PUBLIC FINANCE AUTHORITY

Tax-free deals across US for church schools and birth control clinic thanks to Wisconsin

2013-12-26T10:15:00Z Tax-free deals across US for church schools and birth control clinic thanks to WisconsinSTEVEN VERBURG | Wisconsin State Journal | sverburg@madison.com | 608-252-6118 madison.com

In just over three years, a little-known government entity created by the Wisconsin Legislature has arranged more than $1.3 billion in mostly tax-free loans for businesses in 33 states.

The Public Finance Authority has delivered reduced-tax financing for a Baptist seminary in North Carolina, Planned Parenthood’s national headquarters in New York, a California-based chain of Christian radio stations and a grocer in Mount Horeb.

Closer to home, it supplied

$55.9 million in tax-subsidized bonds for the controversial Edgewater hotel in 2012 after the developer clashed with Madison officials and a subsidy deal collapsed.

The type of debt the authority issues has drawn criticism. Meanwhile, financial statements for 2011 and 2012 show the agency itself lost money.

Still, backers say the PFA spurs vital business expansion without risk to taxpayers.

Unlike conventional government bonds that guarantee lenders will be repaid, the “conduit bonds” offered by the PFA and other government agencies simply bring together investors and developers and then grant tax-exempt status to the interest earned by the investors.

The PFA stands out as one of a few agencies in the country doing deals unrelated to their home states and because it is run without a public employee as director, said James Hamill, program manager for HB Capital Resources in Walnut Creek, Calif.

Almost all the work is done by Hamill’s company, despite the authority’s address on Madison’s Mifflin Street in the offices of the Wisconsin Counties Association, a private organization of county officials that helped found the PFA.

Fewer than a quarter of the authority’s 46 projects since 2010 have involved investment in Wisconsin. Nationally, most were for construction of charter schools, along with medical and housing facilities, Hamill said.

In or out of the state, the PFA issues bonds that other government agencies won’t, Hamill said.

“Sometimes the municipalities don’t have the staff, time or expertise,” Hamill said.

But the PFA has gotten business for other reasons, too.

In 2011, the developer of a 5,000-head dairy farm in Rock County turned to the authority for $15.6 million after residents forced a referendum on town of Bradford plans to issue bonds.

And last year the authority arranged financing for a $117 million retirement community in North Carolina after state officials there said the deal was too risky.

The Wall Street Journal and bond industry publications have reported concerns that debt issued by conduit bond entities has a high default rate.

Hamill said the PFA has had no defaults. HB Capital also runs California Statewide Communities Development Authority, which Hamill said has issued bonds for about 1,300 projects worth $48 billion since 1988 with only three defaults.

Every PFA project requires approval from state or local governments where the development will occur, Hamill said. All deals in Wisconsin are exempt only from federal taxes, he said.

‘Not a free-for-all’

Some states, fearing competition, have taken steps to lock the PFA out, Hamill said.

Other adversity has faced the California bond authority run by HB Capital. Some officials there say agencies run by private business have slipped loose of accountability and transparency, opening the door to unseen conflicts of interest and runaway payrolls.

Hamill said the concerns are unfounded. In Wisconsin, the PFA files reports with several state offices, Hamill said. A board of county and municipal officials appointed by the counties association and three other private associations of government officials gives final approval to the often-complex deals.

“It’s not a free-for-all,” he said.

The PFA board has never rejected a deal proposed by its management company, but HB Capital has turned away about $1 billion in proposals because the potential borrowers and lenders hadn’t thoroughly analyzed risk, Hamill said.

Growing pains

In 2004, HB Capital’s California authority asked legislators for permission to operate nationally, but it never happened. Five years later in Wisconsin, Hamill consulted with the National Association of Counties, the state counties association and two organizations for municipal officials as they helped write the law enabling formation of the PFA.

In 2010, the authority was formed and Hamill’s company was awarded a seven-year contract to run it. The company collects all but a small portion of the PFA’s revenue, which comes from fees charged to borrowers.

Hamill said the PFA’s deficit going into 2013 — $564,000 accumulated over three years — doesn’t mean HB Capital is overpaid. When the authority reaches its stride, revenues will eliminate the red ink, which amounts to startup costs, Hamill said.

