4.4.5 Reimbursement of Prior Expenditures
An issuer may often initially finance costs associated with a project out of its general fund or out of restricted funds in anticipation of being reimbursed from proceeds of a future bond issue. For the proceeds of the bonds to be used to reimburse costs paid before issuance of the bonds, (1) the issuer must adopt a declaration of “official intent” for the original expenditure no later than 60 days after payment of the original expenditure, (2) the original expenditure generally must be a capital expenditure (although certain other expenditures may be eligible for reimbursement), and (3) the reimbursement (i.e., issuance of the bonds and allocation of the proceeds to the initial costs) generally must be made not later than 18 months after the later of the date the original expenditure is paid, or the date the project is placed in service or abandoned, but in no event more than 3 years after the original expenditure is paid. However, these timing requirements are modified such that (a) for certain small issuers, the reimbursement must be made no later than 3 years after the date the original expenditure is paid and (b) on projects for which both the issuer and a licensed architect or engineer certify that at least 5 years are necessary to complete construction, the issuer may reimburse expenditures for up to 5 years after the original expenditure is paid.
An “official intent” is an issuer’s declaration of intent to reimburse an expenditure (initially made from its own funds) with the proceeds of a debt obligation. The official intent of an issuer to reimburse expenditures from bond proceeds may be made in any reasonable form, including (1) a resolution of the issuer, (2) action by an appropriate representative of the issuer (e.g., a person authorized or designated to declare official intent on behalf of the issuer), or (3) specific legislative authorization for the issuance of obligations for a particular project.
The official intent must generally describe the project for which the original expenditure was paid and must state the maximum principal amount of obligations expected to be issued for the project. A project includes any property, project, or program (e.g., highway capital improvement program, school building renovation, water facility capital improvement program, computer equipment acquisition, or treatment plant construction). Deviations between the project description in the official intent and the actual project financed with the reimbursement bonds will not invalidate the official intent to the extent that the actual project is reasonably related in function to the described project. On the date of declaration of official intent, the issuer must have a reasonable expectation that it will reimburse the original expenditure with proceeds of a bond issue. Official intent declared as a matter of course or in amounts substantially in excess of the amounts expected to be necessary for the project (e.g., blanket declarations) are not reasonable. Similarly, a pattern of failure to reimburse actual original expenditures covered by an official intent is evidence of unreasonableness.
The official intent requirement and the reimbursement period requirement do not apply to costs of issuing any bond or to an amount up to the lesser of $100,000 or 5% of the proceeds of the bond issue. In addition, the requirements do not apply to preliminary expenditures of up to 20% of the aggregate issue price of the issue(s) that finance—or are reasonably expected by the issuer to finance—the project accounting for the preliminary expenditures. Preliminary expenditures include architectural, engineering, surveying, soil testing, reimbursement bond issuance costs, and similar costs that are incurred before commencement of acquisition, construction, or rehabilitation of a project, other than land acquisition, site preparation, and similar costs incurred at the start of construction.
If an issuer satisfies the reimbursement guidelines described above, the bond proceeds will be deemed expended for tax purposes upon requisition by the issuer and the reimbursed funds will be no longer be treated as proceeds of the bonds, and instead will be treated as revenues (or restricted funds, as the case may be) of the issuer. If the reimbursement guidelines are not satisfied, bond proceeds disbursed to the issuer for prior expenditures will not be treated as spent for tax purposes and instead will still be treated as unspent proceeds, which may prevent the bonds from qualifying as tax exempt bonds.