Title
ADOPTION OF A RESOLUTION ESTABLISHING TAX EXEMPT FINANCING COMPLIANCE POLICY AND PROCEDURES.
Presented by: Chris Chronis, Chief Financial Officer.
RECOMMENDED ACTION: Adopt the resolution.
Body
For several years IRS officials have expressed concern that state and local government bond issuers do not have adequate written procedures to ensure that the ongoing tax requirements are met after financings have been closed. The IRS had been much less forthcoming when asked specifically what topics should be covered in these 'written procedures' and whether the procedures should go beyond the provisions already contained in the federal tax certificates adopted by issuers in conjunction with each bond issue. The IRS now has published an article that clarifies expectations and describes minimum post-issuance tax compliance standards for all issuers of tax-exempt debt and other 'tax-advantaged' debt, such as Build Americal Bonds. In the article, the IRS strongly suggests that issuers adopt a comprehensive set of tax compliance procedures that will govern all of the issuer's tax-exempt debt, rather than attempting to follow the tax compliance procedures mandated by the federal tax certificates or tax compliance agreements relating to specific bond issues. The article also outlines key characteristics that should be included in an issuer's written tax compliance procedures:
-- Due diligence review at regular intervals;
-- Identification of the official or employee of the issuer who is responsible for review;
-- Provision for training of the responsible official or employee;
-- Retention of adequate records to substantiate compliance (e.g., records relating to expenditure of proceeds);
-- Procedures reasonably expected to reveal noncompliance in a timely manner; and
-- Procedures ensuring that the issuer will take steps to correct noncompliance in a timely manner.
For many years, the County's tax compliance agreements and federal tax certificates have contained provisions that require us to complete arbitrage rebate calculations, obtain an opinion of bond counsel prior to entering into typical private-use transactions (such as management agreements or leases) involving bond-financed assets, and retain copies of records to substantiate the investment and expenditure of bond proceeds and the use of financed property. These provisions, if followed, should cover the concerns raised by IRS auditors and tax administrators regarding post-issuance tax compliance.
However, as administrator of the tax laws, the IRS has wide latitude to decide the type of documentation and procedures local government issuers should follow when they issue tax-exempt debt. This includes setting reasonable standards for written substantiation to support the position that interest on a particular debt is tax-exempt. The IRS, through the recent article, new audit and settlement policies, changes to informational tax returns filed by governmental issuers and tax-exempt organizations, and informational seminars, has stated a strong, clear preference for a stand-alone tax compliance procedure that incorporates the key characteristics outlined above.
The proposed policy and procedures will apply to all tax-exempt debt issued by Sedgwick County. The procedures -- one for debt issued for governmental purposes and one for conduit debt, such as industrial revenue bonds, issued by the County for the benefit of other nongovernmental parties -- contain a list of documents and records that must be prepared and retained as part of a tax-exempt bond compliance file. The written compliance procedures will not replace the tax compliance agreement or federal tax certificate that is part of each financing, but instead will provide a framework we will use to monitor and document tax compliance.
The compliance procedures and tax documents for each financing designate the Chief Financial Officer as the 'bond compliance officer' who will be responsible for post-issuance bond compliance.
Alternatives:
The BOCC could reject the policy and procedures. Doing so would create no risk unless a County bond issue was the subject of an IRS enquiry, and the IRS was unsatisfied with the provisions adopted by the County in the relevant tax compliance agreement and federal tax certificate.
Financial Considerations:
The County will incur no quantifiable cost as a result of adoption of the policy and procedures. They will impose additional obligations on the Chief Financial Officer that will be undertaken as a matter of routine business operation.
Legal Considerations:
The policy and procedures were drafted by Gilmore & Bell, the County's bond counsel. They have been reviewed and approved as to form by the County Counselor.
Policy Considerations:
Outside Attendees: Joe Norton, Gilmore & Bell
Multimedia Presentation: