Post Issuance Best Practices Internal Revenue Service Securities and Exchange Commission State of Texas

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1 Post Issuance Best Practices Internal Revenue Service Securities and Exchange Commission State of Texas There are No Prerequisites for this course 2017 First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

2 Session Objectives This Session is intended to provide participants with: A high level Background on IRS Post Issuance Compliance ( PIC ) Policies and Procedures and Best Practices, A high level Background on SEC PIC Policies and Procedures and Best Practices, Information on the State of Texas Debt Reporting Requirements, Helpful Hints to Avoid PIC related Problems. Member FINRA & SIPC 2017 First Southwest Asset Management LLC

Overview 2017 First Southwest Asset Management

Internal Revenue Service Perspective 2017 First Southwest Asset

5 Post Issuance Background The IRS Post Issuance Compliance was initiated in 2007 based upon a suggestion from the Advisory Committee on Tax Exempt and Governmental Entities ( ACT ). IRS Forms were updated and the IRS began asking Issuers if they had Written Policies and Procedures during Audits in September of There is no statutory authority that mandates that issuers must have Written Policies and Procedures First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

6 Written Procedures IRS Intent 1. To have Procedures which can be Understood and Implemented over Time even as Responsibilities Change. 2. To Assign Responsibility for post-issuance compliance and be sure that Sufficient Information is routinely Identified and Maintained to allow those who later Inherit that Responsibility to Continue the Job. 3. When ever possible the compliance should be Integrated with Accounting Systems to Promptly Identify contemplated changes and Communicate these plans. 4. Avoid Accidental Destruction of Documents. 5 Member FINRA & SIPC 2017 First Southwest Asset Management LLC

7 Rebate/Yield Restriction (The Profit ) Profit Bond Yield Issue Date Investment Rates Generic Example Based Upon Government Investment Pool Rates First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

8 Proper Use of Bond Proceeds (Document Retention) What Documents must be Retained: Basic records relating to the bond transaction Documents evidencing expenditure of bond proceeds Use of bond financed property by public and private sources (Management Contracts, Leases, Private use of Financed Property) Sources of payment or security for the bonds Documents evidencing any investment of bond proceeds How Long? As long as the bonds are outstanding plus three years If refunded, the records must be maintained until three years after the final redemption of both bonds 7 Member FINRA & SIPC 2017 First Southwest Asset Management LLC

9 Expenditures - Section (d)(1) There must be a current outlay of cash. Time periods for Allocation of Proceeds to Expenditures: An issuer must account for the allocation of proceeds to expenditures not later than 18 Months after the expenditure is paid or, if later, the date the financed project is Placed in Service. Subject to an Outside Limit of Sixty Days after the fifth anniversary of the issue date or sixty days after the retirement of the issue. 8 Member FINRA & SIPC 2017 First Southwest Asset Management LLC

10 Proper Use of Bond Financed Assets (Private Use) An issue will not be treated as a Governmental bonds if the issuer reasonably expects, on the issue date, that Private Business and Private Payment/Security tests or the Private Loan Financing test will not be met. Private Business Use Not more than 10% of the proceeds of an issue will be used for any private business use. Private Payment or Security Test Not More than 10% of the payment of principal or interest is either made or secured (directly or indirectly) by payments or property used or to be used for private business use. Private Loan Financing Test The amount of proceeds of the issue which is to be used (directly or indirectly) to make or finance loans to persons other than governmental entities does not exceed the lesser of 5% of the such proceeds or $5M. Loose tax-exempt status if a post issuance Deliberate Action. 9 Member FINRA & SIPC 2017 First Southwest Asset Management LLC

11 Written Procedures Procedure Identify Who is Responsible Multiple People, how Coordinated Determine the Frequency for Review Issuance Obtain and Store Closing Bible. Confirm Closing Filings Plan for Defining Records to be Kept and Responsibilities Arbitrage Accounting Methods Method of Allocation of Bond Proceeds and Income Zero SLGS Rolls Form 8038-T and Compliance 10 Member FINRA & SIPC 2017 First Southwest Asset Management LLC

12 Written Procedures Proper Use of Proceeds (Record Retention) Private Activity (Proper Use of Property) Map of What Issues funded what Facilities (or Portions) Procedures for Allocation of Proceeds to Qualifying Expenditures Procedures to Monitor Private Use Procedures for new Sale, License, Management Contract, Lease, or Other Private Use Reissuance Post Issuance Change in Terms Refinancing/Remarketing Refundings 11 Member FINRA & SIPC 2017 First Southwest Asset Management LLC

14 New Audit Procedures New Procedures began April 1, First Letter: Audit has Commenced Identify the Bond Issue(s) Issuer to Expect a Call Initial call with Agent and Issuer to Discuss: Document Requirements Schedule IDR will be prepared following the initial call to Tailor the Request to the Issue under examination First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

15 IRS Audit Best Practices Involve Tax Counsel From the Start Answer the Question No More or Less Have Supporting Documentation Rebate Calculations Expenditure Support Proof of Private Use Provide Consistent Information Spend Proceeds Timely (or Repurpose) Any Reallocation of Expenditures is Timely and Well Documented First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

