Understanding Arbitrage Rebate Presented By: James Ward.

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Presentation transcript:

Understanding Arbitrage Rebate Presented By: James Ward

| 2Continuing Disclosure Issues – Material Events| 2| 2 What is Arbitrage Rebate?

| 3Continuing Disclosure Issues – Material Events| 3| 3 Tax-Exempt Bonds Arbitrage Taxable Securities Investment Opportunity

| 4Continuing Disclosure Issues – Material Events| 4| 4 Graphic Illustration of Arbitrage 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% Jan-00Jul-00Jan-01Jul-01Jan-02Jul-02Jan-03Jul-03Jan-04Jul-04 Investment Yield Bond Yield Positive Arbitrage Bond Yield Negative Arbitrage

| 5Continuing Disclosure Issues – Material Events| 5| 5 Two Sets of Rules Compares Yield on Investments to Interest Paid to Bondholders Limits Investment Yield to Bond Yield Arbitrage RebateYield Restriction

| 6Continuing Disclosure Issues – Material Events| 6| 6 Multiple Exceptions  Temporary Periods  13 months  3 years  Reserve Funds  Escrows Funds Yield RestrictionArbitrage Rebate  Small issuer  Spending Exceptions  6 months  18 months  24 months  Bona fide debt service

| 7Continuing Disclosure Issues – Material Events| 7| 7 Arbitrage Rebate Reporting & Payment

| 8Continuing Disclosure Issues – Material Events| 8| 8 Required Documents  Official Statement  Tax Certificate  8038G  Trust Indenture  Escrow Verification Report (Refundings Only)  Cash flow transactions/ Asset Statements  SWAP Agreement

| 9Continuing Disclosure Issues – Material Events| 9| 9 Fund Analysis Tracking proceed investment by fund provides easy audit. Cash flow analysis helps to meet expenditure tests.

| 10Continuing Disclosure Issues – Material Events| 10| 10 Calculation Summary Snapshot analysis puts critical detail at your finger tips.

| 11Continuing Disclosure Issues – Material Events| 11| 11 Compliance Monitoring Agency Arbitrage Rebate Compliance Summary as of 1/31/04 Issue Date Original Principal Issue Name Last Report Liability Next Report 10/07/199 3 $2,405,000.00Peacock Gap Refunding 10/01/199 8 ($26,061.00)10/01/ /28/199 7 $5,250, Revenue Bonds 05/31/200 3 ($42,382.16)01/28/ /30/199 9 $23,504, TAB 06/30/200 3 $215, /30/ /06/200 1 $3,220, Revenue, Series A--- 12/06/ /20/200 2 $25,020,000.00TARB Series /20/ /17/200 3 $7,605, Lease Revenue Bonds /17/2008

| 12Continuing Disclosure Issues – Material Events| 12| 12 Computation Schedules  Annual calculation on all variable rate issues and fixed rate bonds that have accrued liabilities.  1 st year, 3 rd year, 5 th year schedule for fixed rate bonds with no accruing liability.  Minimum computation schedule, every 5 years.

| 13Continuing Disclosure Issues – Material Events| 13| 13 IRS Form 8038-T  Form 8038-T only filed when there is a positive liability and/or yield reduction payment needed.  Check payable to US Treasury.  Mail rebate or yield reduction payment to IRS Center in Ogden, UT.

| 14Continuing Disclosure Issues – Material Events| 14| 14 Payment Requirements  Installment Dates –Every 5 years from issue date or bond year –Bond year election – first year can be shorter than a year –90% payments due within 60 days  Final Maturity –Date bonds matured or redeemed early –100% payment due within 60 days

| 15Continuing Disclosure Issues – Material Events| 15| 15 Refund Requests

| 16Continuing Disclosure Issues – Material Events| 16| 16 Filing for a Refund  Use Form 8038R for filing.  Overpayment of less than $5,000 may not be recovered before the final computation date.  Overpayment is limited to actual dollars paid.

| 17Continuing Disclosure Issues – Material Events| 17| 17 Refund Rules  1992 Regulations –Generally applies to bonds issued prior to 6/30/93. –Only permits refunds caused by mathematical errors.  1993 Regulations –Permits refunds whenever an overpayment can be demonstrated.

| 18Continuing Disclosure Issues – Material Events| 18| 18 Calculating Arbitrage Rebate

| 19Continuing Disclosure Issues – Material Events| 19| 19 Overview  Section 148 is the principal Code section governing arbitrage rebate.  Other provisions are found in Section 103, 149 & 150.  Specific requirements for applying the rebate rules are complex and often open to interpretation.

| 20Continuing Disclosure Issues – Material Events| 20| 20 Overview (cont.)  The computation uses a “future value” method for computing arbitrage rebate.  All transactions must be at market rate.  Issuers may not manipulate the rate in order to decrease the amount of receipts, or increase the purchase price to avoid rebate.

