The IRS releases interim guidance on Management Contacts and ACOs, Chan warns SEC eyeing secondary market crackdown on Muni’s, Detroit may exit Chapter 9, IRS audits Philly water bonds, & Solving the Post Issuance Compliance Puzzle – Part 9
CURRENT EVENTS
Detroit Ruling Set for November 7th (BB, October 28, 2014)
After what has been seen as a historic bankruptcy trial, all eyes will on Detroit later this week. The long-fought Chapter 9 bankruptcy ruling, if approved, will allow the City to shed $7 billion in debt obligations and set itself back on the path to recovery.
The plan will also impact pensions, with the largest being a 90% cut in healthcare benefits for all retirees. Police and fire would maintain their pension, but see more than a 50% reduction in their COLA, while general retirees would take a 4.5% pension cut and freeze their COLAs.
On the debt side, the haircuts were much more severe. Bondholders of Unlimited GOs will lose 26%, Limited GOs 66%, and bond insurers over 80%.
As Judge Rhodes continued to grill both sides on Detroit’s confirmation plan, he paid particular attention to the risks of the City’s feasibility plan for revitalization, the amount owed in attorney’s fees ($52 million) as well as the public-private plan which would retain the over $800 million in artwork for the Detroit Institute of the Arts.
Philadelphia 2010 Water Bonds Tax Exemption under Scrutiny (Bloomberg, October 27, 2014)
On October 8th, the City received notice that it’s $396 million in water and wastewater bonds were being audited by the IRS due to “concern that the debt issuance may fail one or more provisions” of the code, according to the MSRB filing.
The 2010 Bonds were used to refinance 2003 securities as well as fund a $48.8 million swap payment.
Treasurer Nancy Winkler stated “We have not identified anything that would lead us to believe that the bonds fail to meet the applicable requirements.” She also noted that the City has undergone five debt issue audits in the last four years, without any action taken.
Chan Warns of Secondary Market Crackdown (BB, October 29, 2014)
While issuers are still focusing on the MCDC for primary market disclosure, former SEC counsel Chan warns that dealers should expect the SEC to start diligently policing the secondary market.
Chan, who was the architect of the MCDC Initiative, said that two SEC Commissioners have repeatedly voiced concerns over opaqueness in the secondary market, primarily around pricing and transactions costs related to retail investors, as well as the quality of dealer recommendations.
Chan indicated that dealers relying on ratings to satisfy suitability requirements would be dangerous. He also stated “I think the cautionary tale is broker dealer reps need to do their homework,”
OUT & ABOUT
IRS Issuers Interim Guidance on Management Contracts and ACOs
Late last week, the Internal Revenue Service issued Notice 2014-67. With an increased emphasis on public-private partnerships and other changes under the Affordable Care Act, questions arose about potential problems regarding private business use restrictions on tax-exempt bonds.
Notice 2014-67 offers interim guidance on structuring management contracts and certain accountable care organizations to avoid jeopardizing the tax-exempt status of the bonds by triggering excessive private business use.
Conferences/Events for the rest of 2014:
In November: Transportation/P3s:
The Transportation Finance/P3 Conference (Nov 16th-18th, Arlington, VA)
SOLVING THE COMPLIANCE PUZZLE
I (Debbie Todd) just fell in love with this graphic as it so clearly and brilliantly represents the puzzling complexity we are dealing with, as issuers, in meeting our compliance needs. We also know that both the IRS and SEC are paying much closer attention to it these days – and that it is our obligation as issuers to understand (and have fully complied with) our respective bond covenants. As part of a 10 week series called Solving the Compliance Puzzle, I will focus on providing tips, insights and resources for one new line of our compliance puzzle.
So, are you ready?
Today, we’ll tie in the ninth line of our puzzle – Policies.
Probably two of the most frequent bond compliance questions I receive are, 1) why is having and maintaining a written policy and procedures on bond compliance so important, and, 2) what should be included in written post issuance compliance or debt management policies and procedures?
These are great questions…
The “Why” question is answered in two parts: Attest and Foundation.
When you close a bond deal, you, as the issuer, are legally required to file a Form 8038 series information return (8038, 8038-G, -CG, -B or -TC) with the IRS. Line 44 of the Form 8038 states, “Check the box if the issuer has established written procedures to monitor the requirements of section 148”.
