Post Issuance Compliance

Size: px

Start display at page:

Download "Post Issuance Compliance"

Leonard Cook
6 years ago
Views:

1 Post Issuance Compliance Joan M. DiMarco, Managing Director PFM Asset Management LLC Arbitrage Rebate and Post Issuance Compliance Group Two Logan Square Suite 1600 Philadelphia, PA Phone:

2 Why Implement a Program Bond documents include covenants regarding tax law compliance and tax-exemption based on such compliance Audits are expensive and time consuming Reputation risk associated with violations Prevent unknown liabilities Be prepared in the event of an audit or receipt of a compliance check evaluation 2015 The PFM Group 2

3 Components of a Compliance Progam Compliance Program Tax Compliance Continuing Disclosure Arbitrage Rebate Private Business Use Record Retention Team Annual Filing Material Events 2015 The PFM Group 3

4 Key Components Foundation established before issuance Investment of proceeds- investment rules and arbitrage rebate Use of Proceeds- financing projects / fair market value/final allocation Use of financed facilities (private use) Record retention preserving the evidence 2015 The PFM Group 4

5 A Change In IRS Focus Prior focus on pre-issuance type compliance problems Is the project financeable with tax-exempt bond proceeds? Less focus on post-issuance compliance, such as arbitrage rebate Beginning in 2007, shift in focus to post-issuance compliance Soft contact surveys sent to 501(c)(3) organizations and governmental entities to assess post-issuance compliance Significant increase in IRS audits Emphasis on written policies and procedures to manage post-issuance compliance Change in IRS Forms to include acknowledgement of written procedures Arbitrage rebate is a significant part of post-issuance compliance Also includes private business use compliance and related requirements 2015 The PFM Group 5

6 IRS Form 8038 IRS revised Form 8038-G in September 2011 to include lines #43 and #44 Issuers that are unable to check the boxes on the Form 8038 / 8038-G may receive greater scrutiny 2015 The PFM Group 6

expected to timely identify noncompliance; and Procedures ensuring that the issuer will take steps to timely correct noncompliance.

7 IRS Best Practices Written Procedures Due diligence review at regular intervals; Identifying the official or employee responsible for review; Training of the responsible official/employee; Retention of adequate records to substantiate compliance; Procedures reasonably expected to timely identify noncompliance; and Procedures ensuring that the issuer will take steps to timely correct noncompliance. Golden Rule: add on to IRS best practices is to have processes, procedures and internal controls that prevent failures 2015 The PFM Group 7

8 Latest IRS Perspectives on Written Procedures Recognize that many issuers have something in writing solely for the purpose of checking the box. Issuers need to have effective written policies and procedures, or at a minimum effective procedures written or unwritten. Next, in VCAP, issuers may need to demonstrate that they have adopted additional procedures so that the failure would not occur again. Fiscal expect 120 VCAP settlements (51 in 2014); not one availed themselves of relief for having written procedures. 51% were for change in use/private use violations The PFM Group 8

9 Compliance Program Administration Assigning responsibilities/designation of individuals Post Issuance Compliance Officer: Team includes Business Administrator, Accounting Supervisor, Legal, Purchasing/contracting Reporting responsibilities Ongoing review, modification, certification procedures Annual review by staff Review of assigned responsibilities; individuals assigned to monitor and manage post-issuance compliance Training and staff education 2015 The PFM Group 9

10 Best Practices Maintain complete inventory of bonds Bond policies and procedures integrated with organizational policies and procedures Job descriptions include bond responsibilities Creates a bond compliance officer Annual certification checklists from key reporters and bond compliance officer (preserved) Internal audit includes bond compliance review periodically Process in place to alert responsible personnel to changes in requirements (training, contractors, or annual bond counsel meeting) Periodic training of personnel responsible for compliance efforts 2015 The PFM Group 10

Record Retention Requirements Requirements are burdensome and may not be consistent with document destruction policies Life of the Bonds + 3 years If the Bonds are refunded, life

11 Record Retention Requirements Requirements are burdensome and may not be consistent with document destruction policies Life of the Bonds + 3 years If the Bonds are refunded, life of refunding bonds + 3 years Consider separate document collection, storage and destruction policies for bond related records Consider electronic storage systems 2015 The PFM Group 11

