1200 Post-Issuance Tax-Exempt Bond Compliance

Responsible Official: 
Vice President, Finance and Business Operations
Responsible Office: 
Finance and Business Operations
Effective Date: 
June 30, 2010
Revision Date: 
September 17, 2015

Scope

This Policy sets forth the University’s methodology for ensuring post-issuance compliance with Internal Revenue Service (IRS) requirements pertaining to tax-exempt bonds (TEBs).

Policy Statement

As a 501(c)(3) organization,  the University is allowed to use  TEBs to achieve its educational, research, and patient care mission.  In exchange for this benefit, the University must comply with legal requirements, which include, but are not limited to, ensuring that:

  • The TEB-financed capital projects are not used for excessive “private business use”;
  • The TEBs comply with arbitrage rules, if required;
  • The use of TEB proceeds for capital projects is supported by the required documentation and the use is within the required timeframes; and
  • Record retention and post-issuance disclosure requirements are met.

Policy Sections

I.Private Business Use

The University’s TEBs will lose their tax-exempt status if more than five percent of the bond issuance or $15 million, whichever is less, is used for any private business use (PBU).   For this reason, the University’s policy is to engage in PBU only to the extent that sufficient non-TEB funding can be allocated to cover 100% of the PBU, with exceptions permitted in certain limited circumstances. To carry out this policy, this Policy requires the approval of all potentially PBU activities by the Tax-Exempt Bond Compliance (TEBC) Director or higher level, and prohibits the approval of any use of TEBs for PBU in excess of five percent of a bond series’ proceeds or $15 million, whichever is less.   

Very broadly speaking, PBU occurs when private business users are allowed to use TEB-financed capital projects or property.  For-profit corporations and the federal government are private business users.  The fifty state governments and their entities (towns, public schools, etc.) are not.  Non-profit 501(c)(3) corporations may or may not be private business users.  Natural persons not conducting a trade or business are not private business users.

The following categories of activities might be PBU if they result in private business users using University property that has been acquired or improved with TEB proceeds:

  1. Sale of University property
  2. Lease of University property
  3. Use of University property
  4. Management contracts
  5. Utility output contracts
  6. Sponsored research agreements, material transfer agreements, and corporate researchers working at the University
  7. Technology transfer and licensing agreements
  8. Clinical trial agreements
  9. Unrelated trade or business activities by the University
  10. Naming rights
  11. Joint ventures, partnerships and limited liability companies agreements
  12. Other actual or beneficial use of, or economic benefit from, University property

See Procedure 1200 PR.01 for guidance on identifying and gaining approval for each of the above categories of potentially PBU activity. 

II. Record Retention

Records of TEB issuances and related post-issuance compliance documentation must be maintained for the life of the bond (which, for the University, has ranged from 25 to 40 years) plus three to six years depending on the Tax Regulatory Agreement of the series.  For refundings, the record retention period includes the original issuance. 

For a description of how the TEBC Director and units will ensure that the University complies with record retention requirements, refer to Procedure 1200 PR.02 Procedure for Ensuring Post-Issuance TEBC.

III.Arbitrage

TEBs lose their tax-exempt status if they violate the IRS’s arbitrage rules.   In general, profits or “arbitrage” is earned when the proceeds of a bond issue are used to acquire investments that have an interest rate that is “materially higher” than the interest rate on the bonds issued.  Because Congress did not intend TEBs to be used to earn arbitrage, the Internal Revenue Code limits the arbitrage earned by 501(c)(3)s on their TEBs through yield restriction and arbitrage rebate rules.

These rules apply to bond proceeds that are invested at an interest rate higher than the interest rate paid on the bonds as well as to “replacement proceeds” which are the funds that are “replaced” by the bond proceeds for a certain purpose and thus are freed up and invested at an interest rate higher than the bond interest rate.   Gifts, pledges, funds in the endowment and sinking funds can all be characterized as replacement funds in certain situations and thus subject to the arbitrage rules.

To avoid having to restrict yields and pay rebate fees on bond proceeds or replacement funds, the University will generally seek to fit into certain exceptions to these rules and avoid having funds be characterized as replacement proceeds as described in Procedure 1200 PR.02 Procedure for Ensuring Post-Issuance TEBC. 

IV.Allocation of TEB Proceeds to University Expenditures

There are a number of federal requirements that must be met when allocating TEB proceeds to University expenditures.  These requirements relate to what kind of University expenditures can be financed with TEBs, what documents must be created and retained to document the allocation, and the timeframes within which the allocations must be made.  The Controller’s Office allocates TEBs to University expenditures and thus has primary responsibility for ensuring that this allocation complies with federal requirements and University policies.

For a list of the relevant requirements, refer to Procedure 1200 PR.02 Procedure for Ensuring Post-Issuance TEBC.

V.Refunding

A refunding issue is an issue the proceeds of which are used to pay principal, interest or the redemption price on a prior issue.   The University will comply with all rules regarding refundings.  For a list of the relevant rules, refer to Procedure 1200 PR.02 Procedure for Ensuring Post-Issuance TEBC.

VI.Extinguishment/Merger

An issuer generally may not purchase and hold its own TEBs without causing a retirement or extinguishment of such TEBs for purposes of Section 103 of the Internal Revenue Code.  In general, it is the University’s policy not to purchase its own TEBs.  The Yale Investments Office, which controls the University’s fixed income investment, will consult with OGC and the TEBC Director before making an exception to this policy.

VII.Post-Issuance Disclosure

The University is subject to continuing disclosure requirements imposed by federal and state agencies.  These requirements are met by providing an annual report and other documents to the designated federal and state agencies.   In addition, the University must notify the federal and state agencies if and when any “reportable events” occur.   The University complies with the continuing disclosure requirements by submitting the required documents and notices by the deadlines as outlined in Procedure 1200 PR.02 Procedure for Ensuring Post-Issuance TEBC.  

VIII.Religious Entanglements 

The University will not use TEBs for projects that will be used in sectarian worship or religious indoctrination.  For the reasoning behind this policy and the way the University will comply with this policy, see Procedure 1200 PR.02 Procedure for Ensuring Post-Issuance TEBC.

IX.Remediation 

Adherence to this Policy will enable the University to identify violations of federal tax-exempt bond requirements in a timely manner.  Whenever anyone identifies any potential violation of a federal tax requirement or this Policy, that person should immediately notify the TEBC Director.  The TEBC Director will determine whether it is in fact a violation and, if so, will work with the OGC to determine whether there are any feasible self-remediation actions available under applicable regulations. 

If no self-remediation actions are available or desirable, the OGC will attempt to negotiate a closing agreement with the IRS under the Voluntary Closing Agreement Program (VCAP).  

Roles and Responsibilities

Vice President for Finance and Chief Financial Officer (VPF)

  • Has primary responsibility for ensuring and monitoring post-issuance compliance with TEB regulations; and
  • Approves revisions to this Policy on the recommendation of the Vice President and General Counsel. 

Tax-Exempt Bond Compliance (TEBC) Director

  • Carries out the operational responsibilities as set forth in this Policy including, but not limited to, analyzing and approving, or obtaining higher approval of, requests to undertake activities that involve PBU. 

Tax-Exempt Bond Compliance Committee (TEBCC)

  • Comprised of representatives from the Office of the General Counsel (OGC) and the Controller’s Office;
  • Recommends revisions to this Policy; and
  • Develops, approves and implements procedures to implement this Policy.   

For a fuller list of roles and responsibilities, see 1200 PR.02 Procedure for Ensuring Post-Issuance TEBC.