E-14-1 Tax-Advantage Bond Post Issuance Compliance Policy

To establish policies and procedures to assist the University of Kentucky (the “University”) in complying with the post issuance requirements of federal income tax law in order to preserve the tax-advantaged status of its bonds. Under federal income tax rules, there are several requirements which must be met in order for the University’s bonds to be considered tax-advantaged. The restrictions apply to the date of issuance and for the life of the bond issue, including any refundings.

This policy will be a living document which will be revised and improved over time to reflect new transactions, changes to law and ideas for improvement.

With the exception of Section IX, the policies described below do not apply to bonds issued as federally taxable obligations.

II. Definitions 

• Arbitrage: investing gross proceeds of tax-exempt bonds in higher yielding investments.
• Financial Obligation: includes (1) debt obligation; (2) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (3) guarantee of a debt obligation or derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation.
  • Note: Financial obligations do not include ordinary financial and operating liabilities incurred in the normal course of the University’s business or municipal securities as to which a final official statement has been provided to the Municipal Securities Rulemaking Board (“MSRB”) consistent with Rule 15c2-12.
  • Note: Debt obligations include leases that operate as vehicles to borrow money.
• Gross Proceeds: sale proceeds + investment proceeds + replacement proceeds + transferred proceeds.
  • Sale Proceeds: amounts actually or constructively received from the sale of the issue (including underwriter’s discount).
  • Investment Proceeds: amounts actually or constructively received from investing proceeds.
  • Replacement Proceeds: amounts with certain nexus to the issue. This includes sinking funds, pledged funds, and negative pledges.
  • Transferred Proceeds: Proceeds of a refunded issue allocated to refunding bonds.
• Materially Higher: 1/8% above the bond yield as the general rule or 1/1000% above the bond yield for refunding bonds and replacement proceeds.
• Private Business Use: the use of tax-advantaged bond financed property (including property financed with tax-exempt bonds or Build America Bonds) in a trade or business carried on by a person other than a state or local government entity. Private users could include a private for-profit business, natural person, private nonprofit organization (501(c)(3) or otherwise), or the federal government or its agencies. See BPM E-14-2 Private Business Use of Tax-Advantaged Bond-Financed Facilities for more information.

III. Responsibilities

1. University Financial Services Administration
   1. Establish and enforce this policy.
   2. Oversee the University’s post issuance compliance program to ensure the University remains in compliance and its bonds do not lose their tax-advantaged status.
   3. Coordinate with the various departments and/or individuals on their post issuance compliance responsibilities and ensure each function is completed accurately and in a timely manner.
   4. In consultation with the University’s bond counsel, provide training, as necessary, on post issuance compliance responsibilities to the appropriate University individuals.
   5. Maintain certain files related to the University’s bond issues.
   6. Work with the Capital Project Management Division to reconcile expenses to ensure bond proceeds were spent in accordance with the tax certificate.
   7. Invest bond proceeds and other funds related to the bond issue as stipulated in the bond documents and Treasury Regulations Sections 1.148-5(d) and (e).
   8. Contract with a rebate service provider annually to perform the University’s rebate calculations and work with Accounting and Financial Reporting Services on allocation of expenditures to proceeds within the required timeframe.
   9. Ensure the University complies with the disclosure requirements outlined in the University’s continuing disclosure agreements, including making annual EMMA filings for the University.
   10. Engage a continuing disclosure provider.
   11. At least quarterly during the construction phase, and with the assistance of Accounting and Financial Reporting Services and the Capital Project Management Division, review expenditures related to the bond issue to track the spending exceptions.
   12. Complete the annual private business use review as outlined in BPM E-14-2 Private Business Use of Tax-Advantaged Bond-Financed Facilities.
2. Accounting and Financial Reporting Services
   1. Establish a separate file for each bond issue for federal income tax purposes on or before the date of issuance of that bond issue.
   2. Maintain certain files related to the University’s bond issues.
   3. Work with Accounts Payable Services to pay any rebate amounts due to the US Government.
   4. Work with University Financial Services Administration, as needed, on the allocation of expenditures to proceeds within the required timeframe.
   5. At least quarterly during the construction phase, assist University Financial Services Administration with the review of expenditures related to the bond issue to track the spending exceptions.
   6. Serve as back up to University Financial Services Administration for continuing disclosure filings to EMMA.
3. Capital Projects Management Division
   1. Maintain records related to capital project expenditures.
   2. Work with University Financial Services Administration to reconcile expenses to ensure bond proceeds were spent in accordance with the tax certificate.
   3. Send University Financial Services Administration the final pay application for all projects funded with tax-advantaged bonds.
   4. At least quarterly during the construction phase, assist University Financial Services Administration with the review of expenditures related to the bond issue to track the spending exceptions.
4. Procurement Services, Real Estate Services, and Other Individuals with Contracting and Leasing Authority
   1. Notify University Financial Services Administration of the incurrence of a financial obligation or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation by sending all leases to UFSdocs@uky.edu.
   2. Notify University Financial Services Administration of any default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation reflecting financial difficulty. Notification should be sent to UFSdocs@uky.edu.
5. Office of Legal Counsel
   1. Work with University Financial Services Administration, in consultation with the University’s bond counsel, to determine if a disclosure filing is required under event 15 of Rule 15c2-12.
   2. Work with University Financial Services Administration, in consultation with the University’s bond counsel, to determine if a disclosure filing is required under event 16 of Rule 15c2-12.
   3. Work with University Financial Services Administration, in consultation with the University’s bond counsel, to prepare the material events filing for events 15 and 16 of Rule 15c2-12.

