CHICAGO - The City Council of Columbus, Ohio, unanimously approved a plan Monday night to issue up to $28 million of taxable bond anticipation notes to pay off a pension liability.
At the same time the council authorized a submission to the Internal Revenue Service for a private-letter ruling on the tax status of the debt.
Michelle Kelly-Underwood, executive assistant to Columbus' auditor, said that if the IRS rules that the debt can be issued on a tax-exempt basis, the city can convert the one-year fixed-rate notes backed by the city's limited tax general obligation pledge to tax-exempt 25-year bonds.
"This is an interim solution for us," Kelly-Underwood said, referring to the council's action.
City auditor Hugh Dorrian sought the council's approval in the wake of his cancellation on Dec. 1 of a $27 million tax-exempt GO bond issue that Columbus tried to sell to pay off its liability to a state pension fund.
IRS officials intervened just as Banc One Capital Corp., the senior manager on the Columbus bond issue, had completed the final pricing of the bonds. Dorrian canceled the deal because of the "serious concerns" raised by the officials over the phone regarding the tax status of the bonds.
Specifically, the officials felt that the deal ran contrary to the spirit of the Tax Reform Act of 1986. They also 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.
Also at that time, Dorrian said the IRS made it clear that it would entertain a request for a letter ruling on the deal.
An IRS letter ruling had been sought in 1990 for a tax-exempt deal by officials from Kemper Securities Inc. and Bricker & Eckler, the city's bond counsel. But the IRS refused to consider the ruling request because no Ohio law authorized the bond sale in 1990.
Kelly-Underwood said Arter & Hadden, special tax counsel on the deal, will begin the process to obtain a letter ruling that the city hopes will permit the issuance of tax-exempt debt. David Rogers, an attorney with Arter & Hadden, did not return phone calls.
Kelly-Underwood said the city is "still comfortable" with Arter & Hadden's opinion that the bonds can be issued on a tax-exempt basis.
"If we weren't confident, we wouldn't go down this path," she said.
She said the council appropriated up to $300,000 to cover legal fees associated with the letter ruling request and also to cover issuance costs on the notes.
The notes are scheduled to be priced by Banc One and Kemper, the co-senior manager on the deal, on Jan. 19 or 20, according to Kelly-Underwood. The deal would close on Jan. 31. The auditor's office considered issuing taxable variable-rate notes but dropped that plan because the cost of issuance was too high, she said.
Columbus plans to use proceeds from the note issue to make a lump sum payment to the Ohio Police and Firemen's Disability and Pension Fund. An Ohio law passed this summer made it possible for Columbus and other cities to issue GO bonds to prepay the $400 million of total liability they owe the fund in return for having their liabilities discounted by the fund.
Columbus, which owes the fund about $41.4 million, had that amount discounted to $26.9 million by the fund in October. Dorrian has said the agreement with the fund on the discount expires in February.
The cancellation of the tax-exempt Columbus bond deal had repercussions throughout Ohio, where several cities that also have a liability with the pension fund were looking to follow Columbus' lead and issue tax-exempt bonds.
Officials in Cleveland, Akron, Dayton, Springfield, Toledo, and Youngstown have said they canceled their deals because of the IRS concerns that scuttled Columbus' bond issue. The cities had been considering the issuance of a total of about $126 million of bonds.