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The Internal Revenue Service is examining the Poway Unified School District’s controversial 2011 bond deal to determine whether it complies with federal tax requirements.
A Feb. 6 letter from IRS Agent Edna Diaz to the district states that Poway’s 2011 bond has been selected for examination. “The IRS routinely examines municipal debt issuances to determine compliance,” the letter states. Voice of San Diego received the document pursuant to a California Public Records Act request.
Diaz requested dozens of documents from the district, including detailed records of how the proceeds from the bonds were spent, who was paid in connection with the deal and who eventually bid on the bonds and bought them.
Diaz did not respond to calls for comment. An attorney for Poway said the audit is ongoing. He said it’s a routine, random investigation and said Diaz hasn’t found anything of concern.
“No issues have come up whatsoever. It’s squeaky clean,” said John Rottschaefer, counsel for the district.
It’s not the first time Poway’s bond deal has caught the attention of a government agency. Last year, the district received a stern warning letter from the state Attorney General’s Office, which cautioned Poway that the deal it was making was illegal.
Two aspects of last year’s $126 million bond are controversial:
First, Poway borrowed the money using an expensive long-term loan called a capital appreciation bond. As we’ve reported, that deal resulted in an almost $1 billion price tag to voters, or almost 10 times what the district borrowed.
Second, Poway used a budgetary tactic to squeeze millions of dollars in extra up-front cash out of its loans. It’s this second component of the deal that raised the ire of the state attorney general last year.
The IRS letter indicates that the agency is examining both elements of Poway’s bonds.
The agency requested detailed information about who Poway paid to put the deal together, including attorneys, financial advisers and the underwriter of the bonds. And it has asked for information about any agreements between the district and the investors in the bonds.
The IRS has also requested highly detailed information about what the proceeds from the bonds were spent on. That information is crucial in determining whether the extra cash Poway got out of the deal was obtained illegally.
The controversy over Poway’s extra cash, known as premium, focuses on whether it was spent on costs related to selling the bonds. The district received more than $21 million in extra cash from last year’s deal. Poway says it spent that money on costs like paying attorney’s fees and interest on other loans it took out in advance of selling the bonds.
The district says the extra cash is legitimate, since it was all used on these ancillary costs, and none was spent constructing buildings or buying carpets, furniture or laptops. But for weeks Poway has refused to provide Voice of San Diego with evidence that it actually spent the extra cash this way.
The district released some of its accounting information to us last week, and we are currently examining those records to try and ascertain how Poway spent the extra $21 million it got from voters.
The IRS seems to be interested in the same issues we are.
The agency requested intricate records about how every dollar of the money raised last year was spent. It wants to know the date, amount and purpose of every expenditure made from the bond proceeds.
The key point: If the district spent any of the extra cash it received from the deal on construction projects or other capital expenditures, its legal argument for getting the extra money largely falls apart.
Poway based its argument for getting the extra money on the fact that school districts routinely squeeze extra money out of their bond deals to pay for costs associated with selling the bonds. It says it was just doing what many districts have done before it.
That argument was already a significant stretch of the existing law, and fell afoul of the attorney general’s reading of state statutes. But bond attorneys around the state disagree on whether what Poway did was actually illegal.
If it turns out the district didn’t actually spend every dollar of the extra cash it got on ancillary costs, then the tenuous legal argument the district has presented would essentially evaporate.
Will Carless is an investigative reporter at Voice of San Diego currently focused on local education. You can reach him at firstname.lastname@example.org or 619.550.5670.
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Disclosure: Voice of San Diego members and supporters may be mentioned or have a stake in the stories we cover. For a complete list of our contributors, click here.