bond counsel develop best practices for the investment of bond proceeds and related issues. Panelists will include lawyers and financial advisory professionals, according to Lew.
The NABL president noted that one of the biggest challenges for TEB this year may be effectively utilizing resources so clear tax abuses are addressed, while minimizing the time and expense incurred by the vast majority of issuers who make their best efforts at tax compliance.
"This is not a new challenge, but it is an important ongoing one as it affects the health of the tax regulatory system," Lew said.
"TEB is actively continuing its work with other [tax-exempt and government entities division] offices in the further development of our data analysis tools and resources," Chamberlin said. "I am encouraged with the progress we've made thus far and believe that the possibilities for enhancement of our case selection process will build upon our compliance program's past successes."
In addition to pursuing "bad actors" in the market, IRS officials in 2007 will continue pursuing several audit initiatives and procedural updates.
As part of TEB's 501(c)(3) initiative, launched this summer, agents are gearing up to open correspondence audits of several hundred bond issues. Those audits will primarily target nonprofit hospitals and will collect compliance information, allowing TEB to analyze specific problem areas, officials have said. The project is mainly focused on post-issuance compliance issues such as private business use, research agreements, management contracts, and lease arrangements.
SWAPS INITIATIVE
The office's so-called swaps initiative was also launched this summer. That inquiry involves agents analyzing hedges of interest rate risk for problems associated with the qualification of hedges, the treatment of off-market components, the valuation of termination fees, and the proper accounting treatment of hedges - all for swaps, caps, and other derivatives transactions entered into in conjunction with bond deals completed at least five years ago.
One of the most significant problems uncovered by the exams thus far, according to officials, is some issuers' failure to rebate arbitrage in compliance with tax code rules.
Beyond those projects, next year the TEB office will likely wrap up its ongoing solid-waste, single-family, and multifamily housing audit initiatives, according to agency officials.
The office is also systematically updating its Internal Revenue Manual to provide more transparency about its procedures. In September, it released an updated version of the revenue procedure used by municipal issuers who want to challenge agency determinations that bonds are in violation of tax laws. Issuers can file administrative appeals of such determinations with the IRS Office of Appeals, which is separate from TEB.
The new revenue procedure reflects organizational changes and stipulates that when cases do not get resolved in appeals, they cannot revert back to TEB for a new round of settlement negotiations. It also codifies the relatively new practice of not offering so-called Section 6700 passes, which previously brought transaction parties into settlements by protecting them from other penalties.
TEB is also developing a compliance regime to replace the voluntary closing agreement program, or VCAP. Issuers can utilize the program when they discover problems with their bonds, before the deals are audited by the IRS. The new voluntary compliance regime will likely include defined settlement terms for specific types of violations, expediting the process for issuers with fairly straightforward tax problems, according to officials.
Alternative dispute resolution mechanisms that encourage voluntary compliance are important to the effectiveness of tax system, according to NABL's Lew.
"We are pleased with the openness of TEB to explore alternatives in this area," she said, adding that it is critical the office alerts the public finance community about its general concerns so proactive measures can be taken to guard against noncompliance.
"We welcome the efforts of Cliff Gannett and his staff at making efforts to communicate areas of concern," Lew said.
Spector said an intermediate sanctions regime could stimulate requests for closing agreements. "I would like to see TEB increase its staffing in CPM to accommodate a greater industry attention to voluntary compliance," he said.
One industry source who did not wish to be identified pointed out that the audit side of enforcement proceedings remains much more adversarial than the voluntary compliance side.
"There's a belief among many audited parties and their counsel that the system is sorely lacking in balance - in other words, it's just not fair," the individual noted. "First, of course, is the frequently voiced view that because there is no practical access to judicial oversight, the service remains free to assert more or less whatever position it deems appropriate. While its position certainly isn't always wrong, when it is, or is strongly believed to be, there's often no practical recourse."
"We have seen several instances where we effectively have law by audit position. The auditors assert a position, and that then becomes the benchmark for the practice," the source said. "Even if bond counsel were prepared to render an unqualified opinion - if they legitimately conclude that a court would not agree with the IRS' asserted position - the obligation to disclose the issue pretty much ensures that the deal won't get done."
While private-letter rulings can be sought in those cases, the process is both time-consuming and expensive, and issuers frequently abandon deals they should be able to do, the individual continued. "In other words, the audit branch is making law without the pesky requirement that the rule be vetted by [IRS] chief counsel and Treasury."
THE TRIBAL SECTOR
The tribal bond sector has been a prime example of such controversies for years, and that was no different in 2006. IRS chief counsel issued a handful of rulings for Indian tribes that had issued tax-exempt debt or borrowed bond proceeds from municipalities. The rulings were, on the whole, interpreted by market participants as negative or restrictive, drawing vociferous reactions.
Currently, the tax code treats tribes as states for purposes of tax-exempt bond issuance if the bonds are used to fund activities that are considered "essential government functions." The proper interpretation of those three words, however, has been hotly contested by tribes who want greater access to debt financing to offset minimal property tax bases and federal officials who say Congress never wanted commercial or industrial ventures built with bonds.
"One of the IRS' greatest challenges is working with practitioners who are representing the issuers but are also defending their own opinions," another market source said. "The tribal bond controversy is exemplary for its large-scale effort to defeat the efforts of Treasury and the IRS to enforce the law. The resources involved and consumed in that controversy were inordinate. So much more could have been accomplished by the government and the industry had it not been so distracted."
Another source concurred, saying: "It didn't have to get this ugly. A couple of attorneys in the IRS and in the practitioner community are responsible for spinning this issue out of control. And, like usual, Indian Country paid the price."
The solid-waste sector has also seen its fair share of controversy over the years. In 2006, the IRS' Anderson announced that TEB officials were working closely with the agency's large and mid-size business division to penalize conduit borrowers who used solid-waste bonds for allegedly unqualified projects.
