WASHINGTON - A Harrisburg, Pa., city council member has asked participants in a controversial $780 million tax-exempt and taxable bond transaction to provide detailed information about the structure of the deal and their fees.
The proposed bond deal, which was to have closed last month, would be the latest in a series of remarketings and refundings of bonds that were issued seven years ago to finance a hydroelectric generating plant and dam.
The 1986 bonds and subsequent remarketings and refundings have generated millions of dollars for the city but the project has never been built.
The latest proposed transaction was delayed last month after federal regulatory officials said it might violate tax laws, and Standard & Poor's Corp. withdrew its proposed credit rating for the bonds because of tax law concerns.
At that time, council member O. Frank DeGarcia insisted that a hearing be held before the deal proceeded. He said the Public Works Comiittee, which he chairs, would hold the hearing, but only if the participants provided information about the deal.
Participants in the transaction maintain that the deal does not need city council approval, since the city has already given a public authority the power to issue the bonds. But DeGarcia said that, having established the authority, the city can also dissolve it and therefore has influence over the deal.
He detailed the information he wanted in a June 18 letter to Milton Lopus, president of Devon Capital Services Inc., the firm serving as financial adviser in the transaction.
In his letter, DeGarcia asked Lopus for a detailed explanation and flow chart of the transaction. He also asked for a list of participants, their roles, and the fees they would receive.
Lopus should fully describe each portion of the transaction for which the city or the authority will be responsible, DeGarcia said. The authority was supposed to issue the bonds.
In addition, DeGarcia asked for information on each participant's level of liability and malpractice insurance. He said he was concerned that if a problem with the transaction caused bondholders to sue the city, the city might have to hire a law firm to defend the actions taken by the council.
He told Lopus that once the public hearings were held, "you and others should have a complete list of what has to be done or corrected.
DeGarcia said last week that he is about to begin a month-long program at Harvard University's John F. Kennedy School of Government. But he said that he expects the city council's Budget and Finance Committee to obtain the information that has been requested and to push forward with the hearing.
However, no date for the hearing has been scheduled.
Robert Jones, chairman of that committee, could not be reached for comment.
Lopus and other participants in the transaction also could not be reached for comment.
The proposed transaction calls for the Harrisburg Authority to issue $390.1 million of tax-exempt refunding bonds and $390.1 million of taxable bonds in a complex transaction designed to preserve financing for a hydroelectric power project dam and provide funding for additional city projects that have not yet been identified.
The tax-exempt bonds would be used to redeem the $390.1 million of refunding notes that the authority privately placed with Pittsburgh National Corp. in May to redeem bonds that had been issued in 1986 and remarketed in 1988 and 1991 for the hydroelectric project and dam.
In the proposed deal, both the tax-exempt and taxable borrowings would be backed by guaranteed investment contracts that would, in effect, cross over in about three years. The bond proceeds could not be used for projects for the first three years while the participants would make sizable fees from the spread between the short-term taxable bonds and one of the GICs, which would be long-term.
Federal regulatory officials and bond lawyers who were not involved in the deal but were familiar with it said they had trouble with the notion that the authority would issue more bonds for a project that may never be built. The project has been denied a key permit by the state's Department of Environmental Resources and is currently opposed by several state and federal agencies as well as environmental and recreational groups.
City officials, who contend the project is a good one, have been appealing the state's decision to deny the permit, but state officials have vowed to fight the appeal and say the project could be tied up in litigation for years.
Federal officials also said the deal appeared to be a hedge bond deal, and that the tax laws generally prohibit the issuance of hedge bonds.
The tax law's prohibition on hedge bonds contains an exemption for refundings. But the federal officials said they doubted the deal was a refunding since it would finance new projects that were not financed under the earlier bond issue and remarketings.
They also said the proposed deal does not appear to meet one of the conditions for the refunding exception, which is that the average maturities of the refunding bonds not exceed the average maturities of the bonds being refunded. The refunding bonds would mature in 2015. But the notes they would refund appear, in substance, to be 90-day notes, even though they have stated maturities of 2025, the federal officials said.
