Debt Issuance Manual 2007

DEBT ISSUANCE MANUAL

SEPTEMBER 2007

Published by the League of Oregon Cities

L E A G U E O F O R E G O N C I T I E S

LEAGUE OF OREGON CITIES

DEBT ISSUANCE

MANUAL

____________________________________________________________

LEAGUE OF OREGON CITIES

1201 Court Street NE, Suite 200 Salem, Oregon 97301

Phone: (503) 588-6550 Fax: (503) 399-4863

Web: www.orcities.org

www.orcities.org

DISCLAIMER: Nothing in this manual should be construed or relied upon as legal or financial advice. Instead, this manual is intended to serve as an introduction to the general subject of debt issuance, from which better informed requests for advice, legal and financial, can be formulated.

All rights reserved. No part of the League of Oregon Cities Debt Issuance Manual may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or any other storage and retrieval system, without written credit given to the League of Oregon Cities.

ACKNOWLEDGMENTS The inaugural 2007 edition of the League of Oregon Cities Debt Issuance Manual has been developed to assist city officials with public finance and debt issues, taking into account the laws governing public finance in Oregon. This significant undertaking developed as a result of comments and conversations at the annual Bonds and Ballots conference which the League of Oregon Cities’ Oregon Local Leadership Institute jointly offers with the Oregon School Boards Association. The Manual covers the basic financing tools available to fund public projects and many of the requirements for using each tool. In addition, steps for the approval and issuance of bonds and levies have been included. This publication will be useful for the lay council person or citizen, as well as the city’s finance professionals, the city manager, city attorney and others. This document represents the combined work effort of the staffs of the League of Oregon Cities, the Pacific Northwest offices of the law firm Orrick, Herrington & Sutcliffe LLP, the investment banking firm Seattle Northwest Securities Corporation and the public relations firm of C&M Communications. The principal inspirations for this publication are Jennie Messmer of the League of Oregon Cities and Douglas Goe, partner in-charge of the Pacific Northwest offices of Orrick, Herrington & Sutcliffe LLP. David Taylor, Vice President, Seattle Northwest Securities Corporation, is especially commended for his singular authorship of many of the chapters in the Manual. Sincere thanks goes to Jeanne Magmer of C&M Communications for her contribution to the Bond Election Process chapter. Our appreciation to Naomi Keck of the investment services advisory firm Bond Logistix LLC for her review of the Eligible Investments and Bond Related Funds chapter. The other team members from Orrick’s staff include Michael Schrader, Scott Schickli, Courtney Muraski, Christine Reynolds, Greg Blonde, Angela Trout and Lee Helgerson. Many thanks also to Dawn Evans for her review and word processing expertise and assistance in assembling the final product. Special recognition and acknowledgment goes to the California Debt and Investment Advisory Commission for the use of the General Federal Tax Requirements chapter in this publication. The 2007 Manual incorporates current requirements and laws as of June, 2007. The League intends to periodically update the information contained in this publication in order to maintain its currency and correctness especially in regards to changes in law or other events. For printed copies of the Manual contact the League of Oregon Cities at (503) 588-6550 or email to [email protected].

TABLE OF CONTENTS PAGE

i

CHAPTER 1: OVERVIEW OF DEBT FINANCING ................................................................. 1

The Municipal Debt Market............................................................................................... 1

Capital Markets at Work.................................................................................................... 2

Methods of Sale ................................................................................................................. 5

The Bond Sale.................................................................................................................... 6

Frequently Asked Questions .............................................................................................. 7

CHAPTER 2: ROLES AND RESPONSIBILITIES OF PRINCIPAL PARTICIPANTS.......... 11

The Issuer......................................................................................................................... 12

Legal Counsel .................................................................................................................. 13

Financial Services ............................................................................................................ 14

Selecting the Finance Team............................................................................................. 18

Frequently Asked Questions ............................................................................................ 19

CHAPTER 3: BASIC LEGAL DOCUMENTS ......................................................................... 21

Authorizing Resolution.................................................................................................... 21

Bond Indenture................................................................................................................. 22

Official Statement ............................................................................................................ 23

Bond Purchase Agreement............................................................................................... 23

Official Notice of Sale ..................................................................................................... 24

Continuing Disclosure Certificate.................................................................................... 25

Conduit Borrowing Documents ....................................................................................... 26

Loan Agreement............................................................................................................... 26

Insurance and Credit Enhancement Related Agreements................................................ 27

Tax Certificate ................................................................................................................. 27

Bond Counsel Opinion and Other Legal Opinions .......................................................... 28

Closing Documents.......................................................................................................... 28


CHAPTER 4: SECURITIES LAW AND DISCLOSURE ......................................................... 31

Federal Securities Law..................................................................................................... 31

Disclosure Obligation When Issuing Bonds .................................................................... 32

Disclosure Obligations Following Issuance of Bonds ..................................................... 33

Avoiding Securities Law Claims ..................................................................................... 35


ii

CHAPTER 5: GENERAL FEDERAL TAX REQUIREMENTS .............................................. 37

Obligations of a State or Political Subdivision................................................................ 38

Definitions........................................................................................................................ 38

Private Activity Bonds..................................................................................................... 40

Qualified Private Activity Bonds..................................................................................... 47

Arbitrage Bonds ............................................................................................................... 50

Rebate Requirement......................................................................................................... 52

Rebate Exceptions............................................................................................................ 53

Fair Market Value Rules.................................................................................................. 55

Hedge Bond Restrictions ................................................................................................. 55

Refunding Bonds ............................................................................................................. 56

Federal Tax Limitations on Investing Bond Proceeds..................................................... 57

CHAPTER 6: STATE AND LOCAL GOVERNMENT LAW AND DEBT POLICY ............. 61

Home Rule and City Charters .......................................................................................... 61

Initiative and Referendum Powers................................................................................... 62

Debt Policy....................................................................................................................... 63

Capital Improvement Plans.............................................................................................. 64

Municipal Debt Advisory Commission ........................................................................... 65


CHAPTER 7: GENERAL OBLIGATION BONDS .................................................................. 69

Electoral Requirements.................................................................................................... 69

Allowable Use of Proceeds.............................................................................................. 69

Debt limitations................................................................................................................ 70

Notice of Classification of Uses ...................................................................................... 71

Structuring of General Obligation Bonds ........................................................................ 71

Interest Rate Swaps with General Obligation Bonds....................................................... 73


CHAPTER 8: FINANCING AND LEASE PURCHASE AGREEMENTS .............................. 77

Limitations ....................................................................................................................... 77

Financing Agreement Documentation ............................................................................. 78


iii

Credit Structures .............................................................................................................. 79


CHAPTER 9: TAX INCREMENT AND ASSESSMENT FINANCINGS ............................... 83

Tax Increment Financing ................................................................................................. 83

Assessment Based Financings ......................................................................................... 85


CHAPTER 10: REVENUE BONDS.......................................................................................... 89

Uniform Revenue Bond Act ............................................................................................ 89

Unique Credit Features of Revenue Bonds...................................................................... 90


CHAPTER 11: CONDUIT REVENUE BONDS....................................................................... 93

Legal Authority: Constitutional, Statutory and Administrative Rule Provisions ........... 93

Policy Considerations and Approval Process .................................................................. 95

Authorized Projects.......................................................................................................... 96

Security and Sources of Repayment Revenues................................................................ 96

General Types and Purposes............................................................................................ 96

Special Tax Considerations.............................................................................................. 98


CHAPTER 12: NOTES, SHORT-TERM AND INTERIM FINANCINGS ............................ 101

Legal Authority.............................................................................................................. 102

Approval Process ........................................................................................................... 102

Manner of Sale............................................................................................................... 102

Security and Source of Repayment Revenues ............................................................... 103

Investment of Proceeds and Interest Earnings ............................................................... 103

General Types of Short-Term Obligations .................................................................... 103

Other Forms of Short-Term Borrowings ....................................................................... 108

CHAPTER 13: REFUNDINGS................................................................................................ 111

Reasons for Refunding................................................................................................... 111

Types of Refundings ...................................................................................................... 113

Frequently Asked Questions .......................................................................................... 114


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CHAPTER 14: INTEREST RATE SWAPS AND OTHER DERIVATIVE FINANCIAL PRODUCTS..................................................................................................... 117

Legal Authority: Constitutional, Statutory, and Administrative Rule Provisions ........ 117

Policy Considerations and Approval Process ................................................................ 118

Using Interest Rate Swaps and Other Hedges ............................................................... 118

Documentation of Interest Rate Swaps.......................................................................... 119

Evaluating and Managing Interest Rate Swap Risk....................................................... 119

Selection of Finance Team and Swap Counterparties ................................................... 121

Disclosure and Financial Reporting............................................................................... 121

CHAPTER 15: LOCAL OPTION OPERATING AND MAINTENANCE LEVY................. 123

Definition and Purpose .................................................................................................. 123

Legal Authority and Approval Process.......................................................................... 123

Security and Source of Repayment................................................................................ 123

CHAPTER 16: BOND ELECTION PROCESS....................................................................... 127

The Bond Election Process ............................................................................................ 127

Ballot Title Wording Requirements............................................................................... 129

Conducting Successful Bond Elections ......................................................................... 132

Preparing City Information ............................................................................................ 134

Election Dos and Don’ts for Public Officials ................................................................ 137

Public Employee Election Guidelines ........................................................................... 139


CHAPTER 17: STRUCTURING THE BOND ISSUE............................................................ 143

Fundamentals of Leveraging.......................................................................................... 143

Sizing Bond Issues......................................................................................................... 144

Issue Affordability ......................................................................................................... 145

Bond Characteristics ...................................................................................................... 146

CHAPTER 18: CREDIT RATINGS AND ANALYSIS.......................................................... 149

Ratings and Rating Agencies ......................................................................................... 149

Determining a Rating..................................................................................................... 150

Assigning Ratings .......................................................................................................... 151

Deciding to Apply for a Rating...................................................................................... 152


v

Bond Insurance .............................................................................................................. 152

Letters of Credit ............................................................................................................. 152


CHAPTER 19: ELIGIBLE INVESTMENTS AND BOND RELATED FUNDS ................... 155

Eligible Investments....................................................................................................... 155

Bond Related Funds....................................................................................................... 163


APPENDIX A: GLOSSARY – TERMS AND CONCEPTS ................................................... A-1

APPENDIX B: U.S. GOVERNMENT AND AGENCY SECURITIES.................................. B-1

APPENDIX C: LEGAL REFERENCES.................................................................................. C-1

APPENDIX D: PUBLIC FINANCE RESOURCES AND CONTACTS ................................ D-1

Chapter 1 – Overview of Debt Financing 1

CHAPTER 1

OVERVIEW OF DEBT FINANCING This chapter introduces the financial markets and its players and discusses how debt is sold or placed with investors. Chapter 2, Roles and Responsibilities of Principal Participants discusses the roles and responsibilities of the issuers’ elected officials and staff and other market participants.

Oregon municipalities are frequent issuers of tax-exempt bonds. From 1997 through 2006, Oregon municipalities (defined as all municipal issuers except the State of Oregon and education districts such as K-12 and community colleges) issued $15.4 billion of debt. This represented about 37 percent of the total tax-exempt debt issued in Oregon by all issuers during that period.

For perspective, during the same period, the total municipal bond volume nationally was more than $3 trillion. The total Oregon market represented about 1.4 percent of the national market, and Oregon municipalities represented less than half of one percent of the national market.

Why Debt? Borrowing for major project and infrastructure needs has a clear place in good public policy decision making. Borrowing allows municipalities to preserve existing resources for current needs. Borrowing accelerates the delivery of a needed asset or project. Borrowing can better allow a municipality to match expenditure of funds with a project’s useful life and establish better ongoing fiscal discipline. In some cases, such as general obligation (GO) bonds, borrowing can provide new sources of funds to repay debt service not otherwise available to the municipality. Borrowing also may be necessary to bridge short term cash flow mismatches between operating needs and availability and timing of certain revenues.

THE MUNICIPAL DEBT MARKET

The municipal bond market is characterized by several key features. First, the market is populated with an enormous variety of credits. Second, most municipal bonds are issued as “tax-exempt,” which means the interest earned by bondholders is not subject to federal (and also usually state, if applicable) income taxation.

A VARIETY OF CREDITS

Nationwide, thousands of municipal bonds are issued every year. In some years more than 10,000 issuers sell tax-exempt debt. Issuers include the full range of municipal jurisdictions such as:

• States, cities, counties

• School districts and community colleges


• Municipal power authorities

• Transportation districts

• Urban renewal agencies

• Hospital districts

• Housing agencies

• Park, fire and water districts

• Private universities and other types of 501(c)(3) non-profits such as museums

Oregon has all of these types of municipal entities and numerous others, all of whom have varying kinds of issuance authority. No two authorities are exactly the same.

Because these issues are sold under different state laws, the municipal market is sometimes more regional than national. While Oregon municipal bonds usually are sold to investors nationwide, issuers are likely to find that financial consultants and bond counsel for their issues often come from regional or local service providers who understand local laws, regulations and customs. This is true for local issuers in other parts of the country as well.

TAX EXEMPTION OF INTEREST

Federal tax law allows municipal issuers to sell tax exempt debt under certain circumstances. The interest paid by these securities is exempt from federal, and in the case of Oregon issuers, Oregon personal income taxes. This tax-exempt status makes municipal bonds a desirable investment for investors who are willing to accept lower interest rates in exchange for the tax advantages municipal bonds offer. Tax-exempt status is a significant benefit to the issuer because of the lower interest cost.

Tax exemption comes at a cost. Issuers must comply with numerous federal rules regarding the use of proceeds, the investment of proceeds and other aspects of the transaction. Chapter 5, General Federal Tax Requirements discusses federal tax law requirements and compliance. It is also worth noting that tax exemption of municipal bond interest is not constitutionally protected. Congress may revoke tax exemption of interest or otherwise change aspects of the federal tax law at any time.

Issuers both in Oregon and nationally also sell some taxable debt because those issues may not comply with all the aspects required of tax-exempt debt.

CAPITAL MARKETS AT WORK

Most municipal debt issues are sold through the basic capital market mechanism. Rather than sell the debt directly to investors, municipalities typically use the services of an underwriter. The underwriter purchases the debt from the issuer and resells the bonds to investors. Issuers find this efficient because they do not need to maintain the specialized expertise needed to place debt. This method also typically results in the lowest cost of capital. Rather than try to find a single lender who will lend the issuer the needed amount of money, the issuer is, via the underwriter,


able to tap into dozens or hundreds of investors all willing to loan the issuer smaller amounts by purchasing specific pieces or maturities of a larger bond issue.

The debt markets are different than the stock markets. Stock markets provide for a single exchange where all stock of a company is bought and sold. Stock markets provide for a single “price discovery” function; that is, buy or sell orders for a security that are placed at the same time are all executed at the same price. Bond markets are different in that the “bond market” is made up of hundreds of firms trading bonds. There is no central pricing function like in a stock exchange. Electronic trading, improved secondary market disclosure and increased price transparency has substantially improved bond pricing in the last decade, but the municipal bond market is still less “commoditized” than the market for U.S. Treasury securities.

In order for capital markets like the bond market to work well, investors need to:

• Have confidence in the integrity of the system

• Have belief they will be repaid

• Have adequate information about the securities traded and sold and

• Have liquidity (the ability to get in and out of an investment)

All of these themes form the foundation of much of the underlying details in this manual. To the extent a bond issue can fulfill the above criteria, the issue will be well received in the marketplace and, for example, obtain the best possible interest rates. To the extent any of these factors are weak, the ability of the issuer to obtain the best price, or at some point to sell the issue at all, will be diminished.

To better understand the roles of the key participants in the bond markets, we briefly discuss the role of the investor and the underwriter and how bonds are sold in the marketplace.

THE INVESTORS

Investors purchase the municipalities’ debt. Because interest on municipal debt is usually exempt from federal and state taxes, these investors are looking to shelter income from taxation. The demand for tax-exempt debt is always subject to investors’ evaluation of tax-exempt securities versus higher yielding but taxable investments such as corporate stocks and bonds or U.S. Treasury bonds.

The following table shows why an investor will accept substantially lower interest rates on tax exempt bonds.

Tax Exemption Benefit Type of Bond 4.00% Tax exempt 5.97% TaxableCash Investment $10,000 $10,000Annual interest payment $400 $597Less: federal income tax (33%) $0 $197Net after tax return $400 $400


After tax yield 4.00% 4.00% (1)Assumes a marginal federal tax rate of 33% and no effect of State of Oregon income taxes.

(2) Does not adjust comparable yields for credit quality.

The investor’s willingness to accept a much lower interest rate on tax exempt debt directly benefits the municipal issuer.

Municipal issuers typically have no direct contact with the investors who purchase the municipality’s bonds. Municipalities rely on underwriters to act as market intermediaries. However, issuers should understand what kinds of investors purchase municipal securities, what their preferences are and how those preferences will impact the issuer’s debt structure and security features.

Most investors who purchase municipal securities are seeking a fixed rate of return on their investment that is exempt from federal (and potentially state) income tax. These investors range from individuals to large institutional investors such as property and casualty insurance companies, money market funds and mutual funds. Broadly, the classes of investors who purchase municipal securities include:

• Retail or individual investors

• Retail investor “proxies” such as bank trust departments, investment advisors, tax-exempt mutual funds and tax-exempt money market funds

• Institutional investors such as property and casualty insurers, corporations and bank portfolios

Because investors’ interest in tax-exempt debt fluctuates with the investors’ profitability or tax status and the relative supply of tax-exempt bonds in the market, it is the underwriter’s job to find the most aggressive set of buyers for an issuer’s offering on the day it comes to market.

Sometimes municipalities will actually sell their securities directly to investors. This generally occurs when vendors finance equipment or when municipalities place an issue directly to a bank portfolio.

UNDERWRITING SYNDICATES, CO-MANAGERS AND THE SELLING GROUP

Underwriters buy the bonds from an issuer and resell them to investors. Underwriters not only find investors for the issuer’s bonds, they also take the risk out of the transaction for the issuer. Once the underwriter makes a firm offer to purchase the bonds, the issuer is not at risk if the underwriter cannot sell the bonds based solely on interest rate increases in the market.

Sometimes, underwriters join together in a “syndicate.” Having more than one underwriter spreads the financial risk if the bond sale does not go well. When there is more than one


underwriter in a deal, one firm leads the transaction while the others take secondary roles. The lead firm is called the “lead underwriter” or “senior manager.” Other underwriters are called “co-managers.” There may be one or several co-managers, or none.

The senior manager is responsible for interacting with the issuer, setting pricing terms for the bonds, managing the sale and allocating bonds to all investors at the sale’s conclusion. Co-managers assist in the bond sale itself but generally have limited roles in other aspects of planning and executing the transaction.

Syndicate firms agree upon a target percentage of the bonds to sell. For example, the senior manager may get 70 percent while a co-manager may get 30 percent. These percentages are only guidelines because actual orders dictate the number of bonds each firm receives at the end of the sale. However, if bonds go unsold, these percentages dictate each manager’s liability for the unsold bond inventory.

“Selling group” members are not syndicate members. Selling group firms are securities firms that have the right to put in orders for a new bond issue. Unlike co-managers, selling group members are not guaranteed that bonds will be allocated to them. However, selling group firms do not have any liability to take bonds if the sale goes poorly, nor are they required to order any bonds.

METHODS OF SALE

We now know that underwriters buy the bonds from issuers and resell them to investors. But how do the prices (that is, interest rates and terms) get established if there is no central pricing function like a stock market? The simple answer is that bond prices are like any other financial product – prices are established by a negotiation between the investors and the underwriters. The investors clearly want to pay the lowest possible price (that is, get the highest possible interest rate or return) while underwriters want to get the highest possible price (that is, the lowest interest rate) for their clients. With dozens of issues in the market on any given day, and with increased price transparency, the negotiation is often over very small changes in rate or yield, as little as one or two “basis points” or 0.01 – 0.02%. The general level of interest rates for any given type of security are already pegged to what is going on with overall rates in the Treasury market.

Municipalities may sell bonds in the public debt markets by:

• Putting the bonds out for a public bid (competitive sale)

• Working with a designated underwriter (negotiated sale)

Issuers may also privately place debt issues directly with investors. This may take the form of a direct “loan” from a commercial bank or a placement to a limited number of sophisticated investors.

Quality of service, issue size, credit rating, need for flexibility, costs of issuance, and market conditions, all come into play when deciding whether to privately place a debt issue or sell in the public markets through either a public bid or a negotiated process.


Issuers choose a method based on which option offers the best overall service at the most reasonable cost for the time period of the bond sale.

THE BOND SALE

Issuers can choose from any number of financing process models. Some issuers choose to engage a financial advisor. Many larger municipalities elect to have an ongoing financial advisory relationship with a firm that advises them on debt related matters. The financial advisor will assist with the planning and execution of a competitive sale or assist with the selection of an underwriter in the case of a negotiated sale. Smaller entities may engage a financial advisor to assist only with a particular debt related project. Some municipalities elect not to use a financial advisor and work directly with their underwriter of choice on debt related matters.

NEGOTIATED SALE

Bonds may be sold through negotiation with an underwriter. By negotiating the sale of a bond issue, the municipality maintains control over which underwriting firm markets its bonds. One underwriting firm may be more qualified than another to structure or market an issue with unique aspects.

If a municipality negotiates the bond sale with an underwriter, the municipality gains flexibility in adapting to changing conditions. Within the municipality’s need for project money, the underwriter recommends the timing of an offering to coincide with a favorable market and receptive investors in an attempt to get the best interest rate for the issuer.

Once a target sale date is selected, the underwriter continues to monitor the market and advise the issuer whether the sale should be accelerated or moved back, depending on market conditions.

When the week of sale arrives, the underwriter provides preliminary interest rate estimates to the issuer, along with any available information regarding comparable sales. The day before the sale, the underwater schedules a pricing conference with the issuer to confirm the interest rates that the underwriter will offer to investors the next day.

On the day of sale, the actual sale happens quickly. Typically, the formal sale or “order period” begins early in the morning and is concluded by midmorning. The underwriter tracks the amount of orders versus the amount of bonds available in each maturity. Where orders strongly exceed bonds available, the underwriter may be able to lower interest rates. Where orders do not match the amount of bonds available, the underwriter may need to raise rates in order to attract sufficient orders to sell the bonds. The underwriter reviews the results with the issuer and recommends whether any adjustments are necessary to conclude the sale process. The underwriter often takes a certain amount of unsold bonds into inventory to facilitate the completion of the underwriting in a timely manner.

Once the issuer and underwriter agree on terms, they will execute a “bond purchase agreement” (BPA) that is the legally binding sale document.


COMPETITIVE BID SALE

Bonds may be sold by public competitive sale. In a competitive sale, the terms of the issue, such as size, structure, maturity dates, amounts and redemption provisions, are determined several weeks prior to the sale and then published in a “official notice of sale.” Issuers strive to provide adequate notice of the sale to potential bidders in order to maximize the number of bids received.

Official Notice of Sale. The official notice of sale contains the bidding rules, constraints, the amount and handling of the good faith deposit submitted by each bidder with its bid, and the method for evaluating the bids the issuer receives for the purchase of its bonds. The issuer establishes these terms in consultation with its financial advisor and bond counsel. Bond counsel typically prepares the notice of sale.

Bidders (underwriters or syndicates of underwriters) base their bids on the salability of the debt, the stability of the bond market, and the pool of potential securities’ purchasers. The successful bidder establishes its reoffering prices to investors by considering comparable sales, what its investors are willing to pay, and the supply of bonds in the market waiting to be sold.

In a competitive bid situation, the issuer hopes to receive numerous bids in response to its notice of bond sale, thereby increasing its chances of paying the lowest possible interest rate on its debt. To increase the odds of this happening, the bond sale should be set at a date and time when the bond market is most receptive to a new issue. Bids typically are calculated by the “true interest cost” (TIC) method (see Appendix A, Glossary – Terms and Concepts).

The financing team should set the bond sale date that best meets the issuer’s needs to receive issue proceeds. Ideally, the sale should be held at a time when the market is not saturated with other similar issues. Sales on Tuesday, Wednesday and Thursday are preferable. Sales scheduled for Mondays and Fridays and days bracketing holidays and long weekends are less common but can be successful as well.

Technology continues to change the way competitive sales are conducted to increase the number of bids an issuer receives. For example, bids are now commonly received electronically via the Internet-based bidding platforms. Surety policies rather than actual checks typically secure good faith deposits.

FREQUENTLY ASKED QUESTIONS

I don’t understand the difference between what the federal government regulates and what the states regulate?

State law governs what kinds of borrowing authority a municipality has and how it may be exercised. Laws differ widely between states – what may be legal in one state may not be legal in another. Federal law governs whether interest on the debt may be exempt from federal income taxation and certain aspects of public offerings.


Is it true that federal tax exemption of interest is not constitutionally protected?

Yes. “Tax-exemption” status is completely at the discretion of the United States Congress and can be expanded, modified, curtailed or revoked by an act of Congress. The last sweeping changes to tax exemption rules was the Tax Reform Act of 1986, which introduced the arbitrage and rebate rules and significantly reduced the types of debt that qualified for tax-exempt status.

Do I need to do a bond issue that is sold to the public? Why not a bank loan?

A bank loan may well indeed be a viable financing option for a prospective issuer. In particular, banks may be excellent options for smaller, shorter termed issues. Public offerings may work better for larger and longer termed issue. Debt may also be “privately placed” with a limited number of qualified investors.

What is the difference between a competitive bid sale and a negotiated sale in a publicly offered issue?

In negotiated sales, the issuer engages the bond underwriter prior to the bond sale. The underwriter usually does (or assists in) the structuring and analytical work for the bond issue, and then, during the sale, the underwriter underwrites and sells the bonds as well.

In a competitive bid sale, the issuer engages a financial consultant to structure the bonds and provide pre-issue analysis and advice. The bonds are then sold to the lowest bidding underwriter at an advertised bid opening.

The two sale methods involve different processes, but both have similar sales results.

What official actions must the issuer’s governing body take on a bond election and sale?

There are two primary actions:

• Adopt a resolution or ordinance authorizing the election and ballot title, if required, and

• Adopt a resolution or ordinance authorizing issuance of the bonds after an election

How much the governing body participates in the details of the process outside these actions varies by issuer. Typically the governing body is more involved in determining the projects and the size of the bond than in the subsequent details of the bond issuance process.

Can we sell our bonds to members of our own community? Our local brokers want some of the bonds to sell.

An issuer can direct its underwriter to give preferential treatment to investors from within the issuer’s boundaries. To do this, the issuer must use a negotiated sale so that the issuer retains control over the actions of its underwriters.

Local brokerage offices can be good sources of sales to retail customers and can be included in the sale as selling group members. (See Chapter 2, Roles and Responsibilities of Principal


Participants discussion on underwriting syndicates). However, local investors typically cannot absorb the entire bond issue.

In addition, local sales campaigns may not be the cheapest way to sell bonds. Consequently, local sales campaigns can conflict with the issuer’s responsibility to get the lowest possible interest rates for its constituents. Municipalities should consult with their financial consultants about including its community in a bond sale without raising issue costs.

Our council members and staff want to buy some of the bonds to show support for the city. How do we do that?

The Council and staff must exercise extreme caution here. Technically what is “good” for the Council and staff as “investors,” that is, higher interest rates, is “bad” for the municipality’s constituents. Since the Council and staff have responsibility for approving final interest costs, the potential for a conflict of interest is clear.

Chapter 1 – Overview of Debt Financing

10

Chapter 2 – Roles and Responsibilities of Principal Participants 11

CHAPTER 2

ROLES AND RESPONSIBILITIES OF PRINCIPAL PARTICIPANTS

Chapter 1, Overview of Debt Issuance presented a brief overview of how the debt markets work and how underwriters and investors participate in the sale of bonds. This chapter discusses the typical roles of the issuer, other key financing team members and explore in more detail what services a municipality can expect from its financial and legal consultants.

Most municipal debt is sold as publicly offered securities. To issue publicly offered debt, Oregon municipalities must comply with both State of Oregon and federal securities laws. State law governs under what conditions, for what purposes and with what authority each kind of municipality can issue debt. Federal securities laws govern the issuance of securities (bonds and other debt instruments) to the investing public. Federal tax laws govern under what conditions an issuer can sell tax-exempt debt. The complexity of complying with state and federal laws usually requires a municipality to engage numerous legal and financial specialists to assist with a debt issue. Consequently, the issuer’s first step in any borrowing should be to identify its borrowing team. This team should include at a minimum:

• The issuer, appropriate staff and councilors or board members

• Financial consultants and legal counsel

In addition to these financing team members, issuers will encounter other participants during the process of issuing and administering municipal bonds. These participants may include but are not limited to:

• Paying agents or trustees who serve as an interface between the municipality and the investors who own the municipality’s bonds

• Escrow agents and escrow verification agents (for refundings)

• Firms that calculate and report arbitrage rebate liabilities

• Various state and federal regulatory agencies

• Project feasibility consultants

• Ratings agencies

• Bond insurers


THE ISSUER

The issuer is the municipality. The municipality is responsible for fulfilling all legal requirements for the debt.

The municipal board authorizes the process through an official action such as a resolution or ordinance. Typically, senior staff are delegated authority by the governing body to execute transaction details.

The issuer’s roles in the financing process are as follows.

GOVERNING BODY

The issuer’s council or board must make the major policy decisions related to any financing. The key components of the policy decisions are included in resolutions or ordinances. Many transactions can be authorized by a single action of the governing body, while others may require two or more actions.

Whether the governing board is involved in a more detailed role or prefers to delegate the authority to authorized staff is a matter of preference that will vary by municipality. Whether actively, or through delegation, the governing board’s responsibilities include:

• Directing the preparation of a long-term capital construction and improvement plan

• Determining the funding needs in consultation with members of the financing team

• Adopting resolutions or ordinances (prepared by bond counsel) authorizing the financing (and for general obligation bonds, authorizing the election and ballot title)

• Authorizing the method of sale and the execution of all issuance related documents and contracts

• Causing publication of notices as may be required by statute or city charter

MUNICIPAL STAFF

Depending on the issuer’s size and administrative structure, the chief administrative officer, finance director or other staff have responsibility for managing financing details. Staff, following the governing body’s direction, select and oversee the financing team members.

After selecting financial experts and bond counsel, staff work with them through the preliminary debt analysis and structuring, the election process (if necessary), and the authorization, sale, execution and delivery of the debt investment. Specifically, staff responsibilities include:

• Providing financial consultants with the required disclosure information for the preliminary and final official statements and providing bond counsel with project descriptions

• Providing information required by rating agencies and bond insurers


• Budgeting for debt service for the specific type of bonded indebtedness and obtaining budget committee and board approval as required by the Oregon “Local Budget Law” (currently, Oregon Revised Statutes (ORS) 294.305 to 294.565)

• Overseeing and participating in the bond sale process. This includes approving bond pricing (either through negotiation or bid) and assisting bond counsel by providing all requested closing documentation

• Directing establishment of capital project funds or accounts for the deposit and investment of bond proceeds (including calculating and paying rebates, if any, during the life of the bonds) and debt service funds to account for the payment of principal and interest on the bonded debt

LEGAL COUNSEL

Municipalities need at least one key legal service for a debt transaction. Specialized attorneys called “bond counsel” provide two essential services in completing a debt financing:

• Ensure all state and federal tax law requirements are met (and in some cases also opine on compliance with federal securities law)

• In the case of tax-exempt debt, provide an opinion to investors that the issuer’s debt is valid and binding and that interest paid on the debt is exempt from federal and state income taxes

Bond counsel firms must be nationally recognized as attorneys specializing in municipal debt and tax law. This means that their “bond opinions” regarding the validity and tax-exempt status of municipal bonds are accepted by underwriters, major banks and financial institutions and they are included in the listing of municipal bond attorneys published in The Bond Buyer’s Municipal Marketplace (commonly known as the “Red Book”).

In addition to bond counsel, other legal service providers may be engaged by one or more financing team participants. Some municipalities choose to involve their local attorney in some manner. Underwriters may require the use an “underwriter’s counsel.” In some other cases, underwriters or the issuer may engage another firm of bond attorneys as “disclosure counsel” to provided guidance and opinions on the adequacy of the debt offering’s disclosure document (generally, the official statement). Each of these legal services roles are discussed below.

BOND COUNSEL

The bond counsel assists the issuer by:

• Determining which financing options comply with state statutes, the Oregon Constitution and federal tax laws

• For general obligation bonds, drafting the election and the issuer’s ballot title for consideration, approval and adoption

• Drafting all authorizing resolutions or ordinances necessary to complete the financing


• Reviewing and commenting on portions of the preliminary and final official statements, directing the bid opening for a competitive bid sale, or reviewing the bond purchase agreement for a negotiated sale

• Preparing closing documents, including a non-litigation certificate, no-arbitrage certificate and the Internal Revenue Service (IRS) information filing for execution by the authorized municipal representative

• Coordinating the delivery of the bonds and the receipt of the bond proceeds

• Issuing an approving legal opinion

• Preparing and distributing transcripts of the proceedings to the financing team

LOCAL ATTORNEY

While bond counsel provides the key financing documents and resolution forms, some municipalities involve their local attorney to ensure that the municipality remains in compliance with local laws relating to meetings, filings and other official actions related to the financing. The local attorney may:

• Provide legal counsel to the governing board and staff

• Help monitor governing board meetings to insure compliance with public meetings laws and with the municipality’s policies and procedures

• Provide assistance to the bond counsel in evaluating any litigation risk regarding the transaction

UNDERWRITER’S COUNSEL

Underwriters may elect to engage their own counsel for any given transaction. Underwriter’s counsel often is engaged to assist in preparation of the disclosure document, the underwriter’s basic documents (such as a bond purchase agreement) and to assist in negotiating certain transaction details. Because underwriter’s counsel is usually paid through an increase in the underwriting fee, issuers typically are given some input over the selection of the firm and the amount of their fees.

DISCLOSURE COUNSEL

In some cases, a separate bond counsel firm may be engaged to provide either the issuer or the underwriter a specific opinion on the adequacy of the disclosure document for an issue.

FINANCIAL SERVICES

Financial services firms provide two key services for debt issuers:

• assisting in sizing and structuring the debt issue and preparing the bonds for sale to investors

• underwriting the bonds and selling the bonds to investors


Firms providing these services specialize in municipal debt issuance. Financial advisory firms perform the first function only but do not provide underwriting services. Investment or commercial banks may have the capability to perform either function or both.

There are many models of how financial services firms can work for a municipality. Some issuers engage a financial advisor first then decide on whether to engage an underwriter for a negotiated sale or sell the bonds via competitive bidding. Other issuers forego engaging a financial advisor and work directly with an underwriting firm. Either way, the issuer can tap the specific expertise of the financial services professionals.

FINANCIAL ADVISORS

A municipality that wishes to sell its debt by sealed bid (competitive sale) typically engages a financial advisor. The financial advisor’s responsibilities for a competitive sale are similar to the presale preparation in a negotiated sale. These responsibilities include:

• Preparing recommendations on bond issue structure and timing of sale

• Providing estimates of proposed debt structure tax rate impacts for general obligation bonds

• Preparing the preliminary and final official statement

• Recommending and assisting the issuer in evaluating the need for a rating

• Developing a ratings strategy and/or examining the feasibility of credit enhancements such as bond insurance, if a rating is sought

• Developing bid specifications for use in the official notice of sale

• Assisting in closing the transaction

Financial advisors may also be asked to provide assistance in developing an investment strategy for bond issue proceeds.

UNDERWRITERS

Underwriters are securities firms that purchase debt from the issuer and resell it to investors in the bond market. The underwriter may purchase the bonds by bid at a public sale or through direct negotiation with the issuer. Depending on whether the issuer additionally engages a financial advisor, in a negotiated sale, the underwriter typically performs some or all of the structuring and advisory duties required by the issuer prior to the bond sale.

In a negotiated sale, the underwriter’s investment bankers assist the municipality by:

• Evaluating the issue’s cost by:

1) Analyzing different issue structures and their impacts on the tax rates or general fund resources required to repay the debt

2) Providing the issuer with a cost of issuance estimate for inclusion in the size of an issue


• Providing debt service and tax rate information for use in an election required for general obligation bonds

• Structuring the bond issue

• Preparing the preliminary and final official statements in consultation with the issuer and bond counsel

• Evaluating advisability of obtaining a rating and bond insurance

• Contacting rating agencies on behalf of the issuer and assisting the issuer in obtaining a rating on the bonds, if appropriate

• Establishing a marketing program and scheduling the offering and pricing

After pricing, the underwriter:

• Finalizes the bond purchase agreement for approval by the governing board and execution by city staff

• Arranges for transfer of funds

• Executes documentation required for the transcript of proceedings

REGISTRAR/PAYING AGENT/TRUSTEE

Generally the same entity, the “registrar” and “paying agent” are agents of a corporate trust department of a commercial bank. Their principal functions are to:

• Keep the official records on behalf of the issuer relating to bond ownership

• Receive debt payments from the municipality that the paying agent uses to make interest payments to registered bond owners on the payment dates and to redeem principal on redemption dates

• Act as Trustee for more complicated financings that require additional fiduciary responsibilities

ESCROW TRUSTEE

For refundings, the escrow trustee (usually the same firm as the paying agent) holds funds deposited in a refunding escrow that are dedicated to paying off the issuer’s outstanding debt. The escrow trustee publishes the redemption notice, as required, and makes the refunded debt payments from the escrow fund. There also is an escrow trustee on lease-purchase and financing agreement transactions. The escrow trustee is the “issuer” of the certificated interests in the issuer’s financing agreement and also performs the tasks of the paying agent. See Chapter 9, Tax Increment and Assessment Financings and Chapter 13, Refundings for a discussion of the legal structure of these types of financings.


RATINGS AGENCIES

Rating agencies provide an independent evaluation of the issuer’s credit relative to other bond issues and similar credits nationally. Through the rating system, an investor anywhere can quickly judge the credit quality of an Oregon issuer even though that investor knows nothing specifically about the issuer or its community. Chapter 18, Credit Rating and Analysis, discusses ratings in more detail.

CREDIT ENHANCERS

Credit enhancers are firms that provide investors with additional protection against payment default.

Bond insurance firms provide direct irrevocable insurance policies that additionally secure the debt being insured. Bond insurance premiums are one time fees charged at closing. Insurance policies are irrevocable once issued. Once an issue is insured, the issue can be assigned the rating of the bond insurer. Most bond insurers are rated the highest rating level by the large national rating agencies.

Commercial banks may provide letters of credit to certain types of transactions as well. Letter of credit fees are charged based on the outstanding balance of the loan covered.

Purchasing bond insurance or a letter of credit is an economic decision, not a legal requirement. The analysis is simply whether purchasing the credit enhancement will improve the interest rates on the bond issue enough to more than offset the cost of the credit enhancement.

ARBITRAGE REBATE SERVICES

There are firms that specialize in providing arbitrage rebate services to tax-exempt bond issuers. Many issuers engage these firms to calculate rebate liability. See Chapter 5, General Federal Tax Requirements for an explanation of arbitrage rebate rules.

Oregon State Treasury Debt Management Division. The Debt Management Division of the Oregon State Treasury serves as a clearinghouse for municipal debt information. With the exception of approval of advance refunding and certain derivative oversight functions, the Treasury does not approve or disapprove of any local debt issuance plans or take positions on local debt issuance. However, for “advance refundings,” the Debt Management Division must review and approve preliminary and final advance refunding plans submitted by the underwriter or financial advisor.

PROJECT FEASIBILITY CONSULTANTS

Certain project based transactions require the use of a consultant with specific knowledge in evaluating the project’s feasibility. These may include consulting engineers or outside financial analysts and project consultants.


INDEPENDENT AUDITORS

Typically, the municipality’s auditors are not directly involved in a debt transaction. However, under some circumstances, the underwriter may seek additional assurances from the municipality’s auditors regarding an updated status of the issuer’s financial statements.

INVESTMENT ADVISORS

A municipality may engage financial experts to advise or assist them with developing and executing an investment strategy for bond issue proceeds. The municipality may find this service expertise in its regular financial advisor or investment banker as well.

SWAP ADVISORS

With the increased use of interest rate exchange agreements (swaps), municipalities increasingly engage a specialized advisor with specific expertise in developing swap policies, analyzing and advising on swap transactions and tracking the performance of swap contracts. The issuer’s financial advisor or investment banker may also have such expertise.

INTERNAL REVENUE SERVICE

The IRS conducts both random and targeted audits of tax exempt issues for compliance with federal tax law. However, under normal circumstances, an issuer will have no contact with the IRS during the course of a typical tax exempt debt issue.

SELECTING THE FINANCE TEAM

Oregon municipalities have tremendous flexibility in selecting finance team members. Bond counsel, underwriters and financial advisors and other consultants and service providers are considered “personal services” under Oregon procurement statutes. Consequently, municipalities are not required to go through formal bidding processes for these services.

Municipalities in Oregon may engage finance team professionals in a manner and process that best fits each municipality’s preferences and procedures. Municipalities with a formal debt management policy may have addressed debt related services procurement through the policy. Others may have procurement policies that address personal services contracts in general.

Some municipalities prefer or require a formal Request For Proposal (RFP) or Request for Qualifications (RFQ) process. Such a process may entail a formal written RFP or RFQ circulated with written acknowledgements of addendums and formal protest and award process specified. The process may entail written responses to questions, a formal evaluation process and interviews with some or all of the proposers.

Formal processes result in formal agreements for specified periods of time with a requirement that engagements be reexamined at specific points in the future.

Many Oregon municipalities use less formal processes for selection of service professionals. Some rely on long standing relationships with lawyers, investment bankers or financial advisors.


Others survey their peer network and make ad hoc decisions based on each individual financing need.


How much time does staff have to spend on a bond issue? Can’t we just hire someone to take care of it?

An issuer relies on a number of financial industry professionals to guide it through the issuance process. However, the ultimate responsibility for the bond issue is the issuer’s. Consequently, municipal officials must understand the process and all the implications of actions taken.

How does a municipality engage finance industry professionals?

Finance and legal professional engagements are considered “personal services” contracts. As such, issuers have authority to engage service professionals, according to governing board policy, in any manner that best fits the issuer’s particular situation. Some use very formal RFP processes. Others make more direct and less process driven decisions.

When should a municipality engage financial consultants and bond counsel? How are they paid if the issuer doesn’t have the money for fees unless the bond passes?

Municipalities should engage financial consultants and bond counsel as early as possible. Many finance industry professionals are paid on a contingency basis. This means they do not charge for services until the bond issue passes and sells. Issuers should ask potential service providers whether they would work on a contingency fee basis. Frequent issuers may have ongoing relationships with their finance and legal professionals.

Why can’t our municipal attorney do the legal work for a bond issue?

There is no statute that requires an issuer to engage a bond counsel firm for a debt issue. However, the market, particularly for any publicly offered issue, will require a legal opinion from a nationally recognized bond counsel. Law firms that specialize in debt-related municipal securities have developed the recognized expertise in municipal, federal securities and federal tax law necessary to analyze and opine on the required areas of investor concern. Local counsel can still play an important role by advising staff on relevant aspects of the financing and providing a non litigation check before closing.

Chapter 3 – Basic Legal Documents 21

CHAPTER 3

BASIC LEGAL DOCUMENTS This chapter describes the basic legal documents that may be required in connection with the undertaking of a project and the subsequent issuance of bonds, full faith and credit obligations or other forms of debt by a city or other local government issuer in Oregon. The legal documents that are required will depend on the type of bonds or debt being issued by a city or local government and whether the bonds are being sold in the public market or being privately placed with a bank.

The summaries below provide general descriptions of the purpose of the various documents, the party who typically drafts the documents and descriptions of the important sections (from the issuer’s perspective) of the documents. Because of the wide variety of transactions that can be undertaken, these descriptions should be used as a general guide and are not a complete representation of the legal documentation for a public finance transaction in today’s marketplace. To address the variation in legal documents depending on the type of transaction, the descriptions of each type of document include a list of alternate documents that may be used in a given transaction.

AUTHORIZING RESOLUTION

Before issuing bonds or debt, the governing body of the city or other local government issuer must take official action to authorize the issuance of debt for the project. The governing body adopts the “Authorizing Resolution” or “Ordinance” to, among other things:

• approve the sale and issuance of the bonds

• direct staff to take action to complete documentation for the sale of the bonds

• authorize execution and delivery of documents

• declare the issuer’s official intent to be reimbursed from bond proceeds for expenditures incurred in advance of the issuance of the bonds in compliance with the Internal Revenue Code and related Treasury Regulations

The reimbursement declaration is often described as a “Reimbursement Resolution” and may be adopted by the issuer as a stand-alone resolution prior to adopting the authorizing resolution. Tax counsel should be consulted to be sure the appropriate project descriptions and tax language are included in any resolution that includes a declaration of intent to be reimbursed from bond proceeds.

The authorizing resolution may establish or delegate authority to an authorized representative to establish the terms of the bonds including payment dates, maturities, redemption provisions,


registration, transfer, exchange and other matters. The authorizing resolution may also include the legal structure for the bonds as described below under the description of the bond indenture. Generally, an authorizing resolution for general obligation bonds would include the legal structure for the bonds.

Alternate Documents: Authorizing Ordinance

Principal Drafter: Bond counsel

Party: Issuer

BOND INDENTURE

For some bond issues, the “Bond Indenture” establishes the legal structure for the security of the bonds, including the terms of the bonds, the principal and interest payment dates, maturities and redemption provisions. The bond indenture may contain the following provisions:

• pledge of revenues or other collateral to secure the payment of the bonds, and the creation and granting of the trust estate

• representations and covenants, including affirmative covenants to maintain facilities or negative covenants to not pledge the revenues that secure the bonds to other debt

• flow of funds from bond proceeds and from debt service payments and establishment of the priority of uses of the revenues pledged to pay the bonds

• additional bonds test or parity debt provisions for issuance of future bonds

• events of default and remedies

• defeasance provisions to refund the bonds

• trustee related provisions, if necessary, including removal of trustee, appointment of new trustee, indemnification and rights and duties of the trustee

The issuer should carefully weigh each of the elements described above and should keep in mind how these provisions may be structured to maintain the issuer’s flexibility to issue debt in the future.

Alternate Documents: Bond Ordinance, Trust Agreement, Master Resolution, Master Ordinance. For example, many cities and other local governments use a Master Resolution to establish the legal documentation and structure of their water or sewer utility revenue bonds. For example, when a Master Resolution is used the issuer will issue each series of bonds under the “umbrella” of the legal terms and conditions established pursuant to the Master Resolution, either on parity with or subordinate to other outstanding series of bond issued under the Master Resolution. A supplemental resolution may also be adopted in connection with subsequent series of bonds to establish terms and conditions specific only to that series of bonds.


Parties: Issuer and trustee, if any


OFFICIAL STATEMENT

The Official Statement (OS) is the offering document that is delivered to prospective investors for bonds that are being sold in the public market. Federal securities laws require that an OS must provide complete and accurate information to potential investors. Full and complete disclosure should be made in the OS of any adverse condition that could materially affect the sale of the bonds or the ability of the issuer to service the debt. The OS should inform potential investors of all levels of sophistication about the financial and economic standing of the city or other local government issuer. The OS should include a description of the bonds, including but not limited to the following:

• project and purpose for issuing the bonds

• pledge and security to repay the bonds

• economic and financial condition of the issuer and/or the conduit borrower

The OS also should provide potential investors with information about the bonds including scheduled debt service and the sources and uses of the bond proceeds, including the sale amount and any underwriting discount or premium. Summaries of the bond documents and the form of “Bond Opinion” are included in the OS. Because the OS is considered the issuer’s document, the issuer should carefully review all portions of the OS for completeness and accuracy.

See Chapter 4, Securities Law and Disclosure for a more detailed discussion about the OS and disclosure obligations of the city or other local government when issuing bonds and subsequent to issuance.

Related Documents: Prior to pricing, a “Preliminary Official Statement” (POS) is usually distributed that includes substantially the same information as the OS, except for the final numbers and pricing data that are updated in the OS after pricing. In certain transactions, such as certain variable rate issues, there is no requirement for a POS.

Principal Drafter: Varies. The OS may be drafted by the underwriter or its counsel or by the issuer or bond counsel. Either bond counsel or underwriter’s counsel may be engaged to serve as disclosure counsel and prepare the OS. In some circumstances, the financial advisor or another third party may prepare the OS.

Parties: Issuer

BOND PURCHASE AGREEMENT

In connection with a negotiated sale or a private placement of bonds, a “Bond Purchase Contract” or “Bond Purchase Agreement” (BPA) is executed and delivered by the issuer and the underwriter(s) or bank and the other parties, if any, to the financing, for the purchase and sale of the bonds. In a conduit financing the BPA can be a three party agreement among the issuer, the conduit borrower and the underwriter, or, the borrower can enter into a separate Letter of Representations.


The BPA will include the offer to purchase the bonds by the underwriter or bank and the acceptance of the issuer to sell the bonds to the underwriter or bank. The BPA will generally include the following:

• a description of the bonds and the authority of the issuer to sell the bonds

• the sale price

• representations of the issuer and the underwriter or bank

• certain “outs” – circumstances under which the underwriter or bank is not obligated to purchase the bonds

• indemnification or liquidated damages provisions

• the fee for the underwriter or bank

• a breakdown of bond issuance costs and specification of what costs the issuer pays and what costs the underwriter or bank pays

• for a public offering, the BPA will include a description of the end of the underwriting period: (i) occurs at closing or when underwriter has sold all of the bonds; (ii) starts the 25 day clock ticking whereby issuer must update the Official Statement if material event occurs

• conditions to and expectations of the parties for closing – delivery of closing certificates and opinions

OFFICIAL NOTICE OF SALE

Bonds may be sold through a public competitive bid process by which the terms of the bonds including the size, maturity dates, redemption provisions and structure are determined several weeks prior to the sale and published in the Official Notice of Sale (NOS). In a competitive sale, the issuer is hoping to receive a large number of bids in response to the NOS, thereby increasing the chances of a competitive interest rate environment that results in a lower interest rate on the debt. The competitive bid process is set forth in the NOS which includes, among other things:

• the bidding rules and constraints

• the amount and procedure for handling the good faith deposit that each bidder must submit with its bids

• the standards that the issuer will use for evaluating the bids

The NOS and authorizing resolution are often prepared and adopted simultaneously. After the NOS is approved, it must be published according to the procedures established under Oregon law.

See Chapter 17, Structuring the Bond Issue and Chapter 1, Overview of Debt Issuance for further details on structuring the bond issue and the process of the debt sale in a negotiated sale, private placement or through a competitive bid process.


Alternate Document: Placement Agreement used in connection with a private placement of the debt with a bank

Principal Drafter for BPA: Underwriter or underwriter’s counsel, or bank for a private placement

Principal Drafter for NOS: Bond counsel

Parties: Underwriter or Bank, issuer, conduit borrower

CONTINUING DISCLOSURE CERTIFICATE

“Continuing disclosure” refers to the process of providing financial and other information to the financial market on a regular basis so long as any bonds are outstanding. Under Securities and Exchange Commission (SEC) Rule 15c2-12 (the “Rule”), an underwriter cannot purchase or sell securities in an offering of more than $1 million unless it has reasonably determined that an obligated person has undertaken to provide ongoing information. In most cases the “obligated person” is the city or local government that is issuing bonds. To comply with the Rule, the issuer will execute a continuing disclosure certificate under which it will agree to provide annual financial information, similar to the financial disclosure in the Official Statement, and information about specific material events for the benefit of the holders of the bonds. The obligations of the issuer under the continuing disclosure certificate are enforceable by the holders of the bonds. See Chapter 4, Securities Law and Disclosure for a more detailed discussion of the requirements of the Rule.

The issuer should carefully review the provisions of the continuing disclosure certificate that describe the annual financial information it is obligated to provide, the deadline for filing annual financial information, the list of material events that require notice and the amendment provisions.

Alternate Document Names: Continuing Disclosure Undertaking, Continuing Disclosure Agreement

Principal Drafter: Bond counsel or underwriter’s counsel

Parties: Issuer, other obligated persons. In some cases, the trustee may be a party to a continuing disclosure agreement pursuant to which it serves as the issuer’s or obligated person’s dissemination agent for purposes of distributing the annual financial information required under the Rule.

See Chapter 5, Securities Law and Disclosure for a more detailed discussion of the standards for continuing disclosure under the Rule, your obligations as an issuer to make annual disclosure filings under the Rule and tips for how to best manage your annual reporting obligations using the DisclosureUSA website (www.disclosureusa.org.). The DisclosureUSA website is operated by The Municipal Advisory Council of Texas. It is a web-based system that enables issuers to meet the filing requirements of Rule 15c2-12 by means of a single filing location. If you file through DisclosureUSA, you do not need to make a separate filing with any of the “NRMSIRs” or “SIDs.” (See Appendix A, Glossary – Terms and Concepts)


CONDUIT BORROWING DOCUMENTS

In a conduit borrowing, a city, county or other authorized public body acts as the issuer of bonds and then loans the proceeds of the bonds to a qualified borrower. The borrower agrees to repay principal and interest on the bonds typically through loan repayments.

See Chapter 11, Conduit Revenue Bonds for a more detailed description of conduit borrowing generally and what is a qualified borrower.

LOAN AGREEMENT

In conduit borrowings, the Loan Agreement between the issuer and the borrower establishes the obligations of the borrower to repay the loan of the bond proceeds. The Loan Agreement generally establishes the terms and conditions of the loan and the repayment provisions, and includes the following:

• description of the project

• the pledge of revenues and establishment of the trust estate to repay the loan

• covenants of the borrower, including financial and general covenants

• representations of borrower

• repayment provisions

• restrictions on sale/merger/acquisition/disposition of the borrower

• restrictions on encumbrances of the revenues, security and trust estate pledged to repay the loan

• permitted indebtedness

• requirements for the project to be insured

• provisions concerning the imposition of taxes

• tax covenants

• covenants to maintain the project

• additional bonds test for future debt

Principal Drafter: Bond Counsel

Parties: Issuer, Conduit Borrower

See Chapter 11, Conduit Revenue Bonds for a more detailed description of the process and documents required for a conduit revenue bond issue.