Tax code regulations allow municipal issuers and conduit borrowers to use solid-waste bonds to finance facilities that process material with no market value at the place it is processed and at the time bonds are issued. Tax problems cited by the IRS in the sector are quite varied, but often revolve around the waste material's alleged value.
Market participants' lack of recourse is particularly apparent in that area, where the IRS "doubles up," asserting a conduit borrower's loss of interest deductibility under Section 150 of the tax code and declaring bonds taxable, penalizing investors, according to a market participant familiar with solid-waste deals and enforcement actions.
That "double dip" ratchets up the pressure on the borrower to settle without giving the issue a fair shake, since issuers cannot take the IRS to court to challenge agency determinations, the source said.
Anderson says those complaints are not realistic. "We still are willing to suspend taxing bondholders if conduit borrowers want to take the 150(b) issue to court," he said. "This entirely eliminates the doubling-up concern and pressure to settle. I think that the lack of 150(b) cases in tax court indicates that our determinations have been on the mark."
(c) 2006 The Bond Buyer and SourceMedia, Inc. All rights reserved.
http://www.bondbuyer.com http://www.sourcemedia.com
November 2006
Tips For TIFs: Development Experts Chime In on Trend
Posted on Wednesday, November 08, 2006
By Tedra Desue
Officials Should Know What Buyers Look for in TIF Deals, Experts Say
Posted on Wednesday, November 08, 2006
By Tedra DeSue
IRS' Charles Anderson to Retire From TEB Office Jan. 4
Posted on Thursday, November 09, 2006
By Alison L. Mcconnell
Justice, SEC Probe Muni Derivatives - Massive Investigation Includes Investments
Posted on Tuesday, November 21, 2006
By Lynn Hume and Alison L. McConnell
Market Shocked at Justice's Reach - Probes May Revisit Yield-Burning Deals
Posted on Wednesday, November 22, 2006
By Lynn Hume and Alison L. McConnell
Tips For TIFs: Development Experts Chime In on Trend
Posted on Wednesday, November 08, 2006
Source: Bond Buyer
By Tedra Desue
While tax increment finance districts continue to grow in popularity as a redevelopment tool, there are some key issues government officials should keep in mind when setting them up, according to panelists at yesterday's Tax Increment Financing Policy and Practice Symposium sponsored by the Council of Development Finance Agencies.
Panelists from almost every spectrum of the TIF creation process gave their thoughts, highlighting the good and the bad.
TIFs, also called tax allocation districts, or TADs, are seen as a way to rid communities of blight and to spur economic development.
Formation of TIF districts allows cities and counties to freeze existing property values within a district's boundaries. As property in the district is developed, the additional taxes paid on the incremental increase in value can be reinvested in the district or used to back debt. In most instances, other taxing entities, such as school districts, have to agree to give up tax dollars from that incremental increase so that they can go to the development district.
One point most market players and government officials agreed on was the need for developers who have deep pockets in addition to a proven track record of success.
Laura Radcliff, a managing director with A.G. Edwards & Sons, said it was crucial that developers have access to financial resources for cases in which bond proceeds were insufficient to cover the costs.
"It's important that they show they have the capability to do the project," she said. "You have a reliable market analysis, and the developer should be able to show that if additional funds are needed, they have access to more funds."
Andrew Frank, the executive vice president of the Baltimore Development Corp., told the group about his organization's work to build Clipper Mill on an abandoned site that was used primarily for manufacturing buildings. Today it houses office, retail, and residential space.
Frank said one priority was making sure the city was practical in determining how much it should contribute to the project, as well as how much the developer would have to kick in.
"The goal is to minimize the city's involvement and maximize the city's returns," Frank said.
That goal can sometimes tie the hands or negatively affect the developer, said Tim Pula, senior development director of Struever Bros., Eccles & Rouse. He was developer for the Clipper Mill project and he recalled the difficulties he found during inspections.
"The inspector is trying to protect the city's interest, and sometimes the process could take weeks," Pula said. "In the meantime, we've got construction crews ready to start."
Panelists said that while some obstacles are inevitable, there are steps that can be taken early on in the process that could stymie any future problems.
"There should be an agreement on a certain set of assumptions between the city and the developer, and that drives the rest of the process," Frank said.
Those assumptions will help determine what the returns will be for the city and the developer. (c) 2006 The Bond Buyer and SourceMedia, Inc. All rights reserved.
http://www.bondbuyer.com http://www.sourcemedia.com
Officials Should Know What Buyers Look for in TIF Deals, Experts Say
Posted on Wednesday, November 08, 2006
Source: Bond Buyer
By Tedra DeSue
Local government officials should be aware that investors consider various factors when looking at bonds sold by tax increment finance districts.
That was one of the topics discussed yesterday at the Tax Increment Financing Policy and Practice Symposium sponsored by the Council of Development Finance Agencies.
Richard Stein, the director of credit research for OppenheimerFunds Inc., noted that there are some inherent differences in the types of TIF projects that are created. Some can be strictly residential, while others can be mixed-use, with a blend of residential, commercial, and office space.
For the most part, mixed-use projects or those that are largely commercial tend to be viewed as riskier because they depend on the developer inking contracts with retailers that will cause the incremental taxes raised through the TIF to be sufficient enough to pay off the bonds.
Formation of TIF districts allows cities and counties to freeze existing property values within a district's boundaries. As property in the district is developed, the additional taxes paid on the incremental increase in value can be reinvested in the district or used to back debt. In most instances, other taxing entities, such as school districts, have to agree to give up tax dollars from that incremental increase so that they can go to the development district.
The districts are also referred to as tax allocation districts, or TADs.
Stein also noted that it is important that officials consider the long-term plans of the major retailers locating in the district. He advised municipalities avoid inking leases for short durations, such as 10 years.
"You don't know what will happen at the end of 10 years - sometimes retailers choose bad locations for their businesses and if they are your only tenant, that likely will be a problem," Stein said. "It's always important to have diversification, including mom and pop stores, and a large retailer."
