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5.g) Staff Report-Post Issuance Compliance Bond Policy � � �-'�.��� � � SCANDIA Staff Report Date of Meeting: August 20,2013 To: City Council From: Kristina Handt, Administrator Re: Post Issuance Compliance Bond Policy Agenda Item#: S.g) Background: Assistant City Attorney Andy Pratt has prepared a Post Issuance Compliance Bond Polic�. The City has to file Form 8038-G with the IRS for the recent bond issuance by November 15t this year. The form has been updated in recent years as the IRS steps up enforcement. The form now asks if the issuer(the City) has written policies to remediate any nonqualified bond issues and monitor the bonds to make sure they remain compliant. Currently, the City does not have any adopted policies in this regard. Issue: Should the city adopt the Post Issuance Compliance Bond Policy? Proposal Details: In summary the policy provides that if ever there is an issue with any of the City's bonds after they are issued (such as an investment problem, conversion of public bond-financed facilities to private facilities, nonuse of bond proceeds, etc.)the City would work with bond counsel and financial advisors to address the problem. Also,the City would submit the reyuired forms to the IRS and track how the funds are spent. All of these things we would do anyways but having a written policy in place may decrease the chances of an IRS audit. Fiscal Impact: NA Options: 1) Approve the policy 2) Amend and then approve the policy 3) Do not approve the policy Recommendation: Option 1. City of Scandia,Minnesota POST-ISSUANCE COMPLIANCE PROCEDURE AND POLICY FOR TAX-EXEMPT GOVERNMENTAL BONDS Adopted: August 20,2013 1 Post-Issuance Compliance Procedure and Policy for Tax-Exempt Governmental Bonds The City of Scandia, Minnesota(the "Issuer") issues tax-exempt governmental bonds from time to time to finance various autharized capital improvements. As an issuer of t�-exempt governmental bonds, the Issuer is required by the terms of Sections ]03 and 141 through 150 of the Internal Revenue Code of 1986, as amended (the "Code"), and the U.S. Treasury Regulations promulgated thereunder(the "Treasury Regulations"), to take certain actions subsequent to the issuance of such bonds to ensure the continuing tax-exempt status of such bonds. In addition, Section 6001 of the Code and Section 1.6001- 1(a) of the Treasury Regulations impose record retention requirements on the Issuer with respect to its tax-exempt governmental bonds. This Post-Issuance Compliance Procedure and Policy for Tax-Exempt Governmental Bonds (the "Policy") has been approved and adopted by the governing body of the Issuer to ensure that the Issuer complies with its post-issuance compliance obligations under applicable provisions of the Code and Treasury Regulations. This Policy additionally serves as a written procedure (i) to ensure that all nonqualified bonds of an issue are remediated according to the requirements under the Code and applicable Treasury Regulations, and (ii) to monitor the requirements of Section 148 of the Code. 1. Effective Date and Term. The effective date of this Policy is the date of approval by the City Council of the Issuer, and this Policy shall remain in effect until supplemented, superseded or terminated by action of the City Council of the Issuer. 2. Responsible Parties. The City Administrator shall be the party primarily responsible for ensuring that the Issuer successfully carries out its post-issuance compliance requirements under applicable provisions of the Code and Treasury Regulations with regard to all taY-exempt governmental obligations of the lssuer. The City Administrator is referred to as the "Compliance Officer" for purposes of this Policy. The Compliance Officer shall be assisted by other Issuer staff and officials when appropriate. The Compliance Officer will also be assisted in carrying out post-issuance compliance requirements by the following entities: (a) Bond Counsel (as of the date of approval of this Policy, bond counsel for the Issuer is Eckberg,Lammers,Briggs, Wolff&Vierling,P.L.L.P.); (b) Financial Advisor (as of the date of approval of this Policy, the financial advisor of the Issuer is Northland Securities, Inc.); (c) Paying Agent (as of the date of approval of this Policy, the paying agent of the Issuer is Northland Trust Services,Inc.); and (d) Rebate Analyst (the organization primarily responsible for providing rebate analyst services for the Issuer). The Compliance Officer shall be responsible for assigning post-issuance compliance responsibilities to other Issuer staff, Bond Counsel, the Financial Advisor, the Paying Agent, and the Rebate Analyst. The Compliance Officer shall utilize such other professional service organizations as are necessary to ensure compliance with the post-issuance compliance requirements of the Issuer. The 2 Compliance Officer shall provide training and educational resources to Issuer staff responsible for ensuring compliance with any portion of the post-issuance compliance reyuirements of this Policy. 