Presentation on theme: "Karen Huffman, CPA, Controller, City of Tempe"— Presentation transcript:
1The ABC’s of PIBC (Post-Issuance Compliance)… keeping you and the IRS happy Karen Huffman, CPA, Controller, City of TempeScott W. Ruby, Attorney, Gust Rosenfeld, P.L.C
2Issuance of Debt Many of us have issued debt COT issues debt annually GO +Excisemoney pours in + build streets
3Life is GoodCitizens are happypot holes are filledPolice facilities are constructedParks are expandedLocal Government is happyProvide great service and amenities in our communitiesAll is wellAnd then…..
4Post Issuance Bond Compliance Then comes….Post Issuance Bond ComplianceIRS/tax code mandates these requirements/ “strongly” suggested guidelinesOne of the main emphasis from these “guidelines” for PIBCwritten proceduresCan be daunting when signing of on bond documents (form 8038)Check box regarding “written procedures”Tempe has proceduresjust not fully documented
5Felt like a monumental task- How do you climb a mountain?One step at a timeLooking for the next ledge to anchor toRock climbingSafety rope-Calling in a “life line”- consultants (experts)
6ABC’s of PIBC Legal Expert Practical Aspect What is included in the lawWhat does it meanPractical AspectWhat did the City of Tempe doWhat challenges did we faceApproach for Today’s session:1> legal expert- Scott- what is included in the law- what does it mean2> practical aspect- what strategies did Tempe use- what challenges did we faceTurn it over to our Legal guru….
7Post-Closing (What's That?) Tax-advantaged bonds are subject to federal tax requirements BOTH at the time of issuance AND so long as the bonds remain outstanding.IRS is concerned about issuers post-issuance compliance and is “encouraging” adoption of written post-issuance compliance policies.IRS concern has manifested into a post-closing compliance initiative. Governmental issues are now on the radar screen.IRS wants issuers to focus on continued monitoring and better record keeping.
8Your Obligation Develop a post-compliance program. Retain certain records.Monitor private business use of financed facilities; and changes in use.Track and Monitor Payments that Result from Financed Facilities.Track Investment of Bond Proceeds and monitor the use of bond proceedsCalculate Arbitrage and Pay Rebate or Yield Reduction.Respond to IRS inquiries.
9Specific Focus of a Post-Closing Compliance Program Assign responsibility.Train responsible person and others who work with bonds and bond financed propertyDevelop a system to monitor compliance that is integrated with existing accounting systems and will allow timely discovery and correction of any problems.Record retention must be for LIFE OF BONDS plus 3 years - - who will be around?
10Alert! Alert!Tax-advantaged bonds are subject to federal tax requirements BOTH at the time of issuance AND so long as the bonds remain outstanding.
11IRS has an initiativeWe are on the radar screenAt City of Tempe- goalImplement such a program that we can just “smile and wave”
12IRS Form 14002 Tempe approach: Walk down IRS form ensuring every area was addressed and documentedDefined who was responsible-Document in a policyCFOPolicy on “Proper” Use of Bond proceedsWhat does that mean?CIP funds broken out by function (police, fire)Entire fund reimbursed with bond proceedsChallenge: If not reimbursed, then where is it going to be charged?Capitalizeable items per GAAP“Capitalizeable costs include the cost to purchase/construct an asset including the ancillary charges necessary to place the asset into its intended location and condition for use”Salaries? AdminSpoke with our auditors- Cities are taking the conservative approach and not reimbursing those items with bond proceedsTrip to Japan for Dam?Feasibility study: need pay-go or other source to financeNeed to think through this items during the budget process so no surprisesDevelop system to monitor proper useAs accountants, not subject matter experts in what expendituresAre true project costsDeveloped a “Framework of Allowable Costs”Meet with project managers to discussUpfront do not charge project costs that are not allowableMethod of Department reviewTraining of project managersUnderstand element of finance (like grant)Need documentation
13Retain Certain Records Basic records:TranscriptOrdinancesOpinionDocumentation evidencing expenditure of bond proceeds.Documentation evidencing all sources of payment or security for bonds.Documentation pertaining to any investment of bond proceeds.Remember, the burden of proof is on you to establish the bonds are Tax-Exempt if you are audited – you can only do so through records.
14Life of Bonds + 3 Years Biggest Challenge: AP Invoices Burden of Proof:Life of bond+3 yearsTranscript of ProceedingsBond FileDebt Service schedulesCost of issuancesJournal entriesElectronically filed by bond issuanceSchedulesArbitrage supportRetaining invoices- CIP Bond File (Challenge)AP staff put invoices in folder weeklyDownload GL by fund monthlyFiles the GL with matching invoices in folderEventually go paperless
15Monitor Private Business Use of Financed Facilities What was intended use of facility being financed by the bonds?Who “owns” it? (Use federal tax definition of owner).Who was using it, who is using it, and who may use it?Is there any “bad” use? How much? (10% and 5% Rules).Practical difficulties – your the CFO … who else has control of the building and programming? (Need for formal policy and procedures.)
