Post Issuance Bond Compliance Policy - NACUBO

IMPLEMENTING YOUR POST-ISSUANCE TAX EXEMPT BOND

COMPLIANCE POLICY

Thursday, October 18 at 2:45 pm

Speakers:

• Kelly Farmer, University of Minnesota

• Cynthia Nethercut, Yale University

Agenda• Introductions• Why have a Post-Issuance Tax-Exempt Bond

Compliance (TEBC) Policy?• What should the policy cover? • How do you implement the policy?

– UMN: Organization, Record Retention, Arbitrage– Yale: Organization, Private Business Use

Introduction University of Minnesota• 5 Campuses in Minnesota• $3.7 Billion Budget• 69,221 Student Body• Research, Professional Schools, Big 10 Athletics• Tax-Exempt Bonds as of FY 2011:

– $1.145 Billion outstanding debt– Commercial paper = $250 million– Build America Bonds– Taxable debt has been issued for naming rights, nonqualified research

• 1,000+ Buildings

Introduction Yale University• New Haven, Connecticut• Students:

– 5,300 Undergraduate students– 6,400 Graduate and Professional School students– 11,700 Total

• 439 buildings dating from the 1700s to the present• Tax-exempt bonds (TEBs) are extremely important for Yale’s $5+

billion capital program:– Yale’s outstanding TEB proceeds total $2.7 billion.– TEBs are ~ 50% of Yale’s capital program funding.– These bonds were issued every two years between 1997 and 2010. – ~55% of Yale’s ~3,200 capital projects are at least partially funded with TEBs.

Issuer v. Borrower DistinctionsTopic Issuer

Public InstitutionBorrowerPrivate Institution

Threshold for PrivateBusiness Use (PBU)

10% (unless unrelated or disproportionateuse, then 5%) or $15 million, whichever is less.

5% of bond issuance or $15 million, whichever is less, including issuance costs of up to 2%.

Unrelated Trade or Business(UTB)

N/A UTB, as defined by IRC Section 513(a), counts as PBU

Issuer v. Borrower DistinctionsTopic IssuerPublic Institution

BorrowerPrivate Institution

50, 100, 200 Day Exclusions

Can take exclusion without regard to UTB

Lease/Use may fit into exclusion but still be UTB

Dividends, Interest, Royalties, Rents, etc.

512 (b) exclusions not considered to be PBU

512(b) exclusions from UBTI are considered to be UTB/PBU

Form 990 Schedule K

N/A Must file annually

Why Have a TEBC Policy?• Benefits of a written TEBC Policy:

– Educates departments, units and schools about TEBC requirements

– Clarifies roles and responsibilities across many units—now and in the future

– Allows for planning in managing tax risks– Permits more favorable treatment by IRS in audit

and Voluntary Closing Agreement Program (VCAP)

Why Have a TEBC Policy?

• Increased IRS Scrutiny– The IRS continues to inquire about written policy and practices related to tax-exempt bonds.– Form 990, Schedule K – Form 8038-G– Recent Compliance Checks– Recent Examinations

Why Have a TEBC Policy?

Consequences of Non-Compliance:– SEC investigation for failure to promptly

disclose tax risks– Lawsuits from bondholders– Credit ratings risks– Difficulty selling bonds in the future– Reputational risks to your institution

Subjects TEBC Policy Should Cover• Organizational Responsibility• Arbitrage• Record Retention• Private Business Use• Remediation• Other compliance requirements:

– Refunding, replacement proceeds, expenditures, allocation of bond proceeds, etc.

IRS Guidance on Procedures

• Due Diligence Review-Regular Intervals

• Identify Individual Responsible• Training of the Responsible Person• Record Retention –Substantiate

Compliance• Timely Identify Compliance• Timely Correct Non-Compliance

Advice for Writing TEBC Policy• Create a drafting committee composed of legal, tax and

finance staff.– Institutionalize this committee to provide ongoing support.

• Identify one person to coordinate all TEBC efforts.• Work with and train people in other departments.• Don’t reinvent the wheel:

– Consult outside counsel for guidance, templates, etc.– Investigate off-the-shelf databases.– Refer to similar institutions’ policies.

