Bonds issued by state and local governments are generally subject to ongoing monitoring and reporting with respect to compliance with federal tax requirements specifically related to tax-exempt bonds and federal disclosure requirements pursuant to their continuing disclosure agreements (CDAs). In addition to federal securities and tax requirements, issuers may face a variety of other compliance obligations, such as bond indenture requirements, state and local law, and policy requirements.
Due to the fundamental differences, GFOA recommends that issuers adopt separate procedures for Internal Revenue Service (IRS) post-issuance compliance purposes, and for the issuer’s continuing disclosure purposes. Having separate procedures provide for IRS audit and other investigations to focus on the relevant areas. This GFOA Best Practice addresses federal securities laws, IRS rules and regulations, bond indenture, state law, local law, and policy matters, while the GFOA Best Practice entitled “Understanding Your Continuing Disclosure Responsibilities" addresses an issuer’s continuing disclosure responsibilities.
Comprehensive post-issuance compliance consists of policies and procedures designed to assist an issuer of bonds in complying with all of the relevant requirements that apply to each series of bonds from the date they are issued until the bonds are no longer outstanding.
GFOA recommends issuers of bonds or other debt obligations develop and adopt formal, written post-issuance compliance policies and procedures to assist in meeting compliance requirements and in preventing, identifying and correcting possible violations that might occur during the term that bonds are outstanding. Such procedures will help an issuer mitigate the risk of violation and preempt enforcement action from federal parties. Issuers should revisit these policies and procedures at least every three years or as directed by the financing team when there are significant legal or regulatory changes.
Policies and procedures at least consist of the following elements: a list of all of the compliance actions at the time that bonds are sold for each series of bonds; documentation of the source and frequency of such compliance requirements; and identification and assignment of compliance responsibilities to officers by title.
Designing a Comprehensive Post-Issuance Compliance Program:
- General Considerations – A comprehensive post-issuance compliance program should reflect an issuer’s size, resources and borrowing frequency. An issuer may decide to handle compliance in-house or to engage a third-party provider for some or all compliance activities including arbitrage rebate and monitoring of private business use and payments. In either case, the post-issuance compliance program should include the elements discussed below. Despite electing to outsource compliance activities, issuers and the assigned issuer staff have the ultimate responsibility for ensuring that the compliance procedures are met in a timely and accurate manner.
- Identify Responsible Staff –Whether an issuer will conduct compliance in-house or will engage outside providers, a “chief compliance officer” with overall responsibility for implementation of the program should be formally identified in policies and procedures. In a large organization, there may be staff in addition to the chief compliance officer that can be assigned specific responsibilities or the chief compliance officer can have authority to delegate where appropriate. Staff turnover is an especially important time to review the assignment of staff responsibilities to ensure that the transition for making debt service payments is seamless. If third-party providers will be engaged to perform some or all of the activities, the program should specify how the providers will be engaged and monitored, as ultimately the liability for non-compliance is the issuer’s. The chief compliance officer or officers should be designated by job title rather than name to ensure continuity.
- Identify the Source of the Requirements Being Monitored – Issuers should identify the documents that set forth all of the requirements being monitored so that the compliance officer(s) can find details if necessary. Examples of such documents include the tax certificate, escrow-related documents (if applicable), and bond indenture. Issuers should compile this list at the time of closing for each bond issue.
- Identify the Frequency of the Actions to Be Undertaken – To ensure compliance, issuers should review a compliance checklist at least annually with key staff members required to make debt service payments. However, it may be advisable to provide for more frequent reviews in connection to specific events such as ongoing reviews, calculating arbitrage rebate liability, renewal of management contracts, or calculation of private business use.
- Monitor for Changes in Law and Regulations – An issuer needs to consistently and carefully monitor for changes to regulations, rules, new interpretive guidance or altered market practices and expectations. An issuer may also want to consult its bond counsel for any changes in rules or interpretive guidance.
- Establish a Deadline Reminder System –Where deadlines exist, a reminder system should be established and a back-up reminder is helpful in avoiding an oversight. Examples of deadlines include deadlines for meeting spend down exceptions for rebate compliance and yield restriction, paying rebate if applicable, and making final allocations of bond proceeds and making debt service payments. Reminders should be set sufficiently in advance of deadlines to accommodate drafting and adequate review of documents prior to the required submission date.
