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POST-ISSUANCE BOND COMPLIANCE BY Arbitrage Compliance Specialists, Inc. (“ACS”) Robert Goubert, Vice President 800 PowerPoint Presentation
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POST-ISSUANCE BOND COMPLIANCE BY Arbitrage Compliance Specialists, Inc. (“ACS”) Robert Goubert, Vice President 800-672-9993 ext. 7536 Robert@RebatebyACS.com Stephen H. Broden, Vice President 800-672-9993 ext. 7530 Stephen@RebatebyACS.com AND Vicenti , Lloyd & Stutzman LLP

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Presentation Transcript
slide1

POST-ISSUANCE BOND

COMPLIANCE

BY

Arbitrage Compliance Specialists, Inc. (“ACS”)

Robert Goubert, Vice President

800-672-9993 ext. 7536

Robert@RebatebyACS.com

Stephen H. Broden, Vice President

800-672-9993 ext. 7530

Stephen@RebatebyACS.com

AND

Vicenti, Lloyd & Stutzman LLP

Renée S. Graves, CPA, CGFM, Partner

626-857-7300 ext. 260

Rgraves@vlsllp.com

new requirement
New Requirement

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:

  • Due diligence review at regular intervals;
  • Identifying the official or employee responsible for review;
  • Training of the responsible official/employee;
  • Retention of adequate records to substantiate compliance (e.g., records relating to expenditure of proceeds);
  • Procedures reasonably expected to timely identify noncompliance; and
  • Procedures ensuring that the issuer will take steps to timely correct noncompliance.
bond compliance
Bond Compliance

Three golden rules when issuing a bond:

  • Issue the bond when you need the funds
  • Issue just enough bonds that you need for the project – not more
  • Complete the project with due diligence
bond compliance1
Bond Compliance

We just closed on a bond issue and received $6,000,000 at closing.

  • Spend the money immediately
    • Refund an older bond issue (current refunding)
    • Reimburse for prior expenditures
    • Buy an asset – building, software, land, (loans to Government Units)
    • Cost of issuance to pay:
      • Financial advisor
      • Bond counsel
      • Underwriter
      • Insurance
bond compliance2
Bond Compliance

We just closed on a bond issue and received $6,000,000 at closing.

  • Invest the money until needed for:
    • Building project
    • Refunding (advanced refunding)
    • Interest payments on the bonds
    • Reserve – set funds aside in case they are need to make a bond payment
we just issued a bond now what
We just issued a bond – now what?

Are there tax rules that we need to follow?

Arbitrage Rebate

Entire Bond

Yield Restriction

Fund

are there tax rules that we need to follow
Are there tax rules that we need to follow?

Yes - Rules are based on three limitations

Interest Earnings

Balance

Time

Time

we just issued a bond now what1
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
Arbitrage Rebate

Investment rate of return > borrowing rate = PROFIT

arbitrage rebate1
Arbitrage Rebate

Borrowing Rate

arbitrage rebate2
Arbitrage Rebate

Are all bonds subject to arbitrage rebate?

EXEMPTIONS

OR

Fund Exemption

Each fund related to bond meets an exemption

Small Issuer Exemption

Entire Bond

arbitrage rebate small issuer exemption
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.
arbitrage rebate small issuer exemption1
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.

arbitrage rebate small issuer exemption2
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

what is arbitrage rebate
What is Arbitrage Rebate?

Are all bonds subject to arbitrage rebate?

EXEMPTIONS

OR

Small Issuer Exemption

Project

Cost of Issuance

Escrow Refunding

Debt Service

Fund Exemption

Each fund related to bond is exempt

arbitrage rebate fund exemptions
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
fund exemption 6 month spending exception
Fund Exemption – 6 Month Spending Exception

Expend within 6 months:

  • Project Funds
  • Costs of Issuance Funds
  • Escrow Refunding Funds
fund exemption 18 month spending exception
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
fund exemption 24 month spending exception
Fund Exemption – 24 Month Spending Exception

Expend within 24 months

  • Project Funds

Spending Timetable

  • 10% within 6 months
  • 45% within 12 months
  • 75% within 18 months
  • 100% within 24 months
arbitrage rebate fund exemptions1
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
fund exemption debt service
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
arbitrage time to review exceptions
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

arbitrage filing period
Arbitrage - Filing Period

IRS filing dates for arbitrage rebate payments

  • Every 5 years
  • Maturity date of the issue
we just issued a bond now what2
We just issued a bond – now what?

