the arbitrage advantage in tax-exempt financing hfma region 11 healthcare symposium anne pelej, vice...
TRANSCRIPT
![Page 1: The Arbitrage Advantage in Tax-Exempt Financing HFMA Region 11 Healthcare Symposium Anne Pelej, Vice President Randal Webb, Principal Consultant](https://reader035.vdocuments.us/reader035/viewer/2022062409/56649e2c5503460f94b1b7ec/html5/thumbnails/1.jpg)
The Arbitrage Advantage in Tax-Exempt Financing
HFMA Region 11 Healthcare SymposiumAnne Pelej, Vice President
Randal Webb, Principal Consultant
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| 2Continuing Disclosure Issues – Material Events| 2| 2
What is Arbitrage?
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| 3Continuing Disclosure Issues – Material Events| 3| 3
Tax-Exempt Bonds
Arbitrage
Taxable Securities
Investment Opportunity
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| 4Continuing Disclosure Issues – Material Events| 4| 4
Two Sets of Rules
Compares Yield on Investments
to Interest Paid
to Bondholders
Limits Investment
Yield to
Bond Yield
Arbitrage Rebate Yield Restriction
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| 5Continuing Disclosure Issues – Material Events| 5| 5
Multiple Leverage Points
Temporary Periods 13 months 3 years
Reserve Funds Escrows Funds
Yield RestrictionArbitrage Rebate
Small issuer Spending Exceptions
6 months 18 months 24 months
Bona fide debt service
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| 6Continuing Disclosure Issues – Material Events| 6| 6
Graphic Illustration of Arbitrage
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
Investment Yield Bond Yield
PositiveArbitrage Bond Yield
NegativeArbitrage
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| 7Continuing Disclosure Issues – Material Events| 7| 7
Understand the Financing
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| 8Continuing Disclosure Issues – Material Events| 8| 8
Bond Structure
Is this a tax-exempt bond? Are the bonds fixed or variable rate? Is the bond hedged and/or insured? What is the purpose of the issue? Is the issue an advance or current
refunding issue? Is there a Construction Fund? Reserve
Fund?
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| 9Continuing Disclosure Issues – Material Events| 9| 9
Transaction Activity
Have the bonds been refunded? Were bond proceeds remaining at the time
of the refunding? Are monies remaining in a construction fund
after 3 years? Are any funds commingled? Is there a parity reserve? Are you trying to meet a spending
exception?
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| 10Continuing Disclosure Issues – Material Events| 10| 10
Compliance Status
Have you passed a required payment date?
Have you had a prior computation? Were there any special elections made? Is the bond hedged or insured? Do you have all required bond and
transactional documentation?
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| 11Continuing Disclosure Issues – Material Events| 11| 11
Managing Arbitrage Rebate Compliance
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| 12
“It’s funny how two intelligent people can have such opposite interpretations of the tax code!”
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| 13Continuing Disclosure Issues – Material Events| 13| 13
Substance vs. Form
Economic consequences overrule verbal characterization
Rules focus on- Timing- Purpose- Security
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| 14Continuing Disclosure Issues – Material Events| 14| 14
Plan for the Future
Promote due diligence Educate elected officials Prepare for staff turnover Document….document…..docume
nt… Remember the good news
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| 15Continuing Disclosure Issues – Material Events| 15| 15
Customize the Flow of Information
Monitor spending Track escrowed investments Be aware of special elections Review investment strategies Strategically place
“gatekeepers”
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| 16Continuing Disclosure Issues – Material Events| 16| 16
Achieve Optimum Payback
Leverage investments Meet exceptions Earn arbitrage Retire bonds early Be prepared for an audit
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| 17Continuing Disclosure Issues – Material Events| 17| 17
Gaining an Edge
Rebate PaymentFully LeveragedInvestments
Under LeveragedInvestments
Lost Opportunity
Bond Yield
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| 18Continuing Disclosure Issues – Material Events| 18| 18
Consequences of Noncompliance
Stiff financial penalties Loss of tax-exempt status
Open season for IRS audits
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| 19Continuing Disclosure Issues – Material Events| 19| 19
Arbitrage Rebate Reporting &
Payment
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| 20Continuing Disclosure Issues – Material Events| 20| 20
Required Documents
Official Statement Tax Certificate
8038G
Trust Indenture Escrow Verification Report (Refundings
Only) Cash flow transactions/ Asset
Statements SWAP Agreement
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| 21Continuing Disclosure Issues – Material Events| 21| 21
Fund Analysis
Tracking proceed investment by fund provides easy audit.