12 Examples Records to Retain Board minutes, resolutions Appraisals Bond transcripts Newspaper ads, misc. correspondence Investment records Expenditure histories Invoices IRS Filings Records related to acquisition of investment agreements and interest rate swaps Payments for credit facilities Arbitrage rebate and yield restriction compliance reports 2015 The PFM Group 12

13 Investment of Proceeds Investments, investment earnings FMV rules Open-market securities GICs CDs Escrows Valuation requirements Allocation of investment earnings Commingled Funds 2015 The PFM Group 13

14 Use of Proceeds Use of proceeds Financed project What is an expenditure? (outlay vs. earmarking/encumbering funds) Capital expenditures and working capital expenditures Allocation methodology options Capital expenditure allocation options Working capital limitations and exceptions- beyond today s scope Timing of allocations Reimbursements & reimbursement resolutions Project completion; documentation/certification of project completion (occupancy certificate?) Costs of issuance 2015 The PFM Group 14

15 Accounting For Bond Proceeds Significant factor in determining arbitrage rebate and yield restriction liabilities Permitted to use any reasonable, consistently applied accounting method to account for gross proceeds, investments, and expenditures of an issue Examples: FIFO, direct tracing, ratable allocation, gross proceeds spent first Proceeds are allocated to an issue until they are spent (actual cash outlay) Expenditure reallocations are permitted, however there are time limits Expenditure allocations must be made no later than 18-months after the later of the expenditure date or the date the project is placed in service Must be made no later than 60 days after five-year anniversary/final maturity date Proceeds of working capital financings (e.g., TANS, TRANs) subject to proceeds-spent-last requirement 2015 The PFM Group 15

Use of Proceeds & Accounting Procedures Category Financed Projects Reimburse with bond proceeds Project Completion Spend-down Requirements

Approach (Commingled Fund) Procedure Verify use of proceeds for approved projects Adoption of Reimbursement Resolution Require Occupancy

16 Use of Proceeds & Accounting Procedures Category Financed Projects Reimburse with bond proceeds Project Completion Spend-down Requirements Expenditure Allocations Pooled Inv. Approach (Commingled Fund) Procedure Verify use of proceeds for approved projects Adoption of Reimbursement Resolution Require Occupancy Certificate, Completion Certificate Monitor 6-mo spending benchmarks Consistent method to allocate bond proceeds no later than 18-months after expenditure date Ratable allocation of investment earnings on periodic basis (no less than quarterly) 2015 The PFM Group 16

17 Tax Considerations Timeline Arbitrage rebate requirements apply to every tax-exempt borrowing Compliance begins with pre-issuance planning and continues with post-issuance policies and procedures (does it ever end ) Pre-Issuance Timing Project Draw Schedule Evaluate available exceptions and elections Identify investment options Issuance Invest bond proceeds Purchase securities, establish FMV Revise draw schedule Make elections in Tax Certificate Post-Issuance Arbitrage reporting Monitor draw schedule Monitor investments Record retention 2015 The PFM Group 17

Arbitrage Rebate & Yield Restriction Compliance Determine the yield for arbitrage purposes Compile and maintain a list of bonds in need of rebate and yield restriction calculations Monitor compliance

18 Arbitrage Rebate & Yield Restriction Compliance Determine the yield for arbitrage purposes Compile and maintain a list of bonds in need of rebate and yield restriction calculations Monitor compliance with exceptions Identify temporary periods Monitor compliance with yield restriction requirements Perform calculations no later than 5-year anniversary dates and final maturity dates (may be earlier than 5- years) Make payments no later than 60 days after computation date Initiate corrective steps if payments are not made timely, or if other violations are identified If 501(c)(3) filing IRS Form 990 Schedule K, report date that required rebate calculations were completed 2015 The PFM Group 18

19 Funds Subject to Rebate Proceeds Category Sale Proceeds / Investment Proceeds ( Proceeds ) Transferred Proceeds ( Proceeds ) Cash / Revenue Funded ( Replacement Proceeds ) Funds Project / Construction Funds Capitalized Interest Funds Debt Service Reserve Funds Escrow Funds Costs of Issuance Funds Any of the above Debt Service Funds Debt Service Reserve Funds Any Pledged Fund Proceeds + Replacement Proceeds = Gross Proceeds 2015 The PFM Group 19

