SESSION ON THE BASICS OF ARBITRAGE REBATE AND HOW TO AUDIT TAX-EXEMPT DEBT

POST-ISSUANCE BOND COMPLIANCEBYArbitrage Compliance Specialists, Inc. (ACS)Robert Goubert, Vice President800-672-9993 ext. 7536Robert@RebatebyACS.com Stephen H. Broden, Vice President800-672-9993 ext. 7530Stephen@RebatebyACS.com ANDVicenti, Lloyd & Stutzman LLPRene S. Graves, CPA, CGFM, Partner626-857-7300 ext. 260Rgraves@vlsllp.com

The IRS is requiring debt issuers to indicate if written post-issuance compliance policies and procedures are in place.

Key characteristics suggested by the IRS:Due diligence review at regular intervals;Identifying the official or employee responsible for review;Training of the responsible official/employee;Retention of adequate records to substantiate compliance (e.g., records relating to expenditure of proceeds);Procedures reasonably expected to timely identify noncompliance; andProcedures ensuring that the issuer will take steps to timely correct noncompliance.

2New Requirement2New Requirement3

3Bond Compliance4Three golden rules when issuing a bond: Issue the bond when you need the fundsIssue just enough bonds that you need for the project not moreComplete the project with due diligence

4Bond ComplianceWe just closed on a bond issue and received $6,000,000 at closing.Spend the money immediatelyRefund an older bond issue (current refunding)Reimburse for prior expenditures Buy an asset building, software, land, (loans to Government Units)Cost of issuance to pay: Financial advisor Bond counsel Underwriter Insurance55Bond ComplianceWe just closed on a bond issue and received $6,000,000 at closing.Invest the money until needed for:Building projectRefunding (advanced refunding)Interest payments on the bondsReserve set funds aside in case they are need to make a bond payment

66We just issued a bond now what?Are there tax rules that we need to follow?

Arbitrage RebateEntire BondYield RestrictionFundAre there tax rules that we need to follow?Yes - Rules are based on three limitations

Interest EarningsBalanceTime

TimeInterest EarningsBalanceTimeWe just issued a bond now what?Are there tax rules that we need to follow?

Arbitrage RebateEntire BondYield RestrictionFundArbitrage RebateInvestment rate of return > borrowing rate = PROFIT

10Interest Earnings10Arbitrage Rebate11

Interest EarningsBorrowing Rate11Arbitrage RebateAre all bonds subject to arbitrage rebate?

EXEMPTIONSOR

12Interest EarningsSmall Issuer ExemptionEntire BondFund Exemption Each fund related to bond meets an exemption12Section 1.148.8: Small Issuer Exception the rebate requirementsScope. Under section 148(f)(4)(D), bonds issued to finance governmental activities of certain small issuers are treated as meeting the arbitrage rebate requirement of section 148(f)(2) (the small issuer exception). This section provides guidance on the small issuer exception. General taxing powers. The small issuer exception generally applies only to bonds issued by governmental units with general taxing powers. A governmental unit has general taxing powers if it has the power to impose taxes (or to cause another entity to impose taxes) of general applicability which, when collected, may be used for the general purposes of the issuer. The taxing power maybe limited to a specific type of tax, provided that the applicability of the tax is not limited to a small number of persons. The governmental units exercise of its taxing power may be subject to procedural limitations, such as voter approval requirements, but may not be contingent on approval by another governmental unit. See, also, section 148(f)(4)(D)(iv). Size limitation- (1) In general. An issue (other than a refunding issue) qualifies for the small issuer exception only if the issuer reasonably expects, as of the issue date, that the aggregate face amount of all tax-exempt bonds (other than private activity bonds) issued by it during that calendar year will not exceed $5,000,000; or the aggregate face amount of all tax-exempt bonds of the issuer (other than private activity bonds) actually issued during that calendar year does not exceed $5,000,000. For this purpose, if an issue has more than a de minimis amount of original issue discount or premium, aggregate face amount means the aggregate issue price of that issue (determined without regard to pre-issuance accrued interest). Arbitrage Rebate Small Issuer ExemptionNew Money Bonds - $5,000,000 or less issued in calendar yearExamples:$4,999,999 Bond issued in 2011 (No other debt in calendar year) - Exempt$4,999,999 Bond A and a $50,000 note issued in 2012$4,999,999 + $50,000 = $5,049,999 Subject to arbitrage rebate* Small Issuer Exception Increase for Public Schools -Public school tax-exempt debt issued from 1/1/98 12/31/01 ($10,000,000 limit): All tax-exempt debt issued in a calendar year cannot exceed $10,000,000. $5,000,000 may be used for any purpose. Any amount over $5,000,000 (up to $5,000,000) must be used for public school construction as part of the additional $5,000,000 limit.Public school tax-exempt debt issued from 1/1/02 current ($15, 000,000 limit):All tax-exempt debt issued in a calendar year cannot exceed $15,000,000. $5,000,000 may be used for any purpose. Any amount over $5,000,000 (up to $10,000,000) must be used for public school construction.

