Post Issuance Compliance

Post Issuance Compliance The Director of the Bond Advisory Division of the Department of Finance and Administration (DFA) shall be the Bond Compliance Officer responsible for each bond issuance under the purview of the State Bond Commission of the State of Mississippi. All information related to State-issued bonds and the facilities/projects financed by the bonds shall be submitted to the Bond Compliance Officer. Page 12 of 38 A. Post-Issuance Compliance Checklist and Continuing Education 1. Post-Issuance Compliance Checklist - Immediately upon issuing any bonds, the Bond Compliance Officer in conjunction with Bond Counsel shall complete the Post- Issuance Compliance Checklist (Exhibit A) and the attached Schedules in order to establish and clearly define the roles and responsibilities relating to the ongoing compliance activities for a bond issue and to identify compliance requirements. 2. Continuing Education – The Bond Compliance Officer will actively seek out advice of Bond Counsel on any matters that appear to raise ongoing compliance concerns and will attend or participate in seminars, teleconferences, etc. sponsored by organizations such as GFOA, SIFMA, NABL or NAST that address compliance issues and developments in the tax-exempt bond arena. B. Continuing Disclosure 1. Disclosure Repositories – Effective July 1, 2009, “repository” in this section shall mean the Electronic Municipal Market Access system (“EMMA”) established by the Municipal Securities Rulemaking Board. 2. Financial information relating to the State (the Mississippi Comprehensive Annual Financial Report) is due to the Repository 180 days after the close of the fiscal year. The Bond Compliance Officer or his designee will provide this information to the Repository. 3. SEC Rule 15c2-12 governs the preparation and dissemination requirements of the Official Statement. In order to comply with these requirements, the Bond Compliance Officer will notify Bond Counsel and the underwriters of any fact or event that might cause the official statement to contain any untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. 4. Material Events Disclosure - SEC Rule 15c2-12 also governs secondary market disclosure. As required in this rule, the Bond Compliance Officer will notify the Repository in a timely manner, when any of the following events that would be considered material within the meaning of the federal securities law occur: a. Principal and interest payment delinquencies; b. Non-payment related defaults; c. Unscheduled draws on debt service reserves reflecting financial difficulties; d. Unscheduled draws on credit enhancements reflecting financial difficulties; e. Substitution of credit or liquidity providers, or their failure to perform; f. Adverse tax opinions or events affecting the tax-exempt status of the bonds; g. Modifications to rights of holders to the bonds; h. Bond calls; i. Defeasances; Page 13 of 38 j. Release, substitution or sale of property securing payment of the bonds; and k. Rating changes. C. State Bond Commission Updates 1. General Obligation Bonds The Bond Compliance Officer will at least annually (immediately following the end of the fiscal year) provide a report to the State Bond Commission to include the following: a. Amount of outstanding debt; b. Description of any pending transactions; c. Any compliance issues with the Debt Management Policy. 2. Variable Rate Debt If the State has any outstanding variable rate debt at fiscal year end, the Bond Compliance Officer will provide an annual report to the State Bond Commission on its variable rate debt portfolio. The report will include the following information: a. A description of the outstanding variable rate debt transactions, including a status report detailing any material changes that may have occurred since the last report; b. A description of any new transactions and any proposed new transactions; c. An evaluation of the debt portfolio with a recommendation on any changes to the balance of structure for variable rate, fixed rate, and synthetic fixed rate debt; d. Rate comparisons in the event that multiple remarketing agents or broker dealers are used. 3. Derivatives The derivative contracts of the State will be part of the annual report on variable rate debt that the Bond Compliance Officer will provide to the State Bond Commission. The derivatives section of the report will include the following information: a. A description of any outstanding derivative contracts of the State, including a status report detailing any material changes that may have occurred since the last report; b. A description of any new agreements and any proposed new agreements; c. A cash flow activity report for the derivative portfolio, including any payments made or received; d. A current assessment of counterparty risk, termination risk and any other applicable risks associated with the agreements in place; e. A calculation, if possible, of