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City of St. Anthony, Minnesota October 24, 1995 The City meets the small issuer exemption, (i) above, and will therefore will be exempt from rebate requirements. Another potential source of arbitrage concern stems from the creation of a debt service fund to pay debt service on the new issue. The arbitrage regulations permit only bona fide debt service funds to be exempt from arbitrage regulations. A bona fide debt service fund is defined as a fund for which there is an equal matching of revenue to debt service expense with a carryover permitted equal to the greater of the investment earnings in the fund during that year or 1/12 of the debt service of that year. A debt service fund can lose its bona fide status if the City accumulates too much tax increment income or other revenues including investment earnings. It is important to monitor the debt service fund for this issue to assure compliance with the regulations. Any portion in excess of a bona fide debt service fund must be restricted in yield to the yield on the bonds. Economic Life of Finance Projects The 1993 "final" arbitrage regulations brought all tax-exempt issues into the calculation of "economic life." Previously this requirement was only for private activity bonds. The intent of this requirement is that the U.S. Treasury does not want bonds outstanding longer than is necessary, thus creating more tax-exempt bonds in the marketplace than are needed. The general safe harbor for assuring that 'bonds comply with the regulations is if the average maturity of the bonds does not exceed 120% of the economic life of the financed projects. The bonds are being issued for building construction which, under the U.S. Treasury guidelines have an economic life of 30 years. The bonds are in compliance with this regulation. Bank-Qualified Obligations The Tax Reform Act of 1986 restricts the ability of banks to deduct tax-exempt interest as a carrying expense under certain circumstances in calculating their tax liability. However, the Act allows certain bonds to be qualified bonds which can be included in a bank's calculation of interest deduction. That qualification is reserved for municipalities that will issue less than $10,000,000 of tax-exempt debt within a calendar year. The City can qualify for this exemption and therefore this issue will be bank-qualified. The result will be slightly lower interest rates than if the bonds were not bank-qualified. This difference has been factored into the interest rates estimated in Appendix I. Sale Procedures Springsted Incorporated, together with Capital Guaranty Insurance Company, a municipal bond insurer, will again offer a surety bond service, "Sure-Bid," to underwriters in lieu of putting up a good faith check in order to submit a proposal on the bonds. In addition to allowing underwriters to submit their proposals by mail or telephone, we will also allow them to submit proposals through PARITY, an electronic bid filing process Springsted has access to the proposals via modem and will verify and tabulate the proposals received to determine the winning proposal. We have allowed for the use of Sure-Bid and PARITY in the Terms of Proposal, attached to these recommendations. We believe that the use of these bidding options may attract more proposals for the bond sale, since it reduces administrative barriers for an underwriter to bid. There is no cost to the City for this service and Springsted does not have a financial interest in the use of Sure-Bid or PARITY. We recommend the bonds be offered for sale on Monday, November 27, 1995, with proposals received in the offices of Springsted Incorporated by 11:00 A.M. Subsequent to receipt, the Page 4