3. Post-Issuance Compliance Actions. The Compliance Officer shall take the following post-issuance compliance actions or shall verify that the following post-issuance compliance actions have been taken on behalf of the Issuer with respect to each issue of tax-exempt governmental bonds issued by the Issuer: (a) The Compliance Officer shall supervise the preparation of a transcript of principal documents(this action will be the responsibilities of the Financial Advisor and Bond Counsel). (b) The Compliance Officer shall file with the Internal Revenue Service (the "IRS"), within the time limit imposed by Section 149(e) of the Code and applicable Treasury Regulations, an Information Return for Tax-Exempt Governmental Obligations, Form 8038-G, an Information Return for Small Tcrx-Exempt Governmental Bond issues, Leases, and Installment Sales, Form 8038-GC, an Information Return for Tax-Exempt Private Activity Bond Issues, Form 8038,or a separate reporting form covering subsequently authorized tax credit or other types of obligations, as the case may be (this action will be the primary responsibility of Bond Counsel). (c) If not otherwise provided for in a "tax certificate" given pursuant to the requirements of Treasury Regulations, Section 1.148-2(b)(2), the Compliance Officer shall prepare an "allocation memorandum" far each issue of tax-exempt governmental bonds in accordance with the provisions of Treasury Regulations, Section 1.148-6(d)(1), that accounts for the allocation of the proceeds of the ta�c- exempt bonds to project expenditures not later than the earlier of: (i) Eighteen(18)months after the later of(A)the date the expenditure is paid,or(B)the date the project, if any,that is financed by the tax-exempt bond issue is placed in service;or (ii) The date sixty (60) days after the earlier of(A) the fifth anniversary of the issue date of the tax-exempt bond issue,or(B)the retirement of the tax-exempt bond issue. Preparation of the allocation memorandum will be the primary responsibility of the Compliance Officer, in consultation with Bond Counsel and the Financial Advisor. If the project(s) to be financed with the proceeds of an issue of tax-exempt governmental bonds is additionally financed with multiple sources of funds, the Compliance Officer, in consultation with Bond Counsel, shall adopt an accounting methodology that maintains each source of financing separately and monitors the actual expenditure of proceeds of the tax-exempt governmental bonds. (d) The Compliance Officer, in consultation with Bond Counsel and the Financial Advisor, shall identify proceeds of tax-exempt governmental bonds that must be yield-restricted and shall monitor the investments of any yield-restricted funds to ensure that the yield on such investments does not exceed the yield to which such investments are restricted. (e) In consultation with Bond Counsel, the Financial Advisor, and the Rebate Analyst, the Compliance Officer shall determine whether the Issuer is subject to the rebate requirements of Section 148(fl of the Code and related Treasury Regulations with respect to each issue of tax-exempt governmental bonds. In consultation with Bond Counsel and the Financial Advisor, the Compliance Officer shall determine, with respect to each issue of tax-exempt governmental bonds of the Issuer, whether the Issuer is eligible for any of the temporary periods for unrestricted investments and is eligible 3 for any of the spending exceptions to the rebate requirements. The Compliance Officer shall contact the Rebate Analyst(and, if appropriate, Bond Counsel)prior to the fifth anniversary of the date of issuance of each issue of taY-exempt governmental bonds of the Issuer and each fifth anniversary thereafter to arrange for calculations of the rebate reyuirements with respect to such tax-exempt governmental bonds. If a rebate payment is required to be paid by the Issuer, the Compliance Officer shall prepare or cause to be prepared the Arbitrage Rebate, Yield Reduction and Penalty in Lieu of Arbitrage Rebate, Form 8038-T, and submit such Form 8038-T to the IRS with the required rebate payment. If the Issuer is authorized to recover a rebate payment previously paid, the Compliance Officer shall prepare ar cause to be prepared the Request for Recovery of Overpayments Under