Are there tax rules that we need to follow?

Yield Restriction

Fund

Arbitrage Rebate

Entire Bond

yield restriction fund restriction
Yield Restriction – Fund Restriction

Yield Restriction Limitations on Funds

  • Project Funds
  • Costs of Issuance Funds
  • Escrow Refunding Funds
  • Debt Service Funds
yield restriction project
Yield Restriction – Project

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

3 years

yield restriction cost of issuance
Yield Restriction – Cost of Issuance

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

3 years

yield restriction refunding escrow
Yield Restriction – Refunding Escrow

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%.

90 days

30 days

yield restriction debt service
Yield Restriction – Debt Service

Balance = Payments

$1,200,000 Balance = $1,200,000 Payments

PERFECT MATCH!

yield restriction debt service1
Yield Restriction – Debt Service

What happens if the balance > payments?

yield restriction debt service2
Yield Restriction – Debt Service

Balance > Payments

$1,800,000 Balance - $1,200,000 Payments = $600,000Reserve

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

slide34

Yield Restriction – Debt Service

Balance >Debt Service Payments

$1,800,000 - $1,200,000 = $600,000 Reserve

Balance >Debt Service Payments

$1,400,000 - $1,200,000 = $200,000 Reserve

Balance = Debt Service Payments

$1,200,000 - $1,200,000 = $0Perfect Match

yield restriction
Yield Restriction

IRS Filing Dates for Yield Restriction

  • Every 5 years
  • Maturity date of the issue
record retention
Record Retention

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)

private business use
Private Business Use
  • 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)?
private business use1
Private Business Use

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).

private business use2
Private Business Use
    • 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.
private business use3
Private Business Use
    • 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).
private business use4
Private Business Use
    • 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.
private business use5
Private Business Use
    • General Question:
    • Isthe 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.
private business use6
Private Business Use
    • 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.”
private business use7
Private Business Use
    • 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
continuing disclosure
Continuing Disclosure

TheOfficial 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:

SEC Securities and Exchange Commission

MSRBMunicipal Securities Rulemaking Board

EMMA Electronic Municipal Market Access

continuing disclosure1
Continuing Disclosure
  • 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:
  • Annual Financial Information or operating data presented in the final official statement
  • If not submitted as part of the Annual Financial Information, audited financial statements
  • Notice of any of the following events in a timely manner, not to exceed 10 business days:
    • Principal and interest payment delinquencies
    • Material non-payment related defaults
    • Unscheduled draws on debt service reserves for financial difficulties
continuing disclosure2
Continuing Disclosure
  • Notice of any of the following events in a timely manner, not to exceed 10 business days: (continued)
    • Unscheduled draws on credit enhancements for financial difficulties
    • Substitution of credit or liquidity providers, or their failure to perform
    • Adverse tax opinions affecting the tax status of the security
    • Material modifications to rights of security holders
    • Material bond calls or tender offers
    • Defeasances
    • Release, substitution or sale of property securing repayment of the securities
    • Rating changes
    • Bankruptcy, insolvency, receivership or similar event
    • Consummation of a merger, consolidation or acquisition
    • Appointment of a successor, additional trustee or change of a trustee
continuing disclosure3
Continuing Disclosure
  • 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:
    • Outstanding debt and lease obligations
    • General fund budget and actual results
    • Enrollment, or equivalent information, as is reasonably available
    • Assessed valuations
    • Largest local secured taxpayers
continuing disclosure4
Continuing Disclosure
  • 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
continuing disclosure5
Continuing Disclosure
  • 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
post issuance policy and procedure manual
Post Issuance Policy and Procedure Manual

=

(Information provided on flash drive)

any questions

Any Questions?

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.