Virginia Resources Authority Governor s Infrastructure Financing Conference Roanoke, Virginia December 11, 2014

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1 Virginia Resources Authority Governor s Infrastructure Financing Conference Roanoke, Virginia December 11, 2014 Arthur E. Anderson II Bonnie M. France McGuireWoods LLP McGuireWoods LLP aanderson@mcguirewoods.com bfrance@mcguirewoods.com 1

2 It ain t over till it s over. (Lawrence Peter Yogi Berra) 2

3 Post-Issuance Compliance I. Federal Tax Law II. Covenants III. Securities Law 3

4 I. Federal Tax Law Use of Proceeds/Financed Facilities Arbitrage Rebate Record Retention/Written Compliance Procedures 4

5 Use of Proceeds/Financed Facilities Tax-exempt status of interest depends on complying with either (i) restriction on private business use or (ii) restriction on private security or payments Private use of bond-financed facilities may not exceed 5% (10% for related use) 5

6 Private Business Use Private business use: use in a trade or business by any person other than a state or local government On some basis other than use by the general public Not just ownership or lease of a facility, but any special rights with respect to a facility Examples: Lease/rentals for private functions Management contract Guaranteed capacity (i.e.: guaranteed parking spaces, guaranteed minimum sewage treatment capacity) Naming rights 6

7 Private Payments/Security Focuses on source of funds expected to be used to repay bonds No more than 5% of debt service may be secured by or payable from payments derived from private business use - Rental payments - Utility revenues from special contracts - Security interest in equipment or real estate used in private business Cell tower leases Volunteer fire department equipment/buildings 7

8 Change in Use of Bond Financed Facilities - Remedial actions; Line 43 on Form 8038-G - Voluntary Closing Agreement Program (VCAP) IRS Notice Through greater transparency of our voluntary resolution methodologies, we hope to promote increased due diligence reviews by issuers and other parties to ensure that violations are timely identified and resolved. (Steven A. Chamberlin, Manager, Tax Exempt Bonds Compliance and Program Management) 8

9 Arbitrage Rebate Investment earnings in excess of bond yield must be rebated to U.S. Treasury Funds that may require rebate: Project Fund Debt Service Reserve Fund Other Pledged Funds Calculation and payment of rebate required every five years and when bonds are refunded 9

10 Rebate Exceptions Small Issuer (under $5 million/additional $10 million for school bonds) 6 month expenditure 18 month spend down 2 year construction project spend down Yield Restriction Earnings on bond proceeds restricted to yield on bonds Bond proceeds not spent within three years must be yield restricted Excess reserve funds must be yield restricted 10

11 Record Retention/Written Compliance Procedures Dear Sir or Madam: We are conducting a compliance check of your governmental bond... (IRS Letter 4408) IRS Compliance Check program Form 8038-G Line 44 11

12 IRS Post-Issuance Compliance Program (Tax Exempt Bond Community Forms and Publications) Publication 4079, Tax-Exempt Governmental Bonds/Compliance Guide Form Governmental Bond Financings Compliance Check Questionnaire Letter 4408 Publication 4386 ( Compliance Checks ) I am excited about the continued use of this approach with respect to governmental bonds... (Clifford J. Gannett, Director Tax-Exempt Bonds, IRS) 12

13 Key Elements of Post-Issuance Tax Compliance Program 1. Written procedures 2. Designate responsible individual 3. Record Retention until 3 years after bonds are paid Bond transcript Non-Arbitrage Certificate Requisitions/Expenditures/Allocations Indenture/Specimen Bond Resolutions/other official action Opinions 13

14 4. Expenditure/Investment records Individual responsible for keeping track of expenditures and investments Dates/Amounts/Purpose of Expenditure of Bond Proceeds Purchase price/description/earnings on investments of bond proceeds Yield on bonds Arbitrage rebate calculations and any payments Investment contracts (GICs) 5. Procedure to monitor private business use/change in use 14

15 If you have ten thousand regulations you destroy all respect for the law. (Winston Churchill) 15

16 II. Covenants Covenants and reporting requirements vary by lender and type of financing General obligation bonds typically few covenants Revenue bonds rate covenants/debt service coverage tests/reporting Lease financings covenants regarding maintenance of leased assets 16

17 Documents to review for covenants: Indenture There are a lot of words on the page, but they don t say anything. - Stephanie Hamlett Financing or Loan Agreement Financing Lease Bond Oh, these are payback bonds?! - Anonymous former client 17

18 Typical covenants: Annual audit/cafr/budget No default certificates Rate covenant Use of proceeds expenditures for authorized projects No transfer of financed property No encumbrance No free service Maintenance of insurance Notice of damage or destruction Consulting Engineer reports 18

19 III. Securities Law Legal requirements are primarily applicable to offerings Lenders in private placements/bank placements should conduct their own due diligence Official Statement the initial disclosure for an offering Includes all material information about bond structure and issuer Allows investors to assess creditworthiness Information is readily accessible posted on EMMA 19

20 I have no doubt that the nation has suffered more from undue secrecy than from undue disclosure. (Daniel Schorr) I meant what I said and I said what I meant. (Dr. Seuss, Horton Hatches the Egg) 20

21 SEC Rule 15c2-12 Imposes continuing disclosure requirements Material information in Official Statement and financial statements must be updated annually Continuing disclosure is filed with MSRB s electronic filing system (Electronic Municipal Market Access System ( EMMA ) Annual filing Event filing notice of certain events required to be filed within 10 business days 21

22 Who has to file continuing disclosure? Underwriter is required to obtain agreement for continuing disclosure from issuer Issuers who have entered into a Continuing Disclosure Agreement make sure locality staff person is responsible Failure to file annual report must be disclosed Typically issues sold in a bank placement or $100,000 denominations to no more than 35 investors are exempt Material obligated persons (borrowers in VPSA or VRA pool are material if obligated to pay 10% for VPSA or 15% for VRA of principal of pool debt) 22

23 Conclusion Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning. (Winston Churchill) 23

24 Questions? McGuireWoods LLP 24

3354:1-20-07.1 Tax-Exempt Debt Compliance Procedure. Tax-Exempt Debt

3354:1-20-07.1 Tax-Exempt Debt Compliance Procedure (A) Tax-Exempt Debt The use of tax-exempt debt plays an important role in funding a significant portion of the College s capital projects. As a result,