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HomeMy WebLinkAbout5E Post-Issuance Compliance 4646 Dakota Street SE Prior Lake, MN 55372 CITY COUNCIL AGENDA REPORT MEETING DATE: February 6, 2012 AGENDA #: 5E PREPARED BY : Jerilyn Erickson, Finance Director PRESENTED BY: Jerilyn Erickson AGENDA ITEM: Consider Approval of Post Issuance Compliance Policies and Proc e dures DISCU SSION: Introduction The purpose of this agenda item is to request City Council approval of post i s suance compliance policies and procedures as proposed by Briggs and Mo r- gan, the City’s bond counsel. History Over the last few years the Internal Reve nue Service (IRS) has increased its scrutiny of tax exempt bonds. Further, it has strongly expressed an expect a- tion that issuers of tax exempt bonds have written procedures in place to r e- main in compliance with IRS rules. Current Circumstances The C ity does not have written procedures in place. Therefore, the City’s bond counsel has prepared such policies and procedures for City Council consider a- tion. The policies and procedures are attached. While there is not statutory or rule requirements that the City have such written procedures, Briggs and Mo r- gan recommends they be adopted by the City Council. Informally , the IRS has indicated that having such procedures in place may r e sult in a lower penalty in the event of any audit or voluntary complian ce agre e ment relating to issuers bonds. According to Briggs and Morgan, “ther e- fore, we strongly recommend that the City adopt the proposed post issuance co m pliance policies and procedures.” Conclusion The Council should determine if it wishes to ado pt the proposed written proc e- dures as part of the Consent Agenda. ISSUES: There is no law or rule requiring adoption of the policies and procedures, but adoption could result in a lesser fine if an irregularity is identified. The proposed post issuanc e policies and procedures are written to address the concerns and expectations expressed by the IRS. Most of the tasks on the list we are already accomplishing. But the adoption of the polic y does express the City’s concern about keeping the bonds tax ex empt. Briggs and Morgan recommends adoption of the policy and procedure prior to the City’s next bond issuance. FINANCIAL I M- Some additional procedures are called for in the policies and procedures, but the financial impact is modest. PACT: ALTERNATIVES: 1. Adopt the Governmental Bonds Post Issuance Compliance Policies and Procedures as recommended by Briggs and Morgan. 2. Take no action and direct staff accordingly. RECOMMENDED Alternative #1. MOTION: 2 CITY OF PRIOR LAKE, MINNESOTA _____________________ GOVERNMENTAL BONDS POST - ISSUANCE COMPLIANCE POLICIES AND PROCEDURES __________________________ The following policies and procedures were adopted by the City Council of the City of Prior Lake, Minnesota (the “City”) as of the date indicated below with respect to the governmental bonds of the City, to require, and further ensure, the ongoing compliance of governmental bonds issued by the City with the Internal Revenue Code of 1986, as amended (the “Code”) , and the Treasury Regulations promulgated thereunder (the "Regulations"), including the record retention requirements of Code Section 6001 and Section 1.6001(a) of the Treasury Regulations. Such policy and procedures were adopted after consultation with Briggs and Morgan, P.A., the bond counsel (“Bond Counsel”), and Northland Securities, Inc., the financial advisors, to the City and are internal operating procedures to be used by the City’s management in connection with the issuance and sale of all issues of governmental bonds. The City Council of the City has the overall, final responsibility for monitoring whether the City is in compliance with post - issuance federal tax requirements for the City's governmental bonds. However, the City Council assigns to the Finance Director of the City the primary operating responsibility to monitor the City’s compliance with post - issuance federal tax requirements for the City’s governmental bonds. The Finance Director may further assign post - issuance compliance respons ibilities to other staff of the City, Bond Counsel, the paying agent for the bonds, and a rebate analyst. The Finance Director shall provide training and educational resources to City staff who are responsible for ensuring compliance with any portion of t hese policies and procedures. 4458498v1 1. Appropriate Application of Proceeds. (a) The Finance Director shall ensure the timely expenditure of the proceeds of governmental bonds by monitoring the application of all bond proceeds in accordance with the source of funds us ed and in accordance with the documents related to the issuance of the governmental bonds, including the reimbursement of pre - issuance expenses. (b) The Finance Director shall ensure the correct calculation and application of bond proceeds pursuant to the Code by: (i) confirming that any closing and/or allocation memorandum for the issuance of the bonds is accurate in the deposits directed thereunder, including ensuring that bond proceeds are used only for public purposes; and (ii) through the draw request process, ide ntifying requested expenditures that are not eligible expenditures. (c) The Finance Director shall monitor the use of all bond - financed facilities in order to: (i) determine whether private business uses of bond - financed facilities have exceeded de minimus limits set forth in Section 141(b) of the Code, and 2 4458498v1 (ii) determine whether private security or payments that exclude the de minimus limits set forth in Section 141(b) of the Code. 2. Arbitrage Yield Restriction and Rebate Requirements. The Finance Director shall monitor and calculate arbitrage, and shall coordinate and maintain, or cause to be maintained, records of: (a) Computations of the yield on the bonds by the City’s financial advisor, and