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STAFF REPORT <br />DATE: March 19, 2024 <br /> REGULAR <br /> <br /> <br />TO: Lake Elmo City Council <br />FROM: Clark Schroeder Interim City Administrator <br />AGENDA ITEM: Conduit Bonding Policy <br />REVIEWED BY: Jenny Boulton. <br /> <br />BACKGROUND: <br /> <br />Unlike almost all other bonds, “conduit bonds” are initiated by and issued for the benefit of private <br />entities. Under the state statutes that authorize these bonds, the city first issues the bonds and then <br />loans proceed to the private entity. That private entity repays the loan in an amount sufficient to pay <br />principal and interest on the bonds. As a practical matter, the loan is (normally) handled entirely by <br />a separate bond trustee (usually the trust division of a bank). After the bonds are issued, the city has <br />almost no role in payment or administration of the bonds. <br /> <br />The bonds are revenue bonds—the city does not pay debt service, or any other cost related to the <br />transaction. As such, the bonds have no effect on the issuing city’s credit rating and are not counted <br />against any statutory limitations on borrowing. When the bonds are sold, investors look only to the <br />credit of the private borrower (and any related private security, such as mortgages and guarantees). <br />While the city council must approve issuance of the bonds and all the bond documents, the <br />transaction is largely handled by the private borrower and the underwriter that usually serves as the <br />initial purchaser of the bonds. The city council does retain the responsibility to bond purchasers to <br />disclose any material facts they may know of that could impact the bonds, such as remaining <br />approvals for zoning approval or provision of utilities. The bond counsel for conduit bonds may be <br />the city’s regular bond counsel or may be retained by the private entity (this is a matter of city policy <br />and practice). <br />The types of private activity bonds are governed primarily by federal tax law. Congress in effect <br />created this kind of bond to provide tax-exempt (and therefore lower cost) borrowing to certain <br />favored activities carried out by private entities. <br /> <br />Much of today’s tax law regarding these bonds originated with the Tax Reform Act of 1986, which <br />sharply narrowed the scope of permissible private activity bonds (previously known as “industrial <br />development revenue bonds” or “IDR bonds”). <br /> <br />The three most common conduit bonds in Minnesota are: