1g. Arbitrage Reimbursement Financing, Designate Project Coordinator 1
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1‘,' ._ 690 COULTER DRIVE • P.O. BOX 147 • CHANHASSEN, MINNESOTA 55317
(612) 937 -1900 • FAX (612) 937 -5739
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MEMORANDUM Rejecter+
Deto 4 - 2 - 9 s3--
' Date Submitted to Commissiort •
TO: Don Ashworth, City Manager Date Submitted to Council
FROM: Torn Chaffee, Data Processing Coordinator
1 DATE: April 6, 1992
SUBJ: Arbitrage: More Regulations
II On March 25, 1992, a meeting was held in the offices of
Holmes & Graven to discuss current and future problems
relating to debt issuance and arbitrage. I included
I representatives from Deloitte & Touche, Sprinqsted, and
Holmes & Graven to assure all view points and concerns were
represented.
II Our current questions regarding arbitrage rebate have been
resolved to everyone's satisfaction and we are now in the
process of finalizing calculations for our initial rebate
II report.
Meanwhile, back at the ranch in Washington, the IRS continues
I their relentless attack on our abilities to finance anything
(maybe with the exception of paper clips) with tax- exempt
bonding.
The attached letter from Dave Kennedy with his attachment of
Treasury Regulations relating to reimbursement financing is
another step toward total nonsense.
I To summarize an otherwise unexplainable situation, the
attached resolution must be adopted and procedures
II established to maintain the exhibit "A" data on an on -going
basis. I will be working with you in the coming weeks to
solidify specific procedures.
II TLC / ko
Attachment 1. Letter from Dave Kennedy
1 2. Resolution
II tt, PRINTED ON RECYCLED PAPER
HOLMES & GRAVEN
CHARTERED
470 Pillsbury Center, Minneapolis, Minnesota 55402
1 Telephone (612) 337 -9300
Facsimile (612) 337.9310
RECEIVED
February 19, 1992 FEB 2 0 1992
CITY OF CHANHASSEN
Jean Meuwissen
' Treasurer
690 Coulter Drive
Chanhassen N 55317
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1 Dear Ms . M
' In Augus 991, I wrote to you describing the Treasury's proposed
regulations— referred to as the "reimbursement rules " — providing, in general terms,
that proceeds of tax - exempt governmental bonds used to reimburse the issuer for
prior expenditures will not be deemed to have been "spent" unless certain
' requirements are met . After receiving many critical comments, the Internal Revenue
Service revised the regulations and published them on January 30, 1992. A summary
of the final reimbursement rules is enclosed for your information.
The final rules are effective for bonds issued after March 2, 1992. Some of the
cumbersome features of the proposed regulations have been revised, but the overall
concept remains the same.
1 In most general terms the reimbursement rules provide that:
(i) a declaration of "official intent" by the City must be made on or before
the date of an expenditure that the City expects to reimburse from bond
proceeds;
' (ii) the reimbursement from bond proceeds must be made within a) one year
after the expenditure or b) one year after the project financed was
"placed in service," whichever date is later; and
(iii) the expenditures to be reimbursed must be "capital expenditures"
under general federal tax law (bond issuance costs are deemed "capital
expenditures ") .
- There are two key exceptions to the "official intent" requirement: (1) the
declaration is not required for "preliminary expenditures" (such as engineering,
architectural work, and bond issuance costs) up to 20% of the bond amount; and (2)
"official intent" during the period from September 8, 1989 to March 1, 1992 can be
shown by "objective" evidence that the issuer intended at the time of the
expenditure to reimburse itself from bond proceeds.
1 Enclosed is a sample resolution that we think will put the City in compliance with the
final rules if it is adopted prior to the expenditure to be reimbursed. The
resolution:
1 (i) states a general intent to reimburse;
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February 19, 1992 1
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(ii) designates a City official of your choice as the person to declare official
intent with regard to the expenditures; and
(iii) includes an exhibit describing the expenditures to be reimbursed and
the maximum amount of debt to be issued for such reimbursement.
Please note that in completing Exhibit A, you will need to provide a "general " '
functional description" of the project to be reimbursed, or identify a fund or account - -
and its general functional purpose. For example, it will suffice to describe a project
as "streets and roads capital improvement program" or as "parks and recreation
fund — recreational facility capital improvement program."
