WASHINGTON — The internal Revenue Service is conducting a targeted audit of Philadelphia's series 2010A water and wastewater revenue refunding bonds, $396.46 million of which were issued.
The city disclosed the audit in an event notice posted on the Municipal Securities Rulemaking Board's EMMA system on Friday.
The IRS told Philadelphia in an Information Document Request earlier this month that it is auditing the bonds because of a concern that they might fail one or more of the bond-related provisions of the federal tax code. Bond lawyers have said that language like this is an indication that the audit is targeted.
The city said in its event notice that it has looked over the bond transcript and discussed the matter with its bond counsel. "At this time, the city has not identified any facts that would lead it to believe that the bonds fail to meet any applicable requirement of the Internal Revenue Code," the city said.
The proceeds of the $396.46 million of series 2010A refunding bonds were to be used, along with other funds, to refund bonds issued in 2003 and fund a payment to terminate a swap associated with those bonds, according to the official statement for the bonds.
Under the swap, the city was making payments to Citigroup Financial Products Inc. at a fixed rate of 4.52%, and in turn the city was receiving payments at a variable rate equal to the bond rate or 68.5% of one-month LIBOR. The swap agreement was terminated shortly before the refunding bonds were issued and $48.76 million of the bond proceeds were expected to be used for the termination payment, according to the official statement.
Philadelphia Treasurer Nancy Winkler said the city doesn't expect there to be any problem with the swap termination part of the bond issue. "We remain comfortable with the tax opinion" that was rendered when the bonds were issued, she said, calling the audit "targeted."
A syndicate led by Morgan Stanley underwrote the bonds. Greenberg Traurig LLP and Gonzalez Gaggio & Harlan LLP were co-bond counsel.