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HomeMy WebLinkAbout2012-02-15 PACKET 04.J.REQUEST OF CITY COUNCIL ACTION COUNCIL AGENDA MEETING ITEM # DATE 2/15/12 Finance ORIGINATING DEPARTMENT . •• a -.. . 41 MIZ i low COUNCIL ACTION REQUEST Consider Post Issuance Debt Compliance Policy STAFF RECOMMENDATION Adopt the Post - issuance Debt Compliance Policy Resolution BUDGET IMPLICATION N/A BUDGETED AMOUNT ADVISORY COMMISSION ACTION ❑ PLANNING ❑ PUBLIC SAFETY ❑ PUBLIC WORKS ❑ PARKS AND RECREATION ❑ HUMAN SERVICES /RIGHTS ❑ ECONOMIC DEV. AUTHORITY SUPPORTING DOCUMENTS ® MEMO /LETTER: ® RESOLUTION: ❑ ORDINANCE: ❑ ENGINEERING RECOMMENDATION: REVIEWED El El El El El El ❑ LEGAL RECOMMENDATION: ® OTHER: Post issuance Debt Compliance procedures '7PA ACTUAL AMOUNT APPROVED DENIED ❑ ❑ ❑ ❑ ❑ ❑ ❑ ❑ ❑ ❑ ❑ ❑ ❑ ❑ ADMINISTRATORS COMMENTS � f , ` ity Administrator Date COUNCIL ACTION TAKEN: ❑ APPROVED ❑ DENIED ❑ OTHER H: \Council items \City Council Action Form.doc City of Cottage Grove Finance Department TO: Honorable Mayor and City Council Ryan Schroeder, City Administrator FROM: Robin Roland, Finance Director DATE: February 10, 2012 SUBJECT: Consider Post Issuance Debt Compliance Policy • Introduction New regulations require formal adoption of a "Post Issuance Debt Compliance Policy by the City Council prior to the issuance /sale of bonds. Discussion Historically, when a municipality has sold bonds, the Finance Director (and /or delegate) has been charged with a variety of duties including but not limited to recordkeeping, arbitrage rebate compliance and reporting, assembling and retaining expenditure and asset documentation and continuing disclosure. Although not formalized in adopted policy or procedure, these duties were assumed by the position in relation to all the City's debt issues. Recently, due to an ever expanding regulatory/compliance environment, the IRS has requested that a formal policy on "Post Issuance Debt Compliance" be adopted by Councils (Boards) of those entities issuing debt. The policy acknowledges steps taken to safeguard against post- issuance violations and to monitor the related regulation of the obligations. Such a policy is attached in Resolution form with this memo. Staff has reviewed the Policy and accompanying procedures and acknowledges our intent on behalf of the City to conform to them. Requested Action Adopt the Post - Issuance Debt Compliance Policy resolution. RESOLUTION NO. 12- RESOLUTION ADOPTING Post- Issuance Debt Compliance Policy The City Council (the "Counsel ") of the City of Cottage Grove, Minnesota (the "City ") has chosen, by policy, to take steps to help ensure that all obligations will be in compliance with all applicable state and federal regulations. This policy may be amended, as necessary, in the future. WHEREAS, The Internal Revenue Service (IRS) is responsible for enforcing compliance with the Internal Revenue Code (the "Code ") and related regulations governing certain obligations (for example: tax - exempt obligations, Build America Bonds, Recovery Zone Development Bonds and various "Tax Credit" Bonds). The IRS expects issuers and beneficiaries of these obligations to adopt and implement a post - issuance debt compliance policy and procedures to safeguard against post - issuance violations; and WHEREAS, The City desires to monitor these obligations to ensure compliance with the IRS Code and related regulations governing such obligations. To help ensure compliance, the City has developed the following policy (the "Post- Issuance Debt Compliance Policy "). The Post- Issuance Debt Compliance Policy shall apply to the obligations mentioned above, including bonds, notes, loans, lease purchase contracts, lines of credit, commercial paper or any other form of debt that is subject to compliance. NOW THEREFORE BE IT RESOLVED, by the City Council of the City of Cottage Grove, County of Washington, State of Minnesota, that the Finance Director of the City is designated as the City's agent who is responsible for post- issuance compliance of these obligations. The Finance Director shall assemble all relevant documentation, records and activities required to ensure post- issuance debt compliance as further detailed in corresponding procedures (the "Post- Issuance Debt Compliance Procedures "). At a minimum, the Post - Issuance Debt Compliance Procedures for each qualifying obligation will address the following: 1. General post - issuance compliance; 2. Proper and timely use of bond proceeds and bond- financed property; 3. Arbitrage yield restriction and rebate; 4. Timely filings and other general requirements; 5. Additional undertakings or activities that support points 1 through 4 above; 6. Other requirements that become necessary in the future. The Finance Director shall apply the Post - Issuance Debt Compliance Procedures to each qualifying obligation and maintain a record of the results. Further, the Finance Director will ensure that the Post- Issuance Debt Compliance Policy and