CR 92-119 Declare Intent Bond Proceeds
May 26, 1992
council Report #92-119
DECLARE INTENT FOR USE OF BOND PROCEEDS
Proposed Action.
Staff recommends adoption of the following motion:
Resolution #92-43. "Declaring the Official Intent of
Hopkins to Reimburse certain Expenditures From the
Bonds to be Issued by the city". be adopted.
Move that
the City of
Proceeds of
overview.
u. S. Treasury Regulations 1.103-18 require adoption by the City
council of a resolution declaring intent for the use of bond
proceeds on all bonds issued after March 2, 1992.
The Regulations require certain limits, deadlines, exceptions, and
actions or bonds issued could become "arbitrage bonds", which means
the bonds would lose their tax-exempt status.
primary Issues to Consider.
o It is in the city's interest that special assessment bonds
remain tax-exempt.
o This is a preliminary action and does not authorize sale of
bonds.
o The City levy will increase $36,600/year over the next 15
years for the City's share of street reconstruction.
o Bonds are necessary to fund projects approved and in the 1992-
1996 Capital Improvement Plan.
SUD~orting Information.
o Summary of Reimbursement Regulations U.S. Tres. Reg. 1.103-18
o Bond issue plan use
o Levy comparison on debt
o Resolution 92-43
~
HOLMES & GRAVEN
2/18/92
SUMMARY OF
REIMBURSEMENT REGULATIONS
TRES. REG. I 1.103-18
I. The Reimbursement Rules.
A. General. The reimbursement rules generally apply to
governmental bonds, 501(c)(3) bonds, and private activity bonds used to
finance a governmentally-owned facility. Beginning with such bonds issued
after March 2, 1992, if bond proe,aeds are used to reimburse an expenditure
made before the bonds were issued, the bond proceeds will not be considered
"spent" unless three basic requirements are met:
1. Declaration of Intent.
(a) General Rule. On or before the date an expenditure
is paid, the issuer or a person or entity authorized to act on its
behalf must declare a reasonable expectation to reimburse the
expenditure with proceeds of a borrowing.
(b) Content of Declaration of Intent. The declaration of-
official intent must:
(i) state that the issuer reasonably expects to
reimburse the expenditure with proceeds of debt to be
incurred by the issuer;
(ii) specifically state that it is a declaration of
official intent under Tres. Reg. Section 1.103-18;
(ill) contain a general functional description of the
project for which the expenditure to be reimbursed is
made, and state the maximum principal amount of debt to
be issued for such purposes. The term "project" means a
property, project or program. The description of the
project is sufficient if it identifies the fund or account
from which the expenditure is paid, and describes the
general functional purpose of the fund or account. Some .. '
examples of sufficient project descriptions are: "Highway (J:J,1)
capital improvement program;" "school building
renovation;" "parks and recreation fund--recreational
facility capital improvement program. "
Reasonable deviations between the project as described and as
actually reimbursed are acceptable as long as the actual. project
is reasonably related in function to the declared project. For
example, an expenditure for hospital equipment is a reasonable
deviation from a project described as "hospital building
improvements." By contrast, an expenditure for rehabilitation
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of a city office building is not a reasonable deviation from a.
. project described as "highway improvements. "
( c) Reasonableness of the declaration. The declaration
of intent to reimburse is reasonable if the following conditions are
met:
(i) Budgetary and Financial Circumstances. The
expectation to reimburse must be consistent with the
budgetary and financial circumstances of the issuer at the
time of the declaration. Such consistency is demonstrated
if no funds from sources other than the reimbursement
bonds are (or are reasonably expected to be) reserved or
allocated on "t long-term basis for the expenditure.
Sources considered include the issuer and all members of
the same "controlled grmlp" (generally, entities whose
powers are significantly controlled by another entity or
group of entities).
(ii) Reasonable Expectation. The expectation to
reimburse must be reasonable based on all the relevant
facts and circumstances at the time of the declaration.
Factors include: the issuer's purposes for declaring
official intent, its history of actual reimbursement for
expenditures for which official intent was declared, and
its actions taken toward reimbursement of the
expenditures. "Blanket" or excessive declarations will not
be reasonable. A pattern of failing to reimburse in the past
is one factor indicating that the intent is unreasonable,
though an exception is made for extraordinary
circumstances that were unforeseen and beyond the
issuer's control.