One further requirement of the rules is that the issuer's declaration of intent may
be relied upon only if it is "reasonable." This means that the reimbursement must
be consistent with the City's budgetary and financial circumstances, i.e., no other
source of funds are allocated on a long -term basis to pay for the expenditures.
Another factor is whether the issuer has a history of failing to reimburse after
declaring an intent to do so. Therefore, it is not advisable to declare official intent
before making every expenditure; only do so in cases where there is a realistic
expectation (and budgetary need) to bond for the expenditure, and where the
principal amount of bonds can be reasonably estimated.
We think that the resolution and forms are self- explanatory (to the degree that these
complex rules can be explained), but if you have any questions be sure to contact
me or any of the bond approving lawyers in our office.
The resolution form sent to you last August (designed to comply with the proposed
regulations), in most cases will comply with the final regulations, though it contains
certain restrictions that are now unnecessary. If your Council adopted the prior
resolution, it may wish to adopt the enclosed, revised resolution to avoid confusion
and undue limitations on your financing plans. If convenient, we would like to
receive a certified copy of the resolution after its adoption.
A final note of caution is in order. If the City made expenditures it expected to
reimburse from bond proceeds and those expenditures were made before
September 8, 1989, or the project financed was placed in service more than a year
ago, it is not possible to finance those expenditures tax - exempt. If you think this
is a problem for your City, please contact us to see what, if anything, can be done
to reimburse those expenditures.
Yours very truly,
HOLMES & cr • ' N, Chartered
By
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Davi J. K =nnedy
cc: Don Ashworth 1
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HOLMES & GRAVEN
2/18/92
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SUMMARY OF
REIMBURSEMENT REGULATIONS
TRES. REG. 1 1.103 -18
I . The Reimbursement Rules.
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A. General. The reimbursement rules generally apply to
governmental bonds, 501(c) (3) bonds, and private activity bonds used to
finance a governmentally -owned facility. Beginning with such bonds issued
t after March 2, 1992, if bond proceeds are used to reimburse an expenditure
made before the bonds were issued, the bond proceeds will not be considered
"spent" unless three basic requirements are met:
' 1. Declaration of Intent.
(a) General Rule. On or before the date an expenditure
is paid, the issuer or a person or entity authorized to act on its
behalf must declare a reasonable expectation to reimburse the
expenditure with proceeds of a borrowing.
' (b) Content of Declaration of Intent. The declaration of
official intent must:
. I (1) state that the issuer reasonably expects to
reimburse the expenditure with proceeds of debt to be
incurred by the issuer;
' (ii) specifically state that it is a declaration of
official intent under Tres. Reg. Section 1.103 -18;
' (iii) contain a general functional description of the
project for which the expenditure to be reimbursed is
made, and state the maximum principal amount of debt to
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be issued for such purposes. The term "project" means a
property, project or program. The description of the
project is sufficient if it identifies the fund or account
from which the expenditure is paid, and describes the
' general functional purpose of the fund or account. Some
examples of sufficient project descriptions are: "Highway
capital improvement program;" "school building
' renovation;" "parks and recreation fund -- recreational
facility capital improvement program . "
Reasonable deviations between the project as described and as
' actually reimbursed are acceptable as long as the actual project
is reasonably related in function to the declared project. For
' example, an expenditure for hospital equipment is a reasonable
deviation from a project described as "hospital building
improvements." By contrast, an expenditure for rehabilitation
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of a city office building is not a reasonable deviation from a
project described as "highway improvements . "
(c) Reasonableness of the declaration. The declaration
of intent to reimburse is reasonable if the following conditions are
met :
(i) Budgetary and Financial Circumstances . The
expectation to reimburse must be consistent with the
budgetary and financial circumstances of the issuer at the
time of the declaration. Such consistency is demonstrated
if no funds from sources other than the reimbursement
bonds are (or are reasonably expected to be) reserved or
allocated on 1 1 long -term basis for the expenditure .
Sources considered include the issuer and all members of
the same "controlled group" (generally, entities whose
powers are significantly controlled by another entity or
group of entities) .
(ii) Reasonable Expectation. The expectation to
reimburse must be reasonable based on all the relevant
facts and circumstances at the time of the declaration .