Procedures are updated on a regular and as needed basis. The Finance Director or any other individuals responsible for assisting the Finance Director in maintaining records needed to ensure post- issuance debt compliance, are authorized to expend funds as needed to attend training or secure use of other educational resources for ensuring compliance such as consulting, publications, and compliance assistance. Most of the provisions of this Post - Issuance Debt Compliance Policy are not applicable to governmental bonds the interest on which is includable in gross income for federal income tax purposes. On the other hand, if an issue of taxable governmental bonds is later refunded with the proceeds of an issue of tax- exempt governmental refunding bonds, then the uses of the proceeds of the taxable governmental bonds and the uses of the facilities financed with the proceeds of the taxable governmental bonds will be relevant to the tax - exempt status of the governmental refunding bonds. Therefore, if there is any reasonable possibility that an issue of taxable governmental bonds may be refunded, in whole or in part, with the proceeds of an issue of tax- exempt governmental bonds then, for purposes of this Post - Issuance Debt Compliance Policy, the Finance Director shall treat the issue of taxable governmental bonds as if such issue were an issue of tax- exempt governmental bonds and shall carry out and comply with the requirements of this Post - Issuance Debt Compliance Policy with respect to such taxable governmental bonds. The Finance Director shall seek the advice of bond counsel and its financial advisor as to whether there is any reasonable possibility of issuing tax- exempt governmental bonds to refund an issue of taxable governmental bonds. If the City issues bonds to finance a facility to be owned by the City but which may be used, in whole or in substantial part, by a nongovernmental organization that is exempt from federal income taxation under Section 501(a) of the Code as a result of the application of Section 501(c)(3) of the Code (the "501(c)(3) Organization "), the City may elect to issue the bonds as "qualified 501(c)(3) bonds" the interest on which is exempt from federal income taxation under Sections 103 and 145 of the Code and applicable Treasury Regulations. Although such qualified 501(c)(3) bonds are not governmental bonds, at the election of the Finance Director, for purposes of this Post - Issuance Debt Compliance Policy, the Finance Director shall treat such issue of qualified 501(c)(3) bonds as if such issue were an issue of tax- exempt governmental bonds and shall carry out and comply with the requirements of this Post - Issuance Debt Compliance Policy with respect to such qualified 501(c)(3) bonds. Alternatively, in cases where compliance activities are reasonably within the control of the relevant 501(c)(3) Organization, the Finance Director may determine that all or some portion of compliance responsibilities described in this Post - Issuance Debt Compliance Policy shall be assigned to the relevant organization. The City may also issue tax- exempt bonds, the proceeds of which are loaned to certain private entities, including qualified 501(c)(3) organizations (referred to as "conduit bonds "). The City will require, as part of approval of any conduit bonds that the borrower assumes the duties of post - issuance debt compliance as described in this Post- Issuance Debt Compliance Policy, including provisions for reporting to the City. Passed this 15th day of February, 2012. Myron Bailey, Mayor Attest: Caron M. Stransky, City Clerk City of Cottage Grove, Minnesota Post- Issuance Debt Compliance Procedures The City Council (the "Council ") of the City of Cottage Grove, Minnesota (the "City ") has adopted the attached Post- issuance Debt Compliance Policy dated February 15, 2012. The Post - Issuance Debt Compliance Policy applies to qualifying debt obligations issued by the City. As directed by the adoption of the Post - Issuance Debt Compliance Policy, the Finance Director will perform the following Post - Issuance Debt Compliance Procedures for all of the City's outstanding debt. 1. General Post- Issuance Compliance a. Ensure written procedures and/or guidelines have been put in place for individuals to follow when more than one person is responsible for ensuring compliance with Post - Issuance Debt Compliance Procedures. b. Ensure training and/or educational resources for post - issuance compliance have been approved and obtained. c. The Finance Director of the City understands that that there are options for voluntarily correcting failures to comply with post - issuance compliance requirements (i.e. Treasury Regulations 1.141 -12 remedial actions, Tax - Exempt Bonds Voluntary Closing Agreement Program and the ability to enter into a closing agreement under the Tax- Exempt Bonds Voluntary Closing Agreement Program described in Notice 2008 -31). 