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POST-ISSUANCE BOND POST-ISSUANCE BOND

POST-ISSUANCE BOND - PowerPoint Presentation

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POST-ISSUANCE BOND - PPT Presentation

COMPLIANCE BY Arbitrage Compliance Specialists Inc ACS Robert Goubert Vice President 8006729993 ext 7536 RobertRebatebyACScom Stephen H Broden Vice President 8006729993 ext ID: 212940

bond 000 debt private 000 bond private debt yield interest balance earnings business fund arbitrage service rebate refunding restriction

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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

Slide2

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; andProcedures ensuring that the issuer will take steps to timely correct noncompliance.

2

New RequirementSlide3

New Requirement

3Slide4

Bond Compliance

4

Three golden rules when issuing a bond:

Issue the bond when you need the fundsIssue just enough bonds that you need for the project – not moreComplete the project with due diligence Slide5

Bond Compliance

We just closed on a bond issue and received $6,000,000 at closing. Spend the money immediatelyRefund 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 Insurance5Slide6

Bond Compliance

We just closed on a bond issue and received $6,000,000 at closing. Invest the money until needed for:Building projectRefunding (advanced refunding)Interest payments on the bondsReserve – set funds aside in case they are need to make a bond payment

6Slide7

We just issued a bond – now what?

Are there tax rules that we need to follow?

Arbitrage Rebate

Entire Bond

Yield Restriction

FundSlide8

Are there tax rules that we need to follow?

Yes - Rules are based on three limitations

Interest Earnings

Balance

Time

Time

Interest Earnings

Balance

TimeSlide9

We just issued a bond – now what?

Are there tax rules that we need to follow?

Arbitrage Rebate

Entire Bond

Yield Restriction

FundSlide10

Arbitrage Rebate

Investment rate of return > borrowing rate = PROFIT10

Interest EarningsSlide11

Arbitrage Rebate

11

Interest Earnings

Borrowing RateSlide12

Arbitrage Rebate

Are all bonds subject to arbitrage rebate?EXEMPTIONSOR 12

Interest Earnings

Small Issuer Exemption

Entire Bond

Fund Exemption

Each fund related to bond

meets an

exemptionSlide13

Arbitrage Rebate – Small Issuer Exemption

New Money Bonds - $5,000,000 or less issued in calendar yearExamples:$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 EarningsSlide14

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 EarningsSlide15

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 EarningsSlide16

What is Arbitrage Rebate?

Are all bonds subject to arbitrage rebate?EXEMPTIONSORSmall Issuer Exemption Project

Cost of IssuanceEscrow Refunding

Debt Service 16

Interest Earnings

Fund Exemption

Each fund related to bond is exemptSlide17

Arbitrage Rebate – Fund Exemptions

There are also individual exemptions on a fund by fund basis for certain funds: Project FundsCosts of Issuance FundsEscrow Refunding FundsDebt Service Funds17

Interest Earnings

Balance

TimeSlide18

Fund Exemption – 6 Month Spending Exception

Expend within 6 months: Project FundsCosts of Issuance FundsEscrow Refunding Funds18Interest EarningsBalance

TimeSlide19

Fund Exemption – 18 Month Spending Exception

Expend within 18 monthsProject FundsCost of Issuance FundsSpending Timetable15% within 6 months60% within 12 months100% within 18 months

19

Balance

TimeSlide20

Fund Exemption – 24 Month Spending Exception

20

Balance

TimeExpend within 24 monthsProject Funds

Spending

Timetable

10%

within 6 months

45%

within 12

months

75

% within

18

months

100

% within

24

monthsSlide21

Arbitrage Rebate – Fund Exemptions

There are also individual exemptions on a fund by fund basis for certain funds: Project FundsCosts of Issuance FundsEscrow Refunding Funds Debt Service Funds21

Interest Earnings

Balance

TimeSlide22

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; or1/12 of the principal and interest payments on the issue for the immediate preceding yearExample:Debt service payments = $1,200,000 for the year$1,200,000/12 = $100,000Debt Service balance < $100,000 = Exemption

22

Balance

TimeSlide23

Summary of Exemptions

FundsFund ExemptionProject6-Month, 18-Month, 24-MonthCost of Issuance6-Month, 18-MonthEscrow Refunding