13Interest Earnings13Section 1.148.8: Small Issuer Exception the rebate requirementsScope. Under section 148(f)(4)(D), bonds issued to finance governmental activities of certain small issuers are treated as meeting the arbitrage rebate requirement of section 148(f)(2) (the small issuer exception). This section provides guidance on the small issuer exception. General taxing powers. The small issuer exception generally applies only to bonds issued by governmental units with general taxing powers. A governmental unit has general taxing powers if it has the power to impose taxes (or to cause another entity to impose taxes) of general applicability which, when collected, may be used for the general purposes of the issuer. The taxing power maybe limited to a specific type of tax, provided that the applicability of the tax is not limited to a small number of persons. The governmental units exercise of its taxing power may be subject to procedural limitations, such as voter approval requirements, but may not be contingent on approval by another governmental unit. See, also, section 148(f)(4)(D)(iv). Size limitation- (1) In general. An issue (other than a refunding issue) qualifies for the small issuer exception only if the issuer reasonably expects, as of the issue date, that the aggregate face amount of all tax-exempt bonds (other than private activity bonds) issued by it during that calendar year will not exceed $5,000,000; or the aggregate face amount of all tax-exempt bonds of the issuer (other than private activity bonds) actually issued during that calendar year does not exceed $5,000,000. For this purpose, if an issue has more than a de minimis amount of original issue discount or premium, aggregate face amount means the aggregate issue price of that issue (determined without regard to pre-issuance accrued interest). Arbitrage Rebate Small Issuer ExemptionRefunding Bonds -The debt being refunded (old debt) qualified for the Small Issuer Exception The weighted average maturity of the refunding debt (new debt) does not exceed the weighted average maturity of the refunded debt (old debt)The refunding debt (new debt) does not mature more than thirty years after the issuance of the original refunded debt (old debt)

Note Historically 1/3 of refunding bonds (new debt) will fail one of the three rules listed above and become subject to the arbitrage rebate regulations.

14Interest Earnings14Section 1.148.8: Small Issuer Exception the rebate requirementsScope. Under section 148(f)(4)(D), bonds issued to finance governmental activities of certain small issuers are treated as meeting the arbitrage rebate requirement of section 148(f)(2) (the small issuer exception). This section provides guidance on the small issuer exception. General taxing powers. The small issuer exception generally applies only to bonds issued by governmental units with general taxing powers. A governmental unit has general taxing powers if it has the power to impose taxes (or to cause another entity to impose taxes) of general applicability which, when collected, may be used for the general purposes of the issuer. The taxing power maybe limited to a specific type of tax, provided that the applicability of the tax is not limited to a small number of persons. The governmental units exercise of its taxing power may be subject to procedural limitations, such as voter approval requirements, but may not be contingent on approval by another governmental unit. See, also, section 148(f)(4)(D)(iv). Size limitation- (1) In general. An issue (other than a refunding issue) qualifies for the small issuer exception only if the issuer reasonably expects, as of the issue date, that the aggregate face amount of all tax-exempt bonds (other than private activity bonds) issued by it during that calendar year will not exceed $5,000,000; or the aggregate face amount of all tax-exempt bonds of the issuer (other than private activity bonds) actually issued during that calendar year does not exceed $5,000,000. For this purpose, if an issue has more than a de minimis amount of original issue discount or premium, aggregate face amount means the aggregate issue price of that issue (determined without regard to pre-issuance accrued interest). Arbitrage Rebate Small Issuer ExemptionSmall Issuer Exception = FAIL (bond is subject to arbitrage rebate)

But wait.! There are also individual exemptions on a fund by fund basis

15Interest Earnings15What is Arbitrage Rebate?Are all bonds subject to arbitrage rebate?EXEMPTIONSOR

