WASHINGTON -- The Treasury and Internal Revenue Service have no plans to postpone either the Aug. 8 public hearing or the Sept. 8 effective date for their proposed reimbursement rules, despite requests to do so by some state and local issuers, officials at both agencies said this week.

The Government Finance Officers Association asked the two agencies last week to postpone both the hearing and effective date of the rules, which were proposed last April to discouraage issuers of governmental and 501(c)(3) bonds from using bond reimbursements to skirt arbitrage restrictions.

The GFOA, in comments submitted to the agencies, said the proposed rules are flawed and too restrictive for issuers and should be withdrawn and rewritten. The National Association of State Treasurers also asked for a delay in the effective date, telling the IRS and the Treasury is its comments that state and local issuers will be "wholly unprepared" to meet the rules on Sept. 8.

But agency officials said they believe they can review the comments and make any needed revisions to the rules by the second week of September. The rules are to take effect for most bonds issued after Sept. 7.

The rules would allow bond proceeds used to reimburse expenditures previously paid with other funds to be treated as spent so they can be invested on an unrestricted basis as soon as the bonds are issued.

While Some revisions probably will be made, Treasury and IRS officials said it is unlikely the rules will be withdrawn and rewritten.

"We will make some changes in the rules. We're going to take these comments into account and modify the rules to the extent we need to," a Treasury official said.

"I don't think we're going to gut the rules," an IRS official said.

Municipal issuers and lawyers have complained that the proposed rules contain far too many requirements for governmental issuers and are more restrictive than the rules that already exist for private-activity bonds.

But the agency officials said stricter reimbursement rules for governmental bonds became necessary after artibrage rebate requirements were extended to governmental issues.

"This type of rule was virtually mandated by the imposition of arbitrage rebate requirements on governmental issuers," the Treasury official said.

The IRS official agreed. "Before, when issuers could earn arbitrage during temporary periods, it made very little difference whether they did reimbursements. But the impact of the rebate requirements was that they placed much more emphasis on when issuers could spend money because of the spend-down exceptions," he said.

Under the tax law, issuers are exempt from arbitrage rebate requirements if they spend bond proceeds within six months or if they meet the rebate relief law's spend-down requirements over a two-year period.

"To the extent that reimbursement money can be spent on day one, it's an effective way to avoid the rebate requirements," the IRS official said.

"If you don't control reimbursement," the Treasury official said, "it almost nullifies the rebate requirements.

The Treasury official said that while "many of the comments received have been helpful and useful, some of them go to policy decisions that we've already made or statutory limitations and requirements that we are under." For example, he said, "Congress has said you can't keep arbitrage directly or indirectly, and we have to enforce that."

The agency officials said the reimbursement rules for governmental bonds have to be more strict than rules for private-activity bonds because governmental issuers have more freedom in doing reimbursements.

"In a private-activity bond financing, you have a wholly unrelated, independent private party seeking to have the issuer issue bonds on its behalf," the IRS official said. "In a governmental financing, you have the issuer issuing bonds for itself. You don't have an independent check on the inducement resolution: authorizing the financing, he said. The same party issuing the bonds is controlling the expenditures, he added.

Some issuers and lawyers had called for the IRS and Treasury to come up with a more simple "bright line" test for governmental and 501 (c)(3) bond reimbursements similar to the private-activity bond rules.

Those rules say private-activity bond proceeds can be treated as spent when bonds are issued if there was an "official action: sanctioning the bond financing before the expenditures were made and the bonds were issued within a year of when the facility being financed was placed into service.

By contrast, the proposed rules for governmental bonds contain four basic requirements and many tests within those requirements. The issuer must declare a "reasonable official intent" to reimburse within the two-year period before expenditures are made. The declaration of intent must describe the project for which expenditures are being reimbursed and must be "consistent with an issuer's budgetary and financial circumstances."

The reimbursement must occur either one year after the expenditures were made or one year after the facility being financed was placed in service, whichever is later. And the expenditure being reimbursed must be used for property that has a "reasonably expected" economic life of at least one year.

The IRS official said, "There is a balance between the flexibility of what's going to be permitted in reimbursements and the attendant requirements that go along with that flexibility."

He said one potential question for municipal officials might be, "Do you want a more stringent rule that is [a bright line test] and clear, or do you want a more flexible rule that has some requirements to it?"

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