6-Month

Debt ServiceInterest earnings or 1/12 test23

Entire Issuance

Small

Issuer Exemption

Bond Structure

Pass

all

testing

criteria (Project + Refunding Criteria)

Interest Earnings

Balance

TimeSlide24

Arbitrage - Time to Review Exceptions

Are all bonds subject to arbitrage rebate?EXEMPTIONSORSmall Issuer Exemption Fund Exemption (entire bond) 6-Month18-Month

24-Month

Debt Service Test 24

Interest Earnings

Balance

TimeSlide25

Arbitrage - Filing Period

IRS filing dates for arbitrage rebate paymentsEvery 5 yearsMaturity date of the issue25

Interest Earnings

BalanceTimeSlide26

We just issued a bond – now what?

Are there tax rules that we need to follow?

Arbitrage Rebate

Entire Bond

Yield Restriction

FundSlide27

Yield Restriction – Fund Restriction

Yield Restriction Limitations on FundsProject FundsCosts of Issuance FundsEscrow Refunding FundsDebt Service Funds

Interest Earnings

BalanceTimeSlide28

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 IRSYield Restriction – ProjectInterest Earnings

Balance

Time

3 yearsSlide29

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 IRSYield Restriction – Cost of IssuanceInterest Earnings

Balance

Time

3 yearsSlide30

Refunding Escrow

Trigger – for a current refundingInterest earnings on the balance after 90 days is to be yield restricted to the bond yield + .001%.Trigger – for a advanced refundingInterest earnings on the balance after 30 days is to be yield restricted to the bond yield + .001%.

Yield Restriction – Refunding Escrow

Interest EarningsBalanceTime

90 days

30 daysSlide31

Yield Restriction – Debt Service

Balance = Payments

$1,200,000 Balance = $1,200,000 PaymentsPERFECT MATCH!

Interest EarningsBalanceSlide32

Yield Restriction – Debt Service

What happens if the balance > payments?

Interest Earnings

BalanceSlide33

Yield Restriction – Debt Service

Balance

> Payments$1,800,000 Balance - $1,200,000 Payments =

$600,000 ReserveExcess 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 IRSInterest Earnings

BalanceSlide34

Excess Debt Service Funds

Very High Reserve Balance

Excess Debt Service Funds

ReservePerfect Match

Yield Restriction – Debt Service

Balance

=

Debt Service Payments

$1,200,000

-

$1,200,000

=

$0

Perfect Match

Interest Earnings

Balance

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 ReserveSlide35

Summary of Yield Restriction

FundsTriggerYield Restriction RateProject Balance – after 3 yearsBond Yield + .125%Cost of Issuance

Balance – after 3 years

Bond 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 restriction

Bond Yield + .001%

Debt Service

Very High Reserve Balance

Bond Yield + .001%

35

Interest Earnings

Balance

Time

90 days

30 days Slide36

Yield Restriction

IRS Filing Dates for Yield RestrictionEvery 5 yearsMaturity date of the issue36

Interest Earnings

BalanceTimeSlide37

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)Slide38

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)?Slide39

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).Slide40

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

.Slide41

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).Slide42

Private Business Use

42

Specific examples of possible

private business use according the Tax Code include:Sale of facilities LeasesSpecial legal entitlements such as naming rights

Management contracts

Research agreements

See handout for specifics.Slide43

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.Slide44

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.”Slide45

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, andthe private security or payment test, orthe 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 facilitySlide46

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

:

SEC

Securities and Exchange Commission

MSRB

Municipal

Securities Rulemaking

Board

EMMA

Electronic Municipal Market

AccessSlide47

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

:

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

difficultiesSlide48

Continuing Disclosure

48

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

trusteeSlide49

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

:

Outstanding debt and lease

obligations

General fund budget and actual results

Enrollment, or equivalent information, as is reasonably

available

Assessed

valuations

Largest local secured

taxpayersSlide50

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

MSRBSlide51

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

BondsSlide52

Post Issuance Policy and Procedure Manual

52

=

(Information provided on flash drive)Slide53

53

Arbitrage and Yield Restriction

Appointed Party

Retention of Adequate Records

Appointed 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 Allocation

Appointed Party

Fair Market Value of Investments

Appointed Party

Continuing Disclosure

Appointed Party

Compliance Training

Compliance Officer

Delegation of Compliance MattersSlide54

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.