INSURANCE AND CREDIT ENHANCEMENT RELATED AGREEMENTS

“Credit Enhancement” is the use of the credit of an entity other than the issuer to provide additional security for the bonds or other debt financing. Typically credit enhancement refers to the use of bond insurance, bank letters of credit and other facilities, and credit programs of federal or state governments or federal agencies, but also may refer more broadly to the use of any form of guaranty, secondary source of payment or similar credit-improving instruments.

BOND INSURANCE

An issuer may purchase a financial guarantee insurance policy from a bond insurer for the payment of the principal of and interest on municipal bonds as they become due should the issuer fail to make required payments. Bond insurance typically is acquired in conjunction with a new issue of municipal securities, although insurance also is available for outstanding bonds trading in the secondary market. In the case of insurance obtained at the time of issuance, the issuer of the policy typically is provided extensive rights under the bond indenture or through a “side agreement” to establish the terms for payment under the policy and repayment by the issuer and to allow the insurer to control remedies in the event of a default. Bond insurance may also be purchased to provide funds required to meet a debt service reserve requirement under the bond indenture.

Other credit enhancement devices, such as letters of credit or standby bond purchase agreements require the issuer and the credit enhancement provider to enter into agreements that among other things establish the terms for drawing on the credit enhancement source for payment of the principal or interest due on the bonds and the subsequent repayment by the issuer of any funds so drawn to pay the bonds.

Possible Documents: Financial Guaranty Insurance Policy (Bond Insurance Policy); Surety Bond Policy; Letter of Credit Security Agreement; Reimbursement Agreement; and Standby Bond Purchase Agreement

Possible Drafters: Insurance company and/or its counsel; Bank/Credit Provider and/or its counsel

Parties: Issuer, Credit Provider

TAX CERTIFICATE

In the “Tax Certificate,” the issuer, or in the case of a conduit issue, the borrower, is required to make certifications to satisfy the requirements of the Internal Revenue Code (the “Code”) and the regulations thereunder for the interest on the bonds to be tax-exempt. The tax certificate may contain certain elections required by the Code at the time the bonds are issued. The rules that apply to investment of bond proceeds and the timing for spending bond proceeds are also set forth in the tax certificate. The issuer or borrower should review the tax certificate carefully, particularly the section on use of proceeds and should consult with bond counsel. See Chapter 5, General Federal Tax Requirements for a more detailed description of the tax certificate and an analysis of the rules and requirements under the Code.


Alternate Document: Tax Agreement, Arbitrage or Non-arbitrage Certificate


Parties: Issuer, borrower

BOND COUNSEL OPINION AND OTHER LEGAL OPINIONS

The attorney or firm of attorneys serving as bond counsel to the issuer delivers the legal opinion in connection with the issuance of bonds. The opinion confirms that the bonds are valid and binding obligations of the issuer and are issued in accordance with the law. The bond counsel opinion typically includes a tax opinion that interest on the bonds is exempt from federal and state income taxes. In some circumstances, the bonds or debt being issued by the city or local government issuer may not qualify for the exemption from federal and/or state income taxation. In these cases, the bond counsel opinion is limited to the validity of the obligations and may run only to exemption for state income tax purposes, if applicable.

SUPPLEMENTAL OPINION

In addition to the final opinion, the issuer may also engage its bond counsel to deliver a “Supplemental Opinion” that covers matters related to the official statement and the bond purchase agreement. The supplemental opinion is addressed to the underwriter and generally includes an opinion that the bonds and the bond indenture are exempt from registration or qualification under certain federal securities laws (the “Securities Law Opinion”), that the purchase contract was duly executed and delivered and that the official statement does not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (a “10b-5 Opinion”). The supplemental opinion is delivered by bond counsel in addition to the final opinion and, as a result, should be specifically requested under the terms of the issuer’s engagement of its bond counsel.

CLOSING DOCUMENTS

Closing documents are the certificates, receipts, notices, written requests or directions and similar documents that are delivered at the closing of a transaction. The closing documents generally:

• document the factual representations required under the bond purchase agreement and the accuracy and completeness of the disclosure

• document compliance with the requirements of law, including state and federal securities laws, for the issuance of the bonds and the disclosure, including the effectiveness of resolutions, due execution of documents and conduct of meetings in accordance with applicable law

• instruct parties to take certain actions such as depositing funds, delivering required notices, recording documents and releasing security


The closing documents are designed to establish all the factual issues required for bond counsel to deliver its final opinion, and if so engaged, the supplemental opinion, and for the underwriters to complete their due diligence and purchase the bonds. The issuer should carefully review the closing documents to verify the accuracy of all amounts for receipt and deposit of funds, accuracy of representations, warranties and certifications.


Parties: All parties to the transaction


What official action is required to authorize a bond issue?

The governing body of a city or other local government issuer must adopt a resolution or ordinance to approve the sale and issuance of the bonds, and delegate authority to staff to take action to complete the documentation for the sale of the bonds. The authorizing resolution or ordinance may also include a “Reimbursement Resolution” which is a declaration of the issuer’s intent to be reimbursed from bond proceeds for expenditures incurred in advance of the bond issue that meets the requirements of the Internal Revenue Code and related Treasury Regulations.

What is the difference between an authorizing resolution and a bond or master resolution?

In some cases, the authorizing resolution and bond resolution may be combined into a single document that authorizes the issuance of bonds and establishes the legal structure and security for the bonds. Frequently, general obligation bonds are issued with a combine resolution following voter approval of the bond levy. For other issues, such as revenue bonds, a city may decided to adopt a general authorizing resolution to provide general authority for the bond issue and then later adopt a more detailed master borrowing resolution that specifies in detail the legal terms of the bonds, such as revenue covenants and procedures for issuing additional bonds. See Chapter 7, General Obligation Bonds and Chapter 10, Revenue Bonds for more information.

What is the difference between primary and secondary market-disclosure?

The Official Statement that is delivered to prospective investors for bonds that are being sold in the public market is a primary disclosure document. The preliminary and final Official Statements are the first information investors receive about bonds that an issuer is offering for sale in the public market.

Secondary market disclosure refers to any time any issuer speaks to the market after its bonds are issued. Examples of secondary market disclosure include the annual financial information that an issuer provides under the Continuing Disclosure Certificate or Undertaking and notices of any of the material events defined under SEC Rule 15c2-12, such as a ratings upgrade, bond call or defeasance, that the issuer provides to pursuant to its Continuing Disclosure Certificate.

See Chapter 4, Securities Law and Disclosure for more information.


What is the difference between a Closing Memorandum and a Settlement Memorandum?

Bond counsel typically prepares a closing memorandum or closing list that outlines the documents that are required to be provided and executed as conditions to closing the bond sale and identifies the responsible parties for each document.

The underwriter typically prepares a closing or settlement memorandum prior to closing that sets out the purchase price of the bonds, itemizes how the bond proceeds are being applied to costs of issuance, such as insurance premiums and the underwriter’s discount, and shows the amounts and locations of wire transfers of the bond proceeds that will occur at closing.

Chapter 4 – Securities Law and Disclosure 31

CHAPTER 4

SECURITIES LAW AND DISCLOSURE Federal and state securities laws govern how stocks, bonds and other securities are offered, sold and traded. Bonds and other debt obligations issued by Oregon cities are “securities” and, as such, are subject to certain federal securities laws. Bonds and other debt obligations issued by cities are not, however, subject to the same securities law requirements that apply to stocks, bonds and other securities issued by corporations and other non-governmental entities. City officials and staff must concern themselves with securities law compliance at the time bonds are issued and as long as the bonds are outstanding.

FEDERAL SECURITIES LAW

The primary federal securities laws are the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). The Securities Act, as a general matter, requires any bond or other security that is offered for sale to be registered with the Securities and Exchange Commission (“SEC”) unless it is either an “exempt security” or is sold in an “exempt transaction.” Section 3(a)(2) of the Securities Act exempts from registration “any security issued or guaranteed by...any State of the United States, or by any political subdivision of a state, or any public instrumentality of one or more states...” Because Oregon cities are “political subdivisions of a state” bonds issued by them are “exempt securities” ─ exempt from registration with the SEC under the Securities Act.

While bonds issued by Oregon cities are exempt from registration under the Securities Act, they are not exempt from the antifraud rules of the Securities Act and the Exchange Act. Oregon’s securities laws also contain antifraud rules that closely parallel these federal rules. Section 17(a) of the Securities Act and SEC Rule 10b-5, promulgated under the authority granted to the SEC by Section 10(b) of the Exchange Act, make it:

Unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce, or of the mails or any facility of any national securities exchange:

• To employ any device, scheme, or artifice to defraud

• To make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which they were made, not misleading, or

• To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security


These antifraud rules have very broad application -- despite the use of terms such as scheme, misleading, fraud and deceit. The term “statement,” for example, refers to any release of information that can reasonably be expected to reach investors and the financial marketplace. In turn, a statement is “material” if there is a substantial likelihood that a reasonable investor or prospective investor would consider the information important in deciding whether or not to invest. As a result, a city must be concerned about its securities law obligations not only when making statements in an Official Statement or other offering document as part of a primary or initial offering of its bonds, but at any time it has bond or other obligations outstanding and it makes a “material statement.” These material statements can impart the value of the bonds trading in the secondary market and could take any variety of forms, including the release of city financial statements, formal press releases, postings on the city’s web site or statements by public officials. According to the SEC, “press releases, public statements, interviews and information on issuer websites, even though not necessarily made or published for the express purpose of informing the securities markets, should be treated with the same care as information included in an Official Statement.” Exchange Act Release No 20,560, 3 Fed. Sec. L. Rep. (CCH) ¶ 23,120B, at 17,095-3 (January 13, 1984).

Regardless of the form of the statement, federal securities law requires that all information that is provided to or can be expected to reach investors and prospective investors, and that can reasonably be expected to be relied on by such investors in making investment decisions must be accurate and complete. This requirement applies at the time the bonds are issued and continues as long as the bonds are outstanding.

DISCLOSURE OBLIGATION WHEN ISSUING BONDS

To ensure that the material statements that are made when a city sells its bonds to the public are accurate and complete, a city will typically prepare and formally approve an official statement or similar disclosure document. While there is no legally prescribed form for an official statement or disclosure document, standard practices have developed among types of issuers and obligations. Despite the standardization, elected officials, city staff and advisors should always review disclosure documents carefully and consider, from the perspective of the investor, whether the information contained in the document is both accurate and complete – providing the investor with all information that is material to the investment decision.

The importance of a hands-on approach to disclosure by city officials is underscored by the SEC’s findings in its report issued following its investigation of Orange County, California more than a decade ago. The failure of elected and other officials to review municipal securities disclosure documents was highlighted in the SEC report that was critical of the supervisors of Orange County, California. Report of Investigation in the Matter of County of Orange, California as it Relates to the Conduct of the Members of the Board of Supervisors, Exchange Act Release No. 36761 (January 24, 1996). As stated by the SEC in the Orange County matter:

In authorizing the issuance of securities and related disclosure documents, a public official may not authorize disclosure that the official knows to be false; nor may a public official authorize disclosure while recklessly disregarding facts that indicate that there is a risk that the disclosure may be misleading. When, for example, a public official has knowledge of facts bringing into question the


issuer’s ability to repay the securities, it is reckless for that official to approve disclosure to investors without taking steps appropriate under the circumstances to prevent the dissemination of materially false or misleading information regarding those facts. In this matter, such steps could have included becoming familiar with the disclosure documents and questioning the Issuer’s officials, employees or other agents about the disclosure of those facts.

The message communicated by the statements of the SEC in the Orange County report, and more recently by the SEC in its investigation of the City of San Diego, California is that public officials must engage in a meaningful review of the disclosure document as part of its approval of the document and cannot simply “rubber-stamp” the document.

In connection with the public sale of bonds by a city, the city will enter into a bond purchase or similar agreement with the underwriter or bond purchaser. This agreement will contain specific representations and warranties as to the accuracy and completeness of the official statement or other disclosure document. The underwriter or other purchaser will typically require, as a condition to completing the issuance and sale of the bonds, that the city deliver certificates and opinions confirming that the representations and warranties contained in the purchase agreement related to the official statement are both accurate and complete as of the date of issuance.

DISCLOSURE OBLIGATIONS FOLLOWING ISSUANCE OF BONDS

The obligations of a city to provide information to investors after bonds are issued comes primarily from SEC Rule 15c2-12 (the “Rule”) promulgated by the SEC pursuant to Section 15(c) of the Exchange Act. While the Rule initially created obligations with respect to the use and delivery of an official statement in connection with the initial offering of municipal securities, it was amended in 1995 to require disclosures to be made after municipal securities were issued, and continuing so long as the securities are outstanding.

While the Rule technically applies to underwriters and not directly to cities and other municipalities (which the SEC is prohibited by federal law from regulating directly), it operates to prohibit a public offering of bonds by a city unless the city has agreed to be obligated to take the actions necessary to ensure compliance with the continuing disclosure requirements of the Rule, unless the bonds are exempt from the Rule. Specifically, an underwriter may not purchase and sell municipal securities in a public offering unless the issuer has undertaken in a written agreement or contract for the benefit of the bondholders to provide to each nationally recognized municipal securities information repository (“NRMSIR”) and to the appropriate state information depository (“SID”) both (1) annual financial information, and (2) notice of the occurrence of certain listed material events.

Annual financial information is described in the Rule to include “annual financial information for each obligated person for whom financing information or operating data is presented in the final official statement” and, if not included as part of this annual financial information, “audited financial statements for each obligated person.”


Events that must be disclosed when they occur, if they are material, are:

• Principal and interest payment delinquencies

• Non-payment related defaults

• Unscheduled draws on debt service reserves reflecting financial difficulties

• Unscheduled draws on credit enhancement reflecting financing difficulties

• Substitution of credit or liquidity providers, or their failure to perform

• Adverse tax opinions or events affecting the tax-exempt status of the security

• Modifications to rights of security holders

• Bond calls

• Defeasances

• Release, substitution, or sale of property securing repayment of the securities, and

• Rating changes

In addition to providing annual financial information and material event notices to NRMSIRs and any SID, issuers or other obligated persons are required to provide notices to the NRMSIRs and SID of any failure to provide annual financial information on or before the date they have agreed to do so in their written contract or agreement. NRMSIR filings can be made by cities directly, including through the use of websites such as DisclosureUSA.org, or accomplished through the use of a dissemination agent or other third-party service provider.

While the continuing disclosure obligations created by the Rule have broad application, the Rule includes exemptions for certain types of bonds and offerings. The continuing disclosure provisions of the Rule do not apply to a primary offering of bonds by a city if the bonds are in authorized denominations of $100,000 or more and such securities:

• Are sold to no more than thirty-five (35) persons, each of whom the underwriter reasonably believes:

A. Has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the prospective investment; and

B. Is not purchasing for more than one account or with a view to distributing the securities; or

• Have a maturity of nine months or less; or

• At the option of the holder thereof may be tendered to an issuer of such securities or its designated agent for redemption or purchase at par value or more at least as frequently as every nine months until maturity, earlier redemption, or purchase by an issuer or its designated agent.


In addition, the Rule contains the two partial exemptions from continuing disclosure. For bonds that have a final maturity date of eighteen months or less, there is no obligation to file annual financial information (though there is still an obligation to file material event notices). Additionally, the Rule contains a limited exemption for “small issuers” having less than $10,000,000 in municipal securities outstanding.

AVOIDING SECURITIES LAW CLAIMS

To avoid potential securities law liability in connection with bonds or other obligations that a city may issue or have outstanding, cities should take steps to ensure that: (1) official statements are subject to meaningful review and formal approval by elected and other officials of the city; (2) that material information is provided to bondholders whenever the city is obligated to provide such information; (3) that all material statements made by the city or its representatives that could potentially impact an investor’s decision to purchase or sell a bond are accurate and complete; and (4) that all material information and statements that are provided are provided on a timely, nonselective basis, so no investor has an unfair information advantage over another in making investment decisions.

Chapter 5 – General Federal Tax Requirements 37

CHAPTER 5

GENERAL FEDERAL TAX REQUIREMENTS This chapter provides an overview of the basic federal tax concepts and rules applicable to public finance. Under the Internal Revenue Code of 1986 (the “tax code”), bonds issued by states and local governmental units generally bear interest that is excluded from gross income for federal income tax purposes. The term “bond” includes any evidence of indebtedness, including notes, installment sale agreements, or financing leases. Although exempt from federal income tax, interest on bonds may be taken into account in determining other federal income tax consequences, such as personal or corporate alternative minimum tax, interest expense deductions, taxation of social security benefits and the like.

Notwithstanding the general rule that governmental bonds are tax-exempt, interest on bonds is taxable if the bonds are not treated as obligations of a state or political subdivision of a state (see below), if the bonds are arbitrage bonds, if the bonds are hedge bonds, or if the bonds violate various other prohibitions contained in the tax code. Furthermore, while governmental bonds that are private activity bonds (that is, the bonds or the project financed by the bonds substantially benefits private businesses) generally are not tax-exempt, certain qualified private activity bonds are tax-exempt.

The discussion below sets forth the principal federal tax rules in sufficient detail, it is hoped, to give the reader a basic understanding of the concepts and limitations listed above. In addition to the requirements covered in detail in this chapter, the following universal requirements apply to all tax-exempt bonds:

• An IRS information return (Form 8038) must be filed for the bonds

• Bonds must be issued in registered form and

• Bonds may not be directly or indirectly guaranteed by the federal government

In many cases (typically with bonds issued to fund public infrastructure and payable from general governmental revenues) the tax rules discussed in this chapter will not have a significant effect on the way a bond issue is put together, at least from the issuer’s perspective. Bond counsel will be analyzing the requirements and taking steps to help the issuer comply, but the tax aspects of the transaction will not be particularly difficult. In other financings, for example qualified private activity bonds or financings (such as single family housing bonds) involving underlying loans, the tax rules are critical to the structuring and success of the transaction, and much of the effort of the financing team will be devoted to ensuring compliance with these complex requirements. In all financings, care must be taken to comply with all of the tax code’s requirements.


OBLIGATIONS OF A STATE OR POLITICAL SUBDIVISION

In order to be tax-exempt, bonds must be issued by or on behalf of a state or a political subdivision of a state. Political subdivisions are public agencies that can independently exercise a substantial amount of one or more of the following governmental powers:

• Eminent domain

• Police power

• Taxing power

Public agencies such as joint powers authorities that are not political subdivisions but issue bonds at the direction of, or are completely controlled by, a political subdivision typically are treated as issuing bonds on behalf of a political subdivision. Tax lawyers sometimes refer to these issuers as “On Behalf Of” issuers.

DEFINITIONS

The following definitions are crucial to an understanding of how the tax law applies to public finance. The reader may wish to refer back to this section as these concepts come up in the later discussion.

ISSUE OF BONDS

In general, the various federal tax limitations and requirements apply to an “issue” of bonds rather than individual bonds. In other words, to determine whether bonds are private activity bonds, arbitrage bonds, or hedge bonds, one must first determine which bonds are part of the same issue. Bonds are part of the same issue if the bonds are sold at substantially the same time (for example, less than 15 days apart), are reasonably expected to be paid from substantially the same source of funds and are sold pursuant to the same financing plan. Typically, all of the bonds that are sold pursuant to the same official statement are part of the same issue.

PROCEEDS

Just as the federal tax rules primarily apply to an issue of bonds, the application of the federal tax rules requires an analysis of the investment and ultimate use of the “proceeds” of a bond issue. For example, it is the timing and manner of the ultimate use of proceeds that determines whether bonds are private activity bonds, qualified private activity bonds, or hedge bonds. Proceeds are comprised of the following:

• Sale proceeds. The amount paid to the issuer by the original purchasers for the bonds

• Investment proceeds. The investment earnings on sale proceeds, including compounded earnings

• Transferred proceeds. For refundings, the unspent sale proceeds and investment proceeds of the issue of bonds being refunded


• Gross Proceeds. All proceeds (sale proceeds, investment proceeds and transferred proceeds) plus amounts that are reasonably expected to be used to repay the bonds, such as revenues deposited in a debt service fund, and amounts that are pledged as security for the repayment of the bonds

EXPENDITURE OF GROSS PROCEEDS

Understanding whether funds held by an issuer are “proceeds” at any given time requires an understanding of how funds related to a bond issue are treated as having been spent. The following are concepts important to an understanding of expenditures:

• Expenditures related to purpose of issue. Generally, proceeds may be spent only on capital costs of facilities and costs of issuing the bonds. Once proceeds are allocated to an ultimate expenditure, the use and nature of any facility paid for with the proceeds is tracked for private activity bond and qualified private activity bond purposes. If the purpose of the bonds is to finance working capital expenditures, the Treasury Regulations provide that proceeds are spent only at times in which the issuer has no other moneys on hand available to cover those working capital expenses (See Chapter 12, Notes, Short-Term and Interim Financing).

• Investments. Gross proceeds are not spent when they are used to acquire investment securities; they are simply allocated to those investments temporarily and return to the issuer for ultimate use or reinvestment as the investment securities mature or are sold. During the time gross proceeds are allocated to investment securities, they are tracked for arbitrage purposes, as well as to determine the amount of investment proceeds that has accumulated.

• Payment of Debt Service. Generally, gross proceeds that are not sale, investment or transferred proceeds are spent only when they are used to pay debt service on the bonds.

• Reimbursements. Issuers and conduit borrowers often wish to use bond proceeds to reimburse themselves for costs paid prior to the issuance of the bonds. Bond proceeds allocated to such “reimbursement costs” will be treated as “spent” only if certain requirements are satisfied. (See text box Reimbursement Rules) If these requirements are not satisfied, any bond proceeds that the issuer or conduit borrower attempts to allocate to the reimbursement costs will not be treated as spent and will continue to be subject to the arbitrage yield restriction rules and the rebate requirement discussed in more detail below.

YIELD

The yield on a bond issue is the discount rate or interest rate that allows all of the payments of principal and interest on the bonds, (net of payments or receipts from certain interest rate hedging transactions such as swap agreements) plus any payments for credit enhancement, to equal, on a present value basis and as of the date the bonds are issued, the aggregate amount paid by the original bond holders for the bonds. It is important to remember that underwriter’s discount or fees do not affect the aggregate amount paid by the original bond holders for the


bonds and, therefore, do not affect the calculation of yield on the bonds. In other words, although from the issuer’s perspective the payment of underwriter’s discount increases borrowing costs, it does not increase the yield on the bonds.

PRIVATE ACTIVITY BONDS

If a bond is a “private activity bond,” it is not tax-exempt unless it meets the requirements for one of the categories of “qualified” private activity bonds. This section describes the conditions under which a bond will be determined to be a private activity bond. The following section describes the categories of “qualified” private activity bonds.

BASIC PRIVATE ACTIVITY BOND TESTS

An issue of bonds is an issue of private activity bonds if it satisfies both of the following tests, known as the “Private Business Tests”:

• Private Business Use Test. More than 10% of the proceeds of the issue are to be used for any private business use.

• Private Payment or Security Test. The payment of principal or interest on more than 10% of the issue is to be secured by or derived from payments in respect of property used for a private business use.

If a facility is used disproportionately by a private business or is used by a private business in a manner that is unrelated to the governmental entity’s use, the 10% limitations of the Private Business Tests become 5% limitations. Moreover, the total dollar amount of private business use typically is limited to $15 million per issue, regardless of the percentage.

Private Loan Test. Even if the Private Business Tests are not satisfied, an issue will nevertheless be an issue of private activity bonds if the lesser of 5% of the proceeds or $5 million are used to make or finance loans to persons other than governmental units.

Reimbursement Rules

Intent. The issuer must demonstrate that an intent to use bonds to reimburse itself existed or around the time the cost was paid.

The issuer must adopt an official intent resolution no later than 60 days after the reimbursement cost in question was paid

The official intent resolution must contain a description of the project, the maximum amount of bonds expected to be issued for the project, and state the issuer’s reasonable expectation to reimburse itself

Reimbursable Costs. Generally, reimbursement costs are limited to capital expenditures and cost of issuance items.

Timing of Reimbursement. Reimbursement must be made no later than 18 months after the later of (i) the date the cost is paid, or (ii) the date the project is placed in service or abandoned (but in no event more than 3 years after the cost is paid).

Preliminary Expenditures Exception. “Soft costs” (such as architectural, engineering, surveying, soil testing, costs of issuance, and similar costs) may always be reimbursed whether or not a resolution was adopted and regardless of timing of the reimbursement.


Reasonable Expectations. Generally, the determination of whether an issue of bonds is an issue of private activity bonds is based upon the issuer’s reasonable expectations as of the date the bonds are issued. With certain limited exceptions, it is important that issuers reasonably expect to own and use a bond financed facility for at least the shorter of the entire economic useful life of the facility or the term of the bonds. If the issuer does not have these expectations, special mandatory call provisions may be required, providing for a redemption of bonds at the time of sale or other change in use of the financed property. The average maturity of bonds generally cannot exceed 120% of the reasonably expected average useful life of the financed property.

Notwithstanding an issuer’s reasonable expectations of governmental use, certain deliberate actions of an issuer or independent actions of third parties may cause the Private Business Tests or the Private Loan Test to be satisfied with respect to an issue. A more detailed description of these rules is set forth in “Change in Use” below.

PRIVATE BUSINESS USE

What is Private Business Use? “Private business use” is defined as any use (direct or indirect) in a trade or business carried on by any person other than a governmental unit. For purpose of this definition, any activity carried on by a person other than a “natural person” is treated as a trade or a business.

The trade or business use of proceeds or bond-financed facilities by a nongovernmental person by way of special legal entitlements such as loans, ownership, or leases, and certain management or service contracts, output contracts, or research contracts constitutes private business use. Use by an employee of the issuer or an individual who is not carrying on a trade or business is not private business use. In addition, use by the general public (for example, use by individuals and business on the same basis) is not private business use. The U.S. Treasury regulations provide useful guidance with respect to facilities that have a close connection to privately used facilities but with respect to which there is no special legal entitlement by a nongovernmental person; for example, private business use of a governmentally owned and operated parking garage adjacent to an airport, a sports stadium, or a shopping center.

To the extent (i) no private business user has a special legal entitlement to the facility (for example, a lease, a management contract, or a priority use right) and (ii) the facility is intended to be available and in fact is reasonably available to the general public, actual use of the facility by nongovernmental persons will not constitute private business use. Use by the general public contemplates use by individuals not acting in a trade or business. Any fees charged for such use must be generally applied. Monthly or longer arrangements for use (such as a monthly parking pass) can satisfy this requirement, so long as the term of the arrangement does not exceed 180 days of use, and the arrangement is not required to be renewed at the end of its term.

To the extent a facility is not intended to be available or is not reasonably available to the general public, but no private business user has a special legal entitlement to the facility, the analysis shifts to whether any private business receives a special economic benefit from the facility. Factors taken into account to make this determination include the proximity of the facility to and


functional relationship of the facility with any activities of a private business, as well as the number of private businesses receiving any special economic benefits.

De Minimis Private Business Use Exceptions. Certain minor or insignificant (so called “de minimis”) private business uses of bond financed facilities are not deemed to be sufficient to satisfy the private business use test. The following sections describe these de minimis exceptions:

Short-Term Rate Scale Arrangements with Private Businesses. Use by a private business pursuant to a lease or contract does not constitute private business use if all of the following are true:

• The term of the lease or contract is not more than 100 days

• Similar arrangements are generally available to, and expected to be executed with, private businesses on a nondiscriminatory, rate scale basis

• The facility is not financed for a principal purpose of providing it for use by the private business

The 100-day time limit relates to the number of days of actual use under the contract, not the time period the contract is in place.

Short-Term Specially Negotiated Arrangements with Private Businesses. Use by a private business pursuant to a lease or contract does not constitute private business use if all of the following are true:

• The term of the lease or contract is not more than 50 days

• The arrangement is arms’-length and compensation is fair market value

• The facility is not financed for a principal purpose of providing it for use by the private business

The 50-day time limit also relates to days of actual use under the contract. This exception generally should apply to facilities such as municipal auditoriums, convention facilities, and the like when rate scale arrangements are not available.

Private Business Use Example

A state uses the proceeds from a bond issue with a 20 year term to reimburse itself for the acquisition of a 10 story office building. The facility is used solely for governmental purposes for 18 years. At the end of the 18th year, state officials lease the entire building for two years to a corporation for its private business use. Two years of 100% private business use averages over the 20 year measurement period to only 10% private business use, and the Private Business Use Test is not satisfied. However, if state sold the building to the corporation, private business use of the building would be equal to the greatest percentage of private business use for any one-year period. Thus, the facility will have 100% private business for its entire life and will therefore satisfy the Private Business Use Test.


Measuring Private Business Use. As described above, the Private Business Use Test is met if more than 10% (in some cases 5%) of the proceeds of the issue are used directly or indirectly in trades or businesses carried on by nongovernmental persons. Private business use generally is measured by determining the average annual amount of private business use that occurs during the period of time beginning on the later of the date the bonds are issued or the date the financed facility is placed in service and ending on the earlier of the date the bonds mature or the end of the reasonably expected useful life of the facility. In general, average private business use of the facility for any given year is equal to the amount (that is, number of days) of private business use during that year divided by the amount (that is, number of days) of total use of the facility during that year. However, uses may need to be weighted if the fair market value of the uses varies.

Simultaneous private business use and governmental use may require more complicated methods of measuring the amount of private business use. Private business use that takes place before or after the measurement period described above is ignored. Special rules exist for measuring the amount of private business use attributable to certain contractual rights to the output of electric and gas generation, transmission and related facilities and certain water facilities.

If the private business use of a financed facility is the result of ownership of the facility by a private business, then the amount of private business use is determined based on the highest percentage of private business use during any of the annual periods that make up the general measurement period.

Management or Service Provider Contracts. Any contract between a governmental entity and a private business providing services with respect to a bond financed facility is a potential source of private business use and must be examined when determining whether the 10% private business use limitation has been or will be exceeded. Generally, the determination of whether a service contract between a governmental person and a service provider gives rise to private business use is based upon all the facts and circumstances of the arrangement.

Private Business Use Contracts. Two types of contracts almost always result in private business use:

• A contract that provides for compensation based upon net profits of the bond financed facility

• A contract under which the service provider is considered the lessee or owner of the facility for federal tax purposes

Exempted Contracts. The Treasury regulations provide a list of arrangements that are not considered service contracts and in doing so answer many questions. The following contracts are explicitly not included within the definition of service contracts:

• Employment contracts (as distinguished from service contracts with an independent contractor)


• Contracts for service solely incidental to the primary governmental function of the facility (for example, janitorial contracts, equipment repair contracts, contracts for billing services)

• Granting of admitting privileges to doctors in hospitals, even if conditioned on the provision of de minimis services, if available to all qualified physicians in the area

• Contracts relating to the operation of public utility property where the only compensation is reimbursement of direct out of pocket costs and reasonable administrative overhead expenses

• Contracts to provide services where the only compensation is reimbursement of direct out of pocket costs paid to unrelated third parties

Safe Harbors for Certain Compensation Arrangements. There are certain “safe harbors” for compensation arrangements in management or service contracts. In order to meet the safe harbors, the compensation to the service provider under the contract must not be based on net profits, the service provider must not be in a position to limit the governmental entity’s rights under the contract, and the contract must fall within one of the following six categories:

• 95% Fixed Fee Contracts. At least 95% of the compensation is based on a periodic fixed fee, and the contract term does not exceed the lesser of 15 years or 80% of the reasonably expected useful life of the managed facility. A one-time, fixed incentive payment based on gross revenue or expense targets is allowed to be paid to the service provider without affecting the fixed fee payment requirement.

• 80% Fixed Fee Contracts. At least 80% of the compensation is based on a periodic fixed fee, and the contract term does not exceed the lesser of 10 years or 80% of the reasonably expected useful life of the managed facility. A one-time, fixed incentive payment based on gross revenue or expense targets is allowed to be paid to the service provider without affecting the fixed fee payment requirement.

• Public Utility Property. If the facility is predominantly public utility property, the “15” and “10” year requirements described above are substituted with a “20” year requirement.

• 50% Fixed Fee or Capitation Contracts. 50% of the compensation is based on a periodic fixed fee, or 100% is based on a capitation (per person) fee or a combination of the two, and the contract term does not exceed 5 years. The issuer must have the power to terminate the contract without penalty after three years.

• Per-Unit Fee Contracts. 100% of the compensation is based on a per-unit fee, or a combination of a per-unit fee and a periodic fixed fee, and the contract term does not

What is a Safe Harbor? A “safe harbor” is a set of requirements which, if satisfied, protect the arrangement from being determined by the IRS from violating a given rule. Being outside the “safe harbor” does not necessarily mean that you have violated the rule, but most tax counsel will not give an unqualified opinion regarding an arrangement which is outside the safe harbor absent obtaining a specific ruling from the IRS.


exceed 3 years. The issuer must have the power to terminate the contract without penalty after two years.

• Percentage of Revenue or Expense Contracts. Applies only to contracts (i) under which the service provider primarily provides service to third parties (for example, a radiologist) or (ii) during the start-up phase of a new facility. 100% of the compensation is based on a percentage of fees charged, or a combination of a per-unit fee and a percentage of revenue or expense fee, and the contract term does not exceed 2 years. The issuer must have the ability to terminate the contract without penalty after one year.

Renewal Options. For purposes of the six categories above, renewal options by the service provider that are enforceable against the issuer are counted in the term limitation. Renewal options by the issuer and automatic renewal provisions subject to cancellation by either party do not count.

Indexing. The payments under the fixed fee contract may change over time if tied to an objective external standard, such as the consumer price index.

Prohibited Relationships. The service provider must not have any relationship with the governmental entity that, in effect, substantially limits the governmental entity’s ability to exercise its rights under the contract. A safe harbor from this relationship limitation is provided if all of the following three requirements are satisfied:

• The service provider does not control more than 20% of the voting power of the board of the governmental entity.

• Overlapping board members do not include the chief executive officers of either party.

• The service provider and the governmental entity are not related parties.

Change in Use. As described above, the private activity bond analysis at the time bonds are issued focuses on the issuer’s expectations as to private business use. However, once bonds are outstanding, voluntary or “deliberate” actions by an issuer that allow in fact for the Private Business Tests to be satisfied can cause bonds retroactively to lose their tax-exempt status. A number of specific remedies have been provided for such a “change in use” problem. In general, and subject to a number of detailed limitations, issuers can redeem or defease bonds, can make sure that the new use of the project qualifies for tax-exempt financing on some alternate basis, or, in the case of a sale of the project, can use any consideration paid for the project to finance a new facility that does not satisfy the Private Business Tests.

PRIVATE PAYMENT OR SECURITY TEST

As its name implies, the Private Payment or Security Test looks at the moneys paid toward debt service (directly or indirectly) and the security provided for the bonds by nongovernmental persons. The Private Payment or Security Test is met if the aggregate present value of the private payments and private security exceeds 10% of the present value of the debt service on the bonds, with certain adjustments. Absent deliberate actions by the issuer, satisfaction of the


Private Payment or Security Test is based upon reasonable expectations as of the date on which the bonds are issued. Present values are computed using the yield on the bonds as a discount rate.

Private Security. The Treasury regulations provide only limited guidance in interpreting the private security provisions of the Private Payment or Security Test. They do reiterate that pledged property provided by a user of the proceeds of the bonds need not be financed by the bonds and clarify that property used by nongovernmental persons is to be valued at its fair market value (rather than its historical cost), as of the date when the property first secures the bonds.

Private Payments. In general, the Treasury regulations seem to take into account all payments to the issuer or to any related entity by any nongovernmental person that uses the bond proceeds or financed facilities, even if such payments are made by nongovernmental persons who use the property as members of the general public, to the extent the payments either:

• Are to be used to pay debt service on the bonds, or

• Are to be made in respect of bond financed facilities

However, the amount of the payments is decreased by the allocable operating and maintenance expenses paid by the issuer with respect to the financed facilities. In addition, the amount of private payments to be taken into account is limited to the amount of private business use.

Exception for Generally Applicable Taxes. Payments of generally applicable taxes are disregarded for purposes of the Private Payment or Security Test. This includes both payments of taxes and “payments in lieu of taxes,” to the extent such taxes are imposed at a uniform rate and are applied to all persons in the jurisdiction of the same classification. Real property assessments and payments for a special privilege granted or service rendered are not generally applicable taxes. The amount of payments made by nongovernmental persons required to be taken into account is limited to the amount of debt service attributable to the portion of the bond financed facility used by such nongovernmental persons.

PRIVATE LOAN TEST

An issue of bonds is an issue of private activity bonds if it satisfies either the Private Business Tests or the Private Loan Test. The Private Loan Test is met if more than the lesser of 5% of the proceeds or $5 million of the proceeds of the issue is used to make or finance loans to

Private Payment Example A state issues 20-year general obligation bonds to finance a new office building which is not pledged to secure the bonds and which is used exclusively by the state during years through 18. During years 19 and 20, the entire building is leased to a nongovernmental person. If the annual payments during years 19 and 20 equal annual debt service plus annual operating expenses during those two years, the Private Payments or Security Test should not be met because present value of adjusted lease rentals in years 19 and 20 exceeds 10% of the present value of the service on the bonds. What if the rental payments during years 19 and 20 could be enough so that the present value of those payments exceeds 10% of the present value of the service on the bonds? The total percentage of average annual private business use is 10%, and the payments to be taken into account under the Private Payment or Security Test is, therefore, limited to 10% of the debt service on the bonds. Private Payment or Security Test is not satisfied.


nongovernmental persons. In determining if the Private Loan Test is met, all loans must be identified. A loan is any transaction that is characterized as a “loan” under general federal income tax principles. The substance of the transaction is determinative. For example, a lease or a management contract might be considered a “loan” if federal tax ownership of the facility is transferred to the lessee or manager. Likewise, an output contract might be considered a loan if the agreement shifts significant burdens and benefits of ownership to the output purchaser. An arrangement is not a “loan” for purposes of the Private Loan test if it arises from the imposition of a mandatory tax or other assessment of general application, if the assessment is imposed for essential governmental functions and if an equal basis requirement is met.

QUALIFIED PRIVATE ACTIVITY BONDS

As described above, the interest on private activity bonds is not excluded from federal gross income unless such bonds are qualified private activity bonds. There are a number of different types of qualified private activity bonds. Each type is based on the specific manner in which the proceeds of the bonds are used. Most of the types of qualified private activity bonds are comprised of “exempt facility bonds,” “mortgage revenue bonds,” “qualified small issue bonds,” and “qualified 501(c) (3) bonds.”

EXEMPT FACILITY BONDS Exempt facility bonds are bonds at least 95% of the net proceeds of which are to be used to finance capital costs of facilities that constitute:

• Airports

• Docks and wharves

• Mass commuting facilities

• Facilities for the furnishing of water

• Sewage facilities

• Solid waste disposal facilities

• Qualified residential rental projects

• Facilities for the local furnishing of electric energy or gas

• Local district heating or cooling facilities

• Qualified hazardous waste facilities, or

• High speed intercity rail facilities

Net proceeds are comprised of all proceeds, less amounts in a debt service reserve fund and less investment proceeds earned after completion of the project. The Treasury regulations contain specific rules and definitions covering each of these “exempt facility” categories. In the case of the first three categories listed above, the facilities must be owned by a governmental unit.


MORTGAGE REVENUE BONDS

Mortgage revenue bonds are bonds, the proceeds of which are loaned to certain home buyers as acquisition financing for a personal residence.

STUDENT LOAN BONDS

Student loan bonds are bonds, the proceeds of which are used to make loans to students for educational purposes. A number of detailed federal tax limitations apply to student loan bonds. Since student loan bonds are not frequently issued and are highly specialized, they are not discussed in detail in this book.

QUALIFIED SMALL ISSUE BONDS

Qualified small issue bonds, also known as industrial development bonds or IDB’s, are bonds at least 95% of the net proceeds of which are used to finance a small manufacturing operation and at least 75% of the net proceeds of which are used to provide the actual production facilities of the manufacturing operation, as opposed to office and warehouse structures and equipment. An incredibly complicated set of requirements apply to IDB’s and are beyond the scope of this manual.

QUALIFIED 501(C)(3) BONDS

Qualified 501(c)(3) bonds are bonds the proceeds of which are loaned to and/or used by charitable nonprofit corporations described in section 501(c)(3) of the tax code. The most common use of these bonds is to finance health care and higher education facilities. Qualified 501(c)(3) bonds are also regularly used to finance low-income housing projects and various other charitable facilities.

The primary requirements for qualified 501(c)(3) bonds are that any financed facilities must be owned by a public agency or a 501(c)(3) corporation and the Private Business Tests must not be satisfied. For purposes of the Private Business Tests in connection with 501(c)(3) bonds,

• 501(c)(3) corporations are treated as governmental units to the extent their use of the financed facilities is not an “unrelated trade or business” use

• The allowable amount of private business use or private payments or security is limited to 5% rather than 10%

Therefore, all of the Private Business Use Test concerns about leases and service contracts apply. Until recently, each group of affiliated 501(c)(3) corporations was limited to being the beneficiary of no more than $150 million of tax-exempt bonds. This limitation did not apply to bonds issued to finance hospital facilities. This limitation was repealed with respect to bonds issued after August 5, 1997 to finance or refinance capital expenditures paid after August 5, 1997.


ADDITIONAL REQUIREMENTS APPLICABLE TO QUALIFIED PRIVATE ACTIVITY BONDS

A number of miscellaneous restrictions apply to some or all of the qualified private activity bond categories.

Volume Cap. In general, the aggregate amount of all tax-exempt qualified private activity bonds issued by all issuers in a state may not exceed the so-called “volume cap.” The volume cap for each state is calculated annually and is equal to $75 multiplied by the population of the state (approximately $291 million for Oregon in 2006). In order to issue tax-exempt qualified private activity bonds, certain issuers must apply to the Oregon Private Activity Bond Committee (PABC) to be assigned a portion of this state ceiling (the “volume cap”).

Exemptions. The following types of qualified private activity bonds do not require volume cap:

• Qualified 501(c) (3) bonds

• Airports

• Ports

• Governmentally owned solid waste disposal facilities

TEFRA Public Hearing Requirements. The Tax Equity and Fiscal Responsibility Act of 1982, or “TEFRA,” requires that prior to the issuance of any qualified private activity bond, a public hearing must be held by or on behalf of an applicable elected public official or elected legislative body. “Reasonable Public Notice” must be given in advance, containing certain basic information regarding the nongovernmental borrower, the project to be financed (such as purpose and location), and the amount of bonds to be issued. The notice must be published in a newspaper of general circulation in the locality of the project at least 14 days prior to the scheduled hearing. After the hearing, the elected official or body must formally approve the bond issue. For State of Oregon issuing authorities, this approval is given by the Governor; for local agencies, the elected legislative body (city council, board or supervisors) typically gives the approval.

A TEFRA hearing and governmental approval are not necessary for an issue of current refunding bonds unless the average maturity date of the refunding issue is later than the average maturity date of the bonds being refunded. See “Refunding Bonds” below.

Substantial User Restriction. Any private activity bond (other than a qualified 501(c)(3) bond) will cease to be a qualified private activity bond and will lose its tax-exempt status during any period in which such bond is owned by a “substantial user” of the financed facility or by a “related person” of such substantial user. A substantial user is an owner or lessee of the financed facility.

Useful Life Limitations. The average maturity of an issue of qualified private activity bonds may not exceed 120% of the average reasonably expected economic life of the facilities being financed with such issue.


Land and Used Property Limits. No more than 25% of the net proceeds of a qualified private activity bond issue (other than an issue of qualified 501(c)(3) bonds) may be used directly or indirectly for the acquisition of land or any interest therein, and no part of the net proceeds of any such issue may be used for the acquisition of previously used property or any interest therein. The latter restriction does not apply, however, with respect to any building (and equipment) if rehabilitation expenditures with respect to such building (and equipment) are at least equal to 15% of the cost of acquiring such building (and equipment) financed with the net proceeds of the issue.

Cost of Issuance Limit. No more than 2% of the aggregate face amount of any qualified private activity bond issue may be used to finance the costs of issuance thereof. Certain costs, such as letter of credit commitment fees, are not treated as costs of issuance for purposes of this limitation. This limitation is particularly important in the case of smaller issues because the actual costs of issuance often exceed the 2% threshold. In these cases, the issuer or conduit borrower will have to pay the excess amount out of cash or a separate, taxable borrowing.

Certain Prohibited Facilities. None of the proceeds of qualified private activity bonds may be used to provide any airplane, skybox or other private luxury box, health club facility, facility primarily used for gambling, or store the principal business of which is the sale of alcoholic beverages for consumption off premises. The prohibition against financing health club facilities does not apply to qualified 501(c)(3) bonds.

ARBITRAGE BONDS

ARBITRAGE YIELD RESTRICTIONS

The tax code generally prohibits municipalities from issuing tax-exempt bonds if the issuer reasonably expects to use the proceeds of such bonds, directly or indirectly to:

• Acquire securities or obligations with a yield materially higher than the yield on such bonds, or

• Replace funds used to acquire such higher yielding securities or obligations

Thus, the tax code generally restricts the rate of return on investments purchased with gross proceeds to a yield that is not materially higher than the yield on the bonds. As with the rebate requirement discussed below, in connection with any analysis of the arbitrage yield restrictions, the issuer must be assured that the fair market value rules are applied to determine the yield on any investment. See Fair Market Value Rules below.

PURPOSE AND NONPURPOSE INVESTMENTS

The arbitrage limitations apply to all investments purchased with gross proceeds. This includes two kinds of investments.

• Nonpurpose Investments. The temporary investment of gross proceeds in various securities, such as United States Treasury obligations pending use of the gross proceeds to finance the project or pay debt service on the bonds


• Purpose Investments. Investment of proceeds in a loan to a borrower to fulfill the purpose of issuing the bonds, such as a loan to a conduit borrower

The exceptions to arbitrage yield restriction described below only apply to Nonpurpose Investments. However, Purpose Investments are allowed to yield either 1/8% or 1.5% higher than the yield on the bonds depending on certain factors. Furthermore, Purpose Investments are not subject to the rebate requirements (described below), so that issuers may retain any excess investment return derived from the allowable 1/8% or 1.5% spread.

ARBITRAGE YIELD RESTRICTION EXCEPTIONS

There are several important exceptions to the arbitrage yield restriction rule. Almost all bond issues take advantage of one or more of these exceptions. As a result of the reasonably required reserve or replacement fund exception, the three-year temporary period exception and the bona fide debt service fund exception each described below, none of the proceeds of a typical, “new money” governmental financing will be subject, at least initially, to an arbitrage yield restriction.

Reserve Funds. A debt service reserve fund will be considered to be a “reasonably required reserve or replacement fund” only if the amount of bond proceeds used to provide the fund is limited to the lesser of:

• Maximum annual debt service on the bonds

• 10% of the proceeds of the bonds

• 125% of average annual debt service on the bonds

If a reserve fund qualifies as a reasonably required reserve or replacement fund, then amounts on deposit in such fund may be invested without regard to the arbitrage yield restriction. (As described below, however, unless an exception to the rebate requirement is satisfied, the issuer will have to pay 100% of any excess earnings (over the bond yield) to the federal government as rebate.)

Three Year Temporary Period. Perhaps the most important arbitrage exception is the so-called “three-year temporary period,” during which the arbitrage yield restriction does not apply to the proceeds of bonds to be used to finance the project and to pay the costs of issuing the bonds. The issuer gets a three year period (from the date of issuance of the bonds) during which proceeds may be invested without regard to yield so long as the issuer reasonably expects to meet the following requirements:

• Spend 5% of the net proceeds in 6 months

• Spend 85% of the net proceeds in three years

• Diligently work to complete the project and spend the net proceeds

“Net proceeds” are the proceeds net of qualified reserve funds as described above. The 5% in six months requirement can be satisfied either by expenditure or by entering into a binding contract.


To the extent proceeds, other than those held in a qualifying reserve fund, remain unexpended after the end of the three-year period, such proceeds generally may not be invested at a yield in excess of 1/8% above the yield on the bonds.

Bona Fide Debt Service Funds. Another significant temporary period is the 13-month temporary period for amounts deposited in a “bona fide debt service fund.” A bona fide debt service fund is one that is used primarily to achieve a proper matching of revenues and debt service during each year by depositing revenues in the fund until they are needed to pay debt service. The fund must be depleted at least once each year, except for a carryover amount not exceeding one month’s debt service on the bonds or one year’s earnings on the fund.

Other Temporary Periods. As described in Chapter 12, Notes, Short-Term and Interim Financing, different temporary period rules apply to proceeds of a working capital borrowing. Additionally, more restrictive temporary period rules apply to certain types of refundings, where the bond proceeds are to be used to retire previously issued bonds (see below). Regardless of the application of a temporary period, the rebate requirement (described below) applies to all gross proceeds, including all proceeds, unless an exception is satisfied.

Exemption for Tax-Exempt Investments. Regardless of the availability of any of the above arbitrage yield restriction exceptions described above, gross proceeds generally may be invested in other tax-exempt bonds without regard to the yield on the tax-exempt investments.

Yield Reduction Payments. Yield reduction payments are akin to rebate requirement payments (described below), but may be allowed in additional situations where investing bond proceeds at an unrestricted yield would not otherwise be permitted, freeing the issuer from having to artificially restrict the yield on investments. Bond proceeds qualifying for yield reduction payments include proceeds of an issue which initially qualified for one of the temporary periods described above, but for which the temporary period has expired, amounts held in reserve funds in excess of the limitations described above, and certain limited types of proceeds arising in refunding transactions.

REBATE REQUIREMENT

Generally, the tax code requires that, to the extent gross proceeds are invested, on an aggregate, blended basis, in Nonpurpose Investments at a yield in excess of the bond yield, such excess, often referred to as “arbitrage earnings,” must be rebated to the federal government. The rebate requirement also applies to arbitrage earnings on investments held in qualifying reserve funds. Periods during which gross proceeds are invested at a yield below the yield on the bonds offset gross arbitrage earnings. Thus, even though, as described above, certain exceptions to the arbitrage yield restriction requirement permit gross proceeds to be invested at an unrestricted yield during certain times or when held in certain funds, the rebate requirement generally requires that all net arbitrage earnings be paid to the federal government.


REBATE EXCEPTIONS

There are four important exceptions to the rebate requirement which should be carefully considered by the issuer and bond counsel when structuring a bond issue.

SMALL ISSUER EXCEPTION

The small issuer exception allows a public agency to retain all arbitrage earnings realized from the investment of the gross proceeds of certain bond issues that are not qualified private activity bonds. The small issuer exception is available only to issuers that possess general taxing powers (even if those powers may only be exercised after voter approval of the tax). The exception may be applied to a bond issue if the amount of such issue, together with the amount of any other bonds issued or expected to be issued by the issuer and all closely related public agencies during the same calendar year, does not exceed $5,000,000. Additionally, the issuer must expect to spend at least 95% of the net proceeds of the bonds for the governmental purpose for which the bonds are issued. The $5,000,000 limit is raised to $15,000,000 to the extent the additional bonds are issued to finance construction of public school facilities.

SIX MONTH EXPENDITURE EXCEPTION

Under the six month expenditure exception, proceeds are not subject to the rebate requirement if the issuer actually spends all proceeds of the issue within six months of the date the bonds are issued. The six month exception is based on actual expenditures. Solely for purposes of determining compliance with the six month expenditure exception, amounts held in a qualifying reserve fund are not treated as proceeds. Therefore, the normal rebate requirement applies to amounts held in a reserve fund. The six month expenditure exception is most likely to apply to acquisition financings (where the project is being acquired rather than constructed), to TRAN financings, to “reimbursement financings,” and to “current refundings.”

EIGHTEEN MONTH EXPENDITURE EXCEPTION

As with the six month exception, proceeds of an issue that are not held in a reserve fund are not subject to the rebate requirement if all such proceeds (including investment proceeds) are expended within eighteen months from the issue date, provided that at least:

• 15% of such proceeds are spent within six months

• 60% are spent within 12 months; and

• 100% are spent within 18 months

Simplified Rebate Example (actual payment will be larger due to future valuing of effects)

Bond yield = 6% $100,000 proceeds invested at 6.5% for 5 years Investment earnings = $32,500 Rebate Payment = $32,500 (actual earnings) - 30,000 (earnings at bond yield) $ 2,500


Compliance with the eighteen month exception, like compliance with the six month exception, is based on actual expenditures, although the 15% and 60% expenditure requirements are measured based on the sale proceeds plus the aggregate investment proceeds expected to be earned during the eighteen month period, in accordance with the issuer’s reasonable estimate of investment earnings at closing. Additionally, as with the six month exception, amounts held in a reserve fund are not treated as proceeds for purposes of satisfying the expenditure requirements. The eighteen month expenditure exception does not apply to refundings.

TWO YEAR EXPENDITURE EXCEPTION

Under the two year rule, an issue is not subject to the rebate requirement if all proceeds (including investment proceeds) except for amounts held in a reserve fund are expended within two years from the issue date, provided that at least:

• 10% of the such proceeds are spent within six months


• 75% are spent within 18 months; and


Compliance with the two year exception, like compliance with the six month exception, is based on actual expenditures, although the 10%, 45%, and 75% expenditure requirements are measured based on the sale proceeds plus the aggregate investment proceeds expected to be earned during the two year period. Additionally, as with the other expenditure exceptions, amounts held in a reserve fund are not treated as bond proceeds for purposes of satisfying the expenditure requirements. The two year expenditure exception does not apply to refundings.

In order to qualify for the two year expenditure exception, at least 75% of the proceeds of the bond issue must be expected to be expended for construction costs, as opposed to acquisition or refinancing costs. If the 75% construction cost requirement is not expected to be met by the bond issue as a whole, the tax code allows the issuer to treat the bond issue as two separate issues. If one of such issues (the “construction portion”) meets the 75% construction cost requirement, then the construction portion is eligible for the two year expenditure exception. The six month expenditure exception (but not the eighteen month expenditure exception) or the normal rebate requirements would apply to the remaining portion. Special rules apply to pooled financings.

