POST-ISSUANCE BOND COMPLIANCE BY Arbitrage Compliance Specialists, Inc. (“ACS”) Robert Goubert,...
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POST-ISSUANCE BOND COMPLIANCE BY Arbitrage Compliance Specialists, Inc. (“ACS”) Robert Goubert, Vice President 800-672-9993 ext. 7536 [email protected]Stephen H. Broden, Vice President 800-672-9993 ext. 7530 [email protected]AND Vicenti, Lloyd & Stutzman LLP Renée S. Graves, CPA, CGFM, Partner 626-857-7300 ext. 260 [email protected]
POST-ISSUANCE BOND COMPLIANCE BY Arbitrage Compliance Specialists, Inc. (“ACS”) Robert Goubert, Vice President 800-672-9993 ext. 7536 [email protected]
POST-ISSUANCE BOND COMPLIANCE BY Arbitrage Compliance
Specialists, Inc. (ACS) Robert Goubert, Vice President 800-672-9993
ext. 7536 [email protected] Stephen H. Broden, Vice President
800-672-9993 ext. 7530 [email protected] AND Vicenti, Lloyd
& Stutzman LLP Rene S. Graves, CPA, CGFM, Partner 626-857-7300
ext. 260 [email protected]
Slide 2
The IRS is requiring debt issuers to indicate if written
post-issuance compliance policies and procedures are in place. Key
characteristics suggested by the IRS: o Due diligence review at
regular intervals; o Identifying the official or employee
responsible for review; o Training of the responsible
official/employee; o Retention of adequate records to substantiate
compliance (e.g., records relating to expenditure of proceeds); o
Procedures reasonably expected to timely identify noncompliance;
and o Procedures ensuring that the issuer will take steps to timely
correct noncompliance. 2 New Requirement
Slide 3
3
Slide 4
Bond Compliance 4 Three golden rules when issuing a bond: 1.
Issue the bond when you need the funds 2. Issue just enough bonds
that you need for the project not more 3. Complete the project with
due diligence
Slide 5
Bond Compliance We just closed on a bond issue and received
$6,000,000 at closing. 1. Spend the money immediately A. Refund an
older bond issue (current refunding) B. Reimburse for prior
expenditures C. Buy an asset building, software, land, (loans to
Government Units) D. Cost of issuance to pay: a) Financial advisor
b) Bond counsel c) Underwriter d) Insurance 5
Slide 6
Bond Compliance We just closed on a bond issue and received
$6,000,000 at closing. 2. Invest the money until needed for: A.
Building project B. Refunding (advanced refunding) C. Interest
payments on the bonds D. Reserve set funds aside in case they are
need to make a bond payment 6
Slide 7
We just issued a bond now what? Are there tax rules that we
need to follow? Arbitrage Rebate Entire Bond Yield Restriction
Fund
Slide 8
Are there tax rules that we need to follow? Yes - Rules are
based on three limitations Interest Earnings Balance Time Interest
EarningsBalanceTime
Slide 9
We just issued a bond now what? Are there tax rules that we
need to follow? Arbitrage Rebate Entire Bond Yield Restriction
Fund
Arbitrage Rebate Are all bonds subject to arbitrage rebate?
EXEMPTIONS OR 12 Interest Earnings Small Issuer Exemption Entire
Bond Fund Exemption Each fund related to bond meets an
exemption
Slide 13
Arbitrage Rebate Small Issuer Exemption New Money Bonds -
$5,000,000 or less issued in calendar year Examples: $4,999,999
Bond issued in 2011 (No other debt in calendar year) - Exempt
$4,999,999 Bond A and a $50,000 note issued in 2012 $4,999,999 +
$50,000 = $5,049,999 Subject to arbitrage rebate * Small Issuer
Exception Increase for Public Schools - Public school tax-exempt
debt issued from 1/1/98 12/31/01 ($10,000,000 limit): All
tax-exempt debt issued in a calendar year cannot exceed
$10,000,000. $5,000,000 may be used for any purpose. Any amount
over $5,000,000 (up to $5,000,000) must be used for public school
construction as part of the additional $5,000,000 limit. Public
school tax-exempt debt issued from 1/1/02 current ($15, 000,000
limit): All tax-exempt debt issued in a calendar year cannot exceed
$15,000,000. $5,000,000 may be used for any purpose. Any amount
over $5,000,000 (up to $10,000,000) must be used for public school
construction. 13 Interest Earnings
Slide 14
Arbitrage Rebate Small Issuer Exemption Refunding Bonds - The
debt being refunded (old debt) qualified for the Small Issuer
Exception The weighted average maturity of the refunding debt (new
debt) does not exceed the weighted average maturity of the refunded
debt (old debt) The refunding debt (new debt) does not mature more
than thirty years after the issuance of the original refunded debt
(old debt) Note Historically 1/3 of refunding bonds (new debt) will
fail one of the three rules listed above and become subject to the
arbitrage rebate regulations. 14 Interest Earnings
Slide 15
Arbitrage Rebate Small Issuer Exemption Small Issuer Exception
= FAIL (bond is subject to arbitrage rebate) But wait. ! There are
