The Internal Revenue Service and U.S. Securities and Exchange Commission are using concern that Build America Bonds are being mispriced as an opportunity to impose restrictions on municipal borrowers, a panel of public issuers said at a conference this weekend.
An IRS plan to audit some Build America issuers is a sign of enforcement that some members of the Government Finance Officers Association’s Committee on Governmental Debt Management consider “over-reaching,” said Frank Hoadley, chairman of the panel and Wisconsin’s director of capital finance. Issuers of the taxable debt get 35 percent federal rebates on their interest payments.
Borrowers should seek legal counsel before responding to an IRS questionnaire on their Build America Bond pricing and issuance standards, and should decline a Municipal Securities Rulemaking Board proposal that they agree to file financial reports within 180 days of the end of their budget years, the committee decided during a six-hour meeting June 5.
Panelists at the GFOA meeting in Atlanta also suggested the association, which says it represents 17,400 public finance officials in the U.S. and Canada, consider advising members to refuse to return the IRS questionnaire. That suggestion wasn’t adopted.
‘Communication and Education’
“There really should be more of a communication and education, and not this ‘My job is to find something wrong and seek redress,’” said Ben Watkins, director of the state of Florida’s division of bond finance, in a panel. “Nor is it appropriate for the enforcement to be setting procedures for our industry.”
Watkins decided last month to stop issuing Build America Bonds because of potential exposure to federal offset penalties on payments owed through other programs.
Dean Patterson, an IRS spokesman, didn’t respond to an e-mail sent outside of business hours.
“The SEC is using the tools at its disposal to protect investors and issuers,” John Nester, a spokesman, said by phone yesterday.
The Build America program began in April 2009 as part of federal economic stimulus efforts. About $108 billion of the securities have been sold, according to Bloomberg data, making it the fastest-growing part of the $2.8 trillion municipal bond market.
Alan Anders, executive director of the New York City Transitional Finance Authority, said the federal agencies are using their oversight of the public agencies to improperly try to make borrowers impose restrictions on the pricing and trading of Build America Bonds.
“If the SEC wants to change the way underwriters do their business, if they want to prohibit them selling to hedge funds or to high-volume traders, they should do it to the underwriters, not to us,” he said during a committee discussion of “flipping,” the practice of quickly reselling bonds bought at initial offering prices at a profit.
In issues such as a 2009 New Jersey Turnpike Authority Build America Bond sale, securities have been sold at a premium over the issuance price days before the sales formally closed, data posted on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access website show.
The IRS in February began sending Build America issuers a questionnaire asking whether they monitor secondary market sales and how they ensure their bonds meet federal restrictions on their cost and the projects they are used on.
The service is taking feedback on a new version of the accompanying questionnaire that focuses on secondary market trades of bonds sold though negotiated, rather than competitive, deals, and asks whether any BABs were sold for more than the listed offering price before the deal’s official closing date.
The service is auditing 10 BABs transactions, Steven Miller, IRS deputy commissioner for services and enforcement, said in an interview reported in the Bond Buyer last week.
The agency said it plans to audit as much as half of Build America deals, which would amount to 600 deals, according to a U.S. Treasury Department tally through April. The IRS also has withheld portions of scheduled rebates from at least three municipal borrowers, including the state of Maryland, to recoup other federal debts, according to those issuers.
Separately, the MSRB, whose rules are set by the SEC, plans to ask borrowers to voluntarily post additional financial information to the EMMA web site.
The committee agreed to formally advise borrowers against cooperating with the expanded disclosure, saying issuers could expose themselves to penalties if it proves too difficult to comply with MSRB timetables.
“The SEC is using EMMA to regulate us in a backdoor way,” Watkins said.