FINANCE POLICIES AND PROCEDURES Eastern Michigan University

EMU – Finance Page 1

POST-ISSUANCE TAX-EXEMPT BOND COMPLIANCE

TABLE OF CONTENTS Page

I. Purpose 1

II. Policy Statement 1

III. Organizational Responsibility 3

IV. Record Retention 3

V. Private Business Use 4

VI. Arbitrage & Rebate 5

VII. Remedial Action 6

VIII. Appendix A – Arbitrage Compliance Checklist 6

IX. Appendix B – Use of Proceeds Checklist 9

X. Appendix C – Definitions 11

I. PURPOSE

This policy provides procedures and guidelines to ensure that all of the outstanding qualified

tax-exempt debt of Eastern Michigan University remains in compliance with federal tax law

requirements. The University recognizes its legal obligation to ensure that this tax-

exemption is used responsibly.

POLICY STATEMENT

Eastern Michigan University (EMU) has financed certain capital projects with the proceeds

of tax-exempt bonds. TEBs are available to the University to leverage its finances to achieve

its tax-exempt purposes. The University therefore practices full compliance with legal

requirements pertaining to the expenditure of the TEB proceeds, the use of the tax exempt

financed facilities, training and record keeping.

II. DEFINITION

Tax-exempt bonds are issued through the Finance Office and are valid debt obligations of state and local governments, referred to as “issuers”, which provide tax-exempt interest. Interest paid to bondholders is not includable in their gross income for federal income tax purposes. The tax-exempt status remains throughout the life of the bonds provided that all applicable federal tax laws are satisfied.

FINANCE POLICIES AND PROCEDURES Eastern Michigan University

EMU – Finance Page 2

Post-issuance tax compliance begins with the debt issuance process itself and provides for a continuing focus on investments of debt proceeds and use of debt-financed property. Post-issuance compliance responsibilities include; - Tracking bond proceeds spending for qualified purposes; - Maintaining detailed records of the expenditure and investment of the proceeds of the

TEBs; - Ensuring the project financing is used in a manner consistent with the federal income tax

requirements; - Providing necessary disclosure information regarding financial and operating status.

See Appendix C for other Definitions as defined in IRS Regulations.

III. ORGANIZATIONAL RESPONSIBILITY

The University’s Finance Office has overall responsibility for bond compliance for the

University. This policy covering tax-exempt bond post-issuance compliance covers the

following areas of concern:

1) Record Retention: focuses on the types of records to retain, establishes the department

primarily responsible for recordkeeping of respective documents, states the length of

time required to maintain records and/or documents, and specifies the method that

may be used to maintain records.

2) Private Business Use: sets the guideline for monitoring private business use in university

owned facilities that are either entirely or partially financed with tax-exempt bond

issues.

3) Arbitrage and Rebate: highlights the key features for managing and calculating the

arbitrage yield and rebate evaluation.

4) Remedial Action: provides for corrective action in the event that it is determined that

the bonds are not in compliance with IRS regulations.

FINANCE POLICIES AND PROCEDURES Eastern Michigan University

EMU – Finance Page 3

IV. RECORD RETENTION

As the conduit borrower of the tax-exempt bond issues, the University is responsible for retaining

the records and legal documents relating to the bond transaction and the expenditure of bond

proceeds. The authorized department and/or office of the University shall retain the required

records for the life of the original and refunding bond issue, plus 3 years after the redemption

date of the bond. In addition, the records shall be retained for the established length of time in

either a hardcopy and/or acceptable electronic format.

In addition, the records shall be retained for the established length of time in either a hardcopy

and/or acceptable electronic format.

The following are the primary records that the University will maintain for the stated retention

period.

1) Basic Documentation: The University shall maintain the bond transcript of each tax-

exempt bond issue. The bond transcript contains the documents which are considered necessary by the parties to the transaction. These may include the following categories of documents: offering documents, basic legal documents, resolutions and certificate of the parties, legal opinions, and miscellaneous documents. The Controller’s Office will maintain a complete hard copy of the bond transcript for all bond issues prior to 2007 and an electronic copy of the bond transcript records for 2007 and later bond issues.

