Tax-exempt Financing Compliance
These Procedures for Post-Issuance Compliance (the “Procedures”) are for the purpose of maintaining and evidencing compliance with the federal tax requirements that apply to the tax-exempt or tax credit financings of St. Mary’s University (the “University”). In furtherance of such purposes the University has adopted these Procedures with respect to the following:
- General Recordkeeping and Record Retention
- Timely return filings
- Proper and timely use of bond proceeds and proper use of bond-financed property
- Arbitrage – yield restriction and rebate
- Reissuance requirements
- Corrective Action
These Procedures apply to any obligations to which sections 103 and 141 through 150 of the Internal Revenue Code of 1986, as amended (the “Code”) are applicable, whether or not such obligations are in fact tax-exempt. For example, these Procedures will be followed with respect to any issue of tax credit bonds to which such sections of the Code apply. It is the intention of the University to modify or amend these Procedures in the future in order to comply with any requirements set forth in subsequent rulings and other advice published by the Internal Revenue Service (the “Service” or the “IRS”), as such authorities may apply to the University and its obligations.
- Responsible Parties
The University acknowledges that as the issuer of debt obligations subject to the Code, it is responsible for post-issuance compliance with respect to such debt obligations (sometimes herein referred to as “bonds”). The Vice President for Administration and Finance of the University has general oversight of the post-issuance compliance of the above described financings. In addition, the following parties are responsible for the duties listed next to their titles:
- Vice President for Administration and Finance – oversees all financial functions of the University.
- Director of Finance and Director of Accounting Operations – responsible for all accounting functions of the University.
- Director of Finance – responsible for banking, cash management, investment, and certain debt administration activities of the University; overseeing the cataloguing and storage of various financial records of the University.
- Bond Counsel – provides legal counsel involving all aspects of the issuance of obligations and post-issuance compliance.
- Arbitrage Consultant – responsible for all aspects of arbitrage rebate compliance activity on behalf of the University.
Parties responsible for the financing aspects and the operations aspects of bond-financed facilities will coordinate efforts to ensure that any actions taken with respect to a bond-financed facility will be in compliance with the requirements of the Code. The University will provide training and/or make available educational materials regarding compliance requirements (e.g., private use requirements) to the parties responsible for the oversight of bond-financed facilities.
- General Recordkeeping & Record Retention
General record retention duties are the responsibility of the Director of Finance. Audited Financial Statements will be maintained at all times. The Director of Finance will maintain reports of any examinations by the Service of the tax-exempt or tax credit University’s financings.
The Director of Finance will retain, as applicable to the structure of the financing, the following for the life of each issue of obligations (including the life of any obligations issued to refund the original debt) plus three years:
- Bond transcript, including authorizing documents, offering document, the federal tax certificate, and certificates regarding issue price.
- Resolution authorizing reimbursement of amounts expended by the University prior to issuance of the bonds in compliance of Section 1.150-2 of the Treasury Regulations (the “Regulations”) and Section 1201.042(c) of the Texas Government Code.
- Minutes and resolution(s) authorizing the issue.
- Any formal elections (e.g., election to employ an accounting methodology other than specific tracing).
- Records relating to the payment of debt service (including credit enhancement).
- Documentation relating to investments and arbitrage compliance, as described in “Arbitrage – Yield Restriction and Rebate – Recordkeeping” below.
- Documentary evidence of when and for what purpose the bond proceeds were expended, as described in “Expenditures of Bond Proceeds – Recordkeeping” below.
- Any grant requests or fundraising materials and documentation of grants or fundraising receipts relating to projects that also may be financed, in whole or in part, with bond proceeds.
- Any agreement of a type described in “Private Business Use – Special Legal Entitlements” that relates to a bond-financed facility.
- Bond paying agent/trustee statements.
- Rebate compliance reports.
- Related IRS filings (e.g. Form 8038-T Rebate.
- IRS correspondence regarding such issue.
- Other documentation (including written advice of Bond Counsel) material to the particular requirements that are applicable to the tax status of the financing.
All documents described herein may be retained as hard copies or in an electronic format (in accordance with Revenue Procedure 97-22, 1997-1 C.B. 652), so long as such documents are retained in organized, accessible format that preserves the accuracy of such documents.
- Return Filings
The Director of Finance will be responsible for the timely filing of the IRS Form 8038-G information report (or such other series 8038 form as may be applicable to a specific issue of bonds) with the Service, which filing may be completed by Bond Counsel after the issuance of the obligations. The University must file a separate IRS Form 8038-G for each issue of bonds not later than the 15th day of the second calendar month after the close of the calendar quarter in which the bonds are issued.
- Expenditure of Bond Proceeds
The Director of Finance is responsible for oversight of the expenditure of bond proceeds, as applicable to the structure of the financing, including monitoring whether such expenditures are made in a timely manner for the purposes for which the bonds were authorized in order to meet qualify for rebate exceptions set forth in the Code the Regulations and whether investments of unexpended bond proceeds continue to qualify for temporary period exceptions to yield-restriction requirements. Bond Counsel may be consulted regarding allocation of expenditures between each bond issue to ensure timely expenditure of bond proceeds.
