B-141529.OM, NOV 20, 1979

B-141529.OM, NOV 20, 1979

SUBJECT: REEVALUATION OF NET INTEREST QUESTION CONCERNING WMATA BONDS (B-141529-O.M.)

DIRECTOR, CED:

IN AN AUGUST 30, 1978 MEMORANDUM (B-141529), THE OFFICE OF GENERAL COUNSEL APPROVED A CED REPORT CONCLUDING THAT THE FEDERAL GOVERNMENT, IN CALCULATING ITS SHARE OF THE "NET INTEREST COST" OF WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY (WMATA) BONDS, SHOULD DEDUCT THE AMOUNT WMATA EARNED FROM THE INVESTMENT OF UNEXPENDED BOND PROCEEDS.

RECENTLY, THE DEPARTMENT OF TRANSPORTATION (DOT) RESPONDED TO THE REPORT, DISAGREEING WITH OUR INTERPRETATION OF THE LAW. WE HAVE REEVALUATED OUR POSITION, TAKING INTO CONSIDERATION DOT'S ARGUMENTS. WHILE WE DO NOT AGREE THAT THE SECRETARY OF TRANSPORTATION'S INTERPRETATION OF "NET INTEREST COST" IS THE ONLY ALTERNATIVE, WE DO NOT THINK HE IS LEGALLY BOUND TO CONSIDER EARNINGS FROM BOND PROCEEDS IN CALCULATING NET INTEREST. OF COURSE, THIS DOES NOT PRECLUDE GAO FROM SUGGESTING THAT THE BEST ACCOUNTING PROCEDURE WOULD HAVE BEEN TO INCLUDE THESE EARNINGS IN CALCULATING NET INTEREST.

SECTION 10 OF THE NATIONAL CAPITAL TRANSPORTATION ACT OF 1969, AS AMENDED, PROVIDES:

"THE SECRETARY OF TRANSPORTATION SHALL MAKE PERIODIC PAYMENTS TO THE TRANSIT AUTHORITY UPON REQUEST THEREFOR BY THE TRANSIT AUTHORITY IN SUCH AMOUNTS AS MAY BE NECESSARY TO EQUAL ONE-FOURTH OF THE TOTAL OF THE -

"(1) NET INTEREST COST, AND

"(2) FEES, COMMISSIONS, AND OTHER COSTS OF ISSUANCE, WHICH THE SECRETARY DETERMINES THE TRANSIT AUTHORITY INCURRED ON ITS OBLIGATIONS ISSUED AFTER THE DATE OF THE ENACTMENT OF THIS SECTION."

UNTIL THE PROCEEDS FROM WMATA BOND SALES ARE EXPENDED, WMATA INVESTS THEM AND REALIZES EARNINGS. THE QUESTION IS WHETHER THE AMOUNT SO EARNED SHOULD BE CONSIDERED AS AN OFFSET IN DETERMINING THE "NET INTEREST COST" OF THE BONDS. THE SECRETARY OF TRANSPORTATION HAS NOT BEEN DEDUCTING THESE EARNINGS IN DETERMINING THE GOVERNMENT'S SHARE OF NET INTEREST.

SINCE "NET INTEREST COST" IS NOT DEFINED IN THE LAW, WE MUST LOOK ELSEWHERE TO DETERMINE ITS MEANING. THE TWO OUTSIDE SOURCES WHICH SHOULD BE USED AS GUIDANCE ARE LEGISLATIVE HISTORY AND THE COMMONLY UNDERSTOOD MEANING OF THE TERM.

IT REMAINS OUR VIEW THAT THE LEGISLATIVE HISTORY IS OF LITTLE HELP. DOT ARGUES THAT DEDUCTING EARNINGS FROM EXPENSES IN COMPUTING NET INTEREST "WOULD UPSET THE BALANCE CONGRESS SOUGHT TO ACHIEVE THROUGH AN OFFSET OF FEDERAL TAX RECEIPTS ON WMATA BONDS WITH THE 25 PERCENT FEDERAL PAYMENT OF WMATA'S TOTAL INTEREST COST." ALTHOUGH CONGRESS DID SEEK TO ACHIEVE THE DESCRIBED BALANCE, THERE IS NOTHING IN THE LEGISLATIVE HISTORY ABOUT HOW TO MEASURE NET INTEREST TO ENSURE THE PROPER BALANCE.

ACCORDING TO MARTY FERBER, THE GAO AUDITOR IN CHARGE OF THIS JOB, EARNINGS ON UNSPENT BOND PROCEEDS HAVE AMOUNTED TO ABOUT $135 MILLION (AND WILL NOT AMOUNT TO MUCH MORE BECAUSE THE MONEY WILL BE SPENT), WHILE THE 25 PERCENT INTEREST SUBSIDY (AS CALCULATED WITHOUT DEDUCTING THESE EARNINGS) WILL AMOUNT TO ABOUT $700 MILLION OVER THE LIFE OF THE BONDS. BASED ON THESE FIGURES, THE SUBSIDY, USING GAO'S CALCULATION (I.E., DEDUCTING EARNINGS), WOULD BE ABOUT $565 MILLION, A SIGNIFICANT BENEFIT TO WMATA FOR RELINQUISHING ITS TAX EXEMPT STATUS. THERE IS NO EVIDENCE IN THE LEGISLATIVE HISTORY THAT THIS AMOUNT, COMPUTED IN THIS WAY, WOULD NOT MAINTAIN THE INTENDED BALANCE.