2) Expenditure Documentation: The University shall maintain expenditure documentation

evidencing the use of bond proceeds. The documents may include purchase requisitions,

purchase orders, contracts with construction companies and other professional services,

invoices for goods and services, reimbursements of expenditures prior to bond issuance,

and expenditure reports, depending on the type of expenditure.

The Physical Plant will be the principal department to maintain the records relating to construction and renovation projects funded by tax-exempt bond issues. An electronic or hard copy of the records for each project will be stored by project name in either the internal accounting area of the department or an external storage facility. These records will include purchase requisitions, purchase orders, invoices and other supporting documents such as contracts, blueprints, etc.

The Finance Office will be the primary owner of records pertaining to acquisitions of property with tax-exempt bond proceeds.

FINANCE POLICIES AND PROCEDURES Eastern Michigan University

EMU – Finance Page 4

The Information Technology Department will retain records related to technology and infrastructure expenditures.

Investment Documentation: The University shall maintain documentation pertaining to any investment of bond proceeds. These documents may include the purchase and/or sale of securities, State Local Government Securities subscriptions, yield calculations for each class of investments, actual investment income received, the investment of proceeds, guaranteed investment contracts, and rebate calculations. The Trustee Bank acts as custodian of the investment of bond proceeds for tax-exempt bond issues. The Finance Office, in conjunction with the Trustee, will be responsible for maintaining records pertaining to the investment of bond proceeds and reserve accounts. The Finance Office will retain records related to the arbitrage yield and rebate calculations. In general, the University will use a third party to calculate arbitrage and rebate.

3) Private-Use Documentation: The University shall maintain all documents supporting the use of tax-exempt bond-financed property by private sources, such as management contracts, leases, and research agreements. The Finance Office will be responsible for the following items:

- Will retain records pertaining to management contracts. - Will retain the contracts for the sale and lease of bond financed property.

- Will retain research agreements that relate to tax-exempt bond-financed property. - Will keep dining and vending service contracts that serve tax-exempt bond financed

property.

V. PRIVATE BUSINESS USE Bond proceeds may not be used for non-qualified uses. The total amount of net proceeds from tax-exempt bond issues that may be applied to private business use may not exceed five percent (5%) of the total proceeds. Private business use refers to the use of a bond-financed facility in a trade or business activity of a third party. These limits apply to the lifetime of the original and/or refunding bond issue. The total five percent (5%) of net proceeds includes a two percent (2%) limit on the amount of proceeds that may be used to pay the issuance cost of the bond such as underwriter’s discount, counsel fees, financial advisory fees, printing costs for bonds and offering documents, public approval process costs, engineering and feasibility study costs, and guarantee fees other than for qualified guarantees.

FINANCE POLICIES AND PROCEDURES Eastern Michigan University

EMU – Finance Page 5

The Controller’s Office will keep an electronic inventory of all projects pertaining to tax-exempt bond issues. The inventory list may include the bond issue, project information (specifically, project title, building name/location/campus, project cost, and project description), original allocated amount, and total expenses to date of property financed with each tax-exempt bond issue.

The Controller’s Office will conduct an audit of all projects financed by tax-exempt bond proceeds each year to ensure that private business use activity, if any, is within the safe harbor described above. The audit will involve periodic computations, which entails aggregating all private business use over the entire term of the bond issue to determine the average annual private business use. The average is arrived at by determining the average percentage of private business use during the entire life of the bond. In evaluating the private business use, the Finance Department will be responsible for the following:

Management contracts • Lease and sale agreements • Research grants and agreements • Management and service contracts

Training will be provided annually for staff involved in contracting, space utilization, research, real estate, document retention, financial reporting and others whose authority may impact bond compliance. Training will be provided by the Tax Manager. See Appendix B for a checklist regarding use of proceeds, monitoring private business use, primary responsible person for training and records retention.

