In this week’s edition, we will look at the NABL and AHA comments on Notice 2014-67, Harvey and Allen Park Settlements, two key webinars (MCDC and TEB) and Investing in our Schools…
CURRENT EVENTS
What’s New at the IRS…
IRS Guidance on Accountable Care Organizations – ACOs – is Too Narrow (Bond Buyer, 1-27-15)
Both the American Hospital Association and the National Association of Bond Lawyers have provided comments, voicing specific concerns regarding the IRS guidance on affordable care organizations and the participation in the Medicare Shared Savings Program (MSSP).
Their biggest concerns are two-fold: That the guidance would only apply to a very limited amount of organizations and that many hospitals could still risk violating the PBU rules.
The basis for confusion is clear:
- The landscape under the ACA is still changing
- The guidance applies for bonds sold after January 22nd, but could be applied earlier
- The criteria for “safe harbors” are still unclear
- Guidance applies only to ACOs who participate in the MSSP, but does not address non-Medicare patients under the ACA
- Clarify what “participation in an ACO” means
- The Accounting: Difficulty in calculating FMV calculation of contracts – there is no established market for shared savings…should be arms-length transaction instead
We all understand that the guidance on Management Contracts applies well outside the healthcare industry, which provides safe harbor for five year contracts which meets the compensation requirements.
NABL suggests the following:
- Define “stated amount”
- Include incentive compensation which maximizes revenue or minimizes expenses, but not both
NABL stated their reasoning very well. “If compensation based on a percentage of revenue or expenses is covered by the management contract safe harbor, incentive payments based on exceeding revenue thresholds or falling below expense thresholds (but not both) should also be covered.”
We will see what the IRS says next …
[Editor’s Note: As a practitioner, PBU implications in management contracts were always a source of concern, particularly when in a decentralized environment. That is why I engaged our Contracts team early in our PIC process. They were amazing! I am excited that Notice 2014-67 provides additional flexibility in management contracts, and applaud NABL for asking for more clarity and to standardize how we look at compensation clauses.]
While over at the SEC….
Judgments Entered Against Officials in Harvey, Ill and Allen Park Cases (Bond Buyer, 1-28-15)
In the formal closing of two much-watched SEC lawsuits, the former Harvey Illinois official Joseph Latke as well as the Allen Park Michigan official’s ex-mayor Gary Berta and former City Administrator Eric Waidlelich were all banned from future public offerings, essentially ending their municipal careers.
In addition, Ledke was fined $217,000 and Burtka agreed to pay a $10,000 civil penalty.
Both of these cases show just how serious the SEC is about protecting bondholders and, in particular, retail investors by making sure that public officials in charge of public debt offerings are providing the required disclosures and those disclosures are accurate, complete and truthful.
Peter Chan, a partner at Morgan, Lewis & Bockius in Chicago, said that these kinds of conduct based injunctions are very meaningful.
In the Harvey Illinois case, this was an example of an official pocketing hundreds of thousands of dollars through multiple schemes. These schemes included owning a private firm that benefited from the work as well as the official, at some point, being a financial advisor to the city. To add insult, some of the proceeds were improperly steered to support operations instead of capital projects.
The SEC was adamant in its request for default judgment, stating, “by abusing his position of trust as a Harvey public official and as a financial advisor to Harvey over a multi-year period, Letke has demonstrated that he is unfit to participate in municipal securities offerings.”
An interesting follow-up to Allen Park: When the judge initially vacated the ruling requested by the SEC it was because the court was concerned about public officials being prosecuted without the same rigor being pursued to the financing officials, namely the underwriters and counsel.
Judge Cohn also asked why authorities are unable to act until AFTER fraudulent action that has already caused harm to investors and taxpayers. He noted that Michigan once had a state agency called the Municipal Finance Commission who oversaw local borrowing and reviewed bonds BEFORE the sale, but that the MFC has long since been disbanded.
