The letter to the editor in the May 8th edition of the Town Crier titled “Setting the record straight” might remind readers of a hackneyed movie scene where a grizzled cop at a crime scene bellows to a crowd of casual onlookers, “Nothing to see here, folks.  Move along!”  However, the facts regarding the Town’s financing of the failed Case Estates purchase from Harvard University indicate otherwise.

The particular issue disputed by the letter’s writers is whether or not the Town has ever run afoul of IRS arbitrage restrictions with its use of the tax-exempt funds obtained in anticipation of that purchase.  So states the letter:  “There are state and federal rules and regulations covering circumstances like this and Weston is in full compliance.”

The fact is that Weston has paid to the IRS over $200,000 in arbitrage penalties, wiping out the advantage the Town had garnered from investing its federally tax-exempt funds in federally taxable securities.  The advantage comes about because the Town, along with all state governments and their political subdivisions, is in general exempt from federal taxes. 

This advantage is not supposed to be abused to finance other than legitimate state and local government objectives.  Playing the spread between taxable and tax-exempt debt markets is not one of those legitimate purposes.  Hence the penalties, which are intended to discourage arbitrage as an illegal activity by towns like Weston.  Mind the word, penalty.  It means it is not to be regarded as an ordinary cost of doing business.    

After the assessment of those arbitrage penalties, the decline in the level of all interest rates has made further arbitrage activity uneconomic for Weston even if there were no penalties.  That is because the interest rates on the $11.3 million long-term fixed-rate bonds issued for the Case Estates purchase in 2006 and 2010 are high relative to today’s capital markets.  The Town’s investment of surplus funds, in other words, has not been recovering borrowing costs.

If the Case Estates purchase had closed as originally scheduled, the interest rates on those bonds would be acceptable (with appropriate refinancing options).  But what pertains now is the drag of debt service on relatively expensive long-term financing for a transaction that has been pushed ever further into the future—and now perhaps even extinguished with the selectmen’s law suit against Harvard.

A question that still has not been satisfactorily explained by the Town, is why these long-term bonds were issued when the due diligence for the purchase of the property, specifically soil contamination tests, was not yet complete.  Those who claim that this question only comes up with the benefit of hindsight should consider this advisory bulletin from the state’s Property Tax Bureau which was issued in December 2000, six years before Weston’s town meeting voted to acquire the Case Estates property:

Communities should initially use temporary debt to finance community preservation acquisitions and initiatives in order to ensure there are no unspent bond proceeds if an acquisition or initiative unexpectedly fails to close for any reason.  Bond anticipation notes may be issued for community preservation purposes in the same manner as any other municipal borrowing and may be cost effective in financing smaller acquisitions and initiatives. Permanent debt may be issued before or after completing a community preservation acquisition or initiative. When bonds are issued in advance of community preservation acquisitions or projects, communities should have an inventory of other eligible parcels or projects and should recognize the risk of incurring an Internal Revenue Service arbitrage rebate penalty. If, an arbitrage penalty is incurred, however, it should be paid from the Community Preservation Fund.  (Property Tax Bureau, Informational Guideline Release No. 00-209, December 2000, Community Preservation Fund, Section IV-B, Temporary and Permanent Borrowing.)


Obviously, the Town did not heed this guidance in two respects.  First, it did not use temporary debt to avoid the possibility of unspent bond proceeds if the transaction unexpectedly failed to close.  Second, it failed to take actions to neutralize the risk of incurring an IRS arbitrage penalty.


And the writers of that Town Crier letter, to put it in its most charitable context, seem unaware of what the real record is.  They conclude “it is important for town residents to understand there are not millions of dollars being wasted and the town’s financial affairs are in order.”  Were that really so.  Town residents have a right to expect that town officials, as the writers of this letter indeed are, wake up when millions of dollars are being wasted and when the Town’s financial affairs need drastic attention and remedy.


Bill Sandalls

Wood Ridge Circle


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