VI. ARBITRAGE AND REBATE TEBs lose their exempt status if they are classified as “arbitrage bonds.” In general, arbitrage is earned when the gross proceeds of a bond issue are used to acquire investments that earn a yield that is "materially higher” than the yield on the bonds issued. The internal Revenue Code contains two separate sets of requirements that must be compiled with to ensure that TEBs are not arbitrage bonds. The IRS assesses a penalty equal to one hundred percent (100%) of the excess earnings. Certain exceptions are provided in the regulations and are not restated in this policy.

FINANCE POLICIES AND PROCEDURES Eastern Michigan University

EMU – Finance Page 6

They are:

Yield Restriction requirements, which generally provide that in the absence of an applicable exception, bond issue proceeds may not be invested at a yield in excess of the bond yield; and

Rebate requirements, which generally provide that when arbitrage is earned on an issue in excess of permitted amounts, the excess earnings must be paid to the U.S. Department of Treasury, even if an exception to the yield restriction requirements applies.

The University will comply with the arbitrage requirements in Section 148 of the Internal Revenue Code. See Appendix C for the Arbitrage Compliance and Appendix D for Rebate Compliance Checklists.

VII. REMEDIAL ACTION The Administration is responsible for notifying the Finance Office/Controller Office before there is a change in use of any facility financed with tax-exempt debt. The Controller Office is responsible if any violations of federal tax requirements are discovered in the process of auditing all projects financed, the University will correct them in a timely manner in compliance with IRS Regulations through the tax-exempt bonds voluntary closing agreement program or self-remediation methods. The Controller Office will seek the advice of bond counsel in the event remedial action may be required. To the extent a potential violation arises and bond counsel in the event remedial action may be required. To the extent a potential violation arises that cannot be corrected through remedial action, or in the event of a potential arbitrage , the Tax Manager will seek the advice of bond counsel concerning its alternatives, which may include approaching the Internal Revenue Service under the Voluntary Closing Agreement Program (VCAP). See Appendix E for the Remedial Action Instructions.

VIII. APPENDIX A - Arbitrage Compliance Checklist

FINANCE POLICIES AND PROCEDURES Eastern Michigan University

EMU – Finance Page 7

___ Review the Tax Certificate to determine the Temporary Periods for the Issue, during which periods various categories of Gross Proceeds may be invested in Higher Yielding Investments.

___ Do not invest Gross Proceeds in Higher Yielding Investments following the end of the applicable Temporary Period unless Yield reduction payments may be made (see Tax Certificate).

___ Monitor expenditures of Proceeds, including Investment Proceeds, against Issuance Date expectations for satisfaction of three-year or five-year Temporary Period from Yield restriction on investment of Proceeds and to avoid “hedge bond” status.

___ Ensure that investments acquired with Gross Proceeds satisfy IRS regulatory safe harbors for establishing fair market value (e.g., through the use of bidding procedures), and maintain records to demonstrate satisfaction of such safe harbors.

___ Consult with bond counsel before engaging in credit enhancement or hedging transactions in respect of the Issue, and before creating separate funds that are reasonably expected to be used to pay Debt Service on the Issue.

___ Maintain copies of all contracts and certificates relating to credit enhancement and hedging transactions in respect of the Issue.

___ Before beginning a capital campaign that may result in gifts that are restricted to the Project (or, in the absence of such a campaign, upon the receipt of such restricted gifts), consult bond counsel to determine whether Replacement Proceeds may result.

___ Even after all Proceeds of the Issue have been spent, ensure that the Bond Fund meets

the requirements of a Bona Fide Debt Service Fund, i.e., one used primarily to achieve a proper matching of revenues with Debt Service that is depleted at least once each Bond Year, except for a reasonable carryover amount not to exceed the greater of (i) the earnings on the fund for the immediately preceding Bond Year; or (ii) one-twelfth of the Debt Service on the Issue for the immediately preceding Bond Year. To the extent that the Bond Fund qualifies as a Bona Fide Debt Service Fund for a given Bond Year, the amounts held in that fund may be invested in Higher Yielding Investments.

