© 2010 bricker & eckler llp post-issuance compliance for colleges and universities april 26,...

© 2010 Bricker & Eckler LLP

Post-Issuance Compliance for Colleges and Universities

April 26, 2010OACUBO Annual Conference

The Ohio State UniversityColumbus, Ohio

William T. Conard IIand

J. Caleb Bell

Bricker & Eckler LLP

[email protected]@bricker.com


PRESENTATION OUTLINE

I. What is “Post-Issuance Compliance”

II. Consequences for Compliance Failures

III. Developing a Compliance Policy

IV. Special Considerations for 501(c)(3) Issuers (IRS Form 990)

V. Conclusion


I. What is “Post-Issuance Compliance”?

Post-issuance compliance refers an issuer’s responsibilities that must be taken after the issuance of debt to ensure compliance with:

(i) federal income tax laws,

(ii) federal securities laws, and

(iii) covenants contained in bond proceedings.

An issuer can be a public college or university with the statutory authority to issue debt or a private 501(c)(3) institution.


I. What is “Post-Issuance Compliance”?

Several factors create/influence post-issuance compliance responsibilities:

Federal Tax Law – requires monitoring of such things as use of proceeds, investment of proceeds, changes in use of financed facilities, changes in security and credit enhancement, changes in hedges and modification of terms of bonds

Federal Securities Law – requires attention to gathering and disclosure of material information regarding the issuer in connection with continuing disclosure obligations and future financings

Bond Proceedings – may contain covenants and other obligations related to or independent of the foregoing; also may contain matters related to state law compliance



A. Loss of Tax-Preferred Status

• Loss of tax-exempt status of interest, in the case of tax-exempt bonds

• Loss of subsidy payment, in the case of tax credit bonds such as Build America Bonds

• Loss of preferred status, in the case of certain other ARRA-authorized bonds



B. Remediation Requirements under Federal Tax Law

• When proceeds of a bond issue are used in a manner for which tax-preferred debt may not be employed, such as in the case of a change in the expected use of a facility, an issuer may be able to preserve the tax-preferred status only through undertaking certain remedial actions.

• The conditions to the availability of such actions, as well as the costs associated with several aspects (e.g., defeasance of bonds) can be onerous.

• Currently, there is no official guidance as to whether remedial action is permitted in the case of certain ARRA-authorized non-tax exempt bonds, i.e., BABs.



C. Penalties and Interest

• In lieu of a declaration of taxability or loss of some other tax-favored status, the Internal Revenue Service could require a payment to preserve the status, measured with reference to the benefit the tax-favored transaction provides to the issuer.

• In the case of rebate amounts, failure to pay in a timely fashion, in addition to threatening the tax status of the bonds, increases the financial exposure to the issuer by incurring interest on unpaid amounts.



D. Securities Law Enforcement

• Failures to adequately disclose material information by an issuer could lead to enforcement action by the Securities and Exchange Commission, including cease and desist orders.

• The general process undertaken by the SEC in connection with such matters is public and costly and often heavily weighted in favor of the federal authorities.

• Failure to make the disclosures required by continuing disclosure agreements are often required to be disclosed themselves for five years following the failure.



E. Market Disapproval

• Issuers with a reputation for securities law irregularities or tax difficulties will often be penalized by the market in the form of higher interest rates on new debt.

• In extreme cases, the municipal bond market may refuse to purchase the securities of certain issuers.

• Serious problems may make it impossible to even go to the market to borrow because lack of knowledge of the status of material matters by the issuer may create a situation where the mere offer would constitute a violation of federal securities laws.



F. Litigation

• To the extent that any adverse regulatory actions caused loss to bondholders, they may seek to recover from the issuer.

• Even in the absence of action by regulators, disclosure of previously undisclosed issues or the discovery of non-compliance could also adversely affect the market value of bondholders’ portfolios, giving them a cause of action for such loss.



