IRS asks information on COPs refunding done by Pennsylvania.

The Internal Revenue Service is examining a Pennsylvania refinancing of certificates of participation done in July 1993 as controversy continues to swirl among state officials over the cost of the deal.

Last week, officials in Gov. Bill Casey's office received a request from the IRS for the official statement and other documents for last summer's $750 million COP sale, said An Heilman, the governor's director of revenue, cash flow, and debt.

The securities refinanced a total of $651.7 million of certificates of participation sold in 1991 by five counties in Pennsylvania to finance the construction of prisons.

Several months ago, the IRS requested documents from the counties on their original COPs issues, Heilman said. He said he did not know why the IRS was looking into the transaction, and he has "not gotten word" that the IRS has begun a formal investigation into the matter.

IRS officials would not comment. The inquiry comes as the state Senate appropriations committee continues to gather information on the July 1993 issue. Robert Bittenbender, the committee's executive director, said questions still linger about the deal's underwriting fees and whether the refinancing saved the state money. The committee is chaired by state Sen. Richard Tilghman, R-Montgomery and Delaware counties.

The Senate panel is concerned that the issue "generated substantial fees," leading to "a question of motivation," Bittenbender said. He would not provide specifics.

In 1991, five Pennsylvania counties issued COPs to finance the construction of prisons, which were leased by the state. Two years later, the state wanted to buy the prisons outright. but the legislature refused to appropriate the money. The state then chose to refinance the five county COP issues through one state issue totaling $750 million.

The counties, looking to do their own refinancings, were frustrated. State Republican lawmakers were also upset, arguing that the state lacked the authority to buy the prisons without legislative approval.

The state has not bought the prisons yet. An agent, Government Services Corp., holds the title to the prisons, which the state will buy for $1 when the COPs mature in 2011, Heilman said.

At the time of the issue, state Republican lawmakers said the refinancing did not make financial sense. Had the state done a traditional general obligation issue, "it appears to us that the prisons would have been constructed and financed for essentially half the amount [of money] that we ultimately paid," Bittenbender said on Friday.

That comparison is not accurate, Heilman said. The transaction saved the state $11 million dollars by consolidating the five issues into one and taking advantage of lower interest rated, he said.

In 1993, The Bond Buyer reported that some of the firms involved in the transaction employed former Casey Administration officials and major contributors to the state Democratic Party. Prudential Securities Inc. was lead manager on the issue.

"I have no knowledge of that." Heilman said regarding firms' political contributions. "The motivation all along was to save money."

Fees on the issue totaled 1.2% and were less on a percentage basis than the five issues combined, Heilman said. "They were not extraordinarily high," he said.

No request for proposals was sent out, Heilman said.

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