Checklist · Local Government Finance

Issuing a Municipal Bond or Responding to a Disclosure Inquiry: A Practical Checklist

26 U.S.C. § 141

Type
Checklist
Jurisdiction
National
Date
2025-02-08
Topic
Local Government Finance

This checklist covers a municipal bond issuance from planning through closing, and then the continuing obligations that follow for decades. The first half runs the transaction: authority, structure, authorization, tax documentation, disclosure diligence, and closing. The second half covers post-issuance compliance — the issue inventory, private use monitoring, arbitrage tracking, and disclosure filings — and then the response to a tax examination or a securities inquiry. Each item names the action and the failure it prevents, with particular attention to the obligations that outlive the transaction team.

Issuing a Municipal Bond or Responding to a Disclosure Inquiry: A Practical Checklist

Local Government Finance > Municipal Bonds, Disclosure, and Tax Exemption | Published 8 February 2025 - Updated 26 May 2026 | UpLaw - uplaw.us

Planning

Confirm state law authority for the issuer, the purpose, and the structure.

Confirm debt limit capacity and how the proposed obligation is counted.

Determine whether a referendum is required, and calendar it, because election dates control the schedule.

Select the security structure deliberately — general obligation, revenue, special assessment, tax increment, lease and appropriation, or conduit — and understand what each commits the issuer to for the life of the bonds.

Analyze the intended uses of the financed facility now. Leases, management contracts, research agreements, naming rights, and concessions all create private business use under 26 U.S.C. § 141, and the analysis is far cheaper before the structure is fixed.

For a conduit financing, confirm the issuer's policies on borrower eligibility, disclosure, and post-issuance reporting.

For a 501(c)(3) borrower, inventory existing private use against the five percent basket under 26 U.S.C. § 145 before adding a new issue.

Model the arbitrage posture. Which spending exception under 26 U.S.C. § 148 the draw schedule can meet, and what rebate exposure exists if it does not.

Engage a municipal advisor and understand the fiduciary duty owed under the framework at 15 U.S.C. § 78o-4.

Authorization

Draft the authorizing resolution or ordinance to authorize the bonds, describe the project and security, approve document forms, and make the tax covenants.

Draft the parameters delegation with care — maximum principal, maximum rate, maximum term, minimum price — because officers may not exceed it and pricing conditions move.

Confirm notice, hearing, and publication requirements, including any public approval requirement applicable to private activity bonds under 26 U.S.C. § 147.

Confirm the governing body's quorum and vote requirements and that the record reflects them.

Tax documentation

Draft the tax certificate as a factual record, not as boilerplate. It records the issuer's reasonable expectations about use of proceeds, timing of expenditures, investment, and private use, and it is the first document an examination will read.

Confirm the allocation of proceeds to expenditures, and how that allocation will be documented as draws occur.

Confirm the private business use analysis for every anticipated arrangement, applying both the use test and the payment or security test under 26 U.S.C. § 141 — remembering that both must be exceeded for the first test to be met.

For a 501(c)(3) issue, compute the five percent basket under 26 U.S.C. § 145 and record what is already consumed.

Confirm compliance with 26 U.S.C. § 147 for any private activity issue: maturity limits, restrictions on land and existing property, prohibited facilities, public approval, and issuance cost limits.

Confirm registration compliance under 26 U.S.C. § 149 and the definitional requirements at 26 U.S.C. § 150.

Record the arbitrage expectations: the spending exception targeted, the temporary period, the reserve fund sizing, and the rebate computation schedule.

Identify who will perform rebate computations and when. This must be a named position, not an assumption.

Confirm records retention for the life of the issue plus any refunding period.

Disclosure

Treat the official statement as the issuer's document. The issuer certifies it and bears the antifraud exposure under 15 U.S.C. § 77q, 15 U.S.C. § 78j, and 17 C.F.R. Part 240, notwithstanding the registration exemption at 15 U.S.C. § 77c.

Participate in diligence substantively. Officers will be questioned on the record; the session is not a formality.

Address the recurring problem areas directly: pension and other post-employment benefit liabilities with their assumptions; conduit obligor condition; known budget stress; and continuing disclosure compliance history.

Verify the compliance history statement against the actual filings, item by item. A misstatement here is the most commonly enforced municipal disclosure violation.

Apply the materiality standard from Basic Inc. v. Levinson, weighing probability and magnitude for contingent matters.

Negotiate the continuing disclosure undertaking with its performance in mind. Annual content requirements should be data the issuer actually produces; event notice triggers should be understood by the people who will have to recognize them.

Confirm who the obligated persons are and who bears the undertaking in a conduit structure.

Closing and the first month

Assemble the transcript and confirm the tax record is complete.

Deliver the issuer's certificate as to the official statement knowingly.

