Tax-Exempt Bond Financing Compliance Policy
This policy provides procedures and guidelines to ensure that all of the outstanding qualified 501(c)(3) bonds or other tax-exempt debt (the “Bonds”) of Loyola University Chicago (the “University”) remain in compliance with federal tax law requirements. Certain of the University’s capital projects have been or will be financed, refinanced or reimbursed through the issuance of Bonds (“Bond-Financed Property”). Tax-exempt status is intended to remain throughout the life of the Bonds, but this status can be lost if certain applicable federal laws and regulations are not followed. Other negative consequences to the University can result from failure to comply with restrictions relating to arbitrage, timing and use of Bond proceeds, and other aspects of a Bond issue. A list of the Bond-Financed Property can be obtained from the University’s Treasurer.
Remedial actions under the Internal Revenue Code of 1986, as amended, including the regulations, rulings and other guidance proposed thereunder (the “Code”) are sometimes available in the event of a failure to comply with these requirements. However, such remedies for non-compliance may not cover all violations of the requirements of the Code and other applicable requirements governing tax-exempt bonds benefiting the University. Certain remedial provisions also require that the non-compliance be identified and remedial action taken within a limited time after the violation. In instances where applicable remedial provisions are not available under the Code the issuer of the University’s Bonds, upon being directed by the University, may request a voluntary closing agreement to address the violation under the Internal Revenue Service’s Tax Exempt Bonds Voluntary Closing Agreement Program. This policy accordingly is also intended to provide written procedures to ensure timely identification of violations of federal tax requirements and timely correction of any identified violation through use of the voluntary closing agreement program if self-remediation is not available under the Code. However, this policy does not address violations other than those related to federal tax requirements (e.g., sectarian use restrictions).
2. PROCEDURES AND GUIDELINES
2.1.1 The Treasurer is responsible for monitoring the compliance of the Bonds with all federal tax law requirements, will contribute to the safeguarding of the federal tax status of the Bonds, and will conduct reviews at least annually of the elements set forth in this policy for each issue of Bonds and will annually report to the Finance Committee of the Board of Trustees regarding compliance with this policy.
2.1.2 In general, records pertaining specifically to tax–exempt Bonds will be retained over a period not less than the life of the Bonds plus 3 years. Specific records to be retained are addressed below in Section 2.4 of this policy and Exhibit 1 attached.
2.1.3 Education, training and information regarding tax-exempt Bonds will be obtained by the Senior Vice President for Finance and CFO, the Treasurer, the Controller and the Director of Strategic Financing from publications by a nationally recognized municipal bond attorney or firm of municipal bond attorneys (“Bond Counsel”), Internal Revenue Service publications and seminars and other means as deemed appropriate, including consultation with the Office of the General Counsel of the University, external counsel and/or Bond Counsel at the time each Bond issue is delivered to discuss applicable provisions of tax exemption agreements and project certificates that apply to bond financed or refinanced assets.
2.1.4 Filing of Form 8038 shall be verified by the Treasurer or the Director of Strategic Financing by obtaining a copy of the filed 8038 from Bond Counsel with proof of filing.
2.1.5 The Treasurer, or his or her designee, will consult with the University’s tax advisors on an annual basis, or more frequently if necessary (e.g., based on results of the arbitrage calculations described in 2.3.1 below), to confirm reporting of required information regarding the Bonds on the University’s annual Form 990 and other required returns and filings. Copies of all such final returns are provided to the Senior Vice President for Finance and CFO, the Treasurer and the Director of Strategic Financing prior to filing. The Treasurer or the Director of Strategic Financing will monitor timely filing of such returns and proper and accurate inclusion of Bond related information required by Form 990 and Schedule K.
2.2 Bond Proceeds and Financed Assets: Investment and Private Use.
2.2.1 Bond proceeds will be invested and used as set forth in the Tax Exemption Agreement (or similar document) and Certificate Regarding the Project and the Expenditure of Funds (the “Project Certificate”) (or similar document) maintained in each respective Bond transcript.
