ERMUSR MISC. ITEMS 12-09-2003 - Laserfiche WebLink

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Page 2 of 4 In 1983, city officials sold the old St. Paul Civic Center to private investors for $33 million, then leased it back. A decade later, when the Civic Center needed improvements the private owners were unwilling to make, the city borrowed $65 million to buy back the building and pay off a dozen development projects its earlier sale had financed. The deals proposed to St. Paul and the other cities are similar to the Civic Center transaction and other traditional sale and lease-back contracts, except the cities would retain title to their sewers. For federal tax purposes, though, the long-term rental agreements businesses would sign with the cities would allow the businesses to claim depreciation on the public infrastructure. Top administrators of the Metropolitan Council also have been approached recently by several investment companies proposing lease deals for the council's regional sewer lines, sewage treatment plants and the new Minneapolis light-rail line. City councils in eight Minnesota cities, not including St. Paul, have voted to enter into agreements that could lead to leasing their sewers, but none is close to signing a final contract. Now, after harsh criticism of the leases last week by the chairman of the U.S. Senate Finance Committee, some city officials are taking a more skeptical look at the financing schemes. On Tuesday, Sen. Chuck Grassley, an Iowa Republican, called the Infrastructure lease proposals, which are surfacing all over the country, "good, old-fashioned tax fraud." His committee, which estimated lease-based tax shelters would cost the U.S. treasury more than $500 million over 10 years, approved legislation Oct. 1 that would dramatically curtail the tax benefits businesses now can reap through such leases. Despite Grassley's harsh language, cities throughout the United States have approved similar tax shelters involving the leasing of assets of big-city transit systems over the past two decades. And the Federal Transit Administration has approved many, if not all, of those leases. Transit systems that have leased their subways, buses and other property include Boston, New York, Chicago, Miami and Washington, D.C., according to promoters of the Minnesota lease plans. Jim Wavle, a spokesman for Allco Finance Corp., the small New York investment company seeking to broker many of the lease deals in Minnesota, accused Grassley of ignoring that history and engaging in "improper and inflammatory political hype." But the lease proposals also are drawing fire from Minnesota officials. State Finance Commissioner Dan McElroy said last week that he questioned the legitimacy of leases on economic grounds. He called the tax benefits "synthetic depreciation" and said the cost to the federal government in lost taxes would be greater than any benefit the cities would receive. State Auditor Pat Awada, who began investigating the lease arrangements about a month ago, weighed in last week with her own criticism. In a memo to state Sen. David Senjem, R-Rochester, who requested the investigation, and to the chairmen of the House and Senate tax committees,Awada said the leases are allowed under federal law. But, she said, plans for cities to continue operating sewer systems that have been leased and then re- leased would raise numerous questions under state laws. She said the leases could affect the ability of cities to use tax-exempt borrowing to finance maintenance 11/26/03