(d) Public Availability. The declaration of intent must
be reasonably available for public inspection within a reasonable
period of time after it is made. This requirement if met if the
declaration is available at the issuer's main administrative office
or customary location of records at least 30 days after the date
of the declaration and continuing until the date the bonds are
issued. The requirement will also be met simply by complying
with state or local law governing the public availability of records
of official acts.
(e) Exceptions.
(i) Emergency expenditures. If an expenditure
was not reasonably foreseeable at least 30 days before its
payment, the intent to reimburse may be declared up to 45
days after the date of the payment.
(ii) Preliminary expenditures. No declaration of
official intent is required for preliminary expenditures in
an amount up to 20 percent of the issue price of the
relevant bonds. "Preliminary expenditures" include
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architectural, engineering, surveying, soil testing, bond
issuance, and similar costs that are incurred before the
project commences. Land acquisition, site preparation and
similar costs incident to construction are not preliminary
expenditures.
2. Reimbursement Period.
(a) General Rule. The allocation of bond proceeds to
the reimbursement must occur on or after the date of the
expenditure and no later than 1 year after the expenditure was
paid or 1 year after the date the property is placed in service,
whichever is later.
(b) Method of Allocation. An allocation of bond proceeds
to reimburse a prior expenditure:
(i) must be evidenced by an entry on the books
or records of the issuer maintained with respect to the
bonds;
(ii) must identify either an actual prior
expenditure to be reimbursed, or, in the case of a fund or
account, the fund or account from which the expenditure
was paid; and
(ill) must be effective to relieve the allocated
proceeds from any restrictions under the relevant legal
documents and applicable state law that apply to unspent
bond proceeds.
(c) Abandonment Exception. If a project is abandoned
before completion, the time limit for allocation of bond proceeds
to reimburse project expenditures is the later of:
(i) 1 year after the date the project is
abandoned; or
(ii) 2 years after the last payment of an
expenditure for the abandoned project that is at least
$25,000 or 5 percent of the project cost, whichever is less.
3. Capital expenditure requirement. The expenditure to be
reimbursed must be a capital expenditure, which means any cost of a
type that is properly chargeable to the capital account under general
federal income tax principles. For the purposes of this regulation,
eosts of issuance of the reimbursement bond are treated as capital
E~xpenditures .
B. Anti-abuse Rules.
1. General Rule. A reimbursement allocation is not treated as
an expenditure of bond proceeds if any action or inaction of the issuer
3
is an artifice or device to avoid arbitrage yield restrictions or arbitrage
rebate requirements.
2. Tax Exempt Refundin?; of Taxable Bonds. In a tax exempt
refunding of a taxable bond, if proceeds of the taxable bond were
allocated to reimburse a previously paid expenditure, such proceeds
are not deemed to have been spent unless the allocation complied with
federal tax laws and reimbursement allocations applicable to tax-exempt
bonds as of the date of the taxable issue. If the taxable bond proceeds
are deemed unspent, such proceeds are subject to "transfer" to the
tax-exempt refunding bond issue.
3. Other Reimbursement Limitations. An issuer cannot treat
proceeds as spent if the proceeds are used directly or indirectly (i)
within 1 year of the allocation to refund a governmental obligation; ell)
within 1 year of the allocation to create or increase the balance in a
sinking fund or replace funds used for such purposes; (ill) within 1
year of the allocation to create or increase the balance in a reserve or
replacement fund or replace funds used for such purposes; or (iv) to
reimburse any person or entity other than the issuer for any
expenditure that was originally paid with proceeds of an obligation of
the issuer (excluding an inter-fund borrowing by the issuer).
An exception is made where proceeds are placed in a bona fide debt
service fund or are used to pay debt service in the next one-year-
period on any obligation of the issuer other than the reimbursement
bonds, or where the proceeds of the original financing were not
reasonably expected to be used as of the date of the original financing
to finance the expenditure.
C. Application to Private Activity Bonds. In addition to official
action requirements, all private activity bonds are subject to the anti-abuse
rules described above, except as follows: exempt facility bonds and qualified
small issue bonds are subject only to the general anti-abuse rule described in
B .1. above and the reimbursement limitations described in B. 3. (ll) and (ill)
above. As noted in paragraph A., governmentally owned exempt facility
bonds and 501(c)(3) bonds are subject to all the reimbursement rules.
D. Effective Date and Transition Rule.
1. Effective Date. The reimbursement and anti-abuse rules
apply to bonds issued after March 2, 1992.
