POST-ISSUANCE COMPLIANCE

1. POST-ISSUANCE COMPLIANCE Brian Lanser Quarles & Brady LLP WGFOA Fall Conference September 16, 2010

2. POST-ISSUANCE COMPLIANCEThe issuance of bonds is not the end of the story. • While it has always been important, post-issuance compliance is a subject that has received greater attention in recent years due to: • More (and more complex) rules • Increased enforcement activity • Post-issuance compliance obligations arise under: • State Law • Federal Tax Law • Federal Securities Law

3. POST-ISSUANCE COMPLIANCE OBLIGATIONS UNDER WISCONSIN LAW • EXPENDITURE OF BOND PROCEEDS • Borrowed money may be used only for the purpose for which it was borrowed • Unspent Proceeds to be used for debt service

4. POST-ISSUANCE COMPLIANCE OBLIGATIONS UNDER WISCONSIN LAW • DEBT SERVICE FUNDS AND OTHER FUNDS AND ACCOUNTS • Statutes require creation and maintenance of a debt service fund or special redemption fund • Tax levies or revenues to be deposited in debt service fund as collected • "Flow of funds" in revenue bond issues must be followed • Investment and use of money in debt service fund is restricted

5. POST-ISSUANCE COMPLIANCE UNDER FEDERAL TAX LAW • TAX-EXEMPT ISSUES • Arbitrage Regulations – Restrictions on Investment of Proceeds (a) Temporary Periods • Federal tax regulations permit proceeds to be invested without restriction on yield during certain "temporary periods."

6. POST-ISSUANCE COMPLIANCE UNDER FEDERAL TAX LAW - New Money Issues - 3-year temporary period for new money issues, if it meets the following tests: • Time Test: Within six months of the closing, enter into substantial binding obligations requiring payment by the issuer of at least 5% of the proceeds of the bonds for project costs. • Due Diligence Test: Commence work on the project and proceed with due diligence to complete the project. • Expenditure Test: Spend all of the proceeds of the bonds allocable to the project within three years.

7. POST-ISSUANCE COMPLIANCE UNDER FEDERAL TAX LAW - Refundings – 90- day temporary period for current refundings (yield restriction for advance refundings) - Debt Service Reserve Funds – Reasonably required reserve funds qualify for investment without restrictions as to yield. (ii) After the end of the temporary period for new money issues, any unspent bond proceeds must be yield restricted.

8. POST-ISSUANCE COMPLIANCE UNDER FEDERAL TAX LAW (b) Rebate of Investment Earnings: Amounts earned on the borrowed money in excess of the yield on the bonds must be rebated to the IRS unless an exception applies. The potential rebate exceptions are: • Small Issuer: A municipality can qualify as a "small issuer" if it will issue less than $5,000,000 of tax-exempt obligations (excluding certain obligations which were issued for current refunding) in the current calendar year. • 6-Month: An issue will be exempt from the rebate requirements if all of the gross proceeds of the bonds allocated (including investment proceeds) will be spent within 6 months of the date of closing.

9. POST-ISSUANCE COMPLIANCE UNDER FEDERAL TAX LAW • 18-Month: The 18- month rebate exception applies if the gross proceeds of the bonds allocated to the project (including investment proceeds) will be spent within the following spending periods beginning on the date of closing: (i) 15% within 6 months (ii) 60% within 12 months, and (iii) 100% within 18 months

10. POST-ISSUANCE COMPLIANCE UNDER FEDERAL LAW • Two-Year (Construction Issues): If at least 75% of the proceeds of the bonds will be spent on construction expenditures (as opposed to acquisition of land or equipment), the two-year exception may apply.

11. POST-ISSUANCE COMPLIANCE UNDER FEDERAL TAX LAW • To qualify for this rebate exception, the available construction proceeds (as defined by Section 148 of the Code) of the bonds (including investment proceeds) must be spent within the following spending periods beginning on the date of closing: (i) 10% within 6 months (ii) 45% within 12 months (iii) 75% within 18 months, and (iv) 100% within 24 months

12. POST-ISSUANCE COMPLIANCE UNDER FEDERAL TAX LAW • Municipalities must track the expenditure of the bond proceeds (and the investments made before the proceeds are expended) to determine if the expenditure tests are satisfied for an issue. The expenditure tests are measured on an actual basis (not on expectations). • If no exception to the rebate requirements applies, the municipality must pay any applicable arbitrage rebate. Use of the services of a rebate specialist is recommended. • Note that rebate requirements are separate from, and in addition to, the temporary period rules.