Arbitrage Rebate Provisions, Form 8038-R, with respect to such rebate recovery,and submit such Form 8038-R to the IRS. 4. Procedures for Monitoring, Verification, and Inspections. The Compliance Officer shall institute such procedures as the Compliance Officer shall deem necessary and appropriate to monitor the use of the proceeds of taY-exempt governmental bonds issued by the Issuer, to verify that certain post- issuance compliance actions have been taken by the Issuer, and to provide for the inspection of the facilities financed with the proceeds of such bonds. At a minimum, the Compliance Officer shall establish the following procedures: (a) The Compliance Officer shall monitor the use of the proceeds of tax-exempt governmental bonds to: (i) ensure compliance with the expenditure and investment requirements under the temporary period provisions set forth in Treasury Regulations, Section 1.148-2(e); (ii) ensure compliance with the safe harbor restrictions on the acquisition of investments set forth in Treasury Regulations, Section 1.148-5(d); (iii) ensure that the investments of any yield-restricted funds do not exceed the yield to which such investments are restricted; and (iv) determine whether there has been compliance with the spend-down requirements under the spending exceptions to the rebate requirements set forth in Treasury Regulations, Section 1.148-7. (b) The Compliance Officer shall monitor the use of all bond-financed facilities in order to: (i) determine whether private business uses of bond-financed facilities have exceeded the de minimis limits set forth in Section 141(b) of the Code (generally l 0% of bond proceeds) as a result of leases and subleases, licenses,management contracts, research contracts, output contracts,naming rights agreements or other arrangements that provide special legal entitlements to nongovernmental persons; and (ii) determine whether private security or payments that exceed the de minimis limits set forth in Section 141(b) of the Code (generally 10% of bond proceeds) have been provided by nongovernmental persons with respect to such bond-financed facilities. The Compliance Officer shall provide training and educational resources to any Issuer staff that have the primary responsibility for the operation, maintenance, or inspection of bond-financed facilities with regard to the limitations on private business use and on private security or payments with respect to bond-financed facilities. The Compliance Officer shall strive to identify in advance any potential transaction that may affect the private use and private security or payment status of bond-finance facilities. If the Compliance Officer identifies potential private use or private security or payments relating to facilities financed with tax-exempt governmental bonds,the Compliance Officer will consult with Bond Counsel to determine whether such private use will adversely affect the tax-exempt status of the governmental bond issue and if so, what remedial action is appropriate. (c) The Compliance Officer shall undertake the following with respect to each outstanding issue of tax-exempt governmental bonds of the Issuer: (i) an annual review of the books and records maintained by the Issuer with respect to such bonds; and (ii)an annual physical inspection of the facilities financed with the proceeds of such bonds, conducted by the Compliance Officer with the assistance of 4 any Issuer staff who have the primary responsibility for the operation, maintenance, or inspection of such bond-financed facilities. 5. Record Retention Reyuirements. The Compliance Officer shall collect and retain the following records with respect to each issue of tax-exempt governmental bonds of the Issuer and with respect to the facilities financed with the proceeds of such bonds: (i) audited financial statements of the Issuer; (ii) appraisals, demand surveys, or feasibility studies, if any, with respect to the facilities to be financed with the proceeds of such bonds; (iii) publications, brochures, and newspaper articles, if any, related to the bond financing; (iv) trustee or paying agent statements; (v) records of all investments and the gains(or losses) from such investments; (vi)paying agent or trustee statements regarding investments and investment earnings; (vii) reimbursement resolutions, if any, and expenditures reimbursed with the proceeds of such bonds; (viii) allocations of proceeds to expenditures (including bond costs of issuance) and the dates and amounts of such expenditures (including any requisitions, draw schedules, draw requests, invoices, bills, and cancelled checks with respect to such expenditures); (ix) contracts entered into for