17 IRS Best Practices Make a Powerful Person Responsible Identify Documentation Requirements and How Long Documents must be Maintained Segregate Bond Proceed Documentation and Other Documentation. Have a Placed in Service Procedure. Review Expenditure Records (Reallocation Documentation). Establish Procedures for Contract Reviews (Inventory and Private Use) Establish Document Destruction Approval Procedures Monitor for Changes in Laws and Regulations Monitor Adherence and Make Changes First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

19 Contacts Lou Ann Heath Director 1201 Elm Street, Suite 3500 Dallas, Texas Tel December 2017 Government Treasurers Officers of Texas Post Issuance Best Practices Continuing Disclosure

20 Learning Objectives High level review and history of Securities and Exchange Commission (SEC) Rule 15c2-12 and reporting requirements Basic understanding of EMMA, the Electronic Municipal Market Access website and the designated repository for municipal securities Current trends in the regulatory environment regarding Continuing Disclosure Member FINRA/SIPC/NYSE 2017 Hilltop Securities Inc. All Rights Reserved

21 Table of Contents Disclosure Reporting Requirements for SEC Rule 15c2-12 What Does Continuing Disclosure Mean For Me? SEC Rule 15c Required Material Events Filing List Is My Government Subject to 15c2-12 Requirements? SEC Rule 15c2-12 Timeline Why is Compliance with SEC Rule 15c2-12 Important? Report Requirements are Cumulative One Issuer, Two Issues, Different Report Requirements Recent Developments in Municipal Disclosure Member FINRA/SIPC/NYSE 2017 Hilltop Securities Inc. All Rights Reserved

22 Disclosure Reporting Requirements for SEC Rule 15c2-12 SEC Rule 15c2-12 (the Rule ) Underwriters cannot buy or sell a primary offering > $1 mil unless there is written agreement in Final Official Statement that Issuer will provide specified information MSRB s EMMA (Electronic Municipal Market Access) system designated sole NRMSIR (Nationally Recognized Municipal Securities Information Repository) on July 2009 Tower Amendment to Securities Act of 1934 prohibits direct or indirect federal regulation of municipal issuers; enacted in 1975 as part of legislation creating MSRB The continuing disclosure agreement remains in place for the life of the bonds Material Events List expanded May 2010 to 14 Items Member FINRA/SIPC/NYSE 2017 Hilltop Securities Inc. All Rights Reserved

23 What Does This Mean For Me? Required: Annual Audit filed on EMMA; may require Budget too Usually due within 6 to 9 months of FYE Required: Annual Financial Information compiled from Issuer financial and operational records (Tables) filed on EMMA Usually due at the same time as the Annual Audit Material Event Notice filed on EMMA within 10 business days of occurrence Voluntary: Information that may be selected to make publicly available on EMMA (not required by SEC Rule 15c2-12) Member FINRA/SIPC/NYSE 2017 Hilltop Securities Inc. All Rights Reserved

24 SEC Rule 15c Required Material Events Filing Required Material Events Within 10 Business Days of Their Occurrence Principal and interest payment delinquencies Non-payment related defaults, if material Unscheduled draws on debt service reserves reflecting financial difficulties Unscheduled draws on credit enhancements reflecting financial difficulties Substitution of credit or liquidity providers, or their failure to perform Adverse tax opinions, IRS notices or material events affecting the tax status of the security Modifications to rights of security holders, if material Release, substitution or sale of property securing repayment of the securities, if material Member FINRA/SIPC/NYSE 2017 Hilltop Securities Inc. All Rights Reserved

25 SEC Rule 15c Required Material Events Filing, cont. Required Material Events Within 10 Business Days of Their Occurrence Bond calls, if material, and tender offers Defeasances Rating changes Bankruptcy, insolvency, receivership or similar event of the obligated person Merger, consolidation or acquisition of the obligated person or issuer, if material Appointment of a successor or additional trustee or name change of a trustee, if material Member FINRA/SIPC/NYSE 2017 Hilltop Securities Inc. All Rights Reserved

Is My Government Subject to 15c2-12 Requirements?

27 SEC Rule 15c2-12 Timeline 1930s Securities Acts of 1933 and 1934 The anti-fraud provisions of the securities laws Securities and Exchange Commission (SEC) created Municipal securities exempt from registration 1970s New York City Fiscal Crisis not able to meet outstanding obligations 1975 Municipal Securities Rulemaking Board (MSRB) Created Tower Amendment (exempts municipal issuers from direct regulation by the SEC and MSRB) 1983 The Infamous Whoops (WPPSS) Washington Public Power Supply System default on $2.25 billion in debt Member FINRA/SIPC/NYSE 2017 Hilltop Securities Inc. All Rights Reserved

28 SEC Rule 15c2-12 Timeline (continued) 1989 SEC adopted Rule 15c2-12 (the Rule ) For regulation of primary offerings of municipal bonds 1994 SEC Amended the Rule Added requirement that issuers file secondary market disclosure information July 3, 1995 Amended Rule became effective for all obligated issues 2006 SEC Filed Fraud Charges for First Time Against a Local Government San Diego, CA Member FINRA/SIPC/NYSE 2017 Hilltop Securities Inc. All Rights Reserved

29 SEC Rule 15c2-12 Timeline (continued) 2008 SEC Amended the Rule (EMMA) Launch of the Electronic Municipal Market Access (EMMA) online system designated as official new repository - effective July 1, SEC Amended the Rule (Material Events) New material events added with 10-business day deadline effective December 1, SEC Assessed First Fine Against an Issuer Four former San Diego officials pay financial penalties for misleading investors Member FINRA/SIPC/NYSE 2017 Hilltop Securities Inc. All Rights Reserved

