The Issuer’s City Treasurer (the “Oversight Officer”) will be responsible for overall administration and coordination of these procedures and policies.
A. Purpose
Issuers of tax-exempt “governmental bonds” must comply with federal tax rules pertaining to expenditure of proceeds for qualified costs, rate of expenditure, use of bond-financed property, investment of proceeds in compliance with arbitrage rules, and retention of records. The following procedures and policies are intended to establish compliance by Salt Lake City, Utah (the “Issuer”) with these rules in connection with the issuance of tax-exempt governmental bonds. These Tax Compliance Procedures may also be used by the Issuer to ensure compliance with federal tax rules for its currently outstanding tax-exempt governmental bonds.
B. Delegation of Responsibility
To the extent that any of the responsibilities set forth in these Tax Compliance Procedures are delegated to any other party, the Issuer will keep a record of such delegations with respect to each bond issue.
C. Schedule of Reviews
The Issuer will establish routines for monitoring on-going compliance that are consistent with discovering any noncompliance in a timely manner so that it may be corrected. While specific review processes are described in detail below, timing for such reviews will be as follows:
1. Private (Non-Exempt) Use: All contracts, leases or other arrangements providing special legal entitlement to the use of bond-financed facilities will be reviewed prior to execution to ensure that they will not cause private use limits to be exceeded with respect to any issue of bonds.
2. Arbitrage Compliance: With respect to each bond issue, the Issuer will ensure that it understands at the time of bond closing which funds and accounts containing bond proceeds may become subject to yield-restriction investment rules and will keep a record of the dates upon which such rules will begin to apply.
3. Rebate Compliance: While rebate calculations may be performed more often, the Issuer will ensure upon the fifth anniversary date of the issuance date of the bonds, every five years thereafter, and upon final retirement of the bonds, that either no rebate is owed or provision has been made for the payment of any rebate owed within 60 days.
4. Change in Use/Ownership: Prior to executing any contract, lease or other document which would materially change the use of the bond-financed project or selling of any bond-financed property, the Issuer will (i) confirm that such change will not require a remedial action to be taken with respect to any bond issue, (ii) take a remedial action, if necessary, or (iii) discuss with bond counsel whether a voluntary closing agreement with the Internal Revenue Service is appropriate.
D. Tax Requirements Associated with Sale and Issuance of Bonds
Review and retention of tax documents related to the sale and issuance of bonds will be generally supervised by the Oversight Officer.
1. Issue Price. The “issue price,” as defined in the Internal Revenue Code of 1986, as amended (the “Code”), of the bonds will be documented at the time of issuance. Certifications of an underwriter, placement agent or purchaser and a final numbers package (if applicable) will establish “issue price” and will be reviewed and included in the bond transcript or other records maintained for the bond issue.
2. Weighted Average Maturity. The weighted average maturity (taking into account the various issue prices of the maturities of the bonds) will be documented at the time of issuance.
3. Economic Life of Financed Assets. As estimated average economic life of the expected bond-financed assets will be documented at the time of issuance.
4. Information Reporting. Form 8038-G will be reviewed and filed not later than the 15th day of the 2nd calendar month following the quarter in which the bonds were issued. Filing of the Form 8038-G will be confirmed with bond counsel.
E. Expenditure of Proceeds for Qualified Costs
Expenditure of bond proceeds will be reviewed by the Oversight Officer or other appropriate department head or designee.
1. Requisitions. The Oversight Officer will establish a form and procedures for preparation and review of requisitions of bond proceeds, and maintain records of the date, amount and purpose of the disbursement. Requisitions must identify the financed property in conformity with the Tax Certificate and Agreement executed by the Issuer at closing, including any certifications as to the location and character of the bond-financed property.
2. Investment Earnings. Investment earnings on sale proceeds of the bonds will be tracked and will be requisitioned only for appropriate expenditures.
