TO:
Honorable Mayor and Members of the City Council
THROUGH:
Talyn Mirzakhanian, City Manager
FROM:
Libby Bretthauer, Acting Finance Director
Julie Bondarchuk, Financial Controller
Emy-Rose Hanna, Budget & Financial Analyst
SUBJECT:Title
Consideration of a Resolution Approving an Agreement with BLX Group for Arbitrage Rebate Services in Relation to Post-Issuance Debt Compliance (Budgeted) (Acting Finance Director Bretthauer).
ADOPT RESOLUTION NO. 25-0058
Body
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RECOMMENDATION:
Staff recommends that the City Council adopt Resolution No. 25-0058 approving an agreement with BLX Group for arbitrage rebate services in relation to post-issuance debt compliance.
FISCAL IMPLICATIONS:
Sufficient funds are available in the General Fund budget. With six tax-exempt bonds subject to Arbitrage Reporting, the estimated cost for FY 2026 is $21,000 based on a not-to-exceed fee of $3,500 per Report.
BACKGROUND:
Under Internal Revenue Code section 148(f), issuers of tax-exempt municipal bonds are required to complete periodic arbitrage reporting to determine if a rebate/payment is due to the Internal Revenue Service (IRS). Arbitrage is earned when proceeds from a tax-exempt bond are used in investments that earn a yield greater than the yield on the bond issue. If the City earns more from investments than what is paid in interest on the bonds, then the profit is considered arbitrage and may result in a rebate payment due to the IRS.
The IRS allows a tax-exempt issuer to earn arbitrage (interest earnings) only under very certain conditions and sets limits on allowable returns. This regulation prevents issuers from exploiting tax-exempt bonds for profit.
To determine if a payment is due to the IRS, a detailed analysis is performed on these excess amounts to determine if the issuer can apply an exemption or exception to the arbitrage. Any excess earnings that do not fall under an exemption or exception may result in a “rebate” due to the IRS. This arbitrage rebate is due no later than 60 days after each 5th bond year/anniversary date of the bond issuance and also 60 days after the final redemption date/maturity of the bond, as defined by Section 148(f)3 of the Internal Revenue Code.
DISCUSSION:
With over 30 years of consulting experience, BLX Group offers extensive expertise and specializes in arbitrage reporting with in-depth knowledge on current IRS requirements. The BLX team consists of experienced professionals that are familiar with the legal and regulatory limits for arbitrage within the Internal Revenue Code section 148. They also understand the needs and expectations of officials at the IRS and other regulatory agencies. BLX offers a streamlined process that provides the following benefits:
• Their experts utilize vetted and efficient data collection methods and resources.
• They have instituted policies and procedures to ensure that all analyses reflect the most recent version of the Treasury Regulations.
• They conduct multiple levels of rigorous internal reviews and external checks and balances to ensure accuracy, and to confirm that possible alternatives are identified and compared.
The attached agreement with BLX Group will enable the City to be in compliance with Internal Revenue Code section 148. The City of Manhattan Beach currently has six active tax-exempt issuances that require arbitrage calculations to be completed on a periodic basis. The City’s current tax-exempt bonds include:
1. Reassessment District No. 2018, Limited Obligation Refunding Bonds (Underground Utility Assessment Districts (UUAD)), Series 2018
• Issue Date: 3/2/2018
2. Assessment District No. 19-12, Limited Obligation Improvement Bonds (Underground Utility Assessment Districts (UUAD)), 2019 Series A
• Issue Date: 12/10/2019
3. Assessment District No. 19-14, Limited Obligation Improvement Bonds (Underground Utility Assessment Districts (UUAD)), 2019 Series A
• Issue Date: 12/10/2019
4. Assessment District No. 19-4, Limited Obligation Improvement Bonds(Underground Utility Assessment Districts (UUAD)), 2020 Series A
• Issue Date: 3/11/2020
5. Certificates of Participation (Fire Station #2), Series 2021
• Issue Date: 8/17/2021
6. Refunding Certificates of Participation (Metlox & Water/Wastewater Refunding Bonds), Series 2021
• Issue Date: 12/15/2021
The attached agreement with BLX Group would enable the completion of the arbitrage services for the six existing tax-exempt bonds noted above, along with any future tax-exempt bond issuances that would be subject to the same arbitrage reporting requirements.
Finance staff will work with the BLX Group to identify if any of the City’s tax-exempt bonds require a rebate due to the IRS. If any rebate is due, then City staff will work with the consultant to identify amounts due to the IRS and file the applicable tax forms.
PUBLIC OUTREACH:
After analysis, staff determined that public outreach was not required for this issue.
ENVIRONMENTAL REVIEW:
The City has reviewed the proposed activity for compliance with the California Environmental Quality Act (CEQA) and has determined that the activity is not a “Project” as defined under Section 15378 of the State CEQA Guidelines; therefore, pursuant to Section 15060(c)(3) of the State CEQA Guidelines the activity is not subject to CEQA. Thus, no environmental review is necessary.
LEGAL REVIEW:
The City Attorney has approved the agreement as to form.
ATTACHMENTS:
1. Resolution No. 25-0058
2. Agreement - BLX Group