2020 Consolidated Major Revenue and Debt Report

7 - Arbitrage T he accompanying schedules provide a brief history of debt afected by arbitrage, the fnancial impact, and the current status. • The cost to administer arbitrage compliance in fscal year 2020 was $15,300. This was paid to arbitrage consultants to perform the complex fnancial calculations required for compliance. • Finance Department personnel spend over one hundred hours annually, monitoring compliance with rules and regulations. • Failure to comply with the regulations can result in an entity’s debt losing its tax-exempt status. • Compliance with arbitrage requirements is covenanted in every debt issue. • Project budgets can be impacted by the failure to meet expenditure tests when the penalty option is elected. If arbitrage is properly monitored, making rebate payments is not necessarily negative. It just means that the entity has earned more on its investments than it is allowed to keep under the federal regulations. REBATABLE ARBITRAGE Arbitrage occurs when governments proft from the diference in rates between tax-exempt and taxable debt. A government is permitted to keep interest earned on the proceeds equal to the borrowing rate of the debt. The diference must be refunded to the federal government. In order to report the liability in the fnancial statements, an annual calculation is performed. This calculation, based upon future values as prescribed in the federal tax code, is very complex. The actual payment is due every fve years during the life of the issue with a fnal calculation and payment at maturity. The County has rebated $1,039,896 on bond issues and $5,444,335 on commercial paper issues to the federal government under the arbitrage rebate regulations. PENALTY If the issue is at least 75% construction-related, at the time the bonds are issued, the issuer may elect to pay a penalty in lieu of rebating the arbitrage. If the penalty is elected, then the government performs a calculation every six months to determine if it has met the spend-down requirements as defned in the tax code. If the requirements are met, the issuer may keep all of the interest earned on the proceeds. If not, then the entity must remit a penalty of 1.5% of the expenditure shortfall. For example, if the proceeds plus estimated investment earnings are $12 million, at the frst six-month test the expenditure requirement is ten percent or $1.2 million. If the actual spent was $1 million, the entity would remit 1.5% of $200,000 or $3,000. This analysis is performed every six months until either all of the proceeds and the interest earned on the proceeds are expended, or the debt is retired. As of September 30, 2020, the County has remitted $277,073 on bond issues and $1,019,633 on commercial paper issues under the penalty election. 46 Consolidated Major Revenue & Debt Report 2020