3. Capital Expenditures. The Issuer will verify that all costs for which it requisitions bond proceeds are capital expenditures, except as otherwise permitted by the Tax Certificate and Agreement executed by the Issuer at closing.
4. Debt Service Reserve Funds. Bond-funded reserve funds cannot exceed the least of (i) 10% of the par amount of the bonds (or the issue price of the bonds, if there is more than a de minimis amount of original issue discount or premium), (ii) maximum annual debt service, and (iii) 125% of average annual debt service. The initial funding of any reserve fund will be measured against this limit.
5. Reimbursement. Requisitions for costs that were paid prior to the issuance of the bonds are, in general, limited to costs paid subsequent to, or not more than 60 days prior to, the date a “declaration of intent” to reimburse the costs was adopted by the Issuer. If proceeds are used for reimbursement, a copy of the declaration will be obtained and included in the records for the bonds, if not already part of the bond transcript.
6. Final Allocation. Requisitions will be summarized in a “final allocation” of proceeds to uses not later than 18 months after the in-service date of the financed property (and in any event not later than 5 years and 60 days after the issuance of the bonds).
7. Timing of Expenditures. Expenditure of proceeds will be measured against the Issuer’s expectations, as set forth in the Tax Matters Certificate executed in connection with the particular bond issue, to spend or commit 5% of net sale proceeds within 6 months, to spend 85% of net sale proceeds within 3 years, and to proceed with due diligence to complete the project and fully spend the net sale proceeds. Expected expenditure schedules, project timelines, and plans and specifications will be maintained to support expectations. Reasons for failure to meet the expected schedule will be documented and retained in the records for the bonds.
8. Rebate Spending Exceptions. Expenditure of proceeds will be monitored for compliance with spending exceptions to the rebate requirement, as follows:
a. If the six-month spending exception applies, expenditure of gross proceeds will be monitored against the following schedule.
100% within 6 months
b. If the 18-month spending exception applies, expenditure of gross proceeds will be monitored against the following schedule.
15% within 6 months
60% within 12 months
100% within 18 months
c. If the two-year spending exception applies, expenditure of “available construction proceeds” will be measured against the following schedule.
10% within 6 months
45% within 12 months
75% within 18 months
100% within 24 months
F. Use of Bond-Financed Property
Use of bond-financed property when completed and placed in service will be reviewed by the Oversight Officer or other appropriate department head or designee. Use of bond-financed property must be measured separately for each bond issue.
1. Limit on Private (Non-Exempt) Use. Average annual private use of bond-financed property over the life of the issue cannot exceed 10% of the proceeds (or 5% if the use is unrelated to the governmental use or disproportionate to the governmental use). Private use will be determined annually as a percentage of total use of proceeds of the bond issue.
2. Review of Contracts and Agreements. Contracts and agreements with private business users for the lease, management, sponsored research, or any other potential private/non-exempt use of bond-financed property will be reviewed prior to execution for compliance with the private use limits. This review will include a determination of whether any arrangement meets the safe harbors of Internal Revenue Service Rev. Proc. 97-13, as modified by Rev. Proc. 2001-39, or, with respect to research arrangements, Rev. Proc. 2007-47. It will also include a determination of whether any arrangement meets the exception for incidental use under Treas. Reg. § 1.141-3(d)(5), the exception for general public use under Treas. Reg. § 1.141-3(c), or the exception for certain short-term arrangements under Treas. Reg. § 1.141-3(d)(3).
3. Tracking Private (Non-Exempt) Use. Agreements with private business users or non-profit organizations for lease or management or services contracts or other private business use involving bond financed property will be tracked and aggregated with other private business uses for compliance with the 10% (or 5%) limit, as set forth in the Tax Certificate and Agreement for the applicable bonds.
4. Change in Use. No item of bond-financed property will be sold or transferred to a non-exempt party without advance arrangement of a “remedial action” under the applicable Treasury Regulations (see Treasury Regulations § 1.141-12).
