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. October 28, 2003 TO: Mayor, Council Members, and City Administrator FROM: Roland Olson, Finance Director SUBJECT: Transferring the balance in the 1993 G.O. Street Bond debt fund and decreasing the arbitrage payment to the IRS for the 1999 G.O. NE Quadrant Street Bond in 2004 During 2003 we paid off the 1993 G.O. Street Bond. The bonds which the city issues are tax- exempt municipal bonds subject to arbitrage regulations. At our last workshop a question was asked about keeping the 1993 G.O. Street Bond debt fund open to keep the excess funds in it instead of transferring them to the 1999 G.O. NE Quadrant Street Bond fund. I asked our auditors about this. Their reply was that since the bond was paid off, there really didn't exist any legitimate reason to keep the fund open. The fund should be closed out. • The balance in the 1993 G.O. Street Bond fund to be transferred would be: $291,168.39 At issue would be concerns about arbitrage. We are subject to IRS arbitrage rules when we bond and borrow money at a rate that is not equal to the rate of return that we get on the investment of the money that we have in the bond debt service fund to pay off the debt. When we do a street project, we get the money up front on the bond issue, then we spend it as the project progresses. Completion of the project can take well over a year. This provides an opportunity to invest the unspent balance of the bond proceeds up to the time we pay off all the liabilities associated with the project. Also, when the special assessment receipts from the property owners are received, these payments must be deposited into the corresponding bond fund. An opportunity exists for the city to make money or lose money on the money that we borrowed and assessed. For example when the interest we are paying bondholders is 4% and we are getting 6% return on investment then a positive arbitrage exists and we would have a payment to the IRS. OR, when the interest we are paying bondholders is 4% and we are only getting 2% return on investment then a negative arbitrage exists and this negative arbitrage can be used to offset any positive arbitrage during each 5 year calculation period. This arbitrage calculation is conducted through out the life of the bond. For our bonds, the first payment date of any arbitrage dollars owed to the IRS is 5 years after issuance. Our first five year period for the 1999 G.O. Street Bond concludes June 2004. We used Springstead Inc. as our financial advisors when we obtained this bond. They have already done some calculations of arbitrage on this bond. They do it periodically.