30 SEC Rule 15c2-12 Timeline (continued) 2014 MCDC Municipal Continuing Disclosure Cooperation Initiative by the SEC to consider favorable settlement terms for Underwriters and Municipal Issuers who self-report possible violations 2015/16 MCDC Enforcement Actions against Underwriters and Issuers 72 Underwriting Firms fined a combined $18 million for selfreported violations, representing 96% of market share for municipal underwritings 71 Municipal Issuers from 45 states enter settlement orders with the SEC SEC focus now is expected on those that did not self-report Member FINRA/SIPC/NYSE 2017 Hilltop Securities Inc. All Rights Reserved

31 Why is Compliance with SEC Rule 15c2-12 Important? According to the Rule, Underwriters/institutional investors cannot bid on transactions until all required information is filed and a notice of late filing (if applicable) is made (5-year lookback) Non-compliance language must be included in any public offering documents for the subsequent five years Serious or ongoing non-compliance issues could limit access to the capital markets, which may increase borrowing costs Inaccurate statements in bond offering documents is considered securities fraud and subject to increased SEC enforcement, including financial penalties for Issuers and Government Officials Member FINRA/SIPC/NYSE 2017 Hilltop Securities Inc. All Rights Reserved

32 Report Requirements are Cumulative Each bond issue must be researched and every requirement listed Review every Final Official Statement One bond issue out of 15 may have an extra Table that no other bond issue has Not including that Table will mean non-compliance with the Rule Make note of any Bond Insurance (rating changes) EMMA is a CUSIP-based system and is how Investors track their securities ownership (Base 6 CUSIP that is unique to your government + 3 digits; i.e. City of Alice, Texas = MG7) Make sure your CUSIPs are reported correctly and required information is filed on each outstanding CUSIP CUSIP = Committee on Uniform Security Identification Procedures Member FINRA/SIPC/NYSE 2017 Hilltop Securities Inc. All Rights Reserved

34 One Issuer, Two Issues, Different Requirements City of Alice, Texas: 2017 Refunding Bonds adds new table for computation of self supporting debt Member FINRA/SIPC/NYSE 2017 Hilltop Securities Inc. All Rights Reserved

35 Recent Developments in Continuing Disclosure SEC Proposes Two New Material Event Categories Other Financial Obligations (Private Placements/Leases), if material Financial Difficulties, such as default, acceleration or termination event, if material Would require 10-business day filing requirement on EMMA Other Hot Topics Voluntary disclosure of items not mandatory under 15c2-12 Heightened industry awareness about continuing disclosure due to MCDC Focus on Best Practices, including Issuer training for persons responsible for disclosure; adopting Disclosure policy GFOA has best practice for continuing disclosure Member FINRA/SIPC/NYSE 2017 Hilltop Securities Inc. All Rights Reserved

38 Objective State Reporting Requirements provides participants with an understanding of: 1. Texas s Debt Disclosure Rules 2. Format Options 3. Due Dates First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

39 Texas Debt Disclosure Rules In 2015, the 84th Legislature passed HB 1378 in order to increase local government debt transparency across the state. Beginning January 2016, political subdivisions, including counties, cities, school districts, junior college districts, special districts, and other subdivisions of state government must annually compile certain debt obligation data from the preceding fiscal year and either: Report the information to the Comptroller of Public Accounts for posting on the Comptroller's Internet website; or Post the information on the political subdivision's own Internet website and make it available for inspection by any person First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

41 Total Authorized Debt Disclosure 1. the amount of all authorized debt obligations; 2. the principal of all outstanding debt obligations; 3. the combined principal and interest required to pay all outstanding debt obligations on time and in full; 4. the amount of all authorized debt obligations secured by property taxes; 5. the principal of all outstanding debt obligations secured by property taxes; 6. the combined principal and interest required to pay all outstanding debt obligations secured by property taxes on time and in full; 7. the amount of all authorized debt obligations secured by property taxes for municipalities, counties or school districts expressed as a per capita amount; 8. the principal of all outstanding debt obligations secured by property taxes for municipalities, counties or school districts expressed as a per capita amount; 9. the combined principal and interest required to pay all outstanding debt obligations on time and in full for all obligations secured by property taxes expressed as a per capita amount; 10. current credit rating on total debt obligations given by any nationally recognized credit rating organization; First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

42 Each Authorized Obligation 1. the principal of each outstanding debt; 2. the principal of each outstanding debt obligation secured by property taxes for municipalities, counties or school districts expressed as a per capita amount; 3. the combined principal and interest required to pay each outstanding debt obligation on time and in full; 4. the combined principal and interest required to pay each outstanding debt obligation on time and in full for municipalities, counties or school districts expressed as a per capita amount; 5. for each debt obligation, the issued and unissued amounts, the spent and unspent amounts, the maturity date and the stated purpose for which the debt obligation was authorized; 6. current credit rating on each debt obligation given by any nationally recognized credit rating organization; and 7. any other information considered relevant or necessary to explain the above required data elements, such as explanations of payment sources for different kinds of debt or projections of per capita amounts of ad-valorem taxation secured obligations as of the last day of the maximum term of the most recent debt obligation issued by the political subdivision First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

