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4 <br />• <br />• <br />• <br />City of Lino Lakes, Minnesota <br />September 23, 2004 <br />8. Term Bonds <br />9. Federal Treasury Regulations <br />Concerning Tax - Exempt Obligations <br />(a) Bank Qualification <br />(b) Rebate Requirements <br />We have included a provision that permits the <br />underwriters to combine multiple maturity years <br />into a term bond, subject to mandatory <br />redemption on the same maturity schedule <br />provided in the Terms of Proposal. The <br />advantage to the underwriter is that it provides <br />large blocks of bonds, which are more attractive <br />to bond funds, and certain pension funds, which <br />deal only with large blocks of bonds. This in turn <br />is a benefit to the City since selling larger blocks <br />of bonds reduces the risk to the underwriter, <br />allowing them to lower their costs and the <br />interest coupons. Since the Bonds are being <br />offered on a competitive bid basis and awarded <br />on the lowest true interest cost, the City will <br />award the Bonds to the best bid regardless of <br />whether term bonds are chosen or not. <br />Under Federal Tax Law, financial institutions <br />cannot deduct from income for federal income <br />tax purposes, income expense that is allocable <br />to carrying and acquiring tax - exempt bonds. <br />There is an exemption to this for "bank qualified" <br />bonds, which can be so designated if the issuer <br />does not issue more than $10 million of tax - <br />exempt bonds in a calendar year. Issues that <br />are bank qualified typically receive slightly lower <br />interest rates than issues that are not bank <br />qualified. Since the City expects to issue less <br />than $10 million of tax - exempt debt in 2004, this <br />Issue is designated as bank qualified. <br />All tax - exempt issues are subject to the federal <br />arbitrage and rebate requirements, which require <br />all excess earnings created by the financing to <br />be rebated to the U.S. Treasury. The <br />requirements generally cover two categories: <br />bond proceeds and debt service funds. There <br />are exemptions from rebate that may apply in <br />both of these categories. <br />There is an exemption from rebate for a <br />municipality that issues $5 million or less of tax - <br />exempt obligations in a calendar year. Since the <br />City does not expect to issue more than $5 <br />million of tax - exempt obligations in 2004, this <br />Issue will be exempt from rebate. Although <br />exempt from rebate, the City must still comply <br />with the arbitrage regulations which require yield <br />restriction of proceeds remaining in a project <br />fund after the three -year temporary period. <br />Page 2 <br />