IRS probes into PUD bond spending
EPHRATA — Senior staff members at the Grant County Public Utility District said Monday they did not spend bond proceeds inappropriately on the Zipp Fiber Network and are quickly preparing a response to an audit finding by the Internal Revenue Service relating to a 2002 bond sale.
An official at the IRS's Seattle office concluded the district's use of bond proceeds from a 2002 electric system issuance for the fiber optic network, is considered expenditures for private use and exceeded the allowable threshold within a tax exempt public use bond issue.
The district issued about $217 million in tax exempt bonds at the time, using a portion to refund prior bonds. The district claimed the remaining $150 million bond proceeds were intended for construction or rebuilding of substations, equipment purchases and construction of new distribution and transmission lines.
Actually, the district spent about $79 million of the bond proceeds on the fiber optic system.
Tom Hupf, a tax exempt bond agent for the IRS, issued a letter to the district on April 20 to report his finding and inform district officials they need to provide a written response of their position on the finding by May 20.
"There is no mention of spending any bond proceeds on the fiber optic network," Hupf wrote in the letter. "Prior to the audit the district said they thought no bond proceeds were spent on the fiber optic network."
Last week, Hupf said he could not answer questions on the audit.
"The IRS is in a technical information gathering process," district treasurer-controller Nick Gerde said during the commission's regular Monday meeting. "The agent's conclusions are preliminary."
"It isn't as though the district spent any money inappropriately, that's not the point," Gerde said. "They (IRS) haven't made any suggestions to us on what the remedies would be if the district did something that was inconsistent with code."
The IRS's national office in Washington, D.C., will review Hupf's finding along with a response by the district before reaching a final conclusion.
The district has contacted their bond counsel, Preston Gates and Ellis LLP, who will assist with the district's response. The district's attorney Ray Foianini is assisting the financial staff in coordinating the issue.
"The district is looking at its response to the IRS letter principally through the bond counsel who provided the initial opinion," Foianini said Monday. "At such time as the response is prepared I'm sure they'll be available to the public."
The district's general manager Tim Culbertson said Hupf's finding is one person's opinion or interpretation.
"We still believe it was an appropriate use of the bonds," Culbertson said in an interview Friday. "Until it's demonstrated otherwise."
The district, he said, did everything appropriately through their bond counsel.
The district will respond within the 30-day time period, he said.
"We will then find out if the IRS is satisfied with our answers or whether they then continue to pursue this issue," Culbertson said. "Just like an audit, you have a right to appeal. Some would like to make more of this right now than ought to be made of it."
Culbertson described the district's response as a "work in progress," and said it is premature to contact the bond holders.
Commissioner Tom Flint, who was on the board at the time of the bond sale, said anonymous allegations have been made against the district regarding the use of the bond funds for the fiber optic network.
"When we acquired those bonds the bonding agencies were aware of what we were going to utilize those funds for, so that's not an issue in my mind," Flint said. "The gray area there has to do with whatever activities happened with Benton REA (Rural Electric Association) and whether or not those tax exempt bond funds were used and that gets to be the issue."
The allegation, Flint said, is "the tax exempt bond funding was used to provide funding for a retail service provider, which would have been Benton REA."
The problem is the district does not have the authority to operate as a retail service provider, he said.
Flint declined to comment further because of the potential for future litigation related to the issue.
Then-Commission President Bill Judge, however, went further.
"This whole fiber system is plagued with fraud and deception," Judge, who served from 1997 to 2002, said. "This is the tip of the iceberg."
Judge said the district's management knew the bond proceeds would be used on the fiber optic network and lied to the bond companies about the use of proceeds.
"The bond companies were lied to, they were naive, and they did not look into it far enough," Judge recalled.
The district's management lied in an effort to pay for fiber with the bonds, he said, because no other funding was available in the wake of a 2001 energy crisis.