Happy Labor Day 2015! We hope you enjoyed last week’s 1 Year Anniversary Edition of the Muni Minutes and were able to download the “Crafting Continuing Disclosures” Report!
Key Highlights this Week!
- Kentucky Downgraded for Pensions – Ratings could see additional downward pressure
- NABL Report: Municipal Bankruptcy: 3rd Edition – a great read for attorneys and issuers!
- Solving the Compliance Puzzle – Line 9 this week is Policies!
- Want FREE CPE? Get 3 hours of dedicated Post issuance Compliance training with CPE in November – see inside for details!
So…here goes…today’s Monday Muni Minutes!
Enjoy and have a great week! Deb
CURRENT EVENTS
A Sad State: Kentucky Dropped to A-Plus on Unfunded Pension Woes
Kentucky took a statewide hit on its ratings from S&P last week due to growing concerns of chronic underfunding of pension liabilities, going from AA-minus to A-plus.
“The downgrade reflects our view of Kentucky’s substantially underfunded pension liabilities that are the result of chronic underfunding and that we view as placing long-term pressures on the state’s finances,” said S&P’s analyst John Sugden.
Ouch – and there are $14 billion reasons why more downgrades are possible.
That’s right – currently Kentucky has a $14 billion unfunded liability – primarily in their Teacher’s Pension Plan.
Sugden went on to state in the report, “Although we don’t currently expect it, the rating could come under renewed pressure over the next two years if there is still no action from elected leaders to address long-term liabilities or if the funded level of Kentucky’s retiree liabilities erodes more significantly due to updated assumptions or reduced employer participation in its plans.”
Stay tuned…
More actions may follow, depending on what the legislature does – or does not – do.
[Editor’s Note: The Bluegrass State also received several other rating downgrades for appropriation-backed debt and on state-aid intercept programs for schools as well as some county public property corporations, which are also backed by appropriations.]
OUT & ABOUT
Conferences:
There are about 30 conferences and regional events for the second half of 2015…
You can go to this Bond Buyer link to review what’s coming up and register!
Resources:
Download NABL’s “Crafting Disclosure Policies” Report
IRS Interim Guidance on BABs and Other Direct-Pay Bonds
IRS 39-Page Memo TE/GE-04-0715-0019
See the full article in the August 3rd Edition of the Muni Minutes!
Replay: Webinar: MCDC – What Comes Next for Muni Underwriters
By: DIVER by Lumesis and hosted by the Bond Buyer
IT was AWESOME! In case you missed it…
Here is the replay link and the slides.
Check out the “muni deal of the week”…try if for FREE and look at it from the bondholder’s perspective.
On-Demand Post Issuance Compliance Training for Issuers
“Compliance Basics” – a FREE, 3-part video Compliance Framework training, plus the Monday Muni Minutes.
Just Released – with a valuable and amazingly cost-effective “team learning” option!
NEW In-Depth Training, PIC Essentials: The Audit-Proven Blueprint – covering, The IDR – Form 4564, Project Accounting Boot Camp and our hot-button friend, PBU!
On-Demand Webinar
Resource: On Demand Replay of Continuing Disclosure after MCDC
Slides: Final Slide Deck for Continuing Disclosure after MCDC
Muni Market Minute Updates
(Quick news bits on topics we’ve covered in earlier MMM editions!)
NABL’s 3rd Edition – Municipal Bankruptcy: A Guide for Public Finance Attorneys (and Issuers!)
As we have covered so many times over the last year, the ever-increasing number of municipal bankruptcies is having a dramatic impact on all of us, as issuers. Of primary concern is 
bondholder and IRS/SEC sentiment with regards to increased scrutiny on all of our official statements and continuing disclosure requirements…
In NABL’s newest report: Municipal Bankruptcy A Guide for Public Finance Attorneys (3rd Edition), they share an immense amount of history and rationale behind bankruptcy – particularly Chapter 9 filings.
Of primary interest to issuers:
- Chapter 3: Part D – Negotiations with Creditors
- Chapter 4: “The Bond Issue is Chapter 9.”
- Types of bonds, pledges, protection of nonrecourse status, stays and more
- Chapter 8: What Lies Ahead?
I encourage you to download the report for your own reference. As a fellow geek, this is fascinating reading to me…
[Editor’s Note: We all know that the last several years have been tough on municipalities and special districts – particularly from a revenue perspective. I am afraid that pending pension liabilities and other burgeoning OPEB concerns will continue to push more agencies toward this option.]
Back by Popular Demand….
Given the recent settlements by the SEC and focus on “what might be coming next” for issuers, let’s make sure we are all…
Solving the Compliance Puzzle!
I have to say that this is still one of my favorites – I 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 this effort, each week for ten weeks, we 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.
What an appropriate follow-up, which ties in perfectly to our NABL report coverage on crafting disclosure policies in last week’s Anniversary Edition of the Muni Minutes!
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 do have such policies and procedures in place.
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,” in late 2013, 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.
Here’s 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.
Oops…that’s NOT good.
The foundation of effective post issuance compliance lies in establishing and maintaining appropriate 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.
In last week’s edition of the Muni Minutes, we shared a high level summary and link to the just-released NABL report “Crafting Disclosure Policies.” You can also review several strong examples on the Issuer 2 Issuer website 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 (see our news on free compliance training below!)
- Retention of adequate records for the life of the bonds/refundings, plus 3 years
- 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:
1) To help you (as the responsible contact) understand how compliance impacts other departments, and
2) To keep key stakeholders who can impact your compliance success engaged and informed
You are welcome to download my nationally published 2013 AFP article, “A Taxing Dilemma.” In it, I share how we, as issuers, can systematically do a better job of understanding and managing our compliance programs. I think you will see strong similarities in what I experienced and what the IRS and SEC are focusing on…
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.
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 a related compliance topic, arbitrage rebate under section 148.
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.
Remember, take small bites. For more information or other “Policies” resources, check out our Knowledge Library. You can also ask a question in the comments section or reach out to us privately via e-mail and we’ll do our best to help.
We really do look forward to your feedback – and to provide the best content possible.
Have a GREAT week!
In closing, we are so excited that PIC Essentials: the Audit-Proven Blueprint is now available! A special welcome to members who joined us. We look forward to your comments, questions and chatting with you in the Private Facebook Group – Club PIC!
NOTE: You can still join the learning group here: PIC Essentials: the Audit-Proven Blueprint.
Plus, as we believe so strongly in the team approach to success, we are offering a tremendous “team discount,” where you and four additional compliance members within your agency or company can join the series right along with you…for only $70 more!
We hope you found this week’s edition of the Monday Muni Minutes valuable and informative.
Chat soon!
As always, your comments are welcome…scroll down and let us know what you think about any of the articles!
To your compliance success,
Debbie
The greatest compliment you can pay us is to share this newsletter with your issuer friends….
P.S. Enjoy reading the Monday Muni Minutes each week? Invite your issuer friends to join us on Issuer 2 Issuer so they can get their free online training, PIC Basics! They will also get the Monday Muni Minutes delivered directly to their inbox as well as receive a special “new member” discount offer on the PIC Essentials training!
P.P.S. PIC Essentials: the Audit-Proven Blueprint is now available! You can sign up for the informative, on-demand webinar series by clicking above! Read about the “Team Discount” above! It’s truly a great deal.
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