The PFA reported roughly

$1.3 million in 2012 revenue. The money was used for contracted services as well as to support salaries of eight to 10 HB Capital employees and several counties association workers who spend at least some time on PFA business, Hamill said. He wouldn’t provide a more detailed breakdown or disclose salaries.

The 2013 PFA budget predicted the deficit would grow this year. Business has slowed because of competition from low-interest conventional loans, Hamill said.

A 2012 California audit of two state bond agencies run by private companies — including the one HB Capital operates — led the agencies to agree to hire publicly accountable executive directors and open competitive bidding on the management contracts every three years to ensure reasonable prices.

“We’re hopeful the agreement satisfactorily resolves the dispute,” said Tom Dresslar, spokesman for state Treasurer Bill Lockyer, a critic of handing over government bonding authority to private firms.

Industry lobbies for more

The PFA was created after the National Association of Counties asked the Wisconsin Counties Association to help create a new agency to issue tax-exempt bonds nationally, said state association chief of staff Mike Blaska.

Bonds for private investment have grown in popularity. Because investors pay no taxes on interest they earn, they are able to set lower interest rates for borrowers. And governments use bonds to compete with neighbors for investment that creates jobs and tax base, said Andrew Reschovsky, a professor of public affairs and applied economics at the UW-Madison La Follette School of Public Affairs.

It looks like everyone wins, but whenever someone is exempted from a tax, it means other taxpayers pick up the slack, he said.

Critics say federal law makes too many types of private development eligible for tax-exempt bonds, said Susannah Camic Tahk, a UW-Madison law professor who specializes in tax policy. The push to keep eligibility broad has come from industry groups, including the specialized attorneys who earn fees arranging bond sales, Tahk said.

“There is an entire industry of municipal bond attorneys,” Tahk said. “They become an interest group themselves.”

Gambling establishments, liquor stores, health clubs and airplane construction are among the relatively few development types that are ineligible under IRS code, she said.

Copyright 2014 madison.com. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

(35) Comments

  1. number6
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    number6 - December 31, 2013 6:41 am
    Any agency with the word 'public' in it's name, and/or which deals with reduced-tax financing, should be required to disclose salaries. I know that'll come off as a radical proposal to some of you -- and you are entitled to your opinion.
  2. bill jorgensen
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    bill jorgensen - December 28, 2013 9:19 pm
    MELLOW, final approval of all bonds has to be done by our Attorney General J.B Van Hollen. He is supposed to check to see if both parties are on the up and up legally. I found this in the 2009 Senate Bill 399. http://docs.legis.wisconsin.gov/2009/related/proposals/sb399

  3. tomtom
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    tomtom - December 28, 2013 7:25 pm
    this whole thing sounds fishy
  4. tomtom
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    tomtom - December 28, 2013 7:19 pm
    Walker would just LOVE to privatize the UW system
  5. Mr Mellow
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    Mr Mellow - December 28, 2013 6:20 pm
    Let me see if I have this right: a Wisconsin-based, privately controlled, public agency is handing tax exemptions, nation-wide, to businesses, religious groups, and non-profits, without the approval of state and local elected officials?

    How is this NOT creating risk for taxpayers? They'll have to make up the lost tax revenue.
  6. Lynne4300
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    Lynne4300 - December 27, 2013 10:28 am
    "singed by the President"

    Accurate description of what he has done to the Constitution.
  7. Lynne4300
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    Lynne4300 - December 27, 2013 10:25 am
    The Public Finance Authority in Madison, and a staff of 1 person, very interesting.
  8. Lynne4300
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    Lynne4300 - December 27, 2013 10:10 am
    Of course we have King Oblunder, who makes laws on his own. Add that to the democrats nuclear option, and that pretty much sums up it up.
  9. Nav
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    Nav - December 27, 2013 9:34 am
    Lynne4300,

    Here is the political lesson for you today.

    A bill can ONLY become law when both houses pass the bill. It does not matter which party is in control of what house. If one house (e.g. the Republicans in the House of Representatives) say NO to a bill made for the good of the people (A Democratic bill). then it CANNOT become law! In fact, it cannot still become law unless it is singed by the President, who can veto ANY bills passed by both houses. Of course, the veto can be overridden but that is not easy to do.

