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Administrative Procedure 8.560 Administrative Procedure 8.560
Post-Issuance Tax Compliance Procedures for Tax-Exempt and Build America Bonds
Administrative Procedure Chapter 8, Business and Finance
Administrative Procedure AP8.560, Post-Issuance Tax Compliance Procedures for Tax-Exempt and Build America Bonds
Effective Date: December 2020
Prior Dates Amended: October 2010
Responsible Office: Office of the Vice President for Budget and Finance/Chief Financial Officer
Governing Board and/or Executive Policy: EP 2.212 Management of University Bond System
Review Date: December 2023
The University of Hawaii (the “University”) borrows through the issuance of either taxable or tax-exempt revenue bonds to finance capital projects. Investors in tax-exempt revenue bonds are willing to accept a lower coupon because interest earned on tax-exempt revenue bonds is exempt from taxation. This exemption translates into a lower cost of capital for the University. Under federal income tax rules, various requirements must be satisfied in order for bonds to qualify for and maintain a tax-exempt status.
In order to preserve the tax-exempt or Build America Bonds (“Bonds”) status, these policies and procedures are established to ensure that the University complies with all applicable post-issuance requirements of federal income tax law in a systematic and timely basis.
These policies and procedures shall apply to all applicable post-issuance requirements including, without limitation, all contracts with respect to the use of or use of output or throughput of tax-exempt or Build America Bonds revenue bond financed assets.
A. Arbitrage Rebate – Payment to the United States Treasury equal to all interest earned on tax-exempt Bond proceeds in excess of the bond yield.
B. Build America Bonds (BABs) – Taxable municipal bonds that carry special federal tax credits or subsidies for either the bond holders or bond issuer. BABs must qualify as tax-exempt governmental bonds under section 103 of the Internal Revenue Code.
C. Direct Pay Bonds – A type of tax-advantaged bond where the interest paid on the Bonds is taxable to the holder and the bond issuer is allowed a refundable tax credit.
D. Private Use - Use of Bond proceeds or Bond-financed property/asset by a nongovernmental person (individual or entity) where all or a portion of the asset is used in a trade or business activity.
III. Administrative Procedure
A. Post-Issuance Compliance Requirements and Procedures
1. External Advisors/Documentation
a. The University Vice President for Budget and Finance/Chief Financial Officer (the “Administrator”) and other appropriate University personnel shall consult with bond counsel and other legal counsel and advisors, as needed:
(1) Throughout the bond issuance process to identify requirements and establish procedures necessary or appropriate so that the Bonds will continue to qualify for the appropriate tax status.
(a) Those requirements and procedures shall be documented in Tax Certificates and/or other documents finalized at or before issuance of the Bonds.
(b) The requirements and procedures shall also include future compliance with applicable Arbitrage Rebate requirements and all other applicable post-issuance requirements of federal tax law throughout the term of the Bonds (and in some defined cases beyond the term of the Bonds).
(2) Following issuance of the Bonds to ensure that all applicable post-issuance requirements are in fact met. This shall include, without limitation, consultation in connection with future contracts with respect to the use of Bond-financed assets and future contracts with respect to the use of output or throughput of Bond-financed assets.
b. Whenever necessary or appropriate, the University shall engage expert advisors:
(1) Each a “Rebate Service Provider” to assist in the calculation of Arbitrage Rebate payable in respect of the investment of Bond proceeds.
(2) Each a “Post-Issuance Service Provider” to assist in tracking of potential private business use of the facilities financed or refinanced with proceeds from the Bonds.
2. Role of the University as Bond Issuer
Unless otherwise provided by University resolutions, unexpended Bond proceeds shall be held by the University and managed by the Administrator.
a. The investment of Bond proceeds must comply with Hawaii Revised Statutes Section 36-21, short term investment of state moneys.
b. The University Bond System office (“UBS”), under the management of the Associate Vice President for Budget and Finance and Controller, shall maintain records and shall provide regular, periodic statements to the University regarding the investments and transactions involving Bond proceeds.
c. If a University resolution provides for Bond proceeds to be administered by a trustee, the trustee shall provide regular, periodic (monthly) statements to the University regarding the investments and transactions involving Bond proceeds.
