Management Report and Recommendations 12/31/1988

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City of Lino Lakes, Minnesota Management Report, Page 23 1988 Temporary Improvement Bonds The City issued these bonds to finance Erickson's 2nd Addition, Phase 2 and South Reshanau Phase 2 Improvements. Arbitrage Regulations Federal law prohibits excess earnings on bond proceeds maintained in construction or debt service funds. The regulations are complex and for "large issuers" (over $5 million of bonds issued in one year) there are rebate requirements. The City of Lino Lakes issued greater than $5 million of bonds in 1987 and 1988 and therefore is required to meet restrictive regulations which require: • Measuring investment interest earned on tax exempt bond proceeds. • Determining the yield of such investment earnings. • Comparing the yield earned with the yield of the tax exempt bonds. • Calculating the amount (if any) of excess earnings. • Reporting the excess earnings to the Internal Revenue Service annually. • Rebating such excess earnings at least every five years. Our firm has assisted another Minnesota city in seeking a ruling request from the Internal Revenue Service which will reduce the administrative complexities of complying with the arbitrage regulations. The City has not received the ruling and the IRS is not willing to issue such a ruling until regulations are issued. The IRS has, however, indicated that the preamble to the regulations indicates that pooled investment procedures will be acceptable. We recommend that the City continue efforts to monitor arbitrage compliance. CAPITAL PROJECT FUNDS The financial statements for the Capital Project Funds are presented in Statements 10 and 11 of the 1988 Annual Financial Report. Pursuant to changes in reporting standards, the Capital Project Fund type now includes special assessment projects. The fund balances (deficits) of the Capital Project Funds at December 31, 1988 and 1987 are presented on the following page.