The Arkansas Development Finance Authority's plans for tax-exemt borrowings to fund out-of-state projects have raised hackles on Capitol Hill, where an aide to Rep. Brian J. Donnelly Friday said he might seek legislation to end the practice.
So far, only one financing is in the works, a $30 million to $50 million deal that First Chicago Capital Markets Inc. could underwrite by the end of the year. But there could be many other such deals in a multistate financing program expected to raise $200 million a year fo hospitals across the country that belong to the San Diego-based American Healthcare Systems.
Thomas R. Barker, Rep. Donnelly's legislative director, said he has long sought a law to bar state agencies from doing tax-free financings that raise money for projects in other states. Mr. Barker said the subject was discussed at a meeting of the joint tax committee staff on Thursday and that it would emerge again this week.
Rep. Donnely, according to Mr. Barker, frowns on exporting tax-exempt bond proceeds across state lines. "I'm sure he would oppose it," Mr. Barker said. "On its face, it sound abusive."
The idea is troublesome, the congressional staffer said, because "state X is becoming indebted to build a project in state Y, and I don't see how that benefits state X."
According to sources familiar with the Arkansas proposal, the deal would generate fees for the Arkansas Development Finance Authority, which would then invest those profits in local medical clinics.
"That sounds like it's stretching it," Mr. Barker said.
The federal Tax Equity and Fiscal Responsibility Act of 1982 requires that projects financed by tax-exempt deals be subject to public hearings. Legal experts say it is unclear how the Arkansas Development Finance Authority would comply.
Bankers at First Chicago insist that state regulations and the 1982 law's requirements will be complied with fully.
But public officials, mainly directors of state hospital financing authorities, still wonder just how the law's requirements would be met. Would public hearings be held in Little Rock, home of the bond-issuing authority, or would they be held in any one of the 47 states home to hospitals eligible to borrow from the pool? Would state taxes apply to the bonds issued for the pool?
William C. Wilson, a vice president at the authority, said the hearings will take place where the projects are planned, not in Little Rock.
Edward M. Murphy, executive director of the Massachusetts Health and Educational Facilities Authority and a member of the board of the National Council of Health Facilities Finance Authorities, said he was "not suprised" that Rep. Donnelly and his staff could seek to nip the new financing technique in the bud, given that and other legal concerns.
"I think that the attempt that's being made in Arkansas to get around the various state laws and the TEFRA requirements would be one of theose things that make the industry look bad," Mr. Murphy said.
Rep. Donnelly has led a number of efforts to curb abusive tax-exempt financing practices, particularly in the nonprofit health-care sector. American Healthcare is a consortium of nonprofit hospitals in 47 states, who are certified under section 501(c)(3) of the Internal Revenue code.
It selected the Arkansas facility as a financing conduit because most, if not all, other tax-exempt bond issuing agencies are barred by their states' laws from borrowing for out-of-state projects.
Robert D. Aicher, an attorney at Chapman & Cutler, said that he could not comment because of instructions from bankers at First Chicago Capital Markets and officials at American Healthcare.
"They have asked us to treat the analysis brought to bear on the program as proprietary," Mr. Aicher said.
He said that questions on matters of federal and state law "have been considered, carefully thought through, and we're going to issue clean opinions that the bonds are tax-exempt."