I. THE TAX-EXEMPT BOND PROCEEDS FUND

 

Public Act 88-258 authorizes the Treasurer to establish a tax-exempt mutual fund for the investment of state bond proceeds. This legislation was enacted to meet provisions of the Tax Reform Act of 1986.

 

Stated simply, for programs and projects which pass through the proceeds of tax-exempt bonds, the Tax Reform Act defined "expenditure" as the point at which the ultimate recipient makes a payment to a contractor or vendor. Until such "expenditure" is made, funds must be invested. The State, as the bond issuer, must track those thousands of investment streams even though it no longer has direct control of the funds, must compare the earnings back to the rate of interest on the underlying bonds, and must "rebate" excess earnings to the federal government, even if those earnings were received by others. Potential payments of a portion of such earnings would be due the federal government, even if this investment was only overnight.

 

The level of tracking required is simply not feasible. The Tax-Exempt Bond Proceeds Fund (TEBPF) is a permitted alternative, provided all pass-throughs of tax-exempt bond proceeds are invested therein.

Up to now, as an interim step to keep your programs in operation, the State has been fronting all pass-through projects with cash from other sources since the effective date of the Tax Reform Act of 1986. It is no longer possible to do so. Immediate start-up of the TEBPF so that bonds may again be issued for your programs is a matter of some urgency. The TEBPF must commence operations by January 1, 1989.

 

The purposes of this memorandum are as follows:

• To inform State agencies about the TEBPF and the urgency of its establishment
• To explain the new project identification system that all agencies will need to use for projects that are directed through the mutual fund and ultimately will be used to identify all capital projects funded from bond proceeds.
• To describe fully the operating characteristics and requirements of the TEBPF.

II. BASIC TEBPF REQUIREMENTS

 

Payments from State tax-exempt bond proceeds, regardless of the date of approval or allotment, made for grant or loan programs of the State must be deposited into TEBPF beginning January 1, 1989.

 

The monies deposited may be withdrawn by the grantee/loan recipient when they are needed to meet an expenditure for a project or to refund the unexpended portion of the grant back to the State.

 

The following is a brief listing of questions typically asked about how this mutual fund will be set-up and what agencies must do to comply with these requirements.

• Participants: Who must participate in the tax-exempt mutual fund?

All State agencies which administer grants and certain loans financed from tax-exempt bond proceeds. These grants or loans are to municipalities, other public agencies or 501 (c) (3) tax-exempt organizations.

• Tax-Exempt vs. Taxable: How does an agency know whether or not the grant-in-aid or loan is taxable or tax-exempt?

Prospectively, agencies must fill out a tax questionnaire and submit that information to OPM. OPM will tentatively classify each project as either "governmental" or "private activity" and this information will appear on the State Bond Commission agenda item. To the extent possible, entire programs will either be included in the TEBPF, or not be included.

 

For both projects in progress and future projects, OPM and the Treasurer's Office will work with you to determine which must be included in the fund. See Part III and Part IV, below.

• Programs administered on a reimbursement basis: What if your grant program is administered on a reimbursement basis? Does it still have to go through the mutual fund?

Yes. Programs which operate on a reimbursement basis will be included initially in order to reduce the likelihood of error.

• Timing of payments through the TEBPF: Does it make any difference that the State Bond Commission approved the grant five years ago?

All payments made after January 1, 1989 from tax-exempt bond proceeds must go through the mutual fund, no matter when approved or allotted.

• Payments to program recipients: How do program recipients receive and make payment?

Through the procedures outlined below, at the point in the payment sequence when a check would have gone out from the State Comptroller's Office to the recipient, a deposit will instead be made in the recipient's name in the TEBPF. The recipient will be issued checks against that account. The checks will be honored only if the "Recipient", "Project Name", and "Project No." blanks have been filled in and the appropriate one of two certifications printed on the face of the check has been properly filled out. The first certification applies to any payment for which a municipality has not already advanced its own funds. The certification indicates that the check is being issued for a payment to a contractor/vendor for the purpose for which the funds were granted. Contractor/vendor generally means any payee other than the recipient.

 

If the check is made payable to the recipient in the case of a reimbursement, the recipient must certify that the payment is a reimbursement and must indicate the date of payment and source of funds being reimbursed. Withdrawals from TEBPF made payable to the recipient should be audited by your agency against proof of expenditure.