purchases and sales of investments made with bond proceeds (including amounts tr eated as “gross proceeds” of bonds under section 148 of the Code) and receipts of earnings in those investments; (b) Expenditures made with bond proceeds (including investment earnings on bond proceeds) for the governmental purposes of the bonds; (c) Calculations that will be sufficient to demonstrate to the Internal Revenue Service (“IRS”) upon an audit of a bond issue that, where applicable, the City has complied with any available exception to the arbitrage rebate requirement in respect of that bond issue; (d) Calcu lations that will be sufficient to demonstrate to the IRS upon an audit of a bond issue for which no exception to the arbitrage rebate requirement was applicable, that the rebate amount, if any, was payable to the United States of America in respect of inv estments made with gross proceeds of that bond issue, was calculated and timely paid with Form 8038 - T timely filed with the IRS; and 3 4458498v1 (e) Information and records showing that investments held in yield - restricted advance refunding or defeasance escrows for bonds , and investments made with unspent bond proceeds after the expiration of the applicable temporary period, were not invested in higher yielding investments. The Finance Director shall also: (a) Ensure that any third - party entity tasked with investment responsi bility for governmental bonds is provided with a copy of the tax compliance or arbitrage certificate for each bond issue and is advised as to all investment restrictions with respect to the proceeds of and funds related to any governmental bonds issued by the City; (b) Cause any funds subject to yield restriction to be segregated; (c) Hire an independent contractor annually or every five years, as the case may be and as required by any arbitrage certificate, to perform all arbitrage and rebate calculations and to review the City’s investment process to ensure that it is in compliance; and (d) Consult with Bond Counsel prior to engaging in post - issuance credit enhancement transactions. 3. Record Retention Requirements. It is the policy of the City that, unless otherwise p ermitted by future IRS regulations or other guidance, written records (which may be in electronic form) will be maintained with respect to each bond issue for as long as those bonds remain outstanding, plus three years. For 4 4458498v1 this purpose, the bonds include refunding bonds that refund the original bonds and thereby refinance the property that was financed by the original bonds. In maintaining electronic storage, the Finance Director will comply with applicable IRS requirements, such as those contained in Rev enue Procedure 97 - 22. The records to be obtained and maintained are to include: (a) The official transcript of proceedings for the original issuance of the bonds (including ensuring that all applicable documents are included in such transcript); (b) Records showin g how the bond proceeds were invested, as described in 2 above; (c) Records showing how the bond proceeds were spent, as described in 1 above, including, but not limited to, loan documents, construction contracts, draw requests, invoices, payment of bond issua nce costs, and records of “allocations” of bond proceeds to make reimbursement for project expenditures made before the bonds were actually issued; (d) Information, records, and calculations showing that, with respect to each bond issue, the City was eligible for an exception to the arbitrage rebate requirement or, if not, that the rebate amount, if any, that was payable to the United States of America in respect of investments made with gross proceeds of that bond issue, was calculated and timely paid with For m 8038 - T timely filed with the IRS, as described in 2 above; 5 4458498v1 (e) Schedules of all bond - financed facilities, including whether such facilities are land, buildings, or equipment, economic life calculations, and information regarding depreciation; (f) Records and ag reements related to any trade or business activities by or with non - governmental entities or persons with respect to any facilities financed with the proceeds of governmental bonds, including, but not limited to, management agreements and leases; and (g) Docum entations of all sources of payment or security for the issue. The basic purpose of the foregoing record retention procedure for the City’s governmental bonds is to enable the City to readily demonstrate to the IRS upon a questionnaire or an audit of any b ond issue that the City has fully complied with all federal tax requirements that must be satisfied after the issue date of the bonds. 4. Reissuance. The following policies relate to compliance with rules and regulations regarding the reissuance of bonds for federal law purposes. The Finance Director will: (a) Identify and consult with Bond Counsel regarding any post - issuance change to any terms of an issue of bonds which could potentially be treated as a reissuance for federal tax purposes; and (b) Confirm with Bond Counsel whether any “remedial action” in connection with a “change in use” (as such terms are defined in the Code and 6 4458498v1 Treasury Regulations) would be treated as a reissuance for tax purposes and, if so, confirm the filing of any new Form 8038 - G. 5. Direct Pay Bonds. (a) In addition to the other requirements herein, should the City issue direct pay bonds pursuant to Sections 54A through 54F of the Code, the Finance Director shall also be responsible for: (i) determining the amount of interest payable on each interest pa yment date and the proper amount of refundable credit reported on Form 8038 - CP; (A) as appropriate, the Finance Director shall compare the interest payment calculations to any independently - verified report prepared at closing for the bond issue; and (B) the Financ e Director shall approve all disbursements. (ii) preparing and timely filing