Post-Issuance Tax-Exempt Bond Compliance
Tax exempt bonds (TEB) issued for the benefit of Carleton College by the Minnesota Higher Education Facilities Authority are typically a lower cost alternative to taxable debt and a valuable tool for financing capital projects. The interest on the bonds that is paid to bondholders is excluded from federal and Minnesota income tax if applicable federal tax laws are satisfied. The compliance requirements fall into two categories – prior to issuance and after issuance. A signed bond counsel opinion at closing is assurance that the requirements that must be satisfied on or prior to issuance have been addressed. In order for bonds to remain tax exempt through maturity, additional requirements must be met after issuance. Those requirements are addressed in this policy.
It is the policy of Carleton College to comply with applicable federal tax laws to ensure that bonds issued for its benefit maintain their tax exempt status. The College will adhere to the guidelines of the Office of Tax Exempt Bonds of the Internal Revenue Service, Tax Exempt and Governmental Entities division, in Publication 4077 and guidance published in their article “TEB Post Issuance Compliance: Some Basic Concepts” . The procedures will be reviewed and updated annually to reflect changes in requirements or IRS guidelines for post issuance compliance procedures.
The College’s compliance efforts are led by the Comptroller or his/her designee (such person is hereafter referred to as the Tax Manager). The Tax Manager consults with the Comptroller and Vice President & Treasurer.
Training and Continued Education
The Vice President and Treasurer and other applicable staff will meet with bond counsel and other legal counsel and advisors, as needed, at least annually to obtain education and training on updates to federal tax law regarding tax-exempt bonds.
Continuing Disclosure Filings and Financial Covenants
The Tax Manager maintains documents of all bond covenant and/or continuing disclosure requirements identified in the loan agreements.
After the close of each fiscal quarter and fiscal year end, the Tax Manager is responsible for ensuring that all continuing disclosure filing deadlines were met, and will prepare for the Treasurer’s signature any certificates evidencing affirmative coverage of bond financial covenant thresholds (e.g. expendable resource ratio, debt service ratio, insurance, etc.) that may be required under a loan agreement or bond-related standby purchase agreements.
The College will monitor the use of bond proceeds in the event that there is or will be private business use violation; not more than 5% of the tax exempt bond proceeds can be used for private business use. Before each issuance of tax exempt debt, the College will analyze the planned use of bond proceeds and the planned use of property financed by bond proceeds to ensure that the 5% limit is not violated. Issuance costs financed with bond proceeds are treated as private business use when applying the private business use test are limited to 2% under section 147(g) of the Internal Revenue Code. Issuance costs include, but are not limited to: underwriters’ discount, counsel fees, financial advisory fees, rating agency fees, trustee fees, paying agent fees (bond registrar, certification and authentication), accounting fees, printing costs, public approval costs, engineering and feasibility study costs, and guarantee fees.
The Tax Manager will maintain a chart of bond financed buildings, equipment and site improvements by bond issue (tracking each refinancing) at least annually to identify any private business use by lease or management contract associated with each facility.
Tax exempt borrowers are required to maintain sufficient records to demonstrate that their bonds have satisfied the requirements for tax exempt status. Under current Internal Revenue Service (IRS) policy, these records generally should be maintained for the entire term of the bond issue (and the term of any refinancing issue), plus three years:
- Bond closing transcript(s) and other relevant documentation in connection with the closing of the bond issue;
- Construction contracts and purchase orders
- Invoices related to bond proceeds spent during the construction period
- Trustee requisitions and payment records
- Documents relating to costs reimbursed with bond proceeds
- Records identifying the assets that are financed or refinanced with bond proceeds
- A copy of all material documents relating to capital expenditures financed or refinanced with bond proceeds including, but not limited to:
- A copy of record of investments, investment agreements, arbitrage reports, and trustee statements.
The Tax Manager maintains an inventory of documents that generally should be retained. Official bond issue documents and post-issuance documentation are maintained in the Business Office. Records are stored in hard copy and electronic format.
- Bond counsel and other legal counsel and advisors will be consulted regarding any potential changes in use of the bonds or refunding of the bonds.
- Engage expert advisors to assist in the calculation of arbitrage rebate with respect to the investment of bond proceeds in accordance with the schedule specified in the loan agreement.
- Monitor the use of bond proceeds (including investment earnings and reimbursement of expenditures made before bond issuance) and the use of bond-financed assets throughout the term of the bonds.
- If discovery that any applicable tax restrictions regarding use of bond proceeds and bond-financed assets may be violated, the College will consult promptly with bond counsel and other legal counsel and advisors to determine a course of action to remediate all non-qualified bonds, if such counsel advises that a remedial action is necessary.