  10. fact_based
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    fact_based - December 27, 2013 8:57 am
    I am reporting Lynne4300 for abusing the understanding of how a bill becomes a law.
  11. mzd
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    mzd - December 27, 2013 8:28 am
    Giving power to a non-governmental group to issue tax exempt loans to anyone they choose seems like a very dangerous practice to me.
  12. Lynne4300
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    Lynne4300 - December 26, 2013 8:52 pm
    The senate is deadlocked? Democrats control 2 out of 3 branches of power, seems like a democratic majority, unless you are using Common Core math.
  13. toobad
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    toobad - December 26, 2013 7:53 pm
    I agree, make the UW pay now.
  14. bill jorgensen
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    bill jorgensen - December 26, 2013 7:25 pm
    "HB Capital is now exporting its financing model nationwide through an agency it launched late last year in Wisconsin. Known as the Public Finance Authority, or PFA, it was given unusual power by the Wisconsin Legislature to issue municipal bonds anywhere in the country."
    http://www.gulftoday.ae/portal/c60ec6f1-4b20-44c8-bd75-9a7fc7c3108f.aspx

    An out of state private company dolling out billions between investors and recipients, with Wisconsin as the enabler. This will end very badly for our State.
  15. woodysguitar
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    woodysguitar - December 26, 2013 3:59 pm
    Democrats have the Whitehouse, Republicans control the House and the Senate is deadlocked.
    You're welcome.
  16. Loyal Opposition
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    Loyal Opposition - December 26, 2013 3:27 pm
    "Like" and that goes for both sides of the aisle from here too.
  17. PapaLorax
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    PapaLorax - December 26, 2013 3:11 pm
    sorry - I should be more clear. These things drive me crazy...and as someone who truly believes in a small government the intrusion into the market is only bad.

    That said...this isn't a GOP/conservative problem. That is my only intention in addressing your criticism.
  18. Timbomc
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    Timbomc - December 26, 2013 3:03 pm
    Thank you for the clarification and historical context. It always ticks me off when people will peruse an article and then quickly jump to conclusions based on their own narrow-minded ideology no matter what side of the aisle they come from.
  19. geo_
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    geo_ - December 26, 2013 2:57 pm
    Pops Lorax, Retirement Communities are not affordable housing, it takes a lot more than SS and a meager 401K to live in one. Add up the monetary bonds issued to the items you mentioned and then add up the bonding issued to the rest of the Charter schools, private universities and private business. If they have such a good business plan and will become a viable business why won't a bank loan them the money needed. Why do investors need a tax free dividend I pay taxes on my dividend income(what little it is.) Family membership to the Y is about $125.00/Month, The unemployed and Walmart workers will surely benefit by that, an after school program at the Y costs 10.00/hr. Yes I agree many of the items on the list are worthwhile programs, but most are just away to scam taxpayer dollars so the rich can get richer at our(yes you're included in the our) expense.
  20. Loyal Opposition
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    Loyal Opposition - December 26, 2013 2:08 pm
    Just to be clear about the chronology: When the PFA was created in Wisconsin, Scott Walker was still Milwaukee County Executive; the Governor was Jim Doyle; and BOTH houses of the Wisconsin Legislature were run by Democrats. Pretty neat trick for the Republicans to pull off, under the circumstances :-)
  21. PapaLorax
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    PapaLorax - December 26, 2013 1:01 pm
    You are seriously off base...I won't count the schools, because I assume you find any non-public school to be a cause of the wealthy...look at this list? Damn you affordable housing!!

    Critical Care Services, Inc., d.b.a. Life Link III (Minnesota)
    Carver Gardens, LLC (Florida)
    Newark Housing Authority (New Jersey)
    RHA/ Affordable Housing II, Inc. (Alabama)
    Chisom Housing Group (Mississippi)
    Las Ventanas Retirement Community (Nevada)
    Mt. Horeb Grocery Store (Wisconsin)
    RHA/Affordable Housing II, Inc (Tennessee)
    1102 South Park (Wisconsin)
    Affordable Housing America (Vermont)
    Oshkosh Community YMCA (Wisconsin)
    Lindsey Terrace Apartments (Florida)
    Kendall Court Apartments (Florida)
    Adams-Columbia Electric Cooperative (Wisconsin)
    Central Wisconsin Electric Cooperative (Wisconsin)
  22. RichardSRussell
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    RichardSRussell - December 26, 2013 12:07 pm
    Really, we hardly ever see in-depth coverage of financial matters like this any more. It's a refreshing change of pace from police-blotter rewrites and lightly edited press releases. Thanks for running it.
  23. pony
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    pony - December 26, 2013 11:48 am
    who controls congress and whitehouse??
  24. Timbomc
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    Timbomc - December 26, 2013 11:24 am
    Geo-Planned Parenthood is definitely NOT a conservative cause.
  25. Andy Olsen
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    Andy Olsen - December 26, 2013 10:43 am
    What possible rationale exists for a Wisconsin agency to fund projects in other states? What a bizarre concept.
  26. Fartinthewind
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    Fartinthewind - December 26, 2013 10:17 am
    There is a whole crop of new investment vehicles that sprang up in the last several years involving the exploitation of tax loop holes.