all Forms 8038 - CP; (A) timely filing of Form 8038 - CP shall be made to insure that payments are timely made on the interest payment date and such timely filing is ensured by the use of a th ird - party filing agent; and (B) in the case of bond issues with multiple maturities, a separate Form 8038 - CP shall be filed for each maturity; 7 4458498v1 (iii) ensuring all credit payments shall be requested to be made by wire. The Finance Director is familiar with the wire p ayment procedures for the City and will ensure that the Form 8038 - CP includes the proper information for payment of the credit to the proper person; and (iv) alternatively, hiring a third party (the “Filing Agent”) who shall be responsible for the matters in t his Section 5 and any other responsibilities set forth in a filing agent agreement between the City and the Filing Agent. (b) In addition to the records retained pursuant to Section 3, the records to be obtained and maintained with respect to direct pay bonds are to include: (i) information, records, and calculations showing that Forms 8038 - CP were properly prepared and timely filed, as described in (a) above; (ii) all contracts that are subject to the federal Davis - Bacon prevailing wage rules; and (iii) with respect to Quali fied Energy Conservation Bonds, such documents, test results, audits, and reports obtained by the City that demonstrate that the final project has achieved a reduction in energy consumption in publicly - owned buildings by at least 20%. 8 4458498v1 (c) The Finance Director shall ensure that all contracts let for projects financed with direct pay bonds shall comply with the federal Davis - Bacon prevailing wage rules. 6. Taxable Governmental Bonds. Most of the provisions of these policies and procedures are not applicable to gover nmental bonds the interest on which is includable in gross income for federal income tax purposes. However, if an issue of taxable governmental bonds is later refunded with the proceeds of an issue of tax - exempt governmental refunding bonds, then the uses of the proceeds of the taxable governmental bonds and the uses of the facilities financed with the proceeds of the taxable governmental bonds will be relevant to the tax - exempt status of the governmental refunding bonds. Therefore, if there is any reason able possibility that an issue of taxable governmental bonds may be refunded, in whole or in part, with the proceeds of an issue of tax - exempt governmental bonds then, for purposes of these policies and procedures, the Finance Director shall treat the issu e of taxable governmental bonds as if such issue were an issue of tax - exempt governmental bonds and shall carry out and comply with the requirements of these policies and procedures with respect to such taxable governmental bonds. The Finance Director sha ll seek the advice of Bond Counsel as to whether there is any reasonable possibility of issuing tax - exempt governmental bonds to refund an issue of taxable governmental bonds. 7. Qualified 501(c)(3) Bonds. If the City issues bonds to finance a facility to be owned by the City but which may be used, in whole or in substantial part, by a nongovernmental organization that is exempt from federal income taxation under Section 501(a) of the Code as a result of the application of Section 501(c)(3) of the Code (a "501 (c)(3) Organization"), the City may elect to issue the bonds as 9 4458498v1 "qualified 501(c)(3) bonds" the interest on which is exempt from federal income taxation under Sections 103 and 145 of the Code and applicable Treasury Regulations. Although such qualified 50 1(c)(3) bonds are not governmental bonds, at the election of the Finance Director, for purposes of these policies and procedures, the Finance Director may treat such issue of qualified 501(c)(3) bonds as if such issue were an issue of tax - exempt government al bonds and shall carry out and comply with the requirements of these policies and procedures with respect to such qualified 501(c)(3) bonds. Alternatively, in cases where compliance activities are reasonably within the control of the relevant 501(c)(3) Organization, the Finance Director may determine that all or some portion of the compliance responsibilities described herein shall be assigned to organization. 8. Conduit Bonds. The provisions of these policies and procedures are primarily intended to be app licable to governmental bonds. However, the City may from time to time issue qualified 501(c)(3) bonds or other qualified private activity bonds that are not governmental bonds and loan the proceeds thereof to a nongovernmental organization that is the o bligor on such conduit bonds. Although such conduit bonds are not governmental bonds, at the election of the Finance Director, for purposes of these policies and procedures, the Finance Director may treat such issue of conduit bonds as if such issue were an issue of tax - exempt governmental bonds and shall carry out and comply with the requirements of these policies and procedures with respect to such conduit bonds. Alternatively, in cases where compliance activities are reasonably within the control of th e relevant obligor, the Finance Director may determine that all or some portion of the compliance responsibilities described herein shall be assigned to or required of such obligor. 10 4458498v1 9. General Requirements. (a) Periodically, the Finance Director shall consult wi th Bond Counsel, general counsel, and financial advisors to the City to determine if any changes to these procedures are advisable and shall amend these procedures accordingly. (b) These procedures may be amended or withdrawn from time to time and constitute i nternal management procedures for compliance with certain provisions of the Code and do not constitute and are not intended to be, rules of the City. Adopted this 6th day of February, 2012 on behalf of the City. CITY OF PRIOR LAKE, MINNESOTA 11 4458498v1