43 State vs IRS State Total Proceeds Received total assets received from the sale of a new issue of public securities. Proceeds Spent the portion of Total Proceeds Received that have been spent. IRS Proceeds - Includes Sale, Investment, and Transferred Proceeds First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

44 Dues Dates Required to report under either option: within 210 days of the end of the political subdivision's fiscal year in 2016; thereafter, within 180 days of the end of the most recently completed fiscal year First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

46 Comprehensive Post Issuance Compliance Make it Your Policy. Consider: Size, Resources, and Borrowing Frequency In House or Third Party? Ultimately it is Your Responsibility Adopt and Document a Post-Issuance Program. Identify and Monitor Responsible People. Identify the Frequency of Actions to be Taken. Establish a Deadline Reminder System. Require Training. Describe Procedures to Identify and Correct Violations First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

47 Know Your Enemy Tax-exempt bonds are viewed as a federal subsidy to state and local governments IRS cares about who gets the benefit of that subsidy (private business tests) and how much subsidy is received (arbitrage rules) SEC cares about protecting investors First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

Keep Adequate Records 2017 First Southwest Asset

49 Keep Adequate Records Use a consistent reasonable accounting method (e.g., gross proceeds spent first) Consider using separate accounts for each bond issue Be able to describe expenditures Date of expenditure Amount of expenditure Name of vendor Nature of expenditure Which asset/project Expenditures means cash out the door (no accrual) Asset/project placed in service date Use of assets/projects First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

Be Able to Describe Expenditures and Assets 2017 First Southwest

51 Be Able to Describe Expenditures and Assets A surprising number of issuers have a hard time identifying the specific assets financed IRS routinely requests a list of assets/projects and the corresponding placed in service date for IRS Audits IRS routinely requests a description of how the assets/projects are used First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

53 Don t Allow Proceeds to Linger Generally, spend bond proceeds first If projects are delayed, record reason why If all projects are complete and bond proceeds remain, spend the proceeds on other eligible projects or pay down bonds Review balances at least annually Tell bond counsel about unspent proceeds before refunding bonds First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

Review Private Business Use At Least Annually 2017 First Southwest

55 Review Private Business Use At Least Annually Consider designating specific persons to monitor use of bond-financed facilities Consider adopting procedures for monitoring use at least annually In some instances, use of a questionnaire that is sent to each department may be appropriate Consider training your facilities manager First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

Know Your Reimbursements 2017 First Southwest Asset

57 Know Your Reimbursements Understand which expenditures are eligible for reimbursement Keep a copy of the reimbursement resolution Make sure bond counsel looks at the resolution before it is adopted Make sure the resolution is signed Make sure the resolution has all its pages Keep a list of all expenditures that are reimbursed Make sure the amount of expenditures that is reimbursed does not exceed the amount in the reimbursement resolution First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

Anticipate Changes in Personnel and Technology 2017 First Southwest

59 Anticipate Changes in Personnel and Technology The IRS will Audit 2 months after your long-term Finance Director retires Request the records that are contained in the software that you no longer know how to use/can t access/that only runs on the ancient DOS computer that is stored in the closet Expect you to hire experts/former employees to retrieve those records Expect that you will be able to provide clear records from 10 or More years ago Not Understand First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

Train Your Personnel 2017 First Southwest Asset

61 Train Your Personnel Both the IRS and the SEC strongly suggest that annual training be provided to those responsible for ongoing compliance Where to get training: Annual Rebate Seminars Bond Counsel Training GTOT MAC Annual Conference National Association of Bond Lawyers Texas Municipal League Training does not have to be expensive, but it does need to be consistent First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

63 Call Your Professionals Early and Often Understand when you will be charged for asking questions Don t be shy Consider private use issues every time you review a contract involving a bond-financed facility Call bond counsel before the contract is signed if you have any questions Call before you shred IRS record-keeping requirements are not always the same as the state auditor s Ask about remedial actions immediately upon identifying a possible issue First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

65 Keep up with Continuing Disclosure Know your CD obligations Calendar them Work with your FA to make sure that disclosures are timely and complete SEC has been issuing cease-and-desist orders and has been imposing fines Failure to disclose can have severe consequences First Southwest Asset Management LLC All rights reserved REGISTERED INVESTMENT ADVISER

67 Arbitrage Rebate FirstSouthwest Asset Management delivers individualized post issuance compliance services to issuers and borrowers nationwide. FirstSouthwest Asset Management

