DDA owes $19,000 to IRS for interest on tax-exempt bonds

Photo by Sue Suchyta

Photo by Sue Suchyta

Allen Park Downtown Development Authority Dennis Miller (left) explains details of an arbitrage payment owed to the Internal Revenue Service, as DDA Director Mike Donofrio and board member Shelly Keenan listen.

Sunday Times Newspapers

ALLEN PARK – The Downtown Development Authority owes the Internal Revenue Service nearly $19,000 for interest it collected on tax-exempt bonds.

DDA Attorney Dennis Miller the payment is for arbitrage, which is defined as making a profit based on the difference in prices or yields from different markets, isn’t a penalty. However, he said, the authority should not have made an interest profit on tax-exempt bonds for which it was paying a 4 percent rate of interest.

Officials did not mention the amount of the bonds. City Finance Director Kim Kleinow, who invested the bond money, did not attend Thursday’s DDA meeting. Efforts to reach her and Miller and for clarification were unsuccessful as of press time.

Miller said at the meeting, however, that Kleinow was directed to make the investments, although it was unclear at press time who gave that direction.

Miller said the authority pays about 4 percent for money it borrows from tax-exempt bonds.
Because the project the money was used for took about three constructions to complete, he said, Kleinow’s investment in certificates of deposit was a smart move, yielding about 4.5 percent in interest.

Miller told DDA board members that the IRS doesn’t want entities to profit by making interest on tax-exempt bonds.

“You can’t borrow at 4 percent for tax-exempt bonds and then invest that money and make (interest) – only Wall Street can do that,” he said jokingly.

Bill Brickey, a certified public accountant with Plante & Moran, audited the figures for the authority and calculated the arbitrage payment to be $18,872.

“It sounds ridiculous,” Miller said, “But Kim Kleinow said we made far more than that on interest over the three years.”

Miller said Brickey still has to file a final report and the DDA has to pay the IRS.

“It’s not a penalty,” Miller said. “It’s not anything anyone’s done wrong. It’s just frankly Kim did a good job in investing, and we made good interest off it.”

Miller likened the payment to taxes.

DDA members voted unanimously to approve an arbitrage payment to the IRS up to $20,000.