IV. Record Retention

The University of Kentucky seeks for its record retention to be in line with the State University Model Record Retention Schedule. 

All records for each bond issue of the University will be maintained for at least six years after the final principal payment is made on the bond issue or the bond issue which refunds the original bond issue. The electronic storage of information will at a minimum conform to the provisions of Revenue Procedure 97-22, 1997-1 C.B. 652 (as amended, supplemented or superseded).

University Financial Service Administration, with the assistance of the individuals outlined in Section III, will ensure, at a minimum, documentation for each bond issue contains the following:

1. Basic records relating to the transaction, including transcripts, reimbursement resolutions, official statements, correspondence, etc.
2. Expenditures from debt proceeds
3. Final pay application for each project financed with bond proceeds
4. Documentation relating to the use of the bond-financed property and any change in use of the property, including any documentation related to remedial actions taken
5. List of projects and buildings being financed or refinanced with bond proceeds
6. Modifications of bonds or bond documents, including any amendments
7. Documentation related to the investment of bond proceeds
8. Documentation related to sources of payment or security for debt
9. Arbitrage or arbitrage rebate calculations or payments
10. Trustee Statements
11. Annual private business use calculations and support documentation

On or about the final retirement date of a bond issue, Accounting and Financial Reporting Services will make a notation in the appropriate file for that bond issue. The files related to the bond issue will remain on site for at least six years after the final retirement date. At the end of six years the University will transfer the paper records to the University Archives for permanent retention. Anything electronic will be retained permanently.

V. Application of Bond Proceeds

1. Allocation and Tracking Bond Proceeds
   1. The Business Office of the Capital Projects Management Division is responsible for tracking and reconciling the expenses and encumbrances monthly for all capital projects.
   2. Per Treasury Regulations Section 1.148-6(d) the University must account for the allocation of proceeds to expenditures not later than 18 months after the later of the date the expenditure is paid or the date the project that is financed by the issue is placed in service. This allocation must be made in any event by the date 60 days after the fifth anniversary of the issue date or the date 60 days after the retirement of the issue, if earlier.
   3. University Financial Services Administration, with the assistance of Capital Projects Management Division, will review the reconciled expenses to ensure bond proceeds were spent in accordance with the tax certificate.
      1. If it is determined that proceeds were spent in a manner different than set forth on the tax certificate, University Financial Services Administration will consult with the University’s bond counsel on an appropriate course of action.
2. Recordkeeping
   1. Records are kept in accordance with Section IV of this policy. Capital Projects Management Division is responsible for maintaining the expense records and sending them to the Kentucky Underground Storage at the appropriate time.
   2. Records kept by Capital Projects Management Division include all invoices, budgets, change orders, correspondence, project management documents, submittals, procard edits, etc.
   3. University Financial Services and Accounting and Financial Reporting Services will maintain records related to the final allocation of proceeds to expenditures.

