Page History

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1. IRS issued guidance relating to Tax Exempt Bonds Post-Issuance Compliance
2. IRS issued Treasury Regulation 1.141-12  - Change in Use Rules 

VI. POLICY

1. The use of tax-exempt debt plays an important role in funding a significant portion of the University’s capital projects. The University recognizes its legal obligation to ensure that this tax-exemption is used responsibly. TEBs are debt obligations, the proceeds of which are used by the University to finance construction of all or a portion of its facilities. The University has an obligation to maintain the tax-exempt status of the TEBs remains throughout the life of the bonds. However, this status can be lost if certain applicable federal income tax requirements are not satisfied during the entire period the TEBs are outstanding. Taxability of the interest on the TEBs or other lesser consequences can result from failure to comply with restrictions relating to arbitrage, timing and use of bond proceeds, and other aspects of bond issue.
2. Post-issuance tax compliance begins with the debt issuance process itself and provides for a continuing focus on investments of debt proceeds and use of debt-financed property; compliance responsibilities require:
1. Tracking bond proceeds spending for qualified purposes;
2. Maintaining detailed records of the expenditure and investment of the proceeds of the TEBs;
3. Ensuring the project financing is used in a manner consistent with the federal income tax requirements; and,
4. Providing necessary disclosure information regarding financial and operating status.
3. RESPONSIBILITIES
1. The Senior Vice President for Finance and CFO approves certain project - level decisions impacting TEB compliance.
2. The Director of Accounting Services monitors and documents:
   1. post-issuance compliance with TEB regulations.
   2. expenditures of all debt proceeds, including for cost of issuance and working capital. 
   3. private use in the financed facilities.  
   4. contracts that potentially could be considered Private Business Use. 
3. The Office of Sponsored Programs (OSP) is responsible for research contracts.
4. University Advancement is responsible for corporate and foundation research agreements 
5. The Senior Director of Procurement is responsible for all other contracts.
4. The University allocates debt proceeds to the various projects being funded with the TEBs. All contracts for bond-financed capital expenditures are approved by the Senior Vice President for Finance and CFO, or in his absence, his designee. All purchase orders are approved in accordance with the University’s Purchasing Policy. 
5. The Accounting Services Department records all spending of the funds toward a financed project’s costs and identifies the sources of the capital expenditures (e.g., bond proceeds, equity or donations).
1. All donations restricted to a particular project are recorded by University Advancement and the Accounting Services Department. The records separately reflect the allocation of donations or other equity and the allocation of borrowed funds to the particular projects.
2. All other uses of bond proceeds such as costs of issuance or deposits to reserve funds are identified on a bond issue-by-issue basis.
3. A final allocation of expenditures for a bond-financed project is made when required under the applicable federal income regulations.
6. PRIVATE BUSINESS USE OF BOND-FINANCED PROPERTY
   1. The use of a facility financed with TEBs by any person or entity that is (1) not a state or local governmental entity, or (2) an entity described in section 501(c)(3) of the Code which is exempt from tax under section 501(a) of the Code, other than a 501(c)(3) entity that is using any portion of the financed facilities in an unrelated trade or business (a “Non-exempt Person”), may be considered a private business use (PBU) of the bond-financed property.
1. The University’s TEBs will lose their tax-exempt qualified status if more than 10% of the net proceeds of the bond issuance are used for any PBU or the ownership of any bond-financed property is transferred to any person other than a 501(c)(3) or state or local governmental entity.
2. Because the use of bond proceeds to finance bond issuance costs is a PBU of those proceeds, the allowable PBU percentage includes the cost of issuance financed with bond proceeds.
3. The private business use (PBU) of TEB - financed property includes (see Attachment 1):
   1. Sale or Other Transfer of Ownership of Bond-Financed Property
   2. Leases/Rentals of Bond-Financed Property
   3. Management Contracts
   4. Sponsored Research Agreements
   5. Unrelated Trade or Business (UTB) Activities
   6. Naming Rights
   7. Other Actual or Beneficial Use of University Property
7. RECORD RETENTION