- Identify Records to be Maintained and the Record Retention Period –Records necessary to ensure and document compliance should be maintained for the required time periods. The issuer should list the records being maintained and where or by whom. There may be various sources of records requirements, such as documentation relating to IRS arbitrage rebate and tax-exemption compliance. In some cases, IRS record retention guidelines supersede and are longer than state and local requirements. Specific to arbitrage rebate and tax-exemption compliance, records must be maintained until full payment of the bonds and any refunding bonds plus three years. The following records should be maintained:
- The bond transcript for each bond issue, which includes among other documents, the trust indenture, loan, lease, or other financing agreement, the relevant IRS Form 8038 (including Forms 8038-G or 8038, as applicable) with proof of filing, the bond counsel opinion and the tax agreement including all attachments, exhibits and any verification report.
- Records of debt service payments for each issue of bonds.
- Documentation evidencing the expenditure of bond proceeds, such as construction or contractor invoices and receipts for equipment and furnishings, bond trustee requisitions and project completion certificates, as well as records of any special allocations made for tax purposes including post-issuance changes in allocations.
- Documentation evidencing the lease or use of bond-financed property by public and private sources, including, but not limited to, service, vendor, and management contracts, research agreements, licenses to use bond-financed property, or naming rights agreements.
- Documentation pertaining to investment of bond proceeds, including:
- the yield calculations for each class of investments
- actual investment income received from the investment of proceeds
- required purchases of SLGS were made or alternative investments when the SLGS window is closed
- investment agreements
- payments made pursuant to investment agreements
- Documentation pertaining to rebate calculations and copies of any 8038-T or 8038-R filed with respect to the bonds.
- Documentation pertaining to remedial action and other change-of-use records.
- Amendments and other changes to the bond documents (including interest rate conversions and defeasances).
- Letters of credit and other guarantees for bond issues.
- Interest rate swaps and other derivatives that are related to bond issues.
- Require Training for Responsible Officers – Identify and document periodic training for all staff responsible for post-issuance compliance. The issuer should also determine whether the training can be done in-house or whether third-party conferences, courses or providers are appropriate.
- Describe Procedures to Identify and Correct Violations – Procedures should describe the review process to ensure compliance and describe what actions will be taken to correct any non-compliance. This may include engaging bond counsel or third-party advisors to assist in any remedial actions such as dealing with IRS tax compliance issues by using the IRS Voluntary Closing Agreement Program.
- Adopt and Document a Post-Issuance Program – An issuer’s post-issuance compliance procedures can be included in its general debt management policies or be stated separately. Procedures may be adopted by formal action of the issuer’s governing board or be developed independently by management, and should be reviewed every year.
Bond Indenture and Other Common Compliance Requirements:
Issuers should be aware that in addition to tax compliance requirements, there are often other legal documents, laws and regulations, policies, contractual requirements, and/or relationships that must be monitored on an ongoing basis. Some of the most common of these are included in this section.
- Bond Indentures/Bond Ordinance/Bond Resolution – Many bond issues have an ordinance and/or resolution that authorize and set many of the terms of the bond issue. Also, some bonds may have a bond indenture, which is a legal contract between the issuer and bond holders. These documents can contain a variety of stipulations including:
- Notice requirements
- Reporting requirements
- Additional bonds tests
- Permitted investments
- Debt service payment and coverage requirements
- Debt service reserve fund requirements
- Bond insurance or surety bond requirements
- Required accounts/segregation of funds
- Requirements related to a trustee or paying agent
- Restrictions on the use of bond proceeds
- Redemption provisions
- Rate covenants for revenue bonds
- Budget requirements for moral obligation bonds
- State and Local Law – Issuers should work with bond counsel and/or legal counsel to determine if there are any ongoing requirements related to State or local law that must be monitored. These may include items such as notice requirements, public protest procedures, legal debt limits, or limitations on revenue used to pay debt service.
- Other Internal Finance Policies – Issuers may have debt or other financial policies that must be monitored to ensure compliance. Common policy items that relate to debt issuance are debt limits, use of debt, debt ratios, and investment policies.
An issuer’s compliance obligations with respect to bonds and other debt obligations do not end at the time of closing and receipt of funds. Following the steps described above will assist issuers in developing the comprehensive policies and procedures needed to ensure compliance with federal securities and tax law requirements, as well as any other obligations imposed by indenture, resolution, ordinance, state and local laws and internal policies.
- GFOA Best Practice: Understanding Your Continuing Disclosure Responsibilities, 2020.
- GFOA Derivatives Checklist, 2010.
- GFOA Best Practice: Bank Loans and Direct Placements, 2020.
- GFOA/NABL Post Issuance Compliance Checklist, 2003.