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• <br />City of Lino Lakes, Minnesota <br />April 1, 2010 <br />10. Federal Treasury Regulations Concerning Tax- <br />Exempt Obligations <br />(a) Bank Qualification <br />(b) Arbitrage Compliance <br />(1) Rebate <br />(ii) Yield Restriction <br />Under Federal Tax Law, financial institutions cannot deduct <br />from income for federal income tax purposes, expense that <br />is allocable to carrying and acquiring tax - exempt bonds. <br />There is an exemption to this for "bank qualified" bonds, <br />which can be so designated if the issuer does not issue <br />more than $30 million of tax - exempt bonds in a calendar <br />year. Issues that are bank qualified generally receive <br />slightly lower interest rates than issues that are not bank <br />qualified. Since the City does not expect to issue more <br />than $30 million of tax - exempt obligations in 2010, the <br />Bonds are designated as bank qualified. <br />The American Recovery and Reinvestment Tax Act of 2009 <br />increased the previous bank qualification limit of $10 million <br />to $30 million for tax - exempt obligations issued in 2009 and <br />2010. <br />All tax - exempt issues and taxable Build America Bonds are <br />subject to the federal arbitrage and rebate requirements, <br />which require all excess earnings created by the financing <br />to be rebated to the U.S. Treasury. The requirements <br />generally cover two categories: issue proceeds and debt <br />service funds. There are exemptions from rebate in both of <br />these categories. <br />Bond proceeds, defined generally as both the original <br />principal of the issue and the investment earnings on the <br />principal, may qualify for a spending exception to rebate. <br />Since Bond proceeds will be expended within 90 days of <br />delivery, the proceeds will qualify for the 6 -month spending <br />exception. <br />Although the Bonds will qualify for an exception from <br />rebate, the City must still comply with the arbitrage <br />regulations which require yield restriction and are <br />discussed in the section below. <br />The City must maintain a bona fide debt service fund for <br />the Bonds or be subject to yield restriction. Yield restriction <br />requires restricting the investment return in the debt service <br />fund to the yield on the Bonds. A bona fide debt service <br />fund is a fund for which there is an equal matching of <br />revenue to debt service expense, with the fund spent down <br />Page 3 <br />