Implementation of TEBC Policy: UMN’s Team Structure

Implementation of Debt Practices

Establishment of University Debt

Policy

Regent & Business Community Oversight

DMACDebt Management

Advisory Committee

DOGDebt Oversight

Group

DPTDebt Process

Team

UMN’s Examples of Policy Decisions

• Risk Management Practices - The advisory/policy & implementation committees, may make certain policy calls.• Decide the type of debt to issue to meet business

needs of the University (e.g. commercial paper, special purpose debt, taxable).

• Adopt the spending exception to arbitrage rebate.– Consider choosing the “penalty in lieu of arbitrage rebate”

election• Allow the University to “swap” projects after bonds are

issued.• Allow the University to pay for capitalized interest

costs with bond proceeds.

UMN’s Record Retention• Records kept in central location• Procedures established to collect records

– At time of issuance– At time of bond draws– Rebate Calculation Periods– Private Business Use Calculations– Other

UMN’s Record Retention• Basic records kept relating to bond transaction:

– Initial Private Use/Interest Projection/Estimated Useful Life, – Final Pricing,– Costs of Issuance,– Project Descriptions,– Declarations of Intent and/or Allocation Certificates,– Documentation Evidencing Bond Expenditures,– Draw Requests with Supporting Documentation,– Documentation Regarding Investment of Proceeds,– Documentation of Private Use after Bond Issuance,– Allocation Certificates for Private Use purposes,– Final Disposition of Total Proceeds of Bond Issuance.

UMN’s Approach to Arbitrage• Spend Down Exception regarding Arbitrage Rebate

– The Director of Debt Management prepares and maintains the spending exception to arbitrage schedule for each bond issue to track the spending against the spending exception deadlines.

– The schedule is shared and discussed with the DPT on a regular basis to insure that all appropriate offices are aware of any potential consequences and/or limitations related to the unspent bond proceeds.

– The University Tax Management Office maintains standard measuring matrixes and documents benefits of compliance.

Implementation of TEBC Policy: Yale’s Team Structure

Reports potential PBU to TEBC

Director

Draft policy, advise, review &

implement

Responsible Officer, approves

TEBC PolicyVP Finance

TEBC Director & Committee

Departments Departments

Goals regarding PBU and TEB

– When considering new activities, keep the PBU activities out of TEB-financed space AND

– When financing new projects, keep TEB-financed capital projects out of PBU-occupied space.

Choose strategy for Tracking PBU• After-the-fact building survey (ATF) - Building

manager reports on uses of building in an annual end-of-year survey.

• Proactive approval process (PAP) - Potential PBU activities are identified by a person knowledgeable about the specific type of PBU and are approved by Tax Exempt Bond Compliance (TEBC) Director.

Compare Approaches

• Ease of administration/Resource requirements– ATF: Relatively easy to administer annual survey– PAP: Increased resources required to analyze and approve all potential

PBU activities year-round.• Training Requirements

– ATF: Requires Bldg Managers to be trained about all types of PBU.– PAP: Knowledgeable people identify potential UTB/PBU activities.

• Completeness of UTB/PBU identification– ATF: Temporary PBU activities might not be reported.– PAP: Captures more PBU activities because knowledgeable people are

identifying as they are proposed.• Year-End Surprises

– ATF: May discover problematic PBU activities after the fact.– PAP: No surprises because problematic PBU activities are not allowed.

Establish a Process

Step 3

Tracking & Monitoring

Step 2

Decision-making

Step 1

Identification of PBU

Identification Decision-making Tracking

Step 1-Identify Potential PBUUnrelated Trade or

Business: Key Depts

Lease/Use: General Counsel’s

Office

Management Contracts:

Purchasing Dept

Utility Output Contracts: Facilities

Sponsored Research Agreements:

Grants & Contracts Administration

Naming Rights: Development Office

Other: All Business Managers


Step 2-Decision-Making: Report Potential PBU

TEB Compliance

Director

Unrelated Trade or

Business: Key Depts

Lease/Use: General

Counsel’s Office

Management Contracts:Purchasing

Dept

Utility Output Contracts:Facilities Sponsored

Research Agreements:

GCA

Naming Rights:

Development

Other: Business Managers


Step 2: Decision-Making


TEBC Director determines whether activity should be treated as PBU

If no, approve the activity

If yes, then determine whether activity is in TEB-financed space

Proceed with analysis

Flowchart of PBU Analysis

Is the proposed PBU SRA in TEB-financed space?