[Editor’s Note: As shared in earlier newsletters, the SEC is fervent in its mission to “protect the individual, retail investor”. It is using previously untapped provisions within the 1933 and 1934 Acts, as well as stronger analytics, coordination with the IRS and other agencies as well as information gathering initiatives such as the MCDC. I also think Judge Cohn hit on a particularly valid point…will there be a push to move to stronger, possibly independent oversight BEFORE a public offering? I will be curious to see if Orrick touches on this in their webinar this Thursday.]
Finally, News from Treasury & Budget
More Ideas to use Repatriation to Bolster Ailing Highway Trust Fund (Bond Buyer, 1-29-15)
As a follow up to last week’s article regarding the Highway Trust Fund woes, Senators Barbara Boxer and Rand Paul planned to introduce yet another bill: The Invest in Transportation Act of 2015.
This bill would provide incentive for multi-national companies to bring back, or repatriate, a portion of the estimated $2 trillion in offshore earnings, but with a few more twists.
Senator Boxer stated, “I hope this proposal will jumpstart negotiations on addressing the shortfall in the highway Trust Fund, which is already creating uncertainty that is bad for businesses, bad for workers and bad for the economy.”
The Invest in Transportation Act of 2015 proposal:
- Would allow multi-national corporations to repatriate earnings running over the next 5 years
- The tax rate would be 6.5 percent vs 35 percent
- It would only apply to repatriations over the company’s recent repatriation average
- It must apply to years 2015 or earlier
The thought is that these funds would bring back hundreds of billions of dollars in foreign earnings and could be invested in America to create jobs. The taxes paid on those earnings would be placed directly into the Highway Trust Fund, which, in turn, would also support millions of jobs.
The CBO has estimated the annual Highway Trust Fund shortfall to be $13 billion in fiscal year 2016, increasing to $15 billion by 2019.
On the house side, Representative John Delaney is also proposing another bill – it is called the Infrastructure 2.0 Act.
The Infrastructure 2.0 Act:
- The repatriation rate would cut the current 35 percent tax rate to 8.75 percent
- Provide $50 billion to capitalize the infrastructure loan bank
However the capitalization would now come from newly generated corporate tax revenue, rather than issuing 50-year taxable bonds from the US Treasury, as earlier discussed.
[Editor’s Note: My sense is that many professionals and citizens alike were really taken aback by the dismal financial state of the HTF…while we are still hearing about state and local fiscal woes as well. Here’s the rub: Taxpayers are feeling pinched in real purchasing power, increasing taxes and yet, there are few tax-collecting entities which are showing fiscal health as a result. If more taxes are levied at any or all three levels, what will be the total economic effect? Will it, A) fix the problem, and B) will the further decrease in taxpayer purchasing power hinder the economic recovery? ]
OUT & ABOUT
Two FREE Webinars This Week!
Audio webcast:
From: IRS Tax Exempt Bond (TEB) Division
Feb 5th at 2:00PM ET / 11:00 AM PST
The webcast will cover the market segment program for audits, the voluntary closing agreement program and new processes for it, customer satisfaction surveys, compliance checks, surveys and other activities.
Register for the webcast at
http://www.visualwebcaster.com/IRS/101226/reg.asp?id=101226
(Note: This is the same day as Orrick’s Bond Buyer MCDC webinar…see below)
Title: Continuing Disclosure after MCDC
Hosted by: Bondbuyer Webinars,
Date: February 5, 2015, 12:00PM ET / 9:00AM PST
Signup: Continuing Disclosure after MCDC
The SEC’s Municipal Continuing Disclose Compliance Initiative has shone a spotlight on continuing disclosure. It signals aggressive enforcement by the SEC and raises the stakes for compliance by Issuers, Borrowers and Underwriters.
Besides being great information….They are both FREE!!
Conferences in early 2015:
The Bond Buyer’s Texas Public Finance Conference, February 9-11, 2015
Omni Barton Creek Resort & Spa, Austin, TX
The Bond Buyer and BDA’s National Municipal Bond Summit March 1-3, 2015
The Westin Beach Resort & Spa, Fort Lauderdale, FL
Check This Idea Out! 