Small Issuer Exemption ProjectCost of IssuanceEscrow RefundingDebt Service 16Interest EarningsFund Exemption Each fund related to bond is exempt16Section 1.148.8: Small Issuer Exception the rebate requirementsScope. Under section 148(f)(4)(D), bonds issued to finance governmental activities of certain small issuers are treated as meeting the arbitrage rebate requirement of section 148(f)(2) (the small issuer exception). This section provides guidance on the small issuer exception. General taxing powers. The small issuer exception generally applies only to bonds issued by governmental units with general taxing powers. A governmental unit has general taxing powers if it has the power to impose taxes (or to cause another entity to impose taxes) of general applicability which, when collected, may be used for the general purposes of the issuer. The taxing power maybe limited to a specific type of tax, provided that the applicability of the tax is not limited to a small number of persons. The governmental units exercise of its taxing power may be subject to procedural limitations, such as voter approval requirements, but may not be contingent on approval by another governmental unit. See, also, section 148(f)(4)(D)(iv). Size limitation- (1) In general. An issue (other than a refunding issue) qualifies for the small issuer exception only if the issuer reasonably expects, as of the issue date, that the aggregate face amount of all tax-exempt bonds (other than private activity bonds) issued by it during that calendar year will not exceed $5,000,000; or the aggregate face amount of all tax-exempt bonds of the issuer (other than private activity bonds) actually issued during that calendar year does not exceed $5,000,000. For this purpose, if an issue has more than a de minimis amount of original issue discount or premium, aggregate face amount means the aggregate issue price of that issue (determined without regard to pre-issuance accrued interest). Arbitrage Rebate Fund ExemptionsThere are also individual exemptions on a fund by fund basis for certain funds: Project FundsCosts of Issuance FundsEscrow Refunding FundsDebt Service Funds

17Interest EarningsBalanceTime17Fund Exemption 6 Month Spending ExceptionExpend within 6 months: Project FundsCosts of Issuance FundsEscrow Refunding Funds18Interest EarningsBalanceTime18Section 1.148-7: Spending Exceptions to the Rebate Requirements(c) 6-month exception- (1) General rule. An issue is treated as meeting the rebate requirement if- The gross proceeds (as modified by paragraph (c)(3) of this section) of the issue are allocated to expenditures for the governmental purposes of the issue within the 6-month period beginning on the issue date (the 6-month spending period); and The rebate requirement is met for amounts not required to be spent within the 6-month spending period (excluding earnings on a bona tide debt service fund). Additional period for certain bonds. The 6-month spending period is extended for an additional 6 months in certain circumstances specified under section 148(f)(4)(B)(ii). Amounts not included in gross proceeds. For purposes of paragraph (c)(1)(i) of this section only, gross proceeds has the meaning used in l.148-1, except it does not include amounts - In a bona fide debt service fund; In a reasonably required reserve or replacement fund (see 1.148-7(b)(5)); That, as of the issue date, are not reasonably expected to be gross proceeds but that become gross proceeds after the end of the 6-month spending period; Representing sale or investment proceeds derived from payments under any purpose investment of the issue; and Representing repayments of grants (as defined in 1.148-6(d)(4)) financed by the issue. Series of refundings. If a principal purpose of a series of refunding issues is to exploit the difference between taxable and tax-exempt interest rates by investing proceeds during the temporary periods provided in 1.148-9(d), the 6-month spending period for all issues in the series begins on the issue date of the first issue in the series. Fund Exemption 18 Month Spending ExceptionExpend within 18 monthsProject FundsCost of Issuance Funds