Additionally, the Director of Finance will monitor compliance with the requirement of the Regulations that proceeds of a bond issue are to be allocated to expenditures by the later of 18 months after the expenditure was made or the date the project is placed in service (and in no event, later than 60 days after (i) the fifth anniversary of the issue date or (ii) retirement of the issue).
With respect to the reimbursement of any expenditure paid prior to the date of issue of the bonds, the Director of Finance will monitor compliance with the requirement of the Regulations that such reimbursement allocation to bond proceeds is made not later than 18 months after the later of (i) the date the original expenditure is made or (ii) the date the project is placed in service, but in no event more than three years after the original expenditure is paid. Furthermore, the Director of Finance will monitor compliance with the requirement of the Regulations that such reimbursement allocation is for the reimbursement of expenditures paid on or after 60 days prior to the date of a reimbursement resolution (including for this purpose a resolution authorizing issuance of the bonds).
With respect to each issue of obligations and as applicable to the structure of the financing, the University will retain the following for the life of the obligations plus three years:
Documentation of allocation of bond proceeds to and contracts for expenditures (e.g., allocation of bond proceeds for expenditures for the construction, renovation, or purchase of facilities).
- Documentation of allocations of bond proceeds to bond issuance costs.
- Copies of all requisitions, draw schedules, draw requests, invoices, bills, and cancelled checks related to bond proceeds spent during the construction period.
- Records of expenditure reimbursements incurred prior to issuing bonds for bond financed facilities.
- List or schedule of all bond-financed facilities or equipment.
- Depreciation schedules, if any, for bond-financed depreciable property.
- Documentation of any purchase or sale of bond-financed assets.
The Director of Finance must actively monitor the following investment practices, as applicable to the structure of the financing, to ensure maximum returns on its invested funds while complying with federal arbitrage guidelines. Investments must comply with the Public Funds Investment Act, Chapter 2256, Texas Government Code, and, if in guaranteed investment contracts, applicable Regulations:
- Investment of proceeds of the tax-exempt obligations and restrict the yield of the investments to the yield on the tax-exempt obligations after three years of the Issue Date.
- All amounts deposited into a sinking fund to assure that the maximum amount invested at a yield higher than the yield on the obligations does not exceed an amount equal to the debt service on the obligations in the succeeding 12-month period plus a carryover amount equal to one-twelfth of the principal and interest payable on the obligations for the immediately preceding 12-month period.
- Ensure that no more than 50% of the proceeds of tax-exempt obligations are invested in an investment with a guaranteed yield for four years or more.
- The actions of any trustee and the escrow agent (to the extent an escrow is funded with proceeds of tax-exempt obligations) to ensure compliance with the applicable provisions of the escrow agreement, including with respect to reinvestment of cash balances.
- Surplus Bond Proceeds
To the extent that proceeds from a particular series of bonds exist after the completion of all projects financed thereby and (i) such proceeds are deemed surplus by the University or (ii) to the extent that proceeds of a particular series of bonds are released from a debt service reserve fund by virtue of a refunding or redemption of bonds, the determination of the appropriate use of such proceeds must first consider the type of bonds from which the proceeds derived (i.e. tuition revenue, revenue, etc.).
Amounts remaining in debt service reserve funds derived from bond proceeds may be expended to pay debt service on any parity bonds or for University projects that are substantially similar to projects financed by the Bonds. The University may only use pledged revenues deposited into its debt service fund to make debt service payments on its outstanding bonds. To the extent there are unused bond proceeds, they may be used to pay debt service on the bonds, fund substantially similar projects, or used to pay debt service on any parity bonds. In light of the tax and state law issues and the application of such laws on the facts of each circumstance, the University should contact Bond Counsel prior to any action to confirm the legality of any transfers for any other purpose.
- Private Business Use
To confirm that the Bonds serve governmental purposes rather than providing proscribed benefits to nongovernmental persons engaged in “private business” activity, it must be determined whether the University expects that there will be any private business use of the proceeds of the bonds. Private business use exists if more than 5% (and, in certain circumstances, 10%) of the proceeds of the issue or the property to be financed by the bond proceeds are used directly or indirectly by any nongovernmental person in that person’s trade or business. In addition, no more than 5% (and, in certain circumstances, 10%) of the proceeds of an issue may be secured directly or indirectly by property or payments derived from private business use under the “private security or payment test.” Private business use may occur due to arrangements (typically contractual) that give nongovernmental persons (including any federal agencies) special legal entitlements with respect to the use of bond-financed property (including a sale or other transfer of bond-financed property to a nongovernmental person). Finally, no more than 5% of the proceeds of an issue of bonds may be used to make loans or arrangement that allow a nongovernmental person to defer payments that it is obligated to make with respect to the financed property or the bonds.