 

Checks which are made out to a recipient, but for which the first rather than the second certification has been completed will not be honored.

• Sequence of events that lead to payment: What will happen when a payment request is made to the Comptroller's Office for a program recipient?

1. The State Comptroller's Office will post project funds electronically for grant recipient payments (no check required).
2. The State Treasurer will transfer project funds via electronic funds transfer to the (TEBPF) fund manager (Reich & Tang).
3. The deposit of the project funds will be made by Reich & Tang to the recipients TEBPF account.
4. Reich & Tang will honor all requests for payments made by the program recipient to contractors or vendors upon completion of certification printed on the face of the check.

III. DEFINITION OF "PROJECT" FOR PURPOSES OF THE TEBPF AND THE OPM CAPITAL BUDGET SYSTEM

 

Payments under a grant or loan program made from tax-exempt bond proceeds deposited into TEBPF must have identification. Identification will be made on a project by project basis. Treasury, the Comptroller's Office and OPM will work with agencies to define the projects.

 

A project is defined as having:

1. The same tax classification (as determined from the tax questionnaire)
2. The same administering State agency
3. The same recipient signatory authorization

Example:

 

A "project": grants for rehabilitation of various housing developments (generally "governmental") to the Hartford Housing Authority (a single recipient and signatory) made by the Department of Housing (a single administering State agency).

 

A "project": school construction grants (generally "governmental") to the City of Hartford (a single recipient signatory) for work at Hartford Public High School and Bulkeley High School.

 

Not a "project": grants to the Hartford Housing Authority and the New Haven Housing Authority (different recipient signatories) by the Department of Housing for rehabilitation of various housing developments.

 

Not a "project": grants to the Hartford Housing Authority and the City of Hartford (differing signatory authorities) for asbestos removal.

The numbering system which is being established for the TEBPF will be used for all State of Connecticut bond projects once the OPM Capital Budgeting System is established. The project numbering system will be as follows:

1. Agencies must maintain the existing numbering system using the bond fund, agency, SID, and project number. A new project ID system, in addition to the existing system, should be recorded on Line 2 after the name of the payee.
2. Agencies must use the 80,000 batch series to identify for the Comptroller and Treasurer the payments to the tax-exempt mutual fund.
3. Project ID must be recorded on the TEBPF Journal and will be a 10 digit numerical sequence as follows:

1. First four digits - the agency number
2. The next two digits - the program code
3. The next four digits - the project number

Please note that within the definition of a project each project number must be unique to that particular project. This unique project number must be maintained for that project and only that project, including any supplemental funding.

4. The following instructions are intended as a guide to assist agencies in coding of capital projects and is divided into two numbering sequences as follows:

1) State grants-in-aid, advances-in-aid, and loan programs; and 2) State construction/acquisition projects.

1. State Grants-In-Aid, Advances and Loans:

1. An agency must use the first four digits in the ten digit project ID for the agency number. This agency code should be one unique agency number.
2. The next two digits should be used by an agency to identify major programs. An agency should use a two digit numbering system starting with 01 through 49.
3. The next four digits must be used by an agency to identify specific projects within a program. The project numbers will be within the range from 0001 to 9999.
4. Also, lump sum requests should be coded using the program "00", and project code "0000".

Please note that these numbers are unique to a project, and must be maintained through all project phases, i.e., land acquisition, design and construction including any supplemental funding. An example of how a project ID could be developed for the Department of Housing is given in Attachment I, and an example for the Department of Education is given in Attachment II.

2. State Construction Projects:

Once the OPM Capital Budget System is implemented, agencies will be required to code all capital projects in accordance with the new ten digit project identification code. The assignment of project ID codes will be detailed in future directives.

 

V. PROCEDURE FOR ESTABLISHMENT OF PROJECT NUMBERING FOR ALL GRANT AND LOAN PROGRAMS

 

The procedure will be as follows:

1. With advice and consultation from OPM, agencies must prepare the following forms:

1. "Listing of Programs to be Funded with Tax-Exempt Bond Proceeds to be Deposited in the Tax-Exempt Bond Proceeds Fund" (Attachment III).
2. "Listing of Programs that Will Not Be Deposited in the Tax-Exempt Bond Proceeds Fund" (Attachment IV).