any actual debt service savings realized from entering into the various derivative contracts. This calculation would be delayed Page 14 of 38 in the case of forward derivative contracts made in relation to a planned future new issuance. D. Contract Monitoring 1. Ratings of Financial Product Providers a. The Bond Compliance Officer will continuously monitor ratings of swap counterparties, remarketing agents, trustees, etc. on the State’s various financial products and bond issues. b. The State Bond Commission may subscribe to online information services provided by Moody’s, Fitch Ratings, or Standard and Poor’s in order to access data pertaining to the ratings of financial institutions. c. The State may also contract with a third party to monitor the ratings of our financial providers and give notice when rating triggers have been activated. 2. The State may contract with a third party to calculate, verify and/or monitor the value of its derivative contracts. 3. The State may contract with a third party or develop spreadsheets internally to monitor and track the performance of its remarketing agents for variable rate debt. E. Direct Payment BABs Direct Payment BABs provide a direct federal subsidy paid by the US Treasury to the government issuer in an amount equal to 35% of the interest. Recovery Zone Economic Development bonds (like the Direct Payment BABs) provide a direct federal subsidy to the government issuer in an amount equal to 45% of the interest. IRS Notice 2009-26 provides guidance on Direct Payment BABs and the payment of the federal subsidy procedures. 1. Procedures for Completing and Filing the IRS Form 8038-G for Direct Payment BABs The Bond Director at the State Treasury will confirm that Bond Counsel has reported the issuance of Direct Payment Build America Bonds on IRS Form 8038-G. The Form 8038-G shall be prepared by Bond Counsel in accordance with IRS guidance. The form shall be filed with the IRS immediately after the issuance of the BABs but at least 30 days before the first Form 8038-CP is filed to request payment with respect to an interest payment date for that issue. 2. Procedures for Completing and Filing the IRS Form 8038-CP for Fixed Rate Debt Direct Payment BABs The Bond Director at the State Treasury (in cooperation with Deutsche Bank) shall file a Form 8038-CP no less than 45 days before the applicable interest payment date but no more than 90 days before the relevant interest payment date. 3. Procedures for Recording Payments and Receipts Page 15 of 38 Upon completion of the Form 8038-CP, the Bond Director at State Treasury shall send a memo to Deutsche Bank stating the amount and date of the State’s upcoming interest payment and the anticipated amount and date of the corresponding credit payment with a copy of the Form 8038-CP attached. 4. The Bond Director at State Treasury shall keep a spreadsheet of each Direct Payment BAB issue and record each federal subsidy payment received. The spreadsheet shall include the date and amount of the interest payment submitted on the Form 8038-CP and the amount and date of the federal subsidy payment received. If the amount of the federal subsidy is different than expected, an explanation for the difference will be included on the spreadsheet. A copy of the Form 8038-CP will be attached to the Cash Receipt (CR) document when submitted to DFA. F. Tax-Exempt Compliance Monitoring and “Qualified Bond” Compliance Monitoring for BABs 1. Restrictions Against Private Use – The State will continuously monitor the expenditure of bond proceeds and the use of facilities or equipment financed with tax- exempt bonds, Direct Payment BABs and Recovery Zone Economic Development Bonds to ensure compliance with Section 14 1 of the IRC. 2. Direct Payment BABs – Direct payment BABs shall also comply with Section 54AA of the Code which requires that 100% of the available project proceeds be used for capital expenditures after allowing for a reasonably required reserve fund and for costs of issuance not exceeding 2 percent. 3. Monitoring for Use of Proceeds - The Bond Compliance Officer will monitor and maintain records with respect to expenditures to ensure that bond proceeds are being used on capital expenditures for governmental purposes in accordance with bond documents by reviewing and maintaining the records of expenditures described in Section 3CVI herein. 