2. Transition Rule. Bonds may be issued after March 2, 1992
to reimburse expenditures made after September 8, 1989 and before
March 2, 1992 without a prior declaration of official intent, if there is
objective evidence that at the time the expenditure was paid, the issuer
reasonably expected to reimburse the expenditure with proceeds of a
borrowing. The reasonaQleness of the' expectation is determined as
described in A.l( c), above.
II. Why Re?;Ulations Were Issued. The reimbursement regulations were
issued in response to a perceived abuse. The IRS was concerned that a city might
decide to issue bonds to reimburse itself for old expenditures, such as a two-year-
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old library financed with general funds, and then invest bond proceeds without
regard to rebate or yield restriction requirements until spent on a new project.
These bonds began to be referred to as "pyramid bonds," on the theory that an
issuer could rely on this method to reimburse itself for expenditures as far back as
construction of the pyramids. The IRS has taken the position that under certain
circumstancEls, the reimbursement is not effective and the bond proceeds are in
reality being' issued to finance the new expenditures and should be subject to
applicable yield restriction and rebate requirements. The new regulations are
intended to identify under what circumstances bond proceeds used for
reimbursement will be considered "spent" for yield restriction and rebate purposes.
III. The Consequences for Failure to Comply. If an issuer does not comply
with the reimbursement rules, the immediate result is that bond proceeds are not
considered "spent." The bond proceeds, wherever they are, will be deemed to be
subject to whatever yield restrictions and rebate requirements are applicable.
Assume, for example, that the issuer allocates $1,000,000 of bond proceeds to an
expenditure made the prior year and no declaration of official intent was made.
A. Rebate. If the issuer fell within the $5,000,000 small issuer
rebate exemption, rebate is not a problem. If the issuer was attempting to
meet the six-month or two-year spenddown test, however, the issuer will be
treated as if it hasn't spent the $1,000,000 of proceeds. This may cause it to
fail the spenddown requirement. If the issue is subject to rebate, it will owe
rebate on the investment of the $1,000,000 even if for its accounting purposes
the issuer considers the money spent.
I
B. Yield Restriction. Assume the same $1,000,000 reimbursement
allocation made without a valid official intent. Normally, the issuer has a
three-year temporary period for the expenditure of proceeds to be used for
construction or acquisition of a project based on an expectation that all
amounts will be spent within that three-year period, arid any amounts
remaining after three years may be subject to yield restriction. If amounts
subject to yield restriction are invested at a yield in excess of the yield on the
bonds, the bonds become "arbitrage bonds" and lose their tax-exempt status.
FurthHr, if the reimbursement allocation is not spent when made, and in fact
is not spent within three years, the issuer may not be entitled to a temporary
period at all.
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1992 Special Assessment Bond Issue
Mainstreet - utility Services
Special Assessment 5 - 11th
11 - 20th
$ 506,312
220,000
Knollwood 1992 ST-5
Special Assessment
City's 30% share of streets
380,293
177,628
Alleys 1992 & 1993 ST-3
Special Assessment
96,000
Street Reconstruction 1992-1993 ST-1
Special Assessment
City's 30% share of streets
Prepayments on Specials
Issuance Costs
Capitalize Interest
233,000
130.000
1,743,233
(40,233)
38,300
158.700
Bond Issue
Interest for 15 years
$1,900,000
1.000.000
$2,900,000
Levy for City's share + 5% = 36,600/year for 15 years
Levy Comparisons For Debt Including 1992 Issue
Levy Year Amount
1991 $ 863,700
1992 888,400
1993 876,100
1994 863,800
1995 851,300
1996 838,700
1997 820,700
1998 808,100
CITY OF HOPKINS
Hennepin County, Minnesota
RESOLUTION NO. 92-43
DECLARING THE OFFICIAL INTENT OF THE CITY OF
HOPKINS TO REIMBURSE CERTAIN EXPENDITURES FROM
THE PROCEEDS OF BONDS TO BE ISSUED BY THE CITY
WHEREAS, the Internal Revenue Service has issued Tres Reg. # 1.103-18
providing that proceeds of tax-exempt bonds used to reimburse prior expenditures
will not be deemed spent unless certain requirements are met; and
WHEREAS, the City expects to incur certain expenditures which may be financed
temporarily from sources other than bonds, and reimbursed from the proceeds of a
bond; and
WHEREAS, the reimbursement rules apply to bonds issued after March 2, 1992;
NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF HOPKINS (THE
"CITY") AS FOLLOWS:
1. The City reasonably intends to make expenditures for the project described
in Exhibit A (the "Project"), and reasonably intends to reimburse itself for such
expenditures from the proceeds of debt to be issued by the City in the maximum
principal amount described in Exhibit A.
