Post-issuance tax exempt bond compliance

The purpose of this policy is to establish policies and procedures in connection with tax-exempt bonds issued by a state or local government agency for loaned funds to Lynn University so as to maximize the likelihood that all applicable post-issuance requirements of federal income tax law needed to preserve the tax-exempt status of the bonds are met.

The use of tax-exempt debt plays an important role in funding a portion of Lynn University’s capital projects. The university recognizes its legal obligation to ensure that this tax-exemption is used responsibly. This policy provides the general guidelines and procedures the university follows to remain in compliance with federal income tax rules relating to tax-exempt bonds.

To maintain the debt status as tax-exempt, the university must comply with post-issuance debt requirements. Post-issuance compliance responsibilities include:

1. Tracking that proceeds of a debt issuance are spent on qualified tax-exempt debt purposes;
2. Maintaining detailed records of all expenditures and investments related to debt funds;
3. Ensuring the project financed is used in a manner consistent with the legal requirements;
4. Reviewing bond terms annually to adhere to bond covenants and post issuance requirements;
5. Ensuring that any space in debt-financed buildings allocated to Private Business Use does not exceed the legal limits;
6. Complying with arbitrage rebate requirements under federal tax regulations; and
7. Providing necessary disclosure information regarding financial and operating status annually.

Applicable federal law – Includes the Internal Revenue Code (IRC) and regulations promulgated thereunder, including IRC sections 103, 141, 147-150 and related regulations. Note: IRS publication 4079, Tax-Exempt Governmental Bonds Compliance Guide provides guidance and explanation for most areas of tax-exempt financing relevant to the university.

Arbitrage – Investment earnings on bond proceeds in excess of the bond interest paid to bondholders, adjusted for certain expenses.

Basic research – An original investigation for the advancement of scientific knowledge not having a specific commercial objective (see IRS Rev. Proc. 2007-47).

External party – Any person other than a member of the university faculty, staff, or student body.

Management contract – A management, service, or incentive payment contract between the university and a service provider under which the service provider provides services involving all, a portion of, or any function of, a facility.

Non-exempt person – The federal government, any agency or department of the federal government, any nonprofit corporation and any other firm, corporation, partnership, or entity that is not a state or local governmental unit.

Private business use – Use in a trade or business carried on by or for the benefit of any non-exempt Person. Private Business Use does not include use of a facility by a member of the general public where the facility is open to the public and the user has no special legal entitlement to use of the facility.

Qualified user - A state or local governmental unit.

Safe harbor – A provision that shields a party from liability under the law provided that certain conditions are met. IRS regulations and revenue procedures contain several safe harbors relating to activities which could generate private business use, the most important of which pertain to management contracts and research contracts.

Service provider - Any person other than a qualified user that provides services under a contract to, or for the benefit of, a qualified user. Common service providers include food vendors and facilities managers.

Tax-exempt bonds – 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. The university issues its tax-exempt debt through the Palm Beach County Educational Facilities Authority, a local government entity established to provide a conduit for educational institutions to issue tax-exempt financing.

Trade or business – Any activity carried on by a non-exempt person other than an individual acting as a member of the general public.

I. Responsibility
The Chief Financial Officer and Treasurer has overall responsibility for bond compliance for the university, including but not limited to monitoring the use of tax-exempt bond proceeds (including investment earnings and reimbursement of expenditures made before bond issuance) and the use of bond-financed or refinanced assets (e.g., facilities, furnishings or equipment) throughout the term of the bonds to ensure compliance with covenants and restrictions set forth in the tax certificate. The Chief Financial Officer and Treasurer shall be knowledgeable and versed in matters of bond financing and compliance. Training and resources in subject matter can be obtained through organizations such as NACUBO or bond consultant companies.

II. Records management
Basic records relating to any debt transaction are maintained as well as documentation evidencing the: expenditure of debt proceeds; use of debt-financed property; and sources of payment or security for the debt.

Documentation pertaining to any investment of debt proceeds is retained. All relevant records and contracts shall be maintained as described below.

The university will maintain the following documents for the term of each issue of bonds (including refunding bonds, if any) plus at least three years:

1. A copy of the bond closing transcript(s) and other relevant documentation delivered to the borrower at or in connection with closing of the issue of bonds;
2. A copy of all material documents relating to capital expenditures financed or refinanced by bond proceeds, including (without limitation) construction contracts, purchase orders, invoices, trustee requisitions, and payment records, as well as documents relating to costs reimbursed with bond proceeds and records identifying the assets or portion of assets that are financed or refinanced with bond proceeds, including a final allocation of bond proceeds and the final completion report filed pursuant to the loan agreement; and
3. A copy of all records of investments, investment agreements, arbitrage reports, and underlying documents, including trustee statements, in connection with any investment agreements, and copies of all bidding documents, if any.

The university seeks to comply with regulatory records retention requirements. Federal regulations provide that records relating to a tax-exempt debt transaction should be retained for so long as they are material in the administration of any federal tax law. Therefore, it is recommended that material records be kept for the life of the debt, including any refunding of the debt, plus three years.