Spending Timetable15% within 6 months60% within 12 months100% within 18 months19BalanceTime19Section 1.148-7: Spending Exceptions to the Rebate Requirements(d) 18-month exceptionGeneral rule. An issue is treated as meeting the rebate requirement if all of the following requirements are satisfied- (i) 18-month expenditure schedule met. The gross proceeds (as defined in paragraph (d)(3) of this section) are allocated to expenditures for a governmental purpose of the issue in accordance with the following schedule (the 18-month expenditure schedule) measured from the issue date- At least 15 percent within 6 months (the first spending period); At least 60 percent within 12 months (the second spending period); and 100 percent within 18 months (the third spending period). Rebate requirement met for amounts not required to be spent. The rebate requirement is met for all amounts not required to be spent in accordance with the 18-month expenditure schedule (other than earnings on a bona fide debt service fund). Issue qualifies for initial temporary period. All of the gross proceeds (as defined in paragraph (d)(3)(i) of this section) of the issue qualify for the initial temporary period under 1.148-2(e)(2). (2) Extension for reasonable retainage. An issue does not fail to satisfy the spending requirement for the third spending period as a result of a reasonable retainage if the reasonable retainage is allocated to expenditures within 30 months of the issue date. Reasonable retainage has the meaning under paragraph (h) of this section, as modified to refer to net sale proceeds on the date 18 months after the issue date. (3) Gross proceeds- Definition of gross proceeds. For purposes of paragraph (d)(1) of this section only, gross proceeds means gross proceeds as defined in paragraph (c)(3) of this section, as modified to refer to 18 months in paragraph (c)(3)(iii) of this section in lieu of6 months. Estimated earnings. For purposes of determining compliance with the first two spending periods under paragraph (d)(1)(i) of this section, the amount of investment proceeds included in gross proceeds of the issue is determined based on the issuers reasonable expectations on the issue date. Fund Exemption 24 Month Spending Exception20BalanceTimeExpend within 24 monthsProject Funds

Spending Timetable10% within 6 months45% within 12 months75% within 18 months100% within 24 months20Section 1.148-7: Spending Exceptions to the Rebate Requirements(e) 2-year exceptionGeneral rule. A construction issue is treated as meeting the rebate requirement for available construction proceeds if those proceeds are allocated to expenditures for governmental purposes of the issue in accordance with the following schedule (the 2-year expenditure schedule), measured from the issue date- At least 10 percent within 6 months (the first spending period); At least 45 percent within 1 year (the second spending period); At least 75 percent within 18 months (the third spending period); and100 percent within 2 years (the fourth spending period). (2) Extension for reasonable retainage. An issue does not fail to satisfy the spending requirement for the fourth spending period as a result of unspent amounts for reasonable retainage (as defined in paragraph (h) of this section) if those amounts are allocated to expenditures within 3 years of the issue date. (3) Definitions. For purposes of the 2-year exception, the following definitions apply: Real property means land and improvements to land, such as buildings or other inherently permanent structures, including interests in real property. For example, real property includes wiring in a building, plumbing systems, central heating or air-conditioning Systems, pipes or ducts, elevators, escalators installed in a building, paved parking areas, roads, wharves and docks, bridges, and sewage lines. Tangible personal property means any tangible property other than real property, including interests in tangible personal property. For example, tangible personal property includes machinery that is not a structural component of a building, subway car, fire trucks, automobiles, office equipment, testing equipment, and furnishings. Substantially completed. Construction may be treated as substantially completed when the issuer abandons construction or when at least 90 percent of the total costs of the construction reasonably expected, as of that date, to be financed with available construction proceeds that have been allocated to expenditures.Arbitrage Rebate Fund ExemptionsThere are also individual exemptions on a fund by fund basis for certain funds: Project FundsCosts of Issuance FundsEscrow Refunding Funds Debt Service Funds

21Interest EarningsBalanceTime

21Fund Exemption Debt ServiceExemption if the debt service fund is depleted each year, except for a reasonable carryover amount defined as an amount up to the greater of: the earnings on the fund for the immediate preceding year; or1/12 of the principal and interest payments on the issue for the immediate preceding yearExample:Debt service payments = $1,200,000 for the year$1,200,000/12 = $100,000Debt Service balance < $100,000 = Exemption

22BalanceTime

Section 1.148-1: Definitions and ElectionsBona fide debt service fund means a fund, which may include proceeds of an issue, that- Is used primarily to achieve a proper matching of revenues with principal and interest payments within each bond year; and Is depleted at least once each bond year, except for a reasonable carryover amount not to exceed the greater of the earnings on the fund for the immediately preceding bond year; orone-twelfth of the principal and interest payments on the issue for the immediately preceding bond year.

