Phil Knight’s gift agreement, which says he will donate $100 million to the athletic department only if the University is able to secure $200 million in bonds, appears to contradict Internal Revenue Service rules prohibiting arbitrage.
The University has yet to provide written documentation indicating otherwise, but is in the process of responding to the Emerald’s request.
Arbitrage, which is a tax law that applies to tax-exempt organizations, can occur in multiple ways, one being when a tax-exempt entity issues public bonds at a low interest rate in order to “acquire higher yielding investments,” according to IRS tax code. Knight’s gift is intended to establish the Oregon Athletics Legacy Fund, which is expected to earn a higher interest rate than the public bonds.
Arbitrage might be an issue because Knight will only provide the donation if the University is able to get $200 million in state bonds. This can be perceived as seeking a low-interest bond so the University can acquire a higher-interest investment.
The Department of Justice told Principal Legislative Analyst Steven Bender in the Legislative Fiscal Office that an independent bond counsel analyzed the arbitrage issue and determined it wouldn’t be an issue.
“The Legislative Fiscal Office had similar concerns (about arbitrage) when we learned the details of the financing plan for the arena project, and raised these concerns with the Department of Higher Education and the Department of Justice,” Bender wrote in an e-mail dated Feb. 17. “The review that the state obtained from bond counsel when these questions were raised relating to the arena project concluded that the financing plan should not violate IRS restrictions on arbitrage.”
Arbitrage can only occur once the bond is actually issued, though, which hasn’t happened yet. As a result, IRS officials have declined the Emerald’s requests to review how arbitrage might apply to the University’s bond requests because it is still in hypothetical stages.
“Nobody knows what’s going to happen until it happens,” said Bill Steiner, IRS spokesman. “Until that bill is passed, or the bond issue is issued, it’s all going to be a proposal … but in the negotiation of the bond proposal, things can change.”
But if the University’s bond is found to be in violation of arbitrage laws, the bonds would become taxable and instantly violate the contract created between the issuer of the bonds and those who purchased them, Steiner said. The breach of contract would likely lead to a lawsuit against the University, Steiner said.
“It isn’t a little deal,” he said. “It’s really important that they’re done correctly.”
But administrators told the Emerald there was no written document supporting the University’s position that arbitrage won’t apply.
Officials from the University and Department of Justice told the Emerald that the only way to show the bond counsel has analyzed the issue would be through e-mails between the bond counsel and the University’s general counsel, Melinda Grier. Accessing those e-mails could take days, and would be subject to public records fees, said Douglas Park, assistant general counsel.
Steiner was confident that the issue has been thoroughly reviewed.
“This is so high profile I can’t imagine,” he said, “I just can’t imagine that scenario.”
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