Bond Financed Records Retention

Bond Financed Records Retention Rosa H Renaud, Financing & Treasury Jean Gill, Financial Services Accounting Lily Wang, Management & Accounting Practices

Agenda • Bond Financed Projects • IRS Requirements • CSU Policy • Implementation • IRS Audit Example • Campus perspectives • Reference Material

Bond Financed Projects Generally, the CSU has projects funded by tax-exempt financings under: • General Obligation Bonds; • State Lease Revenue Public Works Board Bonds; • Systemwide Revenue Bonds; • Commercial Paper; • Auxiliary Organizations. Other funding sources: • Campus program reserve contributions • Third party contributions. The IRS requires bond issuers to have adequate documentation to substantiate eligibility of tax-exempt bond status for the life of the bonds, approximate 35 years. Therefore, all funding source records that contribute to a tax-exempt facility must be retained for 35 years.

Bond Financed Projects • The CSU Trustees have tax-exempt bond obligations, totaling over $3 billion for SRB; and an additional $1 billion for State Public Works Board bonds, auxiliary standalone bonds, and commercial paper. • Additionally, the State of California has General Obligation Bonds in the $100’s millions tied to the CSU. • Currently, there are hundreds of CSU projects, both State and Nonstate, that have existing tax-exempt bond debt obligations.

IRS Requirements • We must be able to demonstrate: • How the money was spent. • How the building has been used.

IRS Requirements • There are two main areas that affect our tax-exempt bonds: • Private Activity Use Limitations - generally not exceeding 10%; (Note: this was the focus of other presentation). • Record Retention – for the life of the bonds plus three years. CSU projects are many times funded over a 2-3 year window with multiple financings. As such, the CSU policy is for the life of the bonds plus 5 years. • Generally, the record retention requirement is for 35 years.

IRS Requirements – Records Retention • General purpose is to keep good records in order to have documentation demonstrating CSU: • Has spent bond proceeds in accordance to a plan of an eligible project; • Uses the facility within the requirements of Private Use limitations. (For Mixed-Use projects, this is particularly important in order to track expenditures, in writing, during the life of the bonds/facility.) • Is consistent in allocating funding between tax analysis and private use.

IRS Requirements – Records Retention • Examples at different stages with the project: • Project Development – Campuses fill out a Private use Checklist form. • Financing – F&T documents tax and bond analysis; Campuses fill out a Preliminary Allocation of Bond Proceeds Form; a Final Project Budget (2-7 form) is memorialized by the campus and CO CPDC department. Board of Trustee agenda items document financing plan. • Commercial Paper Issuance – IRS requires an annual report documenting that CSU has evaluated private use.

IRS Requirements – Records Retention • At different stages with the project (cont’d): • Bond Issuance – financing team analysis; bond transcripts; Official Statements; Tax Certificates, … • Completion of Facility – Final Allocation of Bond Proceeds form by campus to F&T. • Annual CPDC Memo – Tax Compliance, Custodial, Space and Facilities Reporting. • Usage of Facility – campus documents contracts, such as leases, grants, research, and space usage. • Note: Federal grants are considered Private Use.

CSU Policy • Executive Order 1031 • 11 Record Retention Schedules • Retention periods vary from 120 days to “permanently”. • Review for compliance annually.

CSU Policy (cont’d) • What are “Fiscal Records?” • Fiscal Records - Items typically generated by departments such as • Accounts Payable; • Accounting; • Procurement. • Includes records such as • vendor invoices; • general ledgers; • contracts and leases.

CSU Policy (cont’d) • Rules for Fiscal Records: • If funding source is bonds, keep records for life of the bond (as seen in earlier slide). • If funding source is a grant, keep records for 3 years after submission of the Final Report (about 8-10 years), EXCEPT FOR grants for scientific research in a tax exempt facility, then agreements must be kept for 35 years. • For all other funding sources, keep records for 4 years. • May retain in either hardcopy or electronic format. • Must be maintained in a readable format.

Implementation Options Options to accommodate different requirements… • Keep all data to the longest retention requirement (out of compliance) • Purge data as retention period expires.

Implementation Challenges While Option 2 may seem like the obvious choice, it is difficult to accomplish without negative consequences. • Data integrity issue • Extracting data from the GL (original book of records) causes the data to be incomplete, and may create an out of balance. • Impact the accuracy of data warehouse reporting • Time and money • Costly to identify and extract data

Implementation Recommendation Although Option 1 is not the optimum solution as it does not purge data with shorter retention years, it meets the IRS requirement for tax-exempt bonds. The litigation risks and exposure to public records being available diminishes with earlier years.

Implementation Recommendation (cont’d) This topic has been well discussed and will continue to be discussed among various constituents at the CO to seek better options and investigate industry solutions. • CMS • Financial Services • General Counsel • Information Security • Systemwide HR

Implementation Recommendation (cont’d) With ongoing Oracle upgrades, at one point, legacy data may become incompatible with the latest version. CMS is exploring the option of archiving legacy data (pre-CFS) to make it available for retrieval.

IRS Audit Example • In 2011, the IRS audited the Systemwide Revenue Bond program, Series 2005A and 2005B. • It involved 20 “new money” projects built in the 2004-2006 timeframe and two prior bond refundings, which had 15 projects funded and built between 1983 and 1999. • A variety of project types. • Three campuses had in person visits by the IRS agent. • We had a favorable outcome but had many learning lessons given weaknesses.

Campus Perspectives • Comments from campuses involved with the audits • San Diego • Sacramento

Reference Material • http://calstate.edu/ft/taxexemptbonds • CPDC Memo Attachment F – Record Retention Checklist

CPDC Memo – Attachment F – Record Retention Checklist

Bond Financed Records Retention