As we enter the waning days of 2023, it’s important to take some time to reflect on what we’ve accomplished. And for some issuers of tax-exempt bonds, on what we still have to accomplish. You see, as 2023 comes to a close, so too does the three-year temporary period for construction bonds issued in 2020. If your project encountered delays during the COVID-19 pandemic, like so many have, you may be accruing a yield restriction liability on your unspent proceeds.
So, how did we get here? And is there still time to avoid these unexpected liability payments? Let’s dive in.
Expectation
For 2020 tax-exempt debt issuances, new projects qualifying for the three-year temporary period followed the usual standard. Issuers anticipated spending 85% of proceeds within three years. Issuers planned to spend at least 5% of proceeds in the first six months. And lastly, issuers expected to take reasonable steps to accomplish the project, allocating proceeds with the due diligence required by the IRS.
However, for most of us, our reasonable expectations for the year 2020 led us right into one of the starkest reality checks in our lifetimes. Life as we knew it came to a grinding halt in late March/early April 2020. Projects with carefully planned milestones were suspended indefinitely. Our initial expectations, projections, and forecasts were no longer feasible. Consequently, many projects started in 2020 remain unfinished as we prepare to close the books in 2023.
Reality
It’s important that we don’t confuse expectation with reality. After your bonds are issued, reality is all that counts! Regardless of when your 2020 bonds were issued, the low borrowing rates of past years pale in comparison to the current federal funds rate. Standard money market accounts are currently earning well over 5% and the 10-Year treasury rate is well over 4%. When unspent project proceeds are invested above the restricted yield (your bond yield + 0.125%), a yield restriction liability is accruing. And with 2020 bond yields (borrowing rate) topping out around 2.4%, it is extremely likely that your unspent proceeds are quietly racking up a costly bill.
Now, don’t put your finger on that panic button just yet! You’re in the right place. There’s still time to avoid these unexpected liabilities. So, what can you do?
- If your project is complete, ACS recommends using your surplus funds for a comparable project. With your bond counsel’s approval, surplus project proceeds may be used to pay principal and interest on the Debt.
- If your project is still ongoing, ACS recommends spending your proceeds to a balance below $100,000 as soon as possible. The minor portion, defined by the IRS to be the lower of $100,000 or 5% of PAR for issuances below $2 million, can be invested at an unrestricted yield for the entirety of the bond’s life.
If neither of these options appears feasible for you, give ACS a call! We have over 35 years of experience in tax-exempt debt compliance calculations. Follow the prompts on our Contact Us page and we’ll put your mind at ease. It’s what we do.
Arbitrage Compliance Specialists’ wishes the best to you and your loved ones this holiday season!