Columbus asks IRS to rule on request for pension bonds.

CHICAGO -- Columbus filed its long-awaited private letter ruling request this week with the Internal Revenue Service on issuing tax-exempt bonds to refund taxable notes that were issued to pay off a pension liability.

The 44-page letter and "several hundred pages of exhibits" were filed Monday, according to David Rogers. an attorney at Bricker & Eckler, the city's special co-counsel along with Arder & Hadden.

Columbus is requesting the green light from the IRSd to issue $27.3 million of long-term tax-exempt general obligation bonds to refund the same amount of one-year taxable notes that it issued last January. Proceeds from the note issue were used to pay off Columbus' liability to the Ohio Police and Firemen's Disability and Pension Fund.

The city issued the notes after it canceled a $27 million tax-exempt bond issue during its Dec. 1 pricing due to IRS concerns.

Specifically, IRS officials, who interrupted the pricing, said the deal was contrary to the spirit of the Tax Reform Act of 1986 and raised the possibility that a recent federal court case in New York could have a bearing on Columbus' deal, according to city officials and lawyers working for the city. City auditor Hugh Dorrian said at the time that the IRS made it clear it would entertain a request for a letter ruling on the deal. The Columbus City Council on Dec. 20 authorized the IRS submission and appropriated up to $300,000 to cover legal fees and issuance costs for the notes.

An executive summary of the request states that the proposed bonds would not be "pension arbitrage bonds" and could be issued on a tax-exempt basis.

Columbus argues that the notes were "a refunding issue within the meaning of applicable arbitrage regulations," and that, the subsequent issuance of bonds to refund the notes would be "part of a series of refundings" of a city obligation.

The city also claims that even if the argument is made that the city purchased an annuity from the state pension fund when its liability was set in 1967, arbitrage would still not be a factor because the yield on the "so-called annuity" would be less than the yield on the proposed bonds.

In 1967, the state fund took over the unfunded pension liabilities of local communities that had accured as of the end of 1966. The fund determined that Columbus owed about $44 million based on actuarial assumptions that inlcuded a discount rate of 4.21%, compounded semiannually.

"Even though the prior obligation of the city was discharged at a discount, there was no investment return that created arbritrage in that payment," Rogers said.

If the IRS rules against Columbus' use of tax-exempt bonds or fails to issue any ruling iwthin 180 days of the request filing, the city intends to petition the U.S. Tax Court for a declaratory judgment that the proposed bonds would be tax-exempt, according to the summary.

Rogers said that going to tax court would be "an unusual procedure" for a municipal issuer. He said that only one government, Washington State, was successful in court on a arbitrage matter.

If Columbus is able to issue tax-exempt bonds, Dorrian has estimated the city would save $250,000 a year for most years between now an 2035, when the city is dut to complete its payments to the pension fund.

An Ohio law passed in 1993 made it possible for Columbus and other cities to issue GO bonds to prepay the $400 million of total liability they owe the pension fund in return for having their liabilities discounted by the fund.

Columbus, which had owed the fund about $41.4 million, had that amoung discounted to about $27 mullion by the fund in October.

The cancellation of the tax-exempt Columbus bond deal also forced the cancellation of a total of about $126 million of tax-exempt bond issuance by six other Ohio cities that planned to use bond proceeds to pay off their liabilities to the pension fund.

Some of the cities are waiting to see what happens with Columbus' request to the IRS.

Kathryn Burrer Hyer, Cleveland's finance director, said the city intends to have about $75 million of various able-rate 30-year taxable bonds it sold last week repriced as tax-exempt bonds if Columbus' request is affirmed by the IRS.

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