DOT GOES ON TO POINT OUT THAT THE PERTINENT HOUSE AND SENATE REPORTS STATE THAT THE SECRETARY IS TO PAY ONE-FOURTH OF WMATA'S "TOTAL INTEREST" AND ISSUANCE COSTS, AND THE REPORTS DO NOT MENTION "NET INTEREST." THE ANSWER HERE IS THAT THE REPORTS DO NOT USE THE TERM "NET INTEREST" BECAUSE THE REPORTED BILLS REFERRED ONLY TO INTEREST. THE WORD "NET" WAS NOT ADDED UNTIL SOME TIME LATER. IN ANY EVENT, THERE IS NOTHING SPECIFIC IN THE LEGISLATIVE HISTORY TO SUPPORT DOT'S CONTENTION THAT CONGRESS "DID NOT EXPECT THE SECRETARY TO DEDUCT INTEREST EARNED ON THE BOND PROCEEDS IN COMPUTING THE FEDERAL SHARE OF THE INTEREST EXPENSE."

WE FIND MORE PERSUASIVE DOT'S ARGUMENT CONCERNING THE COMMONLY ACCEPTED DEFINITION OF "NET INTEREST COST." TECHNICAL TERMS OR TERMS OF ART USED IN A STATUTE MAY BE PRESUMED TO HAVE BEEN USED WITH THEIR TECHNICAL MEANING. SEE SUTHERLAND ON STATUTORY CONSTRUCTION, VOL. 2A, SEC. 47.29. IN THE ORIGINAL RESEARCH ON THIS QUESTION, OUR ATTORNEYS CONSULTED WITH ACCOUNTANTS AND ACCOUNTING TEXTS BUT WERE NOT ABLE TO DETERMINE THE TECHNICAL MEANING OF THE TERM "NET INTEREST COST." THEREFORE, WE RELIED HEAVILY ON THE COMMONLY ACCEPTED MEANING OF "NET" ITSELF. WE CONSTRUED THE TERM TO REQUIRE ADJUSTMENTS TO INTEREST COSTS BASED BOTH ON INTEREST WMATA EARNED ON UNEXPENDED BOND PROCEEDS AND ON THE AMOUNT OF ANY BOND DISCOUNTS AND PREMIUMS. AFTER ISSUANCE OF THE REPORT, WMATA OFFERED OPINIONS OF FINANCIAL AND LEGAL CONSULTANTS AND REFERENCES TO TEXTS ON MUNICIPAL BONDS THAT INDICATE THE TERM "NET INTEREST COST" WITH REFERENCE TO THE MARKETING OF BONDS IS A COMMONLY ACCEPTED TERM OF ART IN THE FINANCIAL COMMUNITY. IN THIS CONTEXT, IT IS SAID TO REFER TO THE INCLUSION OF BOND DISCOUNTS AND PREMIUMS IN CALCULATING THE NET INTEREST COST OF BONDS. (FN1)

WMATA'S LEGAL CONSULTANT CONCLUDES IN EFFECT THAT ACTIONS OF THE SECRETARY OF TRANSPORTATION CONSTITUTED A DETERMINATION THAT "NET INTEREST COST" REFERS ONLY TO ADJUSTMENTS FOR PREMIUMS AND DISCOUNTS, THAT SUCH A DETERMINATION WAS REASONABLE IN LIGHT OF THE COMMON MEANING OF THE TERM AS IT IS USED IN THE MARKETING OF BONDS, AND THEREFORE THAT THE SECRETARY WAS NOT LEGALLY REQUIRED TO CONSTRUE "NET INTEREST INCOME" AS CONTEMPLATING THE NET RESULT OF SUBTRACTING BOND PROCEED EARNINGS FROM INTEREST COSTS.

WE AGREE WITH DOT THAT A REASONABLE INTERPRETATION OF A STATUTE BY THE AGENCY CHARGED WITH IMPLEMENTING IT SHOULD BE UPHELD. UNFORTUNATELY, UNTIL NOW WE HAD NOT BEEN ABLE TO ASCERTAIN DOT'S INTERPRETATION OF THE STATUTE IN QUESTION. AS FAR AS WE COULD TELL, DOT HAD NOT CONSIDERED THE POSSIBILITY OF INTERPRETING THE STATUTE TO REQUIRE THE CALCULATION OF NET INTEREST TO INCLUDE THE AMOUNT EARNED FROM INVESTMENT OF BOND PROCEEDS. ALTHOUGH WE MIGHT NOT AGREE WITH THE APPROACH OF THE SECRETARY OF TRANSPORTATION REGARDING THE CALCULATION OF NET INTEREST, IT IS NOT AN UNREASONABLE ONE. SINCE THE SECRETARY HAS BEEN CHARGED WITH IMPLEMENTING THE LAW IN QUESTION AND HAS DONE SO IN A REASONABLE WAY, WE COULD NOT TAKE LEGAL EXCEPTION TO HIS ACTIONS. ALTHOUGH THE SECRETARY WAS NOT LEGALLY REQUIRED TO INCLUDE EARNINGS OF BOND PROCEEDS IN CALCULATING THE FEDERAL OBLIGATION, HE HAD THE DISCRETION TO DO SO. WHETHER OR NOT GAO SHOULD CRITICIZE THE SECRETARY FOR THE WAY IN WHICH HE EXERCISED HIS DISCRETION IS A POLICY DECISION.

WE WILL BE HAPPY TO ASSIST YOU IN PREPARING ANY FURTHER GAO RESPONSE ON THIS MATTER.

FN1 ERNST & ERNST, THE FIRM THAT PREPARED WMATA'S 1977 ANNUAL REPORT WHICH WE CITED IN SUPPORT OF OUR POSITION, HAS SINCE WRITTEN TO WMATA TO EXPLAIN THEY DEDUCTED BOND PROCEED EARNINGS, IN CALCULATING NET INTEREST, SOLELY FOR THE PURPOSE OF DETERMINING THOSE COSTS THAT COULD BE CAPITALIZED.