Section 148(f)(4)(A)(ii)(4) Special rules for applying paragraph (2). In general. In determining the aggregate amount earned on nonpurpose investments for purposes of paragraph (2) - any gain or loss on the disposition of a nonpurpose investment shall be taken into account, and any amount earned on a bona fide debt service fund shall not be taken into account if the gross earnings on such fund for the bond year is less than $100,000.22Summary of ExemptionsFundsFund ExemptionProject6-Month, 18-Month, 24-MonthCost of Issuance6-Month, 18-MonthEscrow Refunding6-MonthDebt ServiceInterest earnings or 1/12 test23Entire IssuanceSmall Issuer ExemptionBond StructurePass all testing criteria (Project + Refunding Criteria)Interest EarningsBalanceTimeSection 1.148-1: Definitions and ElectionsBona fide debt service fund means a fund, which may include proceeds of an issue, that- Is used primarily to achieve a proper matching of revenues with principal and interest payments within each bond year; and Is depleted at least once each bond year, except for a reasonable carryover amount not to exceed the greater of the earnings on the fund for the immediately preceding bond year; orone-twelfth of the principal and interest payments on the issue for the immediately preceding bond year.

Section 148(f)(4)(A)(ii)(4) Special rules for applying paragraph (2). In general. In determining the aggregate amount earned on nonpurpose investments for purposes of paragraph (2) - any gain or loss on the disposition of a nonpurpose investment shall be taken into account, and any amount earned on a bona fide debt service fund shall not be taken into account if the gross earnings on such fund for the bond year is less than $100,000.23Arbitrage - Time to Review ExceptionsAre all bonds subject to arbitrage rebate?EXEMPTIONSOR

Small Issuer Exemption Fund Exemption (entire bond) 6-Month18-Month24-Month Debt Service Test 24Interest EarningsBalanceTime24Section 1.148.8: Small Issuer Exception the rebate requirementsScope. Under section 148(f)(4)(D), bonds issued to finance governmental activities of certain small issuers are treated as meeting the arbitrage rebate requirement of section 148(f)(2) (the small issuer exception). This section provides guidance on the small issuer exception. General taxing powers. The small issuer exception generally applies only to bonds issued by governmental units with general taxing powers. A governmental unit has general taxing powers if it has the power to impose taxes (or to cause another entity to impose taxes) of general applicability which, when collected, may be used for the general purposes of the issuer. The taxing power maybe limited to a specific type of tax, provided that the applicability of the tax is not limited to a small number of persons. The governmental units exercise of its taxing power may be subject to procedural limitations, such as voter approval requirements, but may not be contingent on approval by another governmental unit. See, also, section 148(f)(4)(D)(iv). Size limitation- (1) In general. An issue (other than a refunding issue) qualifies for the small issuer exception only if the issuer reasonably expects, as of the issue date, that the aggregate face amount of all tax-exempt bonds (other than private activity bonds) issued by it during that calendar year will not exceed $5,000,000; or the aggregate face amount of all tax-exempt bonds of the issuer (other than private activity bonds) actually issued during that calendar year does not exceed $5,000,000. For this purpose, if an issue has more than a de minimis amount of original issue discount or premium, aggregate face amount means the aggregate issue price of that issue (determined without regard to pre-issuance accrued interest). Arbitrage - Filing PeriodIRS filing dates for arbitrage rebate paymentsEvery 5 yearsMaturity date of the issue25Interest EarningsBalanceTimeSection 148: Arbitrage(f) Required rebate to the United States. In general. A bond which is part of an issue shall be treated as an arbitrage bond if the requirements of paragraphs (2) and (3) are not met with respect to such issue. The preceding sentence shall not apply to any qualified veterans mortgage bond. Rebate to United Sates. An issue shall be treated as meeting the requirements of this paragraph only if an amount equal to the sum of - the excess of - the amount earned on all nonpurpose investments (other than investments attributable to an excess described in this subparagraph), over the amount which would have been earned if such nonpurpose investments were invested at a rate equal to the yield on the issue, plus (B) any income attributable to the excess described in subparagraph (A), is paid to the United States by the issuer in accordance with the requirements of paragraph (3) Due date of payments under paragraph (2). Except to the extent provided by the Secretary, the amount which is required to be paid to the United States by the issuer shall be paid in installments which are made at least once every 5 years. Each installment shall be in an amount which ensures that 90 percent of the amount described in paragraph (2) with respect to the issue at the time payment of such installment is required will have been paid to the United States. The last installment shall be made no later than 60 days after the day on which the last bond of the issue is redeemed and shall be in an amount sufficient to pay the remaining balance of the amount described in paragraph (2) with respect to such issue. A series of issues which are redeemed during a 6-month period (or such longer period as the Secretary may prescribe) shall be treated (at the election of the issuer) as 1 issue for purposes of the preceding sentence if no bond winch is part of any issue in such series has a maturity of more than 270 days or is a private activity bond. In the case of a tax and revenue anticipation bond, the last installment shall not be required to be made before the date 8 months after the date of issuance of the issue of which the bond is a part.