also individual exemptions on a fund by fund basis 15 Interest
Earnings
Slide 16
What is Arbitrage Rebate? Are all bonds subject to arbitrage
rebate? EXEMPTIONS OR Small Issuer Exemption Project Cost of
Issuance Escrow Refunding Debt Service 16 Interest Earnings Fund
Exemption Each fund related to bond is exempt
Slide 17
Arbitrage Rebate Fund Exemptions There are also individual
exemptions on a fund by fund basis for certain funds: Project Funds
Costs of Issuance Funds Escrow Refunding Funds Debt Service Funds
17 Interest Earnings Balance Time
Slide 18
Fund Exemption 6 Month Spending Exception Expend within 6
months: Project Funds Costs of Issuance Funds Escrow Refunding
Funds 18 Interest Earnings Balance Time
Slide 19
Fund Exemption 18 Month Spending Exception Expend within 18
months Project Funds Cost of Issuance Funds Spending Timetable 15%
within 6 months 60% within 12 months 100% within 18 months 19
Balance Time
Slide 20
Fund Exemption 24 Month Spending Exception 20 Balance Time
Expend within 24 months Project Funds Spending Timetable 10% within
6 months 45% within 12 months 75% within 18 months 100% within 24
months
Slide 21
Arbitrage Rebate Fund Exemptions There are also individual
exemptions on a fund by fund basis for certain funds: 1. Project
Funds 2. Costs of Issuance Funds 3. Escrow Refunding Funds 4. Debt
Service Funds 21 Interest Earnings Balance Time
Slide 22
Fund Exemption Debt Service Exemption if the debt service fund
is depleted each year, except for a reasonable carryover amount
defined as an amount up to the greater of: the earnings on the fund
for the immediate preceding year; or 1/12 of the principal and
interest payments on the issue for the immediate preceding year
Example: Debt service payments = $1,200,000 for the year
$1,200,000/12 = $100,000 Debt Service balance < $100,000 =
Exemption 22 Balance Time
Slide 23
Summary of Exemptions FundsFund Exemption 1.Project6-Month,
18-Month, 24-Month 2.Cost of Issuance6-Month, 18-Month 3.Escrow
Refunding6-Month 4.Debt ServiceInterest earnings or 1/12 test 23
Entire IssuanceSmall Issuer Exemption Bond StructurePass all
testing criteria (Project + Refunding Criteria) Interest
EarningsBalanceTime
Slide 24
Arbitrage - Time to Review Exceptions Are all bonds subject to
arbitrage rebate? EXEMPTIONS OR Small Issuer Exemption Fund
Exemption (entire bond) 6-Month 18-Month 24-Month Debt Service Test
24 Interest Earnings Balance Time
Slide 25
Arbitrage - Filing Period IRS filing dates for arbitrage rebate
payments Every 5 years Maturity date of the issue 25 Interest
Earnings Balance Time
Slide 26
We just issued a bond now what? Are there tax rules that we
need to follow? Arbitrage Rebate Entire Bond Yield Restriction
Fund
Slide 27
Yield Restriction Fund Restriction Yield Restriction
Limitations on Funds Project Funds Costs of Issuance Funds Escrow
Refunding Funds Debt Service Funds Interest Earnings Balance
Time
Slide 28
Project Funds Trigger funds remain at the end of Interest
earnings on the balance is to be yield restricted to the bond yield
+.125% or provide a yield reduction payment to the IRS Yield
Restriction Project Interest Earnings Balance Time 3 years
Slide 29
Cost of Issuance Trigger funds remain at the end of Interest
earnings on the balance is to be yield restricted to the bond yield
+.125% or provide a yield reduction payment to the IRS Yield
Restriction Cost of Issuance Interest Earnings Balance Time 3
years
Slide 30
Refunding Escrow Trigger for a current refunding Interest
earnings on the balance after 90 days is to be yield restricted to
the bond yield +.001%. Trigger for a advanced refunding Interest
earnings on the balance after 30 days is to be yield restricted to
the bond yield +.001%. Yield Restriction Refunding Escrow Interest
Earnings Balance Time 90 days 30 days
Yield Restriction Debt Service What happens if the balance >
payments? Interest Earnings Balance
Slide 33
Yield Restriction Debt Service Balance > Payments $1,800,000
Balance - $1,200,000 Payments = $600,000 Reserve Excess debt
service funds are treated as a reserve fund. Interest earnings are
to be yield restricted to the bond yield +.001% or provide a yield
reduction payment to the IRS Interest Earnings Balance
Slide 34
Excess Debt Service Funds Very High Reserve Balance Excess Debt
Service Funds Reserve Perfect Match Yield Restriction Debt Service
Balance = Debt Service Payments $1,200,000 - $1,200,000 = $0
Perfect Match Interest EarningsBalance Balance > Debt Service
Payments $1,400,000 - $1,200,000 = $200,000 Reserve Balance >
Debt Service Payments $1,800,000 - $1,200,000 = $600,000
Reserve
Slide 35
Summary of Yield Restriction FundsTriggerYield Restriction Rate
ProjectBalance after 3 yearsBond Yield +.125% Cost of
IssuanceBalance after 3 yearsBond Yield +.125% Current refunding is