III. Private business use
Where tax-exempt debt is used to finance the construction or acquisition of facilities and capital equipment, the university must comply with IRS laws and regulations applicable to private business use. Pursuant to the private business use test set forth at 26 USC §141, the tax-exempt status of a bond issuance is jeopardized if more than 5% of the proceeds are used for private business use (the applicable limit is 5% for bonds issued for the benefit of university-related Foundations and other 501(c)(3) affiliates).

Each debt issuance is subject to a limitation on the amount of “private use” permitted in the facilities funded by that issuance. The applicable limit is 5% for qualified 501(c)(3) debt issued on behalf of university-related foundations. After completion of the financed project, the Chief Financial Officer and Treasurer is responsible for ensuring that private business use in the facility remains below the applicable limit for as long as the debt (including any refunds) remains outstanding. If the actual private business use of the facility is determined to exceed the applicable legal limits, remedial action will be required.

The university’s debt-financing program will comply with all IRS laws and regulations applicable to private business use in tax-exempt financed facilities.

The Chief Financial Officer and Treasurer is responsible for ensuring that any space in debt-financed buildings allocated to private business use does not exceed the legal limits.

For new capital projects, if debt financing is a component of the business plan, the Chief Financial Officer and Treasurer, along with appropriate managers, should indicate in the request whether private business use may occur in the planned new space. If so indicated, the Chief Financial Officer and Treasurer (or designee) must perform a private use analysis prior to recommendation of the business plan to the Board of Trustees. Where the project is partially funded by tax-exempt bonds, the percentage of that funding to the total capital project cost should first be calculated when performing the private use analysis. The Chief Financial Officer and Treasurer will work to ensure that the reasonably expected Private Business Use will not exceed the applicable legal limit. If the expected private business use of the facility will cause the debt issuance to exceed the applicable limit, the facility may be required to be financed with taxable debt, which carries a higher borrowing cost.

Types of private business use: Most private business use in a tax-exempt financed facility arises from five types of arrangements:

Ownership: A sale or transfer of ownership to a non-governmental person of tax-exempt financed property. Ownership is determined under federal income tax principles.

Leases: Any arrangement that is properly characterized for federal income tax purposes as a lease to a non-governmental person.

Management contracts: A management contract is any arrangement whereby a non-governmental person actively manages the operations of a facility. Management contracts include, for example, contracts for dining services, facility management, or bookstore. However, there are exceptions for certain contracts meeting the Safe Harbors set forth in Rev. Proc. 97-13. In order to meet the Safe Harbors, the contract must provide for reasonable compensation to the non-governmental person for services rendered with no compensation based in whole or in part on a share of net profits. Arrangements that generally are not treated as net profit arrangements and therefore satisfy the Safe Harbor requirements include contracts for a percentage of gross revenues or expenses (but not both), or a per person or per unit fee. Management contracts must be analyzed in advance by the Chief Financial Officer and Treasurer for their impact on tax-exempt financed facilities.

Research agreements: Sponsored research by a non-governmental person (including the federal government and its agencies) may result in private business use unless the terms of the sponsorship agreement meet the Safe Harbors set forth in Rev. Proc. 2007-47. In general, sponsored research will not result in private business use if: (i) the research in question is properly characterized as basic research; (ii) the university’s licensing of the resulting technology to the sponsor is on terms no more favorable than those the university would extend to an unrelated, non-sponsoring party; and (iii) the price paid for that license is determined at the time the resulting technology is available for use. Additional exceptions (as described in Rev. Proc. 2007-47) apply for federally sponsored research and industry-sponsored cooperative research agreements.

Other actual or beneficial use: Any other arrangement that conveys special legal entitlements to a non-governmental person for beneficial use of tax-exempt financed property, such as an arrangement that conveys priority rights to use a tax-exempt financed facility, will result in private business use. Examples of such “special legal entitlements” include summer camps having the exclusive right to use an athletic facility, specially designed courses open only to one company, or use of a parking garage for a private event.

IV. Arbitrage and rebate

Tax-exempt bonds lose their tax-exempt status if they are classified as “arbitrage bonds.” In general, arbitrage occurs when the gross proceeds of a bond issue are used to acquire investments that earn a yield higher than the interest payable to the bondholders. In these situations, 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. The university will comply with the arbitrage requirements in Section 148 of the Internal Revenue Code. If it is determined that rebate is due, the Chief Financial Officer and Treasurer will make any required payments to the IRS.

V. Remedial action

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.

Credit enhancement or other agreements relating to bonds

The university will consult with bond counsel prior to the extension or alteration of any credit enhancement relating to the university’s tax-exempt bonds. The university will also consult with bond counsel prior to investing bond proceeds in guaranteed investment contracts or derivative products which relate to tax-exempt bonds.

VI. Disclosure information
The university will comply with continuing disclosure requirements as stated in the bond documents. The university will file, or cause to be filed, all Form 990s, and other tax returns within the time periods specified. The university will consult with its auditors and bond counsel, as appropriate, to ensure the accuracy of all information relating to tax-exempt debt.

To learn more about this policy or the supporting procedures, please contact Finance.