Jonathan Chirunga, a research analyst for T. Rowe Price Associates, agreed. He added that when his firm evaluates which TIF bonds would be worth investing in, it often looks at the developer and its financial strength.
"It boils down to how we like the deal," Chirunga said. "We're willing to be sizable players if they are good bonds."
Given the complexities of TIF deals, investors say they also look at exactly who the players putting them together are. And while feasibility studies that the team presents are helpful, panelists were split about exactly how much they should be used in determining a deal's viability.
Stein joked that he had never seen a feasibility study that basically said the deal was infeasible.
On that same note, panelists said there was always something that could be gleaned from the documents. Mark Hughes, a senior vice president with First Albany Capital, said such documents were important.
"Giving more disclosure about what's going on in that community to give to investors is very important because it points out what the strengths are of that community, and what the weaknesses are as well," Hughes said.
(c) 2006 The Bond Buyer and SourceMedia, Inc. All rights reserved.
http://www.bondbuyer.com http://www.sourcemedia.com
IRS' Charles Anderson to Retire From TEB Office Jan. 4
Posted on Thursday, November 09, 2006
Source: Bond Buyer
By Alison L. Mcconnell
Charles Anderson, field manager of the Internal Revenue Service's tax-exempt bond office, will retire Jan. 4.
After 33 years with the agency, Anderson recently decided to move up his anticipated departure date by a few months because it is "time to go," he said in an interview yesterday. Anderson has headed up field operations for the TEB office since its inception in early 2000.
As part of the IRS' tax-exempt and government entities division, TEB has grown from a fledgling program six years ago to a full-bore enforcement section that aggressively pursues abusive municipal bond deals. Its evolution has met mixed reactions from market participants who both applaud its efforts to penalize "bad actors" and question the tough, sometimes unyielding stance it takes in audit negotiations.
Current TEB director Clifford Gannett, former director W. Mark Scott, and Anderson "were there at the beginning together, and while we disagreed a lot we were always brutally honest with each other," Anderson said.
He noted that, early on, they often did not get much internal support from upper management on enforcement procedures. But when former IRS commissioner Charles Rossotti departed and the pendulum swung back under current commissioner Mark W. Everson, TEB found itself "ahead of the curve," Anderson recalled.
"I remember Mark and I having discussions on how to focus on enforcement instead of some of the fluff that Rossotti was shoving down everyone's throats. It didn't make us too popular in TE/GE," he said. "Cliff did a great job integrating [the voluntary closing agreement program] into the whole enforcement structure so we were able to keep focused on that."
Anderson said he would probably work part-time after retiring from the IRS and currently has some options to consider.
"If I decide to do any consulting, there will certainly be a list of people that I won't be associated with, I can tell you that," he said. "I just don't know how much that I will want to take on. I will be building a house in Pennsylvania in 2008 and will certainly do some charity and pro bono work in my local community, if any of my experience in bonds or exempt organizations is useful there."
He predicted that buy-side risk analysis and pre- and post-audit due diligence will be critical issues for the municipal market in the coming years. "People should run like the wind when they see certain firms as special tax counsel," he warned.
Anderson also said there is a "sharp cut-off" in the quality of various firms doing arbitrage rebate work today.
"Cliff is designing a very aggressive approach to arbitrage rebate [and] I think that this area of practice will become especially important to issuers," he said. "Cliff is a real rebate guy and he is now getting his horses together. I think that he will surprise people with his arbitrage team."
Anderson had high praise for his current and former colleagues at TEB.
"I have the utmost respect for Mark, Cliff, and my group managers: Karen Skinder, Derek Knight, Allyson Dodd, Tanya Kryah, and Carl Scott," he said. He added that Gannett would be well-served to consider any of those managers for his position or the vacant spot at the head of TEB's office of compliance and program management, which Gannett used to run.
"The agents were loyal. I hope they realize that I tried to watch their backs for them," Anderson said. "I think that we actually did something and affected practices rather than just talking about it."
(c) 2006 The Bond Buyer and SourceMedia, Inc. All rights reserved.
http://www.bondbuyer.com http://www.sourcemedia.com
Justice, SEC Probe Muni Derivatives - Massive Investigation Includes Investments
Posted 11/21/06
By Lynn Hume and Alison L. McConnell
In the largest and most sweeping federal investigations ever conducted of the municipal market, the Justice Department and Securities and Exchange Commission have each asked dozens of firms for information about virtually every investment product or derivative they have brokered, provided, or otherwise been involved with in connection with municipal bond transactions over the past six to 14 years.
“This is massive,” one market participant familiar with the investigations said yesterday.
The Bond Buyer has learned that the parallel criminal and civil investigations go far beyond GICs and may cover thousands of investment products and derivatives entered into in connection with muni bond transactions that could total hundreds of billions of dollars.
Only a portion of that universe is expected to be tied to civil or criminal allegations, however, as the Internal Revenue Service has reached settlements or taken enforcement action with regard to $15 billion to $20 billion of muni bond issues in recent years over investment products or derivatives that contributed to tax law violations, sources said.
The probes cover a wide range of investment and derivatives brokers and providers, including insurance companies, securities firms, banks, derivatives firms, financial advisers, and investment advisers.
The Justice Department’s antitrust division, which is working with the IRS’ criminal investigation division and the Federal Bureau of Investigation on the criminal probe, is focusing on anti-competitive behavior such as collusion between firms to get business, rig bids, and fix prices with regard to transactions that date back through 1992, sources said.
The Justice subpoenas, served Wednesday to at least two dozen firms, asked for documents, e-mails, tapes or notes of phone conversations, and other information regarding “contracts involving the investment or reinvestment of the proceeds of tax-exempt bond issues and qualified zone academy bonds [as well as] related transactions involving the management or transferal of the interest rate risk associated with those bonds, including but not limited to guaranteed investment contracts; forward supply, purchase, or delivery agreements; repurchase agreements; swaps; options; and swaptions.”
