Wind farm abandons tax avoidance tactic that threatened school funding
BLACKWELL — Operators of a northern Oklahoma wind farm are abandoning a creative tax avoidance scheme that was drawing statewide scrutiny because of its potentially damaging impact on Oklahoma school funding.
Representatives of Rock Falls Wind Farm LLC told The Oklahoman on Friday that they will pay more than $2.2 million in property taxes this year that will be split among school districts and other governmental entities in Kay and Grant Counties.
Company executives decided to drop their claim that the wind farm was tax exempt after an Oct. 24 meeting with school superintendents convinced them that continuing to pursue the claim would have a crushing impact on school funding, said Matthew McCluskey, project development director of Rock Falls Wind Farm, a subsidiary of France-based EDF Energies Nouvelles.
"We arrived at a better understanding of the acute funding issues facing rural school districts in Oklahoma," McCluskey said. "The conversation with the superintendents had a big impact with us. The message was received from our CEO to those working down in the field.... We care about these schools and the future of the children in the communities in which we work."
Wind farm operators sent an email to Kay and Grant county school superintendents Friday informing them that Rock Falls plans to reverse a $222-million bond transaction that it had made with the Blackwell Economic Development Authority in an effort to make the property tax exempt.
The announcement by Rock Falls officials represented a dramatic about-face for a company that for more than a year had worked with the Blackwell Economic Authority to develop and carry out an elaborate business and legal strategy designed to avoid paying property taxes on its 154-megawatt wind farm in Kay and Grant counties.
McCluskey said the company turned to that now-abandoned strategy in an attempt to salvage a wind farm project that the Oklahoma Legislature had placed in financial jeopardy by eliminating a five-year property tax exemption at the end of 2016 and by terminating the zero-emissions tax credit in mid-2017. McCluskey said the company had already invested more than $100 million in the project before the Legislature changed the law.
County officials rejected tax tactic
Rock Falls Wind Farm executives set off a firestorm of controversy when they attempted to counter that legislative move by entering into deals with the Blackwell Economic Development Authority. The agreements called for the wind farm to lease its wind turbines and land lease rights to the Blackwell Economic Development Authority and for the development authority to turn around and sublease the property back to Rock Falls.
Rock Falls attorneys had argued that the arrangement made the Blackwell authority the "owner" of the property while the lease and sublease were in place and that the authority didn't have to pay any property taxes because municipal public trusts are tax exempt.
The sublease stated that after 10 years, Rock Falls would be required to make annual payments in lieu of taxes to the county treasurer that would be equal to the amount of property taxes that would otherwise be due each year.
The agreement also called for ownership of the property to revert back to Rock Falls after the sublease expires or is terminated.
Kay and Grant County assessors and their county boards of equalization had rejected Rock Falls' claim that the Blackwell Economic Development Authority owns the property.
They directed the wind farm to pay Kay County $969,179 and pay Grant County $1,239,550 in 2018 property taxes for distribution to school districts, a career technology center and other county government entities.
Rock Falls Wind Farm and the Blackwell Economic Development Authority responded by filing lawsuits in Kay and Grant Counties seeking to nullify the assessments and have the properties declared tax exempt. Potential tax payments have been held up while the lawsuits are pending.
Rock Falls now plans to amend the lawsuit and will abandon its claim that the property is tax exempt, said Jennifer Berry, an Oklahoma City attorney who is representing the company. The company is still reviewing whether it will continue to contest the amount of taxes it has to pay on the wind farm based on the values placed on the property by local county assessors, she said.
Before Rock Falls decided to abandon the wind farm's tax exempt claim, a key issue was whether the company could legitimately claim that the Blackwell authority had ownership of the property through the lease and sublease agreements when those agreements called for ownership of the property to revert back to Rock Falls when the sublease expired.
"It's merely a transfer for the purpose of avoiding paying taxes," Kay County District Attorney Brian Hermanson told The Oklahoman before Rock Falls abandoned its lawsuit claim. "Never been done before in the state of Oklahoma — a question whether it can be done. We say that it cannot be done and that it was not appropriate."
Impact would have been huge on schools
If the wind farm operators had not withdrawn their tax exempt claim, the impact of the tax protest lawsuits would have been huge on the Kay and Grant County school districts that will receive the lion's share of the wind farm's tax payments, Hermanson said.
Newkirk Public Schools is expecting to receive $669,807 of the wind farm's tax payments in 2018.
Newkirk Superintendent Brady Barnes said his school district has budgeted conservatively, so it could have used carry-over funds to mitigate any immediate impact, but said the impact would have been "huge" if the tax dispute had drawn out or the wind farm had been found to be tax exempt.
Under the state's school aid formula that is designed to reduce disparities in school funding, the state aid payment the Newkirk district is scheduled receive has been reduced in anticipation of the district receiving increased revenue from the wind farm.
"Our state aid will be dropped in January around $350,000," he said. "We need every penny we can. That's seven or eight teacher's salaries."
Barnes also said the school district would have been put at risk of defaulting on a sinking fund payment if the wind farm had not agreed to pay the taxes.
Deer Creek-Lamont Public Schools in Grant County were in a similar bind. School officials are expecting to receive about $1 million from the wind farm in 2018 and are counting on that money to help make bond payments.
Barnes said if Rock Falls had succeeded in pressing its tax exempt claim, the impact would have been tremendous.
"There's a lot of ramifications," he said before Rock Falls dropped its claim. "It's bad for our school district and the state of Oklahoma. As far as I know, this is the first time anything like this has happened.
"What's to stop future companies in Oklahoma from using their economic development authorities to be owners of their properties so they wouldn't have to pay taxes? So there's a lot riding on this, not just for Newkirk, but for other school districts statewide."
District attorney was shocked
Shawn Hime, executive director of the Oklahoma State School Boards Association, said he's hopeful other wind farms and economic development authorities won't try to resurrect Rock Falls' abandoned tax avoidance strategy.
"I would hope that any municipal or county officials with economic development authorities ... would have a conversation and have a relationship with school officials before they move forward with such a drastic decision," he said.
Hime said the tactic that Rock Falls has now abandoned appeared to be an attempt to circumvent the Legislature's decision to eliminate the five-year property tax exemption for wind farms.
"Anytime you're looking to circumvent state law, it looks like it's something you shouldn't be doing and I applaud the county officials for stepping up and denying that," he said. "For every dollar they remove from the tax rolls, whether it be Kay County or Grant County or any other county in the state, all of the schools in the state will lose (because of the way the state aid formula is structured)."
Hermanson, the Kay County district attorney, said he was shocked that Rock Falls Wind Farm and Blackwell Economic Development Authority officials came up with the tax avoidance plan in secret and then sprang it on county officials at the last minute.
"They didn't tell us about it until it was all over and the wind farm was built and it was time to assess," he said. "I was shocked at the manner they did it. I was shocked that they would try to cut the school systems from the money they had coming and the county health system from what they had coming and county government, for that matter."
John Robertson, director of the Blackwell Economic Development Authority, declined to explain why authority members chose to participate in the deal.
"I've been told not to talk to anybody," Robertson said, referring questions to EDF attorneys.