Factors include: the issuer's purposes for declaring
official intent, its history of actual reimbursement for
expenditures for which official intent was declared, and -
its actions taken toward reimbursement of the
expenditures . "Blanket" or excessive declarations will not
be reasonable. A pattern of failing to reimburse in the past
is one factor indicating that the intent is unreasonable,
though an exception is made for extraordinary
circumstances that were unforeseen and beyond the
issuer's control.
(d) Public Availability. The declaration of intent must
be reasonably available for public inspection within a reasonable
period of time after it is made . This requirement if met if the
declaration is available at the issuer's main administrative office
or customary location of records at least 30 days after the date
of the declaration and continuing until the date the bonds are
issued . The requirement will also be met simply by complying
with state or local law governing the public availability of records
of official acts .
(e) Exceptions.
(i) Emergency expenditures. If an expenditure
was not reasonably foreseeable at least 30 days before its
payment, the intent to reimburse may be declared up to 45
days after the date of the payment .
(ii) Preliminary expenditures. No declaration of
official intent is required for preliminary expenditures in
an amount up to 20 percent of the issue price of the
relevant bonds. "Preliminary expenditures" include
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architectural, engineering, surveying, soil testing, bond
issuance, and similar costs that are incurred before the
project commences . Land acquisition, site preparation and
1 similar costs incident to construction are not preliminary
expenditures.
2. Reimbursement Period.
1 (a) General Rule. The allocation of bond proceeds to
the reimbursement must occur on or after the date of the
' expenditure and no later than 1 year after the expenditure was
paid or 1 year after the date the property is placed in service,
whichever is later.
(b) Method of Allocation. An allocation of bond proceeds
to reimburse a prior expenditure:
' (i) must be evidenced by an entry on the books
or records of the issuer maintained with respect to the
bonds;
(ii) must identify either an actual prior
expenditure to be reimbursed, or, in the case of a fund or
account, the fund or account from which the expenditure
' was paid; and -
(iii) must be effective to relieve the allocated
proceeds from any restrictions under the relevant legal
documents and applicable state law that apply to unspent
bond proceeds.
' (c) Abandonment Exception. If a project is abandoned
before completion, the time limit for allocation of bond proceeds
to reimburse project expenditures is the later of:
(i) 1 year after the date the project is
abandoned; or
' (ii) 2 years after the last payment of an
expenditure for the abandoned project that is at least
$25,000 or 5 percent of the project cost, whichever is less .
3. Capital expenditure requirement. The expenditure to be
' reimbursed must be a capital expenditure, which means any cost of a
type that is properly chargeable to the capital account under general
federal income tax principles . For the purposes of this regulation,
1 costs of issuance of the reimbursement bond are treated as capital
expenditures .
B . Anti -abuse Rules . •
' 1. General Rule. A reimbursement allocation is not treated as
an expenditure of bond proceeds if any action or inaction of the issuer
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is an artifice or device to avoid arbitrage yield restrictions or arbitrage 1
rebate requirements.
2. Tax Exempt Refunding of Taxable Bonds. In a tax exempt
refunding of a taxable bond, if proceeds of the taxable bond were
allocated to reimburse a previously paid expenditure, such proceeds
are not deemed to have been spent unless the allocation complied with
federal tax laws and reimbursement allocations applicable to tax- exempt
bonds as of the date of the taxable issue. If the taxable bond proceeds
are deemed unspent, such proceeds are subject to "transfer" to the
tax - exempt refunding bond issue. '
3. Other Reimbursement Limitations . An issuer cannot treat
proceeds as spent if the proceeds are used directly or indirectly (i)
within 1 year of the allocation to refund a governmental obligation; (ii)
within 1 year of the allocation to create or increase the balance in a
sinking fund or replace funds used for such purposes; (iii) within 1
year of the allocation to create or increase the balance in a reserve or
replacement fund or replace funds used for such purposes; or (iv) to
reimburse any person or entity other than the issuer for any
expenditure that was originally paid with proceeds of an obligation of
the issuer (excluding an inter -fund borrowing by the issuer) .
An exception is made where proceeds are placed in a bona fide debt
service fund or are used to pay debt service in the next one -year-
period on any obligation of the issuer other than the reimbursement
bonds, or where the proceeds of the original financing were not
reasonably expected to be used as of the date of the original financing
to finance the expenditure.