All of your agency's bond-funded grant and loan programs must be included on one of the two forms. The Agency Head must sign and date these forms and submit copies to OPM, Office of the Treasurer, and Office of the Comptroller, Accounting Systems Division, by December 5, 1988.

2. For all projects and programs that will be included in the Tax-Exempt Mutual Fund program, each agency should assign project numbers, list them on the "Grant/Loan Project Identification Number Assignment" form (Attachment V) and submit the forms to OPM for review. (Agencies should retain a copy for their records). The forms must be received by OPM by December 15, 1988.
3. OPM will review the forms and will contact the agency within five working days, as follows:

If approved:

 

OPM signs and dates the form, makes copies, and distributes as follows:

1 copy to Treasurer

1 copy to the Agency

1 copy for OPM files

 

If unapproved:

 

OPM will contact the agency by phone to resolve any problems.

Possible problems include:

• Incorrect categorization of program
• Incorrect or inconsistent definition of project (e.g. more than one grant recipient covered in single project)
• Duplicate project numbers

4. The Treasurer will not activate a TEBPF account or process payments for any project for which there has not been an approved Project Number.

VI. ESTABLISHMENT OF PROJECT ACCOUNTS

 

The firm of Reich and Tang has been hired to manage the TEBPF. The fund manager will establish project accounts within TEBPF for each grant/loan recipient.

 

Reich and Tang, using the approved listing established in accordance with Part V, will work with project recipients to set up their accounts. A new account letter used to establish withdrawal authorization will be completed and signed by project recipients. A new account letter must be completed for each project by the grant/loan recipient. The grantee agency must provide a new account letter to the recipient for completion. The recipient will transmit this new account letter to Reich and Tang.

 

VII. PAYMENT PROCEDURE

1. IDENTIFICATION

1. TEBPF payments must be processed in separate expenditure batches.
2. The batch number must begin with the 80,000 series and be initialized each fiscal year. Payee information on the batch, CO-19, should read:
   "TAX-EXEMPT BOND PROCEEDS FUND WIRE DEPOSIT - NO CHECK REQUIRED" The amount should be the total for all payees listed. Listing of individual payees on the CO-19 is not required. The batch should be stamped in the upper right hand corner - "TEBPF".
3. A TEBPF Journal (Attachment VI) is to be completed. This journal provides information as to deposit project account numbers and amounts. The attached sample may be copied for use until a supply of printed forms is available.
4. Payee information on the CO-17 or CO-17L should appear as follows:

NAME --	line 1:	Town of ___________, if a town, or payee name
	line 2:	ACT. #XXXX-XX-XXXX (agency number- program number-project number, i.e. the project identifier code)
ADDRESS -	MUST be left blank

 

Complete all other payee information as required in the Expenditure Section of the State Accounting Manual (SAM).

2. TRANSMITTAL

1. To the Comptroller - Special payment batches, for TEBPF (Attachment VII), numbered in the 80,000 series, will be sent to the Central Accounts Payable Division (CAP) of the Comptroller's Office for payment processing.
2. To the Treasurer - At the same time as a payment batch is forwarded to CAP, the Treasurer's copy of the TEBPF journal will be sent to:

The Office of the State Treasurer

(20 Trinity Street) 55 Elm St.

Hartford, CT

ATT: TEBPF Coordinator

3. CORRECTIONS AND ADJUSTMENTS

1. Improperly identified accounts -

Payment made for deposit into TEBPF that are not properly identified or do not have an account set up with the fund manager will require corrective action by the agency originating the claim. Telephone contact will be made by the TEBPF manager concerning improperly identified payments.

Subsequently, a TEBPF journal noting correction and the date of the correction should be forwarded to Treasury. An area has been provided for corrections on the TEBPF journal.