Add the issue to the inventory: closing date, amount, financed facilities, tax status and limits, arbitrage posture and rebate dates, disclosure undertaking deadlines and content, and the location of records.

Update the disclosure calendar with the annual filing deadline and the event triggers.

Notify the departments operating the financed facilities in writing that any lease, management contract, research agreement, naming rights arrangement, or concession requires review before execution.

Confirm the records custodian and the retention period.

Confirm who performs rebate computations and calendar the first computation date.

Ongoing compliance

Route every proposed arrangement affecting a financed facility for private use review before execution — and audit annually whether the routing actually happened rather than merely being required.

Track private use consumption against the applicable basket for each issue, with the tracking living in the space management system rather than in a binder.

Maintain investment records sufficient to compute rebate for the entire period.

Monitor spending exception status against the interim benchmarks under 26 U.S.C. § 148, and know before the deadline whether the exception will be met.

Compute and pay rebate at the required intervals and at final maturity.

File annual reports on time, with the content the undertaking specifies rather than an approximation of it.

Recognize and file event notices within ten business days, with particular attention to rating changes and to incurrence of financial obligations, which are the most commonly missed.

Review the inventory annually with the governing body, documented.

Train facility and department managers, because they are the people who will sign the agreement that creates private use.

Before every subsequent financing, review compliance history honestly, and review the prior issues' tax posture — private use that developed after closing and rebate never computed both surface at refunding, when voluntary correction is still available.

Responding to a tax examination

Confirm the scope: which issue, what periods, what issues identified.

Assemble the tax record before responding: tax certificate, transcript, proceeds allocation, expenditure records, investment records, rebate computations, and every agreement affecting use of the financed property.

Perform the analysis internally first. Compute private business use against the basket and the rebate liability, so that the response is informed.

Preserve the remedial and voluntary options, which narrow once an examination is under way.

Identify whether a remedial action fits — redemption or defeasance of the nonqualified portion, alternative use of disposition proceeds, or alternative qualifying use — and whether the window from the change in use remains open.

Engage original bond counsel where available, because the tax certificate's expectations are best explained by those who formed them.

Assess the disclosure consequence, since an adverse tax determination is an enumerated event under most undertakings.

Responding to a securities inquiry

Issue a preservation hold immediately covering the offering file, diligence record, board materials, budget projections, actuarial reports, internal communications about disclosure, and continuing disclosure filings.

Reconstruct what was known and when, because that is the theory in nearly every municipal disclosure matter.

Check the continuing disclosure history against the filings, item by item.

Determine who made the statements at issue, given the maker requirement of Janus Capital Group, Inc. v. First Derivative Traders.

Assess the exposure realistically. Private claims require scienter under Ernst and Ernst v. Hochfelder, pleaded as Tellabs, Inc. v. Makor Issues and Rights, Ltd. requires, with no aiding and abetting under Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. and narrow scheme liability under Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc.. Regulatory theories are broader, and control person exposure under 15 U.S.C. § 78t applies.

Recognize that the in-connection-with element is construed broadly — Securities and Exchange Commission v. Zandford.

Separate the participants early, because the interests of the issuer, underwriter, advisor, and counsel diverge quickly.

The short version

One — do the private use analysis before the structure is fixed, not after.

Two — draft the tax certificate as a factual record, because it will be read.

Three — verify the continuing disclosure compliance statement against the filings. This is the most commonly enforced misstatement in the market.

Four — add the issue to an inventory on the day of closing and tell the operating departments what it means.

Five — assign rebate computation to a named position with a calendar.

Six — route every facility arrangement for review before execution, and audit that the routing happens.

Seven — when something has gone wrong, come forward, because both the remedial windows and the voluntary programs run out.

The issue inventory

One page per outstanding issue. This document takes an afternoon to build and answers most questions that will arise over the next thirty years.

Field Entry
Issue name and series
Closing date; final maturity
Original par; current outstanding
Security structure
Purpose and financed facilities, by address and building
Tax status — governmental, qualified 501(c)(3), other qualified private activity
Applicable private use basket and amount consumed to date
Arrangements creating private use, with dates and terms
Arbitrage posture — spending exception targeted and met, or rebate applicable
Rebate computation dates and payments made
Reserve fund requirement and funding method
Rate covenant and additional bonds test, if applicable
Continuing disclosure undertaking: annual deadline, content required, event triggers
Filing history and any non-compliance
Bond counsel, disclosure counsel, municipal advisor, trustee
Location of the transcript, tax record, and investment records
Records retention date
Refunding call dates and any restrictions

The private use review trigger

Insert into the issuer's contracting procedures, verbatim.

