Post-Issuance Tax Compliance for NH Municipal Bond Bank Borrowers
Post-Issuance Tax Compliance has become a common topic at seminars recently because the Internal Revenue Service has increased their examinations pertaining to post-issuance tax compliance of municipal borrowers. Municipal borrowers, including towns, cities, counties, schools and village districts sign documents promising to abide by the rules of the Internal Revenue Code. This is relative to all municipal borrowers whether they issue bonds in the market on their own or through the New Hampshire Municipal Bond Bank (Bond Bank).
Municipalities go through the process of issuing tax exempt bonds by following the rules in the state statutes and the Internal Revenue Code along with advice from bond counsels, financial advisors and the state Department of Revenue Administration. They are guided along the way through public hearings and annual meetings to finally voting on the bond issue. Throughout this process, the benefits are described to the residents and the estimated costs of the project and estimated costs for the bond are revealed. After the bond is authorized, the bond is issued, funds are received and the project becomes the main focus of the municipality. At this point, it is imperative to maintain records tracking the flow of funds, including expenditures and investment income, to be sure the project is meeting the regulations. The timeliness and purpose of the expenditures are the main concerns. If the spending timelines are not being met, arbitrage rebates may be required to the federal government and investment of bond proceeds may be limited to the bond yield. Generally, maintaining the tax-exempt purpose is not an issue in the early years of the project. The tax-exempt purpose must be maintained throughout the term of the bond. As the years go by, there may be change in personnel or people forget this requirement and decide to sell land or a building financed with tax-exempt bonds. If a municipality would like to change the purpose of the bond, bond counsel and the Bond Bank should be contacted as soon as possible. Sometimes there is a way to convert the project to a taxable purpose at a reasonable cost to the municipality.
The Bond Bank will be monitoring bonds annually with a questionnaire in an effort to assist municipalities with post-compliance issues and to maintain the Bond Bank's credit ratings. Considering the timelines involved with the expenditure of bond proceeds, during the planning phase of the project, will also make it easier to comply with the regulations. The Bond Bank has received a couple of examination requests from the IRS and plans to adopt post-issuance compliance procedures. We recommend municipalities work with their bond counsels to establish post-issuance compliance procedures. Currently, this is not a requirement to issue through the Bond Bank.
Sheila St. Germain is Executive Director for the NH Municipal Bond Bank. Contact Sheila at 800.393.6422.