DALLAS -- Wayne County, Michigan continues to weigh two proposals to finish a partially built, bond-financed jail project even though one of those options hinges on a decision from the Internal Revenue Service about the use of leftover bond proceeds.

The county announced Thursday that it has received two final proposals. One of the proposals depends on a decision by the IRS over what penalties the county would incur if it were to deed the current Gratiot Avenue site to a private entity and re-purpose leftover bond money from the original 2010 deal to help fund construction at the alternate site.

Rendering of a proposed Major League Soccer stadium in Detroit.
Wayne County is still weighing Rock Ventures' proposal to move a jail project to another site to make room for a Detroit soccer stadium. ROSSETTI

Opting to move the site would expose the authority to losing the federal subsidy payments the county receives for the taxable bonds that were issued under the recovery zone economic development bond program. At risk is a total of about $170 million in subsidies, which includes more than $50 million the county has received so far.

The proposal from Walsh Construction would complete the jail at the original Gratiot site in downtown Detroit and would incur no penalties from the IRS.

Developers Rock Ventures wants to move the jail site to a less central location and use the downtown location for a professional soccer stadium.

“The logic has always been clear to me. It’s not about soccer and it’s not about politics. It’s about a county, with very real fiscal limitations, financing a desperately needed jail which has already cost taxpayers millions,” said County Executive Warren Evans in a press release. “This decision is solely about what’s best for Wayne County.”

Rock Ventures is proposing to build the county a new Criminal Justice Center with a 2,280 bed jail, criminal courthouse, prosecutor offices, sheriff administrative offices and a juvenile detention facility at an approximate cost of $520.3 million with the County responsible for $380 million plus the cost of acquiring the land and Rock responsible for cost overruns. The $380 million would be funded through a combination of unused proceeds from a 2010 bond and the issuance of about $200 million of new bonds.

County spokesman James Martinez said Wayne County is hopeful that the IRS decision will not create that insurmountable obstacle and it is therefore still considering Rock’s proposal an option. “To clarify, the decision on the bonds needs to be resolved for Rock Ventures' criminal justice center proposal to be possible,” he said.

The IRS in July 2015 began conducting a targeted audit of the Wayne County Building Authority's taxable, direct-pay $200 million recovery zone economic development bond issue in 2010 due to concerns over tax code violations. Jail construction began in 2011 but was halted in 2013 due to rising costs.

If the IRS had found violations, the federal subsidy payments would have been at risk. The authority receives subsidy payments equal to 45% of the interest costs, minus reductions due to sequestration.

The IRS notified the county about six months ago that the audit was resolved without any adverse action and no penalties would be imposed as long as about $50 million of remaining proceeds were used to complete the project on the current site which is in a qualified recovery zone.

With a proposal under consideration to move the site, the county proactively approached the IRS about the site issue in March this year. But the IRS concluded it would be unable to render a favorable ruling and suggested the county consider utilizing the voluntary closing agreement program to determine the penalties should it go with the alternative jail site. While the formal process could take a few months, the county hopes for an initial indication in the coming weeks.

In May, Moody’s Investors Service affirmed the county’s Ba1 limited tax general obligation rating while revising its outlook to positive from stable. S&P Global Ratings also affirmed the county’s LTGO rating of BB-plus and positive outlook. Fitch Ratings raised the county’s issuer default rating by one notch to investment-grade BBB-minus in late May.

The country’s recovery plan – aided by flexibility afforded by the state agreement – allowed it to cut labor and retirement costs and reduce healthcare costs. That allowed the county to better align its revenues with expenses, eliminate its accumulated deficit, and post a $53 million operating surplus in fiscal 2016.

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