Reimbursement resolution
A reimbursement resolution is required as part of a complete application; attach a copy of the reimbursement resolution that shows municipal intent to borrow at a future date to reimburse the general fund, or another fund, for project expenses paid by the municipality.
The reimbursement resolution (aka declaration of official intent to reimburse) is a municipal resolution required by the IRS declaring the municipality's official intent to reimburse a municipal account with proceeds from a tax-exempt bond or promissory note.
The Departments of Natural Resources (DNR) and Administration (DOA) suggest that a municipality adopt a reimbursement resolution whenever project costs are being paid out of a municipal account with the expectation to reimburse that municipal account with proceeds from a tax-exempt debt issue. In order to ensure compliance with IRS regulations, the Clean Water Fund Program (CWFP) and Safe Drinking Water Loan Program (SDWLP) strongly encourage municipalities to adopt a reimbursement resolution before spending any money from municipal accounts that will be reimbursed with CWFP/SDWLP loan proceeds.
IRS reimbursement regulations
The municipality should consult with its bond counsel and local attorney as to how the IRS reimbursement regulations apply to its specific municipal project and financing plan. The U.S. Department of Treasury regulations on proceeds of bonds used for reimbursement can be found in 26 CFR 1.150-2.
Sample resolution
Questions regarding the sample reimbursement resolution should be directed to the municipality's bond counsel.
Ineligible for reimbursement
Failure to pass a reimbursement resolution can result in project costs that cannot be reimbursed by the CWFP or SDWLP. Project costs paid by a municipality out of its internal accounts, before adopting a reimbursement resolution, may not be eligible for reimbursement from the CWFP/SDWLP loan proceeds.
A municipality should adopt a resolution declaring its official intent to reimburse its municipal account if it intends to use proceeds from a tax-exempt debt issue to reimburse its municipal account from which project costs were paid prior to the availability of the proceeds from the debt issue.
Exceptions
The U.S. Department of Treasury regulations contain two exceptions to the reimbursement resolution requirement described above.
Preliminary expenditure exception
A municipality may use CWFP/SDWLP loan proceeds to reimburse internal municipal accounts without first adopting a reimbursement resolution for "preliminary expenditures" not in excess of 20% of the total CWFP/SDWLP loan amount. Preliminary expenditures include engineering for facilities plans, plans and specifications, surveying, soil testing, loan closing costs and similar costs that are incurred prior to the start of construction. Preliminary expenditures do not include land acquisition, site preparation and similar pre-construction costs.
De minimis exception
A municipality may use CWFP/SDWLP loan proceeds to reimburse internal municipal accounts without first adopting a reimbursement resolution if the amount of the reimbursement does not exceed the lesser of $100,000 or 5% of the CWFP/SDWLP loan amount.
Resolution Content
In order to ensure compliance with IRS regulations, the CWFP/SDWLP strongly encourages municipalities to adopt a reimbursement resolution before spending any money from municipal accounts that will be reimbursed with CWFP/SDWLP loan proceeds. A reimbursement resolution must be adopted within 60 days of when the first payment of project costs to be reimbursed is made, and contain the following three elements:
- Statement of Expectation to Reimburse: The reimbursement resolution must contain a statement that the municipality reasonably expects to reimburse expenditures with proceeds of debt to be incurred by the municipality. The reference to "debt" need not specifically refer to a CWFP/SDWLP loan.
- Description of Project: The reimbursement resolution must contain a general description or function of the project (include the DNR assigned project number). The reimbursement resolution could also include an identification of the fund or account to be reimbursed and a description of the general functional purpose of the fund or account (for example, the "sewage system capital improvements fund").
- Maximum Principal Amount: The reimbursement resolution must state the maximum principal amount of debt expected to be issued for the project, i.e., the estimated amount of the CWFP/SDWLP loan.
18-month rule
Municipalities should submit invoices for reimbursement in a timely manner to comply with 26 CFR 1.150 2(d)(2)(i). In general, the reimbursement of municipal accounts from CWFP/SDWLP loan proceeds must occur not later than eighteen (18) months after the later of -
- the date the original expenditure is paid; or
- the date the project is placed in service or abandoned, but in no event more than three (3) years after the original expenditure is paid.
Principal and interest payments
The IRS reimbursement regulations do not allow for the reimbursement of principal or interest payments made by the municipality out of its ordinary municipal revenues or funds.
Interest payments on an interim project debt that are made from the proceeds of that particular interim debt issue (capitalized interest) may be refinanced (this is not a "reimbursement" transaction). Rather, such a transaction is treated as a "refunding" which is subject to other IRS regulations.
Eligible municipal accounts
The CWFP/SDWLP may only reimburse a municipal account that is funded by ordinary municipal revenues. This does not include accounts created by the issuance of debt. A borrowed money account, or similar account mandated by Wisconsin Statutes for the issuance of debt, cannot be reimbursed.
Old reimbursement resolutions
If the municipality's reimbursement resolution is more than 2-3 years old at the time the project is starting, it is suggested that the reimbursement resolution be reviewed to determine if the amount stated in the original resolution still covers the estimated amount of the CWFP/SDWLP loan. If not, the municipality will need to adopt a new reimbursement resolution stating the maximum principal amount of debt expected to be issued for the project, i.e. the new estimated amount of the CWFP/SDWLP loan.
What is the difference between "reimbursement" and "refinancing"?
Sections NR 162.04(3) and NR 166.07(3) of the Wisconsin Administrative Code provide that the department may purchase or refinance an eligible municipal applicant's interim financing for an eligible project, subject to applicable requirements and limits established in related statutes and codes.
- Reimbursement is using CWFP/SDWLP loan proceeds to pay back a municipal account that advanced internal funds to temporarily pay project costs.
- Refinancing is using CWFP/SDWLP funding to pay off all or part of a debt that was taken out by the municipality to temporarily finance project costs.