In the event that a State payment is deposited into TEBPF in error, and the agency is notified by Reich & Tang that an account does not exist for the project, the following procedure should be followed:

1. Reich and Tang will deposit unidentified payments into a State account awaiting advice of disposition from the agency.
2. The agency should request a refund of expenditure by wire deposit from the TEBPF by:

1. Completing a TEBPF correction journal indicating that a deposit was made to TEBPF in error. An explanation must be given for the reason the payment was made to the TEBPF. Certification by the agency is required on all corrections made to TEBPF deposits. The batch number on the TEBPF correction journal should be the original batch number, a dash and a sequential number beginning with 1 for the first adjustment on a batch (example Batch 80, 005-1).
2. Filling out a deposit slip, CO-39, following procedures prescribed in the SAM Coding Section, paragraph 2.2.3, Refunds of Expenditures - other than Budgeted Appropriations.
3. Submitting both documents, the TEBPF correction journal and the CO-39, to Treasury, TEBPF Coordinator.
4. Upon completion of the wire deposit, a receipted CO-39 will be returned to the agency as advice of refund of the TEBPF deposit error.

2. Misdirected payments -
   If the agency fails to properly identify the payment batch as a tax-exempt mutual fund payment and a check is mailed to the recipient in error, the recipient must return the undeposited check to the agency. The agency must then follow procedures as prescribed in the State Accounting Manual, Expenditure Section, Vendor Check Cancellation Procedure.
3. Improperly deposited payments -

1. Money deposited to an incorrect project number - an adjustment can be made on the TEBPF journal, within the correction area. Both the correct and incorrect information must be reported. The incorrect amount should be enclosed in parenthesis. See section C-1 for an explanation of batch numbering.
2. Money deposited incorrectly to TEBPF - effect recovery from the recipient by check made payable to the State. Follow the procedures as prescribed in SAM for refund of expenditures.
3. Deposit amount incorrect:

1. Amount greater than - effect recovery from payee directly using the already - established procedures for refund of expenditures
2. Amount less than - issue an additional payment for the difference (on an 80,000 batch)
3. Amount differs between projects - follow the rules established in (c) -1 and (c) -2 above.

4. RECONCILIATION

It is recommended that expenditures paid to grantees and loan recipients for deposit into TEBPF be reconciled with the periodic statements provided by the TEBPF fund manager. Boxes 7 & 8 and the blank column between boxes 12 & 13 of the TEBPF journal have been included to allow for reconciliation.

 

Errors discovered during reconciliation should be reported to the Treasurer utilizing the TEBPF journal in the area provided for corrections.

VIII. NONCOMPLIANCE WITH TEBPF REQUIREMENTS

If through an error, a recipient receives funds directly and fails to comply with the State's deposit requirement for tax-exempt bond fund grant-in-aid program monies, the recipient will be in violation of State law and all State grant/loan awards may be in jeopardy. The continued tax-exempt status of all State of Connecticut bond issuance depends upon the successful implementation of the TEBPF. If a pattern develops in which a State agency has not done what is required to assure that all of its payments to grant and loan recipients from tax-exempt bond proceeds flow through the TEBPF, all such payments by that agency may be halted until correction is made.

IX. MODIFICATION OF GRANT AND LOAN CONTRACTS

 

In order to assure that the fund will operate in a way which permits the bond counsel to approve the issue of bonds as tax-exempt, a modification to new grant and loan contracts paid with tax-exempt bond proceeds will need to be implemented.

 

Guidelines will be issued at a later date to clarify this issue. However, please keep in mind that new tax-exempt bond fund grant-in-aid program contracts must require that:

1. Qualifying grant and loan money be invested in TEBPF
2. The proceeds from the bonds only be withdrawn from a TEBPF account for a contractor or vendor payment and not be reinvested after release from TEBPF, unless the payment is a reimbursement. If a reimbursement, proof of expenditure (generally a cancelled check) must be provided to the State Agency.
3. Fund withdrawal requests be accompanied by a signed certification that the moneys will be used immediately for project expenditure.
4. Unexpended funds be returned to the State.

X. GENERAL

 Questions may be directed as follows:

PROJECT CLASSIFICATION OR BOND COUNSEL ISSUES:

 

Office of the State Treasurer, TEBPF Coordinator -- 566-5054

Office of Policy and Management, Capital Program Unit -- 566-4757

 

PAYMENT PROCEDURE:

 

Office of the State Comptroller, Central Accounts Payable, Special Handling Section -- 566-3895

 

TEBPF ACCOUNT INFORMATION:

 

Fund Manager, Reich & Tang -- 1-800-221-3079

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