TAX-EXEMPT BOND COMPLIANCE TRAINING VIRGINIA COMMONWEALTH UNIVERSITY

TAX-EXEMPT BOND COMPLIANCE TRAINING VIRGINIA COMMONWEALTH UNIVERSITY

Agenda Purpose Pre-Issuance Process Post-Issuance Process IRS Vigilance: Written Procedures Responsible Person(s) Record Keeping & Retention Continuing Disclosure Obligation Monitoring of Arbitrage & Rebate Requirement Education & Training Private Business Use Monitoring Q & A 2

Purpose To identify applicable IRS code provisions and Treasury rules and regulations related to tax-exempt bond compliance To explain the University s policy, which was approved by the Board in February 2012, for complying with applicable rules and regulations to safeguard against violation that may result in penalty or loss of tax exempt status of bonds To assign responsibility for tax exempt bond compliance To identify the University s continuing disclosure requirements and establish procedures for providing annual disclosure, event disclosure and voluntary disclosure through Electronic Municipal Market Access (EMMA) system 3

Purpose To ensure continued access to the taxexempt bond market To ensure that the proceeds of tax exempt bonds are spent as required by both the bond documents and the tax rules To ensure the projects financed by taxexempt bonds do not have impermissible amounts of private use, "bad use 4

Pre-Issuance Capital projects are identified during the biennial updates to the University s six-year capital plan, which is approved by the Board of Visitors Project initiation form submitted to Treasury Services for projects that require debt financing Treasury Services assembles a group of key stakeholders and coordinates the completion of a financial feasibility study 5

Pre-Issuance Financial feasibility study (State or VCU developed process) must be approved by Senior Management and at a minimum will include approval by the University Vice President for Finance & Administration, the Dean, and the Vice President of the sponsoring department Treasury Services requests the following: Board of Visitors Authorization to Issue Debt Declaration of Intent To Borrow and Reimbursement Resolution (if applicable) State Approval if bonds are issued through the State Legal Opinions Bond Counsel opine on validity and tax exempt status of bonds University legal counsel opine on debt authorization and effect on tax exempt status of the debt Tax Certificate Debt is issued upon completion of the process 6

What is Post-Issuance Debt Compliance? "Post-issuance debt compliance begins with the debt issuance process itself and provides for a continuing focus on investments of bond proceeds and use of bondfinanced property. It will require identifying existing policies, the responsible people, the applicable procedures, and the affected population." 7

Post-Issuance Debt Compliance A Brief History A post-issuance compliance questionnaire was issued to 207 charities in 2007 to assess the compliance practices and procedures employed by charities with respect to their bonds. On September 11, 2008, the IRS released a report presenting its analysis and preliminary conclusions on the data, which suggested potential problems related to: inadequate record retention, failure to pay arbitrage rebate, substantial private use of facilities, and other weaknesses related to debt management and monitoring 8

What is the IRS looking for? Written procedures and guidelines An individual identified to coordinate the plan Record keeping and retention guidelines Continuing disclosure obligations Education and training Monitoring of arbitrage and rebate requirements Private business use monitoring 9

Written Procedures & Guidelines Making written procedures readily available Identifying a single office or position within an office in the procedure documents to which questions can be directed Clearly written policies and procedures should identify individuals and units that are held accountable for adherence to the policies and procedures Benefits: Quick response time to the customers Fewer errors Consistent answers 10

Individuals identified to coordinate the plan The Director of Treasury and Foundation Services Responsible for administering and overseeing the day to day aspects of the program Supporting the Bond Compliance Committee Responsible for maintaining records relating to the issuance of the University s tax-exempt bonds, Investment of bond proceeds The University s annual event disclosure and voluntary disclosure The Office of Research Maintain written procedures to ensure compliance with the University s Tax-Exempt Bond Compliance Policy Responsible for maintaining records relating to research contracts Maintain written procedures to ensure compliance with the University s Tax-Exempt Bond Compliance Policy 11

Individuals identified to coordinate the plan The Controller s Office Responsible for maintaining records on private use including responses to annual private use questionnaire Retain the audited financial statements Keep record of any prior IRS examinations of VCU or bond financings Develop training materials and conduct training classes for employees involved in the process The Office of the General Counsel Maintain written procedures to ensure compliance with the University s Tax-Exempt Bond Compliance Policy Bond counsel opines on the validity and tax exempt status of the bonds When questions arise during the life of the bonds, University Counsel is consulted. If appropriate, we also seek the advise of bond counsel. 12

Individuals identified to coordinate the plan Facilities Management Division Responsible for maintaining records on the project expenditures Allocation of bond proceeds including construction contracts, vendor invoices, payments and requisitions The Vice President of Finance & Administration Maintain written procedures to ensure compliance with the University s Tax-Exempt Bond Compliance Policy Responsible for investor relations, rating agencies and other outside parties relating to the status of projects Bond Compliance Committee Responsible for reviewing compliance procedures and systems on a periodic basis, not less than annually Committee is currently comprised of Pam Currey, Stephanie Hamlett, Ben Houck, Kevin Davenport, Dave Goodwin, Sue Robb and Tricia Perkins 13