The subpoenas also requested corporate organizational charts, telephone directories, and lists of all individuals involved with GICs and derivatives, in addition to all documents associated with “relevant municipal contracts awarded or intended to be awarded pursuant to competitive bidding” — including invitations to bid; solicitations, notices, or requests for quotations or proposals issued to any provider; actual or proposed responses; and amounts and prices bid. The documents are to be submitted by Dec. 18, according to the subpoenas.
“The industry tends to be quite intertwined and interconnected,” said Willis Ritter, a partner at Ungaretti & Harris LLP here. “Virtually all the major houses are involved in selling [GICs], so if you think you’ve found something about one, you suspect you’re going to find it about all of them. I think the government believes the whole industry moves like a herd. That would explain why this covers so many people.”
Ritter added that swaps and other derivative products were a logical inclusion in the Justice and SEC inquiries.
“A swap is a means of affecting the interest rate on bonds just as an investment agreement affects the rate on the investment. It’s the other side of the same coin,” he said. “Plus, the people involved in the swap industry are very much same people that are involved in GICs because it involves the same types of analysis, hedging, skills, and capital requirements.”
The SEC is conducting a parallel civil investigation into transactions dating back through 2000. The commission is looking at whether firms disclosed that bidding practices for GICs and other investment products were competitive when they were not, made or received hidden fees, payments, or kickbacks, or failed to disclose other key information to issuers or investors, according to sources.
The SEC subpoenas were similar to the Justice Department’s, requesting information regarding “guaranteed investment contracts, repurchase agreements, flexible repurchase agreements, collateralized certificates of deposit, forward delivery agreements, forward supply agreements, put agreements, interest rate swaps, and basis swaps.”
Sources familiar with the both federal investigations said subpoenas sent to other firms appeared to contain the same language. Some only requested documents while others required appearances before a federal grand jury, they said.
While swaps are deemed to be derivatives contracts and not securities and therefore cannot be regulated by the SEC, the commission’s Rule 10b-5 gives it broad latitude to investigate any alleged fraud in connection with the purchase or sale of a security. As a result, swaps and other derivatives entered into by municipal issuers in connection with underlying bond issues may fall with the SEC’s enforcement realm.
The IRS’ tax-exempt bond office, which in 2004 referred a mass of investigatory findings to the Justice Department, has been looking at issues related to derivatives and investments of bond proceeds in a variety of audits for at least three years. According to sources, Justice has now picked up the prosecution using the 1890 Sherman Act, which prohibits any agreement among competitors to fix prices, rig bids, or engage in other anti-competitive activity.
Sources said yesterday that Justice, which under antitrust laws would have to prove its case beyond a reasonable doubt to get convictions, may be pursuing certain firms with an eye to charging them with continuing acts of conspiracy based on criminal activities that could date back to 1992 but involve payments made or collected more recently. Antitrust statutes of limitation expire five years after the date an alleged conspiracy is somehow dissolved, according to sources.
“The fact that they may be out of time with regard to statutes isn’t determinative of how far back they can look,” one attorney said.
And the sweepingly broad case may have taken years to develop because federal officials did not want to limit themselves in their hunt for patterns of criminal activity over time, another noted.
Yet the scope of the Justice and SEC probes is so wide that cases could take months or years to unfold, some have said.
“One cannot help but note that when you throw this wide a blanket over an entire industry, it begins to look very much like a fishing expedition rather than [something] specifically targeted toward any particular institution or practice,” Ritter said yesterday.
(c) 2006 The Bond Buyer and SourceMedia, Inc. All rights reserved.
http://www.bondbuyer.com http://www.sourcemedia.com
Market Shocked at Justice's Reach - Probes May Revisit Yield-Burning Deals
Posted 11/22/06
By Lynn Hume and Alison L. McConnell
Municipal market participants yesterday were surprised at the breadth of the Justice Department’s investigation of anticompetitive practices in the investment and derivatives areas of the market, with some suggesting the probe may reach back to some of the deals involved in the Securities and Exchange Commission’s global yield-burning settlement with firms six years ago.
Their comments came after The Bond Buyer reported Monday that the Justice Department and the SEC had subpoenaed dozens of firms for information about virtually every investment product or derivative they have brokered, provided, or otherwise been involved with in connection with municipal bond transactions over the past six to 14 years.
In separate sets of subpoenas sent to broker-dealers, banks, insurance companies, investment advisers, and financial advisers, the Justice Department asked for information going back through 1992, and the SEC asked for data going back through 2000, on guaranteed investment contracts, forward supply and purchase agreements, repurchase agreements, swaps, options, and swaptions.
“With the subpoenas seeking information going back to 1992, Justice may be looking at bid-rigging in the deals involved in the yield-burning scandal,” said one long-time market participant who did not want to be identified.
“It is a possibility,” said one source close to the investigations. The source said the Internal Revenue Service has subsequently audited some of the deals that were involved in the global yield-burning settlement for issues that were not covered by the settlement, such as the under-pricing of forward agreements.
In the global yield-burning agreement, the largest settlement ever reached in the muni market, 17 broker-dealers agreed to pay more than $138.3 million to globally resolve federal yield-burning allegations with the SEC and to compensate issuers for losses in connection with 3,603 advance refundings done for hundreds of state and local governments between 1990 and 1994.
The SEC claimed the firms overcharged issuers for open-market Treasury securities for refunding escrows and that the markups reduced or burned the investment yield so that it was below the bond yield and did not generate illegal arbitrage profits. However, in some of the cases, yield burning occurred because issuers underpaid for forward-float agreements, sources said yesterday. The settlement did not cover forwards, bid rigging, or collusion among firms, which could be fair game for the Justice Department in the current probe, the sources said.
Criminal antitrust statutes of limitations run five years from the last act in furtherance of a conspiracy, and the federal government’s position in such cases is that a “last act” can be the last payment made on an allegedly fixed contract, an antitrust lawyer said. If final payments occurred within the last five years, the department could bring a slew of past transactions into the picture in a trial, he said.