    Here in Wisconsin we have seen a huge number of supposedly private tax exempt organizations getting into the housing market. The interesting thing is I don't think the tax exempt organization actually owns the buildings. At least they don't actually own the buildings until the loans are paid off. Of course the loans get paid off faster because the properties are tax exempt. This is a huge money maker for the investors, who are probably reaping the depreciation for their own tax purposes and the interest the tax exempt orgs are paying is tax exempt to.

    This is something that government needs to look into.
  27. pony
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    pony - December 26, 2013 9:57 am
    fyi
    credit unions don't pay taxes, you get a higher rate of interest, and i am subsidizing you
  28. kooler
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    kooler - December 26, 2013 9:19 am
    more corporate welfare and the middle class foots the bill. another GOP rip-off boondoggle.
  29. ghost
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    ghost - December 26, 2013 8:39 am
    How are these tax free? This appears to be private investors lending money to other private entities. They use the PFA as a pass-through, but the PFA isn't doing anything different than what a bank would do. How is the PFA not a government-operated investment bank? (I'm pretty sure that's illegal.)

    I understand that state bonds are exempt from federal taxation and vice versa because of laws that prevent the feds from taxing state government and the inability of the states to tax the federal government. State and municipal bonds are tax exempt because they are being used for public purposes. The bonds in this article don't appear to be issued for public purposes.

    Local municipalities can issue industrial revenue bonds as part of their economic development programs. In those, municipalities borrow money, hand it over to some industry and then pay the loan back through revenues generated by the industry. Those work as kind of a flow-through loan. The loans in this article aren't local, and there is no reference to them being guaranteed by any sort of revenue stream. If the borrowers default, does the agency get stuck with the tab? If not, how is this meaningfully different than the investor lending the money to the business directly? And why should the interest earned from that transaction be tax-exempt?

    I know that I, as a mere citizen, have to pay taxes on the interest I receive from my credit union on my CDs. Am I just a sucker? Do only the little people have to pay taxes on their interest income?
  30. Billie
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    Billie - December 26, 2013 8:19 am
    Yup, lets cut the tax exemption for all non profits. more than 25% of Madison's property is tax exempt. That means you pay more!
  31. toobad
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    toobad - December 26, 2013 7:07 am
    The first sentence indicates "tax free", the second sentence indicates "tax reduced" and the third sentence indicates "tax subsidized". The writer is clearly having trouble grappling with facts.
  32. YetAnotherStateEmployee
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    YetAnotherStateEmployee - December 26, 2013 6:37 am
    "more than $1.3 billion in mostly tax-free loans"

    Aren't all loans "tax free?" I don't recall ever paying taxes on a loan.
  33. Lynne4300
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    Lynne4300 - December 26, 2013 6:35 am
    Planned Parenthood’s national headquarters in New York does not need the money, either.
  34. Good and Godless
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    Good and Godless - December 26, 2013 6:27 am
    The church is a business, unlike any other. It is an extortion racket and the profits pile up overseas, a few charitable acts to appease the devout is incomparable to the billions in assets held throughout the world. The catholic "church" is one of the top ten largest non-governmental land holders in the USA. The burden on society is alarming. Taxing religious donations would recover $10billion in tax revenues... WAY more than you whiny christ-stains costs to pay for someone's birth control.
    Taxing the churches property would recover billions more.
    All missing taxes that everyone else has to shoulder the burden.
    The church uses lies to deny true freedom, and that is insultingly un-American.
  35. geo_
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    geo_ - December 26, 2013 6:23 am
    Sounds like a scam to funnel taxpayer dollars to conservative supporters. Lost money in 2011 and 2012, indicates taxpayer dollars redistributed to more wealthy individuals and corporations. Typical Walker republican game.
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