State regulators allowed some sellers of Oregon energy tax credits to offer buyers deep discounts while forcing others to follow strict state pricing rules.
As a result, those not following the rules were able to more easily sell their credits, and their buyers realized greater value for their investment, while those following the rules were at a competitive disadvantage.
The state offers the tax credits to government and private organizations to help offset the cost of efficiency and renewable energy projects. Recipients can use the credits to reduce their taxes, or sell them to raise capital.
Oregon lawmakers have tried repeatedly to rein in the costly incentives, with bills to reduce the cost of the program and control the price at which the credits could be sold to investors.
But a group of tax credit recipients and brokers set out to find ways to circumvent them.
They had help from staff at the Oregon Department of Energy, where employees gave out conflicting advice over the years. Some employees told energy project owners they had to follow state price guidelines required in statute. At the same time, another employee told project owners they could ignore that section of state law.
The Department of Energy also stopped verifying how much corporations and wealthy individuals paid to purchase the tax credits, despite evidence that brokers and project owners were looking for loopholes in state pricing regulations.
In one case, this resulted in the Portland metropolitan area transit agency TriMet selling tax credits with a face value of $3.6 million for $2.7 million, or 75 cents on the dollar instead of the 98 cents required under the rules. The deeper the discount, the less money went to the renewable energy and efficiency projects the tax incentives were supposed to reward.
Business energy tax credits issued between 2006 and 2014 could cost the state up to $968.1 million in tax revenue, including $703.6 million from tax credits that were sold by recipients to investors, according to an analysis of Department of Energy data.
The EO Media Group/Pamplin Media Group Capital Bureau first reported in June that the Oregon Department of Energy quietly stopped enforcing pricing and other rules on the state tax credits. When people questioned the policy, the Department of Energy responded with a temporary rule change to retroactively eliminate price rules going back to mid-2012.
The temporary rule change, which the department plans to make permanent, would reward people who sold tax credits at deeper discounts than allowed under state rules. It would not help people such as Mel Rumwell, who was told by a state employee that he had to follow the rules. Rumwell is president of the Rock Creek Community Association, which qualified for a business energy tax credit by installing an energy-efficient roof.
“We were told by the state that we could not discount it,” Rumwell said of the tax credit. Rumwell said the association has no use for the credit because it does not owe taxes to the state, and its window to sell the tax credit closed in December.
Energy officials have said they had authority to make a business decision not to enforce the rules, but the policy appears to contradict the intent of the Oregon Legislature, which wanted to set prices to ensure the tax incentives would benefit energy projects.
Rules and loopholes
The Department of Energy historically controlled tax credit prices directly, through what was known as the pass-through program. The agency helped match buyers and sellers, set rates at which the credits could be sold and handled the payments.
When people started to negotiate private deals outside the pass-through program, the Legislature stepped in with a 2009 law that required the Department of Energy to develop “a formula to be employed in the determination of prices of (tax) credits” in those sales. Lawmakers reiterated the mandate in a 2011 law.
However, some energy project owners and tax credit brokers found a different section of state law they interpreted as allowing the sale of tax credits at any price negotiated by the buyers and sellers. Anthony Buckley, the Oregon Department of Energy’s chief financial officer, agreed and since at least fall 2014, the agency allowed the private sales at negotiated prices under that same section of Oregon law. It simply states one-time transfers of tax credits are allowed, unless expressly prohibited by other laws.
Jody Wiser is chair of Tax Fairness Oregon, a group which advocates for a progressive tax code and full enforcement of state tax laws. Wiser said the conflicting advice from Department of Energy employees was a sign the agency lacked leadership.
“Some of them believe in following the law, and some of them don’t believe in following the law,” Wiser said. “And nobody’s telling them, ‘This is the way it will be in our department.’”
Brokers and project owners have for years sought ways around state tax credit price guidelines. In October 2013, Salem-Keizer Transit Finance Manager Jared Isaksen emailed state Energy Incentives Program Manager Maureen Bock to ask if the district could use a side deal to bypass the price guidelines.
The transit district had been awarded energy tax credits worth $3.7 million, which it could sell under state rules for no less than 97.6 cents on the dollar or a total of nearly $3.6 million. Isaksen asked Bock if the district could send a rebate of nearly $876,000 to the buyer of the credits. That would lower the net price of the tax credits to 76 cents on the dollar.
