4.4.1 Issue Sizing and Term

OVERBURDENING RESTRICTIONS – The Tax Code and the Regulations prohibit the issuance of debt by public agencies that may “overburden” the tax exempt bond market. Prohibited practices include issuing more bonds or issuing bonds earlier/allowing bonds to remain outstanding longer than is otherwise reasonably necessary to accomplish the governmental purposes of the bonds. When determining whether an action overburdens the tax exempt bond market, an important factor is whether that action would reasonably be taken to accomplish the governmental purpose of the issue if interest on the issue were not tax exempt. Factors evidencing an over issuance of bonds include the issuance of bonds for which the proceeds are (1) reasonably expected to exceed (by more than a minor portion) the amount necessary to accomplish the governmental purposes of the issue or (2) in excess of the amount of sale proceeds allocated to expenditures for the governmental purposes of the issue. The fact that the bonds do not qualify for a “temporary period,” as discussed in Section 4.8.4.1, Initial Temporary Period, may be evidence of an early issuance. Bonds with a term that exceeds 120% of the average reasonably expected economic life of the financed capital projects may be evidencing of the fact that the bonds may remain outstanding longer than necessary. These factors may be outweighed by other factors, however, such as bona fide cost under runs and long term financial distress.

HEDGE BOND RESTRICTIONS – In general, a bond is not tax exempt if it is a hedge bond, which means any bond issued as part of an issue, unless the issuer reasonably expects both of the following:

To spend at least 85% of the proceeds of the bonds on the governmental projects for which the bonds were issued within 3 years
To invest no more than 50% of the proceeds in “non purpose” investments (investment securities purchased with bond proceeds before expenditure of the proceeds on their ultimate use) with a substantially guaranteed yield for 4 years or more

In the case of a refunding transaction, the hedge bond analysis for the refunding bonds looks to the expectations at the time of issuance of the refunded bonds.

These expenditure requirements do not apply if 95% of the net proceeds of the bonds are invested in other tax exempt bonds that are not subject to the AMT until such proceeds are expended. A hedge bond may still qualify as tax exempt if the following are true:

At the time of issuance of the bonds, the issuer reasonably expects that:
- 10% of the proceeds of the issue will be spent for the governmental purposes of the issue within 1 year from the date of issuance; and
- 30% of the proceeds of the issue will be spent for the governmental purposes within 2 years; and
- 60% of the proceeds of the issue will be spent for the governmental purposes within 3 years; and
- 85% of the proceeds of the issue will be spent for such purposes within 5 years; and
At least 95% of the reasonably expected legal and underwriting costs of issuance are paid no later than 180 days following the date of issuance, and the payment of legal and underwriting costs are not contingent.