2.2.2 The Project Certificate will contain a schedule establishing each project’s expected costs and economic life and will be maintained in each respective Bond transcript. In the event a project is amended and certain elements are changed from those originally set forth in the project schedule described in this Section 2.2.2, the University will prepare upon completion of each project, or earlier if advised by Bond Counsel, an amendment to the schedule showing the final project costs (including those funded from interest earnings), the related economic life of the project components and such other applicable changes to the project as a whole.
2.2.3 Minimizing any private use associated with Bond-Financed Property, and confirming that any private use falls within applicable safe harbors, is a priority of the University. Examples of private business use include (a) unrelated trade or business use (regardless of whether taxable income is generated) and (b) private use by parties other than the University and its students of the Bond-Financed Property, including particularly by independent contractors and vendors serving the University. Leasing of any portion of a Bond-Financed Property generally creates private use.
2.2.4 Generally, no more than 5% of the proceeds of tax-exempt Bonds may be used for private business use of the Bond-Financed Property. For purposes of the 5% limit on private business use, Bond issuance costs financed with Bond proceeds (generally approximately 2%) are included as private business use and reduce the amount of private use that can be conducted in Bond-Financed Property.
2.2.5 Accordingly, contracts and agreements relating to use of Bond-Financed Property (including, without limitation, management contracts, service contracts, joint ventures, operating agreements, leases and research contracts) will be required by the University’s Contract Policy to be reviewed prior to execution by the Office of the General Counsel for compliance with applicable federal requirements.
2.3. Arbitrage Compliance and Yield Restrictions.
2.3.1 The University’s arbitrage rebate consultant will, with information supplied by the University and the Bond Trustee and the letter of Bond Counsel attached as an exhibit to the Tax Exemption Agreement, perform at least every five years on the required anniversary date the required rebate computations to ensure compliance with the Code as outlined in the Tax Exemption Agreement. As required by Section 2.4 of this policy, a copy of each arbitrage rebate computation and report will be retained by the University for a period not less than the life of the Bonds plus three (3) years.
2.3.2 The University will not formally or informally create or set-aside funds reasonably expected to be used to pay debt service on Bonds without determining in advance, by consulting with Bond Counsel, whether such funds must be invested at restricted yield, as required by the applicable Bond document.
2.4. Recordkeeping Requirement.
2.4.1 Records Retention. The University will maintain records relating to the Bonds and the use and expenditure of the proceeds thereof, as described in Exhibit 1 attached.
2.4.2 Information regarding investment of the gross proceeds of the Bonds will be retained in the form of all Trustee statements and related materials described in Exhibit 1.
3. REMEDIATION AND VCAP.
In the event that the foregoing procedures reveal a violation or potential violation of any federal tax law requirements, the Office of the General Counsel of the University should be immediately notified in writing and the Office of the General Counsel and, if deemed appropriate, with the advice of expert counsel in the area of tax-exempt bonds, including, without limitation, Bond Counsel, shall determine if a violation has occurred. If it is determined by the Office of the General Counsel that a violation has occurred, then (1) the Senior Vice President for Finance shall inform the Chair of the Finance Committee and/or the Chair of the Audit Committee and (2) appropriate remedies permitted under the Code shall be pursued, with the assistance of Bond Counsel if required. If action taken under the Code and remedies cannot adequately cure all violations of the requirements of the Code, the Office of the General Counsel shall consult with Bond Counsel and the applicable issuer of the subject Bonds to timely request, where appropriate, a voluntary closing agreement to address the violation under the Internal Revenue Service’s Tax Exempt Bonds Voluntary Closing Agreement Program or to otherwise pursue resolution of the matter.
I. Records Retention in General.
The University will retain all records relating to the Bonds and the use and expenditure of the proceeds thereof, as provided in this Exhibit 1.