PENALTY IN LIEU OF REBATE

If the proceeds of a construction issue (or construction portion) are not spent as required within the two-year period, the issuer generally will be required to rebate all arbitrage earnings under the normal rebate requirement. However, the tax code allows the issuer to pay a penalty in lieu of such rebate, if the issuer so elects at the time its bonds are issued. The penalty is 1.5% of the amount of proceeds of the bond issue which, as of the close of each six month period described above, are not spent in accordance with the expenditure schedule. For example, if the issuer was required to have spent $450,000 within 12 months (45%), but has spent only $400,000, the issuer


would pay a penalty of 1.5% of $50,000, or $750. The penalty must be paid within 90 days of the end of the relevant six month period.

The election to pay the penalty in lieu of rebate may be useful for issuers wishing to avoid the complications normally encountered in calculating rebate. Also, the penalty election permits issuers to retain arbitrage earnings during the temporary period, which may exceed the amount of the penalty even if the proceeds are not spent entirely within the expenditure schedule specified by the two year expenditure exception. However, the benefit to be gained by balancing penalty payments against potential arbitrage earnings depends entirely on issuer’s ability to invest proceeds at interest rates above the bond yield. A delay in construction expenditure together with a drop in interest rates can result in significant penalty payments every six months in a circumstance where no arbitrage earnings are achieved. Extreme caution is therefore advised and issuers should consult with their bond counsel and financial or investment advisor in deciding whether to elect the penalty in lieu of the normal rebate requirement.

FAIR MARKET VALUE RULES

One fundamental requirement of all of the yield related limitations (for example, the arbitrage yield restriction and the rebate requirement) is that Nonpurpose Investments must be purchased by issuers at a fair market value price. Without this fair market value requirement, issuers could simply direct otherwise prohibited investment profits or profits that would otherwise be paid to the federal government to entities other than the United States. The process of purchasing investments at an inflated price, known as “yield burning,” is receiving significant attention and enforcement efforts from federal authorities. Issuers must be careful to comply with the fair market value requirement. Reliance on a fair market value certificate of the seller of securities, in circumstances where the seller will profit from an inflated price and the issuer will not be harmed, is inherently suspect.

The federal government has established a special program through the Bureau of Public Debt in which issuers can purchase special United States Treasury obligations - State and Local Government Series (“SLGS”) at below market yields in order to comply with the arbitrage yield restriction. SLGS purchased with a below market yield are deemed to be purchased at fair market value.

HEDGE BOND RESTRICTIONS

The tax code generally prohibits tax-exempt bonds from being issued far in advance of the time money is required to construct or acquire the assets to be financed. The temporary period rules exceptions to the rebate requirement described above often provide good reason to issue bonds close to the time when the proceeds will be spent. Similarly, economics dictate this result whenever the short-term interest rates at which proceeds may be invested are lower than the long term rates at which the bonds accrue interest.

In general, bonds will be considered “hedge bonds” and will not be tax-exempt unless the issuer reasonably expects either:


• To spend at least 85% of the “net sale proceeds” (generally, sale proceeds, less any amounts deposited into a debt service reserve fund) within three years of the issuance of the bonds, or

• To spend at least 10% of the net sale proceeds within one year, 30% within two years, 60% within three years, and 85% within five years, of the date the bonds are issued

These expenditure requirements do not apply to refundings, and they do not apply to new money bonds in which virtually all of the proceeds of the bonds are invested in other tax-exempt bonds until such proceeds are expended.

REFUNDING BONDS

Refunding bonds are bonds, the proceeds of which will be used to pay debt service on another issue of bonds. Refunding bonds often involve complex federal tax issues and invoke a number of very technical requirements. Although a complete description of these requirements is beyond the scope of this book, some of the more important concepts are described generally below.

TYPES OF REFUNDINGS.

For federal tax purposes, there are two important categories of refunding bonds:

• Advance Refunding - bonds issued more than 90 days before the bonds being refunded will be retired

• Current Refunding - bonds issued within 90 days of the date the bonds being refunded will be retired

LIMITATION ON NUMBER OF REFUNDINGS

In general, issuers are limited to only one advance refunding of any particular bond issue. This is one of the main reasons that issuer’s should be concerned about the total savings they are receiving in a refunding, because they only get “one bite at the apple.” For bonds originally issued prior to January 1, 1986, an issuer gets up to two advance refundings, and for this purpose, all advance refundings issued prior to March 15, 1986 are counted as one. There are no limitations on the number of current refundings. In general, qualified private activity bonds may not be advance refunded at all.

Advance Refunding Example City of X issued bonds to finance a new library in 1980. City of X advance refunded those bonds in 1982, in 1984 and again in 1992. City of X may not issue any further advance refunding bonds for this project since it has used up its allowable two advance refundings: the 1982 and 1984 refundings count as the first and the 1992 refunding counts as the second. If the 1992 refunding had instead been completed in 1985, City of X would still have one more advance refunding left, since 1982, 1984 and 1985 refundings would only be counted as one advance refunding.


LIMITATION ON REFUNDING NONCALLABLE BONDS

In an advance refunding, the tax law generally does not permit refunding any portion of the issue being refunded which is not callable prior to maturity. This is because, except for savings resulting from exploiting the difference between taxable and tax-exempt interest rates, there can be no economic savings from refunding noncallable bonds, since the higher rate of interest they bear will have to be paid to their full maturity. An exception to this rule allows noncallable bonds to be advance refunded for independent business reasons, for example, the need to eliminate a restrictive covenant contained in the indenture for the refunded bonds which can only be eliminated if all bonds issued under that indenture are defeased.

FIRST CALL DATE RULE

For advance refundings issued for the purpose of debt service savings, the refunded bonds must be paid off with the proceeds of the refunding bonds no later than the first date that they may be redeemed at the option of the issuer. For pre-1986 bonds, this is defined to be the first date at which they can be refunded at a premium of 3% or less. Thus, if bonds being refunded may be redeemed at a premium of 2% on 1/1/2008, 1% on 1/1/2009, and 0% on 1/1/2010 and thereafter, the proceeds of the refunding bonds must be used to redeem the bonds no later than 1/1/2008. This is true even if it would be financially advantageous to the issuer to wait until 1/1/2010 to avoid paying the 2% penalty. The policy behind this rule is to have tax exempt bonds (in this case the refunded bonds) in the market for the least amount of time possible.

ARBITRAGE YIELD RESTRICTION

Unlike new money financings, refunding transactions, in particular advance refundings, typically pose significant arbitrage yield restriction issues. Proceeds of an advance refunding held in an escrow are not allowed to be invested at a yield that exceeds the yield on the advance refunding bonds. Often, however, the yield of investments purchased in the open market at fair market value will exceed the yield of the advance refunding bonds. This is because even though these investments are typically of a shorter maturity (which tends to lower yield) they are also typically taxable investments like United States Treasury obligations (which increases yield sometimes above the tax-exempt yield on the refunding bonds). For that reason, advance refunding escrows provide significant opportunities for “yield burning.” See “Fair Market Value Rules” above. In order to avoid any yield burning concerns, many issuers purchase SLGS for their advance refunding escrows.

FEDERAL TAX LIMITATIONS ON INVESTING BOND PROCEEDS

Sections 103 and 148 of the Internal Revenue Code and related regulations and rulings generally describe the requirements (the “Federal Requirements”) which must be met for the interest paid on state and local governmental debt to be excluded from gross Income for federal income tax reporting purposes. Among the Federal Requirements are those related to arbitrage (the “Arbitrage Considerations”) and those related to use of tax-exempt financing by private individuals or entities (the “Private Activity Considerations”). The following describes the rationale for, and basic mechanics and principles of the Arbitrage Considerations.


WASHINGTON’S REGULATORY RATIONALE

The federal government considers the exclusion of interest received on state and local governmental debt from gross income for federal income reporting purposes to be a very large subsidy, or revenue transfer, program. The benefit of lower tax-exempt borrowing costs are “paid for” by foregone federal income tax receipts from bondholders who otherwise would have paid income tax on their interest earnings. Relative to most federal revenue transfer or subsidy programs, tax-exempt borrowing works with minimal federal regulation and bureaucracy. Washington believes, however, and with some justification, that the subsidy is rife with potential for benefits accruing to particular jurisdictions and private individuals/entities in a manner disproportionate to the costs borne by those entities or persons.

For example, a local agency which issues tax-exempt bonds at a five percent (5%) interest cost for the sole purpose of investing those proceeds in identical duration U.S. Treasury bonds yielding six percent (6%) would have the one-percent positive interest differential left over as an additional revenue or income source. While one percent (1%) difference would benefit the constituents of the agency, its cost would be borne by all federal taxpayers and, as such, would be considered unfair and, from Washington’s perspective, abusive. Similarly, if the benefits of tax-exempt interest rates are provided through a conduit financing to a private entity, from Washington’s perspective, that entity would have otherwise borrowed in the taxable market, producing income tax revenue to the federal government.

In order to keep the costs and benefits of the federal interest subsidy in some semblance of proportion, the Federal Requirements have evolved primarily to limit tax-exempt financing to projects and uses that are of a size and scope closely related to the needs of the local constituency.

THE ARBITRAGE CONSIDERATIONS

In the public finance context, arbitrage is most easily understood as borrowing at one rate and investing at another. Because state and local governmental entities can borrow at relatively low, tax-exempt rates and do not pay income taxes on earnings from relatively high, taxable rate securities, they are often in a position to earn so-called “positive” arbitrage (that is, earn more than they are paying). Historically, the relationship between long-term (greater than 10 years) tax-exempt borrowing rates and short-term (less than 3 years) taxable investment rates generally allowed tax-exempt borrowers to earn positive arbitrage even on bond proceeds which were spent relatively quickly. These circumstances gave tax-exempt issuers and their financing teams an incentive to modify transaction structures to maximize arbitrage benefits, even if these modifications caused bond issues to be:

• Larger than necessary

• Issued earlier than necessary

• Left outstanding longer than necessary to accomplish the immediate public purpose of the project being financed


In response to what it perceived as costly abuses, in 1979 the U.S. Department of the Treasury (“Treasury”) began imposing restrictions designed to curb these abuses. By the early 1980’s it became apparent that piecemeal regulation had not sufficiently reduced abusive transaction structuring. As part of the Tax Reform Act of 1986, the United States Congress imposed the arbitrage rebate requirement on issuers of tax exempt bonds, effectively requiring them to pay, or rebate, to the United States any positive arbitrage they did earn. The rebate requirement, while arguably unnecessarily burdensome for particular issuers that were not engaging in abusive arbitrage transactions, has dramatically reduced arbitrage-related abuses industry-wide. With the rationale and effectiveness of the Arbitrage Considerations firmly established, issuers and Treasury have focused recently on real world implementation of arbitrage-related laws and regulations.

Mechanically, the rebate amount, if any, periodically due to the United States is the difference between amounts earned on investment property allocable to gross proceeds (as that term is defined in the Federal Requirements) of a bond issue and the amount that would have been earned had such gross proceeds been invested at the borrowing cost (the “arbitrage yield”) of that bond issue. It follows then that to comply with the Arbitrage Considerations, an issuer must first be able to (1) identify the particular bond issue to which monies or investments are allocable and (2) calculate the arbitrage yield of that bond issue.

A second aspect of public finance arbitrage is so-called “negative arbitrage,” which is incurred when investment rates are lower than borrowing rates. While negative arbitrage is not a compliance issue, it is a very important economic consideration. In general, tax-exempt issuers incur much more negative arbitrage than is necessary in any given interest rate environment. This is due to a variety of reasons, not the least of which is difficulty in knowing when an economically advantageous investment strategy is running afoul of Arbitrage Considerations from a compliance perspective. In other words, an accounting system which allows for accurate tracking of bond yields, amounts that are allocable to particular bond issues, and accumulated positive and/or negative arbitrage is required before investment strategies can be optimized from an “after-tax” perspective. Further, an issuer should always be cognizant of the fact that for a specific bond issue, negative arbitrage on a fund that requires liquidity can be offset by positive arbitrage on another fund where liquidity is not as essential.

Chapter 6 – State and Local Government Law 61

CHAPTER 6

STATE AND LOCAL GOVERNMENT LAW AND DEBT POLICY HOME RULE AND CITY CHARTERS

Generally, the power of local governments is derived from the authorities granted by the state legislature, unless a specific grant of power has been made in the state constitution. State legislatures possess great flexibility in determining the organization and structure of local government units. However, the power of the state legislature over local governments is retained, in states such as Oregon, that grant local governments “home rule” powers within the state’s constitution.

HOME RULE

The Oregon Constitution authorizes cities to operate under “home rule.” Article XI, Section 2 of the Oregon Constitution provides as follows:

Formation of corporations; municipal charters; intoxicating liquor regulation. Corporations may be formed under general laws, but shall not be created by the Legislative Assembly by special laws. The Legislative Assembly shall not enact, amend or repeal any charter or act of incorporation for any municipality, city or town. The legal voters of every city and town are hereby granted power to enact and amend their municipal charter, subject to the Constitution and criminal laws of the State of Oregon, and the exclusive power to license, regulate, control, or to suppress or prohibit, the sale of intoxicating liquors therein is vested in such municipality; but such municipality shall within its limits be subject to the provisions of the local option law of the State of Oregon.

Article XI, Section 2 grants local electors the power to enact laws that were previously vested in the Oregon Legislative Assembly and limits to a certain extent the power of the Oregon Legislative Assembly to enact laws affecting cities. Under the home rule authority granted in the Oregon Constitution, cities have the power to enact and amend Charters that establish the governing principles of the city with respect to municipal affairs, subject to the limitations contained in the City Charter, the provisions of the Oregon Constitution and the provisions of the criminal law and local option law of the State of Oregon.

In addition to the home rule authority granted to cities by Article XI, Section 2 of the Oregon Constitution, in 1958, the Oregon Constitution was amended to authorize counties to adopt home rule Charters, and under Oregon law, counties are authorized to exercise broad home rule


authority. Nine counties have adopted home rule Charters, wherein voters have the power to adopt and amend their own county government organization. Lane and Washington were the first to adopt home rule in 1962, followed by Hood River (1964), Multnomah (1967), Benton (1972), Jackson (1978), Josephine (1980), Clatsop (1988) and Umatilla (1993).

CITY CHARTERS

City Charters can range from relatively short, simple documents to long, complex documents. A City Charter establishes the governing principles of the city, including its governing body and the powers and form of the governing body. The City Charter generally authorizes the governing body to enact ordinances and adopt resolutions and to otherwise conduct the affairs of the city. More complex City Charters may include detailed procedures and restrictions on the exercise of municipal power by the city’s governing body and officials such as debt limitations or other restrictions on the finances of the city. Except as to matters that are addressed in the Charter of a city, the provisions of the Oregon Revised Statutes will apply. In connection with any municipal financing matters, it is critical that the provisions of the City Charter and relevant provisions of a city’s municipal code and governing ordinances are reviewed in advance of any financing transactions to be sure that all relevant requirements under the city’s Charter and other governing legal documents as well as under the provisions of Oregon law are satisfied.

INITIATIVE AND REFERENDUM POWERS

The Oregon Constitution also grants to the local electors of municipalities and districts initiative and referendum powers. Specifically, Article IV, Section 1(5) of the Oregon Constitution provides:

The initiative and referendum powers reserved to the people by subsections (2) and (3) of this section are further reserved to the qualified voters of each municipality and district as to all local, special and municipal legislation of every character in or for their municipality or district.

The initiative and referendum powers granted to local electors by the Oregon Constitution may be more specifically established by a city pursuant to the City Charter, City Code or by reference to the applicable provisions of the Oregon Constitution and Oregon Revised Statutes, including ORS Chapter 250.

Initiatives are an electoral process whereby a certain percentage of electors within a city can propose and compel a vote on legislation. Initiatives can impact public finance transactions in various ways. For example, the initiative process could be used to impose limitations on the powers of the governing body to issue certain types of debt by imposing voter approval requirements or limitations on the use of proceeds. Revenues, such as fees for water or sewer utilities, could be impacted through the use of an initiative to limit future rate increases.

Referendum is the process of referring an action of the governing body to the local electors for approval by popular vote. Typically, if a governing body takes action that is legislative in nature, the people have the opportunity to submit a petition containing the requisite number of signatures to cause the action to be placed on the ballot for approval at the next election. The


governing body may also choose to refer an action to the voters for approval. When considering the timing of transactions it is important to keep the referendum power in mind. For example, under the provisions of Oregon law governing revenue bonds, a city or other local government issuer may not sell revenue bonds authorized by non-emergency ordinance until the period for referral of the ordinance has expired or if the issuer has authorized the revenue bonds by a resolution, the issuer is required to publish notice of its intent to sell revenue bonds and wait 60 days following publication of such notice before the sale.

DEBT POLICY

Sound financial management relies upon sound financial policies. Municipalities can benefit from development of and reliance upon a well thought out debt policy. Debt policies can help ensure that debt issuance is coordinated with an issuer’s overall financial planning for capital needs and ongoing operating requirements.

Debt policies provide a key set of guidelines for staff decision making. Debt polices reduce the politicization of debt issuance by rationalizing the debt issuance objectives and processes. While no policy should be so rigid as to exclude special circumstances, general adherence to a good policy should increase a municipality’s financial standing by demonstrating a long-term commitment to sound planning.

DEBT POLICY BASICS

A debt policy must answer the key question of when to borrow versus using a pay-as-you-go strategy. The most suitable answer will differ for each municipality. However, the basics of a good policy are similar across all jurisdictions. A good policy addresses these fundamental questions:

• For what purposes may debt be considered?

• How are debt and capital improvement planning policies integrated?

• What kinds of debt (general obligation bonds, revenue bonds, etc.) may be considered and for what kinds of purposes?

• What kinds of limits (in addition to constitutional or statutory) should be placed on the amount of debt?

• How will the municipality measure “affordability” for various kinds of debt?

• What are the issuer’s credit objectives for each type of debt?

• When and how will refunding opportunities be evaluated?

• Under what circumstances will derivative products such as swaps be considered? (see below)

• How will secondary market disclosure be handled?

• How will various kinds of debt be sold?

• Under what circumstances will the issuer consider serving as a conduit issuer?


• How and when will the issuer engage financial services and legal professionals?

• How will bond proceeds be invested?

• How will ongoing compliance with federal tax law be ensured?

• How and when will the policy be reviewed and how will the municipality measure compliance?

Once a policy has been developed, it should be formally adopted by the governing body. As noted above, there should be some form of built in compliance testing or review and the policy itself should be reviewed and updated from time to time to ensure it serves the changing financial condition of the municipality over time.

While a thorough and formally adopted policy are excellent goals for a municipality, many infrequent issuers may not have the resources, staff or time to develop a formal policy. However, the general questions posed above should be considered, even if informally, as a potential issuer begins to think through its borrowing options.

SWAP POLICIES

Swaps (or more formally “interest rate exchange agreements”) are subject to specific legal requirements regarding policy development. Specifically, Oregon statutes require that a municipality have formally adopted a policy regarding use of derivative products before proceeding with a swap or other derivative based transaction. See Chapter 14, Interest Rate Swaps and Other Derivative Financial Products for a discussion of swap policy considerations.

CAPITAL IMPROVEMENT PLANS

A key component of sound municipal financial management is a capital improvement plan (CIP) for significant municipal infrastructure. A well thought out CIP, that is regularly updated, is critical to long term financial planning and debt analysis. Because municipal resources are not infinite, a CIP will allow for a more thoughtful approach to prioritizing critical needs and assessing how best to pay for them.

Typical CIPs have five year horizons and the best CIPs are updated on a regular basis. The most useful CIPs will identify 1) key capital projects and prioritize them; 2) timelines for various project completion (assessing the municipalities’ ability to complete the work load as appropriate); 3) cash flows associated with each project; 4) means of funding each project, identifying pay-as-you go availability and debt options and viability.

CIPs should be integrated into long range budget planning as well. For example, development of new capital projects may entail significant new operating costs not specifically accounted for in the CIP.


MUNICIPAL DEBT ADVISORY COMMISSION

The Municipal Debt Advisory Commission (“MDAC” or “Commission”) was created by the Oregon Legislature to provide assistance to state and local governments in the issuance of municipal bonds. The Commission collects and disseminates debt and financial information, undertakes studies and makes recommendations to state law and local practices to improve the sale and servicing of local government bonds. The Commission consists of seven members, including:

• the State Treasurer or designate

• three local government finance officers, appointed by the Governor, one each recommended by the Association of Oregon Counties, the League of Oregon Cities, the Oregon School Boards Association

• one representative of special districts appointed by the Governor

• two other public members appointed by the Governor

The MDAC is staffed by the Oregon State Treasury Debt Management Division and is available to provide assistance and consultation in the planning, preparation, marketing and sale of new bond issues. Generally, any communication with or notice directed to the Oregon State Treasury’s Debt Management Division (“DMD”) is considered the same as to the Commission.

BOND SALE INFORMATION REPORTING

MDAC staff collect, maintain and make available information on local government bonds and serve as a clearinghouse for all local Oregon municipal bond issues. Oregon cities, local governments and other public bodies are required to give the Commission prior notice of the proposed sale of new publicly offered bonds, appropriation credits, notes and other debt obligations. Local governments are also required to provide a post-bond marketing report for both publicly offered and non-publicly offered issuances. OAR 170-061-0000 “Notice and Reporting Requirements by Public Bodies When Issuing Bonds” is the governing rule for reporting bond sale information to the Commission.

MDAC Form 1. This form provides local government notice of a proposed bond sale to the Commission. It is required not less than ten (10) days preceding the bond marketing date for all publicly offered bonds. The notice provides preliminary bond sale information with updates if postponement, cancellation or other significant changes occur. On receipt of notice the Commission will provide a letter of compliance with OAR 170-061-0000 to the issuer’s bond counsel. In the event of non-compliance, a letter will be sent to both the issuer and its bond counsel stating the reason for non-compliance.

MDAC Form 2. The results of a bond sale are reported to the Commission by filing an MDAC Form 2 within five (5) business days after the bond marketing date. In addition, a final official statement is to be submitted to the Oregon State Treasury, Debt Management Division within five (5) business days after closing. The Commission will provide a written notice of non-compliance to the issuer and its bond counsel if the bond sales information is not submitted.


MDAC Form 1, MDAC Form 2 and MDAC reporting requirements are available on the Debt Management Division’s website at www.ost.state.or.us/divisions/DMD/MDAC/.

REPORTING REQUIREMENTS FOR EXCHANGE OF INTEREST RATES AGREEMENTS

Cities, local governments and other public bodies that enter into an exchange of interest agreement or interest rate “swap” are required by Oregon law to notify the State Treasurer of the execution of any such agreement. OAR 170-060-1010 “Terms, Conditions, and Reporting Requirements for an Agreement for Exchange of Interest Rates” is the governing administrative rule for swap transactions.

MDAC Form 3. Issuers must notify the Oregon State Treasury, Debt Management Division of a swap agreement within 30-days of its execution or modification. Notification requirements, as specified in OAR 170-060-1000, include filing an MDAC Form 3, an executed copy of the swap authorization directive or resolution, the issuer’s swap policy and a legal opinion.

The MDAC Form 3, governing rule and a sample swap policy are available on the Debt Management Division’s website at www.ost.state.or.us/divisions/DMD/MDAC/.

MUNICIPAL DEBT INFORMATION COLLECTION, DISSEMINATION AND VERIFICATION

Treasury’s Debt Management Division collects and records the MDAC Form 1, Form 2 and Form 3 data in a comprehensive database of all long-term municipal debt issued by Oregon cities, local governments, special districts and public agencies. The data is supplemented by population statistics and true cash or market valuation data of all Oregon municipal tax code districts. The Division also monitors upcoming local government bond sales, current interest rates and interest rate trends in both the Oregon and national bond markets. Some of the MDAC information services that may be interest to city and local government issuers include:

Oregon Bond Calendar. The MDAC sponsors this publication as a service to local bond issuers and the investing public. The Oregon Bond Calendar lists recent and planned sales of Oregon state and local government bonds. It provides selected bond call and redemption information, public meeting information for the MDAC and the Private Activity Bond Committee (PAB), information on upcoming bond measures and initiatives and election schedules, filing deadlines and election results. The Oregon Bond Calendar has current local and national market interest rate statistics in the form of the Oregon Bond Index and the Bond Buyer Index.

Information on the Calendar is updated daily and is available on Treasury’s website at www.ost.state.or.us/divisions/DMD/MDAC/.

Overlapping Debt Report. Debt for a particular city may include not only the bonds issued by the city itself but also bonds sold by other overlapping taxing authorities or jurisdictions. These might include the county in which the city is located as well as school and library districts, parks and recreation, water and sewer and other taxing districts. The overlapping debt report for a city will list its own outstanding debt and debt service schedules


and provide the overlapping debt percentages for all general obligation debt issued by overlapping tax jurisdictions to which the city is subject.

Overlapping debt reports are available for a fee directly from Oregon State Treasury. Request forms can be found on Treasury’s website at www.ost.state.or.us/divisions/DMD/.

Debt Information Verification. Cities and other local governments that issue bonds are required by Oregon law to verify their outstanding debt with the MDAC at least once every biennium. The MDAC staff will send out debt verification requests to all cities and local governments to confirm their outstanding debt every odd numbered year.


What is Home Rule?

Home rule refers to the authority of local governments, such as cities and counties, to define the form and organization of local government by a locally-approved charter rather than by a general or specific state law. Article IV, Section 1(5) of the Oregon Constitution grants the power to adopt home rule charters to the voters of municipalities and Article XI, Section 2 establishes immunity from legislative control and provides that only voters have the power to enact, amend or repeal a charter, subject to the constitution and criminal laws of the state.

See Home Rule in Oregon Cities: 100 Years in the Making 1906-2006, a League of Oregon Cities publication for a detailed history of Home Rule authority in Oregon.

What is a Charter?

Under Article XI, Section 2 of the Oregon Constitution, cities are authorized to operate under home rule subject to the adoption of a City Charter. The Charter establishes the governing principles of a city including its governing body and the powers and form of the governing body. City Charters may be long or short, complex or simple depending on the form proposed to and approved by the voters of a city.

What is the difference between an initiative and a referendum?

Citizens can propose legislation for a vote by the electors of a city, county or the entire state, if they gather the required number of signatures to place the proposed legislation on the ballot. A measure that is initiated by the people, and not by a governing body, is referred to as an initiative.

Referendum describes the process whereby an action of a governing body, such as a City Council or the state Legislative Assembly, is referred to a vote of the electors. For example, a City Council could approve an increase in a tax, subject to a referral to the electors of the city for approval.

Chapter 7 – General Obligation Bonds 69

CHAPTER 7

GENERAL OBLIGATION BONDS General obligation bonds are secured by the unlimited ad valorem property taxing authority bonds of a municipality. In Oregon, general obligation (GO) bonds must be approved by the municipality’s voters. Oregon municipalities are authorized to issue general obligation bonds only to finance capital construction and improvements. Voter approval of a bond measure authorizes a municipality to sell bonds in an amount not to exceed the amount specified on the ballot and levy taxes in the amount necessary to pay the principal and interest on the bonds. GOs are primarily used to fund the construction of facilities that are non-revenue producing such as libraries, police and fire stations and parks and recreational facilities. However, GOs can be used to fund any capital construction or improvement project so long as the municipality complies with voter approval requirements and applicable State law.

ELECTORAL REQUIREMENTS

General obligation bonds must be approved by a majority of the voters voting in an election with at least a 50 percent voter turnout. The so called “double majority” requirement was imposed by the passage of Measure 50 in 1997. The only exception is the November general election in even numbered years, which has no turnout requirement. The March, May and September elections each year and the November election in odd numbered years are all subject to the “double majority” requirement.

ALLOWABLE USE OF PROCEEDS

If a general obligation bond is to be secured by unlimited property taxing authority, the proceeds can be used only for capital construction and improvements as defined by Article XI, Sections 11 and 11b of the Oregon Constitution. The Constitution specifically prohibits using GO bond proceeds for reasonably anticipated maintenance and repair and for supplies and equipment that are not intrinsic to the structure.

In addition to meeting the constitutional and statutory capital construction and improvement restrictions, Oregon municipalities may only issue bonds for the purposes authorized in the statutes that give those entities the authority to issue bonds.

The use of bond proceeds (and any interest earned on investment of the proceeds) are also limited to the purposes that are identified in the ballot title authorizing the issuance of the bonds. For example, a city whose ballot title specifically sought authorization to build and equip a fire station cannot then use some remaining portion of the bond proceeds to remodel the city hall. Municipalities wishing to maintain flexibility in the use of bond proceeds should be careful not to restrict the ballot title language too severely. A discussion of the ballot title requirements for general obligation bonds is included in Chapter 16, Bond Election Process.


The statutory definitions of allowable use of proceeds are somewhat broader than the constitutional definitions. Specifically, statute defines capital construction and improvements to include the construction, modification, replacement, remodeling, and renovation of a structure, or an addition to a structure that is expected to have a useful life of more than one year, including but not limited to:

• Acquisition of land, or a legal interest in land, in conjunction with capital construction of a structure

• Acquisition and installation of machinery or equipment, furnishings, or materials that will become an integral part of a structure

• Activities related to the capital construction, including planning, design, authorizing, issuing, carrying or repaying interim or permanent financing, research, land use and environmental impact studies, acquisition of permits or licenses, or other services connected with the construction

• Acquisition of existing structures, or legal interests in structures, in conjunction with the capital construction

Both the constitution and statutes also allow purchase of public safety and law enforcement vehicles with a useful life of five years or more.

The constitutional definition of capital construction and improvements excludes maintenance and repairs, the need for which could be reasonably anticipated. Under ORS 310.140, “maintenance and repairs, the need for which could be reasonably anticipated” include activities which may be deducted as an expense under the provisions of the Internal Revenue Code of 1986, as amended, and that do not add materially to the value of the property nor appreciably prolong its life.

The constitutional definition of capital construction and improvements also excludes supplies and equipment that are not intrinsic to the structure. Under ORS 310.140, “supplies and equipment intrinsic to the structure” include those items “that are necessary to permit a structure to perform the functions for which the structure was constructed, or that will, upon installation, constitute fixtures considered to be part of the real property that is comprised, in whole or part, of the structure and land supporting the structure.”

The statutory definition of capital construction and improvements also excludes furnishings, except where the furnishings are acquired in connection with the acquisition, construction, remodeling or renovation of a structure, or the repair of a structure that is required because of damage to or destruction of the structure.

DEBT LIMITATIONS

State law limits the principal amount of outstanding general obligation debt Oregon municipalities may have at any time. The limit is based on the municipality’s Real Market Value. Note that although Measure 50 reduced Assessed Value, it did not affect Real Market Value or a municipality’s statutory debt capacity.


Debt limits are different for each type of municipality. The applicable debt limits for some of the major general purpose and special district entities are summarized in the following table.

Statutory GO Debt Capacity in Oregon

Issuer Type % of RMV City 3.00%

County 2.00%

Park & Recreation District 2.50%

County Service District 13.00%

Rural Fire Protection District 1.25%

NOTICE OF CLASSIFICATION OF USES

The issuing municipality may give notice of its adoption of an ordinance or resolution specifying the authorized uses of proceeds of bonded indebtedness within 15 days after the adoption of the authorizing action in its newspaper of record, in the form described in ORS 305.580(9). This process shortens the time period for challenging the uses of bonded indebtedness proceeds to within 60 days after the adoption of the resolution or ordinance. If such notice regarding the authorized use of proceeds is not published, a petition to challenge the use of bonded indebtedness proceeds may be filed within 180 days after the questioned use of the proceeds is made.

STRUCTURING OF GENERAL OBLIGATION BONDS

As discussed broadly in Chapter 17, Structuring of the Bond Issue all debt repayment structures must be tailored to the specific source of repayment and take into account timing and other related issues specific to that source. In the case of GO bonds, the primary source of repayment is the annual property tax levy. Consequently, GO bond structuring needs to account for the timing and amount of property tax levies.

Municipalities must be careful to structure initial bond repayments on a schedule that allows for adequate collection of the initial year’s and on going tax levies. For example, a municipality selling new bonds in the fall will not have any property taxes to make initial debt repayment until the following November or December.

Municipalities must also account for the levy impact that is created by uncollected taxes in the levy’s first few years. Because there are no prior year collections yet to offset uncollected taxes, the tax rate in the early years can spike up higher than anticipated. Consequently, in the first years of a new bond property tax levy, a municipality will need to increase the bond tax rate to account for current year uncollected taxes not offset by prior year tax collections.


DEBT REPAYMENT OPTIONS FOR GENERAL OBLIGATION BONDS

Several specific structuring options relating to general obligation bonds are discussed here. Please see also Chapter 17, Structuring the Bond Issue, for a broader discussion of debt structuring concepts.

STRUCTURING GOALS

The structure of a bond issue, that is, the timing and manner of principal and interest payments, should coincide with the municipality’s repayment plan. The most important consideration in determining bond issue size and structure is balancing project requirements with affordability.

Affordability can be measured in a number of ways. However, with general obligation bonds that are repaid primarily, if not entirely, from property taxes, affordability translates into the tax rate paid by taxpayers. Taxpayers do not pay an interest rate; they pay dollars expressed in a tax rate per $1,000 of assessed value of their property.

One measure of affordability then is the tax rate’s impact on the taxpayer over the life of the bond issue. The municipality should also consider the cost of any outstanding debt and any future debt plans.

The optimal repayment plan is one that best matches the debt service to the municipality’s ability to repay. In the case of general obligation bonds, the municipality does not repay the bonds out of its own resources, its taxpayers do. Consequently, the question a municipality must answer is, “What repayment plan best fits our taxpayers’ abilities and inclinations?”

Following are several simple repayment plans and their impact on tax rates:

• Level Debt Service. In this plan, the new issue is structured to produce a debt service schedule that is relatively level each year. This is akin to the standard home mortgage. In the early years, debt service is primarily interest. In the later years, debt service is primarily principal. Assuming a municipality’s assessed value grows over the life of the issue, a level debt service structure produces higher tax rate impacts in the early years and lower tax rates in the later years.

• Level Levy Rate. This repayment plan structures debt service so that the resulting tax levy rates are more or less the same each year. This structure accounts for estimated growth in assessed value and the corresponding increase in repayment resources. This structure, on average, defers principal repayment slightly to account for increasing assessed values.

A level levy rate plan can significantly reduce taxpayers’ tax rates in the earlier years of the debt repayment. The lower tax rates produced by rising assessed values are captured early in the repayment plan rather than later as occurs in the level debt service approach. It is important to note here that a municipality may not ask voters for a specific level of “rate” for a GO bond issue, but may only ask voters to approve a “par” amount of bonds to be issued. Consequently “level levy” type structures are based on assumptions about assessed valuation changes in the future and can only eventually approximate an actual level rate.


Comparison of Rating Agency Categories Investment Grade Credits

Moody’s Investors Service Standard & Poors Fitch

Aaa AAA AAA Aa1 AA+ AA+ Aa2 AA AA Aa3 AA- AA- A1 A+ A+ A2 A A A3 A- A- Baa1 BBB+ BBB+ Baa2 BBB BBB Baa3 BBB- BBB-

OTHER STRUCTURING CONCERNS

Municipalities should always take into account the combined effect of new, outstanding, and anticipated future debt when structuring a new debt issue. In addition, municipalities should also account for other jurisdictions’ debt plans and tax rate burdens in anticipating voters’ reaction to the financing plan and its costs.

INTEREST RATE SWAPS WITH GENERAL OBLIGATION BONDS

Issuers of general obligation debt face particular issues in using swaps. The risk of an involuntary termination payment (see Chapter 14, Interest Rate Swaps and Other Derivative Financial Products) is the biggest concern. Under current Oregon law, the issuer may not levy a property tax to pay the termination payment. Consequently, a termination payment would have to be paid from a municipality’s general fund. Because a termination payment could be substantial, an issuer of property tax based debt would be unlikely to take that risk.


What is the difference between a bond and a general obligation bond?

A bond is simply a type of loan. Investors loan money to a municipality for specific capital projects. A bond normally carries a fixed interest rate payable semiannually until the bond matures. A bond issue usually includes bonds that mature on different dates so that the entire principal does not come due on a single date.

General obligation bonds issued by Oregon municipalities are secured by the issuer’s ability to levy “unlimited” property taxes, not subject Oregon Constitutional tax limits, on all taxable property within its jurisdiction to repay the bond’s debt service.


Do Oregon municipalities need voter approval to issue general obligation bonds?

Yes. If a municipality wishes to borrow money with an unlimited property tax pledge, the municipality must have voter approval to do so.

What can general obligation bond proceeds be used for?

General obligation bond proceeds may be used only for those projects and costs listed on the ballot. Oregon law also limits the use of bond proceeds to capital construction and improvements.

Can a municipality use general obligation bonds for operating purposes?

No. Bond proceeds may be used only for capital projects and improvements. However, if voters approve, a municipality may be able to pay for certain continuing capital projects with bond proceeds, thus removing the need to otherwise cover those costs with general fund money.

What other limitations apply to the use of general obligation bond proceeds?

A municipality should consult bond counsel to discuss the use of proceeds related to any given bond issue. In general, municipalities should not use general obligation bond proceeds for supplies, computer software, or reasonably anticipated maintenance and repair work, for example, regularly scheduled painting, roof patching, parking lot pavement, etc.

Are there legal restrictions on the size of bond issues?

Yes. State law limits the amount of outstanding general obligation debt a municipality may have at any time. The limit is based on the municipality’s real market value and the kind of entity it is, for example, city, county or fire district.

Note that even though Measure 50 reduced “assessed” value, it did not affect real market value or a municipality’s debt capacity. Also note that a municipality’s debt capacity includes any outstanding bonded debt.

How long does it take to receive bond proceeds once the voters approve a bond issue?

It depends. If the municipality is ready to proceed with the project immediately, a bond issue can be structured, sold and closed within six to eight weeks. Generally, however, the issuance process takes about three months from start to the receipt of money at closing.

How much does it cost to issue general obligation bonds?

A number of issuance expenses are incurred in issuing bonds. The total expense varies according to issue size, structure and credit quality. Issuance costs may vary greatly. In addition, the issuer pays underwriting fees, which may vary from 0.20 percent to 2.0 percent of the bond proceeds. This amount is determined by the size and type of debt issued.


How does the municipality pay these issuance costs?

Issuance expenses can be paid from bond proceeds. When determining the size of the bond issue, the municipality should ask its financial consultant to determine the likely issuance costs. These costs may be added to the bond authorization amount being requested from the municipality’s electorate.

What kinds of projects can I pay for using left over bond proceeds?

State law limits the use of bond proceeds (including interest earned on the proceeds) to either items specified in the ballot title or for payment of debt service on the bonds.

Chapter 8 – Financing and Lease-Purchase Agreements 77

CHAPTER 8

FINANCING AND LEASE PURCHASE AGREEMENTS

In this chapter, we generally discuss the use of financing agreement authority to issue obligations backed by the “full faith and credit” of a municipality. Financing agreement or lease purchase authority can also be used in conjunction with a limited pledge of revenues.

Oregon municipalities have the authority to enter into financing or lease-purchase agreements without voter approval. These agreements can be used to finance a wide variety of capital items including new facilities and equipment and maintenance projects prohibited from general obligation bond levies under Oregon constitutional tax limitations. These agreements also can be used to pay for construction of new facilities or major renovation of existing facilities which might be financed with voter approved bonded debt but may be more easily financed with a lease-purchase agreement. However, this authority by itself provides no additional tax or revenue source for debt repayment.

In many ways, a financing or lease-purchase agreement is similar to a bond issue. Money is borrowed from an investor and lease payments are made to that investor until the obligation is paid. Payments under such agreements contain a principal component and an interest component. Just like a bond issue, the interest component can be exempt from federal and state income taxes, resulting in low borrowing costs.

Lease-purchase based transactions were once commonly marketed under the term “certificates of participation” or COPs. In Oregon, lease-purchase transactions that carry the unconditional promise to pay from the general fund are now typically marketed under the term of “full faith and credit obligations” or FFCOs. Lease-purchase agreements that must be “subject to annual appropriation” are discussed later in this chapter. For the balance of this chapter, we will use the term “financing agreement.”

LIMITATIONS

Under ORS 271.390, the estimated weighted average life of a financing agreement may not exceed the estimated weighted average life of the real or personal property that is financed. Nor can the financing term exceed 30 years. For Oregon counties there is a limitation on how much debt that is “not subject to annual appropriation” can be outstanding at any one time – the limit is one (1.00%) percent of the county’s real market value. Other Oregon municipalities have no specific restriction on the amount of financing agreements that can be issued or outstanding at any one time.


FINANCING AGREEMENT DOCUMENTATION

Oregon municipalities may enter into a financing agreement (and authorize the issuance of debt certificates) for which the obligation to repay is binding and can be enforced in court. In effect, this makes a financing agreement an obligation payable from the issuer’s general fund.

Because this obligation is binding, a municipality typically will not need to provide additional security. In most instances, the issuer’s promise to repay the financing obligation from its general fund is more valuable to investors than a security interest in the property being financed.

Financing agreements are often broken into smaller pieces and marketed to investors as “full faith and credit obligations” (FFCOs) or “special obligations.”

Two basic documents are required for a financing agreement transaction. A third document is required if the issue is sold to public investors. Bond counsel (typically referred to as “special counsel” for a financing agreement) should draft the required documents. The three documents are (1) resolutions; (2) financing agreements; and (3) escrow agreements. These documents are slightly different for full faith and credit obligations than they are for other types of financings because of the unique structures of these transactions.

RESOLUTION

A Resolution or Ordinance that authorize the terms of the financing agreement must:

• Include the principal amount, interest, maturity, and prepayment provisions

• Authorize the execution of other documents and the taking of other actions necessary to complete a financing transaction

• Approve the selection of the lessor and appointment of the financing team members such as bond counsel and underwriter

The resolution may deal with these items in detail but more typically delegates the responsibility for setting terms, such as interest rates and redemption provisions, to the appropriate designated staff. In such cases, parameters such as maximum principal amount and interest rate may be set in the resolution with the actual amounts and rates set later by staff in conjunction with the financing team.

FINANCING AGREEMENT

The Financing Agreement is between the municipality as the “lessee” and the institution serving as the “lessor.” The lessor may be a third-party financial institution, especially if the financing agreement is divided into FFCOs. The agreement may include language specifying the issuance of FFCOs and the use of an escrow agreement. The agreement incorporates terms established in the resolution and provides details of the property to be financed, payment schedules, security provisions, and other matters.


The form of a financing agreement should always be subject to negotiation. An issuer should not execute any financing agreement without having it reviewed by special (bond) counsel and the district’s general counsel.

ESCROW AGREEMENT

An Escrow Agreement is required for a financing agreement that will be broken into smaller pieces and sold to investors through the bond market. The parties to this document are the issuer and the escrow agent. The escrow agreement is needed because the issuer’s repayment obligation is being sold to investors as separate units and documentation is needed to provide the terms of this division. The escrow agreement usually is a separate document but may be combined with the financing agreement.

An escrow agreement will define the duties of the escrow agent, how payments are to be made to the investors, the actions that the escrow agent may take if the terms of the financing agreement or the escrow agreement are violated, and other items.

CREDIT STRUCTURES

Financing agreements can employ very flexible underlying credit structures. In this chapter, we have generally assumed the use of the “full faith and credit” structure where the municipality pledges all generally available resources for repayment of the debt. However, a municipality can use the financing agreement authority much like a revenue bond. In this format the municipality pledges only a specific stream of resources for debt repayment. Both general types of credit structures are briefly discussed below.

FULL FAITH AND CREDIT OBLIGATIONS

Full faith and credit obligations is a marketing term used to describe a certificated stream of financing payments. Another common marketing name is “Special Obligations.” In this case, the financing agreement pledges all generally available resources for debt repayment and does not other wise limit a government’s obligation to repay – thus the full faith and credit moniker.

FFCOs can be used by a municipality to self insure a project that may be difficult to finance on a stand alone basis. For example, a city may need to finance improvements at its general aviation airport. The improvements are expected to pay for themselves through increased lease revenues. However, using an airport revenue bond structure for a small airport may prove difficult or impossible to finance because of investor reluctance. The municipality may choose to use its full faith and credit as the pledged security while actually paying the debt from the increased airport lease revenues. Self insuring using this method transfers any risks of the financing risk to the city’s general fund so appropriate care should be exercised in when substituting the general fund as credit enhancement.

A FFCO issue usually bears only slightly higher interest rates than a general obligation bond. Because there is no ability to levy additional property taxes to pay the debt service, investors do not consider FFCOs to be as well secured as a General Obligation Bond and therefore expect a somewhat higher interest rate to compensate for the perceived higher risk. FFCOs are often


rated or additionally secured by municipal bond insurance policies. Ratings tend to be slightly lower than for the same issuer’s General Obligation Bonds and bond insurance premiums somewhat higher than those for General Obligation Bonds, all reflecting the perceived difference in credit.

REVENUE SPECIFIC OBLIGATIONS

Financing agreements can be structured to mimic a typical revenue bond structure (see Chapter 10, Revenue Bonds for additional discussion of revenue bond characteristics). In this format, the repayment stream is limited to a pledge of specific revenues. Such a structure may include debt service reserve requirements, coverage requirements and additional debt limits much like a more traditional revenue bond structure. In this way financing agreements provide a municipality with an extremely flexible financing tool.

ADDITIONAL STRUCTURING CONSIDERATIONS FOR FINANCING AGREEMENTS

Financing agreements or FFCO transactions are exceptionally flexible financing tools. Multiple projects can be wrapped into a single transaction. Separate underlying amortization schedules for disparate types of projects can be aggregated into a single overarching transaction. Repayment schedules can be tailored to differing sources of repayment. As noted above, specific revenue streams can be pledged instead of the entire general fund resources of the issuer. Because of the credit strength of a municipality’s binding obligation to pay debt service from its general resources, cash or surety reserves are not usually necessary in a FFCO structure. However, issuers should note that equipment vendors may have different requirements for financing acquisitions of their equipment.

OTHER “FULL FAITH AND CREDIT” AUTHORITIES

Generally, full faith and credit authority requires financing of some type of capitalizable asset. However, Oregon law allows specifically for the use of limited tax or full faith and credit obligations to finance unfunded pension liabilities. ORS 238.694 allows a municipality to use either the limited tax authority found in ORS 288.150 or the revenue bond authority found in ORS 288.805 to finance unfunded pension liabilities.

SUBJECT-TO-APPROPRIATION CREDITS

Before broad authority existed for Oregon municipalities to make unconditional pledges of available resources, lease-purchase transactions were almost always “subject-to-annual appropriation.” Terms of the lease-purchase agreement stipulated that annual debt service payments were subject to the issuer’s annual budgeting process. This was necessary because of constitutional or statutory limits on debt incurred without voter approval. Lease-purchases that were subject to the annual appropriation process were not considered “debt” because there was no long term commitment to repay. If a municipality ever failed to appropriate the annual debt service for a lease, the lease legally terminated (it was not technically an “event of default”) and the items financed were returned to the trustee. This often made sense in the case of an equipment financing, but as this financing structure was extended for use on larger projects (such as a sewer system project or the construction of a controversial city hall), the subject-to-appropriation lease became a problem. This structure became notorious for “defaults” (though


technically not a default under terms of the financing documents, a failure to appropriate is generally considered a “default” by the bond market) in the 1990s. While this structure is still used in other states where borrowing authority is more limited, in Oregon, this form of financing has virtually disappeared.


How do financing agreement issues differ from a General Obligation bond issue?

In most respects they are similar. The issues are sold to investors at low interest rates because the interest is typically exempt from federal and state income taxes. Interest on financing agreement issues is paid semi-annually and principal is paid annually.

There are two important differences:

• A municipality cannot levy additional property taxes to pay debt service on a financing agreement issue as it can to pay debt service on a GO bond. Principal and interest on a financing agreement issue must be paid from an issuer’s existing resources.

• A financing agreement issue usually bears a higher interest rate than a GO bond because there is no ability to levy additional property taxes to pay debt service. Consequently, investors do not consider financing agreement issues as safe as GO bonds and, therefore, demand a higher interest rate to compensate for the higher risk.

How do they differ from revenue bonds?

A financing agreement can be structured very similarly to a “classic” revenue bond if the issuer wishes. For example, a financing agreement could specify a revenue stream and incorporate rate covenants and reserves. A revenue bond is subject to certain public notification and referral process whereas a financing agreement is not. However, revenue bonds can be used for a wider range of applications (including even operating capital) that financing agreements. Revenue bonds (at least those with a classic structure) are widely understood and accepted by investors whereas a financing agreement backed issue may take additional investor education before they are accepted.

Is voter approval needed to use financing agreements?

No. Voter approval is not required.

What can be financed with financing agreements?

In general, the proceeds of a financing agreement may be used for the same purposes as the proceeds of a bond issue plus items for which bonds may not be issued. Therefore, a financing agreement may be used to finance the acquisition and construction of new buildings or additions to or renovations of existing buildings, the acquisition of land, as well as to purchase equipment and supplies, and to pay for maintenance which cannot be financed with general obligation bond proceeds. Financing agreement proceeds cannot be used to finance working capital.


What are full faith and credit obligations?

This is simply a marketing name for financing agreements that are divided into smaller pieces and sold in the public markets like bond issues. Because most Oregon municipalities have authority to enter into financing agreements, they also have authority to authorize an escrow agent to issue securities based on those agreements.

Will the municipality have to give a mortgage or security interest in the property financed with the financing agreement?

No. Investors usually do not believe that the property financed under a financing agreement has value to them if an issuer defaults on debt service. Therefore, investors typically do not believe a mortgage or security interest on that security has value. Instead, investors rely on the binding nature of the underlying financing agreement, and the ability to sue and obtain monies from an issuer’s legally available funds.

How large can a financing agreement issue be?

There is no legal limitation, except for Oregon counties. However, the issuer must be comfortable with its ability to pay the debt and satisfy the underwriter and investors that it will have sufficient resources to pay debt service over the life of the financing. Once issued, debt service on a financing agreement is a binding obligation. (Financing agreements or FFCOs may be redeemed, or paid off, early, however, depending on the specific terms of the issue.)

The issuer also must be able to show potential purchasers where it will get the monies to pay debt service. Will it redirect current resources or have additional resources to service the debt?

How long does the municipality have to spend the proceeds of a financing agreement?

Any financing agreement that is designed to be tax-exempt must comply with all the federal rules regarding a tax-exempt issue. For example, most proceeds of a financing agreement for capital construction generally must be spent within three years of the date of issue.

How long will it take to get the money from a financing agreement?

It will take approximately eight to 10 weeks to get the money through a financing agreement once the issuer has made a decision to proceed.

What is the maximum term for financing agreements?

The estimated weighted average life of the financing agreement cannot exceed the estimated dollar weighted average life of the property financed. The most reasonable term or maturity for the financing agreement issue is determined by the issuer’s available resources and by the property being financed. Under ORS 332.155, the maximum term is 30 years.

Chapter 9 – Tax Increment and Assessment Financings 83

CHAPTER 9

TAX INCREMENT AND ASSESSMENT FINANCINGS

This chapter focuses on two distinct types of financings that do not generally fall under the category of general obligation bonds, financing agreements or revenue bonds. Tax increment borrowings are a financing tool for urban renewal, while assessment debt results from the creation of a local improvement district. We discuss each separately.

TAX INCREMENT FINANCING

DEFINITION AND PURPOSE

Tax increment financing was developed in connection with urban renewal areas. In fact, urban renewal agencies must technically be “in debt” in order to continue to collect tax increment revenues. The purpose of urban renewal is to leverage (that is, borrow against) future tax increment revenues in order to accelerate development opportunities within area targeted plan area. Proceeds of a tax increment financing can only be used for projects identified under the urban renewal plan. Projects are often widely defined and, unlike many municipal financings, often include programs (through both loans and grants) directly aimed at private sector development. Consequently, parts of tax increment financings are often done on a taxable basis as opposed to on a tax-exempt basis.

LEGAL AUTHORITY AND APPROVAL PROCESS

Tax increment financings rely first on the creation and development of an urban renewal agency and plan area by a city or a county. We do not discuss the creation of plan areas here but assume that the issuer has already created the urban renewal agency and plan area.

An individual tax increment financing can be authorized by a single resolution of the urban renewal agency. Depending on federal tax status of the projects financed, additional actions such as TEFRA hearings (see Chapter 5, General Federal Tax Requirements) may be required.

SECURITY AND SOURCE OF REPAYMENT

In the case of tax increment financings, the pledge is typically of the “divide the taxes” revenue stream coming to the urban renewal agency. In the case of certain grandfathered urban renewal areas, additional property tax revenue may be available through a special levy. Some municipalities opt to use their full faith and credit authority (see Chapter 8, Financing and Lease Purchase Agreements) to self insure urban renewal credits while still intending to make debt service payments from available tax increment revenues.


Tax increment debt poses some very special considerations for an issuing urban renewal agency. Tax increment obligations can be backed solely by one or two different sources, depending on when the urban renewal area was created or significantly amended. For areas created prior to the adoption of Measure 50 in 1997, agencies had a one time option of collecting both the traditional “divide the taxes” (or “tax increment”) revenue and levying a special levy up to a certain amount. For newer areas, or for areas that have undergone significant plan modifications since the passage of Measure 50, only the divide the taxes revenue is available.

Division of tax revenues depend on growth in the assessed valuation in the urban renewal area. By making improvements in the targeted plan area, it is expected that property values will increase due to private investments that would not otherwise occur. This increase in value is called increment. All properties in the urban renewal area are taxed exactly as before the plan area was created, but the revenue from applying the tax rates of overlapping jurisdictions to the incremental value goes to the urban renewal agency for improvements. Changes in the incremental assessed value and or changes in the tax rates cause fluctuation in the available tax increment revenue. Generally, the larger the area and the more diversified and established the properties, the more robust the revenue stream from divide the taxes.

Agencies with the ability to levy the additional special levy tend to fare somewhat better as credits. The special levy authority improves the predictability of the agency’s cash flow by providing an additional source of revenue that somewhat offsets the potential fluctuations in the divide the taxes source. This is true except in situations where the incremental assessed value of the area declines, which erodes the value of the special levy at the same time that divide the taxes revenue falls.

Tax increment bonds may not be cross collateralized by tax increment streams from other urban renewal areas in the same city or county.