13. POST-ISSUANCE COMPLIANCE UNDER FEDERAL TAX LAW • Private Activity Rules – Restrictions on the use of bond proceeds and bond-financed property: • Private business use of bond proceeds and bond-financed property must be avoided. • Examples: sale or lease of bond-financed property, management contracts, arrangements that give preferential use to particular businesses.

14. POST-ISSUANCE COMPLIANCE UNDER FEDERAL TAX LAW • Change of Use Rules – A change in the use of bond-financed property should be reviewed by bond counsel. Remedial action could be required to protect the tax-exempt status of the bonds.

15. POST-ISSUANCE COMPLIANCE UNDER FEDERAL TAX LAW • SPECIAL RULES APPLICABLE TO CERTAIN OBLIGATIONS • Although obligations such as Build America Bonds and Recovery Zone Economic Development Bonds are taxable, they are subject to many of the same requirements applicable to tax-exempt bonds and described above. In addition, there are particular rules that apply to these types of obligations:

16. POST-ISSUANCE COMPLIANCE UNDER FEDERAL TAX LAW • Build America Bonds (BABs) • All proceeds must be used for capital expenditures. • Form 8038-CP filings must be made to claim direct payments. A Form 8038-CP must be filed with the IRS at least 45 days but no more than 90 days before each interest payment date throughout the term of the BABs.

17. POST-ISSUANCE COMPLIANCE UNDER FEDERAL TAX LAW • Recovery Zone Economic Development Bonds • In addition to complying with the rules for BABS, RZEDB issuers must also comply with the federal Davis-Bacon requirements with respect to the projects financed by the RZEDBs.

18. POST-ISSUANCE COMPLIANCE UNDER FEDERAL SECURITIES LAW • CONTINUING DISCLOSURE (a) Annual Report: Provide continuing disclosure of audited financial statements and updates of certain sections of the Official Statement on an annual basis electronically to the Municipal Securities Rulemaking Board through the Electronic Municipal Market Access (EMMA) System. - Small Issuers (less than $10 million of obligations outstanding) must also provide annual reports but are only required to provide information that is "customarily prepared and publicly available."

19. POST-ISSUANCE COMPLIANCE UNDER FEDERAL SECURITIES LAW • Material Events: Give notice of any "material events," electronically to the Municipal Securities Rulemaking Board through the EMMA System. • Exceptions: (i) Issues of $1,000,000 or less are not subject to continuing disclosure requirements (ii) Certain primary offerings with denominations of $100,000 or more are exempt.

20. POLICIES AND PRACTICES FOR COMPLIANCE WITH POST-ISSUANCE OBLIGATIONS • Record Retention: Municipalities should keep all records in compliance with the rules and regulations applicable to the bonds pursuant to State law and, as applicable, the Internal Revenue Code including the following materials: (a) the transcript of proceedings (the official "record book"); (b) information showing how the proceeds of the bonds, including investment earnings on the bonds, are spent, which may include invoices and checks or other verifiable information;

21. POLICIES AND PRACTICES FOR COMPLIANCE WITH POST-ISSUANCE OBLIGATIONS (c) records regarding the use of the project, including any private business use; (d) records, certifications, and opinions relating to any change of use of the project, including remedial action certificates and opinions, and;

22. POLICIES AND PRACTICES FOR COMPLIANCE WITH POST-ISSUANCE OBLIGATIONS (e) documentation pertaining to any investment of proceeds of the bonds Examples: • bank or account statements • confirmations for the purchase and sale of securities • yield calculations for each class of investments • actual investment income received on the investment of proceeds • guaranteed investment contracts • rebate calculations

23. POLICIES AND PRACTICES FOR COMPLIANCE WITH POST-ISSUANCE OBLIGATIONS • Existing Post-Issuance Compliance Guidance • Bond transcript (especially Tax Certificate) • Post-Closing Compliance Checklist

24. POLICIES AND PRACTICES FOR COMPLIANCE WITH POST-ISSUANCE OBLIGATIONS • Formal Post-Issuance Compliance Policies • Municipalities may want to consider adopting written policies and procedures to monitor and document: (a) use of proceeds, (b) timing of expenditures, (c) investment of proceeds, (d) use of bond financed projects and property and (e) compliance with arbitrage yield restrictions and rebate requirements.

25. POLICIES AND PRACTICES FOR COMPLIANCE WITH POST-ISSUANCE OBLIGATIONS • As part of a formal post-issuance compliance policy, municipalities should: • Establish a bond compliance officer. Designate a particular person (or persons) to be responsible for post-issuance compliance. • Provide for a review of expenditures and final allocation of proceeds to expenditures upon completion of bond-financed projects. Reallocation rules provide an opportunity to cure problems.