• Were the capital projects in the Medical Research Building (MRB) financed without using tax-exempt bonds (TEB)?

• If no (i.e. financed with TEB), then do the projects meet the Qualified Improvement exception?

• If no, is there sufficient equity as part of the funding of each project to allocate to the PBU space?

• If ‘yes’ to above questions, then no PBU arises.• If no, are the TEB used for PBU, in the aggregate, equal to or less

than the 5%/$15 million PBU allowance?• If no (i.e. it exceeds the threshold), then take corrective actions.


Qualified Improvement Exception (IRS Reg §1.14-3(d)(6))

• Exception -TEB used for capital projects that fall into the QI exception are deemed not to be PBU.

• Criteria for QI exception (ALL must apply):√ A borrower-owned improvement in a borrower-owned building√ An improvement to a building (which excludes new construction, external utility distribution system, equipment and other non-building projects)√ An improvement that began >1 year after the building’s in-service date√ Not an enlargement of the building√ Not for space occupied exclusively by PBU √ Neither the building nor its revenues are security for the bonds√ In a building with <15% PBU.

Step 3: Tracking & Reporting• TEBC Director is responsible for tracking and

reporting:– Maintains a PBU database containing the location,

duration, square footage, etc. of activities to be treated as PBU.

– Retains analyses and decision memos on PBU requests.– Monitors approved PBU to ensure it does not grow

beyond approved limits.– Annually calculates PBU % for Form 990 Schedule K.


Example of PBU Policy Decisions• If Treasury Regulations are unclear, choose a conservative to

middle-of-the-road interpretation.• If the activity falls in a “gray area” (i.e. arguments for and

against considering it to be private business use (PBU)), treat it as PBU.

• Assume that a space that has PBU is 100% PBU. – If a lower PBU % is necessary and documentable, then a lower,

more accurate % is used. • Strive to keep PBU % of all capital projects well below non-

TEB funding %.• Strive to keep PBU % of all buildings well below 15%.• Strive not to use the 5%/$15 million PBU allowance for each

series.• Meet the 5% PBU limit each year, instead of averaging over

the measurement period.

Undivided Portion MethodologyProposed regulations identify three methods for allocating equity and TEBs to PBU:

• Recommended: Elect Undivided Portion Methodology (aka Floating Equity Method) in tax certificate or tax regulatory agreement when bonds are issued.

• Other Methods:– Pro rata (default)– Discrete physical portion

Goals Regarding PBU and TEB

– When considering new activities, keep the PBU activities out of TEB-financed space AND

– When financing new projects, keep TEB-financed capital projects out of PBU-occupied space.

Prepare Recommended Equity* % by Building Table

ID BuildingActual PBU %

Minimum Equity %

Recom-mended

Equity %101 Museum 5.00% 10.00% 15.00%102 Classroom Building 1.00% 6.00% 15.00%103 Power Plant 2.00% 7.00% 15.00%104 Med Research Bldg 25.00% 30.00% 35.00%105 Adminstrative Building 100.00% 100.00% 100.00%106 Athletic Facility 0.01% 5.00% 100.00%

*Where equity is all funding other than TEBs

Use Equity % by Building Table to Assign Equity and TEB

• Capital Management uses the Table to assign equity and TEB to capital projects

– If sufficient equity, use “Recommended Equity”– If limited equity, use “Minimum Equity”

• Goal: Assign sufficient equity to cover PBU in a building (plus a cushion) so that no TEB are used for PBU

Summary• It’s important to have a Post-Issuance TEBC

Policy

• Different ways to organize to implement TEBC Policy but need to assign responsibilities to meet all TEBC requirements, including Arbitrage, Record Retention, and Private Business Use

QUESTIONS?

Documents

Post Issuance Bond Compliance Policy - NACUBO