VI. Investment of Bond Proceeds and Arbitrage

1. Investment of Bond Proceeds
   1. In general, the gross proceeds of a bond issue cannot be invested at a yield which is materially higher than the yield on the bonds.
   2. Gross proceeds may be invested at an unrestricted yield in the following instances:
      1. The University qualifies for a three-year temporary period for construction proceeds if the University reasonably expects that: (1) 85% of bond proceeds, expected to finance the project, will be spent within 3 years, (2) substantial binding commitments to spend 5% are made within 6 months after issuance and (3) the project is expected to be completed and bond proceeds allocated to costs with due diligence.
      2. There is a reasonably required reserve or replacement fund, within the following limitations:
         1. Funding Limitation: Absent significant original issue discount (OID), or original issue premium (OIP), sale proceeds of no more than 10% of the stated principal amount of the bonds may be used for this purpose.
         2. Size Limitation: The fund must be limited to the lesser of: (1) maximum annual debt service, (2) 125% of average annual debt service, and (3) absent significant OID or OIP, 10% of the stated principal amount of the bonds.
      3. There is a bona fide debt service fund which is designed to accumulate revenues on an annual basis to match the annual debt service requirements and is depleted at least once a year, except for a reasonable carryover equal to 1/12 annual debt service.
2. Arbitrage
   1. The University will be responsible for tracking all investment earnings on bond proceeds to ensure compliance with applicable yield restrictions and/or rebate requirements. Although the University may qualify to invest certain funds at a yield higher than the bond yield under one of the exceptions explained above, the arbitrage profit from investments must be paid, or “rebated,” to the US Government.
   2. For as long as the University has bonds outstanding, University Financial Services Administration will contract annually with a rebate service provider for the arbitrage and rebate calculations. Accounting and Financial Reporting Services will be responsible for supplying all the necessary documents to the rebate service provider to complete the calculations.
      1. Accounting and Financial Reporting Services will work with University Financial Services Administration on the allocation of expenditures to proceeds.
   3. Exceptions
      1. No rebate for the construction fund of a bond issue will be due if the University meets any of the following three spending exceptions. 
         1. 6-Month Spending Exception: All proceeds spent within six months of the issue date;
         2. 18-Month Spending Exception: At least 15% of bond proceeds must be spent within 6 months, at least 60% within 12 months and 100% within 18 months; or
         3. 24-Month Spending Exception: This exception only applies to construction issues. To qualify as a construction issue, the University must reasonably expect that 75% of the available construction proceeds will be spent on construction expenditures. Then, at least 10% of available construction proceeds must be spent within 6 months, 45% within 12 months, 75% within 18 months and 100% within 24 months.
      2. Prior to issuing bonds, the University will ensure proper spend is projected. University Financial Services Administration will review expenditures related to the bond issue at least quarterly to track whether the University is within the spending exceptions explained above. If it is determined the University is not on track to meet spenddown requirements, University Financial Services Administration will work with Capital Projects Management Division, and bond counsel as needed, on an action plan.
   4. If the computations completed by the rebate service provider indicate a payment is due to the US Government for any of the University’s bond issues, Accounting and Financial Reporting Services will be responsible for producing a payment request document (PRD) and Accounts Payable Services will be responsible for processing the PRD and making the payment.
      1. Arbitrage rebate payments are due no later than 60 days after the end of every fifth bond year throughout the life of the bond issue.
   5. If there is a rebate due to the US Department of Treasury, the University must submit a completed 8038-T form with the rebate. The rebate service provider contracted to complete the calculation will complete the 8038-T.
      1. If the University is entitled to a refund of amounts paid with the 8038-T form, the University must complete and submit an 8038-R form. Claims for recovery of overpayments cannot be filed later than the date that is two (2) years after the final computation date under Treasury Regulations Section 1.148-3(e)(2) for the applicable issue of bonds.

The University will maintain all investment documentation related to bond proceeds, investments and investment earnings in accordance with Section IV of this policy. The University will also maintain all documentation related to the arbitrage rebate calculations.

VII. Monitoring and Measuring Private Business Use 

University Financial Services Administration, with the assistance of designated employees of the University, will monitor and measure the private use for each bond issue to establish that the amount of private use is not more than the applicable private use limit percentage. Please see the E-14-2 Private Business Use of Tax-Advantaged Financed Facilities Policy for more information on monitoring and measuring private business use.

VIII. Reimbursement Resolutions 

In some instances, the University may seek to reimburse itself for original expenditures with bond proceeds. An original expenditure is an expenditure for a governmental purpose that is originally paid from a source other than a reimbursement bond. 

A resolution, which may include a reimbursement resolution, must be passed by the Board of Trustees. The resolution must be in accordance with Treasury Regulatations Section 1.150-2 and adopted prior to issuing the bonds and no later than 60 days after the payment of the original expenditure. 

The date of issuance of reimbursement bonds must be no later than 18 months after later of (1) the date the expenditure is paid by the University or (2) the date the project is placed in service, but not more than 3 years after the expenditure is paid. The 3-year maximum limit may be extended to 5 years if the University and a licensed engineer or architect certifies that at least 5 years is necessary to complete the project.

IX. Continuing Disclosure

The University will comply with its Continuing Disclosure Agreement (“CDA”) for each outstanding bond issue. University Financial Services Administration and Accounting and Financial Reporting Services will work together to ensure all continuing disclosure documents are submitted to EMMA within the timeframes specified in the CDA.

University Financial Services Administration will engage a provider to provide Continuing Disclosure services.