2. General Recordkeeping a. Retain records and documents for the obligation for a period of at least three years following the final payment or the date in which the obligation is redeemed unless otherwise directed by Bond Counsel. b. Retain both paper and electronic versions of records and documents for the obligation. c. General records and documentation to be assembled and retained i. Description of the purpose of the obligation (referred to as the project) and the state statute authorizing the project. ii. Record of tax- exempt status or revocation of tax - exempt status, if applicable. iii. Any correspondence between the City and the IRS. iv. Audited financial statements. v. Bond transcripts, official statements and other offering documents of the obligation. vi. Minutes and resolutions authorizing the issuance of the obligation. vii. Certifications of the issue price of the obligation. viii. Any formal elections for the obligation (i.e. election to employ an accounting methodology other than the specific tracing method). ix. Appraisals, demand surveys, or feasibility studies for property financed by the obligation. x. Documents related to governmental grants, associated with construction, renovation or purchase of property financed with the obligation. xi. Reports of any prior IRS examinations of the City or the City's obligation. 3. Arbitrage Yield Restriction and Rebate Recordkeeping a. Investment and arbitrage documentation to be assembled and retained i. An accounting of all deposits, expenditures, interest income and asset balances associated with each fund established in connection with the obligation. This includes an accounting of all monies deposited to the Debt Service Account to make debt service payments on the obligation, regardless of the source derived. Accounting for expenditures and assets is described in further detail in Section 4. ii. Statements prepared by Trustee or Investment Provider. iii. Documentation of at least quarterly allocations of investments and investment earnings to each obligation (i.e. un- commingling analysis). iv. Documentation for investments made with obligation proceeds such as: 1. Investment contracts (i.e. guaranteed investment contracts). 2. Credit enhancement transactions (i.e. bond insurance contracts). 3. Financial derivatives (swaps, caps, etc). 4. Bidding of financial products. • Investments acquired with obligation proceeds are purchased at fair market value (i.e. three bids for open market securities needed in advance refunding escrows). b. Computations of the arbitrage yield. c. Computations of yield restriction and rebate amounts including but not limited to: i. Compliance in meeting the "Temporary Period from Yield Restriction Exception" and limiting the investment of funds after the temporary period expires. ii. Compliance in meeting the "Rebate Exception ". 1. Qualifying for the "Small Issuer Exception" 2. Qualifying for a "Spending Exception" • 6 Month Spending Exception • 18 Month Spending Exception • 24 Month Spending Exception 3. Qualifying for the `Bona Fide Debt Service Fund Exception" 4. Quantifying arbitrage on all funds established in connection with the obligation in lieu of satisfying arbitrage exceptions (including Reserve Funds and Debt Service Funds) d. Computations of yield restriction and rebate payments. e. Timely Tax Form 8038 -T filing, if applicable. i. Remit any arbitrage liability associated with the obligation to the IRS at each five year anniversary date of the obligation, and the date in which the obligation is no longer outstanding (redemption or maturity date), whichever comes sooner, within 60 days of said date. f. Timely Tax Form 8038 -R filing, if applicable. g. Procedures or guidelines for monitoring instances where compliance with applicable yield restriction requirements depends on subsequent reinvestment of obligation proceeds in lower yielding investments (for example: reinvestment in zero coupon SLGS). 4. Expenditure and Asset Documentation to be Assembled and Retained a. Documentation of allocations of obligation proceeds to expenditures (i.e. allocation of proceeds to expenditures for the construction, renovation or purchase of facilities owned and used in the performance of exempt purposes). i. Such allocation will be done not later than the earlier of: eighteen (18) months after the later of the date the expenditure is paid, or the date the project, if any, that is financed by the tax - exempt bond issue is placed in service; or the date sixty (60) days after the earlier of the fifth anniversary of the issue date of the tax- exempt bond issue, or the date sixty (60) days after the retirement of the tax - exempt bond issue. b. Documentation of allocations of obligation proceeds to issuance costs. c. Copies of requisitions, draw schedules, draw requests, invoices, bills and cancelled checks related to obligation proceeds expenditures during the construction period. d. Copies of all contracts entered into for the construction, renovation or purchase of facilities financed