Record Keeping & Retention Guidelines Retain all records relating to tax-exempt bond financings for the entire term of the bond issue plus three years Each area is responsible for keeping their own records and complying with this policy This policy supersedes any other documented record retention policies at the University or the Commonwealth 14

Tax & Disclosure Obligations The University is required to provide the following filings: IRS tax forms 8038, 8038-G, 8038-T, and 8038-R Statistics and filings required by the State Arbitrage Certificates Within five years of the anniversary of the debt issue Continuing Disclosure Agreements (CDAs) require filing annual financial and operating information through the (EMMA) system Disclose through EMMA any bond defaults 15

Monitoring of Arbitrage and Rebate Requirements Arbitrage is the investment gain made by investing the proceeds of tax exempt bonds in taxable investments. Generally, IRS rules govern the expenditure of bond proceeds at explicit intervals. Calculate and pay or "rebate" if necessary to the U.S. Government any "arbitrage profit" earned on the investment. 16

Education & Training The Controller s Office will perform the following: Develop training materials. Post the training to the web site for reference. Hold classes for employees in departments that are impacted by this policy. Maintain and distribute private use questionnaire to responsible department managers prior to debt issuance and annually thereafter. 17

Private Business Use General Rules Private business use means use in a trade or business carried on by any person other than an exempt entity for its exempt purposes. For VCU, an exempt entity is any state or local governmental entity. No more than the lesser of $15M or 10% of the proceeds of a bond issue for the University may be used for any private business use. 18

Why does private business use matter? Excessive private business use of the proceeds of facilities financed with tax-exempt bonds may cause the interest on the tax-exempt bonds to be taxable to the holder of the bonds. For financings by state and local governments or their agencies, private business use related to the qualifying use of the proceeds or facility is limited to 10% or less of the proceeds of facilities financed with tax-exempt bonds. Private business use unrelated to such qualifying use of the proceeds or facility is limited to 5% or less of such proceeds. 19

Private Business Use Types of Private Use Ownership A sale or transfer of ownership to a nongovernmental person A lease to nongovernmental person of 80% of the economic life of the facilities is treated as a tax ownership Leases and similar arrangements A nonqualified user s lease of facilities Transaction where the nongovernmental person has high degree of control and user bears risk of loss of the facilities Management contracts A management contract is any arrangement whereby a nongovernmental person actively manages the operations of a facility The contract should not give the private party any of kind of profit sharing Examples: contracts for dining services, retail services, facility management, or vivarium services (management of an animal facility). 20

Private Business Use Types of Private Use Research Contracts Any research that is sponsored by a nongovernmental person including the federal government and its agencies. Qualifying research agreements must be for "basic research" and the rights of the sponsor to the results of the research must comply with the stated rules. IRS Revenue Procedure 2007-47 set forth the basic rules for determining when sponsored research is not considered bad use Other Beneficial Use Arrangements Arrangement that conveys special legal entitlements to a nongovernmental person for beneficial use of tax-exempt financed property. Examples are: Summer camps having the exclusive right to use an athletic facility Specially designed courses open only to one company, or use of a parking garage for a private event. 21

Private Business Use Exceptions General Public Use When use of the facilities is available to the general public with no priority rights or any other preferential benefits conveyed. Use is not general public use if the term of the use under the arrangement, including all renewal options, is greater than 200 days. Short Term Use De-minimis uses of bond-financed facilities are not private business use if the facility is not financed for a principal purpose of providing it for use by a nongovernmental person 50 days or less: The arrangement is a negotiated arm's-length arrangement, and compensation at fair market value. 100 days or less: Similar arrangements are generally available to, and expected to be executed with, private businesses on a nondiscriminatory, rate scale basis Incidental Use Common incidental uses include pay telephones, vending machines, advertising displays, and use for television cameras. 22

Private Business Use Exceptions Safe Harbors Management Contracts Compensation for services rendered must be reasonable, and not based, in whole or in part, on a share of net profits from the operation of the facility. Examples: % of gross revenues or adjusted gross revenues. % of expenses but not both; a capitation fee (per person); or a per-unit fee. Research Contracts Research agreements with a corporate sponsor for basic research Research agreements with industry sponsors Research agreements with federal government sponsors 23

Private Business Use Monitoring Annually The Controller and Treasury Services will analyze private use questionnaire responses to: Identify where taxable financing is appropriate for a particular capital project Identify impermissible private business use in existing facilitates so that corrective action, if necessary, can be taken Collect information necessary for reporting purposes If potentially impermissible private business use is identified, the Controller will notify the VP of Finance and Administration and seek advice of bond counsel 24

Private Business Use Monitoring Annually Any change or contemplated change in a project s use that includes private business use must be reported to the Controller s Office and Treasury Services prior to the implementation of the proposed change 25

CONTACTS Treasury and Foundation Services: Kevin Davenport Phone 828-6533 Email: kwdavenport@vcu.edu Facilities Management Division: Dave Goodwin Phone 828-4785 Email: dagoodwi@vcu.edu Controller s Office: Tricia Perkins Phone 828-5474 Email: prperkins@vcu.edu Office of Research: Sue Robb Phone 827-0479 Email: sarobb@vcu.edu 26