3. Arbitrage Rebate and Yield
Unless the Tax Certificate specifically provides that bond counsel has advised that Arbitrage Rebate(s) will not be applicable to an issue of Bonds:
a. The University shall engage the services of a Rebate Service Provider, and the University or the Bond trustee shall deliver periodic statements concerning the investment of Bond proceeds to the Rebate Service Provider on a prompt basis.
b. Upon request, UBS shall provide to the Rebate Service Provider additional documents and information reasonably requested by the Rebate Service Provider.
c. UBS shall monitor efforts of the Rebate Service Provider and assure payment of required rebate amounts, if any, no later than 60 days after each fifth bond year, and no later than 60 days after the last Bond of each issue is redeemed.
d. During the construction period of each capital project financed in whole or in part by Bonds, UBS shall monitor the investment and expenditure of Bond proceeds and shall consult with the Rebate Service Provider to determine compliance with any applicable exceptions from the Arbitrage Rebate requirements during each 6-month spending period up to 6 months, 18 months, or 24 months, as applicable, following the issue date of the Bonds.
e. The University shall retain copies of all arbitrage reports and trustee statements as described in paragraph 10d. (Record Keeping Requirements).
4. Build America Bonds
All proceeds of Build America Bonds, other than proceeds deposited in a reasonably required reserve fund (see Tax Certificate), or used to pay costs of issuance, must be spent on capital expenditures. Such amounts include earnings on the original proceeds of the Build America Bonds. Capital expenditures may be defined in the Tax Certificates, but generally means:
A cost that is of a type properly chargeable to the capital account of the project under general federal income tax principles. Generally, capital expenditures are costs to acquire, construct, or improve property, or to adapt the property to a new or different use. The property must have a useful life longer than one year. Capital expenditures include design and planning costs related to the project, and include architectural, engineering, surveying, soil testing, environmental, and other similar costs incurred in the process of acquiring, constructing, improving or adapting the property. Capital expenditures do not include operating expenses of the project or incidental or routine repair or maintenance of the project, even if the repair or maintenance will have a useful life longer than one year. This definition of capital expenditures may differ from state law definitions of capital costs or capital expenditures.
5. Requests for Direct Payments with Respect to the Direct Pay Bonds
a. UBS shall ensure the timely filing of a request for the federal tax credit for the Build America Bonds.
b. UBS will refer to the IRS Form 8038-G or 8038-B filed in connection with the issuance of the Bonds, which sets forth the interest payable on each interest payment date and the pricing numbers prepared by the underwriter or financial advisor.
c. Requests for the federal tax credit for the Build America Bonds will be made on the most recent revision of Form 8038-CP.
d. Form 8038-CP will be filed no earlier than 90 days before the next interest payment date on the Bonds and no later than 45 days before the next interest payment date on the Bonds.
e. UBS shall retain copies of all requests for refundable credit with respect to the Build America Bonds for the life of the Bonds, including any refunding Bonds, plus three years.
6. Expenditure Failures
If it is discovered that an Expenditure Deadline has not been met, such person should promptly notify UBS who will consult with bond counsel to determine the appropriate course of action with respect to such unspent Bond proceeds. Special action may need to be taken with such unspent Bond proceeds, including yield restriction or redemption of Bonds.
7. Final Allocation
a. Expenditures will be summarized in a final allocation of Bond proceeds ("Final Allocation") in a manner consistent with allocations made to determine compliance with arbitrage yield restriction and rebate requirements. The Final Allocation will memorialize the assets or portion thereof financed with Bond proceeds and the assets or portion thereof financed with other funds.
b. The Final Allocation must occur not later than 18 months after the date of the expenditure or 18 months after the date the facility to which the expenditure relates is completed and actually operating at substantially the level for which it was designed but in all events not later than 60 days after the end of the fifth year after issuance of the Bonds or 60 days after none of the Bonds are outstanding, if earlier.
8. Use of Bond Proceeds
a. Bond proceeds are subject to certain Private Business Use (as hereinafter defined) and Private Loan (as hereinafter defined) limitations as further provided in the Tax Certificates.
(1) Generally, the amount of Private Business Use a Bond issue may finance is limited to the lesser of 10% of the Bond proceeds or $15 million. However, the 10% Private Business Use limit is reduced to 5% to the extent that such Private Business Use is either not related or disproportionate to the governmental purpose of the issue. For this purpose, "Private Business Use" generally means use of the Bond-financed asset in a trade or business (e.g., use by a corporation, partnership, 501(c)(3) organization or the Federal government). Private Business Use does not include use of the Bond-financed asset by the Issuer or by another state or local governmental unit or use of the Bond-financed asset by the general public free of charge or pursuant to uniformly applied rates. Private Business Use will arise from the lease or sale of the Bond-financed assets. Private Business Use will generally arise through a contract whereby a non-State or local government unit manages, operates or provides services with respect to Bond-financed assets (a "Management Contract"). Management Contracts that meet certain requirements set forth in IRS Revenue Procedure 97-13 (as modified by Rev. Proc. 2001-39 and amplified by Notice 2014-67) and Rev. Proc. 2017-13 are treated as not giving rise to Private Business Use (the "97-13 and 2017-13 Safe Harbors"). Rev. Proc. 97-13 guidelines may be applied to a Management Contract entered into before August 18, 2017 and has not been materially modified or extended on or after August 18, 2017. Rev. Proc. 2017-13 must be applied to contracts entered into, materially modified or extended (including extensions under renewal provisions) on or after August 18, 2017. Rev. Proc. 2017-13 may also be applied to any contract entered into before August 18, 2017.
