Program Revenue Bonding Process
Timing of Bond Sale: Bond or note sale occurs every 4 to 6 months.
Notification of Bond Sale: DOA notifies UW System Administration
who in turn notifies the institution contacts of an upcoming bond sale. UW
is usually given 5 working days to get back to DOA with our PR Bonding needs.
Amount of bonding: Institutions can opt to bond one time for the entire project or in phases. As a general rule, we ask that institutions bond at the minimum an amount sufficient to cover any unfunded expenditures at the time of notification plus an estimate of expenditures for the next 6 months. UW System is required to submit a total bonding request to DOA in increments of $5,000.
Up-to-date project balances (budget, expenditures, encumbrances) are available via DOA’s Capital Accounting Information System on the web:
Note: The “Revenue” figure against a PR Bonding budget line (any appropriation designated with a “T”) in the web site above indicates the amount of PR bond proceeds DOA has applied to a particular project. It does not necessarily reflect how much an institution has actually bonded and is paying debt service for.
Official Statements of the Bond or Note Sales: These are available on DOA Capital Finance’s web site.
Payment Schedules: For each project, UW System prorates the payment schedule received from DOA based on the amount of bonding requested for a particular project. Commercial paper notes have a quarterly payment schedule (payment every August, November, February and May). Bonds have a semi-annual payment schedule (payment every October and April). The payment term is usually 20 years for bonds and 10 years for notes. DOA Capital Finance could finance our bonding needs with either a bond or note sale or a combination of both.
- Prepayment of debt: DOA does not provide prepayment as an option.
PROJECT BUDGETS AND FUNDING CHANGES
Project budgets are initially set up in DOA’s Capital Accounting System (http://cpa.doa.state.wi.us) based on information in the State Building Commission meeting minutes and Small Project Approval forms. It is essential that the budget and funding mix (PR Bonding versus PR Cash) recorded in the system accurately reflect how institutions plan to fund their projects.
It is especially important that any intent to use PR Cash in lieu of PR Bonding be communicated to DOA Capital Accounting as soon as possible. This is usually accomplished by submitting a funding change request to DFD/DOA for approval. Since DOA applies the tax-exempt bond proceeds to projects in compliance with federal arbitrage tax laws, a request to substitute PR Cash for PR Bonding will only be approved if DOA is able to maintain compliance with those tax laws. See section below for the guidelines issued by DOA regarding the application of bond proceeds.
GUIDELINES FOR CHANGING THE APPLICATION OF PROCEEDS OF TAX-EXEMPT DEBT ISSUED BY THE STATE (DOA, 05/06/1999)
Some Changes in Application Could Lead to Loss of Tax-Exempt Status
The State is able to borrow money at a favorable interest rate by issuing debt on which the interest is excluded from federal income tax. Attaining and maintaining tax-exempt status requires compliance with federal law and related regulations.
One portion of the law and regulations denies tax-exempt status to arbitrage bonds. In general, an “arbitrage bond” is any bond the proceeds of which are used to acquire higher yielding investments. Certain exceptions apply, and in some situations the issuer is permitted to keep the bonds from being “arbitrage bonds” by making a rebate payment to the federal government (essentially paying the excess earnings to the federal government).
The State plans to meet one of the exceptions—the two-year spending exception for construction bonds— so that it may avoid making any rebate payment to the federal government and instead keep all the earnings.
Avoiding the Payment of Rebate
The two-year spending exception is provided by the tax regulations. A bond issue is free from the rebate requirement if the proceeds are spent in accordance with the following schedule, measured from the issue date of the bonds:
- 10% within 6 months;
- 45% within 12 months;
- 75% within 18 months; and
- 100% within 24 months.
Projects Funded With Long-Term, Fixed-Rate Debt
To ensure that the spending exception is met for long-term, fixed-rate debt, the Capital Finance Office will honor a request to change the application of bond proceeds only when all of the following are true:
- The bond proceeds have been not been completely expended; and
- Less than 18 months have passed since the issue date of the bonds; and
- Another project is available to use immediately all the revision; and
- The revision will cause no change in meeting the expenditure schedule described above.
To insure that the spending exception is met for short-term, variable-rate debt, the Capital Finance Office will honor a request to change the application of proceeds only when items (1), (3) and (4) above are true. Changing the application of bond proceeds may also raise some State law questions that are not addressed here. The sole purpose of these guidelines is to maintain compliance with federal tax law.
FREQUENTLY ASKED QUESTIONS
1) How is bonding operationalized to budget and then expensed?
- The proceeds from a bond sale are deposited into the Capital Improvement Fund (CIF). DOA pays contractor/vendor invoices encumbered against the PR Bonding budget for each UW project from UW System’s pool of bond proceeds in the CIF.
- DOA’s main concern is that there are sufficient funds in the CIF to meet payment obligations. They do not track actual bonding by project. UW System, on the other hand, tracks actual bonding by project for debt service allocation purposes.
- In WiSMART, DOA will apply PR bond proceeds to the various projects to cover the expenditures charged against the PR Bond budget line.
- During the course of a project, the amount of bond proceeds DOA applies to a project may not reflect actual bonding requested by the institutions. However, at project completion, the amount of proceeds applied to a project by DOA will match the actual amount of bonding requested by an institution for that project.
- For multi-funded projects:
- If a project ends up costing less than budgeted, the final expenditure amount will usually be allocated to the various funding sources based on budget percentage.
- If an institution would like to cover their initial project expenditures with a particular fund source (be it PR Cash or PR Bonding), DFD must be notified so that the project encumbrances are set up to charge PR Cash or PR Bonding first. DOA Capital Accounting does not have the staff to deal with different scenarios for every UW project.
It is UW System’s responsibility to ensure that the Capital Improvement Fund has sufficient funds to cover our PR Bond expenditures. Since bond sales occur about every six months, UW System as a whole has to bond sufficiently to cover about six months’ worth of expenditures. Some institutions prefer to bond one time for the entire PR Bond portion of a project. Some institutions prefer to bond in phases. The latter option is appropriate for projects expected to last more than six months and with a large PR Bond budget. Thus, a project expected to last 6 months with a $50,000 PR Bond budget would most likely participate in one bond sale while a project expected to last more than a year with a PR Bond budget of $5 million would most likely participate in two or more bond sales.
How much and when to bond for each project is, to some extent, at the discretion of the institution. Just as DOA’s main concern is that UW System as a whole is sufficiently funded to meet contractor/vendor payment obligations for the next six months or so, UW System's main concern is that the institutions as a whole are sufficiently funded to cover their expenditures for the next six months or so.
It is expected that, at any point in time, some institutions would be under-funded (insufficient bonding to cover current expenditures) and some institutions would be over-funded (have requested more bonding than needed to cover current expenditures). The same is true at the project level.
We can only afford to play catch up (that is, bond to cover expenditures that have already been incurred but not enough to cover future expenditures) if some other projects have bonded in excess of their current needs.
3) When will debt service payments begin?
If we can predict when we would most likely bond, we can estimate the start of debt service payments. Since bonds have a semi-annual payment schedule (October and April) and notes have a quarterly payment schedule (August, November, February and May), we can expect that if we participated in a bond sale in February 2002, the first debt service payment would most likely be in October 2002. Turnaround time for the actual sale and for DOA to provide us with a payment schedule is usually two to three months after we submit our bonding needs to DOA. If we participated in a note sale in February 2002, the first debt service payment would most likely be in May 2002. The snag, of course, is we do not know in advance how DOA will finance our bonding needs (either with a bond or a note sale or a combination of both).