Cash flow analysis helps to meet expenditure tests.
Fund/Account: Costs of Issuance Exhibit C
Public Financing Authority1997 Lease Revenue Bonds
Delivery Date 09-Oct-97Computation Date 01-Oct-02Arbitrage Yield 4.53195524%
Investment Yield 5.06061283%Total Earnings 582.63$
Date Receipts Payments Earnings Balance Future Value
09-Oct-97 69,242.82$ 0.00$ 0.00$ 69,242.82$ (86,547.39)$ 09-Oct-97 (3,780.00) 65,462.82 4,724.6709-Oct-97 (6,104.68) 59,358.14 7,630.3109-Oct-97 (29,994.62) 29,363.52 37,490.6227-Oct-97 (4,500.00) 24,863.52 5,612.0103-Nov-97 85.53 24,949.0504-Nov-97 (85.53) 24,863.52 106.5701-Dec-97 103.15 24,966.6702-Dec-97 (103.15) 24,863.52 128.0802-Jan-98 106.59 24,970.1105-Jan-98 (106.59) 24,863.52 131.8102-Feb-98 106.35 24,969.8702-Feb-98 (106.35) 24,863.52 131.0724-Feb-98 (6,800.00) 18,063.52 8,357.7602-Mar-98 (4,000.00) 14,063.52 4,911.4302-Mar-98 91.38 14,154.9003-Mar-98 (91.38) 14,063.52 112.1901-Apr-98 60.71 14,124.2302-Apr-98 (60.71) 14,063.52 74.2715-Apr-98 (14,063.52) 0.00 17,175.8301-May-98 28.92 28.9204-May-98 (28.92) 0.00 35.24
Total Rebatable Arbitrage 74.46$
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| 22Continuing Disclosure Issues – Material Events| 22| 22
Calculation Summary
Snapshot analysis puts critical detail at your finger tips.
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| 23Continuing Disclosure Issues – Material Events| 23| 23
Compliance MonitoringAgency
Arbitrage Rebate Compliance Summaryas of 1/31/04
Issue Date
OriginalPrincipal
Issue NameLast
ReportLiability
Next Report
10/07/1993
$2,405,000.00 Peacock Gap Refunding10/01/1998
($26,061.00) 10/01/2003
01/28/1997
$5,250,000.00 1997 Revenue Bonds05/31/2003
($42,382.16) 01/28/2007
06/30/1999
$23,504,004.00
1999 TAB06/30/2003
$215,345.89 06/30/2004
12/06/2001
$3,220,000.00 2001 Revenue, Series A --- --- 12/06/2006
10/20/2002
$25,020,000.00
TARB Series 2002 --- --- 10/20/2007
04/17/2003
$7,605,000.002003 Lease Revenue Bonds
--- --- 04/17/2008
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| 24Continuing Disclosure Issues – Material Events| 24| 24
Computation Schedules
Annual calculation on all variable rate issues and fixed rate bonds that have accrued liabilities.
1st year, 3rd year, 5th year schedule for fixed rate bonds with no accruing liability.
Minimum computation schedule, every 5 years.
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| 25Continuing Disclosure Issues – Material Events| 25| 25
Payment Requirements
Installment Dates– Every 5 years from issue date or bond
year– Bond year election – first year can be
shorter than a year– 90% payments due within 60 days
Final Maturity– Date bonds matured or redeemed
early– 100% payment due within 60 days
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| 26Continuing Disclosure Issues – Material Events| 26| 26
Filing for a Refund
Use Form 8038R for filing. Overpayment of less than
$5,000 may not be recovered before the final computation date.
Overpayment is limited to actual dollars paid.
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| 27Continuing Disclosure Issues – Material Events| 27| 27
Leveraging the Arbitrage
Regulations
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| 28Continuing Disclosure Issues – Material Events| 28| 28
Rules of the Game
The computation uses a “future value” method for computing arbitrage rebate.
All transactions must be at market rate.
Issuers may not manipulate the rate in order to decrease the amount of receipts, or increase the purchase price to avoid rebate.