Examples of Private Business Use relating to tax-exempt bond financed property may include, but are not limited to, the following:
(b) Management or service contracts that do not meet 97-13 and 2017-13 Safe Harbors
(c) Research contracts that do not meet certain requirements described in IRS Revenue Procedure 2007-47
(d) Sale or disposition of property
(e) Naming rights arrangements
(2) No more than the lesser of 5% or $5 million of the Bond proceeds of an issue may be used to make a loan (a "Private Loan") or loans to non-state or local governmental persons.
b. UBS, or if applicable, a Post-Issuance Service Provider, shall:
(1) Monitor the use of Bond proceeds, the use of Bond-financed assets (e.g., facilities, furnishings or equipment) and the use of output or throughput of Bond-financed assets throughout the term of the Bonds (and in some cases beyond the term of the Bonds) to ensure compliance with covenants and restrictions set forth in applicable University resolutions and Tax Certificates.
(2) Maintain records identifying the assets or portion of assets that are financed or refinanced with proceeds of each issue of Bonds.
(3) Consult with bond counsel and other professional expert advisors in the review of contracts or arrangements that may give rise to Private Business Use involving use of Bond-financed facilities.
(4) Maintain records for any contracts or arrangements involving the use of Bond-financed facilities as may be necessary or appropriate to document compliance with all covenants and restrictions set forth in applicable University resolutions and Tax Certificates. Such records are to be maintained by the individual campus departments.
9. Identification and Correction of Violations
In the event that the use of tax-exempt bond or Build America Bond proceeds or Bond-financed assets is different from the covenants and representations set forth in the Tax Certificate, the University should contact Bond Counsel in a timely manner to ensure that there is no adverse effect on the tax status of the Bonds. Under existing Treasury Regulations, various “self-help” remedies are available to the University in the event of certain violations of the limits of use of tax-exempt bond or Build America Bond proceeds, the investment of tax-exempt bond or Build America Bond proceeds, and the use of the Bond-financed assets. For example, a change in the use of the Bond-financed assets after the issuance of the Bonds that results in excessive Private Business Use may be corrected through a 'remedial action' that is described in the Treasury Regulation Section 1.141-12. Such remedial actions include a defeasance of the portion of the Bonds affected by the excessive Private Business Use or using the disposition proceeds from the sale of the Bond-financed assets for another qualified purpose. In the event that the self-help remedial actions in Treasury Regulation Section 1.141-12 are not available to the University, violations occurring through University action (or inaction) that potentially adversely affect the status of the Bonds may be corrected through the Voluntary Closing Agreement Program as further described in IRS Notice 2008-31 and in Sections 7.2.3 of the Internal Revenue Manual.
All relevant records and contracts will be maintained as described below.
10. Record Keeping Requirements
All relevant records and contracts shall be maintained as described in this section. Unless otherwise specified in applicable University resolutions or Tax Certificates, the University shall maintain the following documents for the term of each issue of Bonds (including refunding Bonds, if any) plus at least three years:
a. A copy of the Bond closing transcript(s) and other relevant documentation delivered to the University at or in connection with closing of the issue of the Bonds.
b. A copy of all material documents relating to capital expenditures financed or refinanced by Bond proceeds including, without limitation, construction contracts, purchase orders, invoices, trustee requisitions and payment records, as well as documents relating to costs reimbursed with Bond proceeds and records identifying the assets or portion of assets that are financed or refinanced with Bond proceeds.
c. A copy of all contracts and arrangements involving Private Use of Bond-financed assets or for the Private Use of output or throughput of Bond-financed assets.
d. Copies of all records of investments, investment agreements, arbitrage reports and underlying documents, including trustee statements.
B. Tax Compliance Training
The Administrator or designated staff responsible for monitoring post-issuance compliance matters will attend regular training or educational forums necessary to stay up to date with tax-exempt bond tax requirements.
C. Annual Review
UBS will coordinate an annual review process to investigate, monitor, assure and document compliance with tax-exempt bond and Build America Bond federal tax law requirements.
IV. Delegation of Authority
There is no administrative specific delegation of authority.
V. Contact Information
University Bond System Office
James Yoneda, 956-7351
No References found
VII. Exhibits and Appendices
Vice Pres for Budget & Fin/CFO
December 28, 2020
TopicsBond ; Tax Compliance Procedures ; Build America Bonds ; Post-Issuance Compliance