DeJongh OKs bills covering budget shortfall, IRS penalty
Published: September 4, 2013
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ST. THOMAS - On Thursday, Gov. John deJongh Jr. approved two bills, one designed to cover a budget shortfall for Fiscal Year 2014 and one designed to satisfy a $13.6 million penalty levied against the territory by the Internal Revenue Service.
Bill 30-0198 authorized the payment of $13,635,140 to the IRS after the IRS found that a portion of the Series 2006 bonds - $80 million that went for the refunding of some long-term working capital bonds originally issued in 1999 - violated federal regulations and was issued in an amount that overburdened the tax-exempt bond market.
The penalty arose from a random IRS audit last year of a series of tax-exempt bonds the V.I. Public Finance Authority issued on Sept. 28, 2006, in the amount of $219,490,000.
The penalty already has been paid from a $40 million line of credit authorized earlier this year, according to V.I. Finance Commissioner Angel Dawson Jr.
According to testimony from the V.I. government's current bond counsel at a special Senate session on the matter in August, the penalty was whittled down from $80 million to $13.6 million after months of negotiations with the IRS. At issue was whether the V.I. government should have refunded or retired the Series 2006 bonds.
Given the amount of surplus money the territory had and given the strict regulatory divisions between the use of bonds for working capital or capital project purposes, the IRS decided retiring the bonds was the only appropriate option.
The government has retained the services of a law firm, Stone & Maganini, to pursue settlement for the penalty with the bond counsel that oversaw the tainted transaction, Buchanan Ingersoll & Rooney PC.
The government has engaged the firm in discussions as to recovering some of the $13.6 million plus associated costs, such as legal fees, Dawson said.
According to the testimony of attorney Michela Daliana, a tax partner at the law firm Hawkins Delafield & Wood, LLP, which is the government's current bond counsel, the previous bond counsel should have supplied documentation of surplus funds to the IRS and should not have issued a tax certificate incorrectly claiming that the 2006 bond issuance complied with IRS regulations.
"We are hopeful that it doesn't get to litigation and that it can be settled through discussions. However, if it needs to be litigated, we are prepared to do that," Dawson said of discussions with Buchanan Ingersoll & Rooney PC for the bond counsel to reimburse the territory.
The other bill deJongh signed, Bill 30-0199, authorizes the issuance of up to $90 million in Revenue Refunding bonds to refund and restructure 2004 and 2009 series bonds for a more favorable interest rate.
Dawson cautioned that the move not be interpreted as "new borrowing" by the V.I. government.
The restructuring of Matching Fund and Senior Lien bonds will allow the government to pay $1 million instead of $25 million in debt service obligations during FY 2104, realizing a cost savings of $24 million, which will contribute to balancing the FY 2014 budget, Dawson said.
Although the authorization allows for up to $90 million to be restructured, current projections of the bond market indicate that it would be to the territory's advantage to restructure only up to $75 million, Dawson said.
Although the measure will impact working capital, it will do so through cost savings, not a direct infusion.
There was nothing about the refinancing of the bonds that would risk penalties from the IRS, such as the one levied after the audit last year, Dawson said.
"Similar mistakes will not be made," Dawson said.
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