4. Qualification for Initial Temporary Periods and Compliance with Restrictions Against Hedge Bonds a. Expectations as to Expenditure of bond proceeds (tax-exempt and Direct Payment BABs) i. In order to qualify under the arbitrage rules for an initial temporary period of 3 or, in some cases, 5 years during which bond proceeds can be invested without regard to yield (but potentially subject to rebate), the State must reasonably expect to spend at least 85% of “spendable proceeds” by the end of the temporary period. ii. In general, under IRC Section 149, in order to avoid classification of an issue of bonds as “hedge bonds”, the State must reasonably expect to Page 16 of 38 spend 85% of the “spendable proceeds” of the bond issue within the 3 year period beginning on the date the bonds are issued and invest not more than 50% of the proceeds of the issue in investments having a substantially guaranteed yield for 4 years or more. If these two tests cannot be satisfied, a longer spend down period of 5 years may apply if certain percentage expenditure tests are reasonably expected to be met throughout the 5 year period and costs of issuance must not be contingent and must be expected to be paid within 180 days of bond issuance. b. Project Draw Schedule Compliance Monitoring – The Bond Compliance Officer will semi-annually compare the original project draw schedule and the actual expenditure payouts on each project. The purpose of this analysis is to determine the variances from each draw schedule and to document the reasons for these variances to provide a record of the progress on the project. Factors to include in the analysis should be unexpected delays in the project timeline, extreme weather, contract time extensions due to unexpected events, supplemental agreements and any other factor with a potential to impact the project. There should be no effect on the tax-exempt status of the bonds (or the BABs being “qualified bonds”) under either the temporary period rules or the hedge bond rules if the actual disbursements do not meet the original project draw schedule, unless circumstances surrounding the actual events cast doubt on the reasonableness of the stated expectations on the issuance date. 5. Arbitrage Rebate Compliance a. Tax-exempt bonds lose their tax-exempt status if they do not comply with the arbitrage restrictions of Section 148 of the Code. Direct Payment BABs are also subject to the arbitrage restrictions of Section 148 in order to be “qualified bonds” under Section 54AA. Two general sets of requirements under the Code must be applied in order to determine whether tax-exempt bonds are arbitrage bonds: the yield restriction requirements of Section 148(a) and the rebate requirements of Section 148(f). b. Yield Restriction Requirements – The yield restriction requirements provide, in general terms, that gross proceeds of a tax-exempt bond issue may not be invested in investments earning a yield materially higher than the yield of the bond issue, except for investments (i) during one of the temporary periods permitted under the regulations (including the initial three year or five year temporary period described above), (ii) in a reasonably required reserve or replacement fund or (iii) in an amount not in excess of the lesser of 5% of the sale proceeds of the issue or $100,000. Under limited circumstances, the yield on investments subject to yield restriction can be reduced through payments to the IRS known as “yield reduction payments.” c. Rebate Requirements Page 17 of 38 i. If amounts treated as bond proceeds are invested at a yield in excess of the yield on the bonds (whether pursuant to one of the three exceptions to yield restriction referred to above or because the investment yield is higher than the bond yield, but not “materially higher”), rebate payments may be required to be made to the US Treasury. Under the applicable regulations, the aggregate rebate amount is the excess of the future value of all the non-purpose receipts over the future value of all the non-purpose payments. The future value is computed as of the Computation Date using the Bond Yield as the interest factor. At least 90% of the rebate amount calculated must be paid no later than 60 days after the end of the first Computation Period. The amount of rebate payments required for subsequent Computation Periods (other than the final period) is that amount which, when added to the future value of prior rebate payments, equals at least 90% of the rebate amount. For the final Computation Period, 100% of the calculated amount must be paid. ii. The State has retained the services of an independent rebate analyst to annually calculate any rebate that may result for that year and annually provide the rebate report to the Office of the State Treasurer. d. The State Treasurer’s Office will ensure the proper calculation and payment of any rebate payment and/or yield reduction payment at the required time: i. First installment due no later than 60 days after the fifth anniversary of bond issuance; ii. Succeeding installments at least every five years; iii. Final installment no later than 60 days after retirement of the last bond in the issue. G. Record Retention 1. Section 6001 of the Internal Revenue Code provides the general rule for the proper retention of records for federal tax purposes. The IRS regularly advises taxpayers to maintain sufficient records to support their tax deductions, credits and exclusions. In the case of a tax-exempt bond transaction, the primary taxpayers are the bond holders. In