POST ISSUANCE BOND COMPLIANCE Missouri Association of School Business Officials 2013 Spring Conference January 23, 2013 Erick Creach (314) Sean Flynn (314)

Post-Issuance Bond Compliance 2 USE THISNOT THIS

Why are we here? Bond compliance is important –IRS has stepped up efforts to check compliance –Can be significant penalties for non-compliance –Compliance can impact marketability of bonds Compliance can be complicated –Lots of fact-specific rules Compliance is a team effort –Finance Department/Bond Counsel/Auditor/Financial Advisor We want to answer your questions –Identifying issues early and often usually means we can avoid problems 3

4 What are the regulators asking? Are you following the securities and tax rules that apply to municipal bonds, both at the time the bonds are issued and during the entire life of the bond issue? Can you prove it?

5 4 Key Aspects of “Proving It” #1 – Account for the investment of bond proceeds Complete Arbitrage Rebate Computations on schedule #2 – Account for the expenditure of bond proceeds Complete a Final Written Allocation #3 – Account for the use of bond-financed assets Complete an Annual Compliance Questionnaire #4 – Account to Bondholders File Annual Report and other Event Notices with MSRB

Investment of Bond Proceeds How much interest can I earn? –Yield Restriction Rules Can I keep the interest? –Rebate Rules 6

Investment of Bond Proceeds Yield Restriction Rules –General Rule: May not invest gross proceeds at a yield materially higher than the yield on the bonds. –Exceptions 3 year period for construction proceeds Reserve Fund Bona Fide Debt Service Fund Miscellaneous 7

Investment of Bond Proceeds Rebate Rules –General Rule: If permitted to earn interest in excess of the yield on the bonds, such profit must be paid to the U.S. Treasury –Exceptions Small Issuer Exception 6-month Spending Exception 18-month Spending Exception 2-year Spending Exception 8

Spending Bond Proceeds State Law Considerations –Specific Missouri statutes govern the purposes for which bonds can be used by schools –Authorized use of the bonds could be further limited by the ballot approved by the voters if the bonds required voter authorization 9

Spending Bond Proceeds Federal Tax Rules –Generally only capital expenditures Some limited exceptions –Keeping appropriate documentation is very important Sometimes this is the difference between eligible and ineligible expenditures Must be able to later identify bond-financed assets –Payee, amount, date of payment, description of asset –Placed in service date –Expected useful life of asset 10

Spending Bond Proceeds EXAMPLES OF EXPENSES THAT ARE GENERALLY ALLOWABLE: Purchase of –Buildings –Land –Building Improvements –Equipment –Furniture –Computers and other IT Hardware Other –Bond closing costs –Arbitrage calculation costs 11

Spending Bond Proceeds EXAMPLES OF EXPENSES THAT ARE NOT GENERALLY ALLOWABLE: Annual maintenance costs Online subscription purchases Subscription based software Training costs 12

Spending Bond Proceeds EXAMPLES OF EXPENSES THAT SHOULD BE DISCUSSED BEFORE APPROVING: Personnel Costs Software Moving & storage costs Consultants Warranty/Maintenance 13

Other considerations: –Some legally permitted expenditures may not be in the Issuer’s financial best interests –Useful life of assets financed with a specific bond issue can effect the permitted maximum repayment term of the bonds –Is the time necessary to create the paper trail worth it? –Even if the expense is a capital cost, if the expense is ongoing where will funds come from after bond proceeds are gone? 14 Spending Bond Proceeds

Qualified School Construction Bonds (QSCB) Qualified Zone Academy Bonds (QZAB) –Bond proceeds and investment earnings must be spent within 3 years of issue date Tax-Exempt Bonds and Other Subsidy Bonds (Build America Bonds, Recovery Zone Economic Development Bonds) –Must reasonably expect to spend within 3 years of issue date –Start documenting now if will not meet this timing 15 Spending Bond Proceeds

Use of Bond-Financed Assets Must be able to identify bond-financed assets for life of bond issue + any refunding bond issue + 3 years. Why? IRS rules restrict the use of bond-financed assets during entire term of bonds (including any refunding issue) 16

Use of Bond-Financed Assets Identify Bond-Financed Asset –Final Written Allocation –Most flexibility if allocation is within 18 months of placed in service date of all bond-financed assets (i.e., date all bond proceeds are spent) and no later than 60 days after 5 th anniversary of the issue date –If allocation is not timely made, then Issuer must use default method: direct tracing to actual expenditures 17

Use of Bond-Financed Assets Can be a problem if both: –Private Business Use; and –Payments to Issuer related to the private use Exceptions to Private Use Rules: –Use by another governmental entity –Use by general public –Short-Term Use (less than 50 days) –Incidental Use 18

Use of Bond-Financed Assets What kinds of uses are you concerned about? –Sale or lease of property purchased with bond funds Sale of buildings/furniture/equipment Facility Usage – YMCA, Soccer Club, Coaches’ use of buildings, church/community groups 19

Use of Bond-Financed Assets What kinds of uses are you concerned about? –Management/Operating Arrangements PTO/PTA/Boosters running concession stands Bus barns – leasing to outside company for transportation contract Food/Concession management 20

Use of Bond-Financed Assets What kinds of uses are you concerned about? –Arrangements that convey special legal rights Corporate signs hanging in gyms Naming rights on buildings Vending Machines/Pepsi or Coke Contracts 21

Continuing Disclosure Annual Report –Audit –Financial and Operating Data listed in Official Statement Generally –Enrollment –Indebtedness –Assessed Valuation –Tax Rate Information Generally File within 180 days of Fiscal Year End 22

Continuing Disclosure Material Events –File within 10 Business Days 23

Continuing Disclosure Check your disclosure filing history –Go back five years for submissions starting July 1, 2009http://emma.msrb.org for submissions prior to July 1, 2009http://disclosureusa.org –Compare filings with existing Continuing Disclosure obligations to check existing requirements –File catch-up disclosure for any missing filings 24

Monitor Ongoing Tax and Securities Law Requirements Adopt Written Post Issuance Compliance Policies and Procedures –Identify “Bond Compliance Officer” –Identify Record Keeping Requirements –Identify Ongoing Monitoring Procedures Why do this? 25

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Monitor Ongoing Tax and Securities Law Requirements Annual Compliance Questionnaire/ Checklist –See Example –Form available at: 27

Take-Aways Bond compliance doesn’t end when all of the money is spent! Ask questions early and often –Some answers are very fact-specific –Best financial management practices may mean certain legally permissible expenditures should not be paid with bonds Keep good documentation Don’t forget disclosure –Annual Reports and Material Events 28

Any Questions? 29