The University’s financial officers will coordinate with the parties responsible for the use and operation of a bond-financed facility by communicating the private business use restrictions to such parties and requiring that all activity that may give rise to such use be communicated to the Vice President for Administration and Finance in advance of such use. The Vice President for Administration and Finance is responsible for tracking trade or business activity by third parties as it relates to each issue of obligations and will monitor such activity no less frequently than yearly and, in any event, upon being notified of any new activity that will give rise to a significant amount of trade or business activity by a third party.
- Special Legal Entitlements that Can Create Private Business Use
A special legal entitlement that can create private business use can arise from arrangements that convey ownership rights, leasehold rights, or management rights (e.g., priority rights to use the facility) or other similar rights. Recognizing that a special legal entitlement may give rise to private business use, each time the University intends to enter into one of the following, the University will determine if such agreement relates to any bond-financed facility:
- Management and other service contracts.
- Research agreements.
- Naming rights contracts.
- Leases and Subleases.
- Leasehold improvement contracts.
- Joint venture arrangements.
- Limited liability corporation arrangements.
- Partnership agreements.
- Non-contractual use of bond-financed office space and/or parking facilities by any nongovernmental person.
- Any other contract conferring a special legal entitlement or special economic benefit that are comparable to ownership.
If such an agreement will be with respect to a bond-financed facility, the University will take measures designed to preserve the intended federal income tax status of that issue of bonds. Such measures may include ensuring that such agreement falls into an applicable exception under the private business use rules, making a determination that private use will not exceed the applicable limit or such other action as may be recommended by bond counsel, including taking remedial actions with respect to the issue of bonds whose federal tax status is implicated.
- Payments on the Bonds
If applicable to the structure of the financing, the trustee/paying agent for the bonds shall determine the amount of principal and interest payable on each payment date for the bonds. Periodically, and no less frequently than annually, the Director of Finance will review the amount of the interest payments to verify that proper payments of interest have been made.
- Arbitrage – Yield Restriction and Rebate
If applicable to the structure of the financing, the Director of Finance is responsible for monitoring the University’s compliance with the yield restriction requirements of section 148(a) of the Code and the rebate requirements of section 148(f) of the Code. Such monitoring includes, but is not limited to:
- Tracking the allocation of bond proceeds to expenditures for compliance with any temporary period and spending exceptions, no less frequently than yearly.
- Ensuring that any forms required to be filed with the IRS relating to arbitrage and any payments required pursuant thereto are filed in a timely manner.
- Ensuring that “fair market value” is used with respect to the purchase and sale of investments
Additionally, the University will engage an Arbitrage Consultant to monitor compliance with rebate and yield restriction rules on a yearly basis.
Compliance with the investment rules will require that the University be able to account for, in terms of dates and amounts, all uses (including disbursements and investment activity) of particular categories of bond-related money. The Director of Finance will account for the following disbursements: monies in the project fund, debt service fund, any reserve fund, and any other fund into which proceeds of the obligations have been deposited. In doing so, the Director of Finance will use any reasonable consistently applied accounting method to account for gross proceeds, investments, and expenditures of proceeds of an issue.
With respect to each issue of obligations, the University will retain the following for the life of the obligations plus three years:
- Documentation of allocations of investments and calculations of investment earnings.
- Documentation for investments of the bond proceeds related to:
- Investment contracts (e.g., guaranteed investment contracts)
- Credit enhancement transactions (e.g., bond insurance contracts)
- Financial derivatives (e.g., swaps, caps, etc.)
- Bidding of financial products.
- Documentation regarding arbitrage compliance, including:
- Computation of bond yield
- Computation of rebate and yield reduction payments
- IRS Form 8038-T, Arbitrage Rebate, Yield Reduction and Penalty in Lieu of Arbitrage Rebate d) IRS Form 8038-R, Request for Recovery of Overpayments Under Arbitrage Rebate Provisions
Prior to making any changes to the terms of an obligation, including its underlying security, the University will consult with Bond Counsel to determine whether such change will result in the reissuance of such obligation for federal tax law purposes. If it is determined that a change will result in a “reissuance”, the University will take such action, including the recalculation of yield, the filing of a new IRS Form 8038-G, and the payment of rebate obligations, as is necessary to maintain the tax status of the bonds.
- Corrective Action
Reports regarding the aforementioned compliance policies with respect to any issue of bonds will be made by the party given responsibility for such area to the Vice President for Administration and Finance no less frequently than annually. At such time, the Vice President for Administration and Finance will determine whether any corrective action is required with respect to the applicable issue.
A corrective action may be required if, for example, it is determined that bond proceeds were not properly expended, the University is not in compliance with the arbitrage requirements imposed by the Code, or the University has taken a deliberation action that results in impermissible private business use (e.g., sale of bond-financed property). If the University determines or is advised that corrective action is necessary with respect to any issue of its obligations, the University will, as may be applicable, in a timely manner:
- Seek to enter into a closing agreement under the Tax-Exempt Bonds Voluntary Closing Agreement Program described in Notice 2008-31 (or any successor notice thereto).
- Take remedial action described under Section 1.141-12 of the Regulations including taking anticipatory remedial action as described in subsection (d)(3) thereof.
- Take such other action as recommended by Bond Counsel.