WASHINGTON — Rep. Dennis Kucinich is pressing the Treasury Department to reconsider the idea of prohibiting the use of bonds backed by payments in lieu of taxes to finance sports stadiums, claiming Treasury has misinterpreted the law in two of its private-letter rulings that allowed PILOT bonds to be used in this manner.
But officials with one New York authority that has issued PILOT bonds, and plans to issue more, for two baseball stadiums and another New York authority that plans to issue PILOTs for a basketball arena are asking the Internal Revenue Service to continue to allow PILOT bonds to be used in such transactions.
Kucinich made his plea to Treasury in a recent letter. The Ohio Democrat, who chairs the House Oversight and Government Reform domestic policy subcommittee, said a Treasury official who testified before the panel last October inaccurately interpreted the two private-letter rulings that permitted PILOT bonds to be used as a financing technique for new stadiums in New York City.
Treasury assistant secretary for tax policy Eric Solomon testified at the hearing, which delved into whether or not public funds should be used for public infrastructure rather than for stadiums, which always involve private parties. Solomon's testimony followed a similar panel hearing in March 2007, during which IRS chief counsel Donald Korb testified about the IRS' approval of PILOT financing in the New York City deals for the Yankees' and Mets' stadiums.
The IRS later issued proposed regulations that tightened requirements for all projects seeking PILOT financing.
At the October hearing, Solomon said that current laws attempt to both ensure that tax-exempt debt is issued for critical government projects and allow municipalities to use such debt to finance projects with some private use.
Treasury cannot "write regulations that say stadium financing cannot be done through the use of public funds ... if a stadium is financed and a state or local government says it will come out of generally applicable taxes or their equivalent," Solomon said. "That will require Congress to change that rule."
But Kucinich said in his letter that while the department cannot change the law, it can restrict the use of PILOT bonds for stadiums through its regulations.
"I am particularly troubled with Treasury Department testimony that the department's existing regulations compelled the ... decision to allow the use of PILOT [bond]s in this context ... I believe that your putative lack of discretion to prohibit the use of PILOT [bond]s is incorrect as a matter of law," he said in the letter. "In fact, there is a strong argument that Treasury Department's existing regulations compelled a decision to prohibit the use of PILOTs for tax-exempt bonds used to finance stadium construction .... At a minimum, the Treasury Department retains discretion to prohibit their use."
Kucinich told Treasury officials that he wants them to further clarify their position before they develop any new rules in this area.
The lawmaker challenged Treasury's assessment that any changes restricting the use of PILOT bonds for sports stadiums would require legislative action by Congress. He maintained that Treasury's own admission of ambiguity in its regulations means the department cannot claim it is "compelled" to allow PILOT bonds for stadiums. The department could restrict the technique if it wanted, Kucinich said.
In regulations on PILOT bonds proposed in October, Treasury said it was concerned current regulations could be broadly interpreted to restrict nearly all PILOT bond deals.
"The Treasury Department and the IRS are concerned that [an example found in current regulations] could be interpreted in an unduly restrictive manner to prevent any PILOT [bond]s with respect to property financed with tax-exempt bonds from being treated as generally applicable taxes," the proposed regulations stated.
Kucinich said in his letter, "Logic and the Treasury Department's own discussion of the issue in its rulemaking demonstrate that the provision could be reasonably interpreted to effect such a prohibition."
The lawmaker also criticized Treasury's conclusions in its private-letter rulings that stadiums can be financed with PILOT bonds because they serve a "designated public purpose" and "promote and encourage economic development and recreational opportunities."
There is no proof that stadiums would encourage economic activity, and the department should have looked more critically at this claim, Kucinich told Treasury officials. "Surely, the decision whether the assertion of a 'public purpose' by the project proponent is to be credited remains within the discretion of the Treasury Department and cannot be based on the mere assertion of project proponents," he said in the letter.
However, muni market participants say it is not the responsibility of Treasury officials to make such assessments.
"Their job is to interpret the law. They are not responsible for determining if stadiums are a public good. If Congress doesn't think something is a public good, then it can change the law," said a bond attorney who did not want to be identified.
A Treasury spokesperson said the department is reviewing Kucinich's letter and preparing a response.
Meanwhile, officials with two New York authorities are urging Treasury to make sure that final regulations do not prohibit the use of PILOT bonds for their pending stadiums.
New York City and New York State officials have been lobbying Treasury and the Internal Revenue Service to ensure final regulations would not prevent their economic development agencies from issuing additional bonds backed by PILOTs for two stadiums and new PILOT bonds for a basketball arena.
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"The impact of the proposed effective date is that projects that were in progress long before the proposed regulations were issued are prevented from going forward," the letter states. "This broad impact did not seem intended" by the proposed regulations. The proposed regulations would also prevent outstanding bonds for those projects to be refunded, according to the letter.
The letter urges Treasury to extend the effective date of the final rules for PILOT bonds to Feb. 19, 2009, with an exception for the Atlantic Yards project in case ongoing or new litigation prevents bonds from being sold by that date.
The Yankees and the Mets, two Major League Baseball franchises, expect to sell additional PILOT bonds by Aug. 31, 2008, and Feb. 19, 2009, respectively, according to the letter. The first PILOT bonds for the Atlantic Yards arena are expected to be issued by the ESDC this year, the letter said.
According to an exhibit contained in the letter, the master indenture for the original $942.6 million Yankees PILOT bond deal in 2006 allows the IDA to issue up to $100 million of additional PILOT bonds to complete the project. The master indenture for the original $547.4 million Mets stadium deal in 2006 would allow the IDA to issue an additional $54.7 million of PILOT bonds to compete the project.
No matter what happens with the regulation, Yankees officials maintained that the stadium would be completed as planned. "Not getting the change in the IRS regulation is not going to affect the completion of the stadium," said Yankees spokeswoman Alice McGillion.
