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Lino Lakes Economic Development Authority <br />May 20, 1998 <br />9. Federal Treasury Regulations Concerning <br />Tax -Exempt Obligations <br />(a) Bank Qualification <br />(b) Rebate Requirements <br />anticipated that the Bonds will receive a <br />"BAA2" or "BAA3" rating by Moody's. A <br />"BAA2" or "BAA3" rating is still regarded as <br />investment grade and may result in more <br />bidders. <br />Under Federal Tax Law, financial institutions <br />cannot deduct from income for federal <br />income tax purposes, income expense that <br />is allocable to carrying and acquiring tax- <br />exempt bonds. There is an exemption to <br />this for "bank qualified" bonds, which can be <br />so designated if the issuer does not issue <br />more than $10 million of tax exempt bonds <br />in a calendar year. Issues that are bank <br />qualified receive slightly lower interest rates <br />than issues that are not bank qualified. This <br />issue is not designated as bank qualified. <br />All tax-exempt issues are subject to the <br />federal arbitrage and rebate requirements, <br />which require all excess earnings created by <br />the financing to be rebated to the U.S. <br />Treasury. The requirements generally cover <br />two categories: bond proceeds and debt <br />service funds. There are exemptions from <br />rebate in both of these categories: <br />Bond proceeds, defined generally as both <br />the original principal of the issue and the <br />investment earnings on the principal, have <br />6, 18 and 24 month spend down exemption <br />periods. If all of the proceeds are expended <br />during one of those exemption periods, the <br />bond proceeds are exempt from rebate and <br />may retain the excess earnings. If the EDA <br />does not anticipate being able to meet those <br />requirements, the reinvestment of bond <br />proceeds must be monitored and the EDA <br />must rebate any amount earned in excess of <br />the rate on the bonds. It is our <br />understanding the EDA expects to spend all <br />of the proceeds within 24 months. <br />Springsted currently provides rebate <br />calculation services to the City of Lino <br />Lakes. An amendment for this issue has <br />been provided to EDA staff. <br />The EDA can elect, at the time of issuance, <br />to pay a penalty in lieu of rebate. The <br />penalty is 1.5% of the amount not meeting <br />the expenditure tests, calculated every six <br />Page 2 <br />