WASHINGTON -- Several states told the Internal Revenue Service this week that they probably will not be able to do reimbursement bond financings under the rules proposed by the agency last April without spending millions of dollars and much effort to overhaul long-established bdgetary and debt practices.
In written comments submitted Monday to the IRS, the states complained that, while the proposed rules required issuers to account for and track bond reimbursements on a project-by-project basis, state budgets and accounting systems are focused more broadly on programs and purposes and do not get into the level of detail that would be required to comply with the rules.
"Implementation of project accounting, as would be required by the proposed refulations ... would require millions of dollars in systems changes and hundreds of thousands of person hours of work," Connecticut officials told the IRS. "The effect would be total disruption of Connecticut's capital programs for several years."
Louisiana officials agreed. "We assure you, in the spirit of cooperation and not resistance, that the burden of compliance will be extremely costly and inordinately time-consuming and will aggravate the strain already placed on limited governmental personnel and resources," they said.
The sates said much of the longterm tax-exempt debt they issue is used for the reimbursement of expenditures already paid with other funds. Acurtailment of such financings would hurt many vital state programs, they said.
New York officials told the IRS that about $1.5 billion of the $2.8 billion of tax-exempt bonds issued by the state and its public benefit corporations during the 1991 fiscal year were used for reimbursement. About 50% of an estimated $2.4 billion of bonds to be issued in the 1992 fiscal year are to be used for reimbursement, they said.
But becuase of certain provisions in the proposed rules, "we believe that it will be extremely difficult, if not impossible, for the state of New York and its public benefit corporations to issue tax-exempt reimbursement bonds," they said, adding this "may ultimately harm the operation" of the state's major social service programs.
The reimbursement rules were proposed by the IRS and Tresury Department to discourage state and local governments from using tax-exempt bond reimbursements to avoid arbitrage restrictions. In a reimbursement deal, the proceeds are treated as spent at the time the bonds are issued so they can be invested on an unrestricted basis.
But the states all complained that the rules were too restrictive and reflected a fundamental misunderstanding of state accounting and budgets. Bond lawyers pointed out that the concerns raised by the states are applicable to any large issuer that uses one bond issue to finance many projects at the same time.
For example, the rules require an issuer to specifically describe each project for which expenditures are to be reimbursed in a declaration of intent that must be made within the two-year period before such expenditures are made. The description, according to the rules, must contain the anticipated size, quantity, or cost, as well as the project's general character and purpose. If the project ultimately deviates from the description, it is possible the bonds may no longer be used for reimbursement and may no longer be tax-exempt.
But, New York officials said, "at the time the capital projects budget is formulated, it is simply not possible for the state to identify each capital project to the extent required."
Maryland officials agreed, saying their General Assembly authorizes the issuance of bonds based on programs, rather than projects, designating for example, $495,000 for senior citizens' centers or $2.3 million for construction of publicly owned sewage treatment works.
Even if projects could be identified, New York officials said, "It is frequently possible or even likely that the project actually constructed may deviate from that initially contemplated."
Another problem identified is that the rules asy an isuer cannot use bonds for reimbursement if it has a pattern of failing to follow through on planned reimbursement bond issues. The states said that it would be impossible to do the extensive project-by-project tracking that would be needed to establish whether there was a pattern of failure.
Also troubling is the requirement that a declaration of intent to reimburse be "consistent with an issuer's budgetary and financial circumstances." New York officials said this clearly means that if at any time during the year an issuer has funds that could be used to pay the expenditures, such funds are to be considered available to pay the expenditure, and a bond reimbursement is not permitted. This requirement applies to expenditures incurred during the two years before the rules become effective.
The requirement is especially onerous when combined with the rules' "controlled-group" concept, which states say would force them, as issuers, to include all subordinate bond-issuing entities in any scrutiny of available funds.
Compliance with the consistency and controlled-group requirements, New York officials said, "requires an analysis of every potentially available fund or revenue held by the state or any of its public benefit corporations." The state has 33 public benefit corporations and authorities.
Connecticut officials said that their bond-funded projects were administered by 151 state agencies, subagencies, and institutions. The state lends proceeds to an additional 624 municipalities, regional authorities, and not-for-profit organizations, they said.
New York officials complained that he anti-abuse provisions of the rules would require "that reimbursement bond proceeds continue to be tracked in perpetuity to assure that they are not used for prohibited' purposes."
All of the state said that for years they have done reimbursment financings under long-established accounting and budgeting processes without abusing the tax laws. They questioned the need for the rules.
Maryland said that its constitutional framework governing budgetary expenditures and the creation of tax-supported debt has been unchanged for three quarters of a century, and these rules would be "instrusive" and harmful. "It's as though our whole system has to change to conform to their system which tries to prevent us from doing something we're not now doing," said Lucille Maurer, Maryland state treasurer and chairwoman of the National Association of State Tresurers' legislative committee.