Isaksen said the idea came from certified public accountant Ryan Johnson of AKT CPAs and Business Consultants, which has a contract to broker the sales of Salem-Keizer Transit’s tax credits. Johnson said he could not recall whether he or Isaksen came up with the idea.
Isaksen wrote in October 2013 that Salem-Keizer Transit’s previous finance manager had already presented the deal to the Department of Energy and “you gave you’re (sic) okay to proceed.”
“The underlying question is can the District discount the credits further to make them more attractive to possible pass-through partners?” Isaksen wrote. “If the answer is no, then why not?”
Bock initially referred the question to Joe Colello, who handled tax credits and other renewable energy and efficiency incentives at the agency. Colello wrote back that Salem-Keizer Transit’s proposal was not allowed under state rules.
Isaksen disagreed with Colello’s response, which prompted Bock to step in. She referred to the state law that requires the Department of Energy to set tax credit sales prices, and explained how the agency verified that buyers and sellers were following the rules. Then, she addressed the rebate Isaksen proposed.
“We will not issue a legal opinion on the legality of what you are contemplating nor will we issue tax advice on whether that side transaction might be a taxable transaction for your partner,” Bock wrote. “Whatever side arrangement you are contemplating with a partner is something over which we have no control. I hope that helps.”
Salem-Keizer Transit did not proceed with the deal, and has not sold the tax credits.
In June 2014, a different tax credit broker, Blue Tree Strategies, pitched a similar deal to TriMet, which had $3.6 million in energy tax credits.
Instead of sending the rebates directly to the buyers, however, Blue Tree Strategies proposed that TriMet hide the payments in the broker’s commission. Blue Tree Strategies would then send most of the commission — more than $770,000 — to the tax credit buyers. This would reduce the net price of the tax credits from 95 to 98 cents on the dollar, as required under state rules, to an average of 75 cents on the dollar, according to Blue Tree Strategies’ proposal.
TriMet officials were uncomfortable with the idea, and Blue Tree Strategies’ owner Aaron Berg asked Buckley in an October 20, 2014 email if he would field questions from TriMet and other Blue Tree Strategies clients. Berg provided a copy of Buckley’s answer to the EO Media Group/Pamplin Media Group Capital Bureau.
Buckley, who oversees the agency’s tax incentive, energy grant and loan programs, agreed to Berg’s request.
Although TriMet never went through with the rebate, the transit agency sold its credits at the same steep discount of 75 cents on the dollar earlier this year. TriMet and the buyers waited to complete paperwork until after the Department of Energy’s temporary rule change eliminated price regulations.
Buckley fielded another question from Berg in October 2014.
“You recently asked for guidance regarding the pricing of energy tax credits when using either the transfer or pass-through mechanisms,” Buckley wrote in an October 16, 2014 email to Berg. Buckley wrote that according to energy officials’ understanding of state law, “(Oregon Department of Energy’s) pricing can be referenced, but is not mandated.”
The same month, Colello provided very different advice to another Blue Tree Strategies client. Scott Chancey, transit program manager for Josephine County, emailed questions about tax credit sales and prices to Colello.
“The state wanted me to basically sell them myself,” Chancey said of the credits. “I was actually working with the broker. The broker’s the one that actually prompted all this and helped me get through it ... What they were saying is, this was being done in other areas with these energy tax credits and why couldn’t it be done here?”
Colello responded that the tax credits must be sold at a price calculated with the Department of Energy’s formula. The agency did not provide any evidence Buckley shared his interpretation of the law with Colello until 2015, shortly before the rule change to eliminate price regulations.
Rumwell, president of the Rock Creek Community Association, said he was disappointed by the state’s plan to retroactively change the rules on tax credit prices.
“If they change the rule, I would be somewhat upset that we were never notified,” Rumwell said. “I very clearly put that to the state as to whether we could discount it, because we were up against a deadline, I believe, of December last year.”
Berg, of Blue Tree Strategies, was not bothered by the idea that only a small group of people knew the Department of Energy was not enforcing price rules.
“I think I was busy doing other stuff, and I didn’t even notice,” Berg said. “That wouldn’t fall under something as fully transparent, if some people know about something and others didn’t. But I don’t even know if that happened.”