The South Carolina Supreme Court found that Richland County misspent millions of dollars from a voter-approved 1% sales tax collected for transportation projects.

The ruling, handed down Wednesday, remands the case back to a circuit court for further proceedings that could include ordering the county to repay the misspent money from its general fund.

The decision follows the county’s issuance on Feb. 6 of $250 million in general obligation bond anticipation notes that are backed partly by the “Penny Tax,” as it is called locally. The litigation was disclosed in bond documents. The BANs are backed by the triple-A rated county's full faith and credit.

Richland County, S.C., penny tax transportation program
A court may require Richland County, S.C., to repay millions in funds misspent from the county’s 1% transportation sales tax program. Richland County Program Development Team

“Richland County wants to ensure [sic] residents we are responding responsibly to the ruling, as we do with other issues facing the county,” said a statement from the County Council and the County Administrator Gerald Seals. “We are pleased the Supreme Court affirmed that the flow of tax funds from the penny transportation tax will continue to be sent to Richland County.”

While the Supreme Court did order the South Carolina Department of Revenue to continue to remit tax revenue to the county, it also said that “DOR correctly asserted the county's expenditure of Penny Tax funds on ‘administrative costs’ that were unrelated to any specific transportation project were improper as they exceeded the scope of the Transportation Act.”

Richland County, home to the state capital of Columbia, had argued that it had spent the transportation tax funds for administrative expenses, including hiring two public relations firms and establishing a Small Local Business Enterprise Program among others.

The Supreme Court ruling did not state exactly how much money the county had earmarked as administrative expenses.

In rating the $250 million of BANs SP-1-plus last month, and discussing the pending litigation, S&P Global Ratings said, “It is our understanding that the county could be required to finance approximately $32 million in administrative expenditures.”

S&P said it is its understanding that the $32 million in expenses were not questioned in the litigation, but if for some reason the county is required to pay them it would not have a material impact on the county's financial or liquidity position or credit quality, given its “very strong flexibility and liquidity positions well in excess of the amounts in question.”

S&P also affirmed its AAA long-term rating on the county's outstanding GO debt.

Moody's Investors Service rated the BANs MIG 1, and affirmed its Aaa rating on the GOs.

In July 2012, Richland County adopted an ordinance enacting the Transportation Act and scheduling a referendum to ask voters to approve the local 1% sales and use tax for 22 years.

The county ordinance proposed using $656 million of tax revenue for improvements to highways, roads, streets, intersections, bridges and drainage systems; $300.9 million for mass transit services provided by the Central Midlands Regional Transit Authority; and $80.8 million for pedestrian sidewalks, bike paths, intersections, and greenways improvements.

The referendum passed and the Penny Tax became effective May 1, 2013.

In April 2015, the state DOR initiated a review of Penny Tax expenditures. In December of that year the DOR wrote to the county outlining a series of problems it uncovered, including the county council’s exemption from procedures and authorization of certain payments to the Project Development Team that raised “questions of potential public corruption and fraud.”

The letter did not specify what was found that constituted public corruption and fraud, though it said the information had been referred to law enforcement.

DOR also said it found multiple instances of illegal activity by individuals and/or companies associated with the Penny Program and that certain expenditures appeared to fall outside the parameters of state tax laws and county ordinances.

When DOR said it would stop remitting sales tax revenue to the county, the county filed a lawsuit in circuit court. DOR filed a counterclaim seeking a declaration that the county's expenditures were unlawful. Rulings from the lower court led to the Supreme Court appeal that was decided Wednesday.

The County Council called a special meeting for late Friday to discuss the Supreme Court ruling and obtain legal advice. The meeting was expected to be held in executive session and not open to the public.

In its statement Thursday, the council said that the transportation penny program had not been suspended, and that construction projects were ongoing.

“The county is examining expenses that should be paid from the transportation penny program pursuant to the [court] order,” the statement said. “Richland County will work collaboratively with the S.C. Department of Revenue and the transportation contractor, the Program Development Team, to make the necessary changes to bring the program in line with the order.”

The statement also assured residents that any potential outcome of the circuit court ruling “will not pose a negative impact on the county financially.”

A private lawsuit has also been filed in connection with the transportation program expenses.

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