defined as a refund that takes place within 90 days allowed to
invest without regard to yield restrictionBond Yield +.001%
Advanced refunding is defined as a refunding that takes place after
90 days allowed to invest without regard to yield restrictionBond
Yield +.001% Debt ServiceVery High Reserve BalanceBond Yield +.001%
35 Interest EarningsBalanceTime 90 days 30 days
Slide 36
Yield Restriction IRS Filing Dates for Yield Restriction Every
5 years Maturity date of the issue 36 Interest Earnings Balance
Time
Slide 37
Record Retention 37 Section 6001 provides record retention
requirements for federal tax purposes. It is important that
sufficient records are retained to demonstrate the bonds maintain
their tax-advantaged status. *Retention period is the life of the
bond plus three years. **Extended for refunding circumstances as
the new retention period for refunded bonds is the life of the
refunding bond plus three years. (Information provided on flash
drive)
Slide 38
Private Business Use 38 Private Business Use relates to Section
141 if the Internal Revenue Code of 1986, as amended and Treasury
Regulations 1.141 (the Tax Code). Leading Question: What is Private
Business Use anyways? General Questions: Is the facility used in a
manner that will benefit a for-profit entity or individual (private
business use test)? Specific examples of possible private business
use according the Tax Code. Is the facility owned or leased to a
for-profit entity or individual (security or payment tests)? Are
proceeds used to make or finance loans (financing test)?
Slide 39
Private Business Use 39 Private Business Use relates to Section
141 if the Internal Revenue Code of 1986, as amended and Treasury
Regulations 1.141. Leading Question: What is Private Business Use
anyways? Private Business Use relates to the identification of
proceeds or bond financed property that are to be used for any
private business use. The general rule (private business use test)
is that if 10% or more of the proceeds of the issue/or bond
financed property are used for private business use than the issue
is not a private activity bond (in other words it is taxable).
Slide 40
Private Business Use 40 General Question: Is the facility used
in a manner that will benefit a for-profit entity or individual?
Ways to validate proper use: Identify clearly what building or
project site is involved in each financing. Establish a uniform and
rational system, for example: Calculate the total square footage of
useable space of the facility. Calculate the square footage of the
area used for private use purposes. Determine if the private use
area has general access from all of the common areas of the
facility or if there is a limited area of general access devoted to
the entrance to the private use area. The other areas of general
access may then be added to the other public purpose use areas.
Divide the private use area by the total area of the facility. This
is the percentage of private use and must not exceed the private
use allocation based upon the proceeds percentage. If 100% of the
building is used by a qualified 501(c)(3) corporation or a
governmental entity compliance is achieved.
Slide 41
Private Business Use 41 General Question: Is the facility used
in a manner that will benefit a for-profit entity or individual?
Measuring for the private business use test is based upon the
average percentage of use during the measurement period: The
measurement period of property financed by an issue begins on the
later of: the issue date of that issue, OR the date the property is
placed in service. The measurement period ends on the earlier of:
the last date of the reasonably expected economic life of the
property, OR the latest maturity date of any bond of the issue
financing the property (determined without regard to any optional
redemption dates).
Slide 42
Private Business Use 42 Specific examples of possible private
business use according the Tax Code include: Sale of facilities
Leases Special legal entitlements such as naming rights Management
contracts Research agreements See handout for specifics.
Slide 43
Private Business Use 43 General Question: Is the facility owned
or leased to a for-profit entity or individual? Ways to validate
proper use: If less than 10%, of the proceeds/property are directly
or indirectly secured by an interest in: property used or to be
used for a private business use, or payments in respect of such
property, or. to be derived from payments (whether or not to the
issuer) in respect of property, or borrowed money, used or to be
used for a private business use. General measurement of private
payment and security test: The present value of the payments or
property is compared to the present value of debt service to be
paid over the term of the issue.