G. Investments and IRS Filings
Investment of bond proceeds in compliance with the arbitrage bond rules and rebate of arbitrage will be supervised by the Oversight Officer.
1. Guaranteed Investment Contracts. Guaranteed investment contracts (“GIC”) will be purchased only using the three-bid “safe harbor” (see Treasury Regulations § 1.148-5(d)(6)(iii)), in compliance with fee limitations on GIC brokers (see Treasury Regulations § 1.148-5(e)(2)(iii)); provided, however, that to the extent that the safe harbor provisions cannot be met, the Issuer will consult with bond counsel.
2. Fair Market Value of Investments. Other investments will be purchased only in market transactions.
3. Yield-Restriction. Prior to the purchase of any investment, the Issuer will confirm that such purchase will not violate any rules relating to proceeds which must be invested at a yield not in excess of the yield on the applicable issue of bonds.
4. Rebate Calculations. Calculations of rebate liability will be performed by outside consultants at the end of construction and at least every fifth bond year.
5. Rebate Payments. Rebate payments will be made with Form 8038-T no later than 60 days after (a) each fifth anniversary of the date of issuance of the applicable bonds and (b) the final retirement of the issue. Compliance with rebate requirements will be reported to the bond trustee, if applicable.
6. Note First Rebate Due Date. The date for the first rebate payment will be identified and entered in the records for the issue at time of issuance of the bonds.
H. Refunding Issues
When tax-exempt governmental bonds are used to refund other bonds (“Refunded Bonds”), the new bonds (“Refunding Bonds”) will be treated as having financed the property originally financed with the Refunded Bonds (or any bonds refunded by the Refunded Bonds), such that financed property must be tracked until the last bonds (whether Refunded Bonds or Refunding Bonds) attributable to that property are retired. The Oversight Officer or other appropriate department head or designee will continue reviewing the use of the any bond-financed property until the last bonds attributable to that property are retired; except to the extent that tracking is no longer required due to the economic life of the property coming to an end.
Refunding Bonds the proceeds of which are used to retire Refunded Bonds more than 90 days after the issue date of the Refunding Bonds are “Advance Refunding Bonds”. Advance Refunding Bonds have additional federal tax requirements in order to be tax-exempt governmental bonds. In order to comply with these additional requirements, the Oversight Officer will:
1. Limit on Advance Refundings. Confirm directly, or in conjunction with a financial advisor and/or bond counsel, that the issuer does not issue Advance Refunding Bonds that would violate the limit on the number of advance refundings for any of its tax-exempt governmental bonds;
2. Proper Call Date. Confirm directly, or in conjunction with a financial advisor and/or bond counsel, that the Refunded Bonds are being redeemed on their earliest call date or other allowable date;
3. Mixed Escrows. Confirm directly, or in conjunction with a financial advisor and/or bond counsel, that all non-bond proceeds amounts going into any Refunded Bond escrow comply with the rules relating to mixed escrows (meaning escrows which are funded with bond proceeds and non-proceeds)(see Treasury Regulations § 1.148-9(c)(2));
4. Non-SLGs Investments. To the extent that investments other than United States Treasury Securities – State and Local Government Series (“SLGs”) will be placed in an escrow, confirm directly, or in conjunction with a financial advisor and/or bond counsel, that SLGs were not a more efficient investment on the date of the bidding of any other type of investment; or, to the extent that SLGs sales have been suspended on such date, confirm that the safe harbors for determining the fair market value of yield-restricted defeasance escrows have been met (see Treasury Regulations § 1.148-5(d)(6)(iii)). To the extent that SLGs are unavailable and the Issuer cannot obtain at least three bids to provide other investments, the Issuer will consult with bond counsel and its financial advisor on how to proceed;
5. Monitoring 0% SLGs. To the extent that an escrow funded with Advance Refunding Bond proceeds requires future purchases of 0% SLGs in order to comply with the applicable yield restrictions, the Issuer will purchase the 0% SLGs directly or, by written agreement, cause an escrow agent to purchase such SLGs. If the SLGs are to be purchased by an escrow agent, the Issuer will confirm that such SLGs have actually been purchased, or, to the extent SLGs sales are suspended, comply with alternate procedures (which currently are provided in Rev. Proc. 95-47); and
6. Private Use Measurement Period. Determine whether it will measure private business use using a combined measurement period (meaning starting with the issue date of the Refunded Bonds and ending with the final retirement of the Refunding Bonds) or separate measurement periods for the Refunded Bonds and the Refunding Bonds; provided that the Issuer may not use separate measurement periods if the Refunded Bonds were not in compliance with the private business use limits measured from their date of issuance to the date of issuance of the Refunding Bonds.
