The Bond Buyer’s Patrick Temple-West has an interesting article on Tuesday based on comments made Friday by the interim director of the IRS’s government entities bond office:
The Internal Revenue Service’s tax-exempt bond office has received referrals of around 30 whistleblower claims of potential abuses in the municipal bond market, an official said Friday.
Clifford Gannett said that 30 was a “fairly significant” number and comes in addition to 25 to 30 examinations of Build America Bonds. The specific allegations made by the score and a half of whistleblowers are not named but they refer to “governments that are teetering on insolvency” and deals tied to property taxes:
The IRS has set up a distressed government entities team, led by Bob Griffo. The new nine-member team is “doing a lot of research right now” looking at issues affecting debt issued by troubled governments, Gannett said.
“One of the areas I have been concerned about is the government insolvency issue and how that potentially could affect municipal bonds,” he told the lawyers.
“We are concerned about dropping real estate values,” Gannett said. “You have private users on a lot of these deals, so the question is, are they going to have trouble with the public payments?”
This last question refers in part to payment-in-lieu-of-taxes bonds (Pilot), which typically involve payments from private entities to cover debt service on tax-exempt bonds. For example, a city removes a plot of land (say around Citi field) from taxation and in exchange the private entity makes payments to cover the tax-exempt bond.
These private entities make payments “less than and comensurate” to property taxes, according to this article. These have been used most notably in projects to build stadiums for the New York baseball teams. Unexpectedly low tax revenues could jeopardize a timely payment to bondholders.
The article thus points to two things FT Alphaville has worried about when looking at municipal bonds.
First, the blotchy regulatory landscape and the lack of disclosure in muniland. It’s encouraging that the IRS is at least trying to follow-up on allegations of foul play when issuers file compliance and tax returns.
Second, there’s the lagging danger of property tax declines at local government level. These fears can be overblown but it’s interesting to note that those counting the beans are also worried.
Let’s see if the IRS thinks they hear anything interesting from the whistleblowers.
Related links:
Tax-Exempt Governmental Bonds: Compliance Guide – IRS
A warrior for transparency – Muniland
Regulators and hedge funds in muniland – FT Alphaville