ORLANDO, Fla. -- Treasury and Internal Revenue Service officials hope to issue final rules governing bond reimbursements before the end of the year, a Treasury lawyer told public finance officials meeting here yesterday.
"That's not a promise. It's a goal that we at the staff level, who are writing these rules, have," David A. Walton, Treasury's attorney-adviser for tax-exempt bonds, said at the meeting sponsored by the Florida Public Finance Network and the Florida Government Finance Officers Association.
The rules were first proposed last April to prevent issuers of governmental and 501(c)(3) bonds from using bond reimbursements to skirt arbitrage restrictions. In a reimbursement financing, the bond proceeds are treated as spent as soon as the bonds are issued and can be invested without regard to arbitrage restrictions.
The rules were proposed to clarify the circumstances under which reimbursement bond proceeds can be treated as spent and freely invested.
But much of the municipal bond community complained that the rules were too restrictive and failed to take into account the budgetary and financial practices of some issuers.
Mr. Walton made clear yesterday that while the rules are being revised to address some concerns that were raised about them, they are not being completely rewritten.
Some industry groups had urged Treasury and the IRS to significantly simplify the proposed rules so that they are more in line with existing standards for private-activity bonds. Under those standards, reimbursement bond proceeds can be treated as spent and invested without restriction if there was an "official action" sanctioning the bond financing before expenditures were made and if the bonds were issued within a year of when the project was placed in service.
But Mr. Walton said yesterday that the Treasury and IRS "would have serious difficulty with that standard" for governmental and 501(c)(3) bonds because it would not permit arbitrage-driven deals from being done.
"As a matter of tax policy, it's just not a good idea," he said.
The proposed rules gave issuers a break in allowing them to issue reimbursement bonds within a year of after the project is placed in service, he said. So if it takes five years to complete the project, the issuer has six years in which to issue the remibursement bonds, he said.
Under the proposed rules, issuers would be required either to issue reimbursement bonds one year after expenditures were made or one year after the project was placed in service, whichever is later.
But Mr. Walton said the agencies are not likely to expand the one-year periods included in the original proposal. "I don't see much movement on this," he said.
He noted that many issuers have complain about the proposed rules' requirement that an official intent to reimburse be declared within the two-year period before expenditures are made on the project.
He said the agencies came up with the two-year time frame to make sure the issuers' resolution of official intent would accurately reflect its current financial situation. But agency officials "are taking into account" these criticisms and may "lighten up a little" on this requirement, he said.
He said the agencies might "make some changes" to the proposed rules that would give issuers more flexibility in how they make their resolutions of official intent publicly available.
One of the biggest complaints about the proposed rules is that the declaration of official intent to reimburse be "consistent with an issuer's budgetary and financial circumstances."
This standard has led issuers to worry that they will never be able to reimburse with bonds if any other funds are available and that they have to be broke to borrow. But Mr. Walton said the final rules will clarify that this is not the case and will specify what kinds of funds might be considered available.
Mr. Walton said the agencies will revise the rules to make compliance easier for issuers whose budgetary and accounting practices are based on broad programs rather than specific projects.
"This is one we missed," he said, acknowledging that the proposed rules were too limited in being project- rather than program-oriented.
The Treasury lawyer said the agencies realize that issuers would have a tracking problem in trying to determine if they have a pattern of failing to follow through with planned reimbursements. "There will some liberalization here, but I don't think this will be dropped entirely," he said.
Mr. Walton said also that the proposed rules' "controlled group" concept, under which issuers would have to look at the finances of all related governmental bodies before issuing reimbursement bonds, will be modified. "We're going to be considering an anti-abuse rule here," he said.
The proposed rules will be revised to make clear that it is not appropriate to do a bond reimbursement for working capital expenditures. On the other hand, the revisions will allow bond reimbursements for expenditures made for land.
Meanwhile, J.W. Rayder, legislative assistant to Rep. Beryl Anthony, D-Ark., told the finance officials that a tax bill is a possibility this year if Congress stays in session through part of December, Mr. Rayer said there is a greater chance that bond simplification measures would be included in a small tax bill.
A larger bill, he said, could be a problem for the bond market because it likely would include individual retirement account or family savings account proposals either of which according to the Congressional Budget Office would compete with municipal securities and siphon off about 15% of investments in the municipal market.
Tom McLoughlin, an assistant director of the Government Finance Officers Association, said the group's disclosure task force will begin meeting next summer to update its disclosure guidelines. The revised guidelines will give more emphasis to continuing disclosure and will be published in early 1994, he said.
