for Tax-Advantaged Debt STEPHEN H. BRODEN, VICE PRESIDENT ARBITRAGE COMPLIANCE SPECIALISTS, INC.

Transcription

1 Post-Issuance Compliance for Tax-Advantaged Debt PRESENTED BY STEPHEN H. BRODEN, VICE PRESIDENT ARBITRAGE COMPLIANCE SPECIALISTS, INC.

2 PRESENTATION OUTLINE First Topic IRS Publication 5091, IRS & SEC Enforcement Update Second Topic Arbitrage Compliance (Arbitrage Rebate, Yield Restriction and Record Retention) Third Topic Private Use and Continuing Disclosure Compliance Fourth Topic Implementing Post-Issuance Policies and Procedures 2

3 FIRST TOPIC IRS PUBLICATION 5091 Voluntary Compliance for Tax-Exempt and Tax-Credit Debt ( Tax-Advantaged ) 3

4 IRS & SEC ENFORCEMENT UPDATE IRS ENFORCEMENT (FOCUS/ENFORCEMENT) Revised market segment program focused on governmental bonds, qualified 501(c)(3) bonds, qualified small issue bonds, various exempt facility bonds including airports, solid waste and sewage, various disaster relief bonds, build America bonds, and qualified school construction bonds. Abit Arbitrage focused examinations will cover various market segments including advance refunding bonds, notes, student loan bonds, as well as rebate payment verification and other examinations of Form 8038-T. Compliance check questionnaires evaluating the post-issuance compliance monitoring policies and procedures of issuers of governmental bonds West Texas Detention Facility Corporation Series 2003 (Settled Private Activity Bonds Audit for $1.08 Million and Redemption of Series 2003 Bonds) 4

5 IRS & SEC ENFORCEMENT UPDATE SEC ENFORCEMENT (FOCUS/ACTIONS) Municipalities Continuing Disclosure Cooperation Initiative Issuer Self Reporting Deadline December 1, PM EST /di i i / / d i iti ti ti i df Questioning of qualified immunity Miami, FL/Michael Boudreaux Charges for control person" under Section 20(a) Allen Park, MI/Gary Burtka Fines for improperly selling bonds (1 st MSRB G-15 Rule Violation) 13 dealers 5

6 SECOND TOPIC ARBITRAGE COMPLIANCE Arbitrage The difference between the interest paid on tax advantaged debt and the interest earned by investing the proceeds of the tax advantaged debt in higheryielding taxable securities. 6

7 ARBITRAGE REBATE Rules Established - Arbitrage rebate rules are established for all tax-exempt debt as part of the Tax Reform Act of 1986 Established to discourage Issuers from creating arbitrage bonds which can result from the following: Issuing too much debt Issuing debt before a legitimate need Allowing debt to stay outstanding longer then necessary Established a long list of rules for Issuers to follow for the life of the debt Established exemptions for issues of a certain size and for certain funds 7

8 SMALL ISSUER EXEMPTION New Money Debt 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. p 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. 8

9 SMALL ISSUER EXEMPTION CONTINUED Refunding Debt - 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 debt (new debt) will fail one of the three rules listed above and become subject to the arbitrage rebate regulations. 9

10 FUND EXEMPTION 6 MONTH SPENDING EXCEPTION Spent within 6 months: Project Funds Costs of Issuance Funds Escrow Refunding Funds 10

11 FUND EXEMPTION 18 MONTH SPENDING EXCEPTION Spent within 18 months Project Funds Cost of Issuance Funds Spending Timetable 15% within 6 months 60% within 12 months 100% within 18 months 11

12 FUND EXEMPTION 24 MONTH SPENDING EXCEPTION Expend within 24 months Project Funds Spending Timetable 10% within 6 months 45% within 12 months 75% within 18 months 100% within 24 months 12

13 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; or 1/12 of the principal and interest payments on the issue for the immediate preceding year Example: Debt service payments = $1,200,000 for the year $1,200,000/12 = $100,000 Debt Service balance < $100,000 = Exemption 13

14 SUMMARY OF EXEMPTIONS Bond Type Governmental 501(c)(3) Private Activity Bond Level Exemption(s) Available Small Issuer Exemption Small Issuer Exemption No Exemption Fund Type Fund Level Exemption(s) )Available Project 6-Month, 18-Month, 24-Month Cost of Issuance 6-Month, 18-Month Escrow Refunding 6-Month Debt Service Interest earnings or 1/12 test 14

15 ARBITRAGE REBATE PAYMENT IRS FILING PERIOD IRS filing period: Every 5 years Maturity date of the issue Example: Bond Delivery Date - 3/1/14 Bond Final Date - 3/1/34 Arbitrage Rebate Reporting and Payments are required as of 3/1/19, 3/1/24, 3/1/29 and 3/1/34. 15