   1. The University will retain all records for the length of time required to comply with IRS TEB regulations. Currently, records of TEB issuances and related post-issuance compliance documentation must be maintained for the life of the bond, plus any refunding, plus three years.
1. Basic records relating to any debt transaction will be maintained, as well as documentation evidencing the:
   1. Expenditures of bond proceeds;
   2. Use of debt-financed property; and
   3. Sources of payment or security for the bonds.
2. The Accounting Services department is responsible for identifying the documents to be retained, for identifying and training the person responsible for retaining each type of document, and for maintaining records showing the responsible person and the exact location of the records (either physical or electronic). No employee shall discard or destroy any information identified in the inventory during the period such records are required to be maintained.
8. ARBITRAGE AND REBATE
   1. TEBs lose their tax-exempt status if they are classified as “arbitrage bonds.” In general, arbitrage is earned when the gross proceeds of a bond issue are used to acquire investments that earn a yield that is “materially higher” than the yield on the bonds issued. The Internal Revenue Code contains the following two separate sets of requirements that must be complied with to ensure that TEBs are not arbitrage bonds:
      1. Yield Restriction requirements, which generally provide that in the absence of an applicable exception, bond issue proceeds may not be invested at a yield in excess of the bond yield; and
      2. Rebate requirements, which generally provide that when arbitrage is earned on an issue in excess of permitted amounts, the excess earnings must be paid to the U.S. Department of Treasury, even if an exception to the yield restriction requirements applies.
   2. The NJEFA, GCIA and CCIA have engaged the services of an Arbitrage Compliance Servicer to provide written reports to assist the University in monitoring yield on investments and calculating any rebate that may be due. The University will cooperate with the NJEFA, GCIA and CCIA and Servicers’ to review the yield on investments as reported by the Servicer and to ensure the accuracy of the Servicer’s calculations of possible rebate liability. If the Servicer provides a written report that rebate is due, the University will make any required payments to the IRS.
9. CREDIT ENHANCEMENT OR OTHER AGREEMENTS RELATING TO BONDS
1. The University will consult with the NJEFA, GCIA and/or CCIA prior to the extension or alteration of any credit enhancement relating to the University’s TEBs. The University will also consult with NJEFA, GCIA and/or CCIA prior to investing bond proceeds in guaranteed investment contracts or derivative products which relate to TEBs.
10. DISCLOSURES AND FILINGS
1. The University will comply with continuing disclosure requirements as stated in the bond documents.  The University will consult with the NJEFA, GCIA, CCIA, counsel and its auditors, as appropriate, to ensure the accuracy of all information relating to tax-exempt debt.
11. TRAINING AND CONTINUITY
1. University staff responsible for complying with requirements applicable to TEBs will be trained by the Accounting Services department on the purpose and importance of this policy and the details of the particular staff member’s responsibilities.
2. To ensure there is continuity in compliance with post-issuance debt requirements, the University has established a calendar (see Attachment 4) of significant dates for the annual review of private use of facilities and for compliance with this policy.  
12. REMEDIAL ACTION
1. The Senior Vice President for Facilities is responsible for notifying the Senior Vice President for Finance and CFO before there is a change in use of any facility financed with tax-exempt debt.  
2. If the change in use results in the transfer of ownership of bond-financed property to a non-exempt person during the measurement period or in excessive PBU for a bond issue, the University may avail itself of rules under Treasury Regulation 1.141-12 which provide for “remedial action,” including the redemption or defeasance of nonqualified bonds, or application of disposition proceeds to other qualifying capital expenditures.
3. The University will seek the advice of the NJEFA, GCIA and/or CCIA and bond counsel in the event remedial action may be required.
4. To the extent a potential violation arises that cannot be corrected through remedial action, or in the event of a potential arbitrage violation, the University will seek the advice of NJEFA, GCIA and/or CCIA and bond counsel concerning its alternatives, which may include approaching the Internal Revenue Service under the Voluntary Closing Agreement Program (VCAP).           

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