1. The ABC’s of PIBC (Post-Issuance Compliance)… keeping you and the IRS happy
Karen Huffman, CPA, Controller, City of Tempe
Scott W. Ruby, Attorney, Gust Rosenfeld, P.L.C

2. Issuance of Debt Many of us have issued debt COT issues debt annually
GO +Excise
money pours in + build streets

3. Life is Good
Citizens are happy
pot holes are filled
Police facilities are constructed
Parks are expanded
Local Government is happy
Provide great service and amenities in our communities
All is well
And then…..

4. Post Issuance Bond Compliance
Then comes….
Post Issuance Bond Compliance
IRS/tax code mandates these requirements/ “strongly” suggested guidelines
One of the main emphasis from these “guidelines” for PIBC
written procedures
Can be daunting when signing of on bond documents (form 8038)
Check box regarding “written procedures”
Tempe has procedures
just not fully documented

5. Felt like a monumental task-
How do you climb a mountain?
One step at a time
Looking for the next ledge to anchor to
Rock climbing
Safety rope-
Calling in a “life line”- consultants (experts)

6. ABC’s of PIBC Legal Expert Practical Aspect
What is included in the law
What does it mean
Practical Aspect
What did the City of Tempe do
What challenges did we face
Approach for Today’s session:
1> legal expert- Scott
- what is included in the law
- what does it mean
2> practical aspect
- what strategies did Tempe use
- what challenges did we face
Turn it over to our Legal guru….

7. Post-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.

8. Your 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 proceeds
Calculate Arbitrage and Pay Rebate or Yield Reduction.
Respond to IRS inquiries.

9. Specific Focus of a Post-Closing Compliance Program
Assign responsibility.
Train responsible person and others who work with bonds and bond financed property
Develop 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?

10. Alert! Alert!
Tax-advantaged bonds are subject to federal tax requirements BOTH at the time of issuance AND so long as the bonds remain outstanding.

11. IRS has an initiative
We are on the radar screen
At City of Tempe- goal
Implement such a program that we can just “smile and wave”

12. IRS Form 14002 Tempe approach:
Walk down IRS form ensuring every area was addressed and documented
Defined who was responsible-
Document in a policy
CFO
Policy on “Proper” Use of Bond proceeds
What does that mean?
CIP funds broken out by function (police, fire)
Entire fund reimbursed with bond proceeds
Challenge: 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? Admin
Spoke with our auditors- Cities are taking the conservative approach and not reimbursing those items with bond proceeds
Trip to Japan for Dam?
Feasibility study: need pay-go or other source to finance
Need to think through this items during the budget process so no surprises
Develop system to monitor proper use
As accountants, not subject matter experts in what expenditures
Are true project costs
Developed a “Framework of Allowable Costs”
Meet with project managers to discuss
Upfront do not charge project costs that are not allowable
Method of Department review
Training of project managers
Understand element of finance (like grant)
Need documentation

13. Retain Certain Records
Basic records:
Transcript
Ordinances
Opinion
Documentation 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.

14. Life of Bonds + 3 Years Biggest Challenge: AP Invoices
Burden of Proof:
Life of bond+3 years
Transcript of Proceedings
Bond File
Debt Service schedules
Cost of issuances
Journal entries
Electronically filed by bond issuance
Schedules
Arbitrage support
Retaining invoices- CIP Bond File (Challenge)
AP staff put invoices in folder weekly
Download GL by fund monthly
Files the GL with matching invoices in folder
Eventually go paperless

15. Monitor 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.)

16. Track 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

17. Track and Monitor Contracts/Leases that Touch Financed Facilities
Types of Relationships that create private use:
Leases
Management and Services Contracts
Research Contracts
“Partnerships” with private uses?
Sales agreements
Take or Pay Contracts
Land Use agreements, easements, naming rights, licenses

18. Track 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.

19. Monitoring Private Use
Monitoring Private Business Use
Have conversations with Attorney’s office + CD to determine the extent to which have these agreements
Review existing Capital Assets
Downloaded list of buildings from Capital Asset system
removed all items before any outstanding bond issuances
reviewed remaining assets to determine items that were reimbursed with bond proceeds
Annually review with CD to determine if any of the space is being leased

20. Investment 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 covenants
Investments must comply with ALL of the following:
Arizona statute for investment of public funds
Issuer's investment policy
Authorized investment list included in bond covenants (if applicable)

21. Investment of Bond Proceeds
Investments beyond any qualifying temporary period may have further restrictions – check with bond counsel and/or your bond documents to ensure compliance
Initial investment of proceeds:
Match investment maturity dates and amounts to the project draw schedule
If the issue may qualify for a spending exception to rebate; be sure to structure your portfolio to accommodate the timing of the expenditures
No investments should mature beyond the temporary period (if applicable) in the initial portfolio.