25We just issued a bond now what?Are there tax rules that we need to follow?

Arbitrage RebateEntire BondYield RestrictionFundYield Restriction Fund RestrictionYield Restriction Limitations on FundsProject FundsCosts of Issuance FundsEscrow Refunding FundsDebt Service Funds

Interest EarningsBalanceTime

Project Funds Trigger funds remain at the end of Interest earnings on the balance is to be yield restricted to the bond yield + .125% or provide a yield reduction payment to the IRS

Yield Restriction ProjectInterest EarningsBalanceTime3 yearsCost of IssuanceTrigger funds remain at the end of Interest earnings on the balance is to be yield restricted to the bond yield + .125% or provide a yield reduction payment to the IRS

Yield Restriction Cost of IssuanceInterest EarningsBalanceTime3 yearsRefunding EscrowTrigger for a current refundingInterest earnings on the balance after 90 days is to be yield restricted to the bond yield + .001%.Trigger for a advanced refundingInterest earnings on the balance after 30 days is to be yield restricted to the bond yield + .001%.

Yield Restriction Refunding EscrowInterest EarningsBalanceTime90 days30 daysYield Restriction Debt Service

Balance = Payments$1,200,000 Balance = $1,200,000 Payments

PERFECT MATCH! Interest EarningsBalance

31Allocated Reserve Portion of the debt service fund is approximately 50-75% of the actual debt service balance. Yield Restriction Debt Service

What happens if the balance > payments?Interest EarningsBalance32Allocated Reserve Portion of the debt service fund is approximately 50-75% of the actual debt service balance. Yield Restriction Debt Service

Balance > Payments$1,800,000 Balance - $1,200,000 Payments = $600,000 Reserve

Excess debt service funds are treated as a reserve fund . Interest earnings are to be yield restricted to the bond yield + .001% or provide a yield reduction payment to the IRS

Interest EarningsBalance33Allocated Reserve Portion of the debt service fund is approximately 50-75% of the actual debt service balance. Excess Debt Service FundsVery High Reserve Balance

Excess Debt Service FundsReservePerfect MatchYield Restriction Debt Service Balance = Debt Service Payments $1,200,000 - $1,200,000 = $0 Perfect MatchInterest EarningsBalance Balance > Debt Service Payments $1,400,000 - $1,200,000 = $200,000 Reserve Balance > Debt Service Payments $1,800,000 - $1,200,000 = $600,000 Reserve34Summary of Yield RestrictionFundsTriggerYield Restriction RateProject Balance after 3 yearsBond Yield + .125%Cost of IssuanceBalance after 3 yearsBond Yield + .125%Current refunding is defined as a refund that takes place within 90 days allowed to invest without regard to yield restrictionBond Yield + .001%Advanced refunding is defined as a refunding that takes place after 90 days allowed to invest without regard to yield restrictionBond Yield + .001%

Debt Service Very High Reserve BalanceBond Yield + .001%35Interest EarningsBalanceTime90 days30 days Section 1.148-1: Definitions and ElectionsBona fide debt service fund means a fund, which may include proceeds of an issue, that- Is used primarily to achieve a proper matching of revenues with principal and interest payments within each bond year; and Is depleted at least once each bond year, except for a reasonable carryover amount not to exceed the greater of the earnings on the fund for the immediately preceding bond year; orone-twelfth of the principal and interest payments on the issue for the immediately preceding bond year.

Section 148(f)(4)(A)(ii)(4) Special rules for applying paragraph (2). In general. In determining the aggregate amount earned on nonpurpose investments for purposes of paragraph (2) - any gain or loss on the disposition of a nonpurpose investment shall be taken into account, and any amount earned on a bona fide debt service fund shall not be taken into account if the gross earnings on such fund for the bond year is less than $100,000.35Yield RestrictionIRS Filing Dates for Yield RestrictionEvery 5 yearsMaturity date of the issue