___ Ensure that amounts invested in any reasonably required debt service reserve fund do not exceed the least of: (i) 10% of the stated principal amount of the Issue (or the Sale Proceeds of the Issue if the Issue has original issue discount or original issue premium that exceeds 2% of the stated principal of the Issue plus, in the case of premium, reasonable underwriter’s compensation); (ii) maximum annual Debt Service on the Issue; or (iii) 125% of average annual Debt Service on the Issue.

FINANCE POLICIES AND PROCEDURES Eastern Michigan University

EMU – Finance Page 8

___ Satisfaction of rebate requirement -- see Rebate Instructions. Subject to the exceptions

described below, investment earnings on Proceeds at a Yield in excess of the Bond Yield (i.e., positive arbitrage) generally must be rebated to the U.S. Treasury, even if a Temporary Period exception from Yield restriction allowed the earning of positive arbitrage. o Ensure that rebate calculations will be timely performed and payment of Rebate Amounts, if any, will be timely made; such payments are generally due 60 days after the fifth anniversary of the Issuance Date, then in succeeding installments every five years; the final rebate payment for the Issue is due 60 days after retirement of the last bond of the Issue. Hire a rebate consultant if necessary.

___ If the 6-month, 18-month, or 24-month spending exceptions from the rebate requirement (as described in the Rebate Instructions) may apply to the Issue, ensure that the spending of Proceeds is monitored prior to semi-annual spending dates for the applicable exception.

___ Timely make rebate and Yield reduction payments and file IRS Form 8038-T.

___ Even after all other Proceeds of the Issue have been spent, ensure compliance with rebate requirements for any debt service reserve fund and any debt service fund that is not exempt from the rebate requirement (see the Rebate Instructions).

___ Maintain records of investments and expenditures of Proceeds, rebate exception

analyses, rebate calculations, Forms 8038-T, and rebate and Yield reduction payments, and any other records relevant to compliance with the arbitrage restrictions. The person(s) who hold the following title(s) shall be responsible for monitoring compliance with the arbitrage rebate requirements of Section 148 of the Code, as set forth in this checklist: Tax Manager

___ The person(s) responsible for monitoring compliance with the arbitrage rebate requirements of Section 148 of the Code shall receive appropriate training regarding the Borrower’s accounting systems and their application to the investment and expenditure of Gross Proceeds. This training shall occur when a new individual assumes the responsibilities described in this checklist. Training shall also be available to ensure current knowledge of the Borrower’s existing accounting systems and exposure to any pertinent modifications that are subsequently implemented by the Borrower.

___ The records required to be kept under this checklist shall be maintained in paper or

electronic format until the person(s) who hold the following title(s) shall be responsible

FINANCE POLICIES AND PROCEDURES Eastern Michigan University

EMU – Finance Page 9

for monitoring compliance with the arbitrage rebate requirements of Section 148 of the Code, as set forth in this checklist: Tax Manager.

IX. APPENDIX B - Checklist of Proceeds, monitoring private business use, primary responsible person for training and records retention.

___ Ensure there exists a clearly established accounting procedure for tracking investment and expenditures of Bond Proceeds, including Investment Proceeds. At or shortly after issuance of a Bond issue, allocate Proceeds of the Bond issue to reimbursement of prior expenditures, as appropriate. ___ Ensure that a final allocation of Bond Proceeds (including Investment Proceeds) to qualifying expenditures is made if Bond Proceeds are to be allocated to project expenditures on a basis other than “direct tracing” (direct tracing means treating the Bond Proceeds as spent as shown in the accounting records for bond draws and project expenditures). ___ Maintain careful records of all facilities and other costs (e.g., Issuance Costs, credit enhancement and capitalized interest) and uses (e.g., deposit to reserve fund) for which Bond Proceeds were spent or used. These records should be maintained separately for each issue of Bonds. ___ Ensure that no more than 2% of the Sale Proceeds of a Bond issue are used to pay Issuance Costs. ___ Ensure that all Proceeds are spent in accordance with (i) the published notice of public hearing for the Issue and (ii) the useful life calculation attached to the Tax Certificate. ___ Ensure that all Bond Financed Facilities are owned by a 501(c)(3) Organization or a Governmental Unit. ___ On at least an annual basis, identify all current and contemplated uses of Bond – Financed Facilities and confer as necessary with Bond Counsel to ensure that the use of the Bond Financed Facilities complies with the covenants and restrictions set forth in the Tax Certificate. Monitoring Private Business Use ___ Before entering into any new management, service, or research agreements described below and, engage Bond Counsel to review such agreements to determine whether they result in private business use.

