NCGFOA Presentation --Closing and Beyond: A Guide to Post-Issuance Compliance for Tax-exempt Bonds

1. NCGFOA Presentation --Closing and Beyond: A Guide to Post-Issuance Compliance for Tax-exempt Bonds Presented by: Womble Carlyle Sandridge & Rice, PLLC Paul H. Billow G. Thomas Lee

2. THE CLOSING

3. Documents Differ based on: • Type of financing (i.e., revenue bonds, general obligation bonds, COPs, bank installment financings); • How they are sold/issued (i.e., public offering vs. private placement); and • Financing structure (fixed vs. variable rate, bond insurance, etc.).

4. Documents can be categorized generally as follows: Primary legal documents • Bond Order or Bond Resolution; • Series Resolution; • Trust Agreement; • Installment Financing Agreement; • Deed of Trust/Security Agreement;

5. Escrow Deposit Agreement (refundings); and • Letter of Credit (Reimbursement Agreement) or Liquidity Facility (Standby Bond Purchase Agreement) (variable rate issues).

6. Approval Documents • Governing board proceedings; • Public hearing notices and proceedings; and • Local Government Commission approvals.

7. Offering and Sale Documents • Preliminary Official Statement and Final Official Statement; • Bond Purchase Agreement; and • Remarketing Agreement.

8. General Certificates • Proofs of actions taken (certified resolutions, orders and minutes); • “Estoppel” certificates – the documents being signed are the documents approved; • Incumbency, signatures, no litigation, no default, representations and warranties, etc.; • Additional debt test certificates; and • Receipts and delivery and deposit instructions.

9. Tax Documentation • Tax (Arbitrage) Certificate; including exhibits (i.e., Certificate as to Issue Price); and • IRS Form 8038-G/8038

10. Legal Opinions • Bond counsel approving opinion; • Supplemental bond counsel opinion; • Local counsel opinion; • Insurer Opinions; • Underwriter’s/bank counsel opinions; and • Refunding/defeasance opinions.

11. Miscellaneous • Insurer documents; • DTC letter; and • Accountant/Feasibility Consultant consent letters.

12. Closing Process • Purpose is to properly document the validity (and tax-exempt status) of the financing and to evidence compliance with applicable laws and regulatory requirements. • Closing activities. • The Closing Transcript (your roadmap to ongoing compliance).

13. BEYOND THE CLOSING Unfortunately, activities relating to a bond issue do not end at closing. The remainder of this presentation will focus on ongoing compliance issues relating to outstanding indebtedness.

14. Focus on three major topics: • Federal Tax Law Compliance; • Securities Law Compliance; and • General Document Compliance.

15. FEDERAL TAX LAW COMPLIANCE There are several questions that should be asked which provide essential information to maintain and document compliance with ongoing federal tax law requirements relating to tax-exempt debt.

16. Question 1. Do you know how and when all the bond proceeds, including investment earnings, were spent and do you have records to prove it?

17. What are the basic records that should be retained? • Basic records relating to the bond transaction (including the trust indenture, loan agreements and bond counsel opinion); • Documentation evidencing expenditure of bond proceeds; • Documentation evidencing use of bond-financed property by public and private sources (i.e., copies of management contracts and research agreements);

18. Documentation evidencing all sources of payment or security for the bonds; and • Documentation pertaining to any investment of bond proceeds (including the purchase and sale of securities, SLGs subscriptions, yield calculations for each class of investments, actual investment income received the investment of proceeds, guaranteed investment contracts and rebate calculations.

19. How long should records be maintained? As long as bonds are outstanding, plus three (3) years.

20. Question 2. Is there any private use of the bond financed property? If so, do you have a program in place to track the private use and assure it stays within the permitted limits?

21. Private Use • Leases • Management Contracts • “Special Legal Entitlements”

22. A small amount (usually 10%) of private use is permitted, but must be carefully managed.

23. Private Use is measured over the lifetime of the bond issue.

24. Question 3. Did you meet an expenditure exception to arbitrage rebate and can you document it?

25. What is to be Rebated? Assume $10,000,000 borrowing – Bond Yield is 4% - Investment earnings rate is 5%. No expenditures in first year.