20 Arbitrage Rebate Common Omissions REPLACEMENT PROCEEDS Reserve funds funded with non sale proceeds Insurance, sale proceeds Debt Service Funds (always replacement proceeds but may be excluded if they meet bona fide income and depletion tests). IRS audits now asking about how bona fide exclusion was tested more than an assumption 2015 The PFM Group 20

21 Bona Fide Debt Service Fund Exception Depleted at least annually except for greater of: Previous year s earnings in the fund, or 1/12th of previous year s principal and interest payments Private Activity Bonds Fund has annual earnings of less than $100,000, or Average annual debt service does not exceed $2.5 million 2015 The PFM Group 21

22 Arbitrage Rebate Follow the Money! There may not be any anticipated liability You must complete and keep even if the liability is $0 Bond covenants and IRS regulations are not predicated on completion only when you anticipate a liability REALLY IMPORTANT: the arbitrage rebate computation is the financial roadmap that an IRS uses to trace the expenditure of proceeds and by extension, the facilities financed. IRS Consistency Requirement for Sections of the Code 2015 The PFM Group 22

Private Business Use Tax law limits private use of TE financed facilities to 5% for unrelated use, 10% for related use Example: Lease space to Starbucks Maintain records of business activities and

23 Private Business Use Tax law limits private use of TE financed facilities to 5% for unrelated use, 10% for related use Example: Lease space to Starbucks Maintain records of business activities and measure private business use periodically Require legal counsel review of all management & service agreements, leases, sub-leases, naming rights contracts, etc. Coordinate use of tax-exempt-bond financed facilities with administrative team to ensure compliance 2015 The PFM Group 23

24 Be familiar with your documents especially the tax or non-arbitrage certificate located in the bond transcript. Create a file to retain information needed for the calculation right after the bond closing. Avoids having to find records from 5-years ago Consider hiring a consultant when the bonds are issued Schedule your calculation 60 days after the calculation date is not a lot of time, we suggest starting the process at least 60 days in advance of the calculation date. Know the exceptions if your bond counsel indicates you are eligible for an exception, find out which one, and what that means for the issue. Keep your calculations current consider having calculations prepared more frequently then at the 5-year date. Can help in keeping and eye on spending exceptions Allows you to plan for a future liability Ask Questions! Tips for a Smooth Process 2015 The PFM Group 24

25 Getting Started Start by documenting any current unwritten procedures Review and incorporate current written procedures Source materials to use as a guide: Bond documents (primarily tax certificates) Governmental Bond Compliance Check lists IRS Revenue Procedures Industry publications, e.g. GFOA Consult with your legal counsel, rebate consultant, and financial advisor 2015 The PFM Group 25

26 Creating Policies and Procedures Process is to create good internal control policies and procedures that are action steps. Start by documenting your current unwritten procedures Review current written procedures Identify gaps between good internal controls and what exists Beware one size fits all, externally drafted canned procedures. Team that develops your system should include people knowledgeable about the accounting systems, asset records, tax exempt / BABs bond rules, and development of internal controls 2015 The PFM Group 26

27 These are business functions use tools common to business functions Are there any areas that you know you are not doing, that you want to create a theoretical prospective process map? After you are done with the process mapping, have multispecialty team review to identify needed changes, duplications, etc. Create from this a Compliance Manual with sufficiently detailed action steps, personnel or positions responsible. Create a checklist that can be completed at least annually that forces a senior level review and certification of compliance The PFM Group 27

28 Team Assigned to Manage Compliance Who is assigned to manage compliance? What are they assigned to do? When is the team to take action? Consider individuals from multiple departments Promote coordination & prevent issues from slipping through the cracks 2015 The PFM Group 28

29 2015 IRS Focus Accountability & Transparency Education Outreach Qualified School Construction Bonds Voluntary Compliance Agreement Program Examinations Advance Refunding Bonds 8038-T s Environment & Transportation Bonds Private Activity Bonds Solid Waste Bonds Multi- & Single- Family Housing Bonds Build America Bonds Unspent Bond Proceeds VCAP Voluntary Compliance Agreement Program Continued Emphasis on formal written procedures for post issuance compliance 2015 The PFM Group 29