The Justice Department and the SEC are believed to be investigating, among other things, whether certain investment brokers and providers have developed secret relationships with broker-dealers and have been steering muni business to the dealer firms in return for fees for specific transactions or monthly retainer payments.
One issuer who did not want to be identified said yesterday that years ago he was involved in an escrow restructuring that involved a forward agreement and later found out that the dealer-financial adviser in the deal had served as a “front” for an investment adviser that had put the whole deal together and had manipulated the escrow to ensure the forward would be worth millions of dollars for the broker-dealer firm that provided it.
But several sources questioned the need for the department to go back to 1992.
“I think they’re asking for too much information, it’s too broad, and it’s negatively impacting people that have done nothing wrong,” said W. Mark Scott, a partner at Vinson & Elkins LLP here who formerly was director of the IRS tax-exempt bond office. “They’ve sent out summonses or subpoenas to parties that are innocent that ask for a mountain of information without considering the costs and ramifications on these parties. What are they going to do with a hundred truckfuls of information? Clearly they’re searching for the smoking gun, but with respect to the firms that they don’t seem to have any concerns about it seems like they could have been narrower in the requests.”
“They are going to have to have a warehouse to hold this stuff and semis to move it,” said Frank Hoadley, Wisconsin’s capital finance director.
“What scares me about this is the enormous resources it is going to take to respond to the subpoenas and information requests and the federal resources that are going to be needed to analyze this stuff. The whole market’s going to pay,” Hoadley said. “I hope that they can quickly become surgical about this.”
But Hoadley said he has no doubt the Justice Department will uncover some wrongdoing. “Are they going to find fraud? Of course they’re going to find fraud. I’m certain it’s there,” he said.
Patrick Born, the chief financial officer for Minneapolis who chairs the Government Finance Officers Association’s Governmental debt management committee, said the Justice and SEC probes should make issuers more careful about the transparency of muni and muni-related transactions, as well as the quality of transaction participants.
“Based on the size and scope of this investigation as reported, issuers should be very concerned about potential abuses taking place and should be even more sure than they were before about the quality of professional representatives they are using,” Born said.
“We need to carefully examine whether there is appropriate transparency in the way the municipal bond business is being done in these areas,” he said. “The municipal market is very important to state and local governments and with this investigation it may be tainted. It’s important that everybody who benefits by and supports this market take steps to improve transparency in every transaction — not just the pricing of bonds, but the investment of bond proceeds, derivatives, and related financial products.”
Both Micah Green, co-chief executive officer of the Securities Industry and Financial Markets Association, and Carol Lew, president of the National Association of Bond Lawyers, stressed that their organizations support the investigation and punishment of wrongdoing in the municipal market.
“This has just unfolded, but if the allegations are correct we are dismayed about the behavior of certain market participants,” said Lew, a partner with Stradling Yocca Carlson Rauth in Newport Beach, Calif.
“NABL does not tolerate corruption and unethical behavior in the marketplace. This type of behavior unfortunately happens in different parts of the economy, and the government has a host of different tools it can use” to go after abuses, she said.
To fulfill its mission of improving the integrity of the municipal bond market, NABL is actively planning educational programs for its members to assist them in dealing with “the nuts and bolts of best practices” in the context of the Justice and SEC investigations, Lew said.
The association is also attempting to proactively work with federal officials to find simple administrative solutions to problems within the market, such as a simplification of the arbitrage regulations, which is already the subject of a NABL comment project, she added.
“If the regulators have a concern there is something out there, they ought to investigate it,” Green said. “We support the full enforcement of the laws and regulations. The best way to avoid changes that would make the laws and regulations more onerous is to enforce the ones on the books.”
But Green said he does not think the Justice and SEC probes should taint the market. “I don’t think we should consider there’s a cloud [over the muni market] because there’s an investigation,” he said. “We shouldn’t presume there’s wrongdoing or the outcome of the investigations.”
“If it gets out the bad guys, that’s a public service,” said Peter Shapiro, managing director of Swap Financial Group. “If it scares people away from the products and if people start to view this as a rigged market, that’s bad, because the vast majority of the market is not rigged.”
“Beyond the publicity, if there really is a problem, it’s unfortunate for the municipal business,” said Herman Charbonneau, senior vice president and manager for public finance for Roosevelt & Cross Inc. “We really don’t need to have the image that we’re consistently reaching into new areas of the marketplace to generate transactions that are questionable or profits that are not justified.”
Charbonneau, whose firm has not received subpoenas from the Justice Department or the SEC regarding the ongoing investigations, said he worries that problems being probed stem from the growing use of intermediary firms, which dealers increasingly turn to for help in arranging the details of bond transactions. Since the industry came under scrutiny for yield burning in the late 1990s, these intermediaries have become one way to make sure all the additional due diligence is completed, he said.
The intermediaries have generally been efficient and satisfied all the requirements set out by bond counsel, Charbonneau said, adding that his firm has in the past worked with Sound Capital Management Inc., one of the GIC brokers that was raided by the Federal Bureau of Investigation last week.
“You go out even if you’ve got a small issue — say you’ve got a $12 million issue — you need open markets, you need a GIC, you need a float contract or something like that for refunding,” he said.
“They have the industry contacts and they can scare up interest even in something very marginal from the standpoint of a substantial government dealer,” Charbonneau said. “I assume that perhaps some of the problem is how they scare up some of that interest.”
He added that the current investigations highlight how bond counsel firms might have to go to greater lengths to ensure that the process of securing GICs, swaps, and other extras is legitimate.
