Government & Politics

Lawmakers shift construction funding to avoid running afoul of IRS rules on bonds

Legislative leaders and the Jindal administration are quietly shifting about $70 million in state construction spending slated for next year in an attempt to fix a serious problem caused by the state’s failure to use the money on schedule.

State legislators said they hope that the solution — which calls for spending money meant for an old set of projects on newer ones instead — will head off a potential problem with the Internal Revenue Service. The IRS requires that money raised from the sale of tax-exempt bonds be spent within a certain period of time, tax attorneys said.

How to spend that bond money in the upcoming year is now in the hands of state lawmakers, who have been doing their best not to draw attention to the problem. The plan calls for taking $70 million that was supposed to be used for dozens of older projects and spend it on $70 million of new or existing projects in the next year. The old projects would be next in line for funding.

Members of the House Ways and Means Committee on Thursday made changes meant to ensure that funding isn’t jeopardized for the older projects, which in some cases have been delayed for years. Then they approved House Bill 2, which authorizes state construction funding, without any legislators requesting an explanation during the hearing.

Their changes mean that money will be delayed a bit longer for dozens of projects that have been delayed for years due to logistical and legal reasons. Among them:

  • $572,000 for a chiller at Delgado Community College in New Orleans, which was earmarked in 2010.

  • $580,000 for ramps at the Danziger Bridge in New Orleans, allocated in 2004.

  • $123,000 for the Northeast Louisiana Delta African American Heritage Museum, which was funded in 2001.

At issue is how Louisiana finds millions of dollars each year to build and upgrade state hospitals, roads, sewer systems and the like. Rather than pay for the projects with tax revenue that flows into the state treasury every year, Louisiana — like other states and local governments — borrows the money from private investors by issuing bonds. The state typically pays off those bonds over a 10- to 20-year period.

In some cases, the projects financed with those bonds have been delayed — such as when contaminated soil is found on a site or the state can’t secure rights to all of the property. The Division of Administration has failed to adopt alternate plans, leaving the money unspent.

Officials worried about violating IRS rules on bonds

In separate interviews, Senate President John Alario and House Speaker Chuck Kleckley told The Lens before Thursday’s committee vote that they expect the Legislature to pass HB 2 in a way that cures the problem.

The Lens asked Alario, R-Westwego, if the state had run afoul of the IRS’ rules by failing to spend the money on the prescribed projects. “That is the issue,” he said. “The IRS has some rules about issuing bonds and holding onto the money.”

Kleckley, R-Lake Charles, said, “It’s important for all legislators to get the problem solved” because “of the potential of losing the tax-exempt status.”

Tax attorneys consulted by The Lens said it’s more likely that the state would pay a penalty if the IRS determined that Louisiana had violated rules for tax-exempt bonds.

The state has already had to make a payment in a related instance. The state had to pay $6.69 million to the IRS last year for earning too much interest income on unspent transportation bond money from 2006-11.

Benjamin Huxen, deputy executive counsel for the Commissioner of Administration, downplayed the concerns in an interview, saying the state has been spending proceeds from tax-exempt bonds on schedule.

“There’s no issue with that at all,” Huxen said.

That’s the opposite of what Mark Moses, who oversees how bond money is spent by the Division of Administration, told the House Ways and Means Committee on April 28.

“We had those old projects that had bond proceeds that weren’t spent timely,” Moses told committee members.

Huxen described the effort to shift money within the state construction budget as “something we do every year.”

That’s partly true, based on The Lens’ review of HB 2 as originally filed this year and similar bills approved during the past three years. This year, the number of projects to be shifted took up 23 pages; they weren’t longer than three pages in the other bills.

“We have reappropriated funds from existing projects to a greater extent this year than in past years,” Moses told the committee. He added that in prior years, the state shifted money when it had leftover money after finishing a project. Now state officials want to shift money away from projects that haven’t been completed.