RATINGS AND MARKETING CONSIDERATIONS

The unique nature of tax increment collections creates challenges for ratings agencies or bond insurers, and thus for underwriters of tax increment debt. As with any financing, the ratings analysts, bond insurers and investment bankers will evaluate the size and predictability of the tax increment stream. Factors include size and diversity of the area, concentration of major taxpayers, historical collections, overlapping tax rates (and Measure 5 compression threats) and the presence of a special levy. Only the largest and most secure tax increment financings tend to get high grade ratings. Most areas have difficulty getting ratings in the “A” category. Likewise, bond insurers are reluctant to qualify many tax increment financings for insurance.

Without high grade ratings or bond insurance, underwriters’ audience of investors is limited. Successful publicly marketed issues are usually smaller issues that can be absorbed at reasonable interest cost by the more limited investor audience, or extremely high grade urban renewal credits with a good rating and/or insurance. Other issuers must usually rely on placing the debt with a commercial bank portfolio. This is particularly true with start up areas with little or no tax increment collection history.


While investors can make informed decisions about the quality and volatility of the divide the taxes revenues, many investors place a high level of concern on the uncertainty generated by Oregon’s initiative system that can (and has) inadvertently or intentionally dramatically affected tax increment collections. Tax increment investors have little protection against radical alterations of the Oregon property tax system that either intentionally or unintentionally alter the amount of money an urban renewal agency receives from the divide the taxes sources.

ASSESSMENT BASED FINANCINGS


Assessment borrowings are allowed under Oregon state law to provide cities or counties a viable financing tool to fulfill their obligations under the local improvement district statutes. When a local improvement district is formed, the forming agency (city or county) must allow benefited property owners the ability to finance their assessments. The assessment borrowing statutes were developed long before other more robust financing mechanisms existed. The assessment borrowing authority has been modified numerous times by the imposition of constitutional restrictions imposed by Measures 5 and 50.

Prior to Measure 5, assessment financings could be issued as full blown unlimited tax general obligation bonds of the issuer. Measure 5 eliminated that ability and since then, Local Improvement District assessments have been financed using other forms of security (see below).


State law allows municipalities to borrow to finance signed assessment contracts. The amount of borrowing is limited to the principal amount of assessment contracts outstanding. A single authorizing resolution of the governing body is required with authority to execute the financing details and terms typically delegated to appropriate staff.


For assessment issues, Oregon state law allows the pledge of all assessment payments and proceeds from the sale of foreclosed properties. In addition, most municipalities use some form of limited pledge of the municipality’s unobligated general fund resources.

Local Improvement District financing is one of the more complicated challenges for a municipality. The unique combination of relatively small dollar amounts, risks posed by the nature of property-based financings, state law restrictions and federal tax law restrictions combine to make a properly executed LID financing a significant accomplishment.

Let’s begin with a simple explanation of a typical LID financing. A city or county may form a Local Improvement District. Once formed and the project completed, the cost of the project is spread among the benefited properties based on some agreed upon assessment formula. Benefited property owners have a period of time where they can either pay the assessment in full or sign assessment contracts with the municipality. Assessment contracts must be for a term of at least 10 years (or the assessments are considered property taxes and are subject to the Measure


5 limits). Once signed assessment contracts are in hand, the municipality may (but is not required to) issue limited tax assessment bonds to finance the contract. The actual project costs are typically financed either internally, by issuing a short term note or by using a bank line of credit.

State law poses several challenges for a municipality wishing to form and finance a local improvement district. First, Oregon Revised Statutes impose an obligation on the municipality to offer financing for any property owner wishing to finance their assessment, regardless of the value of the property or the financial status of the property owner. Second, Oregon Revised Statutes require that the assessment contract allow for prepayment in full at any time. Third, the municipality can only issue debt in the maximum amount of the total assessment contracts it receives (after any cash payments). How do these requirements impose a challenge for the municipality? First, the potential issuer needs to understand the kind of risk associated with financing local improvement districts.

Assessment contracts are a lien on the property assessed. While the lien is a powerful tool, it is only valuable if the property is worth more (perhaps significantly more) than the outstanding balance on the assessment contract. The risk to a municipality is that property owners default (or become significantly in arrears) on their assessment payments. Assessment financings do not allow for cross collateralization (that is, other property owner assessments do not rise in order to pay off a delinquent neighbor’s obligation). Consequently, any default can pose a serious threat to the overall level of resources available to pay off an assessment bond. Normally, under a default scenario, the property’s real market value is less than the amount of the contract, so even a foreclosure sale may not be sufficient to fulfill the remaining assessment obligation. Foreclosure sales take time to complete so the municipality faces additional cash flow timing risk depending on the structure of the outstanding debt. Some municipalities are reluctant to foreclose for political reasons. And assessment payments from one LID cannot be used to make debt service payments on another LID so the municipality cannot cross collateralize across diverse LIDs either.

In summary, the only way to control the amount of risk in an LID transaction is to control what kinds of properties are included in an LID. Some municipalities have adopted LID policies that restrict the types of properties that may be included in any one LID. For example, the policy may say that all properties must have a certain Real Market Value to assessment ratio. While these policies reduce the amount of risk the city absorbs, implementing such policies may prove difficult either because of the nature of projects or because of political pressure to complete a particular project.

So, now that the LID is established and the amount of risk determined, the question becomes, who takes the risk? Most Oregon municipalities elect to take the risk in their general funds. This is because they finance the assessments using limited tax obligations. These obligations are payable first from assessments and proceeds of property foreclosures but ultimately have a limited pledge of available general fund resources. So, to the extent assessment are insufficient to repay the debt, the municipality ends up covering the delinquencies and defaults through its general resources.


Theoretically, a municipality could choose not to pledge its general fund (state law does not require such an additional pledge beyond assessment payments). Such a “pure” assessment bond would, in theory, transfer the risk of any inability to cover debt service to the investors who owned the bonds. However, pure assessment based financings are exceedingly difficult to place with investors because of the very risks already discussed. Consequently, use of a pure assessment deal to transfer risk proves impractical.

There are several other challenges for municipalities using LID financing. Because assessment contracts are prepayable at any time and, as property liens are always cleared whenever a property changes hands, the municipality must be able to properly deal with prepayments. Here federal tax law creates a problem. Because LID transactions are typically issued as tax exempt obligations, federal tax law generally restricts the investment yield on proceeds of the issue to the yield on the bonds. Prepayments then become a liability if retained by the municipality. If current investment yields are lower than the rate being paid on the bonds, the municipality begins to dig itself into a hole. Lending money at 6% and reinvesting it at 4% is a recipe for disaster (for example, as in the savings and loan industry). Should investment rates actually rise above the rate being paid on the bonds, then federal tax law demands the excess earning be rebated to the federal government. Consequently, the municipality has all the downside and no upside on prepayments. The issue structure of the debt needs to provide for adequate redemption provisions to allow a municipality to use prepayments to reduce it debt service account balances to comply with federal tax law and optimize long term viability of the debt service repayment.

One final risk remains to be considered. Since municipalities can only finance the amount of assessment contracts signed and outstanding, it is critical that the municipality fully burden the total assessment project with the full costs of the project, including interim and estimated long term financing costs. Failure to do so will result in the inability to recover those additional costs. This, of course, can produce the perverse outcome of raising the assessment costs for property owners who choose not to finance their contracts.

Finally, because of the complications, the risks and the relatively small size of many LIDs, many municipalities choose to finance assessment contracts through a larger, more robust streams of revenue. For example, sewer and water improvements LIDs may be rolled into the municipality’s regular enterprise fund financings for those particular systems.


We just established a new urban renewal area. How can I get money for projects when there is no increment yet to leverage?

Start up financing for urban renewal areas is challenging. Typically, the bond market will want to see several years’ history of robust tax increment before extending long term credit to an urban renewal agency. Most new areas start off with modest lines of credit from a commercial bank while establishing their ability to generate tax increment.

Chapter 10 – Revenue Bonds 89

CHAPTER 10

REVENUE BONDS Revenue bonds are bonds that are payable only from a revenue source specified by the issuer. Generally, a city can designate any revenue source to support revenue bonds. Such sources of revenues commonly include amounts generated from utilities, enterprises or other revenue producing assets owned or operated by a city but many other revenue sources, and combination of sources, can be used as well.

Revenue bonds are not payable from the general revenues of a city or from a city’s general fund. Furthermore, the full faith and credit and taxing power of a city do not stand behind the payment of debt service on revenue bonds. A holder of revenue bonds has recourse only to the revenue source or sources specified by a city in the legal instrument creating the bonds.

A city has great flexibility when determining what kind of project will be financed with revenue bonds. Generally, subject to federal tax law restrictions if tax-exempt revenue bonds are utilized, cities can use revenue bonds to finance any lawful public project. Because revenue bonds are only payable from specified revenues, they are useful when financing revenue producing facilities. For example, a city seeking to construct or improve a water distribution system might choose to finance the system with revenue bonds and designate revenues from the system as the source of revenue pledged to bond repayment.

UNIFORM REVENUE BOND ACT

GENERALLY

The Oregon Uniform Revenue Bonds Act (“URBA”) forms the legal authority under which a city can issue revenue bonds to finance public projects.

ISSUANCE BY RESOLUTION OR NON-EMERGENCY ORDINANCE

A city can issue revenue bonds pursuant to a resolution or non-emergency ordinance authorizing the issuance. Emergency ordinances are prohibited for this purpose. A typical resolution or non-emergency ordinance will approve issuance of the revenue bonds, authorize agreements related to the bonds (including indentures, financing agreements and official statements) and delegate authority to specified city officials to executed related documents and take actions necessary to complete the financing.

NOTICE TO VOTERS AND REFERRAL OF REVENUE BONDS

If revenue bonds are approved by resolution, at least 60 days before the issuance of revenue bonds, a notice of bond issuance must be published in at least one newspaper of general


circulation in the city. The notice must describe the revenue bonds to be issued including the projects to be financed, the source of revenue designated for bond repayment, the estimated principal amount of bonds to be issued and other terms of the bonds. After notice is published, voters in the city have 60 days to refer the revenue bonds to a vote. Such a referral requires valid signatures of 5% of the electors in a city. If a revenue bond issuance is referred, the bonds will be voted upon at the next legally available election. URBA also gives cities the option of voluntarily submitting revenue bonds to a vote of city electors.

SOURCES OF REVENUE TO REPAY REVENUE BONDS UNDER URBA

Pursuant to URBA, a city can designate nearly any lawfully available revenue source to repay all or part of revenue bonds including but not limited to amounts generated from revenue producing facilities, public utilities, enterprises or systems. More than one revenue source may be designated if desired. However, URBA does require that a city prepare and adopt a plan showing that the estimated net revenues to be pledged and designated towards revenue bonds are sufficient to pay the estimated debt service on such revenue bonds.

URBA also allows cities to encumber city-owned assets to provide additional security for revenue bonds. For example, as part of the security package offered to holders of revenue bonds, a city may mortgage, create a lien on, or otherwise grant a security interest in facilities, projects, utilities or systems owned or operated by the city.

Any revenues pledged to bonds, or any assets encumbered in favor of bondholders, may also be pledged or encumbered in favor of banks or other financial institutions that provide credit enhancement for revenue bonds, including bond insurers and letters of credit providers. This flexibility can be crucial to the successful engagement of credit enhancement providers, as such providers often want at least as much security as the bondholders have themselves.

METHOD OF REVENUE BOND SALE UNDER URBA

Pursuant to URBA, a city may sell revenue bonds by means of a public competitive sale or by private negotiated sale to a selected underwriter. If a private negotiated sale is utilized, the governing body of the city must make a finding that such method of sale is desirable. No such finding is necessary for public competitive sales. When using a private negotiated sale, a city may retain a financial advisor to evaluate the terms of the proposed sale, the pricing of the proposed sale and any other relevant aspects of the sale. Such evaluation must be made in writing or orally at the public meeting of the city authorizing the revenue bond sale.

UNIQUE CREDIT FEATURES OF REVENUE BONDS

From the perspective of a bondholder, the credit concerns associated with revenue bonds are very different than those associated with other types of obligations that might be issued by a city. Rather than focusing on the general credit quality of a city, a holder of revenue bonds issued by a city will instead evaluate the credit quality of the revenue source designated for payment of debt service. For example, when issuing revenue bonds payable from the revenues of a utility, an operating history of the utility or a feasibility study are commonly used to determine that revenues from the utility are projected to be sufficient to pay operation and maintenance


expenses of the utility, debt service on the revenue bonds, and an additional amount known as debt service coverage. Debt service coverage is often expressed as the ratio of net revenues (that is, revenues less operation and maintenance expenses other than depreciation) to debt service (for example, 1.2 times coverage).

These unique credit concerns often lead cities to offer additional security features in connection with the issuance of revenue bonds. For example, pursuant to the agreements executed in connection with revenue bonds, a city might enter into a rate covenant whereby the city would agree to set rates and charges in connection with enterprises or utilities such that revenues generated will produce 1.25 times debt service coverage (or some higher ratio). Another common security feature is an additional bonds test. An additional bonds test prohibits a city from issuing additional revenue bonds payable from the same revenue source unless certain levels of debt service coverage are achieved or projected.


How do revenue bonds differ from general obligation bonds?

Unlike general obligation bonds, revenue bonds are not general obligations of a city and are payable only from the revenue source specified by the issuer. The full faith and credit and taxing power of a city do not stand behind revenue bonds.

What kinds of revenue sources can be designated to repay revenue bonds?

Any revenues legally available to a city can be pledged to pay debt service on revenue bonds. The most common sources of revenue are amounts generated from revenue producing facilities such a utilities, enterprises and systems owned and operated by a city. If tax-exempt revenue bonds are utilized, certain federal tax law limitations may apply.

What types of projects can be financed with revenue bonds?

Any lawful public project can be financed with revenue bonds. The most common projects are those associated with constructing or improving revenue producing utilities, enterprises and systems. If tax-exempt revenue bonds are utilized, certain federal tax law limitations may apply.

Do voters have a say in the issuance of revenue bonds?

Yes, if revenue bonds are approved by resolution, voters may refer the issuance of revenue bonds to a vote with the valid signatures of 5% of the electors collected within 60 days of the city’s action authorizing the revenue bonds.

Must revenue bonds be sold by public or private sale?

URBA allows a city to sell revenue bonds by both public competitive sale and private negotiated sale. If a private negotiated sale is utilized, the governing body of the city must make a finding that such method is desirable. A city may retain a financial advisor in connection with a private negotiated sale.

Chapter 11 – ConduitRevenue Bonds 93

CHAPTER 11

CONDUIT REVENUE BONDS This chapter describes the basic authority for the issuance of conduit revenue bonds, the applicable legal framework that governs their structure, and the types of entities that can benefit from the issuance of conduit revenue bonds. To understand these bonds and their structure, there are some important definitions and terms that provide a basis for the following discussion.

The Municipal Securities Rulemaking Board Glossary of Municipal Securities Terms defines “Conduit Financing” as follows:

“The issuance of municipal securities by a governmental unit (referred to as the ‘conduit issuer’) to finance a project to be used primarily by a third party, usually a for-profit entity engaged in private enterprise or a 501(c)(3) organization (referred to as the ‘conduit borrower’). The security for this type of issue is customarily the credit of the conduit borrower or pledged revenues from the project financed, rather than the credit of the conduit issuer. Such securities do not constitute general obligations of the conduit issuer because the conduit borrower is liable for generating the pledged revenues. Industrial development bonds, multi-family housing revenue bonds and qualified 501(c)(3) bonds are common types of conduit financings.”

The key components of this definition are addressed in this chapter, and the roles of the various parties to a conduit financing are important to understanding the legal structure of these transactions.

The term “conduit” refers to the pass-through nature of the bonds where the conduit issuer issues the bonds, and the conduit borrower is the one responsible for payment on the bonds. Conduit financing allows nongovernmental borrowers to take advantage of tax-exempt interest rates that would otherwise not be available to them if a governmental entity such as a city or a county were not involved. Conduit issuers can include cities, counties, state financing authorities, redevelopment agencies and housing authorities. Depending on the particular type of financing, conduit borrowers can include for-profit corporations, partnerships, nonprofit 501(c)(3) corporations and other legal entities.

LEGAL AUTHORITY: CONSTITUTIONAL, STATUTORY AND ADMINISTRATIVE RULE PROVISIONS

Examining the legal authority to issue conduit bonds from both a state law and a federal tax law perspective is important early on in the process for issuing conduit revenue bonds because it provides the legal framework in which a conduit issuer may evaluate a particular issue, the procedural steps a conduit issuer will follow to issue the bonds, and the restrictions and

Chapter 11 – Conduit Revenue Bonds 94

limitations upon the use of bond proceeds that a conduit borrower must focus on to finance a project. State and local governments have statutory authority to issue conduit or pass-through revenue bonds based on various provisions and sources of authority. Examining the relevant source of authority to issue such conduit bonds is important so that all requirements are satisfied and any potential issues are identified. The constitutional, statutory, and administrative rule provisions applicable to conduit bonds may differ depending on the type of conduit bonds being issued.

One important general principle is that conduit bonds are usually not limited by constitutional or statutory debt limitation provisions because they are not considered “debt” within the meaning of such debt limitations.

In the area of economic development, conduit revenue bonds can be issued by different entities including cities, counties, and the Oregon State Treasurer. Under ORS 280.410 to 280.485, for example, cities with a population over 70,000 can issue revenue bonds for economic development projects. The purpose of such bonds is to reduce the occurrence of economic conditions requiring more expensive remedial actions. Economic development projects can include any properties, real or personal, used or useful in connection with a revenue producing enterprise and can include multiple unit residential housing developments subject to certain restrictions. The statutes broadly authorize cities to, among other things, (1) acquire by agreement, donation or exercise of eminent domain, construct and hold in whole or in part any lands, buildings, easements, water and air rights, improvements to lands and buildings and capital equipment to be located permanently or used exclusively on such lands or in such buildings that are deemed necessary in connection with an eligible project; (2) sell and convey all properties acquired in connection with eligible projects; and (3) make or participate in the making of loans, including mortgage loans, to provide for the construction, substantial rehabilitation or permanent financing of eligible projects and undertake commitments to make such loans. In addition, the statutes authorize cities to, among other things, (1) make loans from bond proceeds to finance eligible projects; (2) acquire, sell and enter into installment sale contracts and land sale contracts for eligible projects; (3) pledge and assign to the holders of such bonds or a trustee all or any part of the revenues of one or more eligible projects owned or to be acquired by the city; (4) encumber eligible projects in favor of the holders of such bonds or a trustee; and (5) purchase, service, sell mortgage loans originated by private lending institutions for residential housing for owner-occupied dwelling units subject to certain restrictions.

Similarly, under ORS 468.263 to 468.265, counties also have statutory authority to issue conduit revenue bonds to finance pollution control facilities. Pollution control facilities include any land, building or other improvement, appurtenance, fixture, item of machinery or equipment, and all other real and personal property which are to be used in furtherance of the purpose of abating, controlling or preventing, altering, disposing or storing solid waste, thermal, noise, atmospheric or water pollutants, contaminants, or products therefrom. Under these statutes, counties have broad powers, among other things, (1) to acquire, construct, improve, maintain, equip and furnish pollution control facilities; (2) to enter into leases, (3) to issue revenue bonds for the purpose of carrying out any of its powers; and (4) to make loans for the purpose of financing the acquisition, construction, improvement or equipping of a facility.


Finally, the State Treasurer of the State of Oregon may issue conduit revenue bonds for the assembling and financing of lands for industrial, solid waste disposal, commercial and research and uses pursuant to the authority of ORS 285B.320 to 285B.371. The Oregon Economic and Community Development Commission must determine whether an eligible project satisfies certain criteria.

In the area of education, under ORS 352.790 to 352.820, municipalities, which includes both cities and counties, are authorized to issue conduit bonds to finance education facilities, which include real or personal property owned or operated by an educational institution and used to provide post-secondary education. The statutes also grant municipalities the power: (1) to borrow money and to issue revenue bonds to finance education facilities costs or to refund revenue bonds; (2) to pledge education facility revenues to pay revenue bonds; (3) to loan money to educational institutions to finance education facilities and to enter into loan contracts; (4) to enter into covenants with the owners of revenue bonds which are intended to protect the rights of such owners; (5) to contract with trustees to hold and administer education facility revenues and the proceeds of revenue bonds; and (6) to take any other action necessary to carry out their powers.

Apart from the areas of economic development and education, local governments can also create or establish subordinate entities such as authorities, including for example, housing authorities, hospital facility authorities, or forest authorities, and can provide them with the power to issue conduit bonds and loan the proceeds thereof to conduit borrowers. As a procedural matter, the governing body adopts an ordinance or resolution establishing the authority, prescribing the number of directors who will serve on the Board of Directors, and appointing the initial Board. The Board of Directors of the authority then has the ability to consider and approve specific transactions in which conduit bonds are issued.

Finally, municipalities can issue revenue bonds under the Uniform Revenue Bond Act for other general purposes. For additional information related to the URBA, see Chapter 10, Revenue Bonds.

In addition, some cities may have charter authority, by ordinance, to authorize the issuance and sale of revenue bonds to provide funds with which to acquire, construct, equip or improve revenue producing public purpose facilities. The ordinance authorizing such issuances and sale may be subject to referendum.

Administrative rules may affect the procedural process for issuing conduit revenue bonds in certain circumstances. For example, conduit revenue bonds issued by a city or a county that are being issued to advance refund prior bonds must comply with the administrative rules promulgated by the Oregon State Treasurer related to advance refundings. For additional information related to refundings, see Chapter 13, Refundings.

POLICY CONSIDERATIONS AND APPROVAL PROCESS

Policy considerations for conduit bonds are different than other governmental bonds because the direct credit of the governmental issuer is not involved and the projects are not owned or operated by the governmental issuer. The issuance of conduit bonds typically needs to be


approved by both the conduit issuer pursuant to a resolution or ordinance adopted or enacted by its governing body and by the conduit borrower pursuant to a resolution adopted by its governing body. The conduit issuer often will be required to make a finding that the financing is in the public interest. Issuers will typically have guidelines related to what types of conduit bonds they will issue that include credit quality limitations and public purpose or benefits of the facility. Generally, conduit bonds do not require voter approval.

TEFRA HEARINGS

Federal tax law requires that a public hearing be held in connection with certain conduit bonds that are private activity bonds. The so-called “TEFRA-approval process,” which is named after the Tax Equity and Fiscal Responsibility Act of 1982, requires that certain conduit bonds be approved by the governmental unit which issued such bonds or on behalf of which such bonds were issued and each governmental unit having jurisdiction over the area in which any facility is located. An issue is treated as having been approved by any governmental unit if such issue is approved by the applicable elected representative of such governmental unit after a public hearing following reasonable public notice or by voter referendum of such governmental unit. Reasonable public notice has been interpreted to require publication of a notice describing the project to be financed in a newspaper of general circulation at least 14-days in advance of a public hearing. After the TEFRA hearing, the governing body of the conduit issuer considers a resolution that formally approves of the financing for federal tax purposes.

AUTHORIZED PROJECTS

Conduit revenue bonds can be issued for a variety of projects depending on the applicable authorizing statutes and the financial circumstances of the conduit borrower. Eligible project costs can often include costs of acquiring, constructing and improving certain facilities, and capitalized interest, reserves, costs of credit enhancements and costs of issuing and paying revenue bonds.

SECURITY AND SOURCES OF REPAYMENT REVENUES

Conduit bonds are typically paid from sources of revenues provided for by the conduit borrower. The revenues can be ones that are generated by the project or facility being financed with conduit bonds, and the security for the bonds is derived from the revenues pledged by the issuer to their payment. Conduit bonds are not regarded as obligations of the city or county issuing the conduit bonds or creating an authority, and they are not considered a charge on its tax revenues. Ad valorem property taxes of a governmental entity are not levied or pledged to repay the bonds, and often a conduit issuer such as a hospital authority or a forest authority will not have taxing power. This allows local governments to retain their taxing power for other purposes. Conduit bonds may also be credit enhanced by a bond insurance policy or a letter of credit. For additional information on credit enhancement, see Chapter 17, Structuring the Bond Issue.

GENERAL TYPES AND PURPOSES

Conduit bonds can be issued in a number of different forms and for a variety of purposes that are described in more detail below. Conduit bonds can be issued as fixed rate, variable rate or


auction rate bonds, and they can be sold either on a negotiated or a competitive basis. For additional information about types of bond sales, see Chapter 1, Overview of Debt Issuance.

The basic authorizing documents and bond documents typically include a bond resolution, a trust indenture, and a loan agreement. The bonds are issued under the trust indenture, which is a contract between the conduit issuer and the bond trustee that contains the description of the security for the bonds. The proceeds of the bonds are loaned to the conduit borrower for purposes that are permitted for qualified private activity bonds pursuant to the loan agreement, which is a contract between the conduit issuer and the conduit borrower. Typically, loan repayments are assigned directly to the bond trustee, so the borrower sends the money directly to the trustee to be held in the trust estate for ultimate distribution to the bondholders. For additional information on the types of legal documents involved in a conduit financing, see Chapter 3, Basic Legal Documents.

PRIVATE ACTIVITY BONDS

Private activity bonds are bonds that are issued to benefit private businesses. The federal tax code imposes specific limitations on these types of bonds. Private activity bonds can be issued for the following purposes: single family mortgage, small issue industrial development, student loans, water, sewer, solid waste, hazardous waste, and tax-increment financing. For additional tax issues related to private activity bonds, see Chapter 5, General Federal Tax Requirements.

ECONOMIC AND INDUSTRIAL DEVELOPMENT REVENUE BONDS

Industrial development bonds (“IDBs”) are private activity bonds issued by a state or local government that are used to finance construction of facilities for certain private enterprises, and they can promote economic development. In Oregon, they can be issued through the State of Oregon Economic Community Development Department, port districts and cities that have populations greater than 70,000. IDBs can finance the costs of construction, property acquisition, demolition, eligible machinery and equipment and certain costs of issuing the bonds. IDBs are payable from the revenues of the facility and money or other property received from the company or other private sources. They are not a debt or obligation of the state or the municipality. Investors purchase IDBs depending on the nature of the investment and the security for repayment offered. For additional tax limitations applicable to IDBs, see Chapter 5, General Federal Tax Requirements.

NON-PROFIT 501(C)(3) BORROWINGS

501(c)(3) organizations often benefit from tax-exempt financings for capital projects, refinancing prior debt, reimbursing prior expenditures, working capital, and financing costs. 501(c)(3) organizations are nonprofit organizations that are established for one or more of the following purposes: religious, charitable, scientific, testing for public safety, literacy, education or prevention of cruelty to children or animals. The types of nonprofit corporations that are described in Section 501(c)(3) of the Internal Revenue Code and that receive an IRS determination letter to the effect that they are eligible to benefit from tax-exempt financing are the ones who take advantage of the types of tax-exempt financing through conduit bonds that are described in this chapter.


Such entities can obtain the benefit of tax-exempt financing by having a governmental entity issue bonds on their behalf and then loan the proceeds to the 501(c)(3) organization. The 501(c)(3) organization is responsible for making the payments on the bonds. For additional information about non-profit borrowings, see Chapter 5, General Federal Tax Requirements.

Hospital and Healthcare Facilities. Conduit bonds may be used to finance the following types of hospital and healthcare facilities using tax-exempt bonds: hospitals, clinics, multilevel care, assisted living, and congregate care. Conduit healthcare bonds are payable solely from the loan or installment payments made by the hospital/healthcare facility conduit borrower that is the beneficiary of the issue. Debt service on the bonds may be secured by bond insurance, a letter of credit, a deed of trust, or a guarantee.

Educational and Cultural Facilities. Conduit bonds may be used to finance the following types of educational and cultural facilities using tax-exempt bonds: colleges and universities, schools, research institutions, museums, libraries, aquariums, cultural venues, historical preservation, and public broadcasting stations. Eligible facilities do not include any facility used or to be used for sectarian instruction or as a place of religious worship.

Single and Multi-family Housing. Conduit bonds may be used to finance the following types of housing: low-income housing corporations and lessening the burden of government corporations. Conduit bonds for single and family multi-family housing purposes are subject to numerous state and federal tax law limitations, some of which related to occupancy requirements and income restrictions. Multifamily housing revenue bonds are conduit bonds issued to finance the acquisition, construction, rehabilitation or development of rental housing developments by private developers. Bond counsel should be consulted early in the process to review applicable limitations on eligible projects.

SPECIAL TAX CONSIDERATIONS

There are numerous special tax considerations that arise in connection with the issuance of conduit revenue bonds, and the tax considerations affect whether or not conduit revenue bonds can be issued on a tax-exempt basis. For a description of the federal tax issues associated with conduit revenue bonds, see Chapter 5, General Federal Tax Requirements.


What are conduit revenue bonds?

Conduit revenue bonds are bonds issued by a governmental entity where the proceeds are loaned to a conduit borrower who is responsible for making all payments on the bonds.

Who is the issuer?

The issuer is a governmental entity, but the issuer is not responsible for the payment on the bonds.


Who benefits or can take advantage of conduit revenue bonds?

The conduit borrower is the primary beneficiary of conduit revenue bonds. Conduit borrowers can include partnerships, for-profit corporations, or nonprofit corporations.

What is the legal authority to issue conduit revenue bonds?

The specific statutory authority to issue conduit revenues bonds depends on the nature of the project and the contemplated conduit issuer. There are different sources of authority for different types of financings.

What is the source of repayment for conduit revenue bonds?

The primary source of repayment for conduit revenue bonds are the revenues from the facility being financed with the conduit revenue bonds.

How are conduit revenue bonds sold?

Conduit revenue bonds can be sold on either a competitive or a negotiated basis.

What are the advantages of issuing conduit revenue bonds?

• Conduit borrowers can take advantage of lower rates and better terms than other conventional financing through the use of tax-exempt financing.

• The conduit borrower is responsible for payments on the bonds, and conduit issuers can reserve their power to tax for services other than those provided by the issuance of conduit bonds.

• Voter approval is typically not required.

Chapter 12 – Notes, Short-Term and Interim Financings 101

CHAPTER 12

NOTES, SHORT-TERM AND INTERIM FINANCINGS

Short-term debt is generally defined as debt with a stated final maturity of one year or less at the time of sale, although the stated maturity can sometimes be longer under certain circumstances. A city issues short-term debt primarily (i) to even out cash flow discrepancies attributable to mismatches between the collection of the budgeted tax revenues or other income and expenditures arising throughout the fiscal year or (ii) to provide temporary funding for the costs of capital projects. To even out cash flows or supplement working capital, a city may issue:

• Tax Anticipation Notes (TANs) and Warrants. Tax Anticipation Notes (TANs) and warrants are issued in anticipation of tax revenues to be collected pursuant to the city’s taxing authority and are generally retired from the proceeds of the specific tax levy they anticipate.

• Revenue Anticipation Notes (RANs). Revenue Anticipation Notes (RANs) are issued in anticipation of some other specified revenue source, such as revenues to be generated by a municipal enterprise (e.g., a water and sewer system), and are generally retired when the city receives the proceeds from the pledged revenue source.

• Tax and Revenue Anticipation Notes (TRANs). Tax and Revenue Anticipation Notes (TRANs) are issued in anticipation of both a specified tax levy and other revenue source.

To finance temporarily the costs of capital improvements or capital assets in anticipation of a permanent financing, a city may issue:

• Grant Anticipation Notes (GANs). Grant Anticipation Notes (GANs) are issued in anticipation of receipt of a Federal or state grant.

• Bond Anticipation Notes (BANs). Bond Anticipation Notes (BANs) are shorter-term interest bearing notes issued by a city in anticipation of a future issuance of long-term bonds.

A city may also issue or enter into additional forms of short term indebtedness, including:

• Tax Exempt Commercial Paper (“TXCP”). Tax-exempt commercial paper (“TXCP”) is a form of short-term, often unsecured promissory note issued in registered form, in denominations of $100,000 or more, with maturities ranging from


1 to 270 days and usually backed by a direct-pay letter of credit or a line of credit with a bank or a combination of bond insurance and line of credit or other liquidity facility.

• Line of Credit. A line of credit is a contract between a city and a financial institution, usually a bank, that provides a loan to the city as a substitute for publicly offered TANs or RANs or in the event that insufficient moneys are available to the city to pay debt service (e.g., on commercial paper) or to purchase a demand bond.

LEGAL AUTHORITY

Oregon law authorizes a city to borrow money by entering into a credit agreement or by issuing notes, warrants, short-term promissory notes, commercial paper or other obligations evidencing the indebtedness. The city may issue such obligations: (a) in anticipation of tax revenues or other income for purposes that include, but are not limited to, payment of current expenses; (b) to provide interim financing for capital assets to be undertaken by the city; or (c) to refund outstanding obligations. The issuing city’s ability to incur short-term debt is subject to applicable limitations imposed by the Oregon State Constitution or the laws of the State of Oregon, or its charter, ordinance or resolution. Limitations on the amount of indebtedness an issuing city may incur set forth its charter or bylaws do not affect such city’s right to issue short-term obligations, and neither the short-term indebtedness nor any refunding obligations are taken into consideration when determining whether the city is in compliance with any debt limitations.

APPROVAL PROCESS

Generally, voter approval is not required to issue short-term debt, although voter approval may be required to authorize the underlying debt, as in the case of BANs. To issue short-term debt, the city’s governing body need only enact an ordinance or adopt a resolution authorizing the issuance and setting forth the terms of the short-term debt, including the maximum effective rate of interest, manner of sale, discount the issuer may allow, if any, redemption terms and conditions, maturities, form and denominations of the obligations, and all other terms and conditions related to sale of the obligations. Subject to the applicable requirements of law and limitations set forth in the in the authorizing ordinance or resolution, the city’s governing body may delegate the authority to determine maturity dates, principal amounts, redemption provisions, interest rates or the method for determining a variable or adjustable interest rate, denominations and other terms and conditions not appropriately determined at the time the authorizing ordinance is enacted or resolutions are adopted.

MANNER OF SALE

The issuing city may sell the short-term debt in either a public or private sale upon such terms as the city may find advantageous and with such disclosure as the city deems appropriate and may contract with third parties to serve as the issuing, paying or authenticating agents for such sale. Although the Debt Management Division (“MDAC”) does not track municipal debt with terms of less than 13 months, when issuing short-term debt the city must still comply with certain statutory provisions regarding notice to MDAC of a proposed debt issuance.


SECURITY AND SOURCE OF REPAYMENT REVENUES

The issuing city may secure the repayment of the short-term debt by (1) pledging the anticipated tax revenues or other income, such as with TANs, RANs, TRANs, or GANs, the proceeds of any bonds or other permanent financing, as with BANs, or any combination thereof; (2) segregating pledged funds in separate accounts held by the city or by third parties; (3) contracting with third parties to obtain standby lines of credit or other financial commitments designated to provide additional security for such obligations; (4) establishing any reserves deemed necessary for payment of the obligations; and (5) adopting resolutions and entering into agreements containing covenants and provisions for the protection and security of the owners of the obligations, constituting enforceable contracts with such owners.

INVESTMENT OF PROCEEDS AND INTEREST EARNINGS

Oregon law permits an issuing city to invest the proceeds of the issuance of any short-term obligations and any funds set aside to repay such obligations in investments maturing no later than the maturity dates of the obligations. Subject to limitations of federal tax law described in Chapter 5, “General Federal Tax Requirements,” a city may borrow money at tax-exempt interest rates and invest the proceeds in higher rate taxable securities, or “arbitrage” the proceeds of the obligations, and retain the investment income earned above the yield on the obligations, provided the city follows federal requirements regarding sizing the short-term borrowing. The city may not issue short-term obligations for the sole purpose of investing the proceeds, but must use at least a portion of the proceeds of the sale of the short-term obligations to alleviate the cash-flow deficit justifying the issuance. Over the life of the short-term borrowing, the investment earnings may offset the interest expense and costs of the issuance to the city and the city may even legally make money on the borrowing, provided it complies with certain federal tax law requirements. See Chapter 5, “General Federal Tax Requirements.”

GENERAL TYPES OF SHORT-TERM OBLIGATIONS

As described above, Oregon law permits a city to borrow money on a short-term basis in a number of forms, including notes and warrants. The specific terms and limitations applicable short-term obligations are based on the purposes for which the short-term obligations are issued and the sources of repayment securing the short-term obligation, rather than to the form of the obligation itself. For example, the provisions relating to short-term obligations issued to fund working capital shortfalls and secured by anticipated tax revenues or other income, excluding grants, discussed in the context of TANs, RANs, TRANs and tax anticipation warrants are applicable to other forms of short-term obligations issued to finance working secured by anticipated tax revenues or other income. Similarly, the provisions relating to short-term obligations issued to finance temporarily capital projects and secured by proceeds from anticipated long-term bond issues or grants discussed in the context of BANs and GANs, respectively, are applicable to other forms of short-term obligations issued for similar purposes and with similar security.


TAX AND REVENUE ANTICIPATION NOTES AND TAX ANTICIPATION WARRANTS (TANS, TRANS, RANS AND WARRANTS)

Purposes and Policies. Because a city does not enjoy a steady, consistent revenue stream during the fiscal year, it may issue short-term obligations, such as TANs, RANs, TRANs and warrants, to provide interim financing for operations to which the pledged tax revenues or other budgeted, but not yet collected, income have been committed. The city generally deposits the proceeds from the sale of the TANs, RANs, TRANs and warrants into its general fund and uses them to pay current expenses and expenditures, repay indebtedness and invest and reinvest.

Issue Size. Under Oregon law, the principal amount of TANs, RANs, TRANs and warrants a city may issue is limited to 80 percent of the pledged tax revenues or other income budgeted to be received by the city in the fiscal year in which such TANs, RANs, TRANs and warrants are issued. The size of any issue is also restricted by federal tax law, as discussed below in “—Special Tax Considerations” and in Chapter 5, “General Federal Tax Requirements.”

Term, Issuance and Maturity. Generally, a city may not issue the TANs, RANs, TRANs and warrants, or any short-term obligation refunding the TANs, RANs, TRANs or warrants, prior to the beginning of fiscal year in which the issuing city expects to receive the pledged tax revenues or other income, and the TANs, RANs, TRANS or warrants must mature no later than the end of the fiscal year in which the city expects to receive the pledged tax revenues or other income. A city incorporated on or after January 1, 1990, and located within an urban growth boundary, however, may issue TANs, RANs, TRANs or warrants prior to the beginning of the fiscal year in which the city expects to receive the tax revenues or other income if such obligations (i) mature no later than 18 months after issuance and (ii) are issued in an amount not exceeding 80 percent of the amount of lawfully available funds that the city reasonably expects to receive.

Security and Repayment. The issuing city secures the TANs, RANs, TRANs and warrants by pledging, designating or setting aside the proceeds of the specified tax or revenue source for repayment of the notes as they are received during the fiscal year. The city must establish an account for purposes of repaying the obligations into which it must deposit property taxes, revenues, and earnings upon receipt and must maintain the account until it holds sufficient funds to retire the notes. To provide an additional measure of security to the noteholders, the city may want to pledge the tax or other revenues securing the notes to a third-party trustee that is obligated to use the pledged funds to pay the notes upon maturity. The city may also secure the TANs, RANs, TRANs and warrants with a general obligation pledge, legally obligating the city to use its full taxing powers and available revenues to pay the noteholders in the event the specified tax and other revenue sources are insufficient to repay the notes, or by a third-party credit enhancement, such as a letter of credit.

Generally, the city must repay the TANs, RANs, TRANs and warrants no later than one year after issuance. The obligations are payable from not less than 100 percent of the proceeds of the pledged tax revenues or levies or other budgeted income whose collection the TANs, RANs, TRANS or warrants anticipated at the time of issuance, plus any earnings on the proceeds and on the amounts deposited in the repayment fund.


Structuring of TANs, RANs and TRANs. A city may structure the short-term borrowing to fit its particular needs. For example, the city may issue fixed-rate notes, floating-rate notes and/or notes backed by a letter of credit or other credit or liquidity enhancement, or may issue the notes for the longest term possible or for a term as short as the anticipated cash flow deficit. The issuer should consult with its financial advisors and with bond counsel early in the planning process to determine the most suitable structure.

Special Tax Considerations. In addition to the limitations described above, federal tax law places limits on the timing and size of tax-exempt short-term obligations. With respect to short-term obligations issued to provide working capital, such as TANs, RANs and TRANs, the issuing city may generally only allocate the proceeds of an issue to working capital expenditures when and to the extent the issuer has no “available amounts,” excluding any “reasonable working capital reserve.” To properly size a short-term working capital borrowing, the issuing city must identify all available amounts currently on hand and anticipated to be received for such working capital expenditures and develop a cash flow projection that estimates deficit and surplus periods. The working capital borrowing is limited to the largest actual cash flow deficit expected in the 13 months following the issue date, plus the amount of the reasonable working capital reserve. The acceptable amount of the reasonable working capital reserve depends on a number of factors, although generally a working capital reserve is “reasonable” if it does not exceed 5 percent of the issuer’s actual working capital expenditures in the fiscal year immediately preceding the fiscal year in which the short-term obligations are issued. See also Chapter 5, “General Federal Tax Requirements.”

The primary federal tax constraints on TANs, RANs and TRANs issued to provide working capital financing are the arbitrage bond limitations discussed in Chapter 5, “General Federal Tax Requirements.” Generally, the issuing City may qualify for a “temporary period,” an exception to the arbitrage yield limitations, during which it may invest the proceeds of the TAN, RAN or TRAN issue at rates exceeding the yield on such short-term obligations, provided the issuing city reasonably expects to spend all of the proceeds on working capital expenditures within 13 months of the issue date. See Chapter 5, “General Federal Tax Requirements.” For working capital financings, the city may retain the arbitrage proceeds if it satisfies either the small issuer or the six month expenditure exceptions described in Chapter 5, “General Federal Tax Requirements.”

GRANT ANTICIPATION NOTES (GANS)

Purposes and Policies. Cities issue GANs to cover anticipated shortfalls in project funding, pending receipt of the proceeds of a committed state or federal grant yet to be received. The issuing city deposits the proceeds of the GANs into the fund designated for the related project and uses them to pay or to reimburse the city for approved project costs.

Issue Size. The issuing city may finance both the interest expense of the GANs and its costs in issuing the GANs, so the size of a GANs issue should reflect the amount of the anticipated grant proceeds yet to be received, the anticipated interest expense of the GANs and the issuer’s costs relating to the GANs.


Term and Maturity. GANs must mature no later than five years from the date of issuance and may be redeemed beginning no later than one year after the city expects to receive the grant.

Security and Repayment. If the sole security for the GANs is the city’s assurance that it will receive the anticipated grant, investors are unlikely to purchase the GANs unless they are confident the city will receive the grant and/or the grant has already been approved. If approval is still pending, the issuing city should disclose to investors the pending status, the remaining conditions to approval and the likelihood that all conditions to approval will be met. If at the time the GANs are issued the grant is approved, but the funds are yet to be received, the city should disclose any additional conditions to receipt of the grant funds. The city may also elect to pledge an additional source of repayment if approval of the grant is still too uncertain.

Often with GANs, the issuing city incurs and pays the expenditures associated with the project related to the grant and retires the GANs with the grant proceeds received as reimbursements for project expenditures that are authorized for reimbursement under the terms of the grant. Because the city will only receive grant proceeds for expenditures approved for repayment under the terms of the grant, the issuing city should also disclose to investors any known conditions to reimbursement imposed by the underlying grant.

Special Tax Considerations. The Treasury Regulations do not provide specific guidance relating to GANs; however, general arbitrage bond limitations continue to apply.

BOND ANTICIPATION NOTES (BANS)

Purposes and Policy. A city may issue BANs (i) to finance the initial stages of a project; (ii) finance the initial stages of several unrelated projects, the financings of which will be consolidated in a single offering of long-term bonds to retire all of the BANs; or (iii) to delay selling long-term bonds until market conditions become more favorable to the issuing city. The proceeds from the sale of the BANs are deposited in fund(s) designated for the project(s) and are usually pledged to the noteholders until expended on project costs.

Issue Size. The statutory provisions authorizing the issuance of short-term obligations in anticipation of bond proceeds do not specifically limit the aggregate principal amount of BANs a city may issue; however, the issuing city should confirm that no other limitations apply prior to issuing the BANs.

Term and Maturity. Short-term obligations issued to provide interim financing for a capital asset, such as BANs, must mature no later than five years after issuance and may be redeemed beginning not later than one year after the capital asset is projected to be completed as of the time the BANs are issued. The issuing city may refund BANs by (i) issuing long-term bonds or (ii) issuing short-term refunding obligations, such as a subsequent BANs issue, provided that such refunding short-term obligations mature not later than five (5) years after their date of issuance.

Security and Repayment. The primary security for BANs is the city’s ability to sell the related long-term bonds, although the issuing city may also secure the BANs by the city’s general obligation pledge or other revenue. BANs may be repaid according to the schedule


determined by the governing body and are retired either from the proceeds of the bond issue to which they are related, the revenue pledged by the city or from the proceeds of a subsequent BAN issuance.

Special Tax Considerations. Cities primarily issue BANs to provide interim financing for capital assets. See Chapter 5, “General Federal Tax Requirements” for a discussion of the federal tax implications associated with financing capital assets.

TAX-EXEMPT COMMERCIAL PAPER (TXCP)

Purpose and Policy. The issuing city may use a TXCP program to fund both operating expenses and capital expenditures. TXCP notes issued to fund a city’s current operating expenses generally are structured as TANs, RANs or TRANs specifically tailored to the TXCP market and are subject to the same limitations discussed above with respect to TANS, RANs and TRANs. TXCP notes issued to provide interim financing for capital expenditures generally are subject to the same limitations discussed above with respect to BANs.

A TXCP program may appeal to a city because: (i) the lower interest rates on TXCP notes, as opposed to those on long-term, fixed-rate indebtedness, allow the city to borrow funds at a lower cost; and (ii) TXCP notes can be sold without a long-form disclosure document, simplifying documentation, provided the TXCP is backed by (1) a direct-pay letter of credit or (2) under some circumstances, a combination of bond insurance and a line of credit. Before adopting a TXCP program, however, an issuing city should consider whether the administrative costs of maintaining an on-going TXCP program outweigh these benefits.

Issue Size. To establish a TXCP program, the issuing city’s governing body must enact an ordinance or adopt a resolution authorizing the issuance of TXCP notes and execution of any necessary accompanying documentation, such as a dealer agreement, a direct pay letter of credit agreement or other credit and/or liquidity facility and issuing and paying agent agreements, engage one or more TXCP dealers and have its bond counsel prepare a transcript of the executed documents authorizing the TXCP program, including an opinion of bond counsel. As the issuing city requires cash, its designated representative contacts the dealer to discuss the city’s cash needs and the probable interest rates and maturities for its TXCP. The dealer then markets the TXCP notes and the paying agent collects the proceeds the same day.

When adopting the resolution or ordinance establishing the TXCP program, the city’s governing body should authorize the full amount of TXCP program; however, the aggregate principal amount of TXCP notes a city may issue at any particular time depends on the stated purposes for issuing the TXCP notes and the source of revenue securing repayment.

Term and Maturity. The issuing city may either (i) retire the maturing TXCP notes from the proceeds of the sale of long-term bonds or from some other specified source of funds or (ii) “rollover” the outstanding TXCP notes by paying the maturing principal with newly issued TXCP notes, allowing the issuing city to borrow funds on a short-term basis over an extended period of time. TXCP notes issued to fund a city’s current operating expenses as forms of modified TANs, RANs or TRANs are subject to the same limitations relating to issuance and maturity discussed above with respect to TANs, RANs and TRANs. Although Oregon law


allows for a final stated maturity of up to five years for short-term obligations issued to provide interim financing for capital assets or for short-term obligations refunding such obligations, the terms of TXCP notes issued to provide interim financing for a capital asset are limited to 270 days because SEC Rule 15c2-12(d)(1)(ii) exempts from the general requirement of Rule 15c2-12 that brokers, dealers, and municipal securities dealers to obtain an official statement from municipal issuers issues of municipal securities in authorized denominations of $100,000 or more if the securities mature in nine months or less.

Security and Sources of Repayment. Although TXCP notes may represent obligations payable from a specified source of the city’s funds, TXCP programs are often backed by a direct-pay letter of credit from a commercial bank, in which case the TXCP noteholders look solely to the bank for repayment of the TXCP notes, not the issuing city. The letter of credit is drawn upon to make any required payments to the TXCP noteholders and any payments by the city are used to reimburse the bank for the draws against the letter of credit.

Disclosure Requirements. One of the most attractive features of a TXCP program is the simplicity in documentation, provided the TXCP program is secured by a direct-pay letter of credit or occasionally by another combination of liquidity and credit facilities. Dealers have traditionally sold TXCP notes secured by a direct-pay letter of credit without a long-form disclosure document, using instead a short termsheet describing the TXCP issue. In recent years, dealers have requested that issuers provide them with (i) an issuer-prepared disclosure document to use in marketing the TXCP notes, (ii) Rule 10b-5 disclosure representations and (iii) a 10b-5 opinion of the issuer’s counsel. Many issuers refuse to do so, noting that TXCP notes are exempt from SEC Rule 15c2-12, which requires that brokers, dealers, and municipal securities dealers obtain an official statement from municipal issuers. This issue generally does not arise if the issuer secures the TXCP program with a direct-pay letter of credit because investors base their decisions to invest in the TXCP notes on the creditworthiness of the bank providing the direct-pay letter of credit, not of the issuer.

Special Tax Considerations. The same federal tax limitations and requirements that apply to other forms of tax-exempt short-term debt obligations also apply to TXCP, depending on whether the TXCP notes are issued to provide finance working capital financing or interim financing for capital projects. Defining what constitutes a single issue of TXCP notes to which federal tax law should be applied, however, may be difficult because TXCP notes issued under the same TXCP program may be issued with varying amounts and interest rates. Generally, the issuing city may treat TXCP notes issued pursuant to the same TXCP program documents as part of a single issue, the issue date of which is the first date the aggregate amount of TXCP notes issued under the TXCP program exceeds the lesser of $50,000 or 5 percent of the aggregate issue price of the TXCP in the program, provided the city issues the TXCP notes during an 18-month period beginning on the deemed issue date and complies with certain procedures set forth in the Treasury Regulations.

OTHER FORMS OF SHORT-TERM BORROWINGS

In addition to the short-term obligations described above, Oregon law permits a city to borrow money on a short-term basis in a number of ways, including entering into a credit agreement or issuing notes, warrants, short-term promissory notes, or other obligations: (a) in anticipation of


tax revenues or other income for purposes that include, among other things, payment of current expenses; (b) to provide interim financing for capital assets to be undertaken by the city; or (c) to refund outstanding obligations. An example of another form of short-term obligation is a line of credit.

LINE OF CREDIT

Authorized Amount. To establish a line of credit, the issuing city’s governing body must enact an ordinance or adopt a resolution authorizing the aggregate principal amount it wishes to have available under the line of credit and the deliverance and pledging of the security for the repayment of the borrowings and execution of any necessary accompanying documentation, such as a revolving line of credit agreement with a bank or consortium of banks. The line of credit functions similarly to a revolving loan: the bank authorizes a line of credit up to a specified limit; the city authorizes the incurrence of debt up to that amount (plus interest and bank fees) and delivers to the bank a note in that amount; as the city requires cash, it draws against the line of credit by notifying the bank and executing a note for the loan amount; as the city repays the principal on the loans outstanding under the line of credit, the available credit increases again until all loans are repaid and the full amount of the authorized line of credit is available.

Term. The line of credit extends for a specified term, usually three (3) years, which the bank may agree to renew. The terms of the individual loans made pursuant to the line of credit depend on the terms of the line of credit.

Security and Sources of Repayment. A line of credit may generally be secured by revenues from a specified project, such as a water system, or other available funds.

Chapter 13 – Refundings 111

CHAPTER 13

REFUNDINGS From time to time a municipality may find it in its best interest to refinance bonded debt. The process of refinancing bonded debt is called “refunding.” Typically municipalities refund bond issues to:

• Take advantage of lower interest rates to achieve debt service savings,

• Restructure the debt service repayment schedule, and/or

• Make a change in the legal status of debt covenants.

In a refunding, new bonds are sold and the proceeds are used to make the interest and principal payments on some or all of existing bonded debt. Once a bond issue is refunded, its old or “refunded” debt service is paid by an escrow funded by the new issue. The issuer only pays the new debt service on the refunding debt issue. An issue can even be refinanced before it is callable by using the technique known as “advance refunding.” (See section on Advance Refundings, below).

Issuance of general obligation refunding debt in Oregon does not require voter approval. Property taxes levied to pay principal and interest on such general obligation refunding bonds are not subject to Oregon Constitutional limits.

Refundings are subject to specific and technical Internal Revenue Service regulations that materially impact the structure and timing of refunding transactions. Additionally, State law regulates refundings beyond the normal regulations of new money debt issues.

Because of the complexity and regulations involved in a refunding transaction, issuers contemplating refundings should seek the advice of bond counsel and underwriters or financial consultants very early in the process.

REASONS FOR REFUNDING

Following is a more detailed discussion of the three reasons issuers typically refund bond issues. The math of refundings works the same for refunding general obligation bonds and refunding other kinds of debt issues. There are, however, some differences in the legal requirements between refunding other debt issues and refunding general obligation bonds.

DEBT SERVICE SAVINGS

The most common reason for refunding an outstanding issue is to take advantage of lower interest rates. Just as with a home mortgage, if interest rates decline substantially after the


issuance of a debt issue, an issuer may be able to refund the old issue with a new issue and achieve substantial debt service savings, even after paying all costs associated with the new issue.

In the case of a general obligation bond, the debt service savings are returned to the issuer’s taxpayers in the form of lower tax rates for funded debt. In the case of other kinds of debt, the debt service savings become an additional resource to the issuer’s funds or accounts that had been responsible for making debt service payments.

Savings usually are measured by their “present value,” (that is, the total savings over the life of the refunding discounted to their value in today’s dollars). In the case of an advance refunding, the Oregon State Treasury requires that present value savings from a refunding be at least three (3.00%) percent of the new refunding issue’s proceeds amount.