1. Continuing Disclosure Agreement
   1. Under the CDA, the following information must be provided to the public within the specified timeframes.
      1. Annual financial information and operating data at least annually not later than 180 days following the end of each fiscal year.
      2. Material Events: notice of the occurrence of a material event, within 10 business days of the occurrence of the event. These events include the following:
         1. Principal and interest payment delinquencies;
         2. Non-payment related defaults, if material;
         3. Unscheduled draws on debt service reserves reflecting financial difficulties;
         4. Unscheduled draws on credit enhancements reflecting financial difficulties;
         5. Substitution of credit or liquidity providers; or their failure to perform;
         6. Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax-exempt status of the security;
         7. Modifications to rights of security holders, if material;
         8. Bond calls, if material, and tender offers (except for mandatory scheduled redemptions not otherwise contingent upon the occurrence of an event);
         9. Defeasances;
         10. Release, substitution or sale of property securing repayment of the securities, if material;
         11. Rating changes;
         12. Bankruptcy, insolvency, receivership or similar event of the obligated person (Note: For the purposes of this event, the event is considered to occur when any of the following occur: The appointment of a receiver, fiscal agent or similar office for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization; arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets of business of the obligated person);
         13. The consummation of a merger, consolidation or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such action or the termination of a definitive agreement relating to such actions, other than pursuant to its terms, if material; and

         14. Appointment of a successor or additional trustee or the change of name of a trustee, if material.

             For CDA entered into on or after February 27, 2019, the following two material events will also be included.

         15. Incurrence of a financial obligation of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and
         16. Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.
      3. Notice of the failure of the University to provide the annual financial information and operating data by the date required.
      4. Other information that the University determines to make public through the CDA.
2. Other required filings include:
   1. Tax forms: Tax-exempt debt obligation issuers are required to file the 8038 series of IRS forms (8038, 8038-G, 8038-T, 8038-CP and 8038-R).
      1. University Financial Services Administration will work with the appropriate parties, including the University’s bond counsel, rebate service provider and trustee to ensure timely filing. 
      2. Arbitrage Certificates: within 5 years of the anniversary of the debt issue and every five years thereafter until retirement of the issue, the University must calculate any arbitrage of the debt and make any rebate payments required, in accordance with Section VI.

3. Process for Continuing Disclosure Filings

   For CDA entered into on or after February 27, 2019, the University will be required to include material events 15 and 16 described in Section IX(1). The following outlines the process for identifying these material events.

   1. Process for Event 15
      1. Procurement Services, Real Estate Services, and Other Individuals with Contracting and Leasing Authority will notify University Financial Services Administration of any incurrence of a financial obligation or agreement to covenants, events of default, remedies, priority rights or other similar terms of a financial obligation prior to or upon execution of the agreement and will send the documents to University Financial Services Administration (UFSdocs@uky.edu) for review as soon as practical or within 2 business days.
      2. University Financial Services Administration, in consultation with the University’s bond counsel and the Office of Legal Counsel, will review the documents upon receipt and determine if the terms of the agreement will require a disclosure filing pursuant to event 15.
      3. If the event will require a disclosure filing, University Financial Services Administration will work with the Office of Legal Counsel to prepare the disclosure filing to be posted to EMMA. The Office of Legal Counsel will return the document for posting to University Financial Services as soon as possible or within 2 business days of determination.
      4. University Financial Services Administration will ensure the disclosure filing is posted to EMMA within the required timeframe.
   2. Process for Event 16
      1. Procurement Services, Real Estate Services, and Other Individuals with Contracting and Leasing Authority will notify University Financial Services Administration as soon as practical or within 2 business days of any default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation, any of which reflect financial difficulties. Notice should be sent to University Financial Services Administration at UFSdocs@uky.edu.
      2. University Financial Services Administration, in consultation with the University’s bond counsel and the Office of Legal Counsel, will review the event and will determine if a disclosure filing is required pursuant to event 16.
      3. If the event will require a disclosure filing, University Financial Services Administration will work with the Office of Legal Counsel to prepare the disclosure filing to be posted to EMMA. The Office of Legal Counsel will return the document for posting to University Financial Services as soon as possible or within 2 business days of determination.

      4. University Financial Services Administration will ensure the disclosure filing is posted to EMMA within the required timeframe.

         University Financial Services Administration will maintain a database of all new and existing financial obligations or materials agreements to covenants, events of default, remedies, priority rights, and other similar terms that are subject to event 15 and 16 under Rule 15c2-12.

X. Implementation

The University will comply with all aspects of this policy with respect to each bond issue that is issued after the date of adoption of this policy.

With respect to each outstanding bond issue that was issued before the adoption date of this policy, the University will implement this policy to the greatest extent, and during the shortest time frame, that is reasonably practicable.