Monday, March 14, 2005 | 9:38 a.m.
GULF BREEZE, Fla. -- Two small Florida Panhandle cities have been helping other local governments, most of them much bigger, with more than $1 billion in low-cost borrowing over the years while making money for themselves from the resulting bond fees.
Gulf Breeze and Century, population 6,189 and 1,783, have sold bonds for such projects as an airport hotel in Orlando, utilities in neighboring Okaloosa and Escambia counties, downtown redevelopment in Boca Raton, cargo facilities at Fort Lauderdale-Hollywood International Airport and rebuilding in Homestead after Hurricane Andrew.
Now, however, the Internal Revenue Service says they've gone too far by selling $345 million in tax-free municipal bonds to help finance two Hard Rock casino-resort complexes for the Seminole Indians in Tampa and Hollywood.
The IRS three months ago sent a preliminary notice challenging the bonds' tax-free status to The Capital Trust Agency, a joint venture of Gulf Breeze, a Pensacola suburb, and Century, a former sawmill town north of Pensacola.
Gulf Breeze Mayor Lane Gilchrist said he isn't losing sleep over the IRS investigation.
"I don't see that being a threat," Gilchrist said, adding that none of the city's assets are pledged against the bonds.
Indeed, it would be bondholders who get the tax bills if the IRS challenge stands, but they then might sue Capital Trust and the Seminoles for reimbursement, said Charles Anderson, IRS field operations manager for tax-free bonds.
Most disputes, however, are settled before things go that far, Anderson said. The next step for the IRS would be a formal ruling that could be appealed through an administrative process and then possibly in court.
"We're not thinking about the possibilities or what could happen in the future," said Jim Shore, the tribe's general counsel. He said the focus is on defending the bonds.
Gilchrist's confidence stems from this Pensacola suburb's 20-year track record of selling tax-free bonds, first on its own and later with Century.
Capital Trust collects about $700,000 annually in bond fees, said Ed Gray, the agency's executive director. Gulf Breeze gets about $325,000 a year. The rest pays expenses or goes into a reserve fund.
"For a larger city it's small potatoes," said Gray, a former Gulf Breeze mayor. "It would not be a big number for them in their total budget and, therefore, probably not worth their while."
For Gulf Breeze, though, it's a big deal. The bond fee money has helped pay for a new fire station, street resurfacing, sidewalks, parks, police equipment and other projects.
Instead of an annual share, Century gets part of one-time fees when bonds are sold. For example, Century received $94,500 from the initial $315 million Seminole bond sale.
"Anytime you can get funding (it) is important to the city," said Century Mayor Evelyn Hammond.
Gray was quick to point out Capital Trust's bonds were not used for the casino portions of the Seminole resorts although lawyers advised they probably could have been.
"We didn't buy slot machines; we didn't buy gaming," Gray said.
Other entities come to Gulf Breeze and Capital Trust because they offer attractive fees due to low overhead and by aggressively seeking the best lending rates, Gray said. They also are willing to be creative.
Too creative in the Hardrock deal, IRS officials say. The Seminoles became the first tribe to finance such a project with tax-free bonds sold by a conduit -- Capital Trust -- in 2002 and 2003. It was seen as a model for other tribes until the IRS questioned it.
IRS officials say Florida law bars Capital Trust from entering such an agreement with the Seminoles and that federal law lets tribes use tax-free bonds only for "essential government fuctions" such as schools, roads and sewers -- not resorts or casinos.
Tribes, therefore, cannot do through a conduit what they are barred from doing directly, said the IRS' Anderson.
Boston bond lawyer Neil Arkuss, representing Capital Trust, argues the IRS has misread Florida law.
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