I. Short-Term Working Capital Financings
To the extent that the Issuer is issuing short-term obligations to finance restricted working capital expenditures (meaning non-capital expenditures of the Issuer for which no exception to Treasury Regulations § 1.148-6(d)(3)(i) applies)(“Working Capital Financing”), the Issuer will follow the following rules:
1. Proceeds Spent Last. The Issuer will not allocate proceeds of its Working Capital Financing to expenditures to the extent that it has other “available amounts” to pay such expenditures.
a. For this purpose, “available amounts”, include any amounts that are available to the Issuer for working capital expenditures of the type being financed; however, “available amounts” does not include amounts that may not be used by the issuer for working capital purposes without legislative or judicial action, or amounts that have a legislative, judicial, or contractual requirement that those amounts be reimbursed. (See Treasury Regulation § 1.148-6(d)(3)(iii)(A).)
b. For this purpose, reasonable working capital reserves are treated as unavailable. A working capital reserve is reasonable if it does not exceed 5% of the actual working capital expenditure of the Issuer in the prior fiscal year. (See Treasury Regulation § 1.148-6(d)(3)(iii)(B).)
c. If the Issuer has not historically maintained a working capital reserve, then the Issuer will consult with bond counsel regarding whether it can treat a reasonable working capital reserve as unavailable. An example of how to determine whether the Issuer historically maintained a working capital reserve would be to average the beginning or ending monthly balances available for working capital expenditures (not including the proceeds of any bond issues) during the one year period preceding the Working Capital Financing. (See Treasury Regulation § 1.148-1(c)(4)(ii).)
2. Restricted Funds. To the extent that the Issuer has funds which are available, but restricted (as discussed in 1.b. above), the Issuer will document why it treated such funds as unavailable by keeping a list of such funds and the restrictions that are applicable to them. The Issuer will re-evaluate such funds prior to the issuance of a Working Capital Financing and prior to a final allocation of proceeds of a Working Capital Financing to ensure that such funds should still be treated as unavailable.
3. Investment of Proceeds. If any proceeds of a Working Capital Financing remain unexpended 13 months after the issuance of the Working Capital Financing, such proceeds will be invested at yield not exceeding the yield on the Working Capital Financing; unless the Tax Certificate provides otherwise, or upon the advice of bond counsel.
4. Rebate. The Issuer will calculate and pay any rebate owed (as provided in Section G above) to the extent that the issuer has not spent 100% of the proceeds of the Working Capital Financing within six months of the issuance of the Working Capital Financing; provided, however, for this purpose, the proceeds of the Working Capital Financing will be considered spent if the Issuer achieves a cumulative cash flow deficit greater than 90% of the proceeds of the Working Capital Financing within the period beginning on the issue date of the Working Capital Financing and ending on the earlier of the date the deficit is achieved and six months after the issue date of the Working Capital Financing. “Cumulative cash flow deficit” means the excess of (i) expenses paid during the period which would ordinarily be paid out of or financed by anticipated tax or other revenues, over (ii) the aggregate amount available (other than from proceeds of the Working Capital Financing) during such period for the payment of such expenses. (See Section 148(f)(4)(b)(iii).) For purposes of achieving the 90% cumulative cash flow deficit test, working capital reserves are treated as available.