order to ensure the continued exclusion of interest by the bond holders, it is important that the State retain sufficient records to support the continued exclusion being taken by the bond holders. In the case of Direct Payment BABs, the government issuer receiving the subsidy is the primary taxpayer. In order to ensure the continued payment of the federal subsidy to the State, it is important that the State retain sufficient records to support the finding that the BABs are “qualified bonds” under Section 54AA. Page 18 of 38 Additionally, in the case of many private activity bonds, the conduit borrowers are also primary taxpayers. Conduit borrowers are also often entitled to claim depreciation deductions for bond-financed property. Consequently, conduit borrowers should maintain sufficient records to support their interest deductions, depreciation deductions or other tax deductions, exclusions or credits related to the tax-exempt bond issue. Moreover, issuers and conduit borrowers should retain sufficient records to show that all tax-exempt bond related returns submitted to the IRS are correct. Such returns include, for example, IRS Forms 8038, 8038-G, 8038-GC, 8038-T, and 8038-R. 2. General a. All records associated with any tax-exempt bond issuance of the State shall be stored electronically in a centralized electronic document management repository (CEDMR). The Bond Advisory Division is responsible for maintaining and supporting this document management facility but the Bond Compliance Officer is responsible for ensuring the various documents are scanned, uploaded and indexed. b. The DFA Information Systems Director will also ensure that proper back-ups are performed on the CEDMR and that the State has proper offsite storage of these back-ups in accordance with ITS standards of practice and policy. These procedures are subject to an electronic data processing audit by the State Auditor. c. The CEDMR shall conform to Rev. Proc. 97-22, 1997-1 C.B. 652 (as the same may be amended, supplemented or superseded), which provides guidance on maintaining books and records by using an electronic storage system. d. The State Treasurer or his designee will conduct an annual review of the CEDMR to verify that all of the records described below are properly stored and indexed in the CEDMR. 3. Tax Exempt Bonds and BABs – The State shall maintain the bond record as defined in this section for the life of the bonds plus three years or the life of the refunding bonds which refunded the original bonds plus three years. The bond record shall include the following documents: a. Pre-Issuance Documents i. Pre-Issuance Derivative Documents – The Bond Compliance Officer shall retain all documentation relating to the selection of counterparties and the pricing and determination of fair market value of the derivative contracts with copies stored in the CEDMR. ii. Pre-Issuance Investment of Defeasance Escrows – The Bond Compliance Officer shall retain all documentation regarding the procurement of the Page 19 of 38 investments, including as applicable the request for bids, bid sheets, documentation of procurement method (competitive or negotiated), etc., with copies stored in the CEDMR. If investments other than SLGs are used for a defeasance escrow, the documentation should include an explanation of the reason for the purchase of open market securities and compliance with safe harbor bidding rules. If SLGs are purchased, a copy of the final subscription shall be maintained. iii. Project Draw Schedules – The Bond Compliance Officer shall retain all documentation and calculations relating to the draw schedule used to meet the “reasonable expectations” test and use of proceeds tests with copies stored in the CEDMR. iv. Issue Sizing – The Bond Compliance Officer shall maintain copies of all spreadsheets prepared and presented to the State Bond Commission regarding the projects to be included in the issue. In addition, all underwriter structuring booklets shall be maintained with copies stored in the CEDMR. v. Bond Insurance (if applicable) – The Bond Compliance Officer shall maintain a copy of insurance quotes and calculations supporting the cost benefit of bond insurance, if any, with a copy stored in the CEDMR. b. Issuance Documents i. Bond Transcript - The Bond Compliance Officer shall retain the bond transcript with a copy stored in the CEDMR. ii. Costs of Issuance – The Bond Compliance Officer shall retain all invoices, payments, and documentation of State Bond Commission approval of such costs, with copies stored in the CEDMR. c. Post-Issuance Documents i. Post-Issuance Derivative Contracts – The Bond Compliance Officer shall retain all documentation relating to the selection of counterparties and the pricing and determination of fair market value of the derivative contract swap with copies stored in the CEDMR. ii. Post-Issuance Investment of Defeasance Escrows – The Bond Compliance Officer shall retain all