16 YIELD RESTRICTION Rules Established - Yield restriction rules are established as part of the Tax Reform Act of 1969 Established to discourage Issuers from investing either purpose and non-purpose investments in a manner that would create an arbitrage bond Established a list of rules for Issuers to follow that generally complement those created for arbitrage rebate Established exemptions based on temporary periods, materially higher yields and creation of a minor portion 16

17 YIELD RESTRICTION PROJECT & COST OF ISSUANCE FUNDS Trigger Funds remain at the end of three (3) or five (5) year temporary period Three (3) years is standard Five (5) years requires additional documentation Resolution Interest earnings on the balance is to be restricted to the bond yield %, OR Restricted to the bond yield % 001% (A result of multiple yield restricted funds), OR Provide a yield reduction payment to the IRS 17

18 YIELD RESTRICTION ESCROW FUND Ti Trigger Funds remain at the end of thirty (30) or ninety (90) day temporary period Thirty (30) days for advanced refunding debt Ninety (90) days for current refunding debt Resolution Restricted to the bond yield yed %, 00 OR Provide a yield reduction payment to the IRS 18

19 YIELD RESTRICTION DEBT SERVICE FUND Trigger Funds remain at the end of thirteen (13) month temporary period Resolution Restricted to the bond yield %, OR Provide a yield reduction payment to the IRS 19

20 SUMMARY OF YIELD REDUCTION Funds Trigger Yield Restriction Rate Project Balance after 3 years Bond 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 Advanced refunding is defined as a refunding that takes place after 90 days 90 days allowed to invest without regard to yield restriction 30 days allowed to invest without regard to yield restriction Bond Yield +.001% Bond Yield +.001% Debt Service Non-Current Balance Bond Yield +.001% 20

21 YIELD REDUCTION PAYMENT IRS FILING PERIOD IRS filing period: Every 5 years Maturity date of the issue Example: Bond Delivery Date - 3/1/14 Bond Final Date - 3/1/34 Arbitrage Rebate Reporting and Payments are required as of 3/1/19, 3/1/24, 3/1/29 and 3/1/34. 21

22 IRS RECORD RETENTION IRS Section 6001 provides record retention requirements for federal tax purposes. It is important that sufficient records are retained to demonstrate the debt maintain their tax-advantaged status. *Retention ti period is the life of the bond plus three (3) years. **Extended for refunding circumstances as the new retention period for refunded debt is the life of the refunding bond plus three (3) years. 22

23 THIRD TOPICS PRIVATE BUSINESS USE Private business use relates to Section 141 if the Internal Revenue Code of 1986, as amended and Treasury Regulations (the Tax Code ). Further Defined - 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 the issue is a private activity bond. 23

24 WHAT IS PRIVATE BUSINESS USE? Questions to ask yourself as an Issuer 1) Is the facility used in a manner that will benefit a for-profit entity or individual (private business use test)? 2) Is the facility owned or leased to a for-profit entity or individual (private security or payment tests)? 3) Are proceeds used to make or finance loans (private financing test)? 24

25 PRIVATE BUSINESS USE Specific examples of possible private business use according the Tax Code include: Sale of facilities Leases Special legal entitlements such as naming rights Management contracts (Food Vendors) Research agreements 25

26 PRIVATE BUSINESS USE The Tax Code identifies a private activity bond as a bond which meets the following criteria: the private business use test, and the private security or payment test, OR the 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 debt within 90 days Alternative use of disposition proceeds (Difficult) Alternative use of facility (Difficult) 26

27 CONTINUING DISCLOSURE The Official Statement will state the following regarding Continuing i Disclosure: The Issuer will enter into a Continuing Disclosure Undertaking In the last 5 years, the Issuer 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 MSRB EMMA Securities and Exchange Commission Municipal Securities Rulemaking Board Electronic Municipal Market Access 27

28 FOURTH TOPIC IMPLEMENTING POST-ISSUANCE POLICIES AND PROCEDURES? The IRS is currently auditing debt issuers to see if written post-issuance compliance policies and procedures are in place. 28

29 SOME KEY QUESTIONS Entities needs to work with internal and external parties to ensure applicable compliance measures are taken within the District. Key Questions/Ideas: o Do the Policies and Procedures need to be submitted to the Board for approval? o Should the Board receive only a Policy and Procedure Statement which elects the Compliance Officer, in lieu of submittal of the Policies and Procedures? o Who do we contact t for guidance? o Bond Counsel, Financial Advisor, Rebate Consultant and other Districts. 29

30 Any Questions? This presentation provides brief and general information. Post-issuance bond compliance rules are complex and detailed, so it is important to review the specific guidance provided by the requirements of the Internal Revenue Code, Treasury Regulations and Securities and Exchange Commission. 30