the construction, renovation, or purchase of bond-financed facilities; (x) an asset list or schedule of all bond-financed depreciable properiy and any depreciation schedules with respect to such assets or property; (xi) records of the purchases and sales of bond-financed assets; (xii) private business uses of bond-financed facilities that arise subsequent to the date of issue through leases and subleases, licenses, management contracts, research contracts, output contracts, naming rights agreements, or other arrangements that provide special legal entitlements to nongovernmental persons and copies of any such agreements ar instruments; (xiii) arbitrage rebate reports and recards of rebate and yield reduction payments, if any; (xiv) resolutions or other actions, if any, taken by the governing body of the Issuer subsequent to the date of issue with respect to such bonds; (xv) formal elections authorized by the Code or Treasury Regulations that are taken with respect to such bonds; (xvi) relevant correspondence relating to such bonds; (xvii) documents related to guaranteed investment contracts or certificates of deposit, credit enhancement transactions, and financial derivatives entered into subsequent to the date of issue; (xviii) copies of any and all Form 8038-Ts and Form 8038-Rs filed with the IRS; and (xix)the transcript prepared with respect to such taY-exempt governmental bonds. The records collected by the Issuer shall be stored in any format deemed appropriate by the Compliance Officer and shall be retained for a period equal to the life of the taY-exempt governmental bonds with respect to which the records are collected (which shall include the life of any bonds issued to refund any portion of such tax-exempt governmental bonds or to refund any refunding bonds) plus three (3)years. 6. Remedies. In consultation with Bond Counsel, the Compliance Officer shall become acquainted with the remedial actions under Treasury Regulations, Section 1.]41-12, to be utilized in the event that private business use of bond-financed facilities exceeds the de minimis limits under Section 14](b)(]) of the Code. In consultation with Bond Counsel, the Compliance Officer shall become acquainted with the Ta�c Exempt Bonds Voluntary Closing Agreement Program, described in Notice 2008-31, 2008-11 I.R.B. 592, to be utilized as a means for the Issuer to correct any post-issuance infractions of the Code and Treasury Regulations with respect to outstanding tax-exempt bonds. The Compliance Officer will additionally identify and consult with Bond Counsel regarding any post-issuance change to any terms of an issue of outstanding tax-exempt governmental bonds that could potentially be treated as a"reissuance"of such bonds for federal tax purposes. 7. Continuing Disclosure Obli at� ions. In addition to its post-issuance compliance requirements under applicable provisions of the Code and Treasury Regulations, the Issuer has agreed to provide continuing disclosure, such as annual financial information and material event notices, pursuant 5 to a continuing disclosure certificate or similar document (the "Continuing Disclosure Document") prepared by Bond Counsel and made a part of the transcript with respect to each issue of bonds of the Issuer that is subject to such continuing disclosure reyuirements. The Continuing Disclosure Document is executed by the Issuer to assist the underwriters of the Issuer's bonds in meeting their obligations under Securities and Exchange Commission Regulation, 17 C.F.R. Section 240.15c2-12, as in effect and interpreted from time to time ("Rule ISc2-12"). The continuing disclosure obligations of the Issuer are governed by each Continuing Disclosure Document and by the terms of Rule 15c2-]2. The Compliance Officer is primarily responsible for undertaking such continuing disclosure obligations and to monitor compliance with such obligations. 8. Other Post-Issuance Actions. If, in consultation with Bond Counsel, the Financial Advisor, the Paying Agent, the Rebate Analyst, the Issuer's Attorney, or the City Council of the Issuer, the Compliance Officer determines that any additional action not identified in this Policy must be taken by the Compliance Officer to ensure the continuing tax-exempt status of any issue of governmental bonds of the Issuer,the Compliance Officer shall take such action if the Compliance Officer has the authority to do so. If, after consultation with Bond Counsel, the Financial Advisor, the Paying Agent, the Rebate Analyst, the Issuer's Attorney, or the City Council of the Issuer, the Compliance Officer determines that this Policy must be amended or supplemented to ensure the continuing tax-exempt status of any issue of governmental bonds of the Issuer, the Compliance Officer shall recommend to the City Council of the Issuer that this Policy be so amended or supplemented. 