Arkansas Governmental Finance Officers Association

Compliance for Post-Issuance and Continuing Disclosure

July 25, 2013

Presenters: Dennis Hunt and Michael Moyers

Topics for Discussion

Post-Issuance Tax Compliance

Continuing Disclosure Compliance

Post-Issuance Tax Compliance Policies to assist in compliance with federal

tax law in order to maintain tax-exempt status of bonds

Policies for record retention Establishment of “Responsible Person” for

compliance and monitoring

Why is post-issuance compliance important? Risk of IRS audits has increased IRS FY 2012 Work Plan:

“Expand TEB’s compliance presence in the tax-exempt bond and tax credit bond market through increased use of compliance check initiatives and correspondence examinations”

Written Procedures

IRS now has an initiative to “encourage” written procedures.

IRS position is that tax requirements contained in closing certificate or tax certificate are not enough.

Federal tax law does not require written procedures.

Written Procedures, continued IRS Statement – Issuers have a fiduciary

responsibility to look after bondholders’ best interests. As an issuer, you have to make sure that bonds remain in compliance with the tax-exempt bond rules.

The IRS is working on language in the Internal Revenue Manual that will tell revenue agents what to look for when determining whether an issuer’s written procedures are adequate.

Written Procedures, continued IRS Form 8038-G has two new questions:

1. Has the issuer established written procedures to ensure that all nonqualified bonds are remediated under the Code and Regulations?2. Has the issuer established written procedures to monitor arbitrage requirements?

The issuer must “check the box” on the Form If the boxes are not checked, increased likelihood of

audit

What should the written procedures address? Designate a “Responsible Person” Ensure continuity Continuing Education of Responsible Person Record-Keeping (life of the bonds or any

refunding bonds plus 3 years) Monitoring

Responsible Person

Has primary responsibility for monitoring post-issuance compliance

Should be a position or an office, not just a person

Ensure continuity Provide education and training

Record-Keeping

Retain records for life of bonds (and life of any refunding issues) plus 3 years

Keep in separate and distinct file What to keep?

Bond transcripts Documents related to government grants associated

with bond-financed property Bank statements Correspondence IRS examination reports Documentation evidencing use of bond-financed

property by public and private sources

Monitoring Expenditures and Assets Maintain documentation of allocations of

bond proceeds to expenditures (e.g., allocation of bond proceeds to expenditures for construction of facilities) Keep records on how and when bond proceeds

are spent Allocate proceeds by later of 18 months after

expenditure paid or after facility placed in service No later than 3 years after bonds are issued

Monitoring Expenditures and Assets, Continued Maintain copies of requisitions, draw schedules,

draw requests, invoices, bills and cancelled checks related to bond proceeds spent during construction period. Also maintain records for non-bond sources.

Maintain copies of construction contracts along with change-orders.

Maintain records of expenditures which are reimbursements

Maintain list of schedule of all bond-financed facilities or equipment

Maintain documentation that tracks purchases and sales of bond-financed properties

Monitor Private Business Use

Monitor and maintain records of all private business use of bond-financed facilities Special legal entitlement for use of bond-financed

property to a nongovernmental entity

Private Business Use, Continued

What type of agreements could amount to PBU? 1. Management and other service agreements

(civic/community center, swimming/aquatic/rec center, concession management);

2. Naming rights contracts;3. Leases and/or Subleases;4. Joint venture arrangements, limited liability corporation arrangements or partnership arrangements; 5. Wholesale water contracts;6. Wastewater agreements;

7. Federal prisoner contracts; and8. Any other agreement that grants a special entitlement

for the use of bond-financed property to a nongovernmental entity.

PBU, Continued

Responsible Person should educate and inform the principal operating officials of those City departments for which land, buildings, facilities and equipment are financed with bond proceeds about restrictions on private business use that apply to the property

Responsible Person may engage bond counsel to render advice on proposed contracts and amendments to existing contracts

PBU, Continued

Remedial Actions If City desires to change use of a facility Consult bond counsel Possibly pay-off bonds used to finance facility

which has had a change in use

Monitoring Investments and Arbitrage Compliance Maintain documentation of allocations of

investments and investment earnings to bond financings

Maintain documentation for purchases and sales of investments made with bond proceeds

Maintain documentation of computation of bond yield and rebate

Monitoring Investments and Arbitrage Compliance, Continued Monitor temporary periods for unrestricted

investments Spend or be obligated to spend 5% of proceeds

within 6 months Reasonable expectation to spend 85% of

proceeds within 3 years Proceed with due diligence

Monitoring Investments and Arbitrage Compliance, Continued Monitor arbitrage rebate calculation requirements or

monitor compliance with exceptions There are 4 arbitrage rebate spend-down

exceptions. Check the tax certificate to see if an issue qualifies for an exception to arbitrage rebate.

Bond Oversight Group

Can assist Responsible Person in reviewing and monitoring private business use and investments

Keeps more officials “in the know” about the City’s post-issuance compliance responsibilities

Voluntary Closing Agreement Program IRS VCAP program provides issuers of tax-

exempt bonds with a vehicle to resolve violations of tax law

Information is available on the Tax-Exempt Bond Community page at www.irs.gov

Continuing Disclosure Undertakings If issue is over $1,000,000 and sold through a

public sale, new continuing disclosure requirements apply

File annual report containing information relevant to the type of bond issue

What would bondholders want to know? Sales tax collections Water and sewer system customer information Property tax collections Franchise fee collections Other demographic/City information (population, major

employers, new construction building permits)

Continuing Disclosure, Continued Must also file audit containing the relevant

financial statements For sales tax issue, City audit For utility revenue issue, audit of the utility

Can be filed later than the Annual Report

Continuing Disclosure, Continued Must report the occurrence of certain events:1. Principal and interest payment delinquencies.2. Non-payment related defaults, if material.3. Unscheduled draws on debt service reserves reflecting financial

difficulties.4. Unscheduled draws on credit enhancements reflecting financial

difficulties.5. Substitution of credit or liquidity providers, or their failure to perform. 6. Adverse tax opinions, the issuance by the Internal Revenue Service of

proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax-exempt status of the security.

7. Modification to rights of security holders, if material. 8. Bond calls (excluding mandatory sinking fund redemptions), if

material.

Continuing Disclosure, Listed Events, Continued

9. Defeasances and tender offers.10. Release, substitution, or sale of property securing repayment of

the securities, if material.11. Rating changes.12. Bankruptcy, insolvency, receivership or similar event of the

obligated person.13. The consummation of a merger, consolidation or acquisition

involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material.

14. Appointment of a successor or additional trustee or the change of name of a trustee, if material.