The Pennsylvania matter figures prominently in a nationwide federal inquiry into similar alleged abuses in the municipal bond business, including a practice known as ``yield burning'' - a complex technique once used in bond re-financings that had the effect, investigators say, of enriching bond professionals while cheating the Treasury.
The IRS argues that bonds involving yield-burning should lose their tax-exempt status. As a result, state and local governments around the country could owe as much as $1 billion in federal taxes.
In Harrisburg, it all has amounted to an unpleasant distraction for top officials under Republican Gov. Ridge and Treasurer Barbara Hafer who are having to negotiate with the federal government in an effort to preserve the tax exemption for about $1 billion in state debt.
The bond deals occurred under their Democratic predecessors, Gov. Robert P. Casey and Treasurer Catherine Baker Knoll.
The saga's latest twist became public Wednesday, when the Bond Buyer reported that the Philadelphia firm of Wolf, Block, Schorr & Solis-Cohen agreed last month to pay the state $738,748 to settle potential claims that the firm received improper payments in connection with three bond refinancings in 1993 and 1994.
Wolf Block did not admit wrongdoing as part of the settlement agreement. The firm repaid, with interest, about $350,000 that it had made from the bond deals through a former partner, Patrick H. McCarthy, Pennsylvania officials said. A lawyer for Wolf Block said that McCarthy did no work on the bond deals.
McCarthy, a prominent Democrat who was Casey's appointee on the SEPTA board in the early 1990s, was an unofficial adviser to Knoll. Casey's aides and Knoll held sway over the lucrative contracts doled out to lawyers and underwriters as part of the bond deals.
McCarthy left Wolf Block in 1997, and he could not be located for comment yesterday.
