UofA's bond counsel, Chapman and Cutler, responded to Schneider's concerns by letter on January 9, 1992--one week before the crucial regents meeting. The firm assured Schneider that it believed UofA and other users of the telescopes "have always intended to meet all state and federal income tax laws applicable to the financing."

The letter was meant to ease worries over the uncensored Booz report, which said: "The concept of using bonds, investing part of the funds/fund-raising monies to pay them off and provide an annuity is unduly complicated, risky, and possibly illegal." Even with the bond counsel's assurances, UofA elected to keep Booz's damaging assessment from the regents and the public.

It is impossible to know with certainty how Booz decided that the bonding scheme may be illegal. New Times' efforts to contact Robert Moeller, the author of the Booz report who now works in Singapore, were unsuccessful. But the university financing plan presented to the regents on June 4, 1991--four months before the Booz study--provides clues as to where Moeller may have found problems.

According to the university's financing plan, a $4 million shortfall in the early years of the project would be repaid through a controversial tax-exempt bond manipulation. The project required the creation of a nonprofit Columbus Corporation to sell $15 million in tax-exempt bonds to help build the LBT. UofA would then raise money from the private sector to repay the bonds.

Under the plan, the Columbus Corporation was projected to sell the tax-exempt bonds at 7.5 percent interest rate. UofA would then invest $5 million of the bond proceeds in a special account at a projected interest rate of 8 percent. Interest earned from the $5 million account was earmarked to help repay the $15 million bond.

Such an investment--in which money is raised at one interest rate and reinvested at a higher rate--is often referred to as arbitrage. While it's not certain this is what the Booz report was concerned with, federal tax law generally prohibits investors from making money off reinvestment of tax-exempt bonds. If money raised from a tax-exempt bond sale is reinvested at a higher interest rate, the difference between the two interest rates must be paid to the federal government. This provision is intended to prevent schemes in which money is raised through tax-exempt bonds but never invested in the project it was intended to fund.

Bishop says the regents should have been told that the Booz report suggested fundamental problems with the university's financing plan.

"Just because it may cast a cloud on the university's financing system I think is no reason to try to cover it up," Bishop says. "I think you say, mistakes have been made, there is a potential problem, we're going to confront that and deal with it. It's the whole aura of cover-up that's been troubling to me about this whole affair."
UofA has since dropped its plan to create the special $5 million fund--although Cusanovich says it had nothing to do with the Booz report. He says the plan was scrapped a year ago because the university is confident it can raise the private funds to repay the $15 million bond even faster than first projected. No money has been raised to date.

Before the entire Booz report was released under court order, the university vigorously contested Silver's lawsuit, applying some contradictory logic. Its lawyers argued that although UofA considered the Booz financing assessment inaccurate, release of the negative financial information would damage the state. UofA argued that the information would cost UofA more than $100,000 because potential bond buyers would demand a higher return because of greater perceived risk.

Asked why UofA fought to keep the full report secret, Cusanovich replies, "Why should we waste a few hundred grand to keep Silver happy?"

But Maricopa County Superior Court Judge Sherry Hutt rejected UofA's arguments and ordered the document released immediately. She also awarded $5,000 in attorney fees. But UofA didn't immediately release the report.

Instead, UofA's financial adviser, Bruce D. Kelley of Rauscher, Pierce Refsnes Inc., contacted Moeller, the author of the Booz report, in Singapore. In a March 9 letter, Kelley stated UofA does not plan to invest "borrowed funds at a higher yield than the interest rates on the borrowed funds [arbitrage]. That is not, nor has it been, the financing plan."

With this information in hand, Moeller quickly backed off his earlier assessment. He fired off a letter, also dated March 9, to UofA President Pacheco, saying he had "no opinion on the approach actually being used and definitely would not apply any part of our report statements to our revised understanding of the . . . financing approach."

After getting all its ducks lined up to defuse potential damage from disclosure of the Booz report, UofA finally sent the uncensored version to Silver on March 11.

@body:As so often is the case when money and egos join forces, dreadful mistakes are made. That has happened. UofA officials now admit they screwed up. After years of study, they chose the wrong peak for their prize telescope.

UofA quietly announced last fall that it wanted to relocate the Large Binocular Telescope away from Mount Graham's Emerald Peak because the dense spruce-fir forest would distort images.

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