The Role of State Agencies in Post-Issuance Compliance Georgia State Financing and Investment Commission

Agenda I. Use of Bond Proceeds II. Post Issuance Compliance a. Definition b. Importance c. Elements of a Post-Issuance compliance program III. Asset Tracking IV. Expenditures Eligible for Reimbursement V. Spend-Down VI. Private Use Restrictions VII. Fall Bond Sale VIII. Questions 2

Use of Bond Proceeds As part of agency request for bonds to be sold, agencies certify, in their board resolutions, to the following: Project is ready and proceeds will be spent timely Proceeds will be used for qualified tax-exempt use and no private use will occur No private use has occurred in previously financed projects Life of assets will equal the life of the bonds 3

What is Post-Issuance Compliance? For GSFIC: policies and procedures to ensure bond-funded projects maintain compliance with state and federal law over the life of the bonds. For agencies receiving proceeds: A process for ensuring adequate records exist to document the use of bond proceeds and compliance with applicable state and federal law. 4

Why is Post-Issuance Compliance Important? IRS is increasing its efforts to make sure issuers are complying with federal tax regulations on an on-going basis for the life of the bonds ARRA bonds likely audited IRS audits can be expensive, difficult, and time consuming State’s AAA credit and reputation with investors 5

Georgia’s Reputation : One of only eight triple AAA States Georgia North Carolina Virginia Maryland Delaware Missouri Utah Iowa 6

American Recovery and Reinvestment Act (ARRA) The $787 billion American Recovery and Reinvestment Act (ARRA, or as it is more often called, the Stimulus Bill) was signed into law by President Obama on February 17, One purpose of the Act was to lower borrowing costs for state and local governments and governmental agencies to encourage them to initiate capital projects and increase employment in the construction industry. ARRA created incentives for K-12 projects, energy renewal projects and economic development projects by creating deep interest rate subsidies to governmental issuers. 7

Georgia’s ARRA Issuance to Date TYPE OF BONDISSUANCE TO DATE (FEDERALLY TAXABLE DIRECT PAY) BABsBuild America Bonds (35% Interest Subsidy) $756,956,000 RZEDBsRecovery Zone Economic Development Bonds (45% Interest Subsidy) $136,535,000 QSCBsQualified School Construction Bonds (100% Interest Subsidy) $105,755,000 QECBsQualified Energy Conservation Bonds (70% Interest Subsidy) $0 8

Elements of GSFIC’s Post- Issuance Compliance Program Written policies and procedures Investment and Arbitrage Rebate compliance Expenditure and Asset Records Private business use compliance Retention guidelines (life of bonds + 5 yrs.) 9

Post Issuance Compliance - continued For all state agencies receiving bond proceeds, GSFIC needs your help in four (4) important areas: o Asset Tracking o Expenditures Eligible for Reimbursement o Spend-Down o Private Use Restrictions 10

Asset Tracking For each bond issue, the State must keep records documenting the: o actual assets financed with bond proceeds o actual placed in service dates o expected economic lives of the assets 11

Asset Tracking- continued Before any payment from bond proceeds, state agencies are required to: ● submit to GSFIC a preliminary Asset Tracking Form via eBonds not later than the first request for payment submitted for a project. At project completion or on an ongoing basis: ● submit the final Asset Tracking Form with the final request for reimbursement, ● maintain up-to-date records at the Agency as to the location, disposition, or transfer of any project or equipment financed with bond proceeds while those bonds are outstanding, and ● retain copies of all Asset Tracking Forms together with all other required project documentation for five (5) years after the final bond payment date. 12

Expenditures Eligible for Reimbursement SAO Policy: GSFIC Reimbursement Policy: It is the responsibility of GSFIC to determine if payments made for projects are reimbursable from general obligation bond proceeds for projects managed by GSFIC, as well as for projects managed by an Agency. The authorization of the bonds in the Appropriations Act controls the use of bond proceeds. Legislative and gubernatorial intent are also considered. Only capital expenditures can be reimbursed from general obligations bonds proceeds. Agency operational expenditures may not be paid from bond proceeds. Examples of capital expenditures include: o Acquisition of land o Construction of new buildings, renovation of existing buildings o Equipment with a useful life commensurate with the term of the bonds o Fixed or loose equipment directly associated with new construction or renovation projects o Professional services as design, engineering, commissioning o Initial landscaping o Parking lots Useful life of asset should match life of bonds. 13

