Tax Exempt Bonds – Post Issuance Compliance · PDF fileTax Exempt Bonds – Post Issuance Compliance ... What is a bond issue for tax purposes ... • Retroactive loss of tax-exempt

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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



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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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



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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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


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

• 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



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

• 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



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

• Continuity and Ongoing Review

• Requires on-going monitoring and will be reviewed periodically

and modified as necessary

• Establish a deadline reminder system



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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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


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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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



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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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


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


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


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


DRAFTING A POLICY


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


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


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


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


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


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

[email protected]

Documents

Tax Exempt Bonds – Post Issuance Compliance · PDF fileTax Exempt Bonds – Post Issuance Compliance ... What is a bond issue for tax purposes ... • Retroactive loss of tax-exempt