WASHINGTON — The Internal Revenue Service is auditing $346.6 million of general obligation refunding bonds unlimited tax series and $50.79 million of GO refunding bonds limited tax series issued by the Metropolitan Water Reclamation District of Greater Chicago in May 2006.
The audit was disclosed in an event notice the district filed with the Municipal Securities Rulemaking Board’s online EMMA system. The unlimited tax bonds were issued to refund the $363 million of variable-rate GO refunding bonds unlimited tax series of June 2002. The limited tax bonds were issued to refund the $53 million of variable-rate GO refunding bonds limited tax series of June 2002, according to bond documents. The 2006 bonds were also used to pay termination costs of swap agreements that had been entered into in connection with the 2002 variable-rate bonds.
The IRS notified the district in a Jan. 30 letter that it “is conducting an examination of the bonds” and that it routinely examines municipal debt issuances to determine compliance with federal tax requirements.
The district said it believes all requirements relating to tax-exempt bonds were satisfied and will “fully cooperate with the IRS on the examination.”
The district, which encompasses Chicago and 125 suburbs and is responsible for treating sewage and preventing flooding, is also being audited in 2010 by the IRS and scrutinized by the Securities and Exchange Commission for $600 million of Build America Bonds it issued in August 2009.
That deal was highlighted in a series of published reports by Bloomberg LP that raised questions about the pricing of the BABs.
On BAB deals, the issue price is key to determining the bond yield and determines the subsidy rate of the payment the Treasury Department will make to the issuer. The Treasury pays issuers a subsidy rate equal to 35% of their interest costs. The BAB program was established under the American Recovery and Reinvestment Act but expired at the end of 2010.
Mary Ann Boyle, the district’s treasurer, could not give any update on the the IRS audit of the 2009 BABs, which she said is still ongoing.
Mesirow Financial Inc. and Harris NA were co-underwriters for the 2006 refunding bonds. Chapman and Cutler LLP and Burris, Wright, Slaughter & Tom LLC were co-bond counsel on the deal, according to bond documents. DLA Piper Rudnick Gray Cary US LLP was special counsel to the district. Co-underwriters’ counsel were Katten Muchin Rosenman LLP and Pugh, Jones, Johnson & Quandt, PC. All of the firms are based in Chicago.
Mesirow and Loop Capital Markets LLC were co-underwriters for the BAB deal. Chapman and Cutler and Pugh Jones were co-bond counsel. Katten Muchin and Burke Burns & Pinelli Ltd. were co-underwriters’ counsel.