16Track and Document Changes in Use Create central repository, clearinghouse process through your office.Review (before it happens) any change in the use of the financed facilities.Changes in use can trigger change in the tax status if not done properly and the changes and tax impact are very fact intensive
17Track and Monitor Contracts/Leases that Touch Financed Facilities Types of Relationships that create private use:LeasesManagement and Services ContractsResearch Contracts“Partnerships” with private uses?Sales agreementsTake or Pay ContractsLand Use agreements, easements, naming rights, licenses
18Track and Monitor Payments that Result from Financed Facilities Review Payments from Users of the Facilities Regardless if Used to Pay Debt Service.Lease Payments.Payments from Management Contracts.Proceeds from Sale of Facilities.Allowed to Reduce Payments by Operating Expenses.
19Monitoring Private Use Monitoring Private Business UseHave conversations with Attorney’s office + CD to determine the extent to which have these agreementsReview existing Capital AssetsDownloaded list of buildings from Capital Asset systemremoved all items before any outstanding bond issuancesreviewed remaining assets to determine items that were reimbursed with bond proceedsAnnually review with CD to determine if any of the space is being leased
20Investment of Bond Proceeds Allowable Investments:Proceeds may be restricted to tax-exempt (non-AMT) investments depending on use of the proceeds, initial expenditure projections, and/or other bond covenantsInvestments must comply with ALL of the following:Arizona statute for investment of public fundsIssuer's investment policyAuthorized investment list included in bond covenants (if applicable)
21Investment of Bond Proceeds Investments beyond any qualifying temporary period may have further restrictions – check with bond counsel and/or your bond documents to ensure complianceInitial investment of proceeds:Match investment maturity dates and amounts to the project draw scheduleIf the issue may qualify for a spending exception to rebate; be sure to structure your portfolio to accommodate the timing of the expendituresNo investments should mature beyond the temporary period (if applicable) in the initial portfolio.
22Reimbursement With Bond Proceeds Bond proceeds can be treated as spent (no longer need to track the investment of the money) if used to reimburse the issuer for certain qualifying prior expenditures.Expense was paid no earlier than 60 days prior to declaration of official intent to reimburse.Reimbursed not more than 18 months after the facility was placed in service or 3 years after bonds are sold.Exceptions exist for certain preliminary expenditures.
23City of Tempe’s Debt Practices Simple + SystematicTypically issue debt each June (unless it is a refunding)GO IssuancesIssue a letter of intent (Scott will discuss)August (can go back 60 days on expenditures)Spend for a year- tracking expenditures
24Typical Debt IssuancePrior Year Expenditures Up-coming Year’s Anticipated Expenditures Current Year’s Bond IssuanceSize bond issuance to cover amounts spent + anticipated expenditures for upcoming year.Balanced approach½ spent before the issuance½ spend after the issuance
25Reimbursement + Investment Immediate reimbursement of funds spentRemaining investment in LGIP or Trust AccountImmediate reimbursementOur approach minimizes the amount of unspent proceeds to track in investmentsFairly confident that will be able to spend at within a certain amount of timeremaining money into LGIP account- within investment policieschallenging to match to draw scheduleWe don’t utilize the strategy of purchasing maturities (but it is a wise strategy)Advantages- easier to meet24 month construction exception3 year Temporary periodDisadvantages- cash spent but investment rates are lowArbitrage rebate calculations for 24 month construction spending exceptionEasy to use LGIP Pool 5 rateSpeaking of Arbitrage, fasten your safety belt…… ScottAdvantage- meeting 24 month arbitrage spending exception + temporary periodDisadvantage- using City’s cash initially
26Arbitrage Bonds Bonds become taxable if the Bond is an arbitrage bond. Arbitrage bond exists if the issuer violates either the:Yield restriction requirement; orRebate requirement.Yield Restriction Requirement:Gross proceeds cannot be invested in a materially higher yield;A materially higher yield is (some exceptions):Governmental Project Bonds: 1/8 of 1% (.125%) greater than the bond yield;Refunding Bonds: 1/1000 of 1%; andOther Types of Bonds: Other limits.
27Arbitrage Bonds (cont’d) Exceptions to Yield Restriction Requirement.Investment in tax-exempt bonds (non-AMT).Temporary period for construction fund (3 years) or bona fide debt service fund (13 months).Reserve or replacement fund.Minor portion: lesser of 5% of sales proceeds or $100,000.Bonds must also “pass” the reasonable expectations test.Can lower the yield with yield reduction payments (some exceptions).