9. Taacable Governmental Bonds. Most of the provisions of this Policy, other than the provisions of Section 7 hereof, are not applicable to governmental bonds the interest on which is includable in gross income for federal income tax purposes (i.e. "taxable governmental bonds"). If an issue of taxable governmental bonds is later refunded with the proceeds of an issue of ta�c-exempt governmental bonds, then the uses of the proceeds of the taYable governmental bonds and the uses of the facilities financed with the proceeds of the ta�cable governmental bonds will be relevant to the tax-exempt status of the 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 t�-exempt governmental bonds then, for purposes of this Policy, the Compliance Officer shall treat the issue of taYable 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 Policy with respect to such ta�cable governmental bonds. The Compliance Officer shall seek the advice of Bond Counsel as to whether there is any reasonable possibility of issuing ta�c-exempt governmental bonds to refund an issue of t�able governmental bonds. 10. Qualified Tax Credit Bonds. Section 54A of the Code authorizes the issuance of certain "Qualified Tax Credit Bonds" under certain circumstances. "Qualified Tax Credit Bonds," as of the effective date of this Policy, means a yualified forestry conservation bond, a new clean renewable energy bond, a yualified energy conservation bond, a yualified zone academy bond, or a qualified school construction bond. Section 6431(fl of the Code allows for the direct payment of a portion of the interest on Qualified Tax Credit Bonds (except for qualified forest conservation bonds) to be made to the bond issuer from the United States Department of the Treasury. All of the Available Project Proceeds (as defined in Section 54A(e)(4)of the Code)of a Qualified Tax Credit Bond are to be used for the purposes required for each respective Qualified Tax Credit Bond (as further described in the Code). The bond issuer must make an irrevocable election to (i) designate bonds as Qualified Ta�c Credit Bonds under the Code, and (ii) subject a Qualified Tax Credit Bond to the direct payment subsidy option under Section 6431(fl of the Code. 6 ^ Since the interest on a Qualified TaY Credit Bond must be excludable from gross income under Section 103 of the Code(but for the irrevocable election of the issuer to designate the bond as a Qualified Tax Credit Bond), the Qualified Tax Credit Bond must satisfy all the requirements of the Code and applicable Treasury Regulations that are conditions to the issuance and maintenance of tax-exempt governmental bonds. Therefore, although Qualified Tax Credit Bonds are not tax-exempt bonds, for purposes of this Policy the Compliance Officer shall treat all Qualified Taac Credit Bonds as if such bonds were an issue of t�-exempt governmental bonds and shall carry out and comply with the requirements of this Policy with respect to such Qualified Tax Credit Bonds. In addition, to the extent that less than 100 percent of the Available Project Proceeds of a Qualified Taac Credit Bond are expended by the close of the three-year period beginning on the date of issuance of such Qualified Tax Credit Bond, or by the close of any extended period granted by the United States Secretary of the Treasury under Section 54A(d)(2)(B)(iii) of the Code, the Issuer must, as required by Section 54A(d)(2)(B)(i)of the Code,redeem all nonqualified bonds within 90 days after the end of the later of the initial three-year spending period or any extension of such period. The amount of nonqualified bonds to be redeemed shall be determined in the same manner as under Section 142 of the Code. I 1. (�ualified 501(c,(3)Bonds. If the Issuer issues bonds to finance a facility to be owned by the Issuer 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 Issuer 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 l45 of the Code and applicable Treasury Regulations. Although such qualified 501(c)(3) bonds are not governmental bonds, at the election of the Compliance Officer and after consultation with Bond Counsel, for purposes of this Policy,the ComplSance Officer 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 Policy with respect to such qualified 501(c)(3)bonds. This "Post-Issuance Compliance Procedure and Policy for T�-Exempt Governmental Bonds" is adopted by the City Council of the City of Scandia,Minnesota,this 20th day of August,20l 3. CITY OF SCANDIA, MINNESOTA Mayor ATTEST: City Administrator 7