II. Records to be Retained.
The types of records to be retained include, but are not limited to, the following:
A. Transaction Documents. All legal and closing documents relating to the Bonds, including indentures, loan agreements, trust agreements, resolutions, public notices, tax certificates, opinions of counsel (either at closing or subsequently), pricing book or final underwriters’ cash flows, any and all amendments to the foregoing and any and all documents included in the transcript with respect to the Bonds, or amending or subsequently supplementing transcript documents. Transcript items will be preserved by maintaining an electronic (e.g., CD) and/or paper copy of each Bond transcript.
B. Expenditure of Gross Proceeds.
- Documentation evidencing the expenditure of sale and investment proceeds of the Bonds and including any declarations of official intent to reimburse expenditures, projected and actual draw schedules, requisitions, records of compliance with “spend down” requirements, and relevant funds flow memoranda.
- Documentation evidencing the specific assets financed and refinanced by proceeds of the Bonds including any feasibility studies and including an accounting method for identifying and tracking those assets. See also Section F, below “Use of Bond Financed Assets; Private Security or Payments.”
- Documentation setting forth all funds and accounts relating to the Bonds, including debt service funds, reserve funds, sinking funds and pledged funds, and any related agreements.
- Documentation pertaining to the investment of the gross proceeds of the Bonds, including, where applicable, the offering of securities, state and local government series treasury subscriptions, yield calculations for each class of investments, actual investment income received from the investment of proceeds (including gain or loss on sale of investments), guaranteed investment contracts (“GIC”) and evidence of compliance with bidding requirements for any GIC or yield restricted escrow, rebate calculations, credit enhancement, swap transactions, verification reports, float forward agreements, and brokerage and similar fees.
C. Disposition of Bond Financed Property. Documentation, if applicable, evidencing the sale or other disposition of the financed property including any records of remediation action and records of any voluntary compliance agreement plan or other settlements with the Internal Revenue Service.
D. Economic Life Data. Documentation evidencing the economic life of the assets financed and refinanced with proceeds of the Bonds including any substituted projects.
E. Allocation. Documentation evidencing any allocations with respect to the gross proceeds of the Bonds and the accounting method chosen including LIFO, FIFO, direct tracing, or “bond-proceeds spent-first,” including documentation of all elections or allocations.
F. Use of Bond Financed Assets; Private Security or Payments.
- Documentation evidencing the location, use and ownership of the property financed or refinanced with proceeds of the Bonds, including leases, management contracts, service agreements and other arrangements for the use and ownership of such property; and
- Documentation evidencing sources of payment or security for the Bonds, including liquidity covenants and negative covenants, mortgages and any related agreements.
G. Use of Bond Financed Assets; Private Use; Sale or Other Disposition; Remediation
- Documentation evidencing the expenditure of sale and investment proceeds of the Bonds and including any declarations of official intent to reimburse expenditures, projected and actual draw schedules, requisitions, records of compliance with “spend down” requirements, and any funds flow memoranda.
- Documentation evidencing the specific assets financed or refinanced by proceeds of the Bonds including any feasibility studies and including an accounting method for identifying and tracking those assets. See also Section F, above, “Use of Bond Financed Assets; Private Security or Payments.”
- Documentation setting forth all funds and accounts relating to the Bonds, including debt service funds, reserve funds, sinking funds and pledged funds, and any related agreements and all post-issuance opinions of Bond Counsel related to the Bonds.
- (1) Records of private use of Bond-Financed Property, including sale, lease, non-qualified management or other service contract and non-qualified research contract, and (2) any special legal entitlement, any unrelated business activity and any activity that jeopardizes the 501(c)(3) status of the University.
- Records of all remedial actions and voluntary agreement compliance program or other closing arrangements with the Internal Revenue Service.