(c) 2006 The Bond Buyer and SourceMedia, Inc. All rights reserved.
http://www.bondbuyer.com http://www.sourcemedia.com
October 2006
Derivatives: Panelists at TBMA Conference Preach Caution When It Comes to Swaps
Posted on Thursday, October 12, 2006
By Matthew Hanson
New PILOT Regulations Under Fire
Posted on Friday, October 20, 2006
By Alison L. Mcconnell
How the Boy Scouts of America Helped to Save Municipal Bonds
Posted on Monday, October 23, 2006
By Craig T. Ferris
The Tax Reform Act, 20 Years Later
Posted on Monday, October 23, 2006
By Craig T. Ferris
A Vague Future For Tax Reform
Posted on Tuesday, October 24, 2006
By Alison L. McConnell
Derivatives: Panelists at TBMA Conference Preach Caution When It Comes to Swaps
Posted on Thursday, October 12, 2006
Source: Bond Buyer
By Matthew Hanson
Credit analysts from the nation's major rating agencies and bond insurers explained their take on municipal derivatives yesterday, pointing out best practices to ensure that issuers know what they are getting into when they sign up for swaps and hedges.
Playing the role of cautioners among a slate of other panels extolling the benefits of derivatives at The Bond Market Association's muni derivatives conference, the analysts explained how they evaluate the quality of such contracts.
"Derivatives are like prescription drugs," said managing director David Litvack of Fitch Ratings, explaining what he called a derivatives warning label. "They can be beneficial when used appropriately ... but they may be habit-forming and carry the risk of certain unpleasant side effects."
The risk of large, unscheduled payments coming due, including the chance of termination payments, ranked near the top of panelists' lists of potential problems. The credit ratings of swap counterparties, the chance that interest rates and yields will change, and whether swaps require the parties to post collateral also factor into an evaluation of swaps' viability, panelists said.
They agreed that counting on swaps as an added source of revenue, rather than as a hedging mechanism, is nearly always bad policy.
During the two years that Standard & Poor's has used debt derivative profiles, its scoring rubric for municipal derivatives, the rating agency has scored more than 600 derivative products, said associate director Colin MacNaught. This figure averages out to about three swaps analyzed per day and 60 per month, MacNaught said.
But he added that Standard & Poor's has never downgraded a credit based solely on a high DDP score, which would signify high risk. This is partly because the issuer's credit rating plays into its debt derivative profile -- or DDP -- score, MacNaught said.
"The credit fundamentals of an issuer, across all sectors, plays a major role in the DDP analysis," he said, adding that it is also a product of the strength of swaps brought to Standard & Poor's for a score. Of all the DDP scores assigned during the last two years, 78% of them were 2 or lower, meaning the derivatives carried minimal-to-low risk based on Standard & Poor's DDP system.
Fitch does not use a standardized scoring system for swaps or hedges, preferring to factor them into an issuer's overall credit rating, Litvack said.
"No other part of the rating analysis is productized in that way," he said. "We don't take the management analysis and put it through a rubric. We don't take the analysis of their debt structure and assign it a different score for debt structures. So why assign a separate score for swap analysis?"
Analysts noted that the capacity for swaps and variable-rate debt varies by sector. For example, hospitals, utilities, and universities tend to have large investment portfolios, increasing their capacities. The numbers seemed to play that out, too, as 55% of the derivatives scored by Standard & Poor's DDP process were offered by either health care or higher education issuers.
As new forms of swaps are developed, the risks will stay largely the same, analysts said.
"As I've seen derivatives develop, we've seen derivatives using the [consumer price index], fixed maturities, and basis swaps," Litvack said. "They all seem to have the same risks: termination risks and basis risks."
(c) 2006 The Bond Buyer and SourceMedia, Inc. All rights reserved.
http://www.bondbuyer.com http://www.sourcemedia.com
New PILOT Regulations Under Fire
Posted on Friday, October 20, 2006
Source: Bond Buyer
By Alison L. Mcconnell
The Internal Revenue Service's proposed regulations for payments in lieu of taxes, or PILOTs, could restrict future tax-exempt economic development bond deals, market participants said yesterday.
The regulations, which will not be finalized until after a Feb. 13 public hearing, would tighten tax code rules for PILOTs by requiring the payments to represent a fixed percentage of generally applicable taxes. The regulations signify a new restriction and narrow the interpretation taken by the IRS Office of Chief Counsel in recent private letter rulings issued for the New York City Industrial Development Authority's financing of two new baseball stadiums for the New York Yankees and the New York Mets.
Cities often use PILOT deals, where payments from a private entity are used to pay debt service on tax-exempt bonds, in economic development projects. In a typical transaction a city will take title to a parcel of land, thereby removing the property from tax rolls, and permit a private business to use the exempt property in exchange for payment under the terms of a fixed PILOT contract.
In order to meet private activity restrictions for tax-exempt bonds, those payments must be less than and commensurate with the taxes that would have been collected on the property otherwise. In tax code language, they cannot be "special charges" -- imposed on a limited group of people for benefits to be received only by that group -- but instead must qualify for treatment as "generally applicable taxes," which apply equally to all taxpayers.
The rules proposed yesterday would require PILOT contracts to specify that the payments represent "a fixed percentage of, or reflect a fixed adjustment to, the amount of generally applicable taxes in each year, based on comparable current valuation assessments."
That will "better assure a reasonably close relationship between eligible PILOT payments and generally applicable taxes," the IRS said in the regulations.
The rules would also delete a sentence from the current tax code definition of "special charge" as it pertains to PILOTs because the agency felt an existing definition in another code section was sufficient.
A public hearing on the proposed rules is scheduled for Feb. 17 at 10 a.m. Eastern Standard Time in Washington. The IRS will accept comments until Jan. 16 on the topic of whether any special rules are needed to address PILOTs based on taxes other than property taxes, which are most typically used in the deals.
Market participants reacting to the proposed regulations yesterday said the IRS is taking a narrower approach than it did in two recent private letter rulings issued for the New York City IDA. Those PLRs green-lighted the sale of almost $1.5 billion in tax-exempt bonds for new baseball stadiums for the Yankees and Mets.
The IDA had sought IRS approval of the two transactions -- one for each team -- because no formal PILOT rulings had been issued at that point, according to Nixon Peabody LLP, the firm acting as bond counsel on the deals. The IRS' response approved the structure of the two deals, which involved PILOTs paid by the two teams and contracted to be the amount of debt service on the tax-exempt bonds, rather than a set percentage of generally applicable taxes.