68 Our mission is to serve as a trusted advisor for our clients by providing the expert guidance, solutions and services that achieve their definition of success The arbitrage rebate requirements have been in effect since 1986 and apply to any type of Tax-Exempt Obligations and Stimulus Act Taxable Obligations (BAB s, QSCB s, and QZAB s). The IRS rules related to these types of obligations are interrelated and very complex. The following is intended to provide a very high level overview of the rules. Issuers should seek assistance from a qualified post issuance compliance provider and work with their provider to develop and implement a post issuance compliance plan. What is Arbitrage Rebate? Arbitrage is the Profit from Buying in one market and Selling in another. For issuers of tax-exempt obligations, Borrowing in the tax-exempt market and Investing in the taxable market. Rebate is the profit from taking Advantage of the Market differentials. The Basics of Rebate Compliance The arbitrage rebate requirements permit issuers to retain a rate of return on their unspent proceeds equal to the yield they are paying their bondholders. Issuers must rebate to the Treasury any investment rate earned above their bond yield. Rebate and Yield Restriction liabilities must be paid to the Treasury every fifth Bond Year. A Bond Year is each one-year period ending on the date selected by the Issuer. Installment payments are due 60 days after either the fifth Bond Year or the Final Maturity of the issue. Each issue's liability is determined separately. The IRS does not allow issuers to net negative and positive liabilities. 90% of the liability must be paid at each fifth bond year and 100% of the liability at the Final Maturity date. Payments are made by filing Form 8038-T. The IRS only requires Issuers to file a Form 8038-T along with a check for the required payment. No supporting calculations are required. If no payment is due, there is no filing requirement. If payments are not made timely, the IRS can assess a penalty of 50% of liability for governmental and 501(c)(3) issuers. 100% for other Private Activity Issuers. Interest is due on the underpayment and the penalty. Issuers not under IRS audit can request a waiver of the penalty. Overpayments of prior liabilities can be requested on Form 8038-R. Refunds must be requested no later than 2 years after the final maturity date of the issue. Allocation of Bond Proceeds to Expenditures Contrary to what you might think, you do not spend bond proceeds. You allocate expenditures to them. An issuer can allocate proceeds to expenditures and investments based upon any reasonable, consistently applied accounting method. There must be a current outlay of cash to create an expenditure. The IRS rules limit the time periods that expenditures can be re-allocated to proceeds. An issuer must account for the allocations of expenditures to proceeds not later than 18 months after the expenditure is paid, or if later, 18 months after the financed property is placed in service. Subject to a maximum time limit of 60 days after the fifth anniversary of the issue date or 60 days after the final maturity of the issue. Expenditures prior to the issuance of the bonds can be reimbursed with bond proceeds as long as the issuer makes a Declaration of Official Intent to reimburse the expenditures before the expenditure is made or within 60 days after the expenditure has been made. Official Intent does not apply to Preliminary Expenditures including Architectural, Engineering, Survey, and Soil- Testing costs. Preliminary expenditures do not include Land Acquisition, Site Preparation, or similar Commencement Costs. Preliminary Expenditures cannot exceed 20% of the Issue Price of the Issue(s).

69 Exceptions to Rebate While there are exceptions to the arbitrage rebate requirements, the IRS has made these exceptions technically difficult to meet. Issuers should seek assistance in verifying compliance if they believe an issue may qualify for an exception. Small Issuer Exception If a governmental entity with general taxing powers, on the date of issuance, reasonably expects not to issue more than an aggregate limit during the Calendar Year, they are exempt from the Rebate rules. For municipal issuers, the aggregate limit of tax-exempt debt issued is $5-million. For School Districts (K 12) the aggregate limit is $15-million as long as no more than $5-million is for non-construction. Taxable issues are not included in the aggregate limit. The Small Issuer exception is an exception from the Rebate rules. If proceeds of the tax-exempt issue are not spent within 3 years of the date of issuance, they will be subject to the Yield Restriction rules (see Yield Restriction below). Investing in Tax-Exempt Investments If the proceeds of a tax-exempt issue are invested in non-alternative Minimum Tax tax-exempt obligations, the rebate rules do not apply to those investments. The issuer is Borrowing Tax-Exempt and Investing Tax-Exempt. Spending Exceptions There are three spending exceptions that issuers can meet. The 6-month, 18-month, and the 24-month exceptions. There are interim semi-annual spending benchmarks that must be met. The cumulative expenditures for the benchmarks are calculated based upon the bond proceeds and the investment earnings on those proceeds. If any benchmark is not met, the exception is no longer available to the issuer. For purposes of the 18 and 24-month exceptions, an issue can have unspent proceeds at the final benchmark equal to the lesser of 3% of the issue price or $250, and still meet the exception. If a Reasonable Retainage amount has been specified in the contract, the unspent amounts at the final benchmark is increased by an additional amount equal to a maximum 5% retainage amount. The retainage must be spent within one year of the final benchmark. 6-Month Exception All proceeds and investment earnings, except amounts in a Reserve or Debt Service Fund, are spent on any type of capital assets, within 6 months of the date of issuance. All types of issuers qualify. 18-Month Exception All proceeds and investment earnings, except amounts in a Reserve or Debt Service Fund, are spent on any type of capital assets with cumulative expenditures in the first six months of 15%, first twelve months of 60%, and the first 18 months of 100%. All types of issuers qualify. 24-Month Exception All proceeds and investment earnings, except amounts in a Reserve, Cost of Issuance, or Debt Service Fund, are spent with cumulative expenditures in the first six months of 10%, first twelve months of 45%, first 18 months of 75%, and 100% in first twenty four months. 75% of the expenditures have to be for Construction Expenditures. The exception only applies to Governmental and Section 501(c)(3) issuers. Debt Service Funds Debt service funds are exempt from rebate if they meet both an annual Income and Depletion test. Income Each issue's debt service fund is limited to $100, of investment income per year. Long-term, Fixed Rate Governmental issues are not subject to the earnings limitation. Issues with an average annual debt service not in excess of $2,500, are also not subject to the income limitation. Depletion At some time during the year, an issue's debt service fund s invested balance must drop below a Reasonable Carryover Amount. The Reasonable Carryover Amount is typically 1/12th of the preceding year s debt service. If both the Income and Depletions tests are met, the Debt Service fund is excluded from the rebate calculation.