In refunding for debt service savings, an issuer often refunds only a portion of the outstanding bond issue, rather than the entire outstanding amount. This is because the savings from a refunding come only from the callable portion of the old issue, that is, that portion that can be redeemed before its maturity date. While an escrow can be designed to pay the interest and principal on bonds that are not callable (as must be done in a refunding for defeasance purposes), there are no additional savings attributable to those bonds because the issuer is still paying the original interest cost on the non-callable bonds.

When only a portion of an outstanding bond issue is refunded for savings purposes, for a period of time, the municipality actually has two issues outstanding after the refunding: (1) the unrefunded portion of the old issue and (2) the new refunding issue. However, the combined debt service for these two issues will be lower than the old issue’s original debt service.

DEBT RESTRUCTURING

Refunding an issue allows a municipality to restructure its outstanding debt. The old debt is now paid by the new refunding issue proceeds and the municipality can structure its new debt to better suit current circumstances. For example, a municipality may wish to consolidate several debt issues into a single new issue and restructure the debt in a way to produce a different tax or utility rate impact. Or, a municipality may wish to restructure a borrowing to better match the issuer’s changing cash resources.

CHANGING LEGAL COVENANTS

Once an issue is refunded it may be possible to have any legal restrictions relating to the original issue voided. This is called legal defeasance. Legal defeasance allows the issuer to remove restrictive legal covenants.

While unlikely to be a concern with general obligation bonds, legal restrictions may be a concern with other kinds of debt instruments such as revenue bonds. For example, a city may have pledged a reserve fund and certain revenue coverage covenants for a utility system revenue bond. Improved financial results may allow the city to improve on coverage or reserve requirements. A new refunding revenue bond may be sold (with more favorable legal covenants) to refund and


defease the old bond, thus releasing the municipality from the old issue’s more restrictive covenants.

A refunding may be undertaken to accomplish any one or a combination of these three advantages. However, in the case of general obligation bonds, refundings are almost always undertaken to produce debt service savings.

TYPES OF REFUNDINGS

There are three general types of refundings: current refundings, advance refundings and forward refundings. The type of refunding an issuer must use depends on the transaction’s timing compared to the first available date on which the outstanding debt may be called or redeemed. The State of Oregon and the Internal Revenue Service currently have different definitions for current and advance refundings.

CURRENT REFUNDINGS

Under Oregon law, a current refunding is one in which the new refunding bond transaction is closed within one year of the next available call date of the debt to be refunded. Current refundings are not subject to any regulations other than those that apply to bonds in general. In a current refunding, the new debt proceeds are held (sometimes in an escrow) to make one payment, that is, the payment required to call and retire all of the old debt and pay any accrued interest costs to the date of redemption.

Under federal tax law, current refundings are bonds that refund another bond if the new bond is issued within 90 days of the refunded bond’s next redemption date. As discussed below, federal law treats current and advance refundings differently.

ADVANCE REFUNDINGS

Under Oregon law, an advance refunding is one in which the new refunding bond transaction is closed more than one year before the first available call date of the debt being refunded. In an advance refunding, an escrow is required. The escrow must make all interest and principal payments on the debt being refunded until the first available call date of the old debt. In Oregon, advance refundings of debt must be approved by the State Treasurer’s office and are subject to certain requirements as part of that approval process. The Treasurer’s office charges a fee to review advance refundings.

Under federal tax law, advance refundings are bonds that refund another bond if the new bond is issued more than 90 days before the refunded bond’s redemption. Municipalities should note that bonds originally issued after December 31, 1985, may not be advance refunded more than once. Additionally, federal law stipulates that escrows established with proceeds of advance refunding bonds may not yield investment returns greater than the yield on the advance refunding issue.


FORWARD REFUNDINGS

A forward refunding is used where the bonds to be refunded are not permitted to be advance refunded under federal tax law. Rather than wait until the bonds’ call date (and exposing itself to the risk of rising interest rates), the issuer wishes to lock in interest rates now available. The issuer agrees now to issue bonds on a specified future date when the issuance would become a “current” refunding under federal tax law.

Forward refundings are not as common as advance and current refundings. They are more complicated and carry an interest rate premium. The economic benefit of forward refundings also can be achieved through the use of interest rate swaps. For example, the issuer can enter into a swap agreement now that does not start until a future date. In that way, the issuer can lock in future fixed rates and insure the success of the refunding without waiting to see what happens to interest rates in the future. Interest rate swaps, however, entail certain risks that must be carefully evaluated before an issuer commits to a financing plan. Chapter 14 discusses interest rate swaps in greater detail.


What is a refunding?

A refunding is a refinancing of outstanding debt. A new issue of debt is sold and the proceeds are used (usually in an escrow) to pay off some or all of an old issue. A refunding does not raise new money but simply provides for the refinancing of outstanding debt.

Why would a municipality want to refund an old issue?

The most common reason is to reduce debt service costs when interest rates decline. Refundings also may be used to change legal debt covenants or restructure an outstanding debt issue’s payment schedule and terms.

Do municipalities need voter approval to refund general obligation bond issues? How about refunding for a lease-purchase or revenue issue?

State law allows issuers to sell general obligation refunding issues without voter approval. Neither is voter approval required for financing or refinancing other kinds of debt. However, in Oregon, advance refundings closing more than one year before the next call date of the refunded bonds must be approved by the Oregon State Treasury.

How far do interest rates have to decline before a refunding might produce savings?

Generally, rates must be one to three percentage points lower before refunding is economically feasible. The ultimate feasibility depends on the size of the issue, call date, call price and other factors.


Are refundings subject to different federal and state laws than other kinds of debt issues?

Yes. Both the U.S. Treasury and the State of Oregon have rules that apply specifically to refundings. These rules are often more restrictive than rules applying to new money bond issues. Issuers should involve bond counsel and financial consultant(s) early in the process to ensure compliance with all federal and state laws and regulations.

Is there a limit to how many times a debt issue can be refinanced?

Yes. Federal regulations set limits on the number of times a debt issue can be refinanced. Check with bond counsel or underwriter for a specific ruling on your particular circumstances.

Who gets the savings on a refunding?

Whoever is paying the debt service. For a general obligation bond, the savings are returned to the district’s taxpayers in the form of lower tax rates. For other kinds of debt, the debt service savings become an additional resource to whatever funds or accounts are responsible for the debt service.

What is an advance refunding?

Unlike a home mortgage, most bond issues cannot be prepaid at any time but can be retired (redeemed or called) only after a certain date. In an advance refunding, the issuer sells new bonds before the old debt issue can be redeemed or called. The money is deposited in an escrow that makes all principal and interest payments on the refunded debt until that first call date, then provides the funds to call and retire all the refunded debt. An advance refunding allows an issuer to lock in savings now even though the old debt cannot be called for years.

What is a forward refunding?

A forward refunding allows the issuer to lock in interest rates now available rather than wait until the bonds’ call date (and exposing itself to the risk of rising interest rates). A forward refunding is used when the bonds to be refunded are not permitted to be advance refunded under federal tax law. Under a forward refunding the issuer agrees now to issue bonds on a specified future date when the issuance would become a “current” refunding under federal tax law.

Why refund only a portion of an old issue?

A municipality can save money only on the portion of the old debt that is callable. Therefore, issuers often only refinance the callable portion of the debt. That means that, after the refunding, for a period of time, the district may have two issues outstanding: (1) the unrefunded portion of the old issue and (2) the new refunding issue.

Does a municipality need to budget for the old debt once it is refunded?

No budget is required for the portion of the old debt that is being paid by the escrow. However, the issuer must continue to budget any portion of the old debt that was not refunded.


What are present value savings?

Present value is an economic term that translates future savings/costs into current dollars. Present value incorporates the concept that a dollar received today is worth more than a dollar received tomorrow. In a refunding, most debt service savings occur over a five- to 10-year period. The present value of those savings provides an issuer with a means of valuing the savings in today’s dollars.

Under Oregon law, in advance refundings, present value savings must be at least 3 percent of the refunding bonds’ proceeds.

Chapter 14 – Interest Rate Swaps and Other Derivative Financial Products 117

CHAPTER 14

INTEREST RATE SWAPS AND OTHER DERIVATIVE FINANCIAL PRODUCTS

A “swap” or an “interest rate payment agreement” is a contract between an issuer and a swap provider to exchange cash flows. The cash flows exchanged in each period are calculated by applying interest rates or interest rate indexes to the relevant amount in each period, called the “notional amount.” Swaps agreements are done for two main purposes: to reduce exposure to changes in interest rates, and to reduce the cost of financing. Typically, swaps are used by issuers to achieve results that are better than or not available in the bond market. Swap agreements can specify dates in the future upon which the agreement becomes effective (a “forward” agreement), and may include options for one of the parties to exercise a right to enter into a swap under specified conditions or at a specified time.

In Oregon, a swap must be related to a bond issue. Similar to the amortization schedule for a bond issue, the swap has a “notional amount” on which interest payments are calculated. The notional amount typically amortizes on the same schedule as the bond issue, and has the same term. Below is a diagram illustrating a typical swap transaction in which the issuer issues variable rate debt and uses a swap to achieve fixed payments.

Variable Rate Formula

Fixed Swap Rate

Variable Rate Bonds

Issuer Swap Provider

Variable Rate Formula

Fixed Swap Rate

Variable Rate Bonds

Issuer Swap Provider

Other derivative products include agreements with a provider to hedge the issuer against payment, rate, spread, or other exposure. These products include interest rate caps or floors with respect to variable interest rates, interest rate locks, and put or call options.

LEGAL AUTHORITY: CONSTITUTIONAL, STATUTORY, AND ADMINISTRATIVE RULE PROVISIONS

Statutory authority for municipalities to enter into interest rate swaps is contained in ORS 287.025, as amended by Chapter 443 Oregon Laws 2005. The administrative rule for swaps


promulgated by the Oregon Municipal Debt Advisory Committee (MDAC) is OAR 170-060-1010, which sets forth terms, conditions, and reporting requirements for swaps. Issuers should consult with bond counsel to ensure the purpose for which the swap is done is authorized, and that they are adhering to statutory requirements and associated regulations.

Authorizing Resolution. The issuer must pass a resolution authorizing participation in a swap, in which the issuer makes a finding that the particular swap agreement is being executed for permitted purposes and in compliance with the statute and administrative rule.

MDAC Submittal. Within 30 days of executing or modifying a swap agreement, the issuer must notify MDAC and provide a number of items that are listed in the OAR. Refer to OAR 170-060-1010 for the list of required items.

POLICY CONSIDERATIONS AND APPROVAL PROCESS

Swap Policies. Swaps can provide results that are not available in the regular bond market. However, they involve risks that are different than issuers usually face in the bond market. To ensure that issuers know the benefits and risks of the agreements and has a framework for proceeding with swaps, OAR 170-060-1010 requires an issuer to adopt a swap policy before entering into a swap. Two excellent sources of guidance for swap policies are the “MDAC Sample Interest Rate Swap Policy” and the Government Finance Officers Association Recommended Practice “Use of Debt-Related Derivatives Products and the Development of a Derivatives Policy.” To comply with OAR 170-060-1010, swap policies must provide that the issuer to analyze all the risks, cost and benefits before executing a swap agreement. Swap policies typically describe the types of agreements that are authorized uses, provide for monitoring, and specify who in the organization may execute swaps once they are approved.

Specific Bond Issue Considerations. An issuer’s ability to execute a swap agreement is dependent on the bond ordinance or trust indenture that governs the related bonds. Early in the process, issuers should check with bond counsel to explore legal issues relating to their ability to enter into swaps. If the ordinance authorizing the bonds did not contemplate swaps, the ordinance may need to be amended, or the swap payments may need to be on a lien that is subordinate to that of existing bonds. If the bond ordinance did contemplate swaps, the issuer will want to know what priority in the flow of funds regularly scheduled swap payments and potential termination payments have. For insured bonds, there may be a requirement for the insurer to consent to a change in the bond ordinance or to the swap.

Swap Authorization. The issuer’s governing body must pass a resolution approving the swap.

USING INTEREST RATE SWAPS AND OTHER HEDGES

The best use of swaps is to achieve results that can’t be achieved in the regular bond market. Swaps should not be used for speculation, or for betting on the future direction of interest rates.

Two of the most common uses of swaps for municipal issuers are 1) to lock in a fixed swap rate for a financing which is lower than the rate available in the bond market, and 2) to lock in a fixed


rate for a swap that begins at a future date, either to hedge against rate increases for a new money bond issue, or to lock in refunding savings for bonds that cannot be advance refunded. A third use of swaps is to convert fixed rate exposure to variable rate exposure. This is typically done to hedge interest rate exposure on the asset side of the balance sheet. Variable rate exposure can be achieved through a swap without actually issuing variable rate bonds and incurring issuance and ongoing carrying costs of the bonds.

Other commonly used hedging instruments are interest rate caps, floors, and collars. In a cap agreement, a provider agrees to pay the issuer whenever an index rate rises above the cap level. The issuer pays for this “insurance” either in an upfront payment or as an ongoing payment.

DOCUMENTATION OF INTEREST RATE SWAPS

A swap agreement is documented by agreements written by the International Swap of Dealers Association (ISDA) and contains four parts:

• The ISDA Master Agreement

• A “Schedule” to the Master Agreement, which amends sections of the Master agreement to be specific to the issuer and the swap provider

• A “Credit Support Annex” which sets forth the security for both the issuer and the swap provider

• A “Confirmation” that sets forth the specific details of the swap itself, such as rates, indices to be used, start and end dates, amortization schedules, payment frequencies, and other details

These four documents, taken together, constitute the documentation for a swap. Issuers should be aware that the documents, as written, favor swap providers. The documents are notoriously convoluted, abstruse, and confusing, and are full of cross-references, double negatives, and nearly unintelligible language. This is an area where issuers need to consult with their bond attorney and swap advisor to wade through the verbiage and be able to negotiate terms and conditions intelligently with the swap provider.

The swap agreement contains terms and conditions relating to each party’s obligations and other terms and conditions under the swap, including payment terms, schedule of notional amounts, events of default, collateral requirements, rating requirements, insurance provisions (if any), the rates to be paid and the index on which they will be calculated, and other items.

EVALUATING AND MANAGING INTEREST RATE SWAP RISK

A city should evaluate all derivative financial products with respect to the unique risks with which they are associated, and make a determination that the expected benefits exceed the identified risks by an adequate margin over those available in the traditional cash market. Potential risk factors may include the following, and the issuer should answer these questions before entering into a swap:


• Termination Risk – Under what circumstances might the transaction be terminated? What is the probable range of termination values? How would a possible termination payment be funded?

• Basis Risk/Tax Risk – Do the anticipated payments the issuer will receive match the payments it makes? If not, is the basis risk justified by the expected benefits?

• Rating Risk – Will the proposed transaction have an adverse affect on the issuer’s bond ratings?

• Risk Of Uncommitted Funding – Does the transaction entail the risk of future refinancing needs?

• Reporting Considerations – Has the issuer consulted its accounting staff and auditors to determine the impact the transaction will have on its financial statements?

• Subsequent Business Conditions – Does the transaction or its benefits depend upon the continuation, or realization, of specific industry business conditions?

The risks amenable to numerical analysis are the assessment of termination risk and basis risk.

Termination Risk. Regardless of who is at “fault” in a termination event a termination payment may be owed from one party to the other, and the payment depends on both the level of interest rates at the time of termination, and the time left in the original term of the swap. Unlike the issuer, the swap provider does not have the option to end the swap early, but the issuer still needs to have a plan to handle termination risk, which can occur because of a swap provider default. Termination risk can be evaluated in two ways: looking at how much the potential payment would be at various times during the swap for hypothetical future interest rate environments, and looking at “peak” exposure, which takes into account the fact that a sudden shift in rates is unlikely – therefore the peak exposure is a point at which interest rates have had time to shift.

Management of termination risk can involve several actions before and during the swap: requiring the swap provider to post collateral if ratings fall below specified levels (minimum levels are required by statute); monitoring the provider’s credit ratings; monitoring the market value of the swap (i.e. the potential termination payment); spreading the swap among several counterparties; making the swap transferable to another party; and making sure there are balances available for a termination payment if it occurs.

Basis Risk. Swap agreements providing the greatest savings to the issuer typically involve “tax risk” to the issuer, which is the risk that the tax advantage of municipal bonds is diminished in the future. The issuer taking advantage of low fixed rates available in the swap market has typically issued variable rate bonds. The bonds theoretically trade at a rate close to the Bond Market Association swap index rate (“BMA”), now known as “SIFMA”. In exchange for paying a fixed rate to a swap provider, the issuer receives a percentage of a variable rate from the taxable market, typically 1-month LIBOR. In theory, an investor is indifferent between receiving a tax-exempt interest payment, and a percent of taxable interest that reflects his


marginal tax rate. Over the years that BMA (SIFMA) has been in existence, it has traded (on average) at about 70% of 1-month LIBOR. If the issuer has a swap agreement where the plan is to have 70% of LIBOR payments match payments to bondholders, the provider payment will be insufficient to pay bond interest if tax rates go down, or a flat tax is implemented.

Management of basis risk includes budgeting enough cushion in issuers debt service funds to handle deviations from the historical average pattern of rates. Before entering a swap, the issuer should have an analysis that shows the impact of a change in the relationship of BMA (SIFMA) to LIBOR, and choose the formula for the payments to be received to make expected results consistent with appetite for risk. If you have read this far, you are more diligent than most issuers.

SELECTION OF FINANCE TEAM AND SWAP COUNTERPARTIES

Swap Advisor. It is highly recommended that issuers hire a swap advisor to assist in evaluating swap ideas, assisting with the swap policy, and assisting with swap provider selection, document negotiation, and competitive or negotiated swap pricing. The swap advisor may be a person from the financial advisor or underwriting team, as long as the advisor is not representing any firm that wishes to participate as a swap provider. The issuer may want to conduct an RFP process to select a swap advisor.

Swap Provider Selection. Some issuers want to open up competition to serve as swap provider to the most firms possible, while others want to limit counterparties to underwriters or banks that they already do business with. In any case, the first step is for the issuer to develop a term sheet with the assistance of the swap advisor and bond counsel. The term sheet will have the major deal points that the issuer wants in the swap agreement. The term sheet is circulated to the pool of potential providers, and the issuer can then choose counterparties based on which ones are willing to accept the key deal points.

Swap Pricing. Pricing can be done in a competitive bid process, on a negotiated basis or a hybrid of these two. Counterparties may be reluctant to go to the expense of negotiating documents if they don’t have a reasonable probability of winning part of the business. In recognition of this, some issuers hold a competitive bid to determine pricing, and award, for example, 60% of the swap to the winning bidder. If the next best bidder is willing to match the best bid price, they are awarded 40% of the swap. Pricing can also be done through negotiation with the swap provider. It is recommended that the issuer have a swap advisor assist with price negotiations. The swap advisor can inform the issuer where the mid-market level is for the swap and inform the issuer how much profit & overhead is built into the suggested pricing.

DISCLOSURE AND FINANCIAL REPORTING

Disclosure in Official Statements: Bonds being issued that have an associated swap transaction or with the intent of having an associated swap transaction should include disclosure in the official statement describing the authority to enter into the transaction, the purpose of the transaction, where regularly scheduled payments and termination payments fall in the flow of funds, and the consequences of termination prior to the maturity of the swap (e.g., a termination payment, loss of the interest rate hedge, etc.). The official statement should indicate whether


swap payments are insured, and if the swap counterparty or counterparties have been identified, that information should also be included.

Financial Reporting. The Governmental Accounting Standards Board (GASB) issued a proposed statement for “Accounting and Financial Reporting for Derivative Instruments” on June 29, 2007. A comment period runs through October 26, 2007, after which GASB will hold a public hearing on the statement. For more information, log on to the GASB website at www.gasb.org, where a full text of the proposed accounting treatment can be found. As a very brief summary, GASB is proposing that derivative instruments be reported on the statement of net assets at fair market value. The draft proposes that changes in fair values of derivative instruments be recognized as investment income, unless the derivative instrument is a “hedging derivative instrument”, in which case hedge accounting should be applied. In hedge accounting, changes in fair market values of a hedging derivative instrument are reported as either deferred inflows or deferred outflows, regardless of the measurement focus or basis of accounting of the reporting unit. Until GASB issues its final statement, many governments are using footnotes to describe their derivative activity.

In notes to the financial statements, governments should include a description of their objectives for any swaps or other derivative instruments, plus any context needed to understand the objectives, the start and end dates, the notional amount, the indexes and/or interest rates upon which cash flows are calculated, any embedded options, a summary of derivative activity during the reporting period and balances at the end of the reporting period. This information should include the fair value and the change in fair value during the period and location in the financial statements where they are reported.

Chapter 15 – Local Option Operating and Maintenance Levy 123

CHAPTER 15

LOCAL OPTION OPERATING AND MAINTENANCE LEVY

This chapter focuses on local option levies for both operating and capital purposes. While the levies for operating and capital purposes have differing terms and purposes, they share certain authorization and functional characteristics. We will discuss the similar characteristics, then discuss each type of levy individually. Please note that school district and community colleges face additional and differing restrictions on their local option levy authority that is not discussed in this chapter.

Local option levies present Oregon municipalities an alternative for raising additional operating or capital construction funds from property taxes above their constitutional permanent rate. This authority was created under Measure 50 in 1997. Local option levies are subject to voter approval and other restrictions.


Local options levies are property tax levies imposed in the “gap” between Measure 50 taxes collected and Measure 5 tax rate limits. Levies for operating purposes may only extend for five years. Levies for capital purposes may extend for ten years or the useful life of the project, whichever is shorter. Levy authority can be expressed as a target total dollar amount or as a rate per thousand.


As a property tax increase, local options levies can be imposed only with voter approval. Local options levy elections are subject to the same “double majority” requirements as general obligation bonds, except in general elections in even numbered years. Levy election requirements are similar to those for a general obligation bond issue, requiring submission of ballot title and other language at least 60 days prior to the election date. Ballot titles require approval of the relevant governing body before submission to the county clerk. Once voter approval is received and the election results validated, imposition of the levy is executed via the normal budget process.


Local option levies for operating money are typically not leveraged. Theoretically, a municipality could use its revenue bonding authority to issue revenue bonds – for operating purposes - payable from local option taxes. This type of borrowing would be “taxable” under


federal tax law because tax law generally does not allow tax exempt status for operating debt. Local option levies for capital may be leveraged. Please refer to the discussion below under the Capital Levy section.

OPERATING LEVIES

Local options levies for operating purposes provide local governments with the possibility of collecting additional operating dollars from property taxes. Although these collections are subject to Measure 50 compression, local option levies may present the most significant, efficient and equitable form of revenue raising options for local governments.

Calculating Local Option Capacity. One of the most difficult problems with local option levies is calculating the levy’s capacity to generate tax revenue. That is because the “capacity” is a moving target depending on a number of factors. In order to understand how local option levies work, one must understand the nuances of Oregon’s convoluted property tax system. We provide a brief explanation and history lesson.

Prior to Measure 5’s passage in 1990, Oregon’s property tax system was “levy based.” Municipalities sought voter approval for a dollar amount of taxes that could be levied in any given year. That levy authority was allowed to increase by up to six percent per year without further voter approval. So, tax rates were simply a matter of arithmetic – divide the approved levy amount by the assessed valuation (AV) of taxable property and the result was a tax rate that would be applied to each property. The assessed value of property was defined by law to also be the real market value (RMV), that is, the value at which a property would sell on the open market.

Measure 5 changed the property tax system by adding a rate limit on top of the levy based system. The rate limit for all local governments (not including educational districts) was $10 per thousand. This applied property by property – in other words, each individual property was subject to the $10 rate limit. If, when the tax rates were calculated for each single property, the combined rate exceeded the limit, all taxes for that property had to be reduced pro rata so that the combined rate did not exceed the limit for that property.

Measure 50 imposed new changes on the property tax system in 1997. Measure 50 changed the tax system in two fundamental ways. First, it changed the definition of AV and decoupled it from RMV. Assessed Values for each individual property were reset by rolling back the value of each property to its 1995-96 Assessed Value and then further reducing it by 10%. Future increases in Assessed Value were limited to 3% per year unless substantial improvements were made to the property.

Second, Measure 50 converted the property tax system to a rate based system. Each municipality was assigned a permanent rate that was recalculated based on the new lower AV. Henceforth, all tax collections would be based on the permanent rate calculated on the assessed value of each property, rather than on a specific dollar levy. However, importantly, the tax collections on each property were still subject to the Measure 5 overall rate limits, which were calculated based on real market value.


To summarize:

• Each single property has a Measure 50 tax rate based on Assessed Value

• Each single property has Measure 5 tax rate limit based on Real Market Value

• The Measure 5 limits still rule: Measure 50 collections cannot exceed Measure 5 limits when translated to a Real Market Value base

• Each property has a unique Measure 50/Measure 5 relationship: some have a ‘gap’ between them; some have no gap

• The total of all gaps for each individual property in the taxing district equals the total local option capacity

The existence of a gap (or no gap) will change every year based on differential growth rates of Assessed Value versus Real Market Value and changes in taxes levied. So, the total capacity of a local option levy changes each year as well.

A Capacity Example. Let’s analyze city ABC’s local option capacity.

Assumptions:

• The city has an AV of $1.40 billion and a RMV of $1.60 billion

• The consolidated “governmental” permanent rate (the combined total of all overlapping governments’ Measure 50 rates) in the city is $11.23 per thousand

Under Measure 5, the local governments may collect up to $10 /$1,000 (RMV) x $1.6 billion = $16.000 mm

Actual (Measure 50) collections are $11.23/$1,000 (AV) x $1.4 billion = $15.722 mm

The local option capacity for City ABC is $278,000.

Local Option Tax Collections Are Unpredictable. Because Measure 5 limits affect each property differently, the amount collected by a municipality can be very difficult to calculate and will vary from year to year. Since some properties may already be at the limit, not every property will pay a local option tax, and some properties will pay more than others. Unless every property is raised to the Measure 5 maximum, the municipality will not receive an amount equal to its local option “capacity.” The only way to ensure maximum collections is to identify the single property with the lowest Measure 5 rate and impose the rate necessary to bring it to the maximum Measure 5 rate.

Because local option taxes can fall more heavily (or lightly) on certain properties, explaining the impact of a proposed local option levy is difficult. During an election campaign, some municipalities provide some kind of online local option tax calculator that gives a property owner some better idea of how much that property would pay in local option taxes, depending on its own gap. While it is true that a local option levy will cause some properties to pay more than


others, it is also true that a local option levy tends to “equalize” current differentials in property tax bills for similarly valued properties.

Compression of Local Option Levies. Under Measure 5, if the combined taxes on any given property exceed the Measure 5 limit of $10/$1,000 (RMV), then the taxes imposed are “compressed” pro rata until the $10 limit is reached. Local option levies are compressed before any other levy, including tax increment collections. Local option levies therefore can be “compressed” to zero before any tax increment and permanent tax levies are affected.

Rate versus Levy Amount? Local option levies can be approved as either a rate per thousand of Assessed Value or as a dollar amount of annual levy. A fixed dollar levy will always produce less (sometimes substantially less) than the total dollars levied. That is because the levy amount will be translated into a rate which is subject to compression. This can also lead to confusion with the public when they believe they have voted for more operating dollars than will actually be received.

Rate per thousand levies are more popular. Rate levies can also produce rising tax collections over the levy life as the gap between Measure 5 and Measure 50 tends to grow each year. CAPITAL LEVIES

Local option levies can be used for capital purposes. Levies for capital purposes can extend up to the lesser of 10 years or the useful life of the financed capital items. Capital items can include any capitalizable asset, including items that are specifically excluded from general obligation debt by Measure 50. Capital local options levies are rarely seen in Oregon. Because the levy is subject to the same voter approval requirement as GO bonds but the revenue stream is less predictable and shorter lived, municipalities tend to favor GO bond authority over the local option. However, because general obligation bond proceeds are more limited in usage, some jurisdictions have opted for local option levies to pay for things that would otherwise be disallowed under general obligation bond provisions (for example, supplies and equipment). Local options for capital can be leveraged to accelerate delivery of the assets or the project. A municipality could use either revenue bonds or a financing/lease-purchase agreement to turn the stream of tax revenues into an upfront amount of cash. In the case of a revenue bond with only the local option taxes pledged, the unpredictability of the local option stream makes leveraging trickier as lenders will likely require some cushion against anticipated fluctuations in available revenues from the levy. Using a financing agreement with a pledge of the municipality’s full faith and credit maximizes the issue’s ability to leverage the anticipated local option revenues. However, the risk of revenue fluctuation is thereby transferred to the issuer’s general fund. Local option for capital can also be used on a pay as you go basis for capital projects or assets over the life of the levy.

Chapter 16 –Bond Election Process 127

CHAPTER 16

BOND ELECTION PROCESS Clearly the need for successful finance elections has never been greater. City populations are growing, many facilities are worn, outdated and in need of major improvements. At the same time operating funds are dwindling.

The large and aging “boomer” generation is a now a major force at the ballot box. The majority of the most frequent voters are over age 45 and often in no mood to vote for higher taxes. Unless we approach the business of finance campaigns as a critical component of a city’s leadership agenda, we will fail to provide our communities with the resources they need for the quality of life residents expect.

The most important work in winning elections occurs long before a measure is placed on the ballot. Communities expect to be involved. They expect their public institutions to communicate with them year-round. They want a voice in the planning and decision-making. Following are the steps to take for involving your community in the decision-making regarding a bond proposal and developing the organization needed for a successful bond election. This chapter describes proven strategies to:

• Organize and use a City Council appointed community advisory committee to work with city staff in prioritizing facility needs and recommending a bond levy amount

• Conduct community research — surveys, focus groups, neighborhood and community meetings — to determine voters’ understanding of the need and support for proposed project(s)

• Use survey research and follow recommendations of community advisory committee as closely as possible in determining bond measure projects and amount

• Set an election date and follow Oregon statutes for placing the bond measure on the ballot and conducting the election

• Determine city and community representatives’ roles and responsibilities in providing information about and advocating for the bond measure

• Establish an information timeline and identify the kinds of information the city should provide voters about the bond measure

• Establish an advocacy timeline and identify the activities an advocacy committee can complete 100 percent for turning out a majority “yes” vote

THE BOND ELECTION PROCESS

Oregon cities and other local governments can issue general obligation bonds only if voters approve a bond levy authorizing them to do so. Cities and other jurisdictions can receive this authorization at any election with at least a 50 percent turnout and a majority approving the


measure. The only election with no turnout requirement is the general election in even numbered years (ORS 254.056).

ELECTION DATES

Bond measures can be submitted to voters on the following dates (ORS 221.230 and 254.056).

• March – second Tuesday

• May – third Tuesday

• September – third Tuesday

• November – first Tuesday after the first Monday

The general election is held on the first Tuesday after the first Monday in November of each even-numbered year (ORS 254.056).

DOUBLE MAJORITY REQUIREMENT

Under Article XI, Section 8 of the Oregon Constitution, a “double majority” is required for any increase in property taxes, including levies to pay general obligation bonds. The double majority requirement means that a bond measure must be approved with a majority of the voters and that turnout at the election must be at least 50 percent of the registered voters eligible to vote in the election. The only exception is the November general election in even numbered years. There is no turnout requirement for that election. If the turnout requirement is met, then a simple majority, one more than 50 percent, is required to approve the measure. (Note: a legislative referral to add the May primary and May and November elections in odd numbered years to election dates exempt from the turnout requirement is on the November 2008 ballot.)

Due to the double majority requirement, a majority of local governments are using the November general election for money measures. As a result, according to the League of Oregon Cities’ Local Property Tax Election Study:

• As of May 2007, 168 out of 1,336 property tax measures failed due to the double majority requirement. Eighty-one percent of those failures had a voter turnout of at least 40 percent. Eighty-nine of those measures would have passed if all the needed votes for a 50 percent turnout had been cast as “no.”

• General election ballot (not subject to the double majority) are overloaded with tax and bond measures, forcing local governments to compete. More than half of all the property tax measures since 1997 were placed on general election ballots, an average of 146 measures per election statewide. In November 2006, there were 161 money measures on the ballot.

Under ORS 258.036, if voters approve a bond measure but the election misses the turnout requirement, a city resident has until the 40th day after the election or the completion of a recount to file a petition challenging the eligibility of voters identified as moved out of the city or deceased. The petition must be filed in the circuit court in the county where the election was held.


Information sufficient to change a voter’s eligibility includes U.S. Postal Service change of residence address or published death notice, information provided by the voter, or written notification from family of a death or the official death notice.

Since county voter data are being linked statewide and most counties have systems for regularly purging ineligible voters from their voter lists, any city considering challenging voter eligibility should talk with their county clerk and city attorney before engaging community members in the challenge process.

OTHER LIMITATIONS

ORS Chapter 287 limits the amount of general obligation bonds issued or outstanding by a city to 3 percent of the real market value of all taxable property within the city’s boundaries. This limitation applies unless a lesser limitation is otherwise provided by law or charter, computed in accordance with ORS 308.207, after deducting from outstanding bonds such cash funds and sinking funds as are applicable to the payment of principal thereof. The limitation does not apply to bonds issued for water, sanitary or storm sewers, sewage disposal plants, hospitals, infirmaries, gas power of lighting purposes or the acquisition, establishment, construction or reconstruction of any off-street motor vehicle parking facility to bonds issued pursuant to applications to pay assessments for improvements in installments under statutory or charter authority.

NOTICE OF ELECTION

Cities must prepare a notice of election and file it with the county clerk 61 days prior to the election date (ORS 255.085). Bond counsel prepares the notice of election as an attachment to the city council resolution calling an election. The notice must include:

• The purpose for which the bonds will be used

• The amount and term of the bonds

• The kind of bonds proposed for issue

• A statement that an elector may file a petition for review of the ballot title not later than the seventh business day after the title is filed with the county elections officer

The notice of election must be filed with the county clerk 61 days prior to the election date (ORS 254.095) and must be published once in a newspaper of general circulation in the district (ORS 255.095). The Oregon Secretary of State maintains a current election calendar with the filing deadlines on its Web site: http://www.sos.state.or.us/elections/ .

BALLOT TITLE WORDING REQUIREMENTS

The notice of election includes the ballot title, which is the actual wording of the bond measure as it appears on the ballot that voters receive. Oregon law requires wording of the ballot title to provide a reasonably detailed, yet simple and understandable description of the use of bond proceeds (ORS 250.037(3)). The ballot title must satisfy the specific requirements of section 11, Article XI of the Oregon Constitution and the applicable provisions of the Oregon Revised


Statutes. It is necessary to prepare the ballot title with the assistance of legal counsel, including bond counsel and the city attorney, to be sure that all legal and statutory requirements are satisfied. The ballot title must include:

• Caption. A caption of not more than 10 words that reasonably identifies the subject of the bond measure. (ORS 250.035)

Suggested wording: (city name) Bond to (verb, for example: build/construct/upgrade/ renovate) (key bond component(s)). The first words voters should see are the city’s name and primary use for the bonds.

• Question. A question of not more than 20 words that plainly phrases the chief purposes of the bond measure so that an affirmative response to the question corresponds to an affirmative vote on the bond measure. (ORS 250.035)

Suggested wording: Shall city (verb, for example: build/construct/upgrade/renovate) (key bond component(s)) by issuing (amount) in general obligation bonds?

In addition to the question, Oregon Revised Statutes require the following second sentence that does not count as part of the word limit.

Required second sentence: If the bonds are approved they will be payable from taxes on property or property ownership that are not subject to the limits of sections 11 and 11b, Article XI of the Oregon Constitution.

• Summary. A summary statement of not more than 175 words (ORS 250.035) that provides a concise and impartial statement of the bond measure and its major effect. In addition, for all elections except the general election, the following first sentence must be used: “This measure may be passed only at an election with at least 50 percent voter turnout.” (ORS 250.036)

The summary can be prepared using a bulleted list of items and information, including data from any community surveys conducted to determine the priorities and interests of the community. The summary should describe the proposed bond measure in terms that reflect the concerns and priorities of the community. The summary should be easy for all voters to read and understand.

Contact the League of Oregon Cities in Salem at (503) 588-6550 or [email protected] for sample ballot titles from other cities.

EXPLANATION

In addition to the ballot title, which includes the caption, question and summary, the city may provide an explanation of not more than 500 words. however, this is available only to cities that are located in counties that publish voters’ pamphlets for elections. (ors 251.345 and oar 165-022-0040) the 500-word explanation can provide a more detailed description of the ballot measure than what is included in the ballot title summary. the explanation should also be easy to read and understand. lists, bulleted items and bold type are helpful in making concise points that capture the attention of voters. the explanation should be drafted using information gathered


from any community surveys or other sources of information about community concerns and priorities.

OTHER LEGAL REQUIREMENTS OF THE ELECTION

The Oregon Constitution, Article XI, Section 11(g)(3)(d) and ORS 250.037(4) require that if the bond measure election is conducted by mail, the front of the outer envelope that is mailed to voters must contain the following statement printed clearly, boldly and in red: “CONTAINS VOTE ON PROPOSED TAX INCREASE.”

PUBLICATION AND PETITION FOR REVIEW

Under ORS 250.275(5) the ballot title must be published in the next available edition of a newspaper of general distribution in the city. Any elector that is dissatisfied with the ballot title filed by the city may petition the circuit court of the judicial district in which the city is located. Such a petition must be filed not later than the seventh business day after the ballot title is filed. (ORS 250.296)

VOTING BY MAIL

County clerks in all Oregon counties now conduct all elections by mail. The law requires ballots to be mailed to registered voters not sooner than 20 days before the date of the election and not later than 5 days before the election. To be counted ballots must be received by the county clerk by 8 p.m. on Election Day.

Voters may return ballots by mail, in person or to any elections’ office designated drop off location (ORS 254.456). Cities and advocacy committees may collect ballots and deliver them to the elections office provided they clearly indicate the collection, either in person or at a drop off location, is not an official ballot box or an official drop off location.

SETTING BOND AMOUNT WITH COMMUNITY INPUT

Because of the difficulty of meeting Oregon’s double majority voting requirement for bond levies, cities need to generate community ownership of their bond proposals. To generate this ownership cities should:

• Involve key community leaders in an advisory committee or task force to review and set priorities for city facility needs, and

• Hire a professional survey firm to conduct a random-sample telephone survey to assess voter understanding of the need and support for the proposed measure. Conducting such surveys is a legitimate city research expense providing the results are used to give the community advisory committee or city council data for making recommendations and/or decisions about a bond measure that reflect community priorities.


MAKING ADVISORY COMMITTEES EFFECTIVE

Involve up to 30 community members who represent key community groups to review and prioritize facility needs. Consider including representatives such as builders, realtors, Chamber of Commerce or other key community group members, county planners, the fire marshal’s office, the ministerial association, senior citizens, representatives from other city boards, commissions and neighborhood associations, any other organization agency or individual that has recent experience with major public building or renovation projects, and voters who vote in every election. (Voters’ names, addresses, age and voting frequency are available from the county elections office.)

• Clearly define the committee’s role and responsibilities for reviewing the city’s facility needs and establish a timeline based on the desired completion date and election date.

• Recruit members by sending personal invitations asking them to serve on the committee. The letter should describe the task and provide a timeline, which indicates the approximate number of meetings, or hours, required to complete the task.

• Provide appropriate administrative, city planning staff and secretarial support.

• Follow open meetings law requirements. The facility review committee or task force is an advisory committee to the city council. Its meetings are public meetings. Notice requirements are the same as for city council meetings.

• Make sure meeting minutes and the committee’s final report are distributed widely so that other community members become aware of the city’s needs.

• Follow the committee’s advice as closely as possible in determining bond levy projects and amount.

CONDUCTING A COMMUNITY SURVEY

A reliable way of testing voter understanding of and support for an issue is to conduct a random sample survey of city voters. For statistically accurate results, the number of voters polled will depend on the number of registered voters in a city. Survey costs vary depending on city size. Generally, cities should conduct a 10- to 15-minute survey (25 to 30 questions, including two to four open-ended questions) with at least + 5 percent reliability. Questions about the measure should be specific, including the amount of the levy, what it will pay for and the tax rate.

A number of Oregon polling firms conduct surveys for local governments. For a list of the firms and guidelines for writing a request for survey proposal, contact the League of Oregon Cities in Salem at (503) 588-6550 or [email protected].

CONDUCTING SUCCESSFUL BOND ELECTIONS

A city council’s decision to put a bond levy on the ballot should trigger a number of city information and community-sponsored activities. These activities should involve a cross-section of key community members in the decision-making process, show voters the merits of the city’s proposal, and help advocacy committees focus on effective methods of gaining voter support.


Following are roles and responsibilities for city council members, administrators, staff, and key community members in a bond election campaign.

CITY COUNCIL MEMBERS

• Involve community members in determining building/bond priorities. Follow community advice as closely as possible in determining bond levy projects and amount.

• Conduct a community survey to determine community understanding of and support for the bond proposal and its various components.

• Vote unanimously on final bond proposal.

• Become advocates. Participate in community-run campaign activities; volunteer to accompany city personnel giving informational presentations so that you can encourage those present to vote yes. As long as city council position are not paid positions and council members are not using city staff time or resources, they can, and have a responsibility to, advocate for passage of measures they vote to put on the ballot. (See Election Dos and Don’ts for Public Officials below)

CITY ADMINISTRATORS

• Help council members identify key community members who should be involved in planning and/or campaign processes.

• Provide information about the bond levy to staff, volunteers and community groups/members and be prepared to answer their questions.

• Assist in voter registration efforts and in providing opportunities for public discussion of the bond measure.

• Support advocacy activities as appropriate. (See Election Dos and Don’ts for Public Officials and Public Employee Election Guidelines below)

CITY STAFF

• Know about the bond levy measure and be prepared to answer community members’ questions.

• Volunteer to work with the community advocacy campaign during non-work time.

(See Public Employee Election Guidelines, below)

KEY COMMUNITY LEADERS

• Know about the bond levy measure and be prepared to answer questions.

• Volunteer to take leadership roles in or work with the community advocacy campaign.


PREPARING CITY INFORMATION

• Use survey data to write the 175-word ballot title summary and 500-word voters’ pamphlet ballot explanation. Have bond counsel review ballot title and explanation after it is written using key messages from survey data. In addition, have the Elections Division of the Oregon Secretary of State’s office review the 500-word explanation for advocacy language. Edit copy following the Secretary of State’s guidelines.

• Use approved 500-word explanation to prepare a brief (one-page), factual and impartial summary of the bond proposal to use at presentations and for staff and others to use as a quick reference in talking or answering questions about the bond proposal.

• Meet with all staff, city boards, commissions and volunteers to discuss the bond proposal. Discuss importance of their being informed and able to answer questions from the public. Respond to and record all staff/community questions for reference in producing city publications, and maintaining a questions and answers section on the city Web site.

• Meet with neighborhood associations and community groups, as requested, to discuss bond proposal. Consider presentations that include a city representative to present the facts and a city council member or advocacy committee representative to advocate support and solicit campaign contributions.

• Consider producing two mailings to community members regarding the bond proposal. Information in the mailings must be factual and impartial but should be based on survey data.

The first mailing, sent to all households and out-of-state absentee voters as soon as a decision about a bond measure is made, should include a summary of the facilities committee’s report; details regarding the bond levy amount and its estimated cost to taxpayers; the ballot title and explanation; and election and voter registration information.

For the second mailing to all registered voter households, sent when the measure is filed with the county clerk, consider sending an 8 ½” X 5 ½” postal card using key messages, including the cost to taxpayers; where to get further information; and where and when to vote.

COMMUNITY ADVOCACY CAMPAIGN ACTIVITIES

• Ideally, an advocacy committee should have six months to year to conduct a campaign.

• The advocacy committee should have a simple organization focused on identifying and turning out the number of “yes” voters required to pass the bond measure. (See the following section for a suggested campaign organization.)

• Activities to reach identified voters should be personalized, for example, telephoning, personalized letters, hand-written postal cards, hand-addressed flyers, knock and talk door-to-door canvassing in key precincts.


• Advocacy efforts should be aimed at reaching those voters survey data indicates are most likely to vote in favor of the measure.

• The advocacy committee should check city board, commission, committee, neighborhood association and staff lists against the voter registration list to see if a voter registration drive is required to get more of these individuals registered to vote. This activity should take place early in the campaign. (Actually, cities should provide voter registration materials in all city offices, libraries and senior centers as a regular city service.)

• Activities should be prioritized based on available resources — volunteers, dollars and in-kind contributions ⎯ and a campaign calendar should be developed for accomplishing these activities 100 percent.

• A delegation of city and advocacy committee members should attend an OSBA/LOC/AOC Bonds and Ballots Workshop to find out more about successful campaign strategies and available resources.

Decide on the Structure of Your Campaign. City election campaigns don’t require a complicated campaign structure:

• Keep the organization simple

• Assign one person to coordinate the overall campaign

• Hire a campaign consultant to provide this coordination if your city is large enough and the advocacy campaign has the resources to do so.

• Set up specific subcommittees to handle all the other facets of the campaign

For campaigns that do not involve consultant assistance, use the following sample campaign structure and job descriptions to get organized and assign tasks to subcommittees. Be sure to give one person overall responsibility in each area.

Keep Organization Simple. Bond election campaigns don’t require a complicated structure. However, successful campaigns do require a research-based plan with dedicated volunteers committed to completing agreed upon campaign activities 100 percent.

Have One Leader. Campaign organizations tend to be democratic. While this is necessary to attract dedicated volunteers, make every effort to ensure that one person is in charge and that campaign goals are clear. That person is either the hired campaign consultant or the committee chair(s). People move in and out of campaigns with both good and bad ideas. The consultant or chair’s job is to keep the campaign on target and on schedule.

Some campaigns name co-chairs. Others have a chair and a consultant. The chair usually is a leading community member who adds credibility to the campaign. The second person or consultant has the organizational skills to make sure all the campaign tasks are coordinated and accomplished.


Campaign Chair(s)/Consultant:

• Prepares agendas for meetings

• Establishes subcommittees with the following assignments, responsibilities and subcommittee chairs who will take responsibility for subcommittee assignments

• Keeps in contact with all subcommittee chairs to be sure their tasks are being accomplished as scheduled

Finance Subcommittee. Raises the dollars and finds the in-kind contributions needed for the campaign. The treasurer files all of the required forms and reports with the county elections office.

Data Subcommittee. Is responsible for making sure the campaign has all of the voter information and lists needed for phoning, mailings and door-to-door canvassing.

• Database manager works with software program or other means of keeping track of voter identification data.

• Data lists manager orders labels, phone lists and walking lists from database manager or commercial list service for phoning, mailing and door-to-door activities. The data lists manager also orders returned ballots lists and other required data from the county elections office for poll watching activities.

Publicity Subcommittee. Prepares all campaign literature based on the research, themes and key messages. This committee designs the materials that meet campaign requirements and has them produced in time to meet campaign deadlines.

Volunteers Subcommittee. Is key to the campaign’s success.

• Volunteer coordinator recruits and assigns volunteers by distributing sign-up sheets to all groups willing to sign up volunteers and coordinating the times each group is assigned to work. The most important task is to follow up to be sure the required number of volunteers is present for each phoning, mailing and door-to-door activity.

• Mailing chair is responsible for all campaign mailings. This person should be familiar with first class and bulk mailing procedures. The mailing chair also works with the volunteer coordinator to be sure there are enough volunteers for the dates scheduled for mailings.

• Telephone chair must be available each night that phone calling takes place to be sure the volunteers have direction and guidance. This person is responsible for providing training as well as for supervising the phoning.

• Door-to-door chair is responsible for any scheduled door-to-door activity. This person will need to work closely with the data lists manager to get walking lists and with union representatives to organize materials and assignments for door-to-door volunteers.


• Refreshments chair is responsible for making sure there are beverages and snacks for all activities that involve volunteers.

Involve Key City Groups. Most referenda campaigns are not large enough to necessitate more subcommittees than those listed here. However, you may want representation from city boards, commissions, neighborhood associations or other key city groups on the campaign’s central committee. Also, be sure you include representatives from employee unions and key local businesses/community groups on the central committee.

Using a Consultant. The primary purpose of any advocacy committee is to identify “yes” voters and get them to the polls. If a city has fewer than 10,000 registered voters, a researched-based plan and a strong, committed cadre of community volunteers, it should be able to succeed without outside assistance. In larger cities — those with more than 10,000 registered voters — getting help to organize or for coordinating campaign activities may be beneficial. In fact, when cities have 40,000 or more voters, using outside consultant assistance usually is essential.

Whether the advocacy committee has consultant help or not, success continues to depend on broad-based support and volunteer efforts.

Consultant help can range from community PR or marketing firms that offer to design your campaign flyers and mailers as an in-kind contribution, to someone the city hires to analyze the survey data and other research and recommend strategies for both the city’s information campaign and the community-run advocacy campaign, to a political consultant hired by the advocacy committee to coordinate the campaign and all of its activities. The kind of consultant help used will depend on the city’s size, resources and available professionals. Using a consultant also changes the campaign structure based on the consultant’s recommendations.

ELECTION DOS AND DON’TS FOR PUBLIC OFFICIALS

The following guidelines provide some general legal principles found in case and statutory law. City council members and administrators are encouraged to consult with LOC or their city’s attorney when specific questions arise.

Don’t Use City Resources. Public agencies, including cities, cannot use public resources to advocate a position on a ballot measure.

Public resources mean money, staff time during working hours, vehicles or travel allowances, or facilities and equipment.

Examples: Employees cannot be used to do research or write speeches designed to advocate a position on a ballot measure. Employees cannot charge travel expenses to the city for attending a meeting at which they advocate a campaign position. A city administrator or secretary cannot draft a city council resolution that takes a position on a ballot measure before the city council takes official action on the resolution. (Following a city council action, the city administrator/secretary can format the resolution to comply with a standard format used for resolutions.)


Do Provide Information. Elected city council members may use public resources to develop and distribute objective material on the effects of a ballot measure. Such material must be informational, providing the public with a fair presentation of all relevant facts and may not advocate a position.

Examples: Employees can be asked to do research and prepare impartial, factual information that fairly assesses the effects of a measure on the city and the community. City councils and staff can use such information in meetings with individuals, organizations, the news media, legislators, civic leaders, special interest groups and others to explain objectively the measure’s impact. Because the information is a public record, measure proponents or opponents also can use the information gathered.

Do Check Content, Intent. Give careful consideration to style, tenor and timing when creating information documents. The distinction between legitimate research/information efforts and improper campaign advocacy may be difficult to determine for specific cases. When in doubt, check with the city’s attorney or send the information document to the Secretary of State’s Elections Division for review.

Do Speak Out. Elected city council members may campaign fully for or against any ballot measure as long as they don’t use public resources. The courts recognize the right, if not the duty, of elected officials to speak out on major issues, particularly on matters that affect the constituents they serve. City council members can speak without restriction as long as public resources are not involved in any way. The city council member can use city-prepared materials for reference because these materials are public records available to anyone.

Do Take Positions. Elected officials, including city council members, can take a position on a ballot measure provided public resources are not used to advocate that position.

A member of the city council, not city administrator or city council secretary, must draft city Council resolutions for or against a ballot measure. The city administrator/council secretary can make copies of the proposed resolution and include the drafted resolution in the city Council packet sent out before the city council meeting.

On resolutions that take a position on a ballot measure, city staff can prepare information that indicates the impact that ballot measure will have on the city, but must make that information balanced and impartial.

Following passage of a resolution, the city council secretary can retype the resolution to conform to the city’s format. The mayor or city manager/administrator may not endorse the city council’s action, but can sign the resolution strictly “attesting to the action taken” and as the official clerk. Language labeling the signature as such should be part of the signature line.

If the city normally includes information on city council meeting actions in a regular city publication or on the city’s Web site, the action the city council took on the ballot measure resolution can be included as part of the listing of city council actions, but should not be specifically highlighted. City council action to support or oppose a ballot measure should be included in the city council’s official minutes.


Do Provide Public Forums. Public agencies, including cities, may provide at public expense, a forum in which the opponents and proponents for a ballot measure are given equal time to present their views. (ORS 260.432)

For further information see Restrictions on Political Campaigning by Public Employees from the Elections Division, Secretary of State’s Office, www.sos.state.or.us/elections/

PUBLIC EMPLOYEE ELECTION GUIDELINES

The following guidelines were developed to assist public agencies deal with the legal requirements for what employees can and can’t do during elections. For further clarification, review city council policies and administrative rules or contact legal counsel.

CAMPAIGNING. Public employees can campaign outside their hours of employment and without the expenditures of public funds. Employees must not be required nor coerced to aid in a campaign.

During working hours employees can say, “Here are the facts; please vote.” They can say, “Vote yes,” on their own time.

Examples: A public employee attending a meeting as the representative of the public agency cannot advocate for or against a ballot measure. The employee can provide information on how a ballot measure will impact the city but should provide information that is balanced and impartial.

If a public employee wants to advocate a position on a ballot measure, that employee must make it perfectly clear before speaking at a public gathering that such opinions are personal and are not given in the employee’s official position. If such opinions are given at a public gathering the city cannot pay for any part of that employee’s appearance, such as the cost of the meal or travel expenses.

BUTTONS. Wearing campaign buttons is an expression of personal political views and is permitted under Oregon law. This does not authorize employees to engage in a political lecture of fellow employees or members of the public while at work, and supervisors may stop such conduct if it occurs. Buttons may be prohibited in limited circumstances when the messages cause a disruption or the buttons in some way interfere with an employee’s job duties.

WORKDAY. Federal and state laws specifically prohibit active campaigning, including soliciting funds, during employee work hours. Employees may express personal political views and wear political buttons, but may not otherwise campaign or disrupt the workplace. Employees may participate in campaigns of their choice during non-work hours.

STAFF MEETINGS. Agency policies and contract language may allow union representatives to speak during staff meetings under the topic of “union business.” If time limits are specified, such as 5 or 10 minutes, such limits should always be enforced, especially for election issue discussions.

BULLETIN BOARDS. City policies, contract language and city practices typically allow employee unions to have designated bulletin boards to post information regarding “union business.” The


requirement of “union business” is a broad term. The Employment Relations Board has defined union business as matters directly related and central to the collective bargaining relationship between the employer and the exclusive representative, the local union. The Secretary of State advises that public resources cannot be used to advocate a position on a ballot measure. Public resources mean city funds, city employees during working hours or city facilities and equipment.