(In Week 2, we reviewed section 103 on tax exempt interest as well as section 148 for arbitrage bonds.)
So, let’s think about this…
The Form 8038 is an attestation information return, filed under penalty of perjury. By checking box 44, signing and submitting the return, your authorized officer or tax counsel is attesting that you have such policies.
Now, what does this mean if the IRS audits your bonds?
In short, it means that if (what I call) a ‘line 44 affirmative” Form 8038 has been filed on the bonds under audit, the IRS will expect that your bonds are effectively being monitored and administered under section 148.
Goodbye “get out of jail free” card…
As shared in “A Taxing Dilemma,” last fall, the IRS Tax Exempt Bond Division is really focusing on the area of written policies and procedures. In the IRS Primer on Monitoring Post Issuance Compliance held on August 27, 2013, IRS agents repeatedly voiced concern about the effectiveness of our PIC procedures.
The IRS agent comment that really struck me: They are finding significant gaps between approved post issuance compliance policies and procedures and how covered bonds were actually being monitored. So…what’s missing?
The foundation of effective post issuance compliance lies in implementing and maintaining policies and procedures.
The great news is that bond counsels and the NABL, the IRS and professional organizations such as GFOA are sharing tons of information. You can also review several strong examples on the website’s knowledge library under policies, procedures and guidelines.
So…”What” should your written post issuance compliance policies and procedures include?
Effective policies and procedures include, but are not limited to:
- Due diligence at regular intervals
- Identifying the primary official or employee responsible for review
- Training of the primary responsible officer/employee
- Retention of adequate records for the life of the bonds/refundings
- Procedures for the timely identification of non-compliance
- Procedures ensuring steps will be taken for the timely remediation of non-compliance
Ideally, reviews should be completed annually from a cross-functional team perspective – including your in-house legal, accounts payable, contracting, facilities and finance stakeholders.
This serves two purposes:
- To help you (as the responsible contact) understand how compliance impacts other departments, and
- To keep key stakeholders who can impact your compliance success engaged and informed
In closing, here’s a great resource from the California Debt and Advisory Commission, presented by PFM Asset Management, LLC, if you’d like to learn more on arbitrage rebate under section 148.
Also, for a little historical perspective on compliance procedures, here’s an interesting 2011 recap by Jones Day on the IRS TEB Issues Final Report on Post Issuance Compliance Survey, which began in 2007.
I hope you found this segment helpful! Stay tuned – next week, we’ll conclude our “solving the compliance puzzle” segment with the 10th and final line of the series –Requirements.
The greatest compliment you can pay us is to share this newsletter with your issuer friends….
THE NEXT STEPS
Wow – It’s been almost 10 weeks already! I wanted to share two ideas for us going forward – but I really need your input on this, OK?
Developing your PIC Blueprint
Now that we know each other a little better, I hope you can see how important your success in post issuance compliance is and how much I genuinely want to help you make it a reality.
With that in mind, are you ready to turn our attention to more of a hands-on, interactive, DIY series of topics, specifically focused on building and improving your post issuance compliance programs? How much would this help you?
Monthly Member Showcase / Member Guest Blog
Second, over the last several weeks – and in particular over this last month, I have had the pleasure of chatting and corresponding with many of you. The tenure, knowledge and areas of expertise within our community are really impressive.
However, so far you haven’t had the opportunity to interact with one another like I have. We have some amazing writers and thought leaders – So, how about a new section where you can share your knowledge? It could be a piece of tax law, technology, cool tips on things you do in your compliance program that works, or just a discussion item that you would like to get comments/viewpoints, etc.
This can be a great place for the creative technical writer in you to come out to play…
Again, the Monday Muni Minutes is here to provide value to you, as the issuer. What would help you the most in reaching your post issuance compliance goals? Let me know in the comments section or shoot me an e-mail….
Have a great week!
To your compliance success,
Debbie
P.S. We are planning a fun, new educational topic platform as well as opening an exciting opportunity in the Monday Muni Minutes! Please take a look at our Next Steps section and leave me a comment – let me know what you think!