| 21Continuing Disclosure Issues – Material Events| 21| 21 Computation of Bond Yield  Fixed Rate Bond  Variable Rate Bond

| 22Continuing Disclosure Issues – Material Events| 22| 22 Valuation of Investments  Fair Market Value Approach  Present Value Approach

| 23Continuing Disclosure Issues – Material Events| 23| 23 Exceptions to Rebate

| 24Continuing Disclosure Issues – Material Events| 24| 24 Exceptions to Rebate  Small Issuer Exception  Spending Exceptions  Bona Fide Debt Service Funds

| 25Continuing Disclosure Issues – Material Events| 25| 25 Small Issuer Exception  General taxing powers  Not “Private Activity” Bonds  95% or more proceeds used toward local government activities  Aggregate tax-exempt debt must not exceed $5 million within a calendar year

| 26Continuing Disclosure Issues – Material Events| 26| 26 Small Issuer Exception for Schools  January 1, 1998 limit increased to $10 million  January 1, 2002 limit increased to $15 million –$10 million must be used for construction of public school facilities –$5 million for non-construction purposes

| 27Continuing Disclosure Issues – Material Events| 27| 27 Spending Exceptions  Six Month Spending Exception  Eighteen Month Spending Exception  Twenty-Four Month Spending Exception

| 28Continuing Disclosure Issues – Material Events| 28| 28 Six Month Exception Applies to any type of tax- exempt issue 501(c)(3) have additional 6 months to spend 5% of proceeds Private activity bonds are not afforded the additional 6 months

| 29Continuing Disclosure Issues – Material Events| 29| 29 Eighteen Month Exception Applies to any type of tax-exempt issuance for a capital project including industrial bonds or qualified mortgage bonds

| 30Continuing Disclosure Issues – Material Events| 30| 30 Twenty-Four Month Exception Governmental bonds, 501(c)(3), or private activity construction bonds. 75% of proceeds to be used for construction Expenditures must be on property owned by a governmental unit or 501( c)(3).

| 31Continuing Disclosure Issues – Material Events| 31| 31 Bona Fide Debt Service Funds  Used primarily to match revenue and debt service in a bond year.  Must deplete annually minus a reasonable carryover.

| 32Continuing Disclosure Issues – Material Events| 32| 32 Exceptions to Yield Restriction

| 33Continuing Disclosure Issues – Material Events| 33| 33 Exceptions to Yield Restriction  Temporary Periods  Reasonably Required Reserve  De Minimus Exception

| 34Continuing Disclosure Issues – Material Events| 34| 34 Temporary Periods  Three Year Temporary Period –Project Funds, Capitalized Interest and Costs of Issuance qualify –Within six months from issue date, issuer incurs a substantial binding obligation to a third party to expend 5% of net sale proceeds. –85% of net sale proceeds expended within three year period.

| 35Continuing Disclosure Issues – Material Events| 35| 35 Other Temporary Periods  Five Year Temporary Period –Substantial amount of construction expenditures on a complex construction project. –Issuer and licensed architect or engineer certifies that five year period is necessary to complete capital project.  Working Capital Expenditures/Operating Expenses have thirteen months  Pooled Financings –Six Month Period to loan out proceeds. –Repayments from loans have only three months.

| 36Continuing Disclosure Issues – Material Events| 36| 36 After the Temporary Period  Yield restrict remaining proceeds  Yield reduction payment may be permitted under 1993 Regulations

| 37Continuing Disclosure Issues – Material Events| 37| 37 Reasonable Required Reserve  Should not exceed the lesser of –10% of principal amount –Maximum annual debt service –125% of the average annual debt service  Excess Reserve Portion –Must be funded from other source such as revenues, not sale proceeds –Excess amount must be yield restricted

| 38Continuing Disclosure Issues – Material Events| 38| 38 Yield Reduction Payments  1993 administrative solution to yield restriction.  Yield Reduction Payments (YRPs) are payments made to the IRS on yield restricted funds.  Paid at same time and manner as a rebate payment.

| 39Continuing Disclosure Issues – Material Events| 39| 39 Common Errors

| 40Continuing Disclosure Issues – Material Events| 40| 40  Comply with both the arbitrage rebate and yield restriction regulations  Pay on time  Take into account all “Gross Proceeds”  Verify the bond yield  Understand the Spending Exceptions  Remember a bond year election  Consider the impact of a refunding Failure To:

| 41Continuing Disclosure Issues – Material Events| 41| 41 Client Questionnaire

| 42Continuing Disclosure Issues – Material Events| 42| 42 YesNo Is this a tax-exempt bond? Do you have all the bond documents? Do you have historical cash flow records for all bond proceeds? Have you passed a required payment date? Have you had a prior computation? Were there any elections made?

| 43Continuing Disclosure Issues – Material Events| 43| 43 YesNo What is the purpose of the issue? Is the issue an advance or current refunding issue? Is there a construction fund? Do you still have construction monies at the end of 3 years? Is the bond hedged or insured? Has a reserve fund been established?

| 44Continuing Disclosure Issues – Material Events| 44| 44 YesNo Are the bonds fixed (F), variable (V), or auction (A) rate? Have the bonds been refunded? Were bond proceeds remaining at the time of the refunding? Are any funds commingled? Is there a parity reserve? Are you trying to meet a spending exception?

| 45Continuing Disclosure Issues – Material Events| 45| 45 Questions