A union may use its bulletin board or bulletin board space for information on ballot measures that are directly related and central to the collective bargaining relationship between an employer and local employee unions. Information on other measures is not union business and may not be posted. Advocacy materials on any ballot measure may not be posted on a bulletin board since a bulletin board or bulletin board space is a publicly-owned facility.

FLYERS. City policies or practices govern procedures regarding distribution of flyers or other information from community, state or national organizations. Distribution, if any, should strictly follow policy or procedures. Election flyers and other election information from outside groups should not be distributed or made available in public areas unless policies currently allow community and other outside groups to distribute information in this manner.

EQUIPMENT (TELEPHONES, COMPUTERS, INCLUDING E-MAIL, ETC.). City policies and contract language may allow union representatives to use city equipment, such as telephones, for “union business.” “Union business” is narrowly defined and must relate to local collective bargaining issues. City equipment may not be used to advocate a position on election issues or candidates. The Government Standards and Practices Commission has issued a formal opinion regarding public employer equipment, including regular and cell phones, computers and Internet access. That opinion prohibits the use of such equipment for personal purposes, with limited exceptions. Election issues are not exceptions.

LOC recommends a thorough review of relevant policies and procedures and applicable contract language. Union representatives should then be reminded about restrictions on equipment use during campaign seasons.

FACILITIES, INTERNAL MAIL, EMPLOYEE MAILBOXES. City policies and contract language may allow a union to use facilities and internal mail systems, including employee mailboxes, under certain conditions for “union business.” As with bulletin boards and equipment, “union business” has a narrow definition. Election information on ballot measures that are directly related to the collective bargaining relationship is permitted. Campaign advocacy is prohibited.

LOC recommends a review of relevant policies and procedures and applicable contract language; and outlining restrictions to union representatives.

If policies exist regarding community use of facilities, including a fee for use, a union may rent space as any other group does and then proceed with its discussion of and work on campaign issues. Any community group that wishes to use facilities for any purpose connected to an election, including employee unions, must pay a fee to use facilities or equipment, including telephones, even if under policy it would not otherwise be required to do so. This requirement will comply with guidelines from the Secretary of State stating public resources cannot be used for campaign advocacy purposes.


For further information see Restrictions on Political Campaigning by Public Employees from the Elections Division, Secretary of State’s Office, www.sos.or.us/elections/.


Is the double majority a requirement for all elections?

No. There is no turnout requirement for the November general election in even numbered years. A legislative referral to add the May primary and May and November elections in odd numbered years to election dates exempt from the turnout requirement is on the November 2008 ballot.

Is there any limit to the number of times a city can submit a measure to voters?

No. However, the county does charge the city to cover the election costs for each election. Since elections also are costly in staff time and community resources, including volunteer time, cities should engage community members in the decision- making process and do the survey research required to present proposals that match community priorities so that measures will have the voter support they need to for approval the first time they are placed on the ballot.

Which election is the best for city bond measures?

Due to the “double majority” requirement, a majority of local governments are using the November general election for money measures when there is no 50 percent turnout requirement. Cities that vote at other election dates need to study area election turnout statistics to determine if there is a good chance of meeting the 50 percent turnout requirement. Local governments appear to be more successful in passing measures and meeting the 50 percent turnout requirement in the May primary election in even numbered years. In high turnout areas, May and November in odd numbered years may be possibilities. September and March elections are difficult in most jurisdictions because elections during these months tend to generate much lower public interest. (For a complete discussion of this issue, see the League of Oregon Cities Local Property Tax Election Study.)

What can a city tell voters about the election?

Cities can provide factual and impartial information about the measure and tell voters what the results will be if the measure passes or doesn’t pass.

City information must be unbiased and avoid advocacy. For example, “The ABC city is asking voters to consider a bond levy” is information. “The ABC city is asking voters to approve a bond levy” is advocacy.

Who decides what’s advocacy and what’s information? What’s the penalty for violating the law?

The city has the responsibility to review all election-related materials and activities paid for with public funds or involving public employees to be sure they are advocacy free. If a community believes information a city provides advocates a positive or negative vote, that individual can file a complaint with the Secretary of State.


The Secretary of State’s Elections Division reviews the complaint. If the city and/or employees are found in violation of the law, they may be fined.

Or if a public official “expends any public money in excess of the amounts, or for any other or different purposes than authorized by law,” that official can be sued by the county district attorney or a taxpayer from that city (ORS 294.100 (2)).

Can city Council members and city employees engage in advocacy activities?

Yes. City council members can engage in advocacy activities at any time as long as no public funds are involved. City employees can engage in advocacy activities as long as these activities take place outside of work hours and do not involve use of public resources.

Can the advocacy committee hold meetings in city buildings or use city equipment?

Yes, as long as the advocacy committee pays a fee to use facilities or equipment, including telephones, even if under city policy it would not otherwise be required to do so. This requirement complies with guidelines from the Secretary of State stating public resources cannot be used for campaign advocacy purposes.

The advocacy committee should find and use non-city resources and e-mail addresses. City employees should not use city phones or e-mail for any advocacy activities, although they can respond to requests for public information from community residents and advocacy committee members that they receive by phone, fax or e-mail.

Can the city include a link to the advocacy committee on its Web site?

No. The city can only provide factual information about the bond measure. However, if the advocacy committee has a Web site, that Web site can and should have a link to the factual information on the city’s Web site.

Chapter 17 – Structuring the Bond Issue 143

CHAPTER 17

STRUCTURING THE BOND ISSUE Oregon municipalities have substantial leeway in structuring debt issues for the public debt markets. Given the complexity and constantly changing nature of debt investors’ preferences, issuers are encouraged to hold early consultations with their financial consultants about market expectations and the likely repayment implications of the debt plans. Such early consultation will assist the municipality in developing the best possible debt management plan.

In general, a municipal issuer has three primary goals in any given debt financing:

• Raise sufficient funds to meet the issuer’s financing requirements

• Match the debt service structure to anticipated repayment sources and related cash flows, and

• Raise the funds in the most cost-effective manner possible

FUNDAMENTALS OF LEVERAGING

Leveraging is really just a way to accelerate use of anticipated future financial assets or cash flows. Debt structures can be evaluated in light of the following key fundamental concepts.

Characteristics of Available Revenue Stream. When a municipality issues debt, the municipality is counting on future streams of money to be available to pay off the debt. The first question is “what is the revenue steam available to repay the debt”? For example, a general obligations. Bond issue provides a clear (and additional) source of revenue from which the debt is repaid. How about a municipality using a full faith and credit borrowing to construct a new city hall? Without additional new revenue, the municipality needs to ask how it intends to redirect its future revenue stream to make debt payments. Clearly, the debt repayment structure needs to take into account the nature of the revenue stream, its volatility and timing. The more volatile or uncertain the revenue stream is, the less efficient the revenue stream will be to leverage. Investors will be willing to loan less money up front for a revenue stream that is considered unpredictable.

Matching Useful Life to Structure. A second key concept is to make sure the financing term does not exceed the useful life of the assets financed. For example, it would not be prudent to finance computers with useful lives of 3-5 years by using a 20 year issue. However, that doesn’t mean that assets with shorter useful lives than say 20 years can’t prudently be financed as part of a larger debt issue that overall stretches 20 years. Bond issue principal payments are usually amortized annually such that portions of the debt are repaid over shorter periods of time.


In general, a municipality should strive to ensure the weighted average life of all its projects financed matches or exceeds the weighted average life of any related financing.

Interest Cost versus Affordability. Typically, the longer one borrows the higher the overall interest rate and expense. The interest rate is usually higher because investors demand higher rates of return in order to loan money for longer periods. Since most debt obligations carry fixed interest rates, the longer the loan, the more uncertainty an investor faces regarding future of inflation, changes in tax law and other investment opportunities. The overall interest cost is higher the longer one borrows simply because interest continues to accrue as long as principal remains outstanding. However, interest cost by itself is not necessarily a bad thing. Paying interest allows the cost of the project to be spread over a more affordable (and appropriate) period of time, rather than squeezed into a less affordable shorter period.

Risk versus Return Tradeoff. Credit and structure determine relative interest rate. The riskier the perceived credit, the higher the interest rate will be relative to other more secure credits. Overall interest rate levels are determined by general market levels.

SIZING BOND ISSUES

Each of the following issues directly impacts the size of a potential issue and the municipality’s ability to repay that debt in the most cost-effective manner possible.

PROJECT FUND REQUIREMENTS

The most important variable affecting debt issue size is the project’s projected cost. Normally, estimates include the estimated cost of the project(s) and a reasonable contingency amount to cover unexpected events. If a municipality is concerned about the affordability of a project, it may also consider using expected project fund earnings to reduce the par amount of the bond issue. The municipality’s underwriter or financial consultant can estimate project fund earnings and advise the municipality regarding using project fund earnings to reduce the amount of the borrowing.

The money in the project fund will earn interest until it is expended. In the case of a construction project, these interest earnings, even if subject to arbitrage rebate (see Chapter 5, General Federal Tax Requirements), can be substantial. These additional earnings are considered “bond proceeds” just like the initial sale proceeds received from the underwriter at closing. Under most circumstances, these proceeds must be used for the project or to pay debt service on the bonds.

CAPITALIZED INTEREST

In certain cases, most typically in project financings of new revenue producing facilities, the issuer may wish to capitalize interest payments until the facility is producing revenue. The issuer literally borrows additional capital sufficient to make all interest payments on the debt for the specified period of time.


ISSUANCE COSTS

The sale of debt in the public markets is highly regulated. Bringing a debt issue to market generally requires the use of a number of experts who specialize in municipal bond transactions. Consequently, the issuance of debt comes with certain transaction costs that should be included when considering the bond issue’s size. The municipality’s financial consultant or underwriter can determine the likely issuance and underwriting expenses. The issue size can be properly adjusted to pay for these expenses and still have sufficient funds remaining to pay all project costs.

Issuance costs generally include, but are not limited to, fees for bond and other legal counsel, financial consultants, project feasibility consultants, registrar/paying agents, escrow agents, official statement printing, rating agencies and bond insurance fees and underwriting fees. There also may be travel expenses related to rating presentations and other miscellaneous expenses.

It is impossible to generalize about these costs because they vary depending on the size, credit quality, term, and complexity of the debt issue. Issuance costs (exclusive of underwriting fees) may range from $20,000 for a small issue to more than several hundred thousand dollars for large transactions. Underwriting fees may vary from 0.25 percent or less of the issue amount for a very large, highly rated, issue to 2.0 percent or more for smaller, unrated issues. These expenses are almost always paid from bond proceeds.

ISSUE AFFORDABILITY

Once a municipality decides on the size of its bond issue, the municipality can then determine how to structure bond issue terms to best achieve its affordability goals. The most cost-effective method of financing is the method that best matches the issue size and repayment structure with the municipality’s financial ability to meet the debt obligation.

Adding the size of the issue and the total interest expense incurred is the simplest way of judging the cost of any financing. However, this computation, if used in isolation, is misleading because it does not consider what resources are available over time to repay the cost of the project. A large issue may well be affordable if spread over 20 years, while a smaller issue may not be affordable if spread over only five years.

Another way of measuring an issue’s costs is to compare the true interest cost (TIC) of various alternatives. The TIC is an accurate measure of the all-in interest costs, weighted for time value, of an issue’s repayment schedule. However, looking at TIC alone does not guarantee the most affordable financing structure.

Comparing the TIC of two structuring alternatives of the same maturity length will indicate which is the lowest cost alternative. But, again, TIC alone does not take into account the timing and availability of repayment resources.

The question of affordability then really must be translated into debt service and, for GO bonds, tax rate schedules that can be compared to the resources available for repayment.


BOND CHARACTERISTICS

A bond is simply a formal written promise to repay a specified dollar amount at a certain time with a stated rate of interest. Bonds can be issued with characteristics that vary when and how interest is paid. Four basic interest rate structures exist for fixed income debt:

• Current coupon bonds

• Convertible deferred bonds

• Deferred interest (or zero coupon) bonds, or

• Variable rate bonds

CURRENT COUPON BONDS

These are the most frequently issued bonds in the public debt markets. Current coupon bonds pay interest at a fixed interest rate every six months until they are redeemed or mature. The interest payment date is almost always the first or 15th day of the month.

The first interest payment date may or may not be exactly six months from the date of issue. It is not unusual for the first interest payment date to be as short as three months (a “short first coupon”) or as long as 12 months (a “long first coupon”). Varying the first coupon period is often necessary to put a municipality on its preferred interest payment schedule regardless of the date the bonds are initially sold. Once the first coupon date is set all following interest payments occur at six-month intervals.

Current coupon bonds are almost always sold with serial maturities. By using serial maturity dates, the bond issue’s total principal amount is split into pieces that mature each year, that is, serially, over the life of the issue as opposed to having the entire principal amount come due in a single year.

Current coupon bonds usually are sold in minimum principal denomination sizes of $5,000. Because these bonds are the most common instruments in the public debt markets, they usually carry lower interest rates than deferred interest bonds of similar maturities.

A municipality’s underwriter or financial consultant may recommend combining some of the serial maturities into one or more “term” bonds. Term bonds are consecutively maturing current coupon bonds aggregated together and sold as a single nominal maturity. For example, rather than find investors to purchase bonds maturing serially in years 2021, 2022, 2023 and 2024, the bonds could be sold as a term bond maturing in 2024.

A term bond is subject to mandatory redemption (repayment) according to the serial current coupon bonds that were aggregated to form the term bond. Term bonds carry a single rate of interest despite the mandatory redemption schedule.


DEFERRED INTEREST BONDS

Deferred interest bonds (also known as zero coupon or capital appreciation bonds) are bonds that pay no interest until the bonds mature. The interest accrues and is paid in a lump sum at maturity. Deferred interest bonds sell at prices far lower than their maturity value.

Issuers like deferred interest bonds because they can use bond proceeds now without paying periodic interest for a specified period. For general obligation bonds for example, this can lower tax rates in the early years of debt repayment. However, the drawback to issuers is that deferred interest bonds have higher interest rates than current coupon bonds. In addition, they usually are non-callable (that is, may not be redeemed before maturity) and are more expensive for underwriters to sell.

Investors like deferred interest bonds because they can buy more bonds for their money and lock in their long-term yield. The drawback to investors, however, is that deferred interest bonds are extremely volatile and thus less “liquid” in the secondary market. If investors need to sell the deferred interest bonds prior to maturity, the bonds may not sell as well as current interest bonds.

CONVERTIBLE DEFERRED BONDS

Convertible deferred bonds are bonds that combine the features of deferred interest bonds and current interest bonds. Typically, a convertible deferred bond starts as a deferred interest bond then “converts” to paying current interest at a specified future date. The conversion date is usually not more than two years from the original issuance date.

Convertible deferred bonds are sometimes used to bridge short-term debt service spikes caused when a new issue is layered on top of existing debt. Convertible deferred bonds can only be used under certain market conditions and issue sizes. Convertible deferred bonds typically carry higher interest rates than regular current coupon bonds but may be more cost effective than using deferred interest bonds for the same purpose.

VARIABLE RATE DEBT

Variable rate debt is debt where the interest rate is reset on a very short-term basis, usually weekly. Because the rate is a very short-term rate, variable rate bonds usually carry very low interest rates compared to contemporaneously issued fixed rate bonds. However, because the rate floats with market conditions, variable rate bonds involve interest rate risk. Even though variable rate debt can have many advantages, the difficulty of correctly calculating and levying property taxes to support a floating rate debt instrument makes variable rate debt problematic for general obligation bond issuers. Variable rate debt cash flows may also be simulated by using interest rates swaps (see Chapter 14, Interest Rate Swaps and Other Derivative Financial Products)

Variable rate debt can be issued as variable rate demand bonds (typically backed by a letter of credit) or as auction rate securities. Variable rate demand bonds are “remarketed” by the underwriter every interest rate reset period (daily, weekly, monthly, etc.). Interest rates for auction rate securities are set via an auction process with investors submitting buy orders at certain prices.


MATURITY SCHEDULE

Most new issues of municipal bonds are sold to mature over a period of 20 or more years. Shorter or longer maturities are somewhat less common. The most important rule is to match maturity with available repayment resources and with the useful project life. State law provides no limit on the maturity of a general obligation bond. However, the not-to-exceed maturity must be clearly stated in the ballot title which voters approve. For General Obligation Bonds, the optimal maturity period for any individual municipality depends on the relative tax rates that a longer or a shorter maturity produces and which rate is most acceptable to taxpayers.

EARLY REDEMPTION PROVISIONS

Bonds are normally sold with provisions that allow an issuer to prepay the bonds prior to their stated maturity date. In the municipal bond market, prepayment is referred to as redeeming or “calling” the bonds. For example, early redemption may allow a municipality to refinance the bonds to take advantage of lower interest rates (see Chapter 13, Refundings). The two variables in early redemption provisions are:

• The date(s) on which the bonds may be redeemed, and

• The price(s) at which the bonds may be redeemed

Investors do not like early redemption provisions because they create uncertainty. However, the market does not penalize issues with early redemption provisions if the provisions conform to reasonable market standards. The market standards change over time.

Municipalities should consult with their underwriter or financial consultant to determine which redemption provisions are most appropriate for the municipality’s issue.

Chapter 18 – Credit Ratings and Analysis 149

CHAPTER 18

CREDIT RATINGS AND ANALYSIS A municipality’s primary goal in issuing any type of debt is to obtain the lowest possible interest rates while accomplishing other key financing objectives. The interest rate on any debt issue is directly related to investors’ perceptions of the bond’s value. Consequently, credit quality is a major factor investors use in determining a bond’s value as an investment.

This chapter describes bond ratings and the rating agencies that assign them. After reviewing the information in this chapter, municipalities may consider applying for a rating or purchasing bond insurance to enhance their ratings. Potential issuers should seek the advice of their financial consultants on which option best suits the municipality’s individual circumstances.

RATINGS AND RATING AGENCIES

A municipality can often enhance the perceived credit quality of its debt and obtain lower interest rates by obtaining a debt rating from a national credit rating agency. These agencies are for-profit corporations that analyze the credit quality of debt issues. The issuer pays the rating fee, usually as a cost of issuance.

The rating agency assigns one of a number of standardized ratings, for example, A, AA, AAA, to the issue. In general, the higher the debt rating, the lower the interest rate investors will accept.

The three major rating agencies that analyze municipal debt are:

• Moody’s Investors Service

• Standard & Poor’s

• Fitch Ratings

All three agencies use a standardized series of rating symbols. For example, Moody’s rates long-term debt issues on a scale of Aaa (the highest category) to D (a security that is in default). The lowest rating that Moody’s considers “investment grade” is Baa3. The other agencies use similar symbols. (See Comparison of Rating Agency Categories chart below)

Separate rating symbols are assigned to short-term debt obligations such as tax and revenue anticipation notes (TRANS) or variable rate bonds.

An assigned rating represents the rating for all of a municipality’s outstanding debt of that kind. Different kinds of debt may have different ratings. For example, a municipality may have one rating for its general obligation bond debt and another for its full faith and credit obligation debt and yet another for its enterprise fund or utility system debt.


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DETERMINING A RATING

In general, a particular rating is assigned to a debt issue based on a rating agency’s opinion regarding the probability of timely principal and interest payments. Rating agencies consider a number of factors in determining the probability of repayment including:

FINANCIAL ANALYSIS

A rating agency reviews prior budgets and audited financial statements to determine if adequate resources are available to operate the district and pay debt service. For debt being repaid primarily from property tax collections, a rating agency considers: general fund balance levels, tax levies, concentration of property ownership by large taxpayers, real market value growth, tax delinquencies and similar items. For revenue secured debt, the analysis focuses more on the strength of the revenue stream, its volatility and other demands that may be eventually put on the revenue stream (such as additional debt issues).

DEBT STRUCTURE

A rating agency examines how the debt issue is structured to determine:

• Whether repayment is deferred or accelerated

• The length of the debt related to the financed improvements useful life

• The issuer’s plans or need for future debt issuance

• If the issuer’s plan for future and current capital financing needs is adequate


LOCAL ECONOMIC CONDITIONS

A rating agency evaluates the municipality’s local economy and factors which could affect its ability to repay debt including:

• Levels of income and growth or decline

• Diversity and strength of the local employment base

• Building activity, and

• Population growth

A rating agency also may evaluate a number of other economic and demographic criteria in determining a municipality’s long-term ability to repay its debt.

ADMINISTRATION AND MANAGEMENT

The expertise and stability of a municipality’s top management is considered an important factor in assigning a rating. This evaluation is based on contact with administrative personnel, examination of financial reports and other documents as well as other more objective criteria.

Please note that there is no completely objective means used to assign a rating. The factors described here and other criteria used by a rating agency are subject to interpretation. Consequently, municipalities with seemingly similar financial, economic and geographic conditions may be awarded somewhat different ratings.

ASSIGNING RATINGS

Rating agencies use similar procedures for assigning a rating to a debt. An analyst evaluates the credit quality of the issue under review. This analysis is used to develop a rating recommendation. The lead analyst is sometimes assisted by another analyst.

The analyst then takes the recommendation to a rating committee. The rating committee usually consists of two or more members, usually senior in experience to the analyst. The committee reviews the recommendation and votes to assign a rating. Generally, the rating assigned is the one recommended. However, it is not unusual for a rating committee to assign a rating other than the recommended rating or to send the lead analyst back to review additional information before assigning a rating. Once committee has assigned a rating, the analyst will call the issuer or its financial consultant and ask for approval to “release” (that is, publish) the rating.

A municipality may attempt to “appeal” a rating if it feels the proposed assigned rating is inappropriate. Any effort to change a proposed rating must be undertaken before the rating is released to the financial markets. “Appeals” are seldom granted and then only on the basis of relevant new information that changes the committee’s view.


DECIDING TO APPLY FOR A RATING

Municipalities are not required by law to seek a rating. Some kinds of debt can be successfully placed without a rating. (Some conduit issuing entities – see Chapter 11, Conduit and Pass-Through Revenue Bonds – may require a rating at or above a certain level before agreeing to serve a the conduit issuer). In fact, issuing debt without a rating may sometimes produce a better result than issuing debt with a very low rating.

A municipality should apply for a bond or other debt issue rating if:

• The rating will save the issuer money through lower interest costs, or

• The issuer has rated bonds outstanding of the same type and wishes to maintain its rating on that debt

Determining whether to apply for a rating should be made only after consultation with the financing team. In addition, the rating fee and costs for preparing ratings materials should be more than offset by lower interest costs before a rating is obtained. Very small issues may not benefit enough from a rating to justify the cost of the rating.

BOND INSURANCE

Issuers may also enhance investors’ reception of their bonds by obtaining a municipal bond insurance policy. Certain insurance companies specialize in issuing these policies. For payment of a one-time premium at the time of issuance, these companies will insure the principal and interest payments on bonds or other debt obligations. The premium is a one-time cost and the policy is irrevocable once issued.

Municipal issuers frequently purchase bond insurance because the rating agencies will then substitute the bond insurer’s rating for the issuer’s rating. The highest grade bond insurers have Aaa or AAA ratings from the rating agencies.

Unless an issuer has a relatively high rating on its own, substitution of the bond insurer’s rating can result in substantially lower interest costs over the life of a bond or other debt issue. Investors will purchase an issuer’s debt based on the higher rating of the bond insurer and they will accept lower interest rates based on that higher rating.

To make an informed decision regarding bond insurance, a municipality should consult with its financial consultant(s) or underwriter. The cost for bond insurance can be substantial. Consequently, issuers should incur this cost only when the interest rate savings from the higher rating exceed the insurance premium.

LETTERS OF CREDIT

Letters of Credit (LOCs) function much like bond insurance. LOCs are agreements between a commercial bank and the bond issue trustee. The bank irrevocably agrees to pay to the trustee on demand amounts sufficient to meet debt service payments on a bond issue should the issue default on its obligation to pay. This effectively substitutes the bank’s credit quality for that of


the issuer. A rating on the bond issue can then be based not only on the underlying credit but also on the bank’s rating.

LOCs are used to provide liquidity in case of variable rate obligations. In this case, the bank agrees to advance money to purchase variable rate bonds tendered by investors when a remarketing of the debt fails.

LOC fees are based on the amount and type of debt service being “guaranteed.” LOCs are usually issued for periods much shorter than the longer term of a bond issue and thuis usually must be renegotiated from time to time.


Does an issuer need credit enhancement? If it does, is something wrong with the issuer’s credit?

No, seeking credit enhancement does not mean an issuer has poor credit. Credit enhancement generally provides a method for evaluating or improving an issuer’s credit. Investors rely on credit enhancement (via a rating) to provide an independent evaluation of the issuer’s credit or (via a bond insurance policy) to guarantee debt service payments. Most investors will not buy bonds unless some form of credit enhancement is used.

How large an issue can be sold without a rating or insurance?

A rating or bond insurance substantially increases the number of buyers who are willing to consider purchasing an issuer’s bonds, providing the interest rate is reasonable. The market for non-rated and uninsured issues is limited. Issues of as little as $1 million can benefit from a rating or insurance.

How many ratings should a municipal issuer get?

Whether or not to get a rating and how many to get is a judgment call. The issuer’s financial consultant can help determine the pros and cons of applying for more than one rating. Generally, the larger the issue, the more likely multiple ratings may be advantageous.

Does the issuer have to make an in person presentation to a rating agency?

No. Face-to-face presentations with rating analysts are not necessary. Typically, presentations are handled by sending documents and information to the rating agencies then following up with a phone call to answer questions. However, there may be occasions where a personal presentation is best. In such situations, the ratings analyst may well want to come to the issuer rather than vice versa.

What is the difference between interest rates on insured bonds and interest rates on rated bonds that are not insured?

The difference depends on the market and the price of insurance. Even though insured issues are automatically rated Aaa, the issues tend to command interest rates similar to issues that are rated at Aa but not insured. The reason is investors still give more weight to a natural Aa credit rating


than to an insured Aaa credit rating. Insurance can improve interest rates over an A-level credit by a more significant amount.

Is there a difference between bond insurance companies?

Yes, for certain types of bond issues. However, the major insurers are comparable when insuring general obligation bonds or “plain vanilla” revenue bonds. The lowest priced insurer is usually the issuer’s best choice. However, as an issue becomes more complex and the credit more difficult to analyze, the number of insurers willing to look at the credit will dwindle.

What can a municipality do to influence its general obligation bond rating?

Much of the rating for a general obligation bond issue hinges on the municipality’s economic base, employment levels and other factors that are out of its control. Controlled factors include balanced budgets, adequate fund balances and good management. However, since these are analyzed over at least five years, the issuer must plan ahead if it hopes to influence it’s rating by improving these factors. Generally, even the best financial performance does not change substantially the rating level on a GO bond because the base level is set by the municipality’s economic base.

Are there other forms of credit enhancement? What about letters of credit?

Other kinds of credit enhancement are unusual for fixed rate issues but more likely found on variable rate issues. Letters of credit are issued by commercial banks to back certain kinds of municipal debt, most typically variable rate bonds.

CHAPTER 19

ELIGIBLE INVESTMENTS AND BOND RELATED FUNDS

When a municipality sells its bonds, interest costs immediately start to accrue and debt service payments begin. The bond proceeds received by the issuer are deposited to one or more bond funds or accounts in accordance with the bond resolution, trust indenture and other bond contract documents. These bond funds then provide for the payment of land acquisition, construction and project costs, ongoing debt service payments, debt service reserves, arbitrage rebate and other purposes.

Some of the proceeds will be used immediately but most of the monies deposited to the bond fund accounts will be spent over time in accordance with project or construction draw schedules and debt service schedules. In the meanwhile, these funds are available for investment.

Investing tax-exempt bond proceeds is complex and needs to be considered early in the bond issuance process. Issuers should have a formal investment policy that can serve as a guideline for the investment of bond funds. The investment strategy used for each of the different bond funds will be unique but the foremost objectives are basically the same. Bond fund investment strategies should be prudently designed to earn the maximum interest earnings allowable while adhering to the primary objectives of preservation and safety of principal and the maintenance of sufficient liquidity to meet cash flow requirements.

Those responsible for managing and administering the investment of bond proceeds need to consider the appropriateness of each investment, their potential rewards and their potential risks. Some cities may have the requisite in-house financial investment skills necessary to confidently manage and administer their own investment accounts and portfolios. Others will need to employ an investment advisor to assist with the development of a suitable strategy and identification of various investment options. The issuer also needs to consider both state and federal laws that may restrict the use of public funds for certain types of investments.

ELIGIBLE INVESTMENTS

Oregon Revised Statutes (ORS) 294.035 permits cities and other local governments to invest sinking funds, bond funds or surplus funds in bank accounts, securities, insurance contracts and other investments but only after obtaining written authorization from their governing body. Per ORS 294.135, investment maturity dates may not exceed 18 months or the date of anticipated use of the funds, whichever is shorter, without a written investment policy reviewed by the Oregon Short-term Fund Board and adopted by the governing body of the municipality or other political subdivision.

Chapter 19 – Eligible Investments and Bond Related Funds 156

Cities and other local governments are authorized by ORS 294.035 to invest in the following types of investments:

• Obligations of, or obligations guaranteed by government agencies, enterprises or entities

• Certificates of deposit, share accounts, savings accounts and money market accounts

• Guaranteed investment contracts

• Banker’s acceptances

• Corporate debt securities and commercial paper

• Mutual funds

• Repurchase agreements

• Investment pools

The types of investments permitted by ORS 294.035 are briefly described below.

FEDERAL AND STATE GOVERNMENT OBLIGATIONS

This category of permitted investments includes securities and obligations of the U.S. government or its agencies and instrumentalities as well as debt obligations of the State of Oregon, its agencies and political subdivisions. Also available for investment are debt obligations of the states of California, Idaho and Washington and their political subdivisions.

U.S. Treasury Obligations. U.S. Treasury marketable securities are debt instruments issued to raise money needed to operate the federal government and pay off maturing obligations. These liquid securities are considered to be one of the most secure forms of investment and are fully guaranteed by the U.S. government. As described below, U.S. Treasury marketable securities can be stripped into interest and principal components within the secondary market or can be converted from bearer securities into those that can be held in commercial book-entry accounts. (ORS 294.035(3)(a))

Eligible U.S. Treasury obligation investments include:

a) U.S. Treasury Bills, or T-bills, are liquid short-term securities issued at a discount from their face value and mature in one year or less. They are normally sold at weekly auctions with 4-week, 13-week and 26-week maturities. Cash management bills are auctioned on an irregular schedule based on Treasury’s financing needs and are generally issued in variable terms, usually for only a matter of days. Treasury bills pay interest only at maturity and are sold in increments of $1,000 with a minimum purchase amount of $1,000.

b) U. S. Treasury Notes, or T-notes, are liquid medium-term interest bearing securities with a fixed maturity of not less than 1 year and not more than 10 years. They are currently issued in terms of 2, 3, 5 and 10 years. The 2-year and 5-year notes are auctioned every month, 3-year notes every quarter, and 10-year notes eight times a

year. They earn a fixed rate of interest every six months until maturity and are sold in increments of $1,000 with a minimum purchase amount of $1,000.

c) U.S. Treasury Bonds, or long bonds, are liquid long-term interest bearing securities with maturities over 10 years. Treasury bonds pay interest semi-annually and the investor receives the face value of the bond at maturity. The U.S. Treasury stopped issuing the 30-year bond in 2001 in favor of shorter-term debt, issuance resumed with a 30-year auction in February 2006. In 2007, the U.S. Treasury is scheduled to conduct quarterly auctions in February, May, August and November.

d) U.S. Treasury Inflation-Protected Securities (TIPS) are inflation indexed investments first issued by the U.S. Treasury in 1997. The principal of a TIPS will increase with inflation and decrease with deflation. When a TIPS matures, the investment pays the inflation-adjusted principal or the original principal, whichever is greater. A TIPS pays interest semiannually at a fixed rate with the rate being applied to the adjusted principal. TIPS are currently offered in 5, 10 and 20-year maturities with the 5-year and 20-year maturities being sold at auction semiannually and the 10-year maturity at quarterly auctions.

e) STRIPS or “Separate Trading of Registered Interest and Principal of Securities” are zero-coupon Treasury securities that can be purchased only through financial institutions and government securities brokers and dealers. They are sold in minimum denominations of $1,000 at deep discount with interest and principal paid out at maturity. STRIPS are created by separating or “stripping” the principal and the interest (coupon) components of U.S. Treasury notes or bonds or US. Treasury inflation-protected securities (TIPS) into separate zero-coupon securities. Each separated component is assigned its own identifying number through the commercial book-entry system (CBES) and can be held or traded as separate securities in the secondary market.

f) BECCS and CUBES are U.S. Treasury programs that convert stripped bearer securities into book-entry securities that can be held in commercial book-entry accounts with brokers and financial institutions. A “bearer security” or “bearer bond” is one that is issued in paper or physical form. The interest bearing coupons are then physically separated or “clipped” from the bearer bond and then sold individually as separate securities.

• BECCS (BEarer Corpora ConversionS) are the principal portions, or corpora, of U.S. Treasury bearer securities that have been stripped of all non-callable coupons and converted to book-entry form.

• CUBES (Coupons Under Book-Entry Safekeeping) are detached bearer coupons that have been converted to book-entry form securities.

Once BECCS and CUBES are converted to book-entry form, their return conversion to physical form is prohibited.


Securities of U.S. Government Agencies and Government Sponsored Enterprises. Securities issued by U.S. government agencies and government sponsored enterprises are considered the next most credit worthy investment after U.S. Treasury securities. Both U.S. government agencies and government sponsored enterprises are created by Congress (ORS 294.035(3)(a) and 294.040).

• U.S. Government Agencies: U.S. government or federal agencies include such organizations as the U.S. Department of Housing and Urban Development (HUD), the U.S. Postal Service (USPS), Small Business Administration (SBA) and the General Services Administration (GSA). Securities issued by federal agencies are directly backed by the full faith and credit of the United States. Most federal agencies no longer issue significant amounts of their own securities directly to the public. Rather, federal agency debt is issued by the Federal Financing Bank (FFB), a government corporation, created by Congress in 1973 and administered by the Secretary of the Treasury. The most common U.S. government agency security offered to the public today is the Government National Mortgage Association (GNMA) security or Ginnie Mae.

• Government Sponsored Enterprises (GSE): Government sponsored enterprises are

private corporations chartered by the federal government and granted privileges for the advancement of specific purposes. These securities are not directly backed by the U.S. government, but their credit risk is considered to be very low and have an implicit guarantee and the “moral” backing of the U.S. government. Examples of GSEs include the Federal National Mortgage Association (FNMA), commonly called Fannie Mae and the Federal Home Loan Mortgage Corporation, known as Freddie Mac.

The debt obligations of federal agencies and GSEs are collectively referred to as “Agency Securities” or “agencies.” See Appendix B, U.S. Government and Agency Securities and also the Oregon State Treasury website at www.ost.state.or.us for a listing of U.S. government and federal agency securities that are available for local government investment under ORS 294.035 and 294.040.

Municipal Debt Obligations. Municipal bonds, notes and other debt obligations of the State of Oregon and its agencies, counties, cities and other political subdivisions are authorized as long as they have been rated by a nationally recognized rating agency such as Moody’s Investors Service, Standard & Poor’s or Fitch Rating and have a long-term rating of not less than “A” or an equivalent rating. For short-term municipal debt, the securities must be rated in the highest category by a nationally recognized rating agency (ORS 294.035(3)(b) and 294.040).

Also included in this category are the debt obligations of the states of California, Idaho and Washington and their political subdivisions. These securities must have a long-term rating of not less than “AA” or an equivalent rating or better. For short-term municipal debt, the securities must be rated in the highest category by a nationally recognized rating agency (ORS 294.035(3)(c) and 294.040).

CERTIFICATES OF DEPOSIT, SAVINGS ACCOUNTS AND MONEY MARKET ACCOUNTS

Certificates of Deposit and Share Certificates. Certificates of deposit (CD) and share certificates are basically the same type of financial product. Both offer a variety of maturities, interest rates and minimum deposit amounts. Share certificate is the name generally used by credit unions; the more familiar term “certificate of deposit” is used by banks, thrifts and many other financial institutions.

A certificate of deposit is a time deposit promissory note commonly issued by banks, thrifts, credit unions and other qualified financial institutions. CDs are similar to savings accounts in that they are insured and relatively low risk investments that can be easily converted into cash. An advantage of a CD is that they generally offer higher rates of interest than regular savings accounts. CDs differ from savings accounts in that they are time deposits that restrict the purchaser from withdrawing the funds on demand. Generally, CDs are offered with specific terms or maturities and at fixed interest rates. Although traditionally purchased through local banks and credit unions, they are also available from deposit brokers.

Unlike many other types of securities investments, a CD issued by a U.S. bank or credit union has the added safety feature of being insured in the total aggregate amount of $100,000 for each depositor and backed by the full faith and credit of the U.S. government either through the Federal Deposit Insurance Corporation (FDIC) for banks or by the National Credit Union Association (NCUA) for credit unions. For more information about deposit insurance, visit the FDIC’s website at http://www.fdic.gov/index.html or the NCUA’s website at http://www.ncua.gov/.

Typically, CDs require a minimum deposit ranging from $500 to $100,000 or more. They are usually purchased in fixed amounts for fixed periods of time – six months, one year, five years or more – and pay interest either periodically or at a specified maturity date. Variable rate CDs, long-term CDs, and CDs with other special features are also available. Some long-term, high yield CDs have “call” features that allow the issuing bank to terminate or call its high yield CD if interest rates fall. This option may not be available to the purchaser and in fact there may be early withdrawal penalties if the CDs are redeemed before their stated maturities.

Savings Accounts, Share Accounts and Money Market Accounts. Savings accounts, passbook savings accounts and share accounts are deposit accounts maintained by banks, savings and loan associations, credit unions and other financial institutions. They generally pay interest on the money in the account and on any interest earned. They are highly liquid and are often referred to as near money.

A money market account (MMA) is a demand type savings account offered by banks and credit unions. They generally pay a higher rate of return than a regular savings account but require a higher minimum balance and restrict the number of transactions per month to generally six or fewer.

Certificates of Deposit, share and savings accounts, and money market accounts are authorized investments if they were issued or maintained by a state or national savings bank, or a state or


federal credit union located in Oregon, are guaranteed or insured by the FDIC or the NCUA and are 25 percent collateralized and guaranteed by the bank of deposit (ORS 294.035(3)(d)).

GUARANTEED INVESTMENT CONTRACTS

Municipalities may invest bond funds in fixed or variable life insurance or annuity contracts as defined in ORS 731.170 and guaranteed investment contracts issued by life insurance companies authorized to do business in the State of Oregon (ORS 294.035(3)(f)).

A guaranteed investment contract or GIC is an insured group annuity contract issued by a life insurance company. GIC’s are reasonably secure investments and are typically AA or AAA rated. They are predictable and useful instruments for the investment of bond proceeds that provide relatively high yields in comparison to U.S. Treasuries. They offer guaranteed repayment of principal with either fixed or variable interest rates and fixed maturities. GICs are offered in a wide variety of contract types and terms that provide the liquidity and flexible access to funds necessary to meet the requirements of bond proceed drawdown schedules.

BANKER’S ACCEPTANCES

A banker’s acceptance is a short-term credit instrument, negotiable time draft, or bill of exchange that is payable at maturity, drawn on and guaranteed or accepted by a bank. The acceptance represents an irrevocable commitment to pay the stated amount on the draft at the specified maturity. The bank will actually stamp or write the word “Accepted” on the face of the draft. Banker’s acceptances are used primarily for international trade purposes to finance the export, import, shipment or storage of goods. Acceptances are often traded in the secondary market at a discount and are popular money market fund investments.

Banker’s acceptances are authorized investments for Oregon municipalities if they:

• have a stated maturity of 270 days or less

• are guaranteed by, and carried on the books of, a qualified financial institution that is located and licensed to do banking business in the State of Oregon

• are eligible for discount by the Federal Reserve System

• are issued by a qualified financial institution whose short-term letter of credit rating is rated in the highest category by one or more nationally recognized rating agency

A local government is limited to not more than 25 percent of the monies available to the local government for investment, as determined on the settlement date, to be invested in banker’s acceptances of any qualified financial institution (ORS 294.035).

CORPORATE DEBT SECURITIES AND COMMERCIAL PAPER

Corporate debt securities and commercial paper are issued by a wide variety of corporations involved in financial, commercial, industrial and utility enterprises. Corporate debt securities are generally taxable and typically issued in denominations of $1,000 and/or $5,000 with varying maturities that can be loosely categorized as follows:

• short-term note (maturities up to 5 years)

• medium-term note/bond (maturities from 5 to 12 years)

• long-term bond (maturities greater that 12 years)

Commercial paper is a form of short-term, unsecured security issued primarily by banks and corporations with high credit ratings but also increasingly by foreign governments and municipal issuers. This security is generally used to finance short-term credit or cashflow requirements rather than fixed or long-term capital assets on a permanent basis. Commercial paper is considered to be a relatively low-risk investment as well as a lower cost alternative to bank loans and lines of credit. The maturities of commercial paper typically range from 2 to 45 days and rarely exceed 270 day. This exempts the paper from costly Securities and Exchange Commission (SEC) registration under the 1933 Act, as well as public disclosure requirements and the issuance of an official offering prospectus. Commercial paper denominations are generally high, with minimum denominations of $100,000 common; since most investors are institutions and money market funds, the typical face amounts are in multiples of $1 million. Commercial paper can be interest bearing (fixed or variable) but is normally offered at discount from face value as a zero coupon. There is a limited to non-existent secondary market for commercial paper, so it is not considered to be a very liquid investment, but it can generally be sold back to the original issuer.

Oregon state law requires that corporate notes, bonds and commercial paper invested in by local governments carry a minimum rating of P-1 or Aa or better by Moody’s and A-1 or AA or better by Standard and Poor’s or an equivalent rating by a nationally recognized rating agency. For Oregon companies the minimum ratings are P-2 or A by Moody’s and A-2 or A by Standard and Poor’s or an equivalent rating by a nationally recognized rating agency. These types of investments are limited to 35 percent of a local government’s monies that are available for investment and a maximum of 5 percent in any one company (ORS 394.035(3)(i)).

MUTUAL FUNDS AND MONEY MARKET MUTUAL FUNDS

Securities of any open ended or closed ended management investment company or investment trust are allowable investments but only if the investment does not cause the municipality to become a stockholder in a joint company, corporation or association. These investments include mutual funds and money market mutual funds that invest money in stocks, bonds and short-term money market instruments.

REPURCHASE AGREEMENTS

Repurchase agreements (repo) or sale and repurchase agreements are a form of short-term borrowing in general obligations of the United States or its federal agencies. They are classified as a money market instrument whereby one party acquires funds by agreeing to sell securities to another party with a commitment to repurchase the same or similar security at a future date and a specified price or interest rate. The transaction is termed a repurchase or repo for the party selling the securities, acquiring the funds and repurchasing the security at a later date. For the party on the other end of the transaction, that is the purchaser of the securities and supplier of the


funds with an agreement to sell back the securities at a future date, it is a reverse repurchase or reverse repo.

Most repos are short-term transactions, usually overnight or for a few days, though, longer term maturities extending from a few weeks to a few months are common and maturities as long as a couple of years are not unusual. Repurchase transactions are usually arranged in large dollar amounts of $10 to $25 million or more. The minimum denomination is typically $100,000 although for most transactions the smallest customary denomination is $1 million.

Oregon state law requires that repurchase agreements be secured and fully collateralized by obligations of the U.S. government, its agencies or instrumentalities and that such securities have a maturity of not longer than three years. A master repurchase agreement, that governs all repurchase transactions such as prescribed by the Securities Industry and Financial Markets Association (SIFMA) (formerly the The Bond Market Association) must be in place and executed prior to any securities purchase. The term or maturity of a repurchase agreement is limited to a maximum of 90 days and the maximum percentages for prices paid for such securities are set by the Oregon Investment Council or the Oregon Short Term Fund Board. The minimum repurchase agreement pricing percentages as prescribed by the Oregon Short Term Fund Board are currently as follows:

• U.S. Treasury Securities: 102%

• U.S. Agency Discount and Coupon Securities:

102%

• Mortgage Backed and Other: 103%

LOCAL GOVERNMENT INVESTMENT POOL

Local governments within the state are authorized, with the consent of its governing body, to participate in the Oregon Local Government Investment Pool (LGIP) operated by Oregon State Treasury’s Finance Division. The LGIP was established to provide local governments a low cost, low risk investment option for the investment of available funds. The LGIP is a very safe, highly efficient and professionally managed open-ended, no-load diversified securities portfolio.

The LGIP invests primarily in high quality, low risk securities such as money market instruments, U.S. government and federal agency securities, corporate securities, certificates of deposit, repurchase agreements and other eligible investments. It provides a competitive income yield for participating local governments by investing and managing their pooled funds in securities that offer a high degree of security while maintaining liquidity. Funds in the LGIP are commingled with other state funds in the Oregon Short Term Fund (OSTF). The primary objectives of the LGIP and OSTF are safety of principal, liquidity and return on investment. While the LGIP and OSTF seek to preserve principal and maintain a stable net asset value, the prospect of a market decline and its impact on the fund’s value need to be considered as general market risks. The OSTF is not currently rated by an independent rating agency.

As of April 2007, investments in the LGIP by a local government are limited to a maximum of $39,836,066. This amount is adjusted semi-annually by the Consumer Price index for All Urban Consumers of the Portland, Oregon Area. Oregon State Treasury will notify all LGIP participants whenever the aggregate deposit amount is adjusted. The current limit may be found at Oregon State Treasury’s Internet website located at http://www.ost.state.or.us.

The maximum limitation does not apply to funds placed in the investment pool on a pass-through basis or funds invested on behalf of another government unit. The limitation can be temporarily exceeded but local governments must remove pass-through funds in excess of limitation within 10 business days and county governments must remove such excess funds within 20 business days. (ORS 294.805 to 294.895)

BOND RELATED FUNDS

Bond funds are used to finance the projects for which the bonds were authorized and to account for the receipt and disbursement of proceeds from the sale of bonds. The bond resolution, ordinance, trust indenture, escrow agreement or other agreements will establish various and separate bond funds or accounts for financial accounting and administrative purposes. The number of funds established and the nomenclature or labeling of the fund will vary depending on bond size, complexity and the particular naming conventions used by the issuer and its financial team. Some of the more common categories of bond funds in a typical transaction include:

• Project Fund

• Debt Service Fund

• Sinking Fund

• Debt Service Reserve Fund

• Capitalized Interest Fund

• Refunding Escrow Fund

PROJECT FUND

The project fund, also known as the “construction fund” or the “acquisition and construction fund,” contains monies from the bond sale that are used to finance the costs of the project. The fund is sized to cover costs for land acquisition, architectural planning, site preparation, construction or renovation, facility equipment expenditures, as well as funds to pay interest costs during the project or construction phase. Project fund monies are typically paid out to contractors and other parties in installments over the construction period which can range from six months to two years or more. The project fund usually receives the largest share of bond sale proceeds except in the case of refunding transactions.

Determination of the size and structure of a bond issue is best developed from the project cash-flow and spending plan. The spending plan or draw schedule is an estimate of the dates and expenditure amounts needed to fund construction over the life of the project period. Project fund draw schedules provide estimates for what amount and timing of funds needed; it is integral to the determination of the size of the bond issue and the amount of funds available for investment.


Issuers should begin formulating investment strategies for project fund monies as soon as the structure and size of the bond issue is determined. The project fund investment plan is tailored with consideration of the expected draw and expenditure schedules, prevailing market rates, bond covenant requirements and investment policy guidelines. While the overall plan should be designed to earn the maximum allowable investment return, the strategy also needs to be flexible or liquid enough to adjust to changing construction and expenditure requirements.

Options for project fund investments, especially those tailored to minimize liquidity and reinvestment risk, may include:

• Investment agreements

• U.S. Treasury securities

• Money market funds

Most project funds are designed so that any interest earnings that exceed the amount estimated to pay project costs or any fund balance that remains after project completion will be transferred to other funds such as a debt service fund or a sinking fund to make bond principal and interest payments.

DEBT SERVICE FUND

The debt service fund (DSF) is a trust account used to accumulate monies deposited by the issuer to make required interest and principal payments on its bonds, notes, capital leases, certificates of participation and other long-term obligations. Types of bonds that would typically use a DSF for interest and principal accounting include serial bonds and term bonds. Serial bonds are generally structured with semi-annual interest payments and annual principal payments. Term bonds have semi-annual interest payments but no principal payments until the bonds mature when the entire principal amount would be due. DSFs are normally required to be advance funded with monthly deposit amounts. So, for a serial bond, the issuer would typically make monthly pro-rata deposits into the DSF in amounts equal to one-sixth of the next scheduled interest payment and one-twelfth of the next scheduled principal payment. For term bonds, adequate funding of the DSF is essential to ensure that sufficient monies are available to make the single repayment of principal at the bond maturity date. The amount deposited in the DSF for term bond principal payment will depend on present value calculations as well as realistic estimates of DSF investment earnings.

Investments of the monies set aside in the DSF will need to be scheduled to mature on the debt service payment date. This means that DSF investment maturities for serial bonds will generally average less than six months. The resulting short investment maturities of course result in corresponding low investment returns or yields. DSF investment candidates would typically include tailored investment agreements, forward purchase agreements and certain pooled investment funds (other than money market funds).

SINKING FUND

With a sinking fund, the borrower is generally required to deposit sufficient monies for the purpose of paying, by mandatory redemption, all or part of a long-term debt obligation that is due in a subsequent year. A sinking fund, or interchangeably, a “mandatory redemption fund,” is a common feature of governmental and corporate revenue bonds, most notably, term bonds or bonds of lesser credit quality. A trustee or agent generally accounts for the monies in the sinking fund and may be responsible for any fund investments. The structure of the fund is normally detailed in the bond indenture whereby the borrower is required to make periodic payments to the trustee based on either a specific timetable or criteria such as gross or net project revenues. Indenture provisions will provide for mandatory sinking fund redemptions either on a specific schedule or when a certain dollar amount accumulates in the sinking fund. In either case, a certain number of the outstanding bonds would be retired prior to their stated maturity. This provision is designed to reduce the investment risk to bondholders by assuring that monies are available for debt service payments and that the debt is being retired. For the borrower, use of a sinking fund may also result in lower financing costs.

Depending on the sinking fund provisions, the borrower may have the option to postpone or accelerate the scheduled early retirement of the bonds. This option allows the borrower more flexibility in a changing interest rate environment than the typical serial bond with a strict principal and interest payment schedule. So, if interest rates decrease, a borrower would likely opt to redeem or call its higher interest rate bonds in accordance with the mandatory redemption provisions of the indenture. In a rising interest rate environment, if the provisions permit, the borrower may choose to defease the bonds in-substance through the purchase and deposit with a trustee of no-risk government securities for the purpose of paying bond principal and interest. Another option may be to re-purchase the bonds in the open or secondary market.

Bonds that are to be redeemed by mandatory sinking fund redemption are usually selected by the trustee by lot from among the bonds subject to redemption. The trustee will give notice to bondholders, in accordance with the provisions of the indenture or other bond contract documents, that certain bonds are being called for redemption on a specified date and should be presented for payment as interest on the bonds will cease to accrue after the designated redemption date.

Any sinking fund monies not needed for immediate payment of bonds should be invested in accordance with the municipality’s investment policy. Preferred sinking fund investments ought to be essentially risk free such as U.S. government securities, municipal securities supported by general taxation, time or savings deposits, and money market mutual funds. In all cases, the investments need to be either very liquid, such as interest bearing bank accounts, or scheduled to mature and be available to pay for the sinking fund bonds being called for mandatory redemption.

DEBT SERVICE RESERVE FUND

The Debt Service Reserve Fund (DSRF) is an account established to provide a ready source of funds in the event that there are insufficient revenues to make a scheduled debt service payment. This is a common feature of most revenue bonds but may not be required for general obligation


bonds, variable rate bonds or bonds that utilize a financial guaranty product. Debt service reserve funds may be fully funded at closing with bond proceeds or only partly funded initially and then filled over time from revenues generated by the project, received from other pledged revenue sources, or from cash contributions. For some issuers, a DSRF may be optional or not required at all unless some specific event or breach of a bond covenant occurs. An example of such a trigger is when the project debt service coverage ratio drops below a specified minimum threshold indicating that the issuer’s cash flow may be inadequate to cover principal and interest payments on an ongoing basis. An alternative, in lieu of a cash-funded DSRF, is to fund the account with a financial guaranty product such as a surety bond, insurance policy, letter of credit, line of credit or other similar guaranty.

The initial sizing and amount required to be maintained in the DSRF (that is the “debt service reserve fund requirement”) should be clearly stated in the bond resolution or ordinance and the indenture. Debt service reserve funds are subject to maximum size limitations. The funded amount or size that qualifies as a “reasonably required reserve or replacement fund” is defined by U.S. Treasury regulation, and may not exceed an amount equal to the lesser of:

• 10% of the original principal amount of the bond issue

• the maximum annual principal and interest payment on the bonds

• 125% of the average annual debt service

In the event there is an unscheduled use of the reserve fund to pay debt service, or the fund falls below a minimum balance, the issuer will normally be required to refill the account from first available revenues. Again, this process should be clearly defined in the indenture and other bond contract documents. The same is true when a surety bond or other financial guaranty product is accessed to make principal and interest payments on the issuer’s bonds. In this case, the issuer, pursuant to an agreement with the insurer, will be required to reimburse the insurer the amount of any debt service payments made, plus an agreed upon interest charge.

