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