C. Application to Private Activity Bonds . In addition to official
action requirements, all private activity bonds are subject to the anti -abuse
rules described above, except as follows: exempt facility bonds and qualified
small issue bonds are subject only to the general anti -abuse rule described in
B .1. above and the reimbursement limitations described in B.3. (ii) and (iii)
above . As noted in paragraph A. , governmentally owned exempt facility
bonds and 501(c) (3) bonds are subject to all the reimbursement rules .
D. Effective Date and Transition Rule. 1
1. Effective Date. The reimbursement and anti -abuse rules 1
apply to bonds issued after March 2, 1992.
2. Transition Rule. Bonds may be issued after March 2, 1992
to reimburse expenditures made after September 8, 1989 and before
March 2, 1992 without a prior declaration of official intent, if there is
objective evidence that at the time the expenditure was paid, the issuer
reasonably expected to reimburse the expenditure with proceeds of a
borrowing. The reasonableness of the expectation is determined as
described in A .1(c) , above.
II . Why Regulations Were Issued. The reimbursement regulations were
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issued in response to a perceived abuse. The IRS was concerned that a city might
decide to issue bonds to reimburse itself for old expenditures, such as a two -year-
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old library financed with general funds, and then invest bond proceeds without
regard to rebate or yield restriction requirements until spent on a new project.
These bonds began to be referred to as "pyramid bonds," on the theory that an
' issuer could rely on this method to reimburse itself for expenditures as far back as
construction of the pyramids. The IRS has taken the position that under certain
circumstances, the reimbursement is not effective and the bond proceeds are in
reality being issued to finance the new expenditures and should be subject to
applicable yield restriction and rebate requirements. The new regulations are
intended to identify under what circumstances bond proceeds used for
reimbursement will be considered "spent" for yield restriction and rebate purposes.
1 III. The Consequences for Failure to Comply. If an issuer does not comply
with the reimbursement rules, the immediate result is that bond proceeds are not
considered "spent." The bond proceeds, wherever they are, will be deemed to be
subject to whatever yield restrictions and rebate requirements are applicable.
Assume, for example, that the issuer allocates $1,000,000 of bond proceeds to an
expenditure made the prior year and no declaration of official intent was made.
1 A . Rebate. If the issuer fell within the $5,000,000 small issuer
rebate exemption, rebate is not a problem. If the issuer was attempting to
meet the six -month or two -year spenddown test, however, the issuer will be
treated as if it hasn't spent the $1,000,000 of proceeds. This may cause it to
fail the spenddown requirement. If the issue is subject to rebate, it will owe
rebate on the investment of the $1,000,000 even if for its accounting purposes
1 the issuer considers the money spent.
B . Yield Restriction. Assume the same $1,000,000 reimbursement
allocation made without a valid official intent. Normally, the issuer has a
three -year temporary period for the expenditure of proceeds to be used for
construction or acquisition of a project based on an expectation that all
amounts will be spent within that three -year period, and any amounts
remaining after three years may be subject to yield restriction. If amounts
subject to yield restriction are invested at a yield in excess of the yield on the
bonds, the bonds become "arbitrage bonds" and lose their tax- exempt status.
' Further, if the reimbursement allocation is not spent when made, and in fact
is not spent within three years, the issuer may not be entitled to a temporary
period at all.
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CITY OF CHANHASSEN , MINNESOTA
RESOLUTION NO.
1
DECLARING THE OFFICIAL INTENT OF THE CITY OF
CHANHASSEN TO REIMBURSE CERTAIN
EXPENDITURES FROM THE PROCEEDS OF BONDS TO BE
ISSUED BY THE CITY
WHEREAS, the Internal Revenue Service has issued Tres Reg. i 1.103 -18 I
providing that proceeds of tax - exempt bonds used to reimburse prior expenditures
will not be deemed spent unless certain requirements are met; and
WHEREAS, the City expects to incur certain expenditures which may be
financed temporarily from sources other than bonds, and reimbursed from the
proceeds of a bond; and '
WHEREAS, the reimbursement rules apply to bonds issued after March 2, 1992;
NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY '
OF CHANHASSEN (THE "CITY ") AS FOLLOWS:
1. The City reasonably intends to make expenditures for the project 1
described in Exhibit A (the "Project ") , and reasonably intends to reimburse itself
for such expenditures from the proceeds of debt to be issued by the City in the
maximum principal amount described in Exhibit A.