The indenture should contain provisions describing how reserve fund monies are to be invested and provide the types of eligible or permitted interest bearing instruments. The general investment philosophy should be one designed to earn the maximum permitted interest but also avoid extreme volatility in the market value of the DSRF. Reserve fund restrictions may be limited to eligible investments that permit withdrawals without penalty or have maturities that don’t exceed a specified term. Many issuer investment policies will require that investment maturities not exceed five years, while others may permit investments with longer maturities or some combination of maturities such as five, ten or twenty years. In all cases, investments should not exceed the final maturity date of the bond issue itself. Typical permitted DSRF investments would include:

• U.S. Treasuries such as bills, notes, bonds and strips

• U.S. government agency securities, such as those offered by Ginnie Mae, Fannie Mae, Freddie Mac, and Sallie Mae

• Municipal obligations or securities rated, for example, AA or higher

• Guaranteed investment contracts or GICs, repurchase agreements and forward purchase agreements

Most of the bond funds, such as the project fund and the capitalized interest fund, described below, allow for only short-term, highly liquid investments in order to have monies available to pay the ongoing project construction costs. Consequently, their investment return or yield will likely be less than the yield paid on the bonds themselves. With the DSRF, investment liquidity is less of a concern because the monies are only required on debt service payment dates. Also, for most municipalities with good credit ratings and strong revenue resources, the DSRF will never be accessed. This allows the issuer the opportunity to invest in higher yielding securities of longer duration with a rate of return that may be equal to or above the borrowing costs of the bonds. While the retention by the issuer of such positive arbitrage earnings is generally prohibited by the Internal Revenue Code, the tax law does allow for positive and negative arbitrage offset from fund to fund and over time for the life of the bond issue. Incorporating a comprehensive investment strategy that includes investing DSRF monies in higher yielding securities provides the issuer with a valuable opportunity to offset some or all of the negative arbitrage earned in other funds. Generally, any excess DSRF investment earnings will be transferred to the bond sinking fund or debt service fund to make scheduled principal and interest payments on the outstanding bonds. These provisions will be set forth in the bond indenture or other bond contract document.

CAPITALIZED INTEREST FUND

There are circumstances, such as during the construction phase of a revenue-producing project, when bond interest payments become due prior to the availability of project revenues or the receipt of sufficient taxes, special assessments, fees or other resources for debt service payment. An option available to the issuer is to fund interest payments from bond proceeds for a specified period of time. This capitalized interest period is typically from closing until the end of construction phase or some short period after the date the project is expected to be available for use. Capitalized interest periods may last between six months to about three years.

Capitalized interest is the amount of the bond proceeds used to pay interest during the project construction or start up phase. The capitalized interest amount produced from the bonds is usually deposited in a separate account or “capitalized interest fund.” The fund account will be either gross or net funded. For a gross or fully funded account, the total interest amount estimated to become due during the capitalized interest period is deposited to the account and any interest earned will flow into a debt service fund, sinking fund or other separate account. In most cases the capitalized interest fund is net-funded. The amount deposited in the account, combined with the fund investment earnings, plus any interest from other bond funds, will be used to make the required interest payments during the capitalized interest period.

Monies in the capitalized interest fund are generally invested for the life of the fund. The fund investment strategy needs to ensure that sufficient invested amounts mature and are available, along with any interest earnings, to pay the interest on the scheduled payment dates throughout the capitalized interest period. Typical capitalized interest fund investments include, for example, short-term U.S. Treasury and government agency securities or municipal securities


with maturities matched to bond interest payment dates. Other investments might consist of tailored investment agreements, forward purchase agreements and guaranteed investment agreements.

REFUNDING ESCROW FUND

Municipalities may choose to issue refunding bonds to redeem or retire outstanding bonds at or before their stated maturity. The purpose of most bond refundings is to achieve savings in debt service costs by issuing new debt (the “refunding bonds”) at a lower interest rate than the debt being refunded (the “refunded bonds”). Other reasons to refund bonds would be to effect a favorable reorganization of the debt structure to defer or stretch out debt service payments or to remove bond covenants that are too restrictive.

A refunding within 90 days of the call date of the outstanding bonds is termed a “current refunding” and the new debt proceeds from the current refunding are used to immediately or currently repay the old debt. If the refunding takes place more than 90 days in advance of the outstanding bonds call date, then the refunding is referred to as an “advance refunding.”

Most advance refundings result in the defeasance of the old bonds: the refunding bond proceeds are irrevocably deposited in an escrow fund or account for the sole purpose of making scheduled debt service payments on the refunded but still outstanding bonds. Refunding escrow funds are subject to highly complex and restrictive Internal Revenue Code regulations; which investment yield restrictions and arbitrage limitations are of primary concern. Issuers will generally enter into an escrow deposit agreement with an escrow trustee that will provide for the on-going debt service payment of the refunded bonds and early redemption, if any. The agreement will also direct the trustee to invest the refunding proceeds in “eligible securities” that are essentially risk free.

The investment of refunding escrow funds are generally, but not always, limited to U.S. Treasury notes or other direct or guaranteed obligations of the U.S. government. In most cases, the escrow agent, on behalf of the issuer, will purchase directly from the U.S. Treasury special securities known as “State and Local Government Series” securities or “SLGS.” SLGS securities are issued in book-entry form only and are not transferable. They are sold to issuers or their agents at tailored interest rates and maturities that can be structured so that the investments purchased with the refunding bond proceeds will not earn a higher yield than the original refunded bonds. This ensures that the advance refunding bonds comply with arbitrage and yield restrictions imposed under the Internal Revenue Code. For more information on SLGS see the U.S. Treasury website at www.treasurydirect.gov.


Why should a city finance manager be concerned with investing bond proceeds and monies in bond fund accounts?

The basic reason is that bond interest costs begin accruing immediately. Actively and professionally managing the available funds will result in lower overall borrowing costs and

reduce the amount of monies required from taxes or other resources such as the General Fund or Enterprise Funds.

What primary objectives should be considered when investing bond proceeds and available bond fund monies?

The primary objectives of bond proceed investment management are:

1) Safety – the foremost objective of every investment program. Investments should seek to minimize both credit risk and interest rate risk.

2) Liquidity – the investment portfolio needs to be sufficiently liquid to ensure that funds are available for project costs, debt service payments and reasonably anticipated emergent cash demands. Investments should minimize both market price risk and reinvestment rate risk.

3) Yield – market return on investment is of tertiary importance compared to safety of principal and liquidity considerations but still important. The investment portfolio should be limited to low risk securities in anticipation of generating a consistent risk-adjusted rate of return.

Where can I find out what types of securities and investment instruments are authorized for the investment of city bond proceeds funds and accounts?

Oregon Revised Statute (ORS) 294.035 authorizes cities and other political subdivisions to invest any sinking fund or bond fund in a variety investment instruments. These include but are not limited to U.S. government and agency debt instruments, certain municipal debt obligations, savings accounts, and certificates of deposit. The Oregon State Treasury is required to prepare and keep current a listing of eligible investments. Issuers should also refer to bond declarations, trust indentures or other bond documents that generally provide investment guidance restrictions. Because of the complex rules affecting tax-exempt debt, issuers should confer with their advisors and especially seek the advise of financial/investment experts and especially legal counsel regarding bond proceed investments.

What are SLGS?

The term “SLGS” refers to “State and Local Government Series” (SLGS) securities which are U.S. Treasury obligations that can be purchased by state and local government entities directly from the U.S. Treasury. They are not available for purchase or trading on the open market. SLGS securities are offered by the U.S. Treasury in order to assist issuers of tax-exempt debt with compliance regarding yield restrictions or arbitrage rebate provisions of the Internal Revenue Code. SLGS are most commonly used for deposit in an escrow account in connection with the issuance of refunding bonds. These U.S. Treasury securities are purchased to match the yield on the refunding bonds and the debt service payment schedule on the refunded bonds. This allows the issuer in an advance refunding to achieve maximum investment returns while ensuring that the purchased investments comply with escrow restrictions and avoid “yield burning.” Failure to comply with Internal Revenue Code arbitrage restrictions could result in the


issuer’s bonds being declared “arbitrage bonds” by the Internal Revenue Service and thus become taxable.

APPENDICES

Appendix A – Glossary –Terms and Concepts 1

Appendix A GLOSSARY – TERMS AND CONCEPTS

Many of the definitions contained in this Glossary are adapted and/or reprinted from the Municipal Securities Rule Making Board’s (MSRB) Glossary of Municipal Securities Terms, with permission of the MSRB. Some additional terms and concepts are adapted from the Oregon Bond Manual and from the California Debt Issuance Primer.

ACCREDITED INVESTOR: An investor to whom a security otherwise required to be registered under the Securities Act of 1933 may be sold in a limited offering without registration under the SEC’s Regulation D and who does not count against the maximum limit of 35 investors. In addition to a variety of categories of institutional investors (including banks, insurance companies, investment companies, business development companies and employee benefit plans, as well as certain 501(c)(3) organizations, corporations, business trusts and partnerships), an accredited investor includes high net worth or high income individuals. Municipal securities generally are not subject to registration under the Securities Act of 1933 but sometimes their sales are restricted to accredited investors to ensure that they are sold only to persons who are capable of understanding the risk and bearing the potential loss of an investment in the securities.

ACCELERATION: A contract term providing for the principal amount of and any accrued interest on an obligation to become due and payable prior to the originally scheduled due date upon occurrence of a contractually stipulated event (typically, certain specified events of default).

ACCOUNTING SYSTEM: The total set of records and procedures which are used to record, classify, and report information on the financial status and operations of an entity.

ACCRUED INTEREST: In an original governmental bond sale, accrued interest is the amount which has accumulated on the bonds from the dated date of the issue up to, but not including, the date of delivery or closing. Where a governmental unit purchases a bond, accrued interest is the amount which has accumulated on the bond from the last interest date up to, but not including, the date of purchase.

ADDITIONAL BONDS: Additional bonds is a term found in indentures, trust agreements, bond resolutions, and other bond issuance documents referring to bonds that may be issued in the future in addition to bonds being issued under the current document. Almost always, these bonds are on a parity with the bonds being issued initially and may not be issued without meeting certain conditions involving the level of revenues available to repay the initial bonds and additional bonds, maximum amount limitations, and other conditions. These conditions are often referred to as the additional bonds test.

Appendix A – Glossary – Terms and Concepts

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ADDITIONAL BONDS COVENANT or TEST: The financial test, sometimes referred to as a “parity test,” that must be satisfied under the bond contract securing outstanding revenue bonds as a condition to issuing additional bonds. Typically, the test would require that historical revenues (plus, in some cases, future estimated revenues) exceed projected debt service requirements for both the outstanding issue and the proposed issue by a certain ratio.

AD VALOREM TAX: A direct tax calculated “according to value” of property. Ad valorem tax is based on an assigned valuation (market or assessed) of real property and, in certain cases, on a valuation of tangible or intangible personal property. In virtually all jurisdictions, an ad valorem tax is a lien on the property enforceable by seizure and sale of the property. An ad valorem tax is normally the one substantial tax that may be raised or lowered by a local governing body without the sanction of superior levels of government (although statutory restrictions such as tax rate limitations may exist on the exercise of this right). Thus, ad valorem taxes often function as the element used by local governments to assure that their budgets remain in balance.

ADVANCE REFUNDING: Advance refunding on a municipal bond refers to the sale of a refunding issue several years prior to the first call date of the issue to be refunded, with proceeds held in trust. See also “Advance Refunding Bonds” and “Refunding.”

ADVANCE REFUNDING BONDS: Bonds issued to refund an outstanding bond issue prior to the date on which the outstanding bonds become due or callable. Proceeds of the advance refunding bonds are deposited in escrow with a fiduciary institution, invested in U.S. Treasury Bonds or other authorized securities, and used to redeem the underlying bonds at maturity or call date and to pay interest on the bonds being refunded or the advance refunding bonds. Issuers are usually able to attain debt service savings as a result of this process. Refunded bonds are considered “escrowed to maturity” when the proceeds of the refunding bonds are placed in escrow, invested and applied to payments on the refunded bonds when due, without redemption prior to maturity.

Refunded bonds are considered “pre-refunded” when the proceeds of the refunding bonds are placed in escrow and invested until a date upon which the refunded bonds may be redeemed. The escrow (including earnings thereon) is applied to the payment of interest, principal maturing prior to the redemption date and the redemption price of the refunded bonds.

A Crossover Refunding is a refunding in which the revenues originally pledged to secure the refunded bonds continue to be applied to pay the refunded bonds until the refunded bonds mature or are redeemed. On the date the refunded bonds are paid in full, the pledged revenues “cross over and are thereafter” pledged to pay the refunding bonds. Curing the period when both the refunded and the refunding bonds are outstanding, the escrow containing the proceeds of the refunding bonds pays interest on the refunding bonds. Then on the crossover date, the escrow pays the principal on the refunded bonds.

A Current Refunding is a refunding in which refunding bonds are issued less than 90 days before the date upon which the refunded bonds will be paid.


Generally, in an advance refunding, the revenues originally pledged to the payment of the refunded bonds become pledged to the payment of the refunding bonds on the date the refunding bonds are issued. Payment of the refunded bonds is then secured by the escrow.

AGENT: One who acts on behalf of another party (i.e., the principal) and usually is paid a fee by the principal. The agent is presumed to be subject to the control of the principal.

AGREED UPON PROCEDURES LETTER: A letter from an auditor to the underwriters of a new issue of municipal securities setting forth the procedures undertaken with respect to the review of specified financial information (e.g., interim period financial statements or other information not covered by audited statements)appearing in the official statement and providing certain conclusions regarding the information with respect to which such review procedures were applied. May be also be called a Comfort Letter.

AGREEMENT AMONG UNDERWRITERS (AAU): The contract among the members of an underwriting syndicate establishing the syndicate rules, including the rights, duties and commitments of the senior manager and the other syndicate members with respect to the new issue of municipal securities being underwritten. In a competitive bid underwriting, the AAU is sometimes referred to as a syndicate account letter. The agreement among underwriters is also sometimes referred to as the underwriting agreement.

ALL IN COST or ALL INCLUSIVE COST (AIC):

(i) A measurement of the total cost of a bond financing, expressed as a discount rate calculated using the present value of all debt service payments on the issue and the total proceeds of the issue. For purposes of this calculation, the amount of proceeds is adjusted by any accrued interest, original issue discount, original issue premium and costs of the financing (e.g., costs of issuance, credit enhancement fees, underwriter’s spread, etc.).

(ii) For a variable rate demand obligation issue, the measure of costs expressed as a percentage that includes the cost of the liquidity facility, remarketing fees, interest payments and administrative fees.

ALTERNATIVE MINIMUM TAX (AMT): An income tax based on a separate bond and alternative method of calculating taxable income and a separate and alternative schedule of rates. The interest on certain types of Private Activity Bonds may be included in income for purposes of the individual and corporate alternative minimum tax.

AMORTIZATION:

(i) A reduction of debt by means of periodic payments sufficient to meet current interest and liquidate the debt at maturity.

(ii) Provision for the extinguishment of a debt by means of a debt service fund.

(iii) Accounting for expenses or charges as they apply rather than as they are paid.


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AMORTIZATION SCHEDULE: A table showing the gradual repayment of an issue of securities by periodic payments either directly to security holders or to a sinking fund for the benefit of security holders.

ANNUAL REPORT: The annual report is the report containing annual financial and operating data prepared and filed with the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs) and state information depository (SID) – if any – pursuant to Securities and Exchange Commission (SEC) Rule 15c2-12.

ARBITRAGE:

(i) The practice of investing bond proceeds at a yield greater than the coupon rate being paid on the bonds. With respect to municipal bonds, “arbitrage” is the profit made by issuing bonds bearing interest at tax-exempt rates, and investing the proceeds at materially higher taxable yields. The Internal Revenue Service strictly limits this “profit.”

(ii) The profit derived from the more or less simultaneous purchase and sale of governmental securities.

(iii) A technique used to take advantage of price differences in separate markets, such as tax-free municipal bonds and taxable corporate issues.

ARBITRAGE BONDS: Bonds that violate federal arbitrage regulations. If the Internal Revenue Service finds that bonds are arbitrage bonds, the interest becomes taxable and therefore must be included in each bondholder's gross income for federal tax purposes.

ASSESSMENTS: Assessments are charges in the nature of taxes upon property owners to pay the costs of facilities or improvements that benefit the property owner. Payment of the amount assessed (together with interest if not paid upon assessment) is secured by a direct fixed lien on the property. The assessed payments are either used directly to pay the costs of the facilities or improvements or, if paid over time, are used to repay bonds issued to finance such costs. “Special Assessment” financing proceeds are used for improvements relating to the property, such as sidewalks, streets, gutters, sewers and water systems.

ASSESSED VALUATION (AV): The valuation placed on real estate or other property by a government for the purpose of levying taxes.

ASSESSMENT RATIO: The ratio of the assessed value of property to the full or true market value. Full value may be defined as fair market value at the bid sale of the market less a reasonable allowance for sales and other expenses.

AUCTION: An electronic competitive process through which auction rate securities (ARS) are sold at the lowest yield rate (priced at par) at which sufficient bids are received to sell all securities offered. ARS are sold at the clearing yield established by the auction to the investors placing bids at or below the clearing yield. All ARS in a series will bear interest at the clearing auction rate for the next auction period.


AUCTION AGENT: A third-party institution responsible for conducting the auction used in connection with the periodic reset of the interest rate.

AUCTION DATE: The business day immediately preceding the first day of each auction rate period for an ARS.

AUCTION PROCEDURES: The process and timing for conducting the auction as set forth in the bond indenture or trust agreement and summarized in the auction agreement.

AUCTION RATE: The rate of interest per annum resulting from the implementation of the auction, provided such rate does not exceed a maximum rate specified in the bond indenture or trust agreement.

AUCTION RATE PERIOD: The initial auction rate period established by the underwriter at the time of issuance of the ARS and, subsequently, each period during which a specified auction rate is in effect as a result of an auction. The auction rate period commences on the business day after the auction date and ends and includes the day preceding the next interest rate reset date.

AUCTION RATE SECURITIES: Variable rate bonds whose interest rate is reset periodically under the Dutch auction process.

AUTHORITY: A governmental unit or public agency created to perform a single function or a restricted group of related activities. Usually such units are financed from service charges, fees and tolls, but in some instances they also have taxing powers. An authority can be completely independent of other governmental units, or in some cases it may be partially dependent upon other governments for its creation, its financing or the exercise of certain powers.

AUTHORITY BONDS: Bonds payable from the earnings or other revenues of a specific authority created by governmental action for a public purpose. Since such authorities usually have no revenue other than charges for services, their bonds are ordinarily revenue bonds.

AUTHORIZATION: Permission to issue the bonds. In addition to the constitution, statute or charter enabling language, an election is often also required.

AUTHORIZING RESOLUTION or ORDINANCE: With respect to an issue of municipal securities the document adopted by the issuer that implements its power to issue the securities. The legal grant of such authority may be found in the enabling provisions of the constitution, statutes, charters and ordinances applicable to the issuer. Adoption of an authorizing resolution or ordinance by the issuer's governing body is a condition precedent to the issuance of the proposed securities.

AVERAGE LIFE or AVERAGE MATURITY OF BOND ISSUE: The aggregate life of all bonds (in years) divided by the number of bonds. The average maturity reflects how rapidly the principal of an issue is expected to be paid and is important to underwriters in calculating bids for new issues of municipal securities.


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AWARD: Acceptance by the issuer of a bid by an underwriter to purchase a new issue of municipal securities.

BALANCE SHEET: A statement purporting to present the financial position of an entity by disclosing the value of its assets, liabilities and equities as of a specified date.

BALLOON MATURITY: A maturity within a serial issue of securities (usually the last maturity) that contains a disproportionately large percentage of the principal amount of the issue. The payment of the balloon may be contingent upon or presume some form of refinancing or other event.

BALLOON PAYMENT: The principal payment on a balloon maturity.

BANK QUALIFIED: Designation given to a public purpose bond offering by the issuer if it reasonably expects to issue in the calendar year of such offering no more than $10 million par amount of bonds of the type required to be included in making such calculation under the Internal Revenue Code. When purchased by a commercial bank for its portfolio, the bank may receive an 80% tax deduction for the interest cost of carry for the issue. A bond that is bank qualified is also known as a “qualified tax-exempt obligation.”

BASIS POINT: One one-hundreth of one-percent (0.0001).

BEARER BOND: A bond which does not have the owner's name registered to the books of the issuer or it's paying agent/registrar. The bearer or the person who holds it owns it. The Tax Equity and Fiscal Responsibility Act of 1982 requires the issuance of municipal bonds in fully registered form, with minor exceptions.

BID: A statement of what a bank or syndicate of banks will pay for an entire bond issue, implying an offer to purchase the bonds. The lowest bid, i.e., the bid with lowest net or true interest cost, is the winning bid.

BLUE-SKY LAWS: A colloquial term for state securities laws, derived from a statement that such laws were directed at unethical promoters who “would sell building lots in the blue sky.” Although these laws vary from state to state, most contain provisions concerning (a) prohibitions against fraud, (b) regulation of broker-dealers doing business in the state, and (c) registration of securities. Municipal securities are generally exempt from state securities registration requirements, although broker-dealers selling them are subject to many states’ registration and regulatory requirements.

BLUE-SKY MEMORANDUM: A memorandum typically prepared by underwriter’s counsel describing the treatment of a particular new issue of municipal securities under the blue-sky laws of the various states.

BMA: Bond Market Association is now known as the Securities Industry and Financial Markets Association (SIFMA).

BMA INDEX: See SIFMA SWAP INDEX.


BOND: A certificate representing a promise to pay a specified sum of money, called the face value or principal amount, at a specified date or dates in the future, called the maturity date(s), together with periodic interest at a specified rate. The difference between a note and a bond is that the latter runs for a longer period of time, is usually a permanent financing tool and requires greater legal formality, while a note is typically an interim device. The term “bond” may also mean the par value of $1,000 par value. Although bonds may be issued in any denomination, municipal bond dealers and others use the term to mean $1,000 par value, regardless of the actual denomination. Thus, a $25,000 bond would be referred to as “25 bonds.” Many transactions, e.g., the spread between the purchase and sales price by investment bankers, are expressed in terms of the “amount per bond,” i.e., per $1,000 par value.

BOND ANTICIPATION NOTES (BANS): Short-term interest-bearing notes issued by a government in anticipation of bonds to be issued at a later date. The notes are retired from the proceeds of the bond issue to which they are related. BANS may also be retired from current revenue.

BOND BUYER: A daily trade paper of the municipal bond market. Its New York-based publisher also publishes the weekly Credit Markets, which is devoted to capital market news and provides a summary of the week's municipal news.

BOND BUYER INDEX: An index published weekly by The Bond Buyer to indicate the level of long-term municipal bond yields.

BOND COUNSEL: Legal firm hired to advise the issuer regarding the legal and tax aspects of the sale. Bond counsel writes the legal opinion for the bond issue. This lawyer, in theory, represents the ultimate bond purchaser. The bond opinion provides assurance to the bond purchaser that the bond was legally issued and is tax-exempt. Generally responsible for producing the legal documents required for the sale.

BONDED DEBT: The portion of the an issuer's total indebtedness represented by outstanding bonds.

BOND ELECTION or BOND REFERENDUM: A process whereby the qualified voters of a governmental unit are given the opportunity to approve a proposed issue of municipal securities. An election is most commonly required in connection with general obligation bonds. The constitution, statute or local ordinance may impose requirements for voter approval.

BOND FUND: A portfolio of bonds administered by a manager, who offers shares in such fund to investors. Open-end bond funds offer shares continuously to the investing public, while closed-end bond funds contain a limited number of shares, and new investors must purchase shares from previous investors in such funds.

BONDHOLDER: The owner of a municipal bond. The owner of a bearer bond is the person having possession of it, while the owner of a registered bond is the person whose name is noted on the bond register.

BOND INSURANCE: Non-cancelable insurance purchased by the issuer from a bond insurer to which the insurer promises to make scheduled payments of interest, principal and


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mandatory sinking fund payments on an issue if the issuer fails to make timely payments. When an issue is insured, the investor relies upon the creditworthiness of the insurer rather than the issuer (or in addition to the issuer).

BOND ORDINANCE or RESOLUTION: The document or documents in which the issuer authorizes the issuance and sale of municipal securities. Issuance of the securities is usually approved in the authorizing resolution, and sale is usually authorized in a separate document known as the “sale” or “award” resolution. All such resolutions, read together, constitute the bond resolution, which describes the nature of the obligation, the issuer's duties to the bondholders and the issuer's rights with respect to the obligations and the security for the obligations. In certain jurisdictions, the governing body will act by means of an ordinance (“bond ordinance”) rather than by resolution.

BOND PROCEEDS: The money paid to the issuer by the purchaser or underwriter of a new issue of municipal securities. These monies are used to finance the project or purpose for which the securities were issued and to pay certain costs of issuance as may be provided in the bond contract.

BOND PURCHASE AGREEMENT: In a Negotiated Sale, the bond purchase contract is an agreement between an issuer and an Underwriter or a group of underwriters (a Syndicate or a Selling Group) who have agreed to purchase the issue. A bond purchase contract generally contains the following:

(i) The purchase price to be paid by the underwriter (including any premium or discount);

(ii) certain terms of the bonds, such as interest rates, maturities, redemption provisions, and original issue discount;

(iii) the circumstances under which the underwriter may cancel its obligation to purchase the issue (e.g., changes in the tax treatment of the bonds and other events which would make it substantially more difficult for the underwriter to sell the bonds to investors);

(iv) good faith deposit, if any;

(v) the conditions to the closing of the issue, which often include documents, certificates and opinions which are to be delivered on the closing date; and

(vi) any restrictions on the liability of the issuer. Other common names for a bond purchase contract are “contract of purchase” or “bond purchase agreement.”

In a competitive sale, the notice of sale, the underwriter's bid and the issuer's acceptance of the bid constitutes a bond purchase contract. Generally, these three items, taken together, contain items similar to those in a negotiated bond purchase contract.


BOND TRANSCRIPT: All legal documents, including minutes of appropriate meetings of the issuer, associated with the offering of a new issue of municipal securities. Bond counsel's opinion is given after a review of the transcript and becomes a part thereof.

BOND YEAR: A unit of $1,000 of debt outstanding for one year. The number of bond years in an issue is equal to the product of the number of bonds (with one bond equal to $1,000 regardless of actual authorized denominations) and the number of years from the dated date (or other stated date) to the stated maturity. The total number of bond years is used in calculating the average life of an issue and its net interest cost. Computations are often made of bond years for each maturity or for each coupon rate, as well as total bond years for an entire issue

BONDS AUTHORIZED AND UN-ISSUED: Bonds which have been legally authorized but not issued and which can be offered and sold without further authorization. This term should not be confused with the term “margin of borrowing power” or “legal debt margin” either one of which represents the difference between the legal debt limit of a governmental unit and the debt outstanding against it.

BROKER: A person or firm, other than a bank, which acts as an intermediary by purchasing and selling securities for others rather than for its own account.

BOOK-ENTRY ONLY (BEO) or BOOK-ENTRY SECURITY: A security that is not available to purchasers in physical form. Such a security may be held either as a computer entry on the records of a central holder (as is the case with certain U.S. Government securities) or in the form of a single, global certificate. Ownership interests of, and transfers of ownership by, investors are reflected solely by appropriate books and records entries. Most municipal securities issued in recent years have been in book-entry only form.

BUDGET: A plan of financial operation embodying an estimate of proposed expenditures for a given period and the proposed means of financing them. Used without any modifier, the term usually indicates a financial plan for a single fiscal year. The term “budget” is used in two senses in practice. Sometimes it designates the financial plan presented to the appropriating body for adoption and sometimes the plan finally approved by that body. It is usually necessary to specify whether the budget under consideration is preliminary and tentative or whether the appropriating body has approved it.

CALL: To give notice of redemption; to redeem.

CALLABLE BOND: A bond which the issuer is permitted or required to redeem before the stated maturity date at a specified price, usually at or above par, by giving notice of redemption in a manner specified in the bond contract.

CALL DATE: The date on which a bond may be redeemed before maturity at the option of the issuer.

CALL PRICE: The price established in the bond contract at which bonds will be redeemed, if called. Call price is generally at a premium and stated as a percentage of the principal amount called.


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CAPITAL APPRECIATION BOND: A municipal security on which the investment return on the initial principal amount is reinvested at a stated compounded rate until maturity, at which time the investor receives a single payment (the “maturity value”) representing both the initial principal amount and the total investment return. CABs typically are sold.

CARRY: The interest cost of financing the holding of securities. Negative Carry: The cost incurred in excess of income when borrowing to finance the holding of securities. Positive Carry: A condition where the yield on a security is greater than the interest cost of borrowed funds to finance its operative.

CASH FLOW: A comparison of cash receipts (revenues) to required payments (generally, debt service and operating expenses).

A cash flow may demonstrate that receipts by an issuer from a project's revenues or a mortgage portfolio, or from collection of a tax, fee, or other charge will be sufficient to equal or exceed, in each year the sum of payments of principal and interest on an issue and related expenses, generally on the basis of specified assumptions, which may include a “worst case” scenario.

A cash flow may also be used in the context of showing that payments of principal and interest received on investments held in escrow will be received at such times and in sufficient amounts to equal or exceed debt service on the issue for which the escrow fund has been established, such as is required for an advance refunding.

Finally, in a tax and revenue anticipation note financing, a cash flow may be used to determine the amount of the issuer's operating deficit, which is a factor in determining the permitted size of the issue under federal tax rules.

CERTIFICATE OF DEPOSIT or CD: A negotiable or non-negotiable receipt for moneys deposited in a bank or financial institution for a specified period at a specified rate of interest.

CERTIFICATE OF PARTICIPATION (COP): An instrument evidencing a pro rata share in a specific pledged revenue stream, usually lease payments by the issuer that are subject to annual appropriation. The certificate generally entitles the holder to receive a share, or participation, in the lease payments from a particular project. The lease payments are passed through the lessor to the certificate holders. The lessor typically assigns the lease and lease payments to a trustee, which then distributes the lease payments to the certificate holders.

CLOSING, DELIVERY or SETTLEMENT: The exchange of securities for payment in a new issue. This generally involves participation of representatives of the issuer, bond counsel, the underwriter and other relevant parties on the date of delivery of a new issue of municipal securities. On the closing date, the issuer delivers the securities and the requisite legal documents in exchange for the purchase price. In the case of book-entry securities, global certificates typically are delivered to a registered clearing agency in advance of closing, with the registered clearing agency effecting final delivery of the securities to the underwriter on the closing date by means of book entries. Sometimes a “pre-closing” is held before delivery, typically on the day preceding closing, to review the adequacy of the closing procedures and documents.


COMMERCIAL PAPER or TAX-EXEMPT COMMERCIAL PAPER: Short-term, unsecured promissory notes issued in either registered or bearer form, and usually backed by a line of credit with a bank. Maturities do not exceed one year and often average 30-45 days.

COMPETITIVE SALE: The sale of bonds to the bidder presenting the best sealed bid at the time and place specified in a published notice of sale (also called a public sale).

When bonds are to be sold at a competitive sale, the issuer typically specifies all of the terms of the issue other than interest rates and purchase price. When the issue is ready to market, the issuer solicits bids by placing a notice of sale in one or more industry publications such as The Wall Street Journal or The Bond Buyer and, if required by law, in a local newspaper of general circulation. In the notice of sale, the issuer announces that it will accept sealed bids until a certain date and time. Prior to presenting the bids the underwriters evaluate the credit quality of the issue and the municipal market and may form syndicates or selling groups. The bonds are awarded to the underwriters presenting the best bid based on the criteria specified in the notice of sale. Possible criteria include the Net Interest Cost (NIC) method or the net effective interest rate or True Interest Cost (TIC) method of comparing the cost to the issuer of the financing.

COMPOUND: To treat accrued interest as if it were principal, so that interest thereafter accrues on the sum of the principal and the compounded interest.

CONDUIT FINANCING: A financing in which the proceeds of the issue are loaned to a non-governmental borrower who then applies the proceeds for a Project Financing or (if permitted by federal tax law for a Qualified 501(c)(3) Bond) for working capital purposes. The issuance of securities are by a governmental unit to finance a project to be used primarily by a third party, usually a corporation engaged in private enterprise. The security for this type of issue is the credit of the private user rather than the governmental issuer. Usually such securities do not constitute general obligations of the issuer because the corporate obligor is liable for generating the pledged revenues.

CONDUIT ISSUER: A governmental agency that issues bonds in connection with a conduit financing.

CONFIRMATION: A written summary of a transaction involving the purchase or sale of municipal securities, which the broker or dealer provides to the customer. The confirmation must contain certain information describing the securities and the parties to the transaction. The contents of the customer confirmation are prescribed by Municipal Securities Rule Making Board Rule G-15.

CONTINUING DISCLOSURE: The ongoing disclosure provided by an issuer or obligated person pursuant to an undertaking entered into to allow the underwriter to comply with SEC Rule 15c2-12.

CONTINUING DISCLOSURE AGREEMENT/CERTIFICATE: An agreement (sometimes a certificate) of an issuer or an obligated person containing undertakings to provide annual reports and event notices pursuant to SEC Rule 15c2-12.


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COSTS OF ISSUANCE: The expenses associated with the sale of new issue of municipal securities, including such items as underwriter's spread, printing, legal fees and rating costs. In certain cases, the underwriter’s discount may be considered one of the costs of issuance. The Internal Revenue Code restricts the use of bond proceeds to pay costs of issuance for certain types of tax-exempt bonds, such as private activity bonds.

COUPON: The detachable part of a bond that specifies the date, place and dollar amount of interest payable. Bondholders detach the coupons from bonds, usually semi-annually, and present them to the issuer's paying agent for payment or to the bondholder's bank for collection.

COUPON BOND: A bearer bond, or a bond registered as to principal only, carrying coupons as evidence of future interest payments. As of July 1, 1983, virtually all bonds of one year or greater maturity must be registered under the provisions of the Tax Equity and Fiscal Responsibility Act of 1982.

COUPON RATE: The annual rate of interest payable on a security expressed as a percentage of the principal amount. The coupon rate, sometimes referred to as the “nominal interest rate,” does not take into account any discount (or premium) in the purchase price of the security.

COVENANT or BOND COVENANT: The issuer's enforceable promise to do or refrain from doing some act. With respect to municipal bonds, covenants are generally stated in the bond contract. Covenants commonly made in connection with a bond issue include covenants to charge fees for use of the financial project sufficient to provide required pledged revenues (rate covenant); to maintain casualty insurance on the project; to complete, maintain and operate the project; not to sell or encumber the project; not to issue parity bonds unless certain earnings tests are met (additional bonds covenant); and not to take actions which would cause the bonds to be arbitrage bonds.

COVER: The spread between the winning bid and the next highest bid. It is useful as a basis for evaluation of the bids.

COVERAGE: The ratio of pledged revenues available annually to pay debt service requirement. This ratio is one indication of the margin of safety for payment of debt service.

CREDIT ENHANCEMENT: The use of credit of an entity other than the issuer or obligor to provide additional security in a bond or note financing. This term typically is used in the context of bond insurance, bank letters of credit and other facilities, state school guarantees and credit programs of federal or state governments or federal agencies, but also may refer more broadly to the use of any form of guaranty, secondary source of payment or similar additional credit-improving instruments.

CURRENT COUPON: An interest rate that is in line with interest rates on new issues of securities being sold at the current time. A bond with a “current coupon” would be trading at a price close to par and would have a yield-to-maturity approximately equal to its interest rate.


CUSIP NUMBERS (Committee on Uniform Security Identification Procedures): Identification numbers assigned each maturity of a bond issue, and usually printed on the face of each individual bond in the issue. The CUSIP numbers are intended to facilitate identification and clearance of municipal securities.

DATED DATE: The date of a bond issue, printed on each bond, from which interest usually starts to accrue, even though the bonds may actually be delivered at some later date.

DATE OF ISSUANCE/ORIGINAL ISSUANCE DATE: The date of issuance is the same as the closing date. However, the original issuance date, as used on the standard registered bond form, is the same as the dated date.

DEALER: A securities firm or department of a commercial bank that engages in the underwriting, trading and selling of municipal securities.

DEBT: An obligation resulting from the borrowing of money or from the purchase of goods and services. Debt of governmental units includes bonds, time warrants, notes, and floating debt.

Bond: An interest-bearing promise to pay with a specific maturity.

Note: In general, an unconditional written promise signed by the maker to pay a certain sum of money on demand or at a fixed or determinable time either to the bearer or to the order of a person therein.

Time Warrant: A negotiable obligation of a governmental unit having a term shorter than bonds and frequently tendered to individuals and firms in exchange for contractual services, capital acquisitions, or equipment purchases.

Floating Debt: Liabilities other than bonded debt and time warrants which are payable on demand or at an early date. Examples are accounts payable, notes and bank loans.

DEBT LIMITATIONS: The maximum amount of debt which an issuer of municipal securities is permitted to incur under constitutional, statutory or charter provisions. The limitation is usually a percentage of assessed valuation and may be fixed upon either gross or net debt. If the later is the case, the legal provision will usually specify what deductions from gross debt are allowed in order to determine net debt.

DEBT SERVICE: The amount of money necessary to pay interest on an outstanding debt, the serial maturities of principal for serial bonds and the required contributions to an amortization or sinking fund for term bonds. Debt service on bonds may be calculated on a calendar year, fiscal year or bond fiscal year basis.

DEBT SERVICE FUND: A fund established to account for the payment of interest and principal on all general obligation debt, both serial and term. Usually separate funds are created for special assessment and revenue debt issued for and serviced by a government enterprise.


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DEFAULT: Breach of some covenant, promise or duty imposed by the bond contract. The most serious default occurs when the issuer fails to pay principal or interest or both, when due. Other, “technical” defaults result when specifically defined “events of default” occur, such as failure to perform covenants. Technical defaults may include failing to charge rates sufficient to meet rate covenants or failing to maintain insurance on the project. If the issuer defaults in the payment of principal, interest or both, or if a technical default is not cured within a specified period of time, the bondholders or trustee may exercise legally available rights and remedies or enforcement of the bond contract.

DEFEASANCE: Termination of the rights and interests of the bondholders and of their lien on the pledged revenues in accordance with the terms of the bond contract for the prior issue of bonds. Defeasance usually occurs in connection with the refunding of an outstanding issue by the final payment, or provision for future payment, of principal and interest on a prior issue.

DEFICIT: 1) The excess of an entity's liabilities over its asset; 2) The excess of expenditures or expenses over revenues during a single accounting period.

DELIVERY DATE: Date on which the bonds are physically delivered in exchange for the payment of the purchase price. In the case of new issues, the delivery date, not the dated date is considered the date of issuance.

DEMAND BOND: A long-term-maturity security which is subject to a frequently available put option or tender option feature under which the holder may put the security back to the issuer or its agent at a predetermined price (generally par) after giving specified notice. The put option or tender option right is typically available to the investor on a weekly or monthly basis, although on some demand securities the investor has a daily right to exercise the put option. Many of these securities are floating or variable rate securities, with the put option exercisable on dates on which the floating rate changes. These latter securities are often called “variable rate demand notes” or, colloquially, “lower floaters.”

DENOMINATION: The face amount or par value of a bond that the issuer promises to pay on the maturity date. Most municipal bonds are issued in the minimum denomination of $5,000, although a few issues are available in smaller denominations. Registered bonds may be issued in larger denominations.

DEPRECIATION: 1) Expiration of the service life of capital assets attributable to wear and tear, deterioration, of the physical elements, inadequacy or obsolescence. 2) That portion of the cost of a capital asset that is charged as an expense during a particular period.

DESCRIPTION OF THE BONDS: A summary of the terms and provisions of the bond issue, including the denomination and form of the bonds, purpose of the bonds, lien status, security, covenants and provisions for redemption. Identifying features of a bond include the dated date, issuer, interest rate, maturity date and CUSIP number.

DISCOUNT: The amount by which par value exceeds the price paid for a security and which generally represents the difference between the nominal interest rate and the actual or effective return to the investor.


DISSEMINATION AGENT: An agent appointed pursuant to a continuing disclosure agreement for the purpose of filing annual reports and event notices with NRMSIRs and state information depositories.

DOUBLE-BARRELED BOND: A bond secured by both a defined source of revenue (other than property taxes) and the full faith and credit of an issuer that has taxing powers. The term is occasionally, although erroneously, used in reference to bonds secured by any two sources of pledged revenues.

DUE DILIGENCE: The process of thorough investigation of a bond issue. Such inquiry is made to assure that all material facts are fully disclosed to potential investors and that there have been no material omissions or misstatements of fact. The issuer, the obligation of the bonds, and the true obligor in a conduit financing are investigated. Further inquiry may be required if the investigation reveals facts that are incomplete, suspect or inconsistent, either on their face or in light of other facts known to counsel. Due diligence with respect to municipal securities is not the same process as the more formal due diligence required with respect to corporate debt and equity securities.

DUE DILIGENCE OPINION: A letter of counsel, often referred to as a “10b-5 opinion,” generally based upon an investigation of specified facts, and addressing the accuracy and completeness of the official statement. A due diligence opinion addressed to an underwriter by underwriter’s counsel customarily states that, based on certain specified inquiries, nothing has come to such counsel’s attention indicating that the official statement contains any misstatements of material facts or any material omissions. A due diligence opinion by counsel to an issuer or conduit borrower may use similar or different language to address the adequacy and accuracy of the disclosure made. A due diligence opinion may or may not be issued, depending on the nature and complexities of the new issue of municipal securities.

ECONOMIC USEFUL LIFE: The period over which an asset may reasonably be expected to yield economic benefit to its owner.

Because economic factors can render property useless for its intended purpose long before the property deteriorates physically, the economic life of an asset is often different from its physical life. The maturity of an issue of bonds generally may not exceed 120 percent of the weighted average useful life of financed facilities if interest on the bonds is to be tax-exempt. In determining the economic useful life for this purpose, a safe harbor is available by reference to periods prescribed by the Internal Revenue Service under its Asset Depreciation Range (ADR) system.

ENCUMBRANCES: Obligations in the form of purchase orders, contracts or salary commitments which are chargeable to an appropriation and for which a part of the appropriation is reserved. They cease to be encumbrances when paid or when an actual liability is established.

EFFECTIVE INTEREST COST: The rate at which the total debt service payable on a new issue of municipal securities would be discounted to provide a present value equal to the amount bid on the new issue.


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EFFECTIVE INTEREST RATE: The actual rate of interest earned by the investor on securities, which takes into account the amortization of any premium or the accretion of any discount over the period of the investment. ELIGIBLE SECURITIES: Typically refers to the types of securities authorized under the bond contract to be held in escrow for the purpose of defeasing bonds.

ENTERPRISE: A defined revenue producing life set of facilities that are optionally integrated and which have a common service purpose.

An enterprise may consist of all of the facilities of a special district, such as a municipal water district, or may consist of only a portion of the assets of a general purpose governmental entity, such as the water system of a city.

ENTERPRISE ACTIVITY: A revenue-generating facility or system that provides funds necessary to pay debt service on securities issued to finance its construction or improvement. The debt incurred for such facility or system is self-liquidating when the facility or system produces sufficient revenues to cover all debt service and other requirements imposed under the bond contract. Common examples include water and sewer systems and power supply systems.

ENTERPRISE FUND: A fund established by a governmental entity to account for operations of an enterprise activity. Enterprise funds generally are segregated as to purpose and use from other funds and accounts of the governmental entity with the intent that revenues generated by the enterprise activity and deposited to the enterprise fund will be devoted principally to funding all operations of the enterprise activity, including payment of debt service on securities issued to finance such activity. In some cases, however, the governmental entity may be permitted to use moneys in an enterprise fund for other purposes and to use other funds to pay costs otherwise payable from the enterprise fund.

ESCROW ACCOUNT: A fund established to hold moneys pledged and to be used solely for a designated purpose, typically to pay debt service on an outstanding bond issue in a refunding.

ESCROW DEPOSIT AGREEMENT: An agreement that typically provides for the deposit of moneys or securities in an escrow account to refund an outstanding issue of municipal securities. The agreement sets forth the manner in which funds are to be invested (generally in eligible securities) pending their expenditure and the schedule on which on-going debt service payments are to be made and early redemptions, if any, of securities are to occur.

EXEMPT SECURITIES or EXEMPTED SECURITIES: Issues not subject to the registration requirements of the Securities Act of 1933 or the reporting requirements of the Securities Exchange Act of 1934. In general, obligations of the United States Government, states, municipalities or other political subdivisions are exempted.

EXPENDITURES: Where accounts are kept on the accrual or modified accrual basis of accounting, the cost of goods received or services rendered whether cash payments have been


made or not. Where accounts are kept on a cash basis, expenditures are recognized only when the cash payments for the above purposes are made.

FAIL: A transaction between municipal securities brokers or dealers on which delivery does not take place on the settlement date. A transaction in which a dealer has yet to deliver securities is referred to as a “fail to deliver,” a transaction in which a dealer has not yet received securities is referred to as a “fail to receive.”

FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) OR (FREDDIE MAC): One of the two presently existing corporations that formerly comprised the FNMA. As it currently exists, FNMA is a government-sponsored private corporation authorized to purchase and sell mortgages and to otherwise facilitate the orderly operation of a secondary market for home mortgages. The purchase of mortgages by FNMA is financed by the sale of its corporate debentures and notes. Sellers of mortgages may be required to purchased FNMA stock in connection with some transactions.

FINANCIAL ADVISOR or CONSULTANT: With respect to a new issue of municipal bonds, a consultant who advises the issuer on matters pertinent to the issue, such as structure, timing, marketing, fairness of pricing, terms and bond ratings. Such consultant may be employed in a capacity unrelated to a new issue of municipal securities, such as advising on cash flow and investment matters. Provides similar services to those of an Investment Banker during the sale process, but does not underwrite bonds. Additionally serves as agent for the issue during the pricing of bonds during a negotiated sale.

FIRST COUPON or FIRST INTEREST PAYMENT: The date on which an issuer’s initial interest payment to bondholders on a particular security is due.

FISCAL AGENT: An agent (usually an incorporated bank or trust company) designated by a government to act for it in any of several capacities in the sale, administration and payment of bonds and coupons.

FISCAL YEAR: A 12-month period of time to which the annual budget applies and at the end of which a governmental unit determines its financial position and the results of its operations. For example, the State of Oregon's fiscal year starts July 1 and ends June 30 of the succeeding calendar year.

FITCH RATINGS: A nationally recognized statistical rating organization that provides ratings for municipal securities and other financial information to market participants.

FIXED RATE: An interest rate that is set at the time a bond issued and that does not vary during the term of the bond.

FLOAT: The amount of money represented by checks outstanding and in the process of collection.

FLOATING or VARIABLE INTEREST RATE: A method of determining the interest to be paid on a bond issue by reference to an index or according to a formula or other standard of measurement at intervals as stated in the bond contract. One common method is to


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calculate the interest rate as a percentage of the prime rate published by a named financial institution on specified dates.

FLOW OF FUNDS: The order and priority of handling, depositing and disbursing pledged revenues, as set forth in the bond contract. Generally, the revenues are deposited, as received, into a general collection account or revenue fund for disbursement into the other accounts established by the bond contract. Such other accounts generally provide for payment of debt service, debt service reserve, operation and maintenance costs, redemption, renewal and replacement and other requirements.

FORECLOSURE: A lawsuit by which the issuer of assessments or Mello-Roos bonds enforces the payment obligation against a defaulting landowner by suing to have the property sold to repay the debt. Issuers in these land-secured financings promise in the bond documents to prosecute foreclosure actions against defaulting landowners.

FULL FAITH AND CREDIT: A pledge of the general taxing power for the payment of debt obligation. Bonds carrying such a pledge are usually referred to as general obligation bonds or full faith and credit bonds.

FUND: An independent fiscal and accounting entity with a self-balancing set of accounts recording cash and/or other resources together with all related liabilities, obligations, reserves, and equities which are segregated for the purpose of carrying on specific activities or attaining certain objectives.

FUND BALANCE: The excess of an entity's assets over its liabilities. A negative fund balance is sometimes called a deficit.

GENERAL OBLIGATION BONDS (GO BONDS): Bonds that are secured by the full faith and credit of the issuer. In Oregon, state general obligation bonds are secured by the state's full taxing power not otherwise pledged to trust funds. General Obligation bonds issued by local units of government are secured by a pledge of the issuer's ad valorem taxing power. Ad valorem taxes necessary to pay debt service on general obligation bonds are not subject to the constitutional property tax millage limits. Such bonds constitute debts of the issuer and normally require approval by election prior to issuance. In the event of default, the holders of general obligation bonds have the right to compel a tax levy or legislative appropriation, by mandamus or injunction, in order to satisfy the issuer's obligation on the defaulted bonds.

GOOD FAITH DEPOSIT: A sum of money, usually in an amount from 1 percent to 5 percent of the par value of the bond issue, and generally in the form of a certified or cashier's check, which is enclosed with the bid in a competitive sale. The check is returned to the bidder if the bid is not accepted, but the check of the successful bidder is retained by the issuer and applied against the purchase price if the bonds are delivered. In the event the winning bidder fails to pay for the bonds on the delivery date, the check is usually retained by the issuer as full or partial liquidated damages.

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) or (GINNIE MAE): One of two corporations formerly comprising the FNMA, GNMA is an agency of the federal Department of Housing and Urban Development empowered to provide


special assistance in financing home mortgages and is responsible for management and liquidation of federally owned mortgage portfolios. GNMA's special assistance functions are carried out by issuing two types of securities pledging the full faith and credit of the United States Government pass-through securities by which principal and interest payments on mortgages in specified pools are passed on to the holders of such certificates; and mortgage-backed bonds. Its liquidation functions involve the issuance of participation certificates (PCs) representing beneficial interest in future payments on a pool of mortgages.

GOVERNMENTAL BONDS: Bonds that are issued by a public agency and not private activity bonds.

HEDGE BONDS: Bonds and substantially in advance of when monies will be needed for the purpose being financed, in order to hedge against subsequent interest rate increases.

The Internal Revenue Code contains specific limitations on tax-exempt hedge bonds (as defined therein).

HIGH-YIELD BOND: A bond with unfavorable credit characteristics that is typically non-rated or rated below investment grade. A high-yield bond trades at yields substantially higher than bonds with more favorable credit characteristics and often suffers from lack of liquidity and marketability.

HOUSING REVENUE BONDS: A bond that is secured by revenues derived from rentals from financed housing projects or house mortgages. There are two major types of housing revenue securities:

Single-Family Mortgage Revenue Bonds: Bonds issued to finance mortgages on single-family homes, either directly by purchasing newly originated or existing mortgage loans or indirectly by allowing lenders to purchase mortgage loans using bond proceeds. Repayment of the mortgages may be guaranteed under federal programs or through private mortgage insurance. The issuance of single-family mortgage revenue bonds is subject to stringent requirements under Section 103A of the Internal Revenue Code.

Multi-Family Housing Revenue Bonds: Bonds issued to finance construction of multi-family housing projects, typically for the elderly or for moderate-and low-income families. These securities also may provide financing either directly or through a loans-to-lenders program, and may be secured, in whole or in part, by federal guarantees or subsidies.

INDENTURE: See TRUST INDENTURE.

INDUCEMENT RESOLUTION: The first “official action” or evidence of official intent indicating an issuer’s intent to issue certain types of private activity bonds. Because the proceeds of such bonds generally may be used on a tax-exempt basis only to finance capital costs incurred after official action has been taken toward issuing the bonds, the inducement resolution determines the point after which the user of the project being financed can be reimbursed for capital costs paid or incurred in connection with the acquisition and construction of the project


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(subject to exceptions for certain expenditures incurred prior to the date of the inducement resolution).

INDUSTRIAL DEVELOPMENT REVENUE BOND (IDBs, IDRBs, IRBs): Bonds issued by governmental units, the proceeds of which are used to construct plan facilities for private industrial concerns. Lease payments made by the industrial concern to the governmental unit are used to service the bonds. Such bonds may be in the form of general obligation bonds, revenue bonds, or a combination thereof.

INSTITUTIONAL SALES: Sales of securities to banks, financial institutions, insurance companies or other business organizations (institutional investors) that possess control over considerable assets for large scale investing.

INTEREST: Compensation paid or to be paid for the use of money, including amounts payable at periodic intervals or as discount at the time a loan is made. Interest may be paid or may Compound at intervals different from the period used to express the interest rate. For example, interest on current interest Fixed-Rate bonds generally is expressed as an annual rate, but is paid semiannually, with each semiannual payment being one-half of the amount that would accrue over an entire year. Interest on Compound Interest Fixed-Rate bonds generally is compounded semiannually and paid at Maturity. Interest on Variable Rate bonds accrues at a rate that changes from time to time (perhaps as often as daily), but each such rate is nevertheless generally expressed as a percentage per year.

The amount of interest that has accrued over a period shorter than the payment or compounding interval may be determined by one of several different rules. For example, if interest accrues “on the basis of a 360-day year of 12 30-day months,” the amount of interest that has accrued since the last payment or compounding date is calculated assuming that 1/12 of one year's interest accrues for each complete calendar month and 1/360 of one year's interest accrues for each additional day. On the other hand, if interest is calculated on the basis of a year of 365 days and the actual number of days elapsed, the amount of interest accrued since the last payment or compounding date is calculated assuming that 1/365 of one year's interest accrues each day.

Generally, interest on fixed-rate bonds is calculated on the basis of a 360-day year and interest on variable rate bonds is calculated on the basis of a 365-day year.

INTEREST RATE: The annual percentage of principal payable for the use of borrowed money.

INTEREST RATE EXCHANGE AGREEMENT or SWAP: A contract entered into by an issuer or obligor with a swap provider to exchange periodic interest payments. Typically, one party agrees to make payments to the other based upon a fixed rate of interest in exchange for payments based upon a variable rate. Interest rate swap contracts typically are used as hedges against interest rate risk or to provide fixed debt service payments to an issuer or conduit borrower dependent on a specified revenue stream for payment of such debt. For example, an issuer may issue variable rate debt and simultaneously enter into an interest rate swap contract. The swap contract may provide that the issuer will pay to the swap counter-party a fixed rate of


interest in exchange for the counter-party making variable payments equal to the amount payable on the variable rate debt. See: SWAP.

INVESTMENT AGREEMENT: An agreement, typically purchased by the Trustee for an Issue from a financial institution, in which the financial institution agrees to guarantee a certain investment return on moneys, often Proceeds of the issue, invested under the agreement.

