Date: April 26, 1996 Code: AD 96-10
To: Vice Presidents for Administration Supersedes: AD 95-12
From: George A. Pardon Accounting Director Business and Finance
Subject: Deferred Maintenance Projects Funding
Business and Finance has used tax exempt bonds to secure funding for approximately forty-one million dollars of 1994/5 and 1995/6 deferred maintenance projects. A number of restrictions exist regarding the timing of disbursement of these funds by the campuses. The purpose of this memo is to explain these restrictions and inform you of revised reporting requirements.
The most critical restriction comes from the debt being subject to federal arbitrage rules. Arbitrage is essentially the spread between the bond interest rate and the interest rate earned on the bond proceeds prior to expenditure multiplied by the bond proceeds. If proceeds are not spent within two years of the bond issue date, penalties and interest accrue on the entire bond issue from the date of issue until the last dollar is spent. Simply encumbering the funds is not sufficient to avoid penalties. Warrants must have cleared the State Treasury by the specified date. The potential penalty can be as high as 100% of the arbitrage earned plus accrued interest. The total penalty incurred on these bonds will be charged, on a pro-rata basis, to the campus(es) failing to ensure the funds are fully spent by the date noted on the attached project list.
Another critical date affecting the deferred maintenance funding is the Executive Order 648 transfer date. Under the terms of the Executive Order, general fund cash will revert back to the Chancellor's Office six months prior to the expiration date, regardless of any outstanding encumbrances or warrants. Since the bond proceeds were recorded in the General Fund as a reimbursement, E.O. 648 applies to these funds.
Deferred maintenance funding provided from the July 1995 and March 1996 bond sales must be spent by July 7, 1997 and December 31, 1997, respectively. Attachments A-1 and A-2 identify funding dates of amounts applicable to each campus project. Attachment B demonstrates graphically these critical dates based upon the bond issuance date. Failure to adhere to the arbitrage and E.O. 648 expenditure limits may result in reversion of funds or substantial penalties.
It may be possible for campuses to expedite the expenditure of these funds and reduce the arbitrage penalty risk on their 1994/5 projects by substituting the cost of other deferred maintenance projects that may be completed sooner, in place of those shown on Attachment A-1. The campus will still be responsible for completing the original projects (Attachment A-1), but the deadline for the original projects would change to December 31, 1997 since they would no longer be funded from monies subject to arbitrage.
REVISED REPORTING REQUIREMENTS: This memo supersedes the reporting requirements indicated in AD 95-12 dated July 27, 1995.
Campuses will report disbursements as indicated on Attachment C. The report is to be submitted with a copy of the AM091 "Report of Transactions" showing the detail of expenditures totaling the amount allocated to the campus. To simplify this request, campuses should record the bond funded deferred maintenance entries in a separate ledger account.
If you have any questions on reporting the disbursements, please call Mr. Bill Musselman at (310) 951-4610. Any questions about projects should be directed to Ms. Elvyra San Juan in PP&D at (310) 985-9467.
GAP:WPM:js AD 96-10
Distribution: Presidents (w/ Attachments) Executive Deans Directors of Physical Plant Financial Managers Accounting Officers Budget Officers Chancellor's Office