70 Commingled Funds A commingled fund contains Proceeds of a tax-exempt issue and more than $25, of amounts that are not proceeds of the issue. In addition, all of the amounts in the fund are invested and accounted for collectively. Allocations must be made to all of the participants in a commingled fund no less frequently than as of the close of each Fiscal Period. A Fiscal Period is defined as a period that does not exceed three months (e.g. daily, weekly, monthly, or quarterly). Expenditures in a commingled fund can be allocated among the participants based upon any of the following safe harbor methods: Specific Tracing Pro-Rata First-In, First-Out Gross Proceeds Spent First Income in a commingled fund can be allocated among the participants under one of the following safe harbor methods: The Average Daily Balances The Average of the Beginning and Ending Balances Mark to Market accounting is required for commingled funds if the average investment maturity of the fund is more than eighteen-months. Mark to Market accounting treats all of the investments as sold for their Fair Market Value on the last day of each Fiscal Period. Refundings and Transferred Proceeds A Refunding Issue uses it proceeds to pay Principal, Interest, or a Redemption Price of a Refunded issue(s). A refunding is performed to Reduce Interest Costs or eliminate Restrictive Covenants. There are two types of refundings: Current Refunding Within 90 days of issuance. Advance After 90 days of issuance Per the IRS rules, the yield on an Advance Refunding Escrow cannot be more than.001% above the Refunding Issue bond yield. Unspent proceeds of the Refunded issue transfer to the Refunding issue as the Refunding issue makes Principal payments on the Refunded issue. Advance Refundings are only allowed for Governmental and Section 501(c)(3) issuers. Bonds issued after 1985 may only be Advance Refunded once. There is no limit on Current refundings. If the Advance Refunding produces an interest savings, the issuer must redeem the Refunded Bonds on the first optional call date. Yield Restriction Yield Restriction is a separate set of rules from the Rebate rules. Rebate is the excess earnings over the bond yield (Profit) on a cumulative basis from the inception of the issue. The Yield Restriction rules govern when an issuer can legally earn arbitrage without jeopardizing the taxexempt status of the obligations. Yield Restriction starts after a Temporary Period or is based upon a Size Limitation, and is calculated at a Materially Higher yield. Unlike rebate liability payments, 100% of the Yield Restriction liability is due at any required payment date. Temporary Period During the Temporary Period an issuer can earn a yield on their investments in excess of the bond yield. However, the investments are still subject to the rebate rules during the Temporary Period.

71 Project Funds typically have a 3-Year Temporary Period. In order to receive a 3-year Temporary Period, an issue must reasonably expect as of the date of issuance: That 85% of the Project Proceeds will be spent within 3 years after the date of issuance. The Issuer will Contract for at least 5% of the Project Proceeds within six months after the date of issuance. That the Issuer will proceed with Due Diligence to complete the Project. Replacement Proceeds have a 30 day Temporary Period. Replacement Proceeds are monies that bond holders are legally entitled to in the case of financial difficulties of the issuer. Replacement Proceeds include non bona fide debt service funds, non-bond proceeds assets pledged for the benefit of the bond holders, or reserve funds funded with non-bond proceeds issuer contributions. Size Limitations Reserve Funds are subject to a size limitation. This size limitation is referred to as the Reasonably Required Reserve amount. If the reserve fund balance is less than the size limitation, it will not be subject to yield restriction. Any excess above the size limitation will be yield restricted. The IRS size limitation is based upon the lesser of a three prong test. The Reasonably Required Reserve amount is the lesser of: 10% of the par amount Maximum Annual Debt Service 125% of Average Annual debt service Materially Higher Amount The Yield Restriction calculation takes all of the Yield Restricted assets and compares their investment yield to the bond yield plus an adder. The adder is either.125% or.001%. The adder depends upon the type of yield restricted assets. For bond proceeds funded Project, Cost of Issuance, Capitalized Interest, and Reserve Funds, the Materially Higher adder is.125%. For Advance refunding escrows and Replacement Proceeds, the Materially Higher amount is.001%. If you have both types of assets in the calculation, the lowest adder is used for all of the Yield Restricted assets. The IRS Yield Restriction rules permits an issuer to exclude amounts invested in higher yielding investments equal to the lesser of $100, or 5% of the Sales Proceeds of the issue. Post Issuance Compliance The IRS believes that issuers with written post issuance policies and procedures are more likely to be in Compliance with their Post Issuance responsibilities and Document Retention requirements. Post Issuance Policies and Procedures should include: Assignment of Responsibilities for Who is responsible for What functions. Document Retention Policies and Procedures Arbitrage and Yield Restriction Calculation Requirements Procedures for Monitoring Private Business Use A Training Plan that avoids the Turn Over Factor Document Retention Closing Documents, Investment Support, Expenditure Support, and any other documents material to the issue must be maintained for the life of the issue plus three years. If the issue is refunded, the documents must be maintained for the life of the refunding issue plus three years. Monitoring Private Business Use The IRS limits the amount of Private Use on tax-exempt financed property. Governmental issues are allowed 10% private use. Private Active issuers, including Section 501(c)(3) issuers, are only allowed 5% private use. Issuers are required to track and maintain records documenting any private business use and the fact that it does not exceed the allowable limits.