36Interest EarningsBalanceTimeSection 148: Arbitrage(f) Required rebate to the United States. In general. A bond which is part of an issue shall be treated as an arbitrage bond if the requirements of paragraphs (2) and (3) are not met with respect to such issue. The preceding sentence shall not apply to any qualified veterans mortgage bond. Rebate to United Sates. An issue shall be treated as meeting the requirements of this paragraph only if an amount equal to the sum of - the excess of - the amount earned on all nonpurpose investments (other than investments attributable to an excess described in this subparagraph), over the amount which would have been earned if such nonpurpose investments were invested at a rate equal to the yield on the issue, plus (B) any income attributable to the excess described in subparagraph (A), is paid to the United States by the issuer in accordance with the requirements of paragraph (3) Due date of payments under paragraph (2). Except to the extent provided by the Secretary, the amount which is required to be paid to the United States by the issuer shall be paid in installments which are made at least once every 5 years. Each installment shall be in an amount which ensures that 90 percent of the amount described in paragraph (2) with respect to the issue at the time payment of such installment is required will have been paid to the United States. The last installment shall be made no later than 60 days after the day on which the last bond of the issue is redeemed and shall be in an amount sufficient to pay the remaining balance of the amount described in paragraph (2) with respect to such issue. A series of issues which are redeemed during a 6-month period (or such longer period as the Secretary may prescribe) shall be treated (at the election of the issuer) as 1 issue for purposes of the preceding sentence if no bond winch is part of any issue in such series has a maturity of more than 270 days or is a private activity bond. In the case of a tax and revenue anticipation bond, the last installment shall not be required to be made before the date 8 months after the date of issuance of the issue of which the bond is a part.

36Record Retention

37Section 6001 provides record retention requirements for federal tax purposes. It is important that sufficient records are retained to demonstrate the bonds maintain their tax-advantaged status.

*Retention period is the life of the bond plus three years. **Extended for refunding circumstances as the new retention period for refunded bonds is the life of the refunding bond plus three years.

(Information provided on flash drive)

37Private Business Use

38Private Business Use relates to Section 141 if the Internal Revenue Code of 1986, as amended and Treasury Regulations 1.141 (the Tax Code).

Leading Question:

What is Private Business Use anyways?

General Questions:

Is the facility used in a manner that will benefit a for-profit entity or individual (private business use test)? Specific examples of possible private business use according the Tax Code.Is the facility owned or leased to a for-profit entity or individual (security or payment tests)?Are proceeds used to make or finance loans (financing test)?

38Private Business Use

39Private Business Use relates to Section 141 if the Internal Revenue Code of 1986, as amended and Treasury Regulations 1.141.

Leading Question:

What is Private Business Use anyways?

Private Business Use relates to the identification of proceeds or bond financed property that are to be used for any private business use.

The general rule (private business use test) is that if 10% or more of the proceeds of the issue/or bond financed property are used for private business use than the issue is not a private activity bond (in other words it is taxable).39Private Business Use

40General Question:

Is the facility used in a manner that will benefit a for-profit entity or individual?

Ways to validate proper use:

Identify clearly what building or project site is involved in each financing.Establish a uniform and rational system, for example:Calculate the total square footage of useable space of the facility.Calculate the square footage of the area used for private use purposes.Determine if the private use area has general access from all of the common areas of the facility or if there is a limited area of general access devoted to the entrance to the private use area. The other areas of general access may then be added to the other public purpose use areas.Divide the private use area by the total area of the facility. This is the percentage of private use and must not exceed the private use allocation based upon the proceeds percentage.If 100% of the building is used by a qualified 501(c)(3) corporation or a governmental entity compliance is achieved.40Private Business Use

41General Question:

Is the facility used in a manner that will benefit a for-profit entity or individual?

Measuring for the private business use test is based upon the average percentage of use during the measurement period:

The measurement period of property financed by an issue begins on the later of:the issue date of that issue, ORthe date the property is placed in service.The measurement period ends on the earlier of:the last date of the reasonably expected economic life of the property, ORthe latest maturity date of any bond of the issue financing the property (determined without regard to any optional redemption dates).41Private Business Use

42Specific examples of possible private business use according the Tax Code include:

Sale of facilities LeasesSpecial legal entitlements such as naming rightsManagement contractsResearch agreements

See handout for specifics.42Private Business Use

43General Question:

Is the facility owned or leased to a for-profit entity or individual?

Ways to validate proper use:

If less than 10%, of the proceeds/property are directly or indirectly secured by an interest in:property used or to be used for a private business use, orpayments in respect of such property, or.to be derived from payments (whether or not to the issuer) in respect of property, or borrowed money, used or to be used for a private business use.

