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1/18/2017
1
Risk Analysis Report
Year End
Tax Exempt Bonds –
Post Issuance Compliance
January 26, 2017
Amber Sherrill, CPA
Director
BKD, LLP
AGENDA
�What is Post-Issuance Compliance and Why Have a
Policy?
� Key Components, Initial Steps, and Drafting a Policy
Document
� Policy Implementation Considerations and Concluding
Thoughts
2 // experience direction
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POST ISSUANCE COMPLIANCE
What is Post-Issuance Compliance?
Compliance with IRS Regulations related to tax-exempt
financings with continued focus on:
• Spending and investing bond proceeds
• Use of tax-exempt financed property
• Annual disclosure requirements
• Record retention
3 // experience direction
POST ISSUANCE COMPLIANCE
Basic Unit of Compliance – the Bond “Issue”
• Rules apply separately to each bond “issue”
• Identify each “issue”; What is a bond issue for tax purposes
may not be the same for state law or securities purposes
• Special considerations may apply to refundings and special
“separate issue” elections
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POST ISSUANCE COMPLIANCE
Why have a Policy?
• Be prepared for the IRS – want nonprofits to adopt procedures as
evidenced by IRS initiatives and questions on Schedule K of Form
990
• Reduce risk of IRS bond audit; If audited, IRS may be more
sympathetic
• Avoid missing deadlines or making other mistakes
• Take best advantage of favorable rules
• In long-term, more cost-effective for future financings, change of
use, and other actions
• Forecasting arbitrage and rebate payments
5 // experience direction
POST ISSUANCE COMPLIANCE
Consequences of Non-Compliance
• Retroactive loss of tax-exempt status of issue
• Significant liability to the IRS or bondholders
• Reputational damage
• Inability to access future tax-exempt markets
• Credit rating downgrades
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POST ISSUANCE COMPLIANCE
Other Reasons to Adopt a Policy
• Promotes an internal awareness throughout your entire
campus
• Assigns responsibilities to positions and units
• Helps mitigate risks by identifying issues and potential
problems early
• Offers continuity, even with staff turnover
7 // experience direction
KEY COMPONENTS OF POLICY
Key Components
• Proceeds Tracking
• Bond proceeds can only be used for eligible project costs,
capitalized interest, and issuance costs
• Maintain payment records
• Final accounting should be compiled
• Explain reallocation rules
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KEY COMPONENTS OF POLICY
Key Components
• Arbitrage
• Arbitrage is investment gains made by investing bond proceeds
• Cannot make over arbitrage yield limit, or subject to rebate
payments
• Generally, proceeds must be spent within 3 years of bond
issuance
• Calculation (annually or every 5 years) and payment of rebates
(every 5 years, unless yield restriction payment)
• Two-year spending rebate exception
9 // experience direction
KEY COMPONENTS OF POLICY
Key Components
• Records maintenance
• Requires records to be maintained for the entire term of the
bond issue, plus 3 -5 years (depends on bond docs)
• Entire term, includes life of bonds refunded
• Not limited to date-of-issuance “snapshot”
• Must generally include
• Bond Transcript, How Proceeds Are Spent, Disclosures & Filings,
Resolutions, Authorizations, PBU Survey Results, Service Contracts,
Research Contracts, Leases, Records of Investments, Interest Rate
Swaps or derivatives, Arbitrage calculations and IRS Rebates,
Requisitions/invoicing, Final Accounting, etc.
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KEY COMPONENTS OF POLICY
Key Components
• Private Business Use
• Private Business Use is use (directly or indirectly) by any person
other than an governmental unit, includes unrelated trade or
business activity
• Generally limits the amount of private use or the amount of
private payment or security
• No more than 10% allowed
• Examples: Ownership, Leases and Similar Arrangements,
Management Contracts, Research Contracts, Other Beneficial
Use Arrangements
11 // experience direction
KEY COMPONENTS OF POLICY
Key Components
• Disclosures and Filings
• Continuing Disclosure Agreements (CDAs)
• Required filings
• IRS Forms 8038
• Arbitrage certificates
• State forms
• Requirements vary depending on bond documents
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KEY COMPONENTS OF POLICY
Key Components
• Continuity and Ongoing Review
• Requires on-going monitoring and will be reviewed periodically
and modified as necessary
• Establish a deadline reminder system
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KEY COMPONENTS OF POLICY
What is the IRS looking for?
• Written policies and procedures
• Address key components
• An individual identified to coordinate the plan
• Roles and responsibilities assigned
• Education and training
• Procedures to timely identify noncompliance
• Steps to timely correct noncompliance
• Due diligence review at regular intervals
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KEY COMPONENTS OF POLICY
What is the IRS looking for?
• Three considerations – Internal Revenue Code requirements,
bond document requirements, IRS expectations
• IRS expectations are rigorous, and appear to exceed both Code
and bond documentation requirements
15 // experience direction
INITIAL STEPS TO DRAFT POLICY
Initial Steps
• Does your organization currently have policies and procedures
in place?
• If so, are they written? Are they sufficient?