28Arbitrage Bonds (cont’d) Rebate Requirement.Certain earnings must be rebated (e.g. earnings on the construction, reserve and debt service funds).Exceptions to Rebate.Small Issuer: governmental issuer who issues less than $5 million of tax-exempt obligations in the year.Spending: (1) 6 months – spending 100%; (2) 18 months, spend certain percentages by 6, 12 and 18 months; (3) 24 months (construction bonds), spend certain percentages by 6, 12, 18 and 24 months. (Still rebate on reserve and debt service funds).Bona Fide Debt Service Fund: If $100,000 or less.
29Arbitrage Rebate and Yield Reduction Calculations Issuer is responsible for rebate and yield reduction calculations:Calculations must be completed every 5 years (IRS) and payment remitted if requiredCalculations are typically done more frequently (annually, monthly..) to monitor and track liabilities and spending exceptions if applicableA rebate fund must be established if a liability exists to set aside funds for paymentIf calculations show no payments are due, no reporting is required to the IRS
30Arbitrage Rebate and Yield Reduction Calculations (cont’d) Choose accounting method with respect to bond proceeds and interest earnings, investment, and expenditures.Obtain computation of “yield” of bonds and establish procedure to track investment returns.Establish procedure for allocation of bond proceeds and interest earnings to expenditures, including reimbursement of pre-issuance expenditures.
31Tips to Avoid Becoming an Arbitrage Bond (cont’d) Monitor compliance with “temporary period” expectations for expenditure of bond proceeds, typically 3 years for new money bonds, and provide for yield restriction of investment or “yield reduction payments” if expectations are not satisfied.Establish procedures to ensure investments acquired with bond proceeds are purchased at fair market value. These can include use of bidding procedures under regulatory safe harbor.
32Tips to Avoid Becoming an Arbitrage Bond (cont’d) Avoid formal or informal creation of funds reasonably expected to be used to pay debt service on bonds without determining in advance whether such funds must be invested at restricted yield.Consult with bond counsel before engaging in post-issuance credit enhancement transactions (e.g., bond insurance, letter of credit) or hedging transactions (e.g., interest rate swap, cap).Identify situations in which compliance with applicable yield restrictions depends upon later investments, (e.g., purchase of 0% SLGS from U.S. Treasury), and monitor implementation.
33Tips to Avoid Becoming an Arbitrage Bond (cont’d) Monitor compliance with 6-month, 18-month, or 2-year spending exceptions to rebate requirement.Arrange for timely computation of rebate liability and, if rebate is payable, for timely filing of Form 8038-T and payment of rebate. Rebate is ordinarily due at 5-year intervals.Arrange for timely computation and payment of “yield reduction payments,” if applicable.Issuers/borrowers frequently engage outside arbitrage/rebate consultants to do such computations.
34Tracking Expenditures Issuer is responsible for rebate and yield reduction calculation!!Tempe example of how we monitor the spending exceptions and allocate interest.Track expenditures on Arbitrage Support scheduleMonthly download + review expMonitor 6-month, 18-month, 24 month exceptionsInterest allocationQuarterly charged to fund (per IRS no less than quarterly)Move total earning to DS fund to avoid approp issueArbitrageNeed to track taxable series (BAB, QECB)WIFA
35Debt Service Fund Debt Service Fund If one is established through bond documents- (DS Reserve Fund)If required in the bond doc’sFund holding secondary property taxMust clear out 11/12th annually to be “Bona Fide”Tempe’s method lend us NOT to having a Bona Fide DS FundNon-Bona Fide Fund analysisWe will “yield restrict” or make a “yield reduction payment”Compare arbitrage yield to annual portfolio yieldConsult with your Arbitrage consultantIRS may forgive penalty but will not forgive interestIt compounds!Look at a 5 year periodCould own but then later it may be able to request a refundKey: have the calculation done timely and remitted to the IRSTwo past issuances owing a rebate on the Debt Service Fund (property tax)1995 GO Issuance$14k in arbitrage rebate payment$12k in interest1998 GO Issuance$7.4k in rebate payment$4.6k in interest“Innocent Failure” letterImportance of working with your arbitrage consultantSpeaking of the IRS….
36IRS City on it 3rd Desk Review BAB Excise issuance- 2009 Refunding- 2003TCA Excise- 2006Answered a 15 page questionnaireSend closing documentsFollow upHad to supply invoices
37Summary The tax-issues do not go away once you close the bonds. Continuing obligations are important.Uses of your buildings that were financed with bond proceeds will probably change over 20 plus years.IRS is becoming much more active in policing post-issuance compliance mattersConsequences of non-compliance:Bonds could forfeit their tax-exempt status.