Tax-Exempt Debt Compliance Policy

Scope

This policy applies to all Tax-Exempt Debt (including tax-advantaged bonds such as Build America Bonds) currently outstanding, as well as any future Tax-Exempt Debt issued by the University. If there is any conflict between this policy and the Tax Compliance Agreement or other instructions provided by external bond counsel for a particular bond issue, the terms of the Tax Compliance Agreement or instructions from external bond counsel will take precedence.

Reason for Policy

This policy provides guidance to assist the University in meeting its obligations under federal tax law and Collected Rules and Regulations 145.015 with regard to Tax-Exempt Debt. By maintaining proper records, conducting regular compliance reviews, and working closely with external bond counsel and other external experts, the University will continue to meet its financial obligations while preserving the tax-exempt status of its debt issuances.

Policy Statement

The University utilizes various borrowing programs, including Tax-Exempt Debt, for financing of the acquisition, construction, renovation or expansion of various University facilities, infrastructure, and/or equipment.  Tax-Exempt Debt receives preferential tax treatment and contains post-issuance reporting requirements per applicable federal tax laws.  These reporting requirements help the University ensure that the debt proceeds are used in compliance with regulations over the life of the debt.  The University commits to maintaining detailed records and consistent oversight of the use of Tax-Exempt Debt proceeds and the related projects they fund.

Tax-Exempt Debt must comply with the qualified use of the proceeds and the financed property for which they were issued.  The proceeds are used to finance the acquisition, construction, renovation or expansion of various University facilities, infrastructure or equipment that supports the University’s tax-exempt purposes.  Once constructed, the financed property must have limited private-business use. Private Business Use can arise from a lease, Management or Service Contract, sponsored research agreement, clinical trials, or any other arrangement that gives a private business user special legal entitlements with respect to the use of the financed facility or the use of the debt proceeds.  This can include activities conducted by the federal government as well as nonprofit organizations.  Priority use or control agreements and naming rights agreements also are considered Private Business Use in many cases.

The University Collected Rules and Regulations address responsibilities of the Board of Curators and Vice President for Finance and Administration or designees associated with the selection and approval of and compliance with Tax-Exempt Debt.  The UM System Executive Vice President of Finance & Operations and Chief Financial Officer (CFO) has delegated compliance monitoring to the Bond Compliance Officer, who compiles information from Campus Accounting Offices for reporting.  The Campus Accounting Offices rely on information from various departments to meet reporting requirements, including the completion of the annual Private Business Use (PBU) Questionnaire. 

Departments must report on how space is used during the year.  Any changes to the use of space involving third parties must be reported to Campus Accounting Offices for consultation with the Bond Compliance Officer and UM Real Estate prior to implementation of the proposed change, ensuring compliance with applicable regulations. 

Sponsored Programs Administration tracks research agreements & clinical trials, including determining where those services were performed, and reports to the Campus Accounting Offices for use in determining Private Business Use.

By adhering to Federal and state regulatory requirements and closely monitoring Private Business Use, the University can continue to access favorable financing through Tax-Exempt Debt, avoiding potential penalties or reclassification of debt.

Definitions

Private Business Use (PBU) Questionnaire –A tool maintained by the Bond Compliance Officer and completed by the Campus Accounting Offices to gather information about facilities financed by Tax-Exempt Debt. The Bond Compliance Officer uses the tool to complete the Annual Compliance Checklist and ensure the University maintains compliance with IRS regulations & debt covenants for tax-exempt financing. The questionnaire is to be completed for all facilities funded with Tax-Exempt Debt. 

Annual Compliance Checklist – A form completed annually by the Bond Compliance Officer to measure compliance with Tax-Exempt Debt obligations across the system. The form aggregates all details from Private Business Use (PBU) Questionnaire’s completed by the Campus Accounting Offices and other information as available.

Management or Service Contract – For Private Business Use, contracts that give the service provider an ownership or leasehold interest in the financed facility (or an interest in the nature of an ownership or leasehold interest), or the contract provides for compensation for services based, in whole or in part, on a share of net profits from the operation of the financed facility.

Private Business Use – Occurs when facilities are used by private, nongovernmental persons, such as individuals and for-profit companies.

Tax-Exempt Debt – Financing instruments, such as bonds or commercial paper, where the purchaser is willing to accept a lower return in exchange for not having to pay federal income tax on the interest earned.  

Accountabilities

Bond Compliance Officer 

• The role of Bond Compliance Officer is filled by the UM System Treasurer, but in their absence, the UM System Executive Vice President of Finance & Operations and Chief Financial Officer (CFO) will assume this responsibility.
• Maintains a listing of Tax-Exempt Debt associated with facilities, which will be shared with UM Real Estate, UM Procurement, MUHC Supply Chain and Campus Accounting Offices.
• Provides Campus Accounting Offices with a Private Business Use (PBU) Questionnaire as necessary.
• Utilizing all compiled information from Campus Accounting Offices and other sources, completes the Annual Compliance Checklist.
• Regularly consults with external bond counsel and legal counsel to ensure that compliance procedures are properly followed for each bond issue and comply with federal regulations.
• If any potential noncompliance issues are identified (e.g., improper use of bond proceeds or arbitrage violations), the Bond Compliance Officer will consult with legal counsel to determine the necessary actions to resolve the issue.
• Assists with determining methodology for measuring Private Business Use.
• Maintains accurate records and monitors post-issuance compliance for all tax-exempt financing.

UM Real Estate

• As agreements are being negotiated, confirm whether the associated facilities are financed with Tax-Exempt Debt by reviewing the listing of Tax-Exempt Debt provided by the Bond Compliance Officer.
• For leases associated with Tax-Exempt Debt-funded facilities, consults with the Campus Accounting Office and Bond Compliance Officer on the associated risk of non-compliance by entering into the agreement.
• Maintains appropriate indicators in lease management system to identify Tax-Exempt Debt funded facilities.

UM Procurement and MUHC Supply Chain:

• As agreements are being negotiated, confirm whether the associated facilities are financed with Tax-Exempt Debt by reviewing the listing of Tax-Exempt Debt provided by the Bond Compliance Officer. For agreements associated with Tax-Exempt Debt funded facilities, consults with the Campus Accounting Office and Bond Compliance Officer on the associated risk of non-compliance by entering into the agreement.

Sponsored Programs Administration Offices

• Maintains indicators associated with clinical trials, intellectual property, and sponsored program entity type to be used by Campus Accounting Offices when completing the PBU Questionnaire.

Campus Accounting Offices 

• Responsible for proactively reviewing activities (leases, service agreements, etc.) that could create Private Business Use.
• Completes the PBU Questionnaire and reports results to the Bond Compliance Officer. 

College/School/Division Employee

• Maintains awareness of Tax-Exempt Debt funded buildings the department utilizes.
• Reports on the use of space, including Private Business Use, during the space survey and/or at the request of the Campus Accounting Office.

Additional Details

Forms

Annual Compliance Checklist

Private Business Use (PBU) Questionnaire

Related Information

Collected Rules and Regulations 145.015 Debt Management Guidelines 

History

This policy summary combines the various compliance requirements of the University into a single document for reference.

Procedure

Tax-Exempt Financing Compliance Procedure Guide​​​​​​