Bailout of Napa wine shrine flawed; Copia was broke and had violated tax rules
The agency has attracted little outside scrutiny. But the state's legislative analyst, Elizabeth Hill, said in a report earlier this year that I-Bank's annual reports to the Legislature offered too little financial information, hampering legislative oversight.
In Copia's case, I-Bank approved the 2007 bond deal even though the nonprofit was one payment shy of defaulting on $67 million in previous I-Bank bond debts, "raising substantial doubt about its ability to continue as a going concern," according to I-Bank board minutes and Copia's 2006 and 2007 annual financial reports.
Stanley Hazelroth, I-Bank's executive director, defended the state agency's decision to approve the deal not only to refinance Copia's debts but to add $10 million to them. Hazelroth said the goal was to give the center time to improve its finances.
"There was clearly hope that it would recover," he said. "The alternative was imminent and worse."
Hazelroth said he believes Copia has the revenue to make its bond payments, and he added that the bonds are backed with the center's real estate and furnishings as collateral.
But a California Debt and Investment Advisory Commission researcher warned in 2002 that nothing prevents so-called "conduit issuers" like I-Bank from getting drawn into expensive legal battles and settlement talks when a bond deal fails. Such failures also can damage their credibility in endorsing future bond sales.
"Their reputation and standing with respect to future debt financing may be negatively affected," commission researcher Mark Campbell said.
Before the board approved the bonds, former I-Bank chairman Edward Heidig "expressed concern" at a board meeting about Copia's refinancing request. The board approved it only after assurances that Copia had purchased bond insurance from ACA Financial Guarantee Corp.
But, about 10 weeks after the bond deal closed, ACA declared a quarterly loss of $1 billion on its subprime mortgage loan guarantees, and analysts immediately questioned its ability to honor any of its guarantees.
Last December, ACA Financial collapsed in a $7 billion sea of subprime mortgage loan guarantees. Maryland insurance regulators now are supervising its daily operations. ACA president Allan Roseman didn't respond to requests for comment.
Busted by the IRS
As ACA's woes began to mount, Copia was tangling with Sacramento IRS agent Jeffrey Brown over how it was using the space and facilities built with its first round of tax-exempt bond money.
After an introductory visit in October 2006, Brown made an unannounced visit during which he snapped photos of tables in the lobby displaying toaster ovens for sale and of wine with price tags resting in a cart parked on the second floor. Brown noted that Copia's patio was being used by the restaurant and that small tables in the atrium were an extension of the center's restaurant, wine bar and café, the documents show.
Brown did not return phone calls from The Bee. IRS spokesman Jesse Weller in San Francisco declined to comment.
But Brown's conclusion, documents show, was that Copia was using far more than the allowable 5 percent of its space for business activities, such as sales of wine and food, and private events, such as receptions and parties. That finding put the center's tax-exempt status in jeopardy.
The IRS' concern about using tax-exempt bonds to finance such facilities was echoed by a recent federal Government Accountability Office report to the Senate Finance Committee.
The GAO pointed out that, while attractive to investors, tax-exempt bonds are costing the public billions in lost tax revenue each year. The GAO concluded that their tax-exempt status should be reconsidered because "it's unclear whether the facilities generate public benefits that would be un-provided by the private market."
Copia initially disputed Brown's accusations, but after the agent presented his photographic evidence, attorney Carol Lew – a specialist in nonprofits and tax-exempt bonds – quickly proposed a compromise.