FINANCE POLICIES AND PROCEDURES Eastern Michigan University

EMU – Finance Page 10

___ Analyze at least annually any private business use of Bond Financed Facilities to

determine whether the 5% limitation on private business use of Proceeds of the Issue is exceeded. Contact Bond Counsel if this limit is exceeded.

___ Maintain copies of all of the following contracts or arrangements (or, if no written

contract exists, maintain detailed records of the following contracts or arrangements) with a Private Person:

___ Sales of Bond Financed Facilities. ___ Leases of Bond Financed Facilities. ___ Management or service contracts relating to Bond Financed Facilities. ___ Research contracts under which a Private Person sponsors research in Bond

Financed Facilities. ___ Any other contracts involving “special legal entitlements” (such as naming rights or

exclusive provider arrangements) granted to a Private Person with respect to Bond Financed Facilities.

Each of the foregoing contracts or arrangements may result in Private Business Use of the Bond Financed Facilities, and a sale of Bond Financed Facilities to a Private Person would violate the requirement that a 501(c)(3) Organization or Governmental Unit own all property financed or refinanced by the Issue. Consult with Bond Counsel to undertake any necessary remedial actions, discussed below, in respect of “nonqualified bonds” of the Issue. If a remedial action is not available, consult with Bond Counsel regarding the potential application of the voluntary closing agreement program maintained by the Internal Revenue Service. Responsible Person, Training and Record Retention The person(s) who hold the following title(s) shall be responsible for monitoring the use of Proceeds and the existence of any private business use of Bond Financed Facilities, as set forth in this Checklist and Instructions: Tax Manager The person(s) responsible for monitoring the use of Proceeds and the existence of any private business use of Bond Financed Facilities shall receive appropriate training regarding the University’s accounting systems (including entries for the expenditure of Proceeds on Bond Financed Facilities), contract intake system, facilities management and other systems that track the expenditure and use of Proceeds.

FINANCE POLICIES AND PROCEDURES Eastern Michigan University

EMU – Finance Page 11

This training shall occur when a new individual assumes the responsibilities described in this Checklist and Instructions. Training shall be available to ensure current knowledge of the University’s existing accounting, contract, facilities management and other systems that involve Qualified 501(c)(3) Bonds and exposure to any pertinent additional systems that are subsequently implemented by the University. The records required to be kept under this Checklist and Instructions shall be maintained in paper or electronic format until the date three (3) years after the last bond of the applicable issue of Qualified 501(c)(3) Bonds (“Issue”) has been retired; if any portion of such Issue is refunded by a Refunding Issue, such records shall be maintained until the later of the date three (3) years after the last bond of the Issue has been retired or the date three (3) years after the last bond of the Refunding Issue has been retired.

X. APPENDIX C – Definitions

Definitions:

ARBITRAGE: In debt finance, refers to the excess of interest earned on investments over interest

paid on debt issued to fund investments. Generally, under the Code, arbitrage earned on

investments funded with the Gross Proceeds of tax-exempt bonds is required to be rebated to

the U.S. Treasury. Generally, the difference between the amount earned on all investments and

reinvestments of Gross Proceeds and the amount that would have been earned if Gross Proceeds

had been invested at Bond Yield must be paid to the United States, and such payments are known

as ARBITRAGE REBATE. There are certain exceptions to the payment of arbitrage rebate.