Sources said yesterday that the PLRs' approval of tax-exempt bonds backed by a PILOT contract that looked "too much like a private loan" might have pushed Treasury Department and IRS officials to clamp down in the regulations. But the proposed rules are inconsistent with the way PILOTs are commonly used, one attorney noted.
"The IRS' proposal would reduce the intended financial benefit the governmental entity is intending to provide for the designated project," said Richard Chirls of Orrick Herrington & Sutcliffe LLP in New York. "Tax-exempt bonds will be issued, but at a higher cost, [and] that is not good for the IRS, the municipality, or the developer."
And issuers considering PILOT deals are not likely to rush to market before the regulations are finalized, sources noted.
"Bringing a deal to market in the current legal environment would face the challenge of balancing the ambiguities in the current regulations, as interpreted by the recent private letter rulings for the Yankees and Mets, against the IRS' views as indicated by the requirements set forth in the proposed regulations," according to Chirls. "Prompt resolution by the issuance of final regulations is very important."
(c) 2006 The Bond Buyer and SourceMedia, Inc. All rights reserved.
http://www.bondbuyer.com http://www.sourcemedia.com
How the Boy Scouts of America Helped to Save Municipal Bonds
Posted on Monday, October 23, 2006
Source: Bond Buyer
By Craig T. Ferris
It doesn't seem possible that Boy Scouts of America saved tax-exempt bonds, but they did.
When the Treasury unveiled in November 1984 what would become the Reagan administration's landmark tax reform proposal, the 461-page plan contained a ticking time bomb for the municipal bond market.
Besides eliminating all private-activity bonds, repealing the deduction for banks to buy and carry tax-exempt bonds, prohibiting all advance refundings, and restricting arbitrage by requiring that all earnings above a certain minimal level be rebated to the Treasury, the massive plan proposed that any governmental bond where more than 1% of the proceeds were used for private purposes would no longer be tax-exempt.
That one proposal, far more than all the others, threatened to drive a stake into the heart of the traditional tax-exempt market and would make it extremely difficult for most state and local governments to issue traditional general obligation and revenue bonds.
The problem was compounded because some major participants in the tax-exempt market wanted to save private-activity bonds, while others were concerned that a separate tax proposal to eliminate the deductibility of state and local taxes would cripple the ability of states and localities to raise taxes.
After much infighting, the so-called Big Seven, which represented both issuers and underwriters, finally reached a consensus that the highest priority for fixing the administration's proposal was to preserve traditional GO and revenue bonds by eliminating or toning down the proposed 1% limit on private use, which in existing law was 25%.
But how could the Big Seven -- which was composed of representatives of the National League of Cities, the National Governors' Association, the National Conference of State Legislatures, the U.S. Conference of Mayors, the Council of State Governments, the International City Managers Association, and the National Association of Counties -- get the message to Treasury and the White House?
At the time, Sen. George V. Voinovich, R-Ohio, was then the mayor of Cleveland and the president of the NLC. He was also " a pretty good friend of then-Vice President George Herbert Walker Bush," according to Frank Shafroth, who was then the NLC's director of policy and federal relations.
"Voinovich -- who is like a bulldog that gets his teeth into your heel and holds on until you've got to do something to get rid of him -- called Bush faithfully for 51 weeks to get the White House to get Treasury Secretary James A. Baker 3d to meet with muni market participants," said Shafroth, who is now the director of intergovernmental relations for Arlington County, Va.
"Finally, the White House told Baker to meet with Voinovich to get him off their backs," he said.
Meanwhile, Shafroth said he finally figured out a way to help NLC members understand the president's 1% proposal and why it would be so harsh.
In an article in Nation's Cities Weekly, Shafroth used an example of the Boy Scouts renting an elementary school in Richmond, Va., after the school year had ended. If the scouts used the school for two weeks, that would exceed the 1% use limit and would make the bonds for that elementary school taxable.
"When the meeting finally took place, it became apparent that somebody at Treasury did a really good job of prepping the secretary," Shafroth said in a recent interview.
Besides Voinovich and representatives of the Big Seven, Ronald Pearlman, who was then the assistant Treasury secretary for tax policy, was sitting at the table.
"Baker walked in -- he didn't do any introductions -- and said, 'Before we start this meeting, I have to ask Ron a question,' " Shafroth said.
"Baker gave the Boy Scout example and Pearlman scratched the right side of his head and said, 'Mr. Secretary, I guess we would have to make a legitimate exception for the Boy Scouts.' "
"I'm at the Red Auerbach stage," Shafroth said, referring to the legendary Boston Celtics coach who would light a cigar when he knew the basketball game was won. "I don't know how Baker got briefed, but the issue is over ... but Pearlman doesn't get it. No one in the room realizes that the meeting is over and the only thing we were trying to obtain was gained."
But he said Baker continued. "'You know, Ron, I know I am from Texas, but I have been in Washington long enough to know if we create an exception for the Boy Scouts, we'd have to do it for the Girl Scouts.' Then Pearlman scratched the left side of his head and said, 'Mr. Secretary, I guess we'd have to do that,' " Shafroth said. "Then Baker said, 'Ron, you don't get it. We'd have to make tens of thousands of legitimate exceptions.' "
"At that point, Baker turned to Voinovich -- remember there have been no introductions and the meeting hasn't started -- and said, 'George, you can go up to the Hill and tell them we don't support our proposal with regard to traditional municipal bonds,' " Shafroth recounted. "The meeting was over."
It would be several more months before a plan would be hammered out in Congress under which governmental bonds would remain tax-exempt if no more than 10% of the proceeds were used by a private entity and a compromise would be reached that allowed private-use bonds to continue to exist under the state-by-state volume cap.
There were a lot of issues left such as how to treat bonds for airports and ports where one or two airlines or users have well over 10% of the usage, Shafroth said.
"My crystal ball was not good enough then" to know how those issues would settled, he said. "But it was good enough to know we had preserved the essential access to the market that was critical for the issuance of tax-exempt bonds."
