ADMINISTRATIVE LETTER NO. 28

POLICY CODE: DK

TO:               Superintendent of Schools

                     Directors of Applied Technology Regions

                     Municipal Officials of School Administrative Units

FROM:         J. Duke Albanese, Commissioner

DATE:         April 22, 1999

RE:             Disposition of Unused Bond Proceeds for School Construction

This letter addresses the disposition of unused and unneeded bond proceeds identified at the time of the final audit of a school construction project.

As you may know, under the Internal Revenue Code ("IRC") and Regulations, excess bond proceeds held by a School Administrative Unit ("SAU") can only be used to pay debt service on bonds, and the payment can only be made at the earliest call date on the bonds. The IRC requires that until the last payment(s) on the debt service, the excess bond proceeds, after final close out of the project (final audit) and payment of any arbitrage rebate to the Internal Revenue Service, must be deposited in an escrow account that earns interest restricted to a rate no greater than the interest rate earned by holders of the bonds. These escrow accounts are designated as "restricted yield" accounts but are sometimes referred to as State and Local Government ("SLG") accounts. The principal amount plus the interest earnings in these restricted yield accounts are used to pay the last debt service payment(s).

This letter is also to advise you that within two weeks of acceptance of the final audit of a school construction project, the Department of Education will require all SAU's with unused bond proceeds to instruct the banking institution establishing the restricted yield account to submit to the Management Information Systems Team, Department of Education, the following information: (1) the amount deposited in the account, (2) the first call date on the bond, and (3) the total amount of funds in the account expected on the first call date on the bond. This information will allow the Department to determine when it will make the last State subsidy payment on the debt service to a SAU that has an established restricted yield account for school construction bonds.

Please note that the information in this letter regarding the IRC regulations is provided only as a general overview. For further information on the IRC regulations for establishing a restricted yield account specific to your construction project, we recommend you consult with your bond counsel.

If you have any questions, please call Susan Griffin, Supervisor of Audit, at 624-6864.