CONDUIT BORROWER: The entity that borrows the proceeds of an issue of bonds in a conduit

financing transaction. A 501(c)(3) organization that borrows the proceeds of a qualified 501(c)(3)

bond is a conduit borrower.

PRIVATE USINESS USE: Trade or business use, or indirect use carried on by any person other than

a governmental unit (state and local governmental units only).

REBATE: The requirement to pay to the United States the difference between the amount earned

on all investments and reinvestments of gross proceeds and the amount that would have been

earned if gross proceeds had been invested at bond yield. Also referred to as ARBITRAGE REBATE.

There are certain exceptions to the payment of rebate.

FINANCE POLICIES AND PROCEDURES Eastern Michigan University

EMU – Finance Page 12

VOLUNTARY CLOSING AGREEMENT PROGRAM: Through the Voluntary Closing Agreement

Program (VCAP), issuers of tax-exempt bonds can voluntarily resolve violations of the Code and

applicable Regulations (through closing agreements with the IRS). VCAP can be used when a

remedial action is unavailable or there is another violation of the Code or Regulations that cannot

be fixed through self-help mechanisms. The incentive for an issuer to use VCAP is that, generally,

a settlement in VCAP will be more favorable to the issuer than if the violation were discovered in

an IRS audit of the bonds.

Basic Financial Documents:

1. Official Statement: A document prepared for a new municipal issue by or for the issuer. It describes the issue, financial details about the issuer and other relevant facts.

2. Bond Purchase Agreement: The contract between the underwriter and the issuer setting forth the final terms, prices and conditions upon which the underwriter purchases a new issue of municipal securities in a negotiated sale. The bond purchase agreement is sometimes referred to as the “purchase contract” or, less commonly, the “underwriting agreement.”

3. Trust Indenture: The contract between the Eastern Michigan University Board of Regents and the trust company acting as trustee for the bondholders. The trust indenture sets forth the details of the bonds, including interest rate and maturity dates, and provides for the administration of all financial aspects of the bond issue.

4. Bond Insurance Policy: Issuers that meet certain credit criteria can purchase municipal bond insurance policies from private companies. The insurance guarantees the payment of principal and interest on a bond issue if the issuer defaults. Bond ratings are based on the credit of the insurer rather than the underlying credit of the issuer.

5. Blanket Issuer Letter of Representations: Form agreements that contain certain representations that must be made to the Depository Trust Company (DTC) by the issuer and others before various issue types (e.g., book-entry-only issues, Rule 144A issues, Reg. S issues) can be made eligible for deposit at DTC and for DTC book-entry services.

6. Escrow Deposit Agreement: An agreement that typically provides for the deposit of moneys or securities in an escrow account to refund an outstanding issue of municipal securities. The agreement sets forth the manner in which funds are to be invested (generally in eligible securities) pending their expenditure and the schedule on which on-going debt service payments are to be made and early redemptions, if any, of securities are to occur.

7. Stand by Purchase Agreement: An agreement with a third party, typically a bank, in which the third party or liquidity facility agrees to purchase tender option bonds (typically variable rate demand obligations) tendered for purchase in the event that they cannot be remarketed. Unlike a letter of credit, a standby bond purchase agreement does not guarantee the payment of principal and interest by the issuer and is not an unconditional obligation to purchase the tender option bonds.

FINANCE POLICIES AND PROCEDURES Eastern Michigan University

EMU – Finance Page 13

8. Custody Agreement: The agreement executed by the Grantor whereby the Grantor as custodian of assets of the Grantor appoints the bank.

9. Remarketing Agreement: The agreement between the Eastern Michigan University Board of Regents and the remarketing agent (usually an investment banking firm), used only in variable rate financing, describing the procedure and compensation for resetting interest rates and arranging for the remarketing of securities to investors when put back (returned) by other investors.

10. Letter of Credit or Credit Facility: A form of credit enhancement in variable rate financing

pursuant to which all payments of principal and interest are made by draws on the letter of credit and ratings are based on the credit of the bank.