G. General Adverse Publicity

• College and university issuers dependent on community and alumni support for debt offerings could generally suffer to the extent that a failure in post-issuance compliance creates negative perceptions for community or alumni donors.

• Particularly egregious situations could lead to civil or criminal prosecutions in connection with the events connected with the failure in compliance.



STEP 1:

IDENTIFY COMPLIANCE AREAS

An issuer should identify all the areas that will require monitoring or further actions after the date of issuance of the bonds. Generally, this includes:

(i) federal income tax compliance,

(ii) federal securities law compliance, and

(iii) compliance with covenants contained in bond proceedings.



STEP 1 (Continued): FEDERAL INCOME TAX COMPLIANCE

Preserving a federal income tax-exemption (and comply with tax law):

Two main areas of federal income tax compliance:

Proceeds and Facilities

Proceeds – Temporary Period Exception (3-Part Test)• Expenditure Test – 85% of proceeds must be spent within three years

of the date of the issue• Time Test – within six months of the date of the issue, the issuer must

incur a substantial binding obligation (5% of debt proceeds)• Due Diligence Test – work on the project must proceed with due

diligence• All three parts apply to a “reasonable expectation” at the date of the

issue



STEP 1 (Continued): FEDERAL INCOME TAX COMPLIANCE

Facilities – Monitor Private Business Use

• Private Business Use – “use” of bond financed property by a person or entity in a trade or business in excess of 10% of proceeds

• Leases create “use”• Management and service contracts create “use”• Other “special” legal entitlements create “use”

Other Tax Prohibitions

• Private Payment or Security – debt service on bonds is derived or secured directly or indirectly by a private source of payment or security (i.e., rent)

• Private Loan Financing – not more than the lesser of 5% or $5,000,000 of proceeds may be loaned to nongovernmental persons



STEP 1 (Continued):

FEDERAL INCOME TAX COMPLIANCE

Other Tax Requirements

• Rebate Compliance

• Sign Tax Compliance Certificate & file IRS Form 8038-G

• Monitor post-issuance changes In credit enhancement In hedging transactions In use of facilities In bond terms



STEP 1 (Continued):

FEDERAL SECURITIES LAW COMPLIANCE

• Preparation of annual disclosure per continuing disclosure agreements

• Preparation of annual financial reports per continuing disclosure agreements

• Submission of disclosure on material events per continuing disclosure agreements



STEP 1 (Continued):

COMPLIANCE WITH BOND PROCEEDINGS

• Maintenance of pledges or other security

• Notice Provisions

• Ratios or other special performance or financial achievement covenants (i.e., cash on hand, debt service coverage ratio)



STEP 2: DRAFT A WRITTEN POLICY

• An issuer should develop a written policy

• The written policy should assign responsibility for monitoring the areas identified in STEP 1. “Compliance Officers” assigned responsibility in the written policy should include representatives from your institution’s FINANCE and LEGAL departments

• The written policy should outline a schedule for action items

• It may be necessary to develop a protocol for the retention of records necessary to evidence the post-issuance compliance efforts required by law

• The written policy should complement existing institutional policies



STEP 3:

IMPLEMENTATION

• Implement the policy using: (i) Compliance Officers (financial and legal representatives), (ii) institutional personnel and resources, and (iii) outside experts

• The policy should be reviewed periodically to address: (i) experience, (ii) institutional changes, (iii) changes in law

• The policy should be integrated with the information gathering process associated with securities law disclosure (i.e., the preparation of annual financial statements) so that information required for future bond issues can be identified quickly and consistently



IRS Form 990, Schedule K

“Supplemental Information on Tax-Exempt Bonds”



Schedule K – General Information

How did we get Schedule K?