72 An issue can lose its tax-exempt status if the Private Activity tests are not met. These tests include: Ownership Private Use and Private Security/Payment Private Loan Financing These rules encompass the following items that may generate private use: Transfer of Ownership Management or Service Contracts Advertising or Naming Rights Lease or Rental by an External Party FirstSouthwest Asset Management Can Help FirstSouthwest Asset Management s (FSAM) Arbitrage Rebate Compliance Services Group was established in Since the inception of the group, FSAM has performed more than 40,500 calculations for more than 1,800 issuers on more than 7,800 bond issues. Our practice today consists of a diverse client base of approximately 380 issuers, across 22 states, with 2,875 bond issues and an aggregate par value of approximately $166 billion. FSAM s senior rebate staff has on average more than 21 years of rebate compliance experience. 58% of our calculations contain commingled construction, debt service, or reserve funds. In addition to the standard rebate compliance functions, FSAM provides Issuers with service after the calculation, this includes: Annual Post Issuance Compliance Training. Unlimited Consultation. FSAM prides itself in its commitment to post issuance compliance education. Since 1993, FSAM has sponsored annual Post Issuance Compliance Seminars devoted solely to the topic of IRS and SEC compliance. To date, the seminars have been held in fourteen states and have had more than 4,500 attendees. FSAM takes great pride in that approximately 70% of its rebate compliance clients have been with us for 10 years or more. This retention history demonstrates not only FSAM s technical abilities, but our ability to continue to maintain a high level of client satisfaction over time. When the IRS wants advice on tax-exempt obligations, they ask FSAM. From 2015 to 2018, Bill Johnson will be an advisor to the IRS as part of the IRS Advisory Committee on Tax-Exempt/Governmental Entities or ACT on the Tax-Exempt Bond subcommittee. In order not to limit FSAM s pre-issuance tax advisory services to its clients, or run afoul of the FINRA rules on Municipal Advisory Representatives, each member of the senior management team of FSAM s Arbitrage Rebate Compliance Services Group will become certified as Municipal Advisory Representatives by obtaining his or her Series 50 securities license. FirstSouthwest also provides the following Post Issuance Compliance Services: SEC Continuing Disclosure Investment Advisory Services Structured Products (Swaps, Investment Contracts) GASB and FASB reporting for Financial Statement valuation Process Improvement Suggestions. Post Issuance Compliance and Document Retention Monitoring and Feedback.

73 Post Issuance Compliance Quiz What is your Post Issuance Compliance Score? Answer each of the questions Yes or No. For each Yes answer you will receive 5 points. If the question does not apply, consider it a Yes. 1. Do you have formal written Post Issuance Policies and Procedures ( PIPP )? 2. Do you have Detailed Procedures in place for each of the Functional Areas responsible for Post Issuance Compliance? 3. Have you Followed Up to ensure that the people Assigned with Responsibilities are Performing those Functions? 4. Do you Review your PIPP Annually for Compliance and make Necessary Revisions? 5. Do you Segregate bond related legal documents, requisitions/invoices, and investment support? 6. Are you maintaining records related to your bond issues for the life of the issue plus three years? Or, in the issue is refunded, the life of the refunding issue plus three years? 7. Have you recently audited your document retention procedures to determine they are being followed? 8. At a minimum, are you having Rebate calculations performed at IRS Computation Dates? 9. Do you Review and Adjust Expenditure Allocations within 18 Months of the project being Placed in Service? 10. If you are trying to take advantage of the Small Issuer, Spending, or Debt Service Fund Exceptions, do you have Documentation that Supports meeting the Exception? 15. Do you have Policies and Procedures in place to monitor Private Business Use? 16. Have you entered into any Leases, Management Contracts, or Naming Rights with private parties? 17. Do you have documentation to support the Amount of Private Use? 18. Have you recently audited your Private Business Use procedures to determine if they are being followed? 19. Do you provide annual Post Issuance Compliance training for anyone responsible for a Post Issuance Compliance Function? 20. For any new Post Issuance Compliance Responsible Person, have you confirmed that they understand their responsibilities and they have been properly Trained to perform them? Compare your scores to the following table: Score Ranking Action Needs Improvement Work in Process Getting There Looking Good Seek Assistance Formulate a Plan Focus on Non-Compliance Continue to Refine the Process 11. At a minimum, are you spending at least 85% of your project proceeds in the First Five Years? 12. If the issue is a Refunding issue, did you have a Final Calculation performed on the Refunded Issue? 13. Do you have procedures in place to Monitor that necessary Zero SLGS Rolls are being made by your Escrow Agent? 14. Are you having Yield Restriction calculations performed?