• If not, identify individual to coordinate efforts and create a team;
review resources; talk to peers and experts
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INITIAL STEPS TO DRAFT POLICY
Drafting Recommendations
• Consider your organization and the type of debt it will hold
• Define objectives and deliverables
• Identify roles and responsibilities
• Address key components and include items important to the
IRS
• Utilize peer policies, IRS checklists, and bond counsel meetings
• Give time for research and learning
• Make policy simple enough for non-technical readers but
detailed enough to handle basic questions
17 // experience direction
INITIAL STEPS TO DRAFT POLICY
Assigning Responsibilities
• Compliance requires a blend of tasks – legal review,
information gathering, computation, and recordkeeping
• Define legal and treasury responsibilities
• Identify specific tasks and assign them to specific employees or
functions
• A “compliance committee” may be helpful for some
organizations
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INITIAL STEPS TO DRAFT POLICY
Drafting Recommendations
• Make draft policy available for review to numerous sources
• Bond Counsel
• General Counsel
• Financial/Tax Advisor
• Expert consultants
• Governing Boards
• Relevant Committees, personnel, and building managers
• Internal Audit
• Approval by Board and/or Senior Administration
19 // experience direction
DRAFTING A POLICY
Establish a Project Completion Review Procedure
• May determine how bond proceeds are spent up to 18 months after
issuance
• Time-limited chance to correct mistakes
• Opportunity for rebate benefits (i.e. meet spending exceptions)
• Opportunity to manage private use issues
• Distribute an annual survey for changes in use
• Establish a record for future private use compliance and refundings
• Coordinate with any completion certificates required in bond
documents
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DRAFTING A POLICY
Establish Rebate and Yield Restriction Compliance
Procedures
• Assign responsibility to obtain rebate computations, make rebate
payments, and comply with yield restriction requirements
• Recommend retaining a rebate service provider on date of Issuance
• Recommend preparing a summary schedule of funds and accounts
subject to rebate and yield restriction
• Establish “FMV” procedures for purchase and sale of investments
• Consider a policy regarding when to invest in SLGs
21 // experience direction
DRAFTING A POLICY
Establish Procedures to Monitor and Measure Private
Use
• Assign responsibility to track private use (in addition to reviewing
contracts to determine whether they result in private use)
• Given right framework, this is computational and information
gathering task
• Identify the bond “issue” and the applicable private use limit
• Establish a consistent approach for creating a monitoring
spreadsheet, or “private use log”, for each bond issue
• This will not only help with record keeping, but Form 990, Sch K
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DRAFTING A POLICY
Establish Procedures to Monitor and Measure Private
Use
• Applicable private use limit
• Reasonably expected denominator:
• Sales proceeds
• Less: Proceeds applied to reserve fund
• Less: Proceeds applied to qualified guarantees
• Plus: project period investment earnings
• Reasonably expected private use arrangements
• Update in connection with project completion review and as
additional private use arises
23 // experience direction
DRAFTING A POLICY
Establish Procedures to Monitor and Measure Private
Use
• Use of simplifying conventions can reduce the administrative burden
• Private use rules can be complex; i.e. need to track different
economic life “measurement periods” for different assets
• Consider a general policy to meet private use limits on an annual
basis, even though the averaging “measurement period” rule is
more liberal
• Consider a policy to take compliance burdens into account in
selecting assets to finance
• Many tax agreements use simplifying conventions but don’t say so
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DRAFTING A POLICY
Establish Procedures to Monitor and Measure Private
Use
• Review of Physician and Other Service Contracts
• Review of Other Contracts; i.e. research and clinical trials
• Review of Contracts with other 501(c)(3) orgs
• Review of Unrelated Trade or Business Activities
25 // experience direction
DRAFTING A POLICY
Establish Procedures for Refunding Bonds
• Require cross-reference in books and records of
refunded bonds
• Require bond counsel to clearly identify the property
financed; i.e. “multipurpose” elections
• Determine whether “combined issue” rule applies
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DRAFTING A POLICY
Additional Areas for Compliance Procedures
• Letters of credit, bond insurance and other
guarantees
• Interest rate swaps and other derivative contracts
• Amendments and other changes to bonds or bond
documents
• Retirement of bond issues
27 // experience direction
IMPLEMENTING POLICY
Implementation Recommendations
• Plan for outstanding bond issues may be less complete than
for new bonds
• Establish formal books and records files for each outstanding
bond issue
• Make sure responsibilities are assigned to specific
departments and individuals
• Develop procedures to support the policy
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IMPLEMENTING POLICY
Implementation Recommendations
• Establish a Deadline Reminder System for each outstanding
bond issue
• List of responsibilities and dates, rebate dates, project
completion review, other special deadlines
• Develop annual training
• Establish an oversight committee for on-going monitoring
• Distribute an annual survey for changes in use
29 // experience direction
IMPLEMENTING POLICY
Ongoing Improvements
• Review policy each year
• Stay current on new IRS rules and regulations
• Subscribe to publications
• Solicit constant feedback (internal & external)
• Incorporate any changes based on new debt issues
• Document review process
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CONCLUDING THOUGHTS
Keys to Successful Post-Issuance Compliance Policies
and Procedures
• Manage policy development expectations
• Find key administrator to champion policy
• Consider related policies and procedures
• Start post-compliance efforts at issuance
• Create a repository of information
• Be conservative in interpreting regulations
31 // experience direction
DISCLOSURES
• These discussions & conclusions are based on facts as stated & existing
authorities as of date of this communication. Our advice could change
as result of changes in applicable laws & regulations. We are under no
obligation to update this communication if such changes occur. Any
advice should be based on your unique facts & circumstances as you
communicated them to us & should not be used or relied on by anyone
else. This advice is not intended or written to be used for the purpose
of avoiding penalties that may be imposed.
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Questions?
Thank you for attending!
If you have further questions…
Amber Sherrill, CPA
Director
501.372.1040
asherrill@bkd.com
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