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| 29Continuing Disclosure Issues – Material Events| 29| 29
Maximizing Cash at Issue
Parity Reserve- runs risk if all bonds default at once
Surety Bond- can be costly for disclosure reporting
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| 30Continuing Disclosure Issues – Material Events| 30| 30
Creating the Best Bond Yield
Fixed Rate BondCost of credit enhancements increases arbitrage yield
Variable Rate BondManipulation of annual periods prior to the 5th bond year can reduce liability
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| 31Continuing Disclosure Issues – Material Events| 31| 31
Allocation & Accounting Rules
Common sense principals Consistently applied Methodology
- first in first out (FIFO)- specific tracing- ratable allocation- gross proceeds spent first (GPSF)
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| 32Continuing Disclosure Issues – Material Events| 32| 32
Maximizing Cash Flow
Goal is to meet a spending exception, expenditures should be recorded on the on earliest date possible.
Goal is to calculate the lowest possible rebate liability on a construction fund, expenditures should be recorded on the last possible date.
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| 33Continuing Disclosure Issues – Material Events| 33| 33
Applying Exceptions to Rebate
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| 34Continuing Disclosure Issues – Material Events| 34| 34
Common Exceptions
Small Issuer Exception
Spending Exceptions
Bona Fide Debt Service Funds
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| 35Continuing Disclosure Issues – Material Events| 35| 35
Small Issuer Exception
General taxing powers Not “Private Activity” Bonds 95% or more proceeds used
toward local government activities
Aggregate tax-exempt debt must not exceed $5 million within a calendar year
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| 36Continuing Disclosure Issues – Material Events| 36| 36
Spending Exceptions
Six Month Spending Exception
Eighteen Month Spending Exception
Twenty-Four Month Spending Exception
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| 37Continuing Disclosure Issues – Material Events| 37| 37
Six Month ExceptionApplies to any type of tax-exempt issue
501(c)(3) have additional 6 months to spend 5% of proceeds
Private activity bonds are not afforded the additional 6 months
6 mos. 100%1
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| 38Continuing Disclosure Issues – Material Events| 38| 38
Eighteen Month Exception
Applies to any type of tax-exempt issuance for a capital project including industrial bonds or qualified mortgage bonds
15%
60%
100%
6 mos
12 mos.
18 mos.
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| 39Continuing Disclosure Issues – Material Events| 39| 39
Twenty-Four Month Exception
Governmental bonds, 501(c)(3), or private activity construction bonds.
75% of proceeds to be used for construction
Expenditures must be on property owned by a governmental unit or 501( c)(3).
10%
45%
75%
100%
6 mos
12 mos.
18 mos.
24 mos.
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| 40Continuing Disclosure Issues – Material Events| 40| 40
Bona Fide Debt Service Funds
Used primarily to match revenue and debt service in a bond year.
Must deplete annually minus a reasonable carryover.
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| 41Continuing Disclosure Issues – Material Events| 41| 41
Enhancing Earnings
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| 42Continuing Disclosure Issues – Material Events| 42| 42
Control Yield Restriction
Leverage Temporary Periods
Maximize Reserve Fund Earnings
Carefully match liquidity to need
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| 43Continuing Disclosure Issues – Material Events| 43| 43
Temporary Periods
Three Year Temporary Period Five Year Temporary Period Working Capital
Expenditures/Operating Expenses
Pooled Financings
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| 44Continuing Disclosure Issues – Material Events| 44| 44
Reasonable Required Reserve
Should not exceed the lesser of– 10% of principal amount– Maximum annual debt service– 125% of the average annual debt
service
Excess Reserve Portion must be yield restricted
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| 45Continuing Disclosure Issues – Material Events| 45| 45
Match Liquidity to Need
Ladder long-term investments Monitor construction schedules Review overall all performance
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| 46Continuing Disclosure Issues – Material Events| 46| 46
Common Errors
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| 47Continuing Disclosure Issues – Material Events| 47| 47
Comply with both the arbitrage rebate and yield restriction regulations
Pay on time Take into account all “Gross
Proceeds” Verify the bond yield
Failure To:
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| 48Continuing Disclosure Issues – Material Events| 48| 48
Understand the Exceptions Remember a bond year
election Consider the impact of a
refunding Spend construction proceeds
Failure To: