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RELEVANT LINKS: Note that bond investors have very little interest in how the proceeds are used, if the bonds are general obligations. Therefore, the classification by use of proceeds is mostly relevant from a standpoint of city policy and financial management. IV. Bonds by user The most commonly -issued bonds represent borrowing by a city to finance public assets —the city itself is the "user" of the proceeds. But Minnesota law authorizes cities to issue bonds where the proceeds are actually used by private parties. These bonds are referred to in most cases as "private See Section v111-B activity bonds" —a name derived from federal tax law. Private activity Governmental versus private activity. bonds fall into two major categories, discussed in turn below. A. Conduit bonds Minn. Stat. §§ 469.152 to Unlike almost all other bonds, "conduit bonds" are initiated by and issued 469.1651. Minn. Stat. ch. 462C. for the benefit of private entities. Under the state statutes that authorize these bonds, the city issues the bonds and loans the proceeds to the private entity. That private entity repays the loan in an amount sufficient to pay principal and interest on the bonds. As a practical matter, the loan is (normally) handled entirely by a separate bond trustee (usually the trust division of a bank). After the bonds are issued, the city has almost no role in payment or administration of the bonds. The bonds are revenue bonds —the city does not pay debt service or any other cost related to the transaction. As such, the bonds have no effect on the issuing city's credit rating and are not counted against any statutory limitations on borrowing. When the bonds are sold, investors look only to the credit of the private borrower (and any related private security, such as mortgages and guarantees). While the city council must approve issuance of the bonds and all the bond documents, the transaction is largely handled See section x Participants by the private borrower and the underwriter that usually serves as the in a bona sale. initial purchaser of the bonds. The bond counsel for conduit bonds may be the city's regular bond counsel, or may be retained by the private entity (this is a matter of city policy and practice). The types of private activity bonds are governed primarily by federal tax law. Congress in effect created this kind of bond to provide tax-exempt (and therefore lower cost) borrowing to certain favored activities carried out by private entities. Much of today's tax law regarding these bonds originated with the Tax Reform Act of 1986, which sharply narrowed the scope of permissible private activity bonds (previously known as "industrial development revenue bonds" or "IDR bonds"). League of Minnesota Cities Handbook for Minnesota Cities 10/26/2017 Debt and Borrowing Chapter 23 1 Page 8