documentation regarding the procurement of the investments, including as applicable the request for bids, bid sheets, documentation of procurement method (competitive or negotiated), etc., with copies stored in the CEDMR. If investments other than SLGs are used for a defeasance escrow, the documentation should include an explanation of the reason for the purchase of open market securities and compliance with safe harbor bidding rules. If SLGs are purchased, a copy of the final subscription shall be maintained. Page 20 of 38 iii. Record of Investments – The Bond Compliance Officer shall coordinate with the Chief Investment Officer at the Office of the State Treasurer to document and retain all investments purchased with tax-exempt or BABs bond proceeds, with a copy stored in the CEDMR. iv. Investment Activity Statements – The Bond Compliance Officer shall coordinate with the Chief Investment Officer at the Office of the State Treasurer to retain all investment activity statements related to the tax- exempt bonds and BABs, with a copy stored in the CEDMR. v. Trustee Activity Statements – The Bond Compliance Officer shall retain copies with copies stored in the CEDMR. vi. Record of Expenditures – The Bond Compliance Officer shall scan invoices, etc. related to the projects funded by the tax-exempt bond proceeds or the BABs, along with the appropriate SAAS-produced documents such as payment vouchers, intergovernmental transfer documents, etc. vii. Records Establishing the Use of Property – The Bond Compliance Officer shall retain documents regarding the use of property financed with tax- exempt bonds/notes or Direct Payment BABs. This includes leases and service contracts. Copies of these documents shall be store in the CEDMR. viii. Arbitrage Rebate Reports – The Bond Compliance Officer shall retain documents prepared by the third party independent rebate analyst as described in Section VIII.F.5. herein. Copies of these documents shall be retained in the CEDMR. ix. Records of Continuing Disclosure – All continuing disclosure documents described in Section VIII B. shall be maintained by the Bond Compliance Officer with a copy stored in the CEDMR. x. Contracts under which any bond proceeds are spent (architectural, engineering, consulting, ROW, construction, etc.) – The Bond Compliance Officer shall obtain copies of these contracts and store in the CEDMR. xi. Grant Agreements under which any bond proceeds are spent – The Bond Compliance Officer shall obtain copies of these agreements and store in the CEDMR. xii. Records of the Federal Subsidy Payments for Direct Payment BABs – The Bond Compliance Officer shall obtain a copy of the filed IRS Form 8038- CP and store in the CEDMR. xiii. Record of Debt Service Payments – The Bond Compliance Officer should coordinate with the Office of the State Treasurer to obtain documentation of debt service payments made for each issue and store copies in the Page 21 of 38 CEDMR. Documentation should include debt service payment schedules, SAAS-generated documents, wire advices, etc. xiv. Reports of any IRS examinations or inquiries – The Bond Compliance Officer will maintain copies of any such examinations or inquiries and store in the CEDMR. 4. Short Term Borrowings – The State shall maintain all documents related to short term or interim borrowings as defined in this section for the life of the borrowing plus three years. The documents should be filed in the CEDMR in such a way as to directly associate the short term borrowing with the long term issuance used to retire it. i. Record of Expenditures – The Bond Compliance Officer shall scan invoices, etc. related to the projects funded by the tax-exempt note proceeds, along with the appropriate SAAS-produced documents such as payment vouchers, intergovernmental transfer documents, etc. ii. Arbitrage Rebate Reports – The Bond Compliance Officer shall retain documents prepared by the third party independent rebate analyst as described in Section VIII.F.5. herein. Copies of these documents shall be retained in the CEDMR. iii. Records of Continuing Disclosure – All continuing disclosure documents described in Section VIII B. shall be maintained by the Bond Compliance Officer with a copy stored in the CEDMR. iv. Contracts under which any note proceeds are spent (architectural, engineering, consulting, ROW, construction, etc.) – The Bond Compliance Officer shall obtain copies of these contracts and store in the CEDMR. v. Grant Agreements under which any note proceeds are spent – The Bond Compliance Officer shall obtain copies of these agreements and store in the CEDMR. vi. Record of Debt Service Payments – The Bond Compliance Officer should coordinate with the Office of the State Treasurer to obtain documentation of debt service payments made for each short term borrowing and store copies in the CEDMR. Documentation should include debt service payment schedules (if applicable), SAAS-generated documents, wire advices, etc.