Here’s a neat micro-conference/networking idea from Women in Public Finance…a local Roulette Dinner.
This would be a BYOM (buy your own meal) event, held at a convenient, local restaurant on a chosen date, where neighboring finance professionals could connect and discuss “all things public finance”.
If any Portland/Salem OR & SW Washington public finance members would like to do this, send me an e-mail and I will arrange something in Portland, OR.
Editor Commentary: Schools…our Next Best Investment
In reading more this week about bankruptcies, pension woes and some of the aftermath, what struck me were the headlines about
Detroit and their challenge with their schools. The one line that stands out to me…not just for Detroit, but all schools is…
A stable school district is key to any healthy city.
Although Detroit has emerged from bankruptcy, it now faces probably an even bigger challenge…and that is turning around its troubled school district, the Detroit Public Schools.
While under State control since 2009, it continues to suffer declining enrollment..as well as revenues. This is an area that analysts and economists say will need to be fixed in order to stop Detroit’s continuing slide.
“I don’t think Detroit can recover – absent dealing with the school system,” says Frank Shafroth, director of the Center for State and Local Leadership at George Mason University. “Absent turning it around, I don’t see any way for Detroit not to go back to the bankruptcy.”
That is ominous news…and worth reading twice.
So you can truly understand the magnitude, the district’s enrollment has declined 62% in the five years between 1998 and 2002. That is more than half. The district also maintains a junk rating and a negative outlook on their debt. Double ouch.
In the school year 2015, the district is expected to face a $170 million deficit, down from $327 million in 2010. 
While that may be seen as improving, it is still on the road to disaster. Additionally the district carried roughly $2.1 billion of debt and their fixed costs including debt service and retirement makes up 35% of operating costs and is expected to grow at least 3 percent this year.
Across the state of Michigan, there are 57 districts and public school academies that had deficits or expected deficits in fiscal 2014. So that means Detroit is not alone…and more students are at risk.
Is the answer restructuring, cutting costs and larger classrooms?
Innovative and sustainable solutions are needed, but increasing class size is not a key driver. The Michigan State University report “Knowledgeable Navigation to Avoid the Iceberg: Considerations in Proactively Addressing School District Fiscal Stress in Michigan”, has some key recommendations, which would help not only Detroit, but any school in the country prior to financial duress.
The report recommends enacting a so-called fiscal health indicator to help understand where and when school districts are in fiscal trouble. A similar “health indicator” model for public agencies has been enacted in California, with information being published on the State’s website. This allows for many eyes and perspectives…
However, there is a glimmer of sunshine in the stormy statistics.
If a new road funding ballot is approved in May, schools could get a much needed infusion of $300 million annually. This would come from raising the state sales tax from 6% to 7%.
Education is crucial to both our short-term and long-term viability. 
Unfortunately, what we see in Detroit’s schools is happening in many other areas of the country. Education is crucial to both our short-term and long-term viability. Our kids need solid, globally-competitive educations. Our standing as an economic superpower and hence, our national vitality will be stymied.
Shafroth again brings us back to the main point that all cities need to consider…”Are we a place where young families will come?”
Remember, the health of your city depends on it.
In closing, last week we held the third and final regular session in our on-line webinar series for PIC Essentials: The Audit-Proven Blueprint. Members learned a broad, practical overview of Private Business Use, including the Regs and Notice 2014-67, exceptions to PBU, several calculation examples and what to do with hot buttons in an audit.
We covered a lot of PBU ground in an hour…and PIC Essentials members received several downloadable resources for future reference with their replay.
Members are looking forward to this week’s bonus session, which is a round table discussion on both of the webinars being held on Thursday. This session will be casual, yet informative – where we can brainstorm on gold nuggets gleaned from both the IRS and Orrick.
If you need or want more help in any of these compliance areas, just let us know. We are already thinking about more sessions, based on suggestions and questions from members.
Also…stay tuned for next week’s Special Editor Commentary…
We hope you found this week’s edition of the Monday Muni Minutes valuable and informative.
As always, your comments are welcome…
To your compliance success,
Debbie
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