Slide 44
Private Business Use 44 Are proceeds used to make or finance
loans? Ways to validate proper use: If less than 5% or $5 million
of the proceeds are directly or indirectly used to make/finance
loans to non governmental persons. General measurement of private
loan financing test: The actual amount loaned is not discounted to
reflect present value but instead relies testing based on the face
amount.
Slide 45
Private Business Use 45 The Tax Code identifies a private
activity bond as a bond which meets the following criteria: the
private business use test, and the private security or payment
test, or the private loan financing test. Both the reasonable
expectations of the issuer on the issuance date and subsequent
deliberate actions of the issuer are considered when determining if
the private activity bond tests are met. There are three basic
remedial action options as generally described below: Redemption or
defeasance of nonqualified bonds within 90 days Alternative use of
disposition proceeds Alternative use of facility
Slide 46
Continuing Disclosure 46 The Official Statement will state the
following regarding Continuing Disclosure: The District will enter
into a Continuing Disclosure Undertaking In the last 5 years, the
District has complied in all material respects with its previous
undertakings under the Rule to provide annual reports and notices
of Listed Events Important Acronyms: SECSecurities and Exchange
Commission MSRBMunicipal Securities Rulemaking Board EMMAElectronic
Municipal Market Access
Slide 47
Continuing Disclosure 47 SEC 15c2-12(b) Requirements:
15c2-12(b)(5)(i) An underwriter shall not purchase or sell
municipal securities unless they have reasonably determined that
the issuer (District) has undertaken to provide the following to
the MSRB: A.Annual Financial Information or operating data
presented in the final official statement B.If not submitted as
part of the Annual Financial Information, audited financial
statements C.Notice of any of the following events in a timely
manner, not to exceed 10 business days: 1.Principal and interest
payment delinquencies 2.Material non-payment related defaults
3.Unscheduled draws on debt service reserves for financial
difficulties
Slide 48
Continuing Disclosure 48 C.Notice of any of the following
events in a timely manner, not to exceed 10 business days:
(continued) 4.Unscheduled draws on credit enhancements for
financial difficulties 5.Substitution of credit or liquidity
providers, or their failure to perform 6.Adverse tax opinions
affecting the tax status of the security 7.Material modifications
to rights of security holders 8.Material bond calls or tender
offers 9.Defeasances 10.Release, substitution or sale of property
securing repayment of the securities 11.Rating changes
12.Bankruptcy, insolvency, receivership or similar event
13.Consummation of a merger, consolidation or acquisition
14.Appointment of a successor, additional trustee or change of a
trustee
Slide 49
Continuing Disclosure 49 Form of Continuing Disclosure
Undertaking Usually an appendix to the Official Statement that is
signed by District Administration Describes the content for the
Annual Financial Information Financial information in the Annual
Report may be unaudited Audited financial information must be
provided to the MSRB as soon as practical after it has been made
available to the District Include Operating Data in the Annual
Financial Information to the extent it's not included in audited
financial statements: 1.Outstanding debt and lease obligations
2.General fund budget and actual results 3.Enrollment, or
equivalent information, as is reasonably available 4.Assessed
valuations 5.Largest local secured taxpayers
Slide 50
Continuing Disclosure 50 Form of Continuing Disclosure
Undertaking District agrees to provide to MSRB Notice of Listed
Events (Material Events) with respect to the Bonds no later than 10
business days after the occurrence Provided in electronic format
Accompanied by identifying information as prescribed by the
MSRB
Slide 51
Continuing Disclosure 51 If the District includes any
information in addition to what is specifically required: There is
no obligation to update the information or include it in any future
disclosure The sole remedy for failure to comply with the
Continuing Disclosure Undertaking: Is an action to compel
performance Don't risk management's credibility by not complying!
The Continuing Disclosure Undertaking terminates: When the District
is no longer obligated with respect to the Bonds
Slide 52
Post Issuance Policy and Procedure Manual 52 = (Information
provided on flash drive)
Slide 53
53 Arbitrage and Yield RestrictionAppointed Party Retention of
Adequate RecordsAppointed Party Borrower Spending's Report
Construction Progress Appointed Party Qualified Use of Proceeds,
Financed Property and Private Activity Appointed Party Issuance
Price and Volume Cap AllocationAppointed Party Fair Market Value of
InvestmentsAppointed Party Continuing DisclosureAppointed Party
Compliance TrainingCompliance Officer Delegation of Compliance
Matters
Slide 54
This presentation provides brief and general information. IRS
rules are complex and detailed, so it is important to review the
specific guidance provided by the arbitrage rebate and related
requirements of IRC Section 148.