The projects to be shifted in HB 2 show that the state has failed to spend bond proceeds as far back as 1994 – when Edwin Edwards was governor – but it’s happened more frequently since 2008, under Gov. Bobby Jindal’s watch.

Problem contributed to delay of bond issuances

The problem became acute enough that the Louisiana Bond Commission — which approves the issuance of bonds throughout the year — discussed it behind closed doors at its November and December meetings.

According to the minutes of the December meeting, the commission went into executive session “to discuss issues and to receive legal advice relating to the use of certain bond proceeds and future issuances of bonds.” Asked which exception to the public-meetings law applied, the Attorney General’s Office cited attorney client privilege, which appears to cover the portion involving legal advice.

Those private discussions occurred after Meredith Hathorn, a private attorney contracted by the Bond Commission, wrote a memo on Oct. 1 saying she would not certify the state’s next bond issue – a necessary step – until the problem was addressed, said two officials familiar with the memo.

The Attorney General’s office would not release the memo to The Lens, claiming attorney-client privilege.

Minutes of Bond Commission meetings in September and October indicate that state officials had planned to issue tax-exempt bonds in December for infrastructure projects. They didn’t do so until February when Foley & Judell, Hathorn’s law firm, felt comfortable enough to issue a favorable opinion for $347.1 million in tax-exempt bonds, which were part of a $496 million bond sale.

That issuance meant “the State was in compliance with applicable tax law,” Hathorn said in a statement issued by the Division of Administration. She did not respond to a call or email from The Lens for an interview.

States are supposed to spend bond money, not invest it

Tax-free government bonds are attractive to investors because they don’t have to pay income taxes on on the earnings. Because the bonds are tax-free, states such as Louisiana can offer a lower interest rate to investors, which saves the state money.

The IRS requires states to spend the money within a certain period of time in return for being allowed to issue tax-exempt bonds, said Robert McIntyre, the director of Citizens for Tax Justice, a Washington, D.C.-based public policy group. The IRS, McIntyre added, wants to make sure that governments do not profit by investing the tax-exempt bond money — which could bring in more than they pay bondholders.

The state usually expects to spend the money within three years on a particular project, Moses told the Ways and Means Committee. If that is not possible, he said, the money should be shifted to another project.

State plans to use old bond money on current projects

In his testimony, Moses said the Jindal administration proposed to take unspent money for past projects and instead use it on projects that they know will go forward in 2015, such as the giant state hospital under construction in New Orleans.

“There are a lot of old projects,” Moses said, adding that his agency would “be more proactive” in making sure the bond money is spent properly in the future.

State Treasurer John Kennedy, who chairs the Bond Commission, characterized the issue as a “bookkeeping problem.”

“We have been assured going forward that the process has been fixed and that we won’t have a problem in the future,” Kennedy said in an interview, declining to be more specific.

State Rep. Joel Robideaux, R-Lafayette, the chairman of the Ways and Means Committee, has taken the lead in fashioning a solution that state legislators can accept. He said he has met with Alario, Kleckley and Moses.

Robideaux offered 161 amendments approved by the committee on Thursday that revised the initial construction spending plan offered by the Jindal administration. Robideaux said his change gives legislators greater confidence that the $70 million of old projects will be funded when they’re ready.

Robideaux said the state is shifting an unusual amount of money this year. “If there’s a threat from the IRS, I guess that makes it more urgent this year. I don’t know if we have that problem,” he said. “Bond counsel says it would be prudent to get our house in order as it relates to the spending of bond proceeds.”

Robideaux briefed state Rep. John Bel Edwards, D-Amite, on the problem Wednesday night. Edwards leads the House Democratic Caucus.

“There’s enough blame to go around,” Edwards said in an interview after Thursday’s committee hearing.

“Clearly, this problem is at odds with the message Gov. Jindal is preaching around the country, that Louisiana is better off financially than ever before,” Edwards added. “Perhaps if he was home minding the store more, this would have been corrected before now.”

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