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2. The City MANAGER is authorized to designate appropriate
additions to Exhibit A in circumstances where time is of the essence, and any such
designation shall be reported to the Council at the earliest practicable date and shall
be filed with the official books and records of the City as provided in Section 3.
3. This resolution shall be maintained as part of the books and records of
the City at the main administrative office of the City, and shall be continuously
available during normal business hours of the City on every business day of the
period beginning not more than 30 days after adoption of this resolution and ending
on the last date of issue of any bonds issued to reimburse expenditures described
in Exhibit A .
4. This resolution is an expression of the reasonable expectations of the
City based on the facts and circumstances known to the City as of the date hereof.
The anticipated reimbursements set forth at Exhibit A are consistent with the City's
budgetary and financial circumstances. No sources other than proceeds of bonds
to be issued by the City are, or are reasonably expected to be, reserved, allocated
on a long -term basis, or otherwise set aside pursuant to the City's budget or
financial policies to pay such Project expenditures. The City has not adopted any
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allocation, budget, or restriction of moneys or adoption of a requirement or policy
• to reimburse a fund, the ggrimary purpose of which is to prevent moneys from being
available to pay an expe$diture the City intends to reimburse with proceeds of a
borrowing.
5. This resolution is intended to constitute a declaration of official intent
for purposes of Tres. Reg. 1 1.103 -18 and any successor law, regulation, or ruling. '
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6. The allocation of proceeds of the bonds to be issued to any Project
expenditures described in Exhibit A will be made not later than the later of one year
after the expenditure was paid or one year after the property was placed in service.
1 7. The Project expenditures described in Exhibit A are capital
expenditures as defined in Tres. Reg. { 1.150 -1(h) , including costs of issuance of
the bonds to be issued in order to reimburse the Project expenditures.
8. Proceeds of the bonds issued to reimburse the Project expenditures
described in Exhibit A will be deemed spent only when (1) an allocation entry is made
on the books or records of the City with respect to the bonds; (2) the entry
identifies an actual expenditure to be reimbursed, or where the Project is described
as a fund or account, the fund or account from which the expenditure was paid; and
' (3) the allocation is effective to relieve the bond proceeds from restrictions on
unspent proceeds under applicable documents and state laws.
9. No entity or entities possess simultaneously two or more of the following
discretionary and non - ministerial powers with respect to the City: power to (1)
remove without cause a controlling portion of the City Council; (2) select, approve,
or disapprove a controlling portion of the City Council; (3) determine the City's
' budget or require the use of the City's funds or assets for the other entity's
purpose; or (4) approve, disapprove, or prevent the issuance of debt obligations
of the City .
1 10. None of the proceeds of the bonds issued to reimburse the City for the.
Project expenditures described in Exhibit A will be used within one year of the
allocation (i) to refund another governmental obligation or (ii) to create or increase
' the balance in a sinking fund or replace funds used for such purpose, or (iii) to
create or increase the balance in a reserve or replacement fund or replace funds
used for such purposes; or will be used at any time to reimburse any person or
entity (other than the City) for expenditures originally paid with the proceeds of a
City obligation (excluding a City inter -fund borrowing) ; unless (i) such amounts are
deposited in a bona fide debt service fund or are used to pay debt service in the
next one -year period on any City obligation other than the reimbursement bond, or
(ii) the original issue was not reasonably expected to be used to finance the
expenditure.
' 11. No action or inaction by the City with respect to the allocation of bond
proceeds to reimbursement of Project expenditures will be an artifice or device to
avoid, in whole or in part, arbitrage yield restrictions or arbitrage rebate
' requirements .
12. The procedures described in this resolution shall cease to apply to the
extent not required by Tres. Reg. 1 1.103 -18 or any successor law, regulation, or
ruling.
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Approved by the City Council of the City of this 1
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day of , 19_
CITY OF 1
Attest:
Mayor
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City
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' EXHIBIT A
TO OFFICIAL INTENT RESOLUTION
ADOPTED
Maximum Principal
Amount of Debt
Date of to Reimburse
Declaration Description of Project Project Costs
1 $
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