SUPTS. MEMO. NO. 6
May 31, 1996
|FROM:||William C. Bosher, Jr.
Superintendent of Public Instruction
|SUBJECT:||Use of Literary Fund Loan Proceeds|
The Code of Virginia and Regulations of the Board of Education Governing Literary Loan Applications convey to local school divisions the ability to apply to the Board of Education for a loan from its Literary Fund to finance the construction, renovation and/or expansion of school buildings (the "Project"). In the event your application for a Literary Fund loan is approved and funded, the note that you will execute will be transferred to the Virginia Public School Authority (the "VPSA") and used to secure certain of its bonds. The Constitution of Virginia specifically authorizes the use of Literary Fund assets as collateral for bonds issued by the VPSA. All permanent notes evidencing Literary Fund loans (the "Loan Notes") are transferred from the Literary Fund to the VPSA at which time the Loan Notes are deposited in the Reserve Fund, which is pledged to the payment of certain of the VPSA's bonds. In order to maintain the tax exemption of the VPSA bonds, the Loan Notes must also be tax exempt obligations. Therefore, it is necessary that your Loan Note qualify as a tax exempt obligation. If you use the money advanced to you from the Literary Fund to reimburse yourself for money advanced toward the Project, or to retire any interim borrowing that you may have incurred to finance the Project, you should be aware that there are certain requirements that must be met in order for your Loan Note to be tax exempt. Accordingly, you will be required to provide the Department of Education and the VPSA with an opinion of nationally recognized bond counsel that the Loan Note will be a tax exempt obligation before any money from the Literary Fund will be advanced. Since these requirements may require you to take certain action during the period of time after your application has been approved and before any moneys are advanced from the Literary Fund, the purpose of this memorandum is to summarize SUPTS. MEMO. NO. 6 May 31, 1996 Page 2 some of those requirements so that you may take the action necessary to preserve the tax exemption of your Loan Note. TEMPORARY USE OF OWN FUNDS If you use your own money to finance the Project and intend to use the money from a Literary Fund loan draw to reimburse yourself, you must adopt a resolution BEFORE YOU SPEND ANY OF YOUR OWN MONEY that indicates that the use of your own money is temporary and that you intend to borrow money to reimburse yourself (the "Reimbursement Resolution"). The Reimbursement Resolution should also describe the Project and indicate the maximum principal amount of obligations expected to be issued for the Project. A copy of a model Reimbursement Resolution is attached as Exhibit A to this memorandum for your convenience. There is also a time limit in which you may use the proceeds of the Literary Fund loan to reimburse yourself. Generally, you must reimburse yourself within 18 months of the later of (1) the date the expenditure is paid and (2) the date that the project is placed in service but no later than 3 years after the date the expenditure is paid (the "Time Limit"). For example, assume that an issuer uses its own money to pay project costs in November 1990 and June 1992 and the project was placed in service in June 1992. If the issuer proposes in December 1993 to reimburse itself with Loan Note proceeds, it may reimburse itself for the costs paid in June 1992 because it is within 18 months of the date the expenditure was made and the date the project was placed in service, but it cannot reimburse itself for the November 1990 costs because those costs were paid more than three years earlier. INTERIM BORROWINGS If you use your own money to finance the Project and borrow money (e.g., from a bank, through a general obligation borrowing, or through a conduit issuer such as an industrial development authority) to reimburse yourself (the "Interim Borrowing") and intend to use the money from a Literary Fund loan draw to retire the Interim Borrowing, you must still adopt a Reimbursement Resolution BEFORE YOU SPEND ANY OF YOUR OWN MONEY. In addition, the Time Limit is measured from the date you use your own money and not from the date that borrowed funds are used. SUPTS. MEMO. NO. 6 May 31, 1996 Page 3 If you use the proceeds of the Interim Borrowing to pay directly for the costs of the Project, you do not need to adopt a Reimbursement Resolution. Whether you use the proceeds of the Interim Borrowing to reimburse yourself or to pay directly for the costs of the Project, you may wish to structure your Interim Borrowing to permit you to prepay the Interim Borrowing at any time without penalty so that when Literary Fund money is available, you may use it immediately to retire the Interim Borrowing. If you are unable to prepay your Interim Borrowing within 90 days of the date of the release of your Literary Fund loan, your Project will not be funded and your Project will be moved to the bottom of the First Priority Waiting List. The attached questionnaire will be sent to you once your Literary Loan has been released. No funds will be advanced to you until the questionnaire has been completed and submitted to the Department. There is no need for any division to complete the questionnaire at this time. If you have any questions regarding any of this information, please call Kathryn S. Kitchen, Division Chief, Finance, at (804) 225-2025. WCBJr/kk Attachment: This memo and its attachment will be sent to the superintendent's office.