Bond-Financed Facility Review. Before executing any lease, sublicense, management agreement, service contract, operating agreement, research agreement, naming rights agreement, sponsorship, concession, joint venture, or other arrangement granting any non-governmental person a right to use, occupy, or receive services from any facility identified on the Bond-Financed Facility Inventory, the responsible department shall submit the proposed arrangement to the Compliance Officer, who shall obtain bond counsel review. No such arrangement shall be executed without written confirmation that it does not impair the tax status of any outstanding issue, or that any resulting private business use has been accounted for and remains within permitted limits.

Why this single paragraph matters more than anything else. The most expensive failures in municipal finance arise from arrangements negotiated in good faith by people who did not know the building was bond-financed. This paragraph is the only mechanism that reliably connects them to the analysis.

The annual compliance calendar

Month Task Owner
Fiscal year end Begin annual report preparation Finance
FY end + [90-270] days File annual financial information and audited statements per each undertaking Compliance Officer
Quarterly Review private use arrangements executed in the period; confirm routing occurred Compliance Officer
Quarterly Confirm no event notice triggers occurred; file within 10 business days if any Compliance Officer
Annually Update the issue inventory Compliance Officer
Annually Review with the governing body, documented Compliance Officer
Annually Train facility and department managers Compliance Officer
Per computation date Compute and pay rebate Finance and rebate consultant
Per spending benchmark Confirm exception status Finance
Before any financing Verify compliance history; review prior issues' tax posture Counsel
Continuously Monitor for rating changes, financial obligations, and other event triggers Finance

Diligence questions for the official statement

Ask these in the drafting session, and answer them in the document.

Financial condition. What is the trend in the general fund balance and in the operating margin of any pledged enterprise? What one-time revenues supported the last two budgets? What is the structural gap between recurring revenues and recurring expenditures?

Pensions and benefits. What is the funded ratio, on what discount rate, and what would it be at a lower rate? What assumption changes were made in the last three valuations and why? What is the actuarially determined contribution and what has actually been contributed?

Debt. What other obligations exist, including leases, certificates of participation, direct placements, and financial obligations subject to disclosure? What covenants do they impose, and are any close to a threshold?

The enterprise, in a revenue financing. What is the coverage trend? When were rates last raised and what is the process for raising them? What capital needs are unfunded? What concentration exists in the customer base?

Projections. What internal projections exist, and are they consistent with what the document says? This is where enforcement matters begin.

Litigation and contingencies. What is pending, what is threatened, and what is the exposure?

Continuing disclosure. For each outstanding undertaking, was every annual report filed on time with the required content, and was every event notice filed within ten business days? Verify against the filings rather than accepting a summary.

Conduit obligor, if applicable. What is the obligor's financial condition and trend, what covenants does the loan impose, and who prepared the obligor disclosure?

A closing note on responsibility

The obligations described in the second half of this checklist belong to the issuer. Bond counsel's engagement ends at closing. Disclosure counsel's engagement ends at closing. The underwriter is gone. The municipal advisor's engagement covers the transaction.

Unless the issuer engages someone specifically to perform post-issuance compliance, nobody is performing it — and the issuer will not learn that until an examination, a refunding diligence review, or an enforcement inquiry.

The remedy is a single decision made at the first closing: name a position, give it the inventory and the calendar, and put the review trigger into the contracting procedures. Everything else in this checklist follows from that decision, and nothing in it works without it.

Two documents to produce at every closing

A one-page memorandum to the governing body, delivered with the closing report, stating in plain language: what the issuer has committed to for the life of the bonds; which facilities are now bond-financed and what that means operationally; who is responsible for compliance; and what happens if the obligations are not met. Elected officials who receive this memorandum ask about compliance in later years. Those who do not, do not.

A one-page memorandum to the operating departments, stating which buildings are on the inventory, listing the arrangements that require review before execution, naming the person to contact, and explaining — briefly and without jargon — that signing a lease without review can cost the issuer millions of dollars. Managers respond to that framing; they do not respond to a citation to 26 U.S.C. § 141.

Both memoranda take an hour. Between them they create the institutional awareness that the compliance policy depends on, and without which the policy is a document nobody reads.

A final observation

Practitioners who work on municipal financings occasionally sometimes assume that the difficulty is the tax analysis, and that once bond counsel has delivered the opinion the hard part is over. The opposite is true. The tax analysis at closing is performed by specialists on known facts and is almost always right. What fails is the assumption embedded in it — that the facts will stay as described.

That assumption is not a legal conclusion; it is an administrative prediction. It holds only if the issuer builds a process that keeps it true. And it is the issuer's prediction to keep, because every professional who made it will have moved on long before it is tested.

Keeping it is administration, not law, and it is what this checklist is for.

Run it once at the first closing and it becomes routine; skip it and the next examination will explain why it mattered.

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