A representative of a government accountability group yesterday warned that the Internal Revenue Service's proposed public approval requirements for private-activity bond-financed projects are "corrosive of democracy, transparency, and accountability," but three other groups said they support the proposals with minor modifications.

At an IRS public hearing on the proposed rules, Greg LeRoy, executive director of Good Jobs First in New York City, who testified on behalf of several community and labor groups, strongly criticized the IRS' attempts to ease requirements for public hearings required under the Tax Equity and Fiscal Responsibility Act of 1982. Instead, he called for the agency to tighten the requirements for issuers to obtain the public's approval for private-activity bond-financed projects.

Instead of decreasing the advance notice required for a TEFRA hearing to seven days from 14, LeRoy said the IRS should mandate a 30-day period. He also said it should remove a provision from the proposed rules allowing issuers to cancel hearings if nobody requests to testify, calling it "an insidious deterrent against public participation."

Further, he called for the IRS to require issuers to webcast all of their TEFRA hearings, noting that several New York City groups already do so.

John J. Cross 3d, tax legislative counsel for the Treasury Department's office of tax policy, who was one of three Treasury and IRS officials overseeing the hearing, said that while they will carefully consider LeRoy's comments, he believes there has been "an overreaction to these regulations."

The IRS is simply trying to update the 30-year old rules to better reflect the speed at which transactions occur today, he said, adding that the agency itself has a policy of canceling hearings lacking public interest.

"Does it serve a productive purpose to hold a hearing if no one requests to testify?" Cross asked.

Charles Samuels, a lawyer with Mintz Levin Cohn Ferris Glovsky & Popeo PC here, who testified on behalf of the National Association of Health and Educational Facilities Finance Authorities, applauded the rules and called for the IRS to finalize them as soon as possible so issuers can take advantage of them.

As for LeRoy's call for mandatory webcasting, Samuels noted that of "the thousands and thousands of issuers across the country, most of them are not like New York City," and that such a mandate would be overly burdensome for small issuers.

Samuels, however, requested a few minor modifications to the regulations, such as allowing bond proceeds to be used to finance working capital costs in times of distress, even if they were not originally intended to be used for that purpose. He also said that a bond-financed project should be considered to have an "insubstantial deviation" if the cost does not exceed 10% of the originally approved amount. Current regulations state that if projects costs are exceeded by 5%, another TEFRA must be held on the project.

The final regulations also should ensure that local officials are kept in the loop for state-sponsored projects, said Stephen Swendiman, managing director of the National Association of Counties' Financial Services Center.

He reiterated a letter NACo sent to the IRS last month, noting that the proposed rule changes would allow states serving as the issuers in private-activity bond financings to hold a single public hearing at the state capitol that covers several bond-financed projects across the state.

While this policy could work in smaller states, Swendiman said it would be difficult in larger states for the affected public to travel long distances to testify on projects. Instead, he requested the final rules state that TEFRA hearings must be held in the communities that would be affected by the projects so that local officials could weigh in on them.

Frederic J. Ballard Jr., a partner at Ballard Spahr Andrews & Ingersoll LLP, testifying on behalf of the National Association of Bond Lawyers, called for a more generous effective date provision for the final regulations.

He also suggested that the final rules give issuers the option of applying them to their outstanding bond issues as well as to bonds issued after they are adopted.

Ballard also suggested the IRS clarify that deviations from the publicly approved amount for a project only qualify as "substantial," which would necessitate a new TEFRA hearing, if they issue 5% more of bonds than approved. The proposed regulations state that deviations of more than 5% above or below the approved amount constitutes a substantial deviation.

He argued that the current rules require issuers to state the maximum expected amount for the project at the hearing, and that public approval should not be required in instances where a project costs less than expected.

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