26. After one year - $102,250 of rebatable arbitrage: Actual Earnings at 5% $506,250 Hypothetical Earnings at 4% 404,000 $102,250

27. Rebate Exception No. 1 Issuer of less than $5,000,000 of tax-exempt debt in the calendar year.

28. Rebate Exception No. 2 • 6 month exception. • All proceeds expended within six months.

29. Rebate Exception No. 3 • 2 year exception. • Applies to “construction issues.” No rebate on “available construction proceeds” if exception is met. • 6 month – 10% • 12 month – 45% • 18 months – 75% • 2 years – all

30. Rebate Exception No. 4 • 18 month exception. • Applies to construction or non-construction issue. • 6 months – 15% • 12 months – 60% • 18 months – 100%

31. Bond proceeds and the earnings on those proceeds must be spent within the required periods. • Subject to certain “de minimis” exceptions.

32. Question 4. Even if you met an expenditure exception to rebate for most of the bond proceeds, are other funds still subject to rebate?

33. Reserve Funds. • “Other” Funds.

34. Question 5. If you did not meet a rebate exception, are you tracking rebate liability and are you making required rebate payments to the U.S. Treasury?

35. Rebate paid every 5 years (may pay sooner). • May want to reserve for a payment. • Negative earnings can offset positive earnings. • Utilization of rebate analysts.

36. Question 6. Even if all rebate liability has been addressed, do you have yield restriction issues that should be addressed?

37. Bond proceeds “yield restricted” after first 3 years. • How do you yield restrict – yield reduction payments. • Very similar to computing rebate. • Yield restriction applies even if there is no rebatable arbitrage. • Yield restriction applies even if you meet $5,000,000 exception.

38. SECURITIES LAW COMPLIANCE

39. SEC Rule 15c2-12 Continuing Disclosure Applicability • Issue must exceed $1,000,000; • Does not apply to offering with $100,000 denominations and • Sold to no more than 35 sophisticated investors; or • Maturity of 9 months or less; or • Subject to optional tender at least every 9 months (variable rate bonds); • Other limited exceptions (typically not applicable).

40. Condition to underwriter underwriting the bonds • Contractual “undertaking” by issuer or obligated person. • Undertaking must: • Identify person or persons for whom financial information and notice of material events will be provided; • Type of financial information and operating data to be provided;

41. Accounting principles pursuant to which financial statements will be prepared and whether or not they will be audited; and • The date by which the annual financial information will be provided and to whom it will be provided.

42. Annual Disclosure of Financial Information • File with Nationally Recognized Securities Information Repositories (NRMSIRs) and State Information Depository (SID), if any (currently no SID). • File financial statements annually by date specified (file unaudited statements if audit not complete).

43. File audited financial statement when and if available. • Operating data (determined by Official Statement disclosure). • General obligation bonds and COPs (debt and tax information). • Revenue bonds (also include System operating information).

44. Material Events Disclosure • Eleven specified events: • Principal and interest payment delinquencies; • Non-payment related defaults; • Unscheduled draws on any debt service reserves reflecting financial difficulties; • Unscheduled draws on credit enhancements reflecting financial difficulties; • Substitution of credit or liquidity providers, or their failure to perform;

45. Adverse tax opinions or events affecting the tax-exempt status of the bonds; • Modifications to the rights of the beneficial owners of the bonds; • Bond calls, other than calls for mandatory sinking fund redemption; • Defeasances; • Release, substitution or sale of any property securing repayment of the bonds; and • Rating changes.

46. File with NRMSIRs or Municipal Securities Rulemaking Board (MSRB). • Notices must be sent “if material” and “in a timely manner.”

47. Other Requirements • “Undertaking” must also include agreement to timely notify each NRMSIR or the MSRB and the appropriate SID, if any, of any failure to provide required annual financial information on or before date specified in the agreement. • Official Statements must disclose any failure to comply in any material respects with any previous continuing disclosure undertaking within the previous 5 years.

48. Electronic Filings • Texas Municipal Advisory Council (MAC) at www.disclosureusa.org. • Use of Digital Assurance Corporation (DAC). • Future SEC-sponsored central repository?

49. Other Ongoing Disclosure Requirements • Duty to speak truthfully to the market. • Voluntary disclosure. • Ongoing disclosure obligations for variable rate issues.

50. GENERAL DOCUMENT COMPLIANCE • Typically required by financing documents or credit/liquidity facility documents.