• In 2007, the IRS sent questionnaires to approximately 200 non-profit organizations to gather information on post-issuance policies and procedures

• The IRS Report summarizing its findings on the questionnaire concluded that there were a “lack of written policies and procedures” and “poor recordkeeping” among 501(c)(3) issuers of tax-exempt debt

• As a result of its findings, and in conjunction with many other changes to IRS Form 990, the IRS developed Schedule K to IRS Form 990




• Applies only to non-profit 501(c)(3) organizations• Filed along with IRS Form 990• Must be filed annually• Filed with respect to the same reporting year as the 990

(but an issuer can use the same year as a tax-exempt obligation – i.e., an issuer can use the 12-month “bond year” used for arbitrage rebate calculations)

• Designed to elicit information on each separate debt issue of an organization

• For reporting year 2009 onward, all parts of Schedule K must be completed




Four Parts:

Part I – Bond Issues

Part II – Use of Proceeds

Part III – Private Business Use

Part IV – Arbitrage



Schedule K – Who Must File?

Any 501(c)(3) organization with a tax-exempt bond issue issued after December 31, 2002 with an outstanding principal amount of more than $100,000 must fill out all of Schedule K

Exception: 501(c)(3) organizations that issued refunding bonds after December 31, 2002 to refund bonds originally issued before January 1, 2003 do not have to complete Part III about Private Business Use.



Schedule K – Part I – Bond Issues

Information should be consistent with the information included on IRS Form 8038:• Name of Issuer• Issuer EIN• CUSIP• Date Issued• Issue Price• Description of Purpose• Defeased• On Behalf Of Issuer



Schedule K – Part II – Proceeds

Some information the same as IRS Form 8038

Other information based on post-issuance facts

Two Important Questions:• Line 11 – Has the Final Allocation of Proceeds Been Made? (final

allocation must be made no later than 18 months after the later of (i) the date of the expenditure, or (ii) the date the property is placed in service (which must be within 60 days of the fifth year after the issue date))

• Line 12 – Does the Organization Maintain Adequate Books and Records to Support the Final Allocation of Bond Proceeds?



Schedule K – Part II – Proceeds

Records common to most tax-exempt bond transactions include documentation evidencing:• The bond transaction (including the trust indenture, loan agreements, and

bond counsel opinion);• Expenditure of bond proceeds;• Use of bond-financed property by public and private sources (i.e., copies of

management contracts and research agreements);• All sources of payment or security for the bonds; and• Investment of bond proceeds (including the purchase and sale of

securities, SLGs subscriptions, yield calculations for each class of investments, actual investment income received the investment of proceeds, guaranteed investment contracts, and rebate calculations).

Keep records as long as the bonds are outstanding plus 3 years



Schedule K – Part III – Private Business Use

• Are there leases, management or service contracts, or research agreements with respect to bond financed property that may result in private business use?

• Line 3c: Does the organization routinely engage bond counsel or other outside counsel to review management or service contracts or research agreements? Answer should be YES.

• Line 7: Has the organization adopted management practices and procedures to ensure the post-issuance compliance of its tax-exempt bond liabilities? Answer should be YES.



Schedule K – Part IV – Arbitrage

Questions are about investments of bond proceeds. Questions designed to determine whether the issuer may be violating yield restriction (gross proceeds of the issue may not be invested at a yield materially higher than the yield on the bonds) or may be obligated to pay rebate (if issuer meets an exception to yield restriction, issuer must pay the IRS the difference between the investment earnings and the bond yield)

• Has a rebate analysis been performed and an IRS Form 8038-T filed?

• Has the organization identified an interest rate hedge with respect to the bond issue?

• Were bond proceeds invested in a GIC?


V. Conclusion

NOW YOU KNOW…

What Post-Issuance Compliance Is…

What the Consequences of Compliance Failures Are…

What to Do to Ensure Ongoing Compliance…


Questions and Contact Information

William T. Conard II(614) 227-2351

[email protected]

J. Caleb Bell(614) 227-2384

[email protected]

Bricker & Eckler LLP

© 2010 bricker & eckler llp post-issuance compliance for colleges and universities april 26,...

Documents