with obligation proceeds. e. Records of expenditure reimbursements incurred prior to issuing bonds for facilities financed with obligation proceeds (Declaration of Official Intent/Reimbursement Resolutions including all modifications). f. List of all facilities and equipment financed with obligation proceeds. g. Depreciation schedules for depreciable property financed with obligation proceeds. h. Documentation that tracks the purchase and sale of assets financed with obligation proceeds. i. Documentation of timely payment of principal and interest payments on the obligation. j. Tracking of all issue proceeds and the transfer of proceeds into the debt service fund as appropriate. k. Documentation that excess earnings from a Reserve Fund is transferred to the Debt Service Fund on an annual basis. Excess earnings are balances in a Reserve Fund that exceed the Reserve Fund requirement. 5. Miscellaneous Documentation to be Assembled and Retained a. Ensure that the project, while the obligation is outstanding, will avoid IRS private activity bond concerns. i. Specifically, the Finance Director shall monitor the use of all bond - financed facilities in order to: determine whether private business uses of bond - financed facilities have exceeded the de minimus limits set forth in Section 141(b) of the Code as a result of leases and subleases, licenses, management contracts, research contracts, naming rights agreements, or other arrangements that provide special legal entitlements to nongovernmental persons; and determine whether private security or payments that exceed the de minimus limits set forth in Section 141(b) of the Code have been provided by nongovernmental persons with respect to such bond - financed facilities. The Finance Director shall provide training and educational resources to any City staff who have the primary responsibility for the operation, maintenance, or inspection of bond - financed facilities with regard to the limitations on the private business use of bond- financed facilities and as to the limitations on the private security or payments with respect to bond - financed facilities. b. The Finance Director shall undertake the following with respect to the bonds: i. an annual review of the books and records maintained by the City with respect to such bonds; and ii, an annual physical inspection of the facilities financed with the proceeds of such bonds, conducted by the Finance Director with the assistance with any City staff who have the primary responsibility for the operation, maintenance, or inspection of such bond - financed facilities. c. Changes in the project that impact the terms or commitments of the obligation are properly documented and necessary certificates or opinions are on file. 6. Additional Undertakings and Activities that Support Sections 1 through 5 above: a. The Finance Director will notify the City's bond counsel, financial advisor and arbitrage provider of any survey or inquiry by the IRS immediately upon receipt (Usually responses to IRS inquiries are due within 21 days of receipt. Such IRS responses require the review of the above mentioned data and must be in writing. As much time as possible is helpful in preparing the response). b. The Finance Director will consult with the City's bond counsel, financial advisor and arbitrage provider before engaging in post - issuance credit enhancement transactions (ie. bond insurance, letter of credit, or hedging transactions (i.e. interest rate swap, cap). C. The Finance Director will monitor all "qualified tax- exempt debt obligations" within the first calendar year to determine if the limit is exceeded, and if exceeded, will address accordingly. For tax- exempt debt obligations issued during years 2009 and 2010, the limit is $30,000,000 (The limit was $10,000,000 prior to 2009. 11120 and thereafter it will remain at $10,000,000 unless changed by Congress). During this period, the limit also applies to pooled financings of the governing body and provides a separate $30,000,000 for each 501 (c)(3) conduit borrower. d. Comply with Continuing Disclosure Requirements. i. If applicable, the timely filing of annual information agreed to in the Continuing Disclosure Certificate. ii.Crive notice of any Material Event. e. Identify any post- issuance change to terms of bonds which could be treated as a current refunding of "old" bonds by "new" bonds, often referred to as a "reissuance ". f. Confirm whether any "remedial action" in connection with a "change of use" must be treated as a "reissuance ". g. The Finance Director will ensure that the appropriate tax form for federal subsidy payments is prepared and filed in a timely fashion for applicable obligations (i.e. Build America Bonds). 7. Compliance with Future Requirements a. Take measures to comply with any future requirements issued beyond the date of these Post - Issuance Debt Compliance Procedures which are essential to ensuring compliance with the applicable state and federal regulations.