General measurement of private payment and security test:

The present value of the payments or property is compared to the present value of debt service to be paid over the term of the issue.

43Private Business Use

44Are proceeds used to make or finance loans?

Ways to validate proper use:

If less than 5% or $5 million of the proceeds are directly or indirectly used to make/finance loans to non governmental persons.

General measurement of private loan financing test:

The actual amount loaned is not discounted to reflect present value but instead relies testing based on the face amount.44Private Business Use

45The Tax Code identifies a private activity bond as a bond which meets the following criteria:the private business use test, andthe private security or payment test, orthe private loan financing test.

Both the reasonable expectations of the issuer on the issuance date and subsequent deliberate actions of the issuer are considered when determining if the private activity bond tests are met.

There are three basic remedial action options as generally described below:Redemption or defeasance of nonqualified bonds within 90 daysAlternative use of disposition proceedsAlternative use of facility

45Continuing Disclosure

46The Official Statement will state the following regarding Continuing Disclosure:

The District will enter into a Continuing Disclosure Undertaking

In the last 5 years, the District has complied in all material respects with its previous undertakings under the Rule to provide annual reports and notices of Listed Events

Important Acronyms:SECSecurities and Exchange CommissionMSRBMunicipal Securities Rulemaking BoardEMMAElectronic Municipal Market Access46Continuing Disclosure

47SEC 15c2-12(b) Requirements:

15c2-12(b)(5)(i) An underwriter shall not purchase or sell municipal securities unless they have reasonably determined that the issuer (District) has undertaken to provide the following to the MSRB:

Annual Financial Information or operating data presented in the final official statementIf not submitted as part of the Annual Financial Information, audited financial statementsNotice of any of the following events in a timely manner, not to exceed 10 business days:Principal and interest payment delinquenciesMaterial non-payment related defaultsUnscheduled draws on debt service reserves for financial difficulties47Continuing Disclosure

48Notice of any of the following events in a timely manner, not to exceed 10 business days: (continued)Unscheduled draws on credit enhancements for financial difficultiesSubstitution of credit or liquidity providers, or their failure to performAdverse tax opinions affecting the tax status of the securityMaterial modifications to rights of security holdersMaterial bond calls or tender offersDefeasancesRelease, substitution or sale of property securing repayment of the securitiesRating changesBankruptcy, insolvency, receivership or similar eventConsummation of a merger, consolidation or acquisitionAppointment of a successor, additional trustee or change of a trustee48Continuing Disclosure

49Form of Continuing Disclosure Undertaking

Usually an appendix to the Official Statement that is signed by District AdministrationDescribes the content for the Annual Financial InformationFinancial information in the Annual Report may be unauditedAudited financial information must be provided to the MSRB as soon as practical after it has been made available to the District

Include Operating Data in the Annual Financial Information to the extent it's not included in audited financial statements:Outstanding debt and lease obligationsGeneral fund budget and actual resultsEnrollment, or equivalent information, as is reasonably availableAssessed valuationsLargest local secured taxpayers49Continuing Disclosure

50Form of Continuing Disclosure Undertaking

District agrees to provide to MSRB Notice of Listed Events (Material Events) with respect to the Bonds no later than 10 business days after the occurrenceProvided in electronic format Accompanied by identifying information as prescribed by the MSRB50Continuing Disclosure

51If the District includes any information in addition to what is specifically required:There is no obligation to update the information or include it in any future disclosure

The sole remedy for failure to comply with the Continuing Disclosure Undertaking:Is an action to compel performanceDon't risk management's credibility by not complying!

The Continuing Disclosure Undertaking terminates:When the District is no longer obligated with respect to the Bonds51Post Issuance Policy and Procedure Manual

52

=(Information provided on flash drive)5253Arbitrage and Yield RestrictionAppointed PartyRetention of Adequate RecordsAppointed PartyBorrower Spending's Report Construction ProgressAppointed PartyQualified Use of Proceeds, Financed Property and Private ActivityAppointed PartyIssuance Price and Volume Cap AllocationAppointed PartyFair Market Value of Investments Appointed PartyContinuing DisclosureAppointed PartyCompliance TrainingCompliance OfficerDelegation of Compliance Matters

53Any Questions?This presentation provides brief and general information . IRS rules are complex and detailed, so it is important to review the specific guidance provided by the arbitrage rebate and related requirements of IRC Section 148.