74 Contact Us Call us, we are happy to work with you to develop a plan to get your post issuance compliance house in order. It is less expensive than you think. Bill Johnson CPA Managing Director Bill.Johnson@HilltopSecurities.com Colby Jackson Director Colby.Jackson@HilltopSecurities.com Headquarters 1201 Elm Street Suite 3500 Dallas, Texas HilltopSecurities.com 2016 First Southwest Asset Management, LLC All rights reserved ARB

75 Page 1 of 4 10/13/2017 BEST PRACTICE Post-Issuance Policies and Procedures BACKGROUND: Bonds issued by state and local governments are generally subject to ongoing monitoring and reporting with respect to federal disclosure requirements pursuant to their continuing disclosure agreements (CDAs), as well as compliance with federal tax requirements specifically related to taxexempt bonds. In addition to federal securities and tax requirements, issuers may face a variety of other compliance obligations, such as bond indenture requirements, state and local law and policy requirements. Comprehensive post-issuance compliance consists of policies and procedures designed to assist an issuer of bonds in complying with all of the relevant requirements that apply to each series of bonds from the date they are issued until the bonds are no longer outstanding. RECOMMENDATION: GFOA recommends issuers of bonds or other debt obligations develop and adopt formal, written post-issuance compliance policies and procedures to assist in meeting compliance requirements and in preventing, identifying and correcting possible violations that might occur during the term that bonds are outstanding. Such procedures will help an issuer mitigate the risk of violation and preempt enforcement action from federal parties. Issuers should revisit these policies and procedures at least every three years. Policies and procedures at least consist of the following elements: a list of all of the compliance actions at the time that bonds are sold for each series of bonds; documentation of the source and frequency of such compliance requirements; and identification and assignment of compliance responsibilities to officers by title. Designing a Comprehensive Post-Issuance Compliance Program: General Considerations A post-issuance compliance program should reflect an issuer s size, resources and borrowing frequency. An issuer may decide to handle compliance in-house or to engage a third-party provider for some or all compliance activities including continuing disclosure, arbitrage rebate and monitoring of private business use and payments. In either case, the post-issuance compliance program should include the elements discussed below. Despite electing to outsource compliance responsibilities, issuers and the assigned issuer staff have the ultimate authority for ensuring that the compliance procedures are met in a timely and accurate manner. Responsible Staff Should Be Identified Whether an issuer will conduct compliance in-house or will engage outside providers, a chief compliance officer with overall responsibility for implementation of the program should be formally identified in policies and procedures. In a

76 Page 2 of 4 10/13/2017 large organization, there may be staff in addition to the chief compliance officer that can be assigned specific responsibilities or the chief compliance officer can have authority to delegate where appropriate. Staff turnover is an especially important time to review the assignment of staff responsibilities. If third-party providers will be engaged to perform some or all of the activities, the program should specify how the providers will be engaged and monitored, as ultimately the liability for non-compliance is the issuer s. The chief compliance officer or officers should be designated by job title rather than name to assure continuity. Identify the Source of the Requirements Being Monitored Issuers should identify the documents that set forth all of the requirements being monitored so that the compliance officer(s) can find details if necessary. Examples of such documents include the CDA, tax certificate, and bond indenture. Issuers should compile this list at the time of closing for each bond issue. Identify the Frequency of the Actions to Be Undertaken To ensure compliance, issuers should review a compliance checklist at least annually. However, it may be advisable to provide for more frequent reviews in connection to specific events such as ongoing reviews, calculating arbitrage rebate liability, renewal of management contracts, or calculation of private business use. Monitor for Changes in Law and Regulations An issuer needs to consistently and carefully monitor for changes to regulations, rules, new interpretive guidance or altered market practices and expectations. Establish a Deadline Reminder System Where deadlines exist, a reminder system should be established and a back-up reminder is helpful in avoiding an oversight. Examples of deadlines include continuing disclosure filing dates and deadlines for meeting spend down exceptions for rebate compliance, paying rebate if applicable, and making final allocations of bond proceeds. Reminders should be set sufficiently in advance of deadlines to accommodate drafting and adequate review of documents prior to the required submission date. Identify Records to be Maintained and the Record Retention Period Records necessary to ensure and document compliance should be maintained for the required time periods. The issuer should list the records being maintained and where or by whom. There may be various sources of records requirements, such as documentation of continuing disclosure filings, but most requirements for record retention will relate to IRS arbitrage rebate and tax-exemption compliance. In some cases, IRS record retention guidelines supersede and are longer than state and local requirements. Specific to arbitrage rebate and tax-exemption compliance, records must be maintained until full payment of the bonds and any refunding bonds plus three years. The following records should be maintained: The bond transcript for each bond issue (which includes among other documents, the trust indenture, loan, lease, or other financing agreement, the relevant IRS Form 8038 (including Forms 8038-G or 8038, as applicable) with proof of filing, the bond counsel opinion and the tax agreement including all attachments, exhibits and any verification report). Records of debt service payments for each issue of bonds. Documentation evidencing the expenditure of bond proceeds, such as construction or contractor invoices and receipts for equipment and furnishings, bond trustee requisitions and project completion certificates, as well as records of any special allocations made for tax purposes including post-issuance changes in allocations. Documentation evidencing the lease or use of bond-financed property by public and private sources, including, but not limited to, service, vendor, and management contracts, research agreements, licenses to use bond-financed property, or naming rights agreements. Documentation pertaining to investment of bond proceeds, including the yield calculations for each class of investments, actual investment income received from the investment of proceeds, investment agreements, payments made pursuant to

Region One Post Issuance Compliance Seminar Edinburg, Texas July 24, 2017

Region One Post Issuance Compliance Seminar Edinburg, Texas July 24, 2017 There are No Prerequisites for this course Welcome CPE Credit We are registered with the Texas State Board of Accountancy as a