Expenditures Eligible for Reimbursement- continued (Purchase of Vehicles) When tax-exempt bonds are used to purchase cars, vans, or buses, those vehicles must be used for the governmental purpose of the agency during the period the bonds are outstanding. The vehicles may not be leased to, or used by, private parties for non- governmental activities during that period. If the vehicles are no longer needed (or are no longer available for use due to wear or tear, damage, etc.) and/or are sold or disposed of for cash before the final maturity of the bonds financing the initial vehicle purchase, the agency must spend the amounts received from the disposition on vehicles or other capital equipment used for the governmental purpose of the agency. The agency must maintain records of the amounts received pursuant to the disposition of the vehicles and the expenditures made with those funds. The agency also must maintain records for the secondary equipment purchased (through the final maturity of the bonds financing the initial vehicle purchase). 14

Expenditures Ineligible for Reimbursement Examples of operating expenditures NOT eligible for reimbursement o Personal services o Lease payments o Maintenance agreements for copiers or computers o Depletable/disposable items o Moving Costs o Decorative items o Office supplies o Fuel oil o Termite inspections o Drug tests for employees o Annual fire inspections o Lab monkeys 15

IRS Spend Down Requirements for GO Bond Proceeds GSFIC issues the State’s general obligation bonds under “the three-year spend down rule.” Under this rule it is expected that the construction of the projects will be completed within three years of issuance. Further, Federal arbitrage regulations require that the State affirm that the State’s bond proceeds for capital projects be spent as follows: o 5% spent (or contractually obligated) within six months of issuance; o 85% spent within three years of issuance; and o 100% spent within five years. The redirect and compliance exchange processes are mechanisms to help agencies meet these deadlines in the event a project is delayed. After five years, any unspent bond proceeds will be returned to GSFIC and used to retire debt. 16

Spend-Down - continued In accordance with the State Accounting Office’s Statewide Accounting Directive regarding Interagency Receivables and Payables, requests for reimbursement should be sent to GSFIC on a periodic basis, preferably monthly, but at a minimum, quarterly. Requests for reimbursement that are not received in a timely manner, or contain invoices over one hundred twenty (120) days old will require additional justification. GSFIC will review requests for reimbursement promptly and, if deemed a proper application of general obligation bond proceeds, will authorize payment within 30 days of the request for reimbursement date. If part, or all, of a request for reimbursement is denied by GSFIC, the denied expenditure will remain the responsibility of the Agency. When in doubt – ASK! 17

Private Use Restrictions Private Business Use, as defined by the Tax Code is the use (directly or indirectly) of a facility financed with tax-exempt bonds in a business or trade carried on by a non-governmental user. State Agencies in their board resolutions certify that the projects financed with GO Bonds will not be used for any non ‑ governmental purpose, or any purpose that would give rise to private business use. GSFIC must be notified and approval granted, in advance, for all proposed instances of private business use. 18

Private Use Restrictions- continued Private Use may include: o management or service contracts o leases o research contracts (including any with federal government) o parking contracts o use of space within a public use facility by a private citizen or company for the operation of a business enterprise, even if that enterprise serves the visiting public, agency clients or customers, or state employees o naming rights for buildings and athletic facilities o use by the federal government o other examples include: food services located in a bond funded facility operated by a private vendor, prison facility operated by a private vendor, land leased to a private entity. (janitorial services ok) 19

Private Use Restrictions-continued One way to accommodate private business use is through the use of “Qualified Management Agreements.” (QMAs) In general, for a management, service, research or parking contract to be a QMA, the compensation for services rendered must: o be reasonable, o not give the service provider ownership interest in the financed facility, or o not provide for compensation based in whole or in part on a share of the net profits of the operations of the facility. 20

Fall Bond Sale Agency requests due September 9 th Total requests = $253,800,000 o 5 year bonds = $41,800,000 o 20 year bonds = $212,000,000 Sale expected early November Proceeds should be available early December 21

QUESTIONS?