5. Records. The Issuer will maintain a final allocation of proceeds showing that it spent the proceeds of the Working Capital Bonds using the proceeds spent last method (described in paragraph 1 above). If the Issuer did not spend 100% of the proceeds of the Working Capital Financing within six months of issuance, the Issuer should also maintain records showing either (i) that it met the 90% cumulative cash flow deficit test within the applicable period, or (ii) maintain records showing the calculation and payment (if any) of rebate.
J. Post-Issuance Corrective Actions
The Issuer expects that its compliance with the procedures outlined above will prevent any violations of federal tax rules pertaining to the Issuer’s outstanding tax-exempt governmental bonds (including any Refunded Bonds). However, if the Issuer discovers a potential violation through its ongoing monitoring or otherwise, it will determine in conjunction with its bond counsel whether a violation actually exists. If it is found that a violation actually exists, the issuer will determine whether (i) any remedial actions are available, or (ii) a voluntary closing agreement with the Internal Revenue Service is appropriate. Common examples of violations are as follows:
a. Failure to purchase 0% SLGs at the appropriate time.
b. Subsequent sale or other change in use of bond-financed property.
c. Private (non-exempt) use of bond-financed property resulting in overall private use not expected at closing and in excess of the 10% (or 5%) de minimis limit for the particular bond issue.
d. Post-issuance change in the terms of the bonds without proper reissuance analysis and actions, if necessary.
e. Post-issuance purchase of the bonds by the Issuer, a borrower of bond proceeds or a related party to either, resulting in an extinguishment of the bonds without proper analysis and actions, if necessary.
f. Failure to pay rebate in a timely manner.
g. Improper reimbursement of expenditures (too old or not capital).
K. Records
With the exception of 2.c. below, which records will be managed and retained by the appropriate department head or designee, management and retention of records related to tax-exempt bond issues will be supervised by the Oversight Officer.
1. Records will be retained for the life of the bonds plus any Refunding Bonds plus three (3) years. This means that the Issuer will maintain records regarding Refunded Bonds until three years after the final Refunding Bonds (including through a series of refundings) is retired. Records may be in the form of documents or electronic copies of documents, appropriately indexed to specific bond issues and compliance functions.
2. Retainable records generally include:
a. The transcript documents executed in connection with the issuance of the bonds (including the authorizing documents, offering materials, Form 8038-G, and the Tax Certificate and Agreement, and any elections made with respect to the bonds, if applicable) and any amendments to such documents.
b. Records of expenditures of bond proceeds include requisitions, account statements and the final allocation of proceeds.
c. Records of the use of bond-financed property, including all agreements reviewed for private use.
d. Records pertaining to investments including GIC documents under the Treasury Regulations, records of purchase and sale of other investments, SLGS subscriptions, and records of investment activity sufficient to permit calculation of arbitrage rebate or demonstration that no rebate is due.
e. Records pertaining to rebate calculations and all rebated amounts paid to the United States Treasury.
f. Documentation evidencing sources of payment or security for the bond issue.
L. Training
The Issuer will use its best efforts to ensure that any officers and employees responsible for carrying out these procedures are properly trained for that responsibility. Such training will include:
1. Ensuring access to the necessary records.
2. Ensuring that such persons have reviewed a copy of these procedures and the tax certificates and Forms 8038-G related to the relevant bond issues.
3. Permitting attendance on free educational conference calls or webinars sponsored by the Internal Revenue Service, bond-related professional associations or law firms.
4. Permitting access to free educational websites, such as: http://www.irs.gov/taxexemptbond/index.html
Cost permitting, such training may also include attendance at educational conferences and maintaining tax-exempt bond-related reference materials.
APPROVED on February 13, 2012
By:_______________________________________
Finance Director