The Internal Revenue Service is requesting documents from the Erie City Water Authority regarding a tranche of advance refunding bonds sold in 2019, in what looks to be a routine examination.
"This is the manner in which routine, random audits of bonds are opened by the IRS," said Rich Moore, tax partner at Orrick. "No reason to think anything is amiss here. This issuer just lost the audit lottery."
Notice was provided by the IRS to the issuer earlier this month as reported on EMMA.
Per the notice, "This is to advise the that the Erie City Water Authority received an Information Document Request from the Internal Revenue Service dated May 1, 2025."
The $53.8 million sale was originally issued in two tranches including $17,540,000 of federally taxable Series C Water Revenue Bonds, and $36,320,000 Series D both of 2019. CUSIP Number 295542 is the issuance of interest.
The proceeds of the Series D were used for the advance refunding for some of the authority's water revenue bonds 2001 Series A, along with fixed rate series 20006, 2009, 2012, 2014, 2015, 2016, and 2018B.
Proceeds were also used for funding capital projects, funding a Debt Service Reserve Fund deposit, and paying the costs of issuing the bonds.
At the time of issuance S&P Global Ratings applied an underlying rating of 'A' with a stable outlook and an insured bonds rating of 'AA' with a stable outlook. The bonds were insured by Build America Mutual Assistance Company.
PNC Bank was the underwriter, with Stevens & Lee serving as the underwriter counsel.
The Bank of New York Mellon Trust Company served as the trustee, while the bond counselor was Knox, McLaughlin, Gornall & Sennet.
The Erie City Water Authority is also known as the Erie Water Works and has been serving the city of Erie, Pennsylvania since 1865. The authority answers to a board of commissioners and operates independently of the city government
S&P's most recent data includes an 'A' long-term rating to the authority's 2023 Water Revenue Bonds. They also affirmed an 'A' rating on the authority's existing water revenue debt with a stable outlook.
Per S&P, "Erie is a stable, primarily residential, service area with affordable rates and ample capacity coupled with conservative budgeting practices that have ensured historically positive financial results and sound financial metrics."
"The authority's recent debt funding coupled with its formal five-year capital improvement plan, which is primarily funded through debt issuance and PennVest loans, has led to a very high debt to capitalization ratio of 114%."
"When combined with projected water rate increases and below average income indicators and affordability issues over time, we believe, it currently precludes a higher rating."
Neither the bond counsel nor the authority chose to comment on the notice and the 2019 bonds continue to be actively traded on the secondary market.
The city of Erie, Pennsylvania sits on the south shore of Lake Erie with a population of about 94,000. Erie Insurance is the area's largest employer.