2. The City Manager is authorized to designate appropriate additions to
Exhibit A in circumstances where time is of the essence, and any such designation
shall be reported to the Council, at the earliest practicable date and shall be filed
with the official books and records of the City as provided in section 3.
3. This resolution shall be maintained as part of the books and records of
the City at the main administrative office of the City, and shall be continuously
available during normal business hours of the City on every business day of the
period beginning not more than 30 days after adoption of this resolution and ending
on the last date of issue of any bonds issued to reimburse expenditures described in
Exhibit A.
4. This resolution is an expression of the reasonable expectations of the
City based on the facts and circumstances known to the City as of the date hereof.
The anticipated reimbursements set forth at Exhibit A are consistent with the City's
budgetary and financial circumstances. No sources other than proceeds of bonds to
be issued by the City are, or are reasonably expected to be, reserved, allocated on
a long-term basis, or otherwise set aside pursuant to the City's budget or financial
policies to pay such Project expenditures. The City has not adopted any allocation,
budget, or restriction of moneys or adoption of a requirement or policy to reimburse
a fund, the primary purpose of which is to prevent moneys from being available to
pay an expenditure the City intends to reimburse with proceeds of a borrowing.
5. This resolution is intended to constitute a declaration of official intent
for purposes of Tres. Reg. # 1.103-18 and any successor law, regulation, or ruling.
6. The allocation of proceeds of the bonds to be issued to any Project
expenditures described in Exhibit A will be made not later than the later of one
year after the expenditure was paid or one year after the property was placed in
service.
7. The Project expenditures described in Exhibit A are capital expenditures
as def ined in Tres. Reg. # 1.150-1 (h), including costs of issuance of the bonds to
be issued in order to reimburse the Project expenditures.
8. Proceeds of the bonds issued to reimburse the Project expenditures
described in Exhibit A will be deemed spent only when (1) an allocation ent:ry is
made on the books or records of the City with respect to the bonds; (2) the entry
identifies an actual expenditure to be reimbursed, or where the Project is desc=ribed
as a fund or account, the fund or account from which the expenditure was paid; and
(3) the allocation is effective to relieve the bond proceeds from restricti.on on
unspent proceeds under applicable documents and state laws.
9. No entity of entities possess simultaneously two or more of the following
discretionary and non-ministerial powers with respect to the City: power to (1)
remove without cause a controlling portion of the city Council; (2) select, apl?rove,
or disapprove a controlling portion of the City Council; (3) determine the City's
budget or require the use of the City's funds or assets for the other en1:ity's
purpose; or (4) approve, disapprove, or prevent the issuance of debt obligations of
the City.
10. None of the proceeds of the bonds issued to reimburse the City for the
Project expenditures described in Exhibit A will be used within one year of the
allocation (i) to refund another governmental obligation or ( ii) to create or
increase the balance in a sinking fund or replace funds used for such purpone, or
(iii) to create or increase the balance in a reserve or replacement fund or rl3place
funds used for such purposes; or will be used at any time to reimburse any perl30n or
entity (other than the City) for expenditures originally paid with the proceedl3 of a
City obligation (excluding a City inter-fund borrowing); unless (i) such amoun1ts are
deposited in a bona fide debt service fund or are used to pay debt service in the
next one-year period on any City obligation other than the reimbursement bond, or
(ii) the original issue was not reasonably expected to be used to finance the
expenditure.
11. No action or inaction by the City with respect to the allocation of bond
proceeds to reimbursement of Project exp~nditures will be an artifice or device to
avoid, in whole or in part, arbitrage yield restrictions or arbitrage rebate
requirements.
12.
extent not
ruling.
The procedures described in this resolution shall cease to apply 1:0 the
required by Tres. Reg. # 1.103-18 or any successor law, regulation, or
Approved by the City Council of the City of Hopkins this 2nd day of June, 1992.
By
Nelson W. Berg, Mayor
ATTEST:
James A. Genellie, City Clerk
Date of
Declaration
6-2-92
EXHIBIT A
TO OFFICIAL INTENT RESOLUTION
ADOPTED JUNE 2, 1992
Description of Project
Mainstreet Utility Service
Assessments
Knollwood street Reconstruction
Assessments ,
City's 30% share
Alleys 1992 and 1993
Assessment
street Reconstruction 1993-94
Assessment
City's 30% share
Maximum principal
Amount of Debt
to Reimburse
proiect Costs
$ 726,300
380,300
177,600
96,000
233,000
130,000