H. Tax Returns and Related Information. Internal Revenue Service Forms 8038, 8038-T and 8038-R, as applicable and, if relevant, Forms 8328 and 8703, and proof of filing, and information in regard to the pricing of the Bonds, yield calculations, weighted average maturity calculations, other information included in the 8038 statistics report, verification reports and arbitrage rebate reports.
I. Derivatives Contracts. All derivatives contracts, including swap confirmations and copies of swap identification forms (including rate lock contracts), forward contracts, and forward float contracts.
J. Other Contracts Affecting Bond Yield. With respect to bond yield, all documents related to qualified guarantees (including insurance policies, guarantees, letters of credit, lines of credit and standby bond purchase agreements), surety bonds, put options and call options with respect to the Bonds, and forms of credit enhancement provided by the University, related or unrelated parties, even if not paid from Bond proceeds.
K. Arbitrage. Documentation evidencing computation of yield, allocation of bond proceeds, compliance with “temporary period” expectations, fair market value purchase (including “bidding” under safe harbor), counsel’s approval of post-issuance credit enhancement or hedging transactions (e.g., bond insurance, letter of credit, interest rate swap, interest rate cap and other similar hedging transactions) and identifying “qualified hedge” contracts.
L. Investment of Bond Proceeds. Documentation pertaining to the investment of the gross proceeds of the Bonds, including the offering of securities, subscriptions for United States Treasury Series, State and Local Government Series, if any, yield calculations for each class of investments, actual investment income received from the investment of proceeds (including gain or loss on sale of investments), guaranteed investment contracts (“GIC”) and evidence of compliance with bidding requirements for any GIC or yield restricted escrow, rebate calculations, credit enhancement, swap transactions, verification reports, float forward agreements, and brokerage and similar fees.
M. Bond-specific Documentation.
- Non-Hospital Bonds. Documentation of all outstanding non-hospital Bonds allocated to the University which are subject to the $150 million cap, if any.
- Capital Cost 501(c)(3) Bonds. Documentation evidencing compliance with the expenditure of 95% of “net proceeds” on capital costs.
- Elections and Allocations. Documentation, if applicable, evidencing (a) elections made with respect to the Bonds including multi-purpose allocations, election to treat a portion as a construction issue exempt from rebate, election to apply transition (grandfather) rules or to apply proposed or temporary regulations or to elect into regulations which are not otherwise applicable to the Bonds, (b) agreements and assignments between governmental units that affect volume cap allocations under the Code, and (c) any election not to take depreciation on leased property that must be treated as owned by a government unit.
N. Safe Harbor. Documentation evidencing compliance with the safe harbor bidding procedure for investment contracts and defeasance escrows.
O. Nonpurpose Investments. With respect to nonpurpose investments deposited into or held in any fund or account in connection with the Bonds, the following information will be recorded and retained:
- Purchase date;
- Purchase price;
- Information establishing that the purchase price is the fair market value as of the acquisition date (e.g., the published quoted bid by a dealer in such an investment on the date of purchase);
- Any accrued interest paid;
- Face amount;
- Coupon rate;
- Schedule of interest payments;
- Disposition price;
- Any accrued interest received; and
- Disposition date.
P. Rebate Payments. Documentation evidencing Rebate Payments (except as otherwise provided in the Tax Exemption Agreement, first installment due on the fifth anniversary of the Bonds plus 60 days, with additional installments every 5 years and a final installment 60 days after retirement (or redemption)) of the Bonds.
III. Records Retention Format and Periods.
A. Record Format. All records must be kept either in hard copy or electronic format allowing for complete access during the applicable period (generally ending 3 years after all of the Bonds are redeemed or paid at final maturity, as applicable). Electronic records shall comply with the requirements of the Code. Electronic record retention must also retain the machine(s) or other retrieval system that indexes, stores, preserves, retrieves and reproduces all transferred information, and provides adequate cross-referencing with the University’s books and records.
B. Required Retention Periods. The University will use its best efforts to retain records until 3 years following the final redemption or final maturity date of the Bonds, as applicable.