30 VCAP STATS fiscal ; expect 150 closed in Reasons for VCAP Change in Use 34 % Arbitrage 18 Private Use 17 Prohbited Use, Public Approvals 12 Other % 2015 The PFM Group 30

31 IRS Audit Sample Questions Easy: Generic and straightforward Please provide a description of the current status of the Bonds. (i.e., outstanding, retired, refunded, defeased, etc.). Please provide a complete copy of the bond transcript. Please provide a schedule of the total interest expense paid on the Bonds from the issue date to the most recent interest payment date. Please describe the specific project(s) financed with the Bonds The PFM Group 31

32 IRS Audit Sample Questions Moderate: More intriguing, requires some digging Provide copies of all bank trustee or other statements for all accounts containing gross proceeds of the Bonds. Please describe the accounting method used to account for gross proceeds, investments, and expenditures of this bond issue and how this accounting method is reflected in the issuer's books and records. (Note: If an issuer fails to maintain books and records sufficient to establish the accounting method used for an issue and the allocation of the proceeds of that issue, the specific tracing method is to be used.) Were there any changes to the expected use of proceeds since the date of issuance? If so, please describe. Please provide a copy of the most arbitrage rebate and yield restriction computation prepared for the Bonds The PFM Group 32

33 IRS Audit Sample Questions Difficult: Requires research and your time For each project identified above, please provide a listing of the facilities or assets acquired or financed with bond proceeds including the date acquired or placed in service and the total cost of each asset. For any office space, training facilities, or storage space included in the bond financed property, please provide a description of the size, location, user, or use of any such space. Please provide a statement of assets, or other documentation, showing the value of each nonpurpose investment held in each account purchased with gross proceeds of the Bonds for any date the investments must be valued (e.g., a computation date) The PFM Group 33

34 IRS Audit Sample Questions Written procedures: Are there written procedures, other than bond documents provided at closing, which contain the following key characteristics to ensure that violations are timely identified and corrected so that the Bonds remain in compliance with federal tax requirements from the time they are issued until they are no longer outstanding? Due diligence review at regular intervals? Identification and training of the officer or employee responsible for review? Retention of adequate records to substantiate compliance (e.g., records relating to the allocation of proceeds, etc.). Procedures reasonably expected to timely identify noncompliance? Procedures to ensure that steps will be taken to timely correct noncompliance? 2015 The PFM Group 34

35 Refunding Impacts May accelerate final maturity of the issue. Possible loss of temporary period on the bonds being refunded. Escrow yield cannot exceed the bond yield by more than 1/1000th of 1% May create Transferred Proceeds when proceeds of the prior issue or issues become proceeds of the Refunding Bonds Current IRS focus unexpended proceeds of refunded issues that are not used toward the redemption of the refunded bonds The PFM Group 35

36 The SEC Acts on Continuing Disclosure MCDC Initiative Need to develop written policies and procedures similar or part of tax post issuance procedures Confirm continuing disclosure requirements before bond closing Tickler Assure that postings are on EMMA, timely 2015 The PFM Group 36

37 Final Thoughts & Considerations The IRS is focused on post-issuance compliance Attempting to influence issuers to adopt and implement written postissuance compliance procedures Audits, soft-contact surveys Changes to 8038 series forms Arbitrage rebate and yield restriction compliance is an integral part of post-issuance compliance Keeping good records, making timely allocations, and proactively monitoring arbitrage rebate and yield restriction liabilities will mitigate audit risk Arbitrage rebate & yield restriction compliance can be very complicated and costly if liability reduction strategies are not considered Build cohesive system of processes, procedures and internal controls and include both tax and continuing disclosure as typically same group of people 2015 The PFM Group 37

38 THANK YOU! 2015 The PFM Group 38

Tennessee GFOA 2017 Spring Institute

Tennessee GFOA 2017 Spring Institute Post Issuance Compliance: What Do I Need To Know? Mike Steinbrook, Director steinbrookm@pfm.com PFM Asset Management LLC One Keystone Plaza 717.232.2723 Suite 300 pfm.com