(c) 2006 The Bond Buyer and SourceMedia, Inc. All rights reserved.
http://www.bondbuyer.com http://www.sourcemedia.com
The Tax Reform Act, 20 Years Later
Posted on Monday, October 23, 2006
Source: Bond Buyer
By Craig T. Ferris
When the Tax Reform Act of 1986 was signed into law 20 years ago yesterday, many in the municipal bond market thought the future was bleak.
Although the massive measure that was signed by President Reagan on Oct. 22, 1986, was far less punitive to the tax-exempt market than the original White House and congressional proposals that were unveiled in 1983, 1984, and 1985, the historic tax package sent chills through the muni market because it contained the most stringent restrictions ever imposed on tax-exempt bonds.
Market participants expected volume to plunge and some underwriting firms and bond counsel to get out of the market. That happened to some extent, but much of the volume damage was undone within a few years, and the long-term market, which reinvented and rejuvenated itself, now stands at just over four times its size in 1984 when the Reagan administration first launched its tax reform efforts, a year after the initial Bradley-Gephart and Kemp-Roth tax reform proposals.
But there was still a lot of pain and suffering during the three-year debate over tax reform when tax-exempt bond issuers fought to preserve their ability to finance their own operations and facilities, as well as private-use debt that provides financing for housing and other projects that states and localities would have to provide if tax-exempt bonds were not available.
Many of the veterans of those battles have gone into other businesses, have retired, or in some cases have died, but those who are either still in the business or who were there at the time remember the trauma on Nov. 27, 1984, when the Treasury unveiled its tax reform proposal that would have eliminated an estimated two-thirds of the $101.8 billion in long-term municipal debt issued that year.
That plan, which was formally proposed by the Reagan White House on May 28, 1985, was a potential minefield for the muni market. The muni proposals in the plan would have eliminated all private-purpose nongovernmental bonds issued after Dec. 31, 1985, limited private use of the proceeds of governmental bonds to no more than 1%, repealed outright the 80% deduction that banks could take to buy and carry tax-exempt bonds, further restricted arbitrage profits states and localities could earn on invested bond proceeds, and prohibited advance refundings of all tax-exempt bonds.
THE GOAL OF TAX REFORM
The administration's goal for reforming the entire tax code, not just tax-exempt bonds, was to create a fairly pure tax system that eliminated numerous tax preferences, including those for private-activity bonds, that had distorted the code.
"The goal was not to go after the muni market per se. It was to get rid of tax benefits that were riddling the code," according to H. Benjamin Hartley, who was a senior legislation counsel at the Congressional Joint Committee on Taxation when the act was drafted.
But the goal behind both the centerpiece proposals to eliminate private-activity bonds and limit private use of governmental bonds "was to curb what had become an unbridled subsidy to private business," said Hartley, who retired from the JCT in January 2003 and now lives in North Carolina.
The driving force behind the curbs that were eventually enacted in less drastic form was spelled out in the so-called Blue Book, the explanation of the 1986 act that was issued shortly after it was enacted.
"To the extent possible, Congress desired to restrict tax-exempt financing for private activities without affecting the ability of state and local governments to issue bonds for traditional governmental purposes," the Blue Book noted in the section devoted to the reasons for the curbs on tax-exempt bonds.
Between 1975 and 1985, the volume of long-term tax-exempt bonds for private activities increased from $8.9 billion to $116.4 billion.
"As a share of total state and local government borrowing, financing for these activities increased from 29% to 53%," the Blue Book said, arguing that the high proportion of private-purpose debt was driving up the cost of traditional borrowing while allowing high-income taxpayers to earn tax-exempt yields that were nearly as high as taxable investments and creating large revenue losses for the Treasury.
In the ensuing seesaw House and Senate legislative battle, representatives of muni issuers, underwriters and bond counsel succeeded in convincing congressional tax writers to protect traditional governmental and revenue bonds by reducing the 25% limit on private use to only 10% instead of the proposed 1%.
Then rather than eliminating all private-activity bonds, the tax writers agreed to save the tax-exemption for single-family mortgage bonds, multifamily housing, small-issue industrial development bonds, student loans, and exempt facilities by placing them under a state-by-state volume cap, while eliminating the use of tax-exempt bonds for privately owned pollution control, water, sewer, and solid-waste facilities;, sports, convention, and trade show facilities; parking, and industrial parks. Both single-family mortgage bonds and small-issue IDBs were to be eliminated in a few years, but after a roller-coaster ride that involved several reprieves and lasted until the early 1990s, both were finally extended permanently.
VOLUME CAP
The volume cap salvation of private-use bonds was the brainchild of the late Bruce F. Davie, the chief tax economist of the House Ways and Means Committee, who conceived the idea of a unified volume cap that kept the lid on issuance, but left it up to the states to decide how much cap to allocate to each category of bonds. The final bill set that cap at $75 per resident with a minimum of $250 million for small population states, but included a provision requiring it to drop to $50 per capita, or a minimum of $150 per state, on Jan. 1, 1988. (Muni market participants, however, succeeded 14 years later in convincing Congress to increase incrementally the cap back to $75 per resident with a small-state minimum of $225 million, and then to index it for inflation starting in 2003. It now stands at $80 per capita or $246.6 million per state, whichever is greater.]
Davie, who died at 67 in 2003 while working for the Treasury's Office of Tax Analysis, had worked on the separate volume caps for single-family bonds and small-issue IDBs that were enacted earlier in the 1980s, and he felt strongly that as long as there was a limit on the total, it should be left up to the states to decide how much should be issued for each permitted category of bonds.
"Here's the limit, the states can decide how to allocate it," he said in 1986 while explaining the House bill.
Davie, often described as a "big picture guy" by fellow staffers, also was a strong advocate of arbitrage rebate, which was first enacted by the House and then included in the final bill.
Rather than setting up intricate arbitrage rules and exceptions, Davie said at the time that the concept was simple. "You can earn all the arbitrage you want beyond a minimum permitted am