22. Reimbursement 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.

23. City of Tempe’s Debt Practices
Simple + Systematic
Typically issue debt each June (unless it is a refunding)
GO Issuances
Issue a letter of intent (Scott will discuss)
August (can go back 60 days on expenditures)
Spend for a year- tracking expenditures

24. Typical Debt Issuance
Prior Year Expenditures Up-coming Year’s Anticipated Expenditures Current Year’s Bond Issuance
Size bond issuance to cover amounts spent + anticipated expenditures for upcoming year.
Balanced approach
½ spent before the issuance
½ spend after the issuance

25. Reimbursement + Investment
Immediate reimbursement of funds spent
Remaining investment in LGIP or Trust Account
Immediate reimbursement
Our approach minimizes the amount of unspent proceeds to track in investments
Fairly confident that will be able to spend at within a certain amount of time
remaining money into LGIP account- within investment policies
challenging to match to draw schedule
We don’t utilize the strategy of purchasing maturities (but it is a wise strategy)
Advantages- easier to meet
24 month construction exception
3 year Temporary period
Disadvantages- cash spent but investment rates are low
Arbitrage rebate calculations for 24 month construction spending exception
Easy to use LGIP Pool 5 rate
Speaking of Arbitrage, fasten your safety belt…… Scott
Advantage- meeting 24 month arbitrage spending exception + temporary period
Disadvantage- using City’s cash initially

26. Arbitrage Bonds Bonds become taxable if the Bond is an arbitrage bond.
Arbitrage bond exists if the issuer violates either the:
Yield restriction requirement; or
Rebate 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%; and
Other Types of Bonds: Other limits.

27. Arbitrage 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).

28. Arbitrage 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.

29. Arbitrage 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 required
Calculations are typically done more frequently (annually, monthly..) to monitor and track liabilities and spending exceptions if applicable
A rebate fund must be established if a liability exists to set aside funds for payment
If calculations show no payments are due, no reporting is required to the IRS

30. Arbitrage 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.

31. Tips 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.

32. Tips 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.

33. Tips 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.

34. Tracking 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 schedule
Monthly download + review exp
Monitor 6-month, 18-month, 24 month exceptions
Interest allocation
Quarterly charged to fund (per IRS no less than quarterly)
Move total earning to DS fund to avoid approp issue
Arbitrage
Need to track taxable series (BAB, QECB)
WIFA

35. Debt Service Fund Debt Service Fund
If one is established through bond documents- (DS Reserve Fund)
If required in the bond doc’s
Fund holding secondary property tax
Must clear out 11/12th annually to be “Bona Fide”
Tempe’s method lend us NOT to having a Bona Fide DS Fund
Non-Bona Fide Fund analysis
We will “yield restrict” or make a “yield reduction payment”
Compare arbitrage yield to annual portfolio yield
Consult with your Arbitrage consultant
IRS may forgive penalty but will not forgive interest
It compounds!
Look at a 5 year period
Could own but then later it may be able to request a refund
Key: have the calculation done timely and remitted to the IRS
Two past issuances owing a rebate on the Debt Service Fund (property tax)
1995 GO Issuance
$14k in arbitrage rebate payment
$12k in interest
1998 GO Issuance
$7.4k in rebate payment
$4.6k in interest
“Innocent Failure” letter
Importance of working with your arbitrage consultant
Speaking of the IRS….

36. IRS City on it 3rd Desk Review BAB Excise issuance- 2009
Refunding- 2003
TCA Excise- 2006
Answered a 15 page questionnaire
Send closing documents
Follow up
Had to supply invoices

37. Summary 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 matters
Consequences of non-compliance:
Bonds could forfeit their tax-exempt status.