The return provided by the investment agreement may be fixed at a stated interest rate for each fund or account held by the trustee, or may “float” at a level related to the Yield on the bonds (if the bonds bear interest at a Variable Rate) or some other index. Moneys that may be invested include a fund for the construction or acquisition of the project or the program loans to be financed, a Reserve Account, and a fund in which moneys to pay debt service on the issue are accumulated. An investment agreement is usually provided by a highly rated financial institution, in most instances a commercial bank or insurance company, because the Credit Rating on the bonds may be used in part on the credit rating (or the rating of the claims-paying ability) of the institution providing the investment agreement.

Investment agreements are sometimes used as a convenient means of managing the investment of moneys that are subject to Arbitrage Yield Restriction or Rebate.

INVESTMENT BANKER: A person who works in the “Finance Department” at a banking firm and normally works in the field with the security issuer. These people normally do not work on the underwriting desk nor are they registered to sell or trade bonds. They aid the issuer in preparing bonds for sale to the underwriter.

INVESTMENT GRADE: The broad credit designation given bonds that have a high probability of being paid. Such bonds have minor, if any, speculative features and are rated as least BBB by Standard & Poor’s Corporation, BBB by Fitch Ratings, or Baa by Moody's Investors Service. Bank examiners require that most bonds held in bank portfolios be investment grade.

INVESTMENT OF PROCEEDS: The investment of Proceeds and other moneys relating to an issue is typically governed by state law and by the indenture or bond resolution.

Either document may prescribe both the types of investments which may be purchased (e.g., U.S. Treasury obligations, bank certificates of deposit, or corporate obligations with a specified rating) and the maximum maturity of investments of certain funds (e.g., short term investments for moneys to be used to make the next debt service payment, longer term investments for reserves). The Arbitrage rules under federal tax law may regulate the Yield at which proceeds may be invested.

INVESTOR or BONDHOLDER: Ultimate buyer of any number of bonds from an issue who intends to hold the bonds for investment purposes.

INVESTOR LETTER: A letter signed by an investor acknowledging the risks associated with the securities being purchased and usually containing one or more representations of the investor as to its financial ability to take such risks, its access to information on the securities, its intent to hold the securities for investment purposes (i.e., not for


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resale), and/or such other matters determined by the issuer or underwriter of the securities. Typically, an issuer or underwriter will establish such standards in connection with more risky securities that it believes should be held only by investors with sufficient resources and market sophistication to understand and bear the risks involved in such investment. This letter is sometimes referred to as a “big boy letter” or “sophisticated investor letter.” When used in a private placement, this letter may be referred to as a “private placement letter.” Some letters may be said to “travel” if they include a representation on the part of the investor to the effect that, if the investor resells the securities, it will require the purchaser to sign an identical letter. Such a letter is often referred to as a “traveling letter.”

IRREVOCABLE LETTER OF INSTRUCTIONS: A letter sometimes delivered by the issuer to the bond trustee and/or escrow agent appointed under an escrow deposit agreement setting forth the issuer’s irrevocable instructions to apply moneys held under the escrow deposit agreement to payment of debt service on a refunded issue of securities and to call such issue for redemption on a specified date. These instructions often are contained in the escrow deposit agreement itself, in which case an irrevocable letter of instructions is not necessary.

ISSUER: A state, political subdivision, agency or authority that borrows money through the sale of bonds or notes.

JUNIOR LIEN BONDS or JUNIOR LIEN REVENUE BONDS: Bonds that have a subordinate claim against pledged revenues or other security, also known as “subordinate lien bonds.”

LEASE or LEASE-PURCHASE BONDS: Revenue bonds paid from lease payments made on projects financed by bonds.

LEGAL OPINION or APPROVING OPINION: The written conclusions of bond counsel that the issuance of municipal securities and the proceedings taken in connection therewith comply with applicable laws, and that interest on the bonds will be exempt from federal income taxation and, where applicable, from state and local taxation.

LETTER OF CREDIT or LC or L.O.C.: An agreement, usually with a commercial bank, to honor demands for payment upon compliance with conditions established in the agreement. Bank letters of credit are sometimes used as additional sources of security for municipal bond and note issues. Examples are to secure commercial paper and put bonds with letters of credit.

Customarily, a letter of credit is issued by a commercial bank directly to the trustee and is irrevocable until a specified date. The letter of credit entitles the trustee, if certain conditions are met, to draw upon the letter of credit by submitting to the bank a written request for payment (a draft) and other carefully specified documents and certificates. If the documents submitted for the draw meet the requirements specified in the letter of credit, the bank must pay as provided in the letter of credit.

Letters of credit are also used as Liquidity Facilities in connection with obligations such as Commercial Paper or Demand Bonds. The trustee may draw upon the letter of credit if commercial paper has matured and not been “rolled over” by issuing new commercial paper, or


if demand bond owners “put” them to the issuer, and the Remarketing Agent is unable to find new purchasers.

A draw on a letter of credit results in an obligation by the “account party” on the letter of credit to reimburse the bank for the amount of the draw, plus interest if the reimbursement is not immediate. The account party may be either the issuer or, in the case of a Conduit Financing, the Non-governmental Borrower.

A letter of credit may be either a “direct pay letter of credit” or a “standby letter of credit.” A direct pay letter of credit entitles the trustee to draw on the letter of credit for all debt service payments. Moneys that would otherwise be available to pay debt service are then used to reimburse the bank. Because payments of principal and interest are made from moneys of the bank rather than of the issuer, receipts by the owners of bonds are not subject to being reclaimed from the owners of bonds under the federal Bankruptcy Code.

In the case of a standby letter of credit, the trustee only draws on the letter of credit in the event moneys available to pay debt service are insufficient. In this type of financing, to assure that payments to owners of bonds are not subject to being reclaimed in a bankruptcy, moneys for debt service are typically required to be on deposit several months in advance of the date on which payments are made to the owners of bonds. These moneys are then “seasoned” for the period required extinguishing any potential claim to them in a bankruptcy.

LEVEL DEBT SERVICE: An arrangements of serial maturities in which the amount of principal maturing increases at approximately the same rate as the amount of taxes, special assessments or service charges imposed by a governmental unit.

LIABILITY: Debt or other legal obligations arising out of transactions in the past which must be liquidated, renewed or refunded at some future date. Note: The term does not include encumbrances.

LIBOR: A benchmark interest rate upon which many transactions are based. Obligations of parties to such transactions are typically expressed as a spread to LIBOR. The term is an acronym for “London Inter-Bank Offered Rate.”

LIMITED OFFERING: An offering of a new issue of municipal securities sold to a limited number of investors that meet certain established standards for qualifying as a purchaser of the securities. The term typically refers to an offering exempt from the provisions of Rule 15c2-12 as a primary offering of municipal securities in authorized denominations of $100,000 that are sold to no more than 35 persons each of whom the underwriters reasonably believe: (A) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment; and (B) is not purchasing for more than one account or with a view to distributing the securities.

LIMITED TAX BOND: A bond secured by the pledge of a specified tax or category of taxes.

LIMITED TAX GENERAL OBLIGATION BOND: A general obligation bond secured by the pledge of ad valorem tax that is limited as to rate or amount.


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LINE OF CREDIT: A line of credit is a contract between the Issuer and a bank that provides a source of borrowed moneys to the issuer in the event that moneys available to pay Debt Service (e.g., on Commercial Paper) or to purchase a Demand Bond are insufficient for that purpose. If a draw on line of credit is necessary, the issuer notifies the bank and executes a note for the amount of the loan.

LIQUIDITY (of investment): The ability to convert an investment to cash promptly with minimum risk to principal or accrued interest.

LIQUIDITY FACILITY: A letter of credit, standby bond purchase agreement or other arrangement used to provide liquidity to purchase securities that have been tendered to the issuer or its agent but which cannot be immediately remarketed to new investors. The provider of the liquidity facility, typically a bank, purchases the securities (or provides funds to the issuer or its agent to purchase the securities) until such time as they can be remarketed.

LOAN AGREEMENT: An agreement under which the Proceeds of a Conduit Financing are loaned to the non-governmental borrower and the borrower agrees to pay to the Issuer or the Trustee the amounts necessary to pay Debt Service on the Issue.

A loan agreement usually includes a set of Covenants, financial tests and restrictive provisions governing the borrower and the project financed.

LOCAL GOVERNMENT INVESTMENT POOL (LGIP): An investment trust established by a state or local governmental entity or instrumentality that serves as a vehicle for the pooled investment of public moneys of participating governmental units. Participants purchase shares or units in the trust and trust assets are invested in a manner consistent with the trust’s stated investment objectives.

LONG-TERM DEBT: Debt with a maturity of more than one year after the date of issuance.

MANAGEMENT FEE: (1) A component of the underwriter’s discount. See: SPREAD or UNDERWRITER’S GROSS SPREAD.

(2) A fee paid by an issuer of municipal fund securities to its investment advisor for management of the underlying investment portfolio and other services rendered. Typically, the management fee is based on a percentage of the portfolio’s asset value and is paid from portfolio assets. Thus, the management fee ultimately is paid by the investor.

MANAGER: The leading member or members of an underwriting syndicate charged with primary responsibility for conducting the affairs of the syndicate. The manager generally takes the largest underwriting commitment.

Lead or Senior Manager: A single underwriter serving as head of the syndicate. The lead manager generally handles negotiations in a negotiated underwriting of a new issue of municipal securities and directs the processes by which bids are calculated for a competitive underwriting. The lead manager generally signs contracts on behalf of the


syndicate and is charged with allocating bonds among the members of the syndicate according to the terms of the syndicate account and orders received.

Joint or Co-Manager: The terms may be used in two contexts. In a negotiated underwriting, the issuer may appoint multiple underwriters, each of which is referred to as a joint or co-manager. When a large syndicate is composed of several smaller syndicates that may operate as syndicates themselves, each such smaller syndicate will be represented by its manager in the consolidation of syndicates. Each group's representative is a joint manager of the consolidated syndicate. In either event, one of the joint managers is selected as lead manager.

MANDATORY TENDER: The requirement that a holder of a security surrender the security to the issuer or its agent (e.g., a tender agent) for purchase. The tender date may be established under the bond contract or may be specified by the issuer upon the occurrence of an event specified in the bond contract. The purchase price typically is at par. This term is sometimes referred to as a “mandatory put.”

MARKET VALUE: The price at which a security can be currently traded in the market, also known as the “market price.”

MARK-DOWN: A form of remuneration received by a broker-dealer when purchasing securities as principal from a customer. Mark-down generally is considered to be the differential between the prevailing market price of the security at the time the broker-dealer purchases the security from the customer and the lower price paid to the customer by the broker-dealer. MSRB rules require that the price at which a broker-dealer purchases a municipal security from a customer be fair and reasonable, taking into consideration all relevant factors. MSRB rules do not provide numerical guidelines regulating the amount of mark-down but do recognize that the mark-down can affect whether the total price paid to a customer is fair and reasonable.

MARK-TO-MARKET: A process whereby the carrying value of a security is adjusted to reflect its current market value. Certain regulatory requirements mandate that broker-dealers carry positions at prices that reflect current market values. Issuers or their agents also must generally adjust the value of securities held in a debt service reserve fund or other bond-related fund, or of investments held in a local government investment pool, to reflect current market value.

MARK-UP: A form of remuneration received by a broker-dealer when selling securities as principal to a customer. Mark-up generally is considered to be the differential between the prevailing market price of the security at the time the broker-dealer sells the security to the customer and the higher price paid by the customer to the broker-dealer. MSRB rules require that the price at which a broker-dealer sells a municipal security to a customer be fair and reasonable, taking into consideration all relevant factors. MSRB rules do not provide numerical guidelines regulating the amount of mark-up but do recognize that the mark-up can affect whether the total price paid by a customer is fair and reasonable.

MARKETABILITY: The ease or difficulty with which securities can be sold in the market. An issue’s marketability depends upon many factors, including its coupon, security


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provisions, maturity, credit quality and the existence of ratings. In the case of a new issue, marketability also depends upon the size of the issue, the timing of its issuance, and the volume of comparable issues being sold.

MASTER RESOLUTION or MASTER INDENTURE: The document stating the general terms and conditions under which an issuer can offer more than one series of bonds. Among the terms that generally must be satisfied in order for a new series of bonds to be issued is the “additional bonds” test. Typically, an issuer will enter into a supplemental indenture in connection with each series of bonds issued under a master indenture.

MATERIAL/MATERIAL FACTS: Facts that a reasonably prudent investor would want to know in making an investment decision.

MATERIAL EVENT DISCLOSURE: Disclosure of certain enumerated events affecting a municipal security required to be made under a continuing disclosure agreement meeting the requirements of Rule 15c2-12. These events include the following, if material: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the security; (7) modifications to rights of securities holders; (8) bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the securities; (11) rating changes; and (12) failure to provide annual financial information as required.

MATERIAL OMISSION: The failure to include in an official statement or other offering document any information that is necessary to produce full disclosure. The term arises from the language of Rule 10b-5, which provides that it is unlawful in connection with the purchase or sale of securities to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.

MATURITY or MATURITY DATE: The date the principal of a municipal security becomes due and payable to the security holder.

MATURITY SCHEDULE: An amortization schedule listing the maturity dates and maturity values of each maturity of an issue of bonds.

MATURITY VALUE: The amount (other than a periodic interest payment) that will be received at the time a security is redeemed at its maturity. On most securities the maturity value equals the par value; on zero coupon, compound interest and multiplier bonds, however, the maturity value will equal the principal amount of the security at issuance plus the accumulated investment return on the security.

MONEY MARKET INSTRUMENTS: Obligations that are commonly traded in the money market. Money market instruments are generally short-term and highly liquid. In addition to certain U.S. Government securities, the following are commonly traded in the money market:


Bankers Acceptance or BA: A draft or bill of exchange most commonly generated in import or export transactions, representing moneys due at a future date in connection with the transaction, the payment of which has been guaranteed by the “accepting” bank. Bas are typically sold on a discounted basis in a wide variety of denominations. Many BAs are eligible for discounting at the Federal Reserve.

Certificate of Deposit or CD: A negotiable instrument representing a large time deposit at a commercial bank. Most CDs are interest bearing (typically paying interest at maturity), but some discounted CDs are issued. CDs are typically sold in denominations of from $100,000 to $1,000,000 principal amount.

Eurodollar Deposit: A time deposit of Eurodollars. Eurodollars are U.S. dollars on deposit at a branch of a U.S. bank or a foreign bank located outside the United States.

Repurchase Agreement or RP or REPO: An agreement consisting of two simultaneous transactions whereby one party purchases securities from a second party, and the second party agrees to repurchase the securities on a certain future date at a price which produces an agreed-upon rate-of-return.

Reverse Repurchase Agreement or Reverse REPO or Reverse: An agreement consisting of two simultaneous transactions whereby one party purchases securities from a second party, and the second party agrees to repurchase the securities on a certain future date at a price which produces an agreed upon rate-of-return.

MOODY'S INVESTORS SERVICE: A nationally recognized statistical rating organization that provides ratings for municipal securities and other financial information to market participants.

MORAL OBLIGATION BOND: A bond, usually issued by a state agency or authority, that is secured by a non-binding covenant that any amount necessary to make up any deficiency in pledged revenues available for debt service will be included in the budget recommendation made to the state legislature or other legislative body, which may appropriate moneys to make up the shortfall. The legislature or other legislative body, however, is not legally obligated to make such an appropriation.

MORTGAGE REVENUE BONDS (Housing Bonds): Revenue bonds paid from mortgage payments or rental payments from housing projects financed by bonds (e.g., State Housing Division Low-Income Housing Bonds). Note: State of Oregon bonds issued for the elderly are General Obligation Housing Bonds.

MUNICIPAL BONDS or MUNICIPALS: A general term referring to bonds of local government subdivisions such as cities, towns, villages, counties and special districts as well as states and subdivisions thereof, which are exempt from federal income taxation.

MUNICIPAL SECURITIES: A general term referring to securities issued by local governments subdivisions such as cities, towns, villages, counties, or special districts, as well as securities issued by states and political subdivisions or agencies of states. A prime feature of these securities is that interest on them is generally exempt from federal income taxation.


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MUNICIPAL SECURITIES RULEMAKING BOARD (MSRB): The Municipal Securities Rulemaking Board is an independent self-regulatory organization, consisting of representatives of securities firms, dealer banks and the public, that is charged with primary rulemaking authority over dealers, dealer banks and brokers in connection with their municipal securities activities. MSRB rules are approved by the SEC and enforced by NASD for broker-dealers other than dealer banks and by the appropriate regulatory agencies for dealer banks.

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. (NASD: A self-regulatory organization, formerly known as the National Association of Securities Dealers, Inc., that enforces MSRB rules applicable to the municipal securities activities of its member broker-dealers, administers the MSRB’s professional qualification examinations and handles arbitration proceedings relating to municipal securities for its member broker-dealers and for dealer banks. NASD also adopts rules governing the conduct of its members with respect to most types of securities other than municipal securities.

NATIONAL ASSOCIATION OF BOND LAWYERS (NABL): A professional organization of bond counsel and other public finance lawyers organized to provide education in the law relating to municipal securities, a forum for the exchange of ideas as to law and practice, and advice and comment with respect to legislation, regulations, rulings and other action or proposals relating to municipal securities.

NATIONALLY RECOGNIZED MUNICIPAL SECURITIES INFORMATION REPOSITORY (NRMSIR): An entity designated by the SEC to receive final official statements, material event notices and annual financial information under Rule 15c2-12.

NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO): A rating organization designated by the SEC as being nationally recognized. See: FITCH RATINGS; MOODY’S INVESTORS SERVICE, INC.; RATING AGENCY; STANDARD & POOR’S.

NEGATIVE COVENANTS: Promises contained in the bond contract, whereby the issuer obligates itself to refrain from performing certain actions. One common example of a negative covenant is a promise to sell or encumber the project.

NEGOTIATED SALE: The sale of a new issue of municipal securities by an issuer through an exclusive agreement with an underwriter or underwriting syndicate selected by the issuer. A negotiated sale is distinguished from a competitive sale, which requires public bidding, by the underwriters. The primary points of negotiation for an issuer are the interest rate and purchase price on the issue. The sale of a new issue of securities in this manner is also known as a negotiated underwriting. Unlike a Competitive Sale, the underwriter is customarily active in all aspects of structuring the negotiated deal. Selection of the underwriter can be based on many different considerations including, but not limited to, expertise with a particular type of issue, market expertise, reputation, guaranties of maintaining a maximum gross spread as well as prior relationships with the issuer.

NET INTEREST COST (NIC): A method of computing the interest expense to the issuer of bonds, which may serve as the basis of award in a competitive sale. NIC takes into


account any premium or discount applicable to the issue, as well as the dollar amount of coupon interest payable over the life of the issue. NIC does not take into account the time value of money (as would be done in other calculation methods, such as the “true interest cost” (TIC) method). The term “net interest cost” refers to the overall rate of interest to be paid by the issuer over the life of the bonds. The formula for calculating the NIC rate is:

Total Coupon Interest Payments + Discount (- Premium) Bond Years

NET OFFERING: An offering made at a net price without any concession.

NET PRICE: The price at which a security is offered to the general public. The price of a transaction between municipal securities professionals is generally the net price less a concession.

NET PROCEEDS: Bond proceeds less costs of issuance, costs of any bond insurance or other credit enhancement and any reserves.

NET REVENUES: The amount of money available after subtracting from gross revenues such costs and expenses as may be provided for in the bond contract. The costs and expenses most often deducted are operations and maintenance expenses.

NEW ISSUE: Municipal securities sold during the initial distribution of the issue in a primary offering by the underwriter or underwriting syndicate. For purposes of MSRB rules, new issue municipal securities are municipal securities (other than commercial paper) that are sold by a broker-dealer during the issue’s underwriting period. All broker-dealers selling a new issue of municipal securities to customers or to other broker-dealers must meet certain requirements regarding delivery of official statements and certain other information. This obligation is not limited to broker-dealers acting as underwriters or selling group members.

NON-AMT BOND: A tax-exempt bond, interest on which is not subject to the federal alternative minimum tax.

NON-APPROPRIATION CLAUSE: A provision of a bond contract that allows the government to terminate a lease securing a long-term certificate of participation or other revenue obligation financing if its appropriating body does not appropriate funds for the lease payments. This clause permits a long-term financing without technically incurring debt. Such obligations are not considered debt in most states and thereby generally are not subject to debt limitations because the lease payments are characterized as payments for use of the facilities rather than as payments on a promise to repay bonded debt.

NON-CALLABLE BOND: A bond that cannot be redeemed at the issuer's option before its stated maturity date.

NON-LITIGATION CERTIFICATE: A certificate signed on behalf of the issuer and dated as of and delivered at the Closing to the effect that there is no litigation known to the issuer to be currently pending, threatened, or contemplated that would affect in any materially adverse manner the validity or security of the bonds issued; the issuance, execution or delivery of the


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bonds issued; the existence or boundaries of the issuing entity (on general obligation bonds); or the validity or legality of provisions authorizing the payment of principal and interest on the bonds. The non-litigation certificate may also affirm the incumbency of specified officers, or this may be done in a separate document.

If litigation is pending, it is customarily described in the non-litigation certificate, presuming that the bonds are to be issued in spite of such litigation, the issuer and the purchasers of the bonds must be able to conclude that the litigation does not present a Material risk to the Investors. One method of reaching that conclusion is to obtain, if available, an opinion of counsel to the effect that there is “no merit” to the adverse claims presented in the litigation.

NOTE: A short-term obligation of an issuer to repay a specified principal amount on a certain date, together with interest at a stated rate, usually payable from a defined source of anticipated revenues. Notes usually mature in one year or less, although notes of longer maturities are also issued. The following types of notes are common in the municipal market:

Bond anticipation notes (BANs) – Notes issued by a governmental unit, usually for capital projects, that are paid from the proceeds of the issuance of long-term bonds.

Commercial paper (CP) – See: COMMERCIAL PAPER.

Construction loan notes (CLNs) – Notes issued to fund construction of projects (typically housing projects). CLNs are repaid by the permanent financing, which may be provided from bond proceeds or some pre-arranged commitment, such as a GNMA takeout.

Grant anticipation notes (GANs) – Notes issued on the expectation of receiving grant moneys, usually from the federal government. The notes are payable from the grant funds, when received.

Revenue anticipation notes (RANs) – Notes issued in anticipation of receiving revenues at a future date.

Tax anticipation notes (TANs) – Notes issued in anticipation of future tax receipts, such as receipts of ad valorem taxes that are due and payable at a set time of year.

Tax and revenue anticipation notes (TRANs) – Notes issued in anticipation of receiving future tax receipts and revenues at a future date.

NOTICE OF REDEMPTION: A publication announcing the issuer’s intention to call some or all outstanding bonds prior to their stated maturity dates.

NOTICE OF SALE: A publication by an issuer describing the terms of sale of an anticipated new offering of municipal securities. It generally contains the date, time and place of sale, amount of issue, type of security, amount of good faith deposit, basis of award, name of bond counsel, maturity schedule, method of delivery, time and place of delivery, and bid form. Issuers use it to solicit bids from prospective Underwriters for a competitive sale of bonds.


The notice will commonly be published in a financial industry journal, usually The Bond Buyer or The Wall Street Journal (and, if required by law, a local newspaper of general circulation) and will list the details concerning an issue. This my include the date, time and place of the sale, the amount of the Issue, Maturity schedule and Redemption provisions; legal authority for sale; the manner in which the bid is to be delivered; the type of Security (general obligation, pledge of Revenues, etc.); limitations on Interest Rates and interest payment dates; Denominations and Registration provisions (registered, Book Entry, etc.); names of Bond Counsel and any other attorney delivering opinions, Credit Enhancement facilities, and other details.

The notice of sale, the winning bid and the issuer's acceptance of the winning bid together constitute an agreement for the purchase and sale of the issue in a competitive sale.

OBLIGATED PERSON: Any person, including an issuer of municipal securities, who is either generally or through an enterprise, fund, or account of such person committed by contract or other arrangement to support payment of all, or part, of the obligations on the municipal securities (other than providers of credit enhancement).

OBLIGOR: The party having an obligation with respect to the payment of debt service on bonds, typically but not always the borrower (such as a conduit borrower) of bond proceeds.

ODD COUPON: An interest payment for a period other than the standard six months. A payment for a period of less than six months is a “short” coupon; a payment for a period of more than six months is a “long” coupon. Usually only the first interest payment on an issue of bonds is an odd coupon, but some issues have an odd last coupon. See: FIRST COUPON.

ODD LOT: A principal amount of securities that is smaller than what is considered a normal trading unit. An odd lot is often traded at a price that includes a differential attributable to the size of the lot (e.g., a broker-dealer may bid lower for an odd lot than for a larger block).

OFFER: A proposal to sell securities at a stated price or yield.

OFFERING CIRCULAR: A document generally prepared by the underwriters about an issue of securities expected to be offered in the primary market. The document discloses to the investor basic information regarding the securities to be offered and is used as an advertisement for the sale of the securities. The term is also used to refer to a document prepared and used by broker-dealers when selling large blocks of previously issued securities in the secondary market.

OFFERING PRICE: The price or yield at which broker-dealers offer securities to investors.

OFFICIAL ACTION: See: INDUCEMENT RESOLUTION.

OFFICIAL STATEMENT or FINAL OFFICIAL STATEMENT or OS: A document discloses material information on a new issue of municipal securities including the purposes of the issue, how the securities including the purposes of the issue, how the securities will be repaid, and the financial, economic and social characteristics of the issuing government.


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Investors, analysts and rating agencies may use this information to evaluate the credit quality of the securities.

Federal securities laws generally require that if an official statement is used to market an issue, it must fully disclose all facts that would be of interest (material) to a potential buyer of bonds of the issue. For example, for a general obligation issue, the most important information may concern the financial health of the issuer, its tax base, and the economic health of the jurisdiction. For a water revenue issue, the most important information may be the financial health and physical condition of the water system enterprise, water supply and economic health of the service area. For a conduit financing, the most important information may concern the financial health of the Non-governmental Borrower. The materiality of such information may also depend upon whether or not Credit Enhancement is used.

Under MSRB rules, a final official statement (which is printed only after the final terms of the bonds are available) must (if available) be delivered by the broker or dealer to purchasers of bonds no later than the settlement date of the transaction. An official statement may also be called an “offering circular,” “offering memorandum” or “bond prospectus.”

OPEN END LIEN: Provisions in a bond contract that permit the issuer to issue additional bonds that have an equal claim on the pledged revenues under certain circumstances (typically upon satisfaction of an additional bonds test).

ORDER PERIOD: The period of time following the competitive sale of a new issue during which non-priority orders submitted by account members are allocated without consideration of time of submission. The manager usually determines the length of the order period. In a negotiated sale the order period is the period of time established by the manager during which orders are accepted from account members. The order period generally precedes the sale by the issuer. At times, order periods are established at subsequent points in the life of a syndicate. Such order periods occur when securities are repriced or market conditions improve dramatically.

ORDINANCE: The official action of the governing body of an issuer, typically enacted by a vote of the members of the governing body at a public meeting. The procedures for enacting an ordinance are often more formal than those for adopting a resolution. For example, in many jurisdictions, an ordinance cannot be finally enacted at the same meeting at which it is introduced, whereas a resolution may often be adopted at the same meeting. Some jurisdictions permit the incurrence of debt through adoption of a resolution while others require enactment of an ordinance. Compare: RESOLUTION.

ORIGINAL ISSUE DISCOUNT (O.I.D.): An amount by which the par value of a security exceeded its public offering price at the time of its original issuance. The original issue discount is amortized over the life of the security and, on a municipal security, is generally treated as tax-exempt interest. When the investor sells the security before maturity, any profit realized on such sale is calculated (for tax purposes) on the adjusted book value, which is calculated for each year the security is outstanding by adding the accretion value to the original offering price. The amount of the accretion value (and the existence and total amount of original


issue discount) is determined in accordance with the provisions of the Internal Revenue Code and the rules and regulations of the Internal Revenue Service.

ORIGINAL ISSUE DISCOUNT BOND or O.I.D. BOND: A bond that was sold at the time of issue at a price that included an original issue discount.

ORIGINAL ISSUE PREMIUM: The amount by which the public offering price of a security at the time of its original issuance exceeded its par value. The original issue premium is amortized over the life of the security and results in an adjustment to the basis of the security. Original issue premium generally is not deductible for federal income tax purposes. The amount of original issue premium received by the issuer in a primary offering, also known as the “bond premium,” is generally treated as proceeds of the issue.

OUTSTANDING: In general as used with respect to the Principal of an Issue, remaining unpaid. However, the terms of Indentures and Bond Resolutions often provide that bonds that are not yet paid but are the subject of a Defeasance or an Advance Refunding are treated as no longer being outstanding.

OVERLAPPING DEBT: That portion of the debt of other governmental units for which residents of a particular municipality are responsible. Normally, an issuer is located either wholly or partly within geographic limits of other units. Debt is generally apportioned based on relative assessed values. Generally, the amount of debt attributed to a municipality from an overlapping district is determined by multiplying the total assessed value of the overlapping jurisdiction by the percentage that lies within the limits of the reporting municipality. Special assessment debt is allocated on the basis of the ratio of assessments receivable in each jurisdiction.

PAR: 100 percent of face value of a security. “Par” or “par value” refers to the Principal amount of a bond. A bond may be purchased 1) “at par,” meaning the price of the bond is equal to its principal amount; 2) “below par,” meaning the price is below its principal amount; or 3) “above par,” meaning the price is above its principal amount.

PARITY BONDS: Two or more issues of bonds that have the same priority of claim or lien against pledged revenues. Parity bonds are also referred to as “pari passu bonds.” For example, two issues of revenue bonds are said to be on a parity with each other if the Revenues, projects, program loans and other assets securing the first issue also secure the second issue, and vice versa.

PARITY TEST: See: ADDITIONAL BONDS TEST.

PARTICIPANT: An organization that has access to and uses the facilities of a registered clearing agency for the confirmation, clearance and/or settlement of securities transactions. An organization that is a member of a registered clearing agency is referred to as a “direct participant”; one which is not a member but which uses a clearing agent who is a member is considered an “indirect participant.”

PAR VALUE: The amount of principal that must be paid at maturity. The par value is also referred to as the “face amount” of a security.


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PAY-AS-YOU-GO STRATEGY: A term used to describe the financial policy of a governmental unit that finances all of its capital outlays from current revenues rather than by borrowing. A governmental unit that pays for some improvements from current revenues and others by borrowing is said to employ a partial or modified pay-as-you-go strategy.

PAYING AGENT: The entity responsible for transmitting payments of interest and principal from an issuer of municipal securities to the security holders. The paying agent is usually a bank or trust company, but may be the treasurer or some other officer of the issuer. The paying agent may also provide other services for the issuer such as reconciliation of the securities and coupons paid, destruction of paid securities and coupons, and similar services.

PAYMENT DATE: The date on which interest, or principal and interest, is payable on a municipal security. Interest payment dates usually occur semi-annually for bonds.

PERMITTED INVESTMENTS: The instruments in which moneys held in various funds and accounts may be invested pursuant to the provisions of the bond contract. Compare: ELIGIBLE SECURITIES.

PLACEMENT AGENT: A broker-dealer acting as agent who places a new issue of municipal securities directly with investors on behalf of the issuer.

PLEDGE: To grant a security interest in or lien on an asset to provide security for the repayment of bonds or the performance of some other obligation.

PLEDGED REVENUES: The moneys obligated for the payment of debt service and other deposits required by the bond contract.

Gross Pledge or Gross Revenue Pledge: A pledge that all revenues received will be used for debt service prior to deductions for any costs or expenses.

Net Pledge or Net Revenue Pledge: A pledge that all funds remaining after certain operational and maintenance costs and expenses are paid will be used for payment of debt service.

POINT/BASIS POINT: One percent of par value. Because municipal dollar prices are typically quoted in terms of a percentage of $1,000, a point is worth $10 regardless of the actual denomination of a security. A security discounted 2 ½ points, or $25, is quoted at “97 ½” (97 ½ percent of its value), or $975 per $1,000.

PRELIMINARY OFFICIAL STATEMENT or RED HERRING or POS: A preliminary version of the official statement which is used by an issuer or underwriters to describe the proposed issue of municipal securities prior to the determination of the interest rate(s) and offering price(s). The preliminary official statement may be used by issuers to gauge underwriters' interest in an issue and is often relied upon by potential purchasers in making their investment decisions. Normally, offers for the sale of or acceptance of securities are not made on the basis of the preliminary official statement, and a statement to that effect appears on the face of the document generally in red print, which gives the document its nickname “red herring.” The preliminary official statement is technically a draft.


PREMIUM: The amount by which the price of a bond exceeds its Principal amount or Par value. A Redemption premium is the premium an issuer is required (by the terms of a bond) to pay to redeem (Call) the bond prior to it's stated maturity.

PREMIUM CALL PRICE: A price, in excess of par value (or compound accreted value, in the case of certain original issue discount or zero coupon bonds) and expressed as a percentage of par (or compound accreted value), that the issuer agrees to pay upon redemption of its outstanding bonds prior to the stated maturity date. The amount of premium to be paid often declines as the possible redemption date approaches the maturity date.

PRE-SALE ORDER: An order given to the syndicate manager, prior to the purchase of securities from the issuer, that indicates a prospective investor’s intention to purchase the securities at a predetermined price level. Pre-sale orders, almost exclusively seen in competitive sales, are normally afforded top priority in allocation of securities from the syndicate.

PRESENT VALUE: The value at the current time of a cash payment which is expected to be received in the future, allowing for the fact that an amount received today could be invested to earn interest for the period to the future date.

PRESENT VALUE SAVINGS: Difference expressed in terms of current dollars between the debt service on an refunded bond issue and the debt service on a refunding bond issue for an issuer. It is calculated by discounting the difference in the future debt service payments on the two issues at a given rate.

PRICE: The amount to be paid for a bond, usually expressed as a percentage of par value but also sometimes expressed as the yield that the purchaser will realize based on the dollar amount paid for the bond.

PRICING: The determination (or redetermination) by the Underwriters in a Negotiated Sale of the Interest Rates and Reoffering prices at which an Issue will be offered to Investors. Generally, the underwriters will have mailed a Preliminary Official Statement to potential investors and to other underwriters approximately one to two weeks prior to the pricing date. On the pricing date the underwriters will price the issue at the lowest marketable interest cost to the issuer. The price must be agreeable to the issuer. The underwriters then offer the bonds to investors on the agreed terms and if an appropriate number of orders are received, the issuer and the underwriters enter into a Bond Purchase Contract on those terms. If not enough or too many orders are received on the original terms, the issue may be repriced to be more attractive to investors or to give a better rate to the issuer, as the case may be.

PRIMARY MARKET: The market for new issues of municipal securities.

PRIMARY OFFERING: For purposes of Rule 15c2-12 and MSRB Rule G-36, an offering of municipal securities directly or indirectly by or on behalf of the issuer, including certain remarketings of municipal securities.

PRINCIPAL: The face amount or par value of a security payable on the maturity date.


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PRIOR ISSUE: An issuer’s outstanding issue of municipal bonds. The term is often used in the context of a refunding to denote the obligations being refinanced, sometimes called “refunded bonds.”

PRIORITY PROVISIONS: The rules adopted by an underwriting syndicate specifying the priority to be given different types of orders received by the syndicate. MSRB rules require syndicates to adopt priority provisions in writing and to make them available to all interested parties. For competitive underwritings, orders received prior to the sale (“pre-sale orders”) generally are given top priority. In some negotiated offerings, retail orders or other restrictions designated by the issuer are given priority. Once the order period begins for either negotiated or competitive underwritings, the most common priority provision gives group net orders top priority, followed by designated orders and member orders. These types of orders are described below:

Designated Order – An order submitted by a syndicate member on behalf of a buyer on which all or a portion of the takedown is to be credited to certain members of the syndicate. The buyer directs the percentage of the total designation each member will receive. Generally two or more syndicate members will be designated to receive a portion of the takedown.

Group Net Order – An order that, if allocated, is allocated at the public offering price without deducting the concession or takedown. A group net order benefits all syndicate members according to their percentage participation in the account and consequently is normally accorded the highest priority of all orders received during the order period.

Member Order – An order submitted by a syndicate member where the securities would be confirmed to that member at syndicate terms (e.g., less the total takedown).

Other priorities, such as retail orders or orders from local residents, may supercede those noted above.

PRIVATE ACTIVITY BONDS: Under federal tax law, bonds of which

(i) 10 percent or more of the Proceeds are “used” in the trade or business of non-governmental persons and 10 percent or more of the Debt Service is secured by or derived from property used in the trade or business of non-governmental persona; or

(ii) 5 percent or more of the Proceeds are loaned to non-governmental persons.

For this purpose, non-governmental persons are treated “users” of facilities that they lease and of facilities that they lease and of facilities the output of which they agree to purchase. Non-governmental persons may be treated as “users” of facilities by reason of long-term management contracts. The United States government is treated as a non-governmental person.

Interest on Private Activity Bonds is tax-exempt only if certain requirements are satisfied. In particular, private activity bonds are tax-exempt only


(i) if they relate to certain qualified single family mortgage loan programs, qualified “small issues” for manufacturing facilities, qualified redevelopment programs, qualified student loan programs, qualified 501(c)(3) Bonds; or

(ii) if at least 95 percent of the proceeds are used to provide one or more Exempt Facilities.

With the exception of qualified 501(c)(3) bonds and certain bonds for government owned seaports or airports, private activity bonds are tax-exempt only if they are allocated a portion of the State's Volume Cap.

PRIVATE PLACEMENT: With respect to municipal securities, a negotiated sale in which the new issue securities are sold directly to institutional or private investors rather than through a public offering. Issuers often require investors purchasing privately placed securities to agree to restriction as to resale; the investors may provide a signed agreement to abide by those restrictions.

PRIVATE PLACEMENT MEMORANDUM: A document functionally similar to an official statement used in connection with an offering of municipal securities in a private placement. Circulation of a private placement memorandum often is strictly controlled to avoid distribution to investors who may not be qualified to purchase the securities.

PROCEEDS/ORIGINAL PROCEEDS/GROSS PROCEEDS: The amount paid to the Issuer by the first purchaser (usually an Underwriter) of a new Issue. Bond proceeds are equal to the Principal amount of the bonds issued, plus Premium or less Discount, and plus Accrued Interest.

For example, with respect to an issue in the Par amount of $1,000,000, with an underwriters' discount of 2 percent, and $3,000 of accrued interest to the Closing Date, the underwriters would purchase the issue for $983,000 ($1,000,000, minus $20,000, plus $3,000). Under the federal tax regulations, this amount is called the “original proceeds.”

The term Gross Proceeds refers to all of the moneys relating to an issue which are subject to Arbitrage limitations and Rebate under the Internal Revenue Code. Gross proceeds include original proceeds, investment earnings on proceeds, moneys in a Sinking Fund, moneys in a Reserve Account, and securities Pledged by the Issuer or a Non-governmental Borrower as security for the payment of Debt Service.

PRODUCTION: The expected spread in a new issue offering.

PUBLIC OFFERING: The sale of bonds (generally through an underwriter) to the general public (or a limited section of the general public).

The offer is usually disclosed by an Official Statement in which the terms of the financing and its structure are set forth, allowing the investor to make an informed decision about the merits of the proposed securities. The issuer may market a proposed public offering either via Competitive Sale or Negotiated Sale. In addition to public offerings, bonds are also sold in limited public offerings and Private Placements.


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PUBLIC OFFERING PRICE: The price at which a new issue of municipal securities is offered to the public at the time of original issuance. This price, sometimes referred to as the “initial offering price,” is equal to the par value less original issue discount or the par value plus original issue premium, as appropriate, usually expressed as a percentage of par.

QUALIFIED 501(c)(3) BONDS: Private Activity Bonds issued for certain nonprofit organizations (including hospitals and universities) descried in Section 501(c)(3) of the Internal Revenue Code.

To the extent bonds do not finance hospital facilities, they will be treated as Qualified 501(c)(3) Bonds only if the bonds allocated to any given 501(c)(3) organization, together with the outstanding aggregate face amount of all prior tax exempt bonds allocated to the same organization, does not exceed $150 million.

QUALIFIED BOND: A private activity bond that meets certain requirements under the Internal Revenue Code in order for the interest thereon to be excluded from gross income for federal income tax purposes. Also sometimes referred to as a “qualified private activity bond.” See: PRIVATE ACTIVITY BOND.

QUALIFIED INSTITUTIONAL BUYER (QIB): An entity to whom a security otherwise required to be registered under the Securities Act of 1933 may be sold without such registration under SEC Rule 144A. In general, a QIB must own and invest on a discretionary basis at least $100 million in securities and must be an insurance company, investment company, employee benefit plan, trust fund, business development company, 501(c)(3) organization, corporation (other than a bank with net worth less than $25 million), partnership, business trust or investment adviser.

QUALIFIED LEGAL OPINION: A legal opinion of bond counsel, sometimes referred to as a “reasoned opinion,” that is conditional or otherwise subject to qualifications. A legal opinion generally is not considered to be qualified if it is subject to customary assumptions, limitations and qualifications or if the opinion is otherwise explained. In the municipal securities market, legal opinions have traditionally been unqualified.

RATING AGENCIES: The organizations that provide publicly available ratings of the credit quality of securities issuers. The term is most often used to refer to the three nationally recognized agencies, Moody's Investors Service, Inc., Standard & Poor’s Corporation, and Fitch Ratings. See: NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION.

RATINGS: Evaluations of the credit quality of notes and bonds usually made by independent rating services. Ratings are intended to measure the probability of the timely repayment of principal of and interest on municipal securities. Ratings are initially made before issuance and are periodically reviewed and may be amended to reflect changes in the issuer's credit position. The information required by the rating agencies varies with each issue, but generally includes, information regarding the issuer's demographics, debt burden, economic base, finances and management structure. Many financial institutions also assign their own individual ratings to securities.


REBATE: To pay to the United States government (or in the case of certain qualified single family mortgage revenue bonds, to mortgagors) amounts earned from the investment of Gross Proceeds at a Yield in excess of the yield on the Issue.

Generally, the amount of this Rebate must be computed at least annually, and at least 90 percent of the cumulative rebate amount must be paid to the federal government every five years. Exceptions are provided (and no rebate of Arbitrage need be paid) if

(i) all Proceeds (other than certain Debt Service funds) are spent within six months after the date of issuance; or

(ii) the amounts are earned with respect to moneys in Debt Service funds that generate gross investment receipts of not more than $100,000 during the year.

REDEMPTION: A transaction in which the issuer returns the principal amount represented by an outstanding security (plus, in certain cases, an additional amount). Redemption can be made under several different circumstances; at maturity of the security, as a result of the issuer's call of the securities or (in rare cases) as a result of the security holder's election to exercise at put or tender option privilege.

REDEMPTION PREMIUM: An amount paid to the holder of the security called for redemption in addition to the principal amount of (and any accrued interest on) the security. Redemption premiums typically are paid only in the case of certain optional redemptions.

REDEMPTION PRICE: See: CALL PRICE.

REDEMPTION PROVISIONS or CALL FEATURES: The terms of the bond contract giving the issuer the right or requiring the issuer to redeem or “call” all or a portion of an outstanding issue of bonds prior to their stated dates of maturity at a specified price, usually at or above par. Common types of redemption provisions include:

Optional Redemption: The issuer has the right to redeem bonds, usually after a stated date and at a premium, but is not required to do so.

Mandatory Redemption: The issuer is required to call outstanding bonds based on a predetermined schedule or as otherwise provided in the bond contract. Frequently, the issuer is allowed to make open market purchases in lieu of calling the bonds.

Extraordinary Optional Redemption: The issuer has the right to call or redeem an issue of bonds upon the occurrence of certain events. For example, the right to extraordinary optional redemption of an issue of bonds may be exercised when mortgages are prepaid in connection with a housing revenue bond issue.

Extraordinary Mandatory Redemption: The issuer is required to call or redeem all or part of an issue of bonds upon the occurrence of certain events. For example, the issuer may be required to call or redeem bonds when proceeds of an issue are not expended for the purpose of the issue as of a given time; when excess bond proceeds exist after completion of a project; or when the facility has been substantially destroyed during


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construction due to an accident. The latter situation is also known as “calamity call” or “catastrophe call.”

RED HERRING: See PRELIMINARY OFFICIAL STATEMENT.

REFINANCING: Retiring existing securities by the sale of new issues. The object may be to save interest costs or to extend the maturity of the loan.

REFUNDING: A procedure whereby an issuer refinances an outstanding bond issue by issuing new bonds. There are generally two major reasons for refunding: to reduce the restrictive covenant imposed by the terms of the bonds being refinanced. The proceeds of the new bonds are either deposited in escrow to pay the debt service on the outstanding obligations, when due (in which case the financing is known as an “advance refunding”), or used to immediately retire the outstanding obligations. The new obligations are referred to as the “refunding bonds,” and the outstanding obligations being refinanced are referred to as the “refunded bonds” or the “prior issue.” For accounting purposes, refunded obligations are not considered a part of the issuer's debt because the line of the holders of the refunded bonds, in the first instance, is on the escrowed funds, not on the originally pledged source of revenues. The refunded bonds, however, will continue to hold a lien on the originally pledged source of revenues unless provisions have been made in the bond contract on the refunded bonds for defeasance of the bonds prior to redemption.

REFUNDING BOND: A bond issued to retire a bond already outstanding. Refunding bonds may be sold for cash and outstanding bonds redeemed in cash, or the refunding bonds may be exchanged with holders of outstanding bonds.

REGISTERED BOND: A bond whose owner is designated on records maintained for this purpose by a registrar, the ownership of which cannot be transferred without the registrar recording the transfer on these records. The principal and interest on “fully registered” bonds is paid directly by check (or other funds transfer) to the registered owner. Bonds issued prior to July 1983 may sometimes be “registered as to principal only”; in this form coupons reflecting the interest payments due remain attached to the bonds and must be detached and redeemed in order to receive the interest due. Most municipal securities issued after June 1983 are in “fully registered” form due to provisions of the Internal Revenue Code which deny exemption to interest paid on issues (other than those exempt from this provision) which are not in registered form. Generally, interest payments on a registered bond are made by check or wire sent to the registered owner. The registered owner may not be the beneficial owner of the bond, but rather a nominee for the beneficial owner. If the registered owner is a broker/dealer acting as a nominee for a client, the bond is referred to as being held in “street name.” Registered bonds are often held in the name of a securities depository or in the name of a nominee for a securities depository, such as Depository Trust Company, which then keeps a record of the broker/dealers whose clients are the beneficial owners of the bonds.

REGISTRAR: The person or entity responsible for maintaining records on behalf of the issuer for the purpose of noting the owners of registered bonds.


REIMBURSEMENT RESOLUTION: A resolution declaring an issuer's official intent to reimburse an original expenditure with proceeds of an obligation. Under federal tax laws, an issuer may reimburse itself with proceeds of tax-exempt bonds for certain expenditures made within 60 days prior to the issuer adopting an official intent.

REMARKET: To buy and resell to the public previously-issued bonds that have been or are required to be purchased from the original or subsequent holders of the bonds by the issuer or another party upon the occurrence of certain events specified in the legal documents.

With respect to Variable Rate bonds, remarketings commonly occur in connection with

i) a tender of the bonds at the option of the holder;

(ii) the conversion from one interest rate mode (e.g., weekly variation) to another interest rate mode (e.g., quarterly variation);

(iii) the conversion of the variable rate bonds to Fixed Rate bonds; or

(iv) the termination or other alteration of the Letter of Credit, Standby Purchase Agreement or other Credit Enhancement facility or Liquidity facility.

With respect to an issue the proceeds of which were escrowed upon Closing, a remarketing would occur upon satisfaction of the requirements for breaking the escrow and disbursing the proceeds for the purposes for which the bonds were issued.

In a remarketing, bonds tendered by their holders for purchase are sold to new purchasers. A remarketing is usually conducted on behalf of the issuer by an investment bank or commercial bank acting as Remarketing Agent pursuant to a remarketing agreement entered into at the time of the original issuance of the bonds. Frequently, the remarketing agent is the same firm that acted as the Managing Underwriter for the original issue.

In many instances, including a conversion to fixed-rate or the breaking of escrow, a remarketing will resemble a new issue in many respects, including the preparation and distribution of the new Official Statement, often called a “reoffering circular.” Unlike a new issue, however, the proceeds of remarketing do not go to the issuer. Rather, remarketing proceeds are used to pay the purchase price of the tendered bonds to the previous owners or to reimburse the credit facility provider for draws made on the credit facility for such purchase.

REOFFERING: This term is used in two contexts. First, it is used to describe the offering of bonds by the Underwriter to the public. For example, the “initial offering price to the public” is often referred to in shorthand as the “reoffering price.” Second, the term “reoffering” is used to describe a form of Remarketing in which an issuer exercises the right to require bondholders to mandatorily tender their bonds for reoffering to the public customarily in the context of a conversion from a Variable Rate to a Fixed Rate.

REOFFERING SCALE: The prices and/or yields, listed by maturity, at which new issue securities are offered for sale to the public by the underwriter.


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REQUEST FOR PROPOSAL (RFP): A formal process by which an issuer gathers written information from professionals for the purpose of selecting underwriters, financial advisors, attorneys, architects, and providers of other services.

RESERVE: An account used to indicate that a portion of fund equity is legally restricted for a specific purpose or not available for appropriation and subsequent spending.

RESOLUTION: The official action of the governing body of an issuer, typically adopted by a vote of the members of the governing body at a public meeting. Compare: ORDINANCE.

RETAIL CUSTOMER: Any customer other than an institutional customer. Retail customers generally include individual investors and small organizations.

RETAIL SALES: Sales of securities to individual investors and small institutions.

RETENTION: The minimum quantity of bonds allocated to a particular underwriter at the outset of the order period in a syndicated negotiated offering. The retention amount is distinct and separate from any other bonds that may be allocated at the end of the order period.

REVENUE BOND: A bond which is payable from a specific source of revenue and to which the full faith credit of an issuer with taxing power is not pledged. Revenue bonds are payable from identified sources of revenue, and do not permit the bondholders to compel taxation or legislative appropriation of funds not pledged for payment of debt service. Pledged revenues may be derived from operation of the financed project, grants and excise or other specified non-ad-valorem taxes. Generally, no voter approval is required prior to issuance of such obligations.

REVENUES or GROSS REVENUES or NET REVENUES: The income produced by a given source.

In the context of revenue bonds, revenues typically means the income and receipts generated from the operation of the project or loan program being financed, or from the enterprise of which the project or loan program is a part, or from other non-tax sources – for example, water charges in the case of water revenue bonds, lease payments in the case of lease revenue bonds, or loan repayments in the case of mortgage revenue bonds or a conduit financing. Such revenues would normally be pledged to the payment of the revenue bonds.

Gross revenues refers to the total receipts derived from the operation of the project, program, or enterprise. Net revenues refers to the amount available after subtracting certain costs and expenses, most commonly for operation and maintenance, from gross revenues.

REVOLVING FUND: A fund, typically created with bond proceeds and/or grant moneys, that makes loans to borrowers and uses loan repayments to make additional loans.

ROLL OVER: Payment of maturing commercial paper with a new issue of commercial paper. See: COMMERCIAL PAPER.


ROUND LOT: The increment in which securities are traded without a potential addition or deduction of a price differential due to the size of the block. There is no consensus in the industry as to what constitutes a round lot of municipal securities. Although it depends upon the size of the broker-dealer and the nature of the investor, at the time of this publication many industry participants consider $1,000,000 par value to constitute a round lot with respect to institutional sales and $100,000 par value to constitute a round lot with respect to retail sales. Compare: ODD LOT.

SCALE: Reoffering terms to the public of a serial bond issue showing price or yield offered on each maturity. May also refer to the coupon rate on each maturity proposed by underwriters at the time of sale.

SECONDARY MARKET: The market in which bonds are purchased from bondholders who have held such bonds for investment purposes, as opposed to being purchased directly from the issuer or from the issuer through an underwriter.

SECONDARY MARKET DISCLOSURE: Disclosure of information relating to outstanding municipal securities made following the end of the underwriting period by or on behalf of the issuer of or other obligor with respect to the securities. Certain secondary market disclosure obligations are set forth in Rule 15c2-12. Broker-dealers also have an obligation to disclose certain material information regarding any security sold to a customer pursuant to MSRB Rule G-17.

SECURITIES: Bonds, notes, mortgages, or other forms of negotiable or non-negotiable instruments.

SECURITIES ACT OF 1933: Federal securities legislation originally enacted in 1933 that provides for, among other things, the registration of securities with the SEC and the preparation and distribution of prospectuses. Issuers of municipal securities are generally exempt from these requirements, although certain anti-fraud provisions under the Act apply to such issuers.

SECURITIES AND EXCHANGE COMMISSION or SEC: The federal agency responsible for supervision and regulating the securities industry. Generally, municipal securities are exempt from the SEC’s registration and reporting requirements. Brokers and dealers in municipal securities, however, are subject to SEC regulations and oversight. The SEC also has responsibility for the approval of MSRB rules, and has jurisdiction, pursuant to SEC Rule 10b-5, over fraud in the sale of municipal securities. Reference 15 United States Code 78(d).

SECURITIES EXCHANGE ACT OF 1934: Federal securities legislation originally enacted in 1934 that provides for, among other things, the regulation of the marketplace for securities. Regulation of broker-dealer activities in the municipal securities market is primarily effected through the rules of the MSRB, which was created under Section 15B of the Act. In addition, certain SEC rules, including but not limited to Rule 10b-5 and Rule 15c2-12, apply to broker-dealer transactions in municipal securities.


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SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA): A member network of financial and capital markets industry organizations born of the merger of The Securities Industry Association and The Bond Market Association.

SEC REGISTRATION: The filing of information with the Securities and Exchange Commission in accordance with the Securities Act of 1933 as a prerequisite to selling or marketing the securities. Most bonds issued by or on behalf of state or local governmental entities are exempt from such registration requirements.

SEC RULE 15c2-12: An SEC rule under the Securities Exchange Act of 1934 setting forth certain obligations of (i) underwriters to receive, review and disseminate official statements prepared by issuers of most primary offerings of municipal securities, (ii) underwriters to obtain continuing disclosure agreements from issuers and other obligated persons to provide material event disclosures and annual financial information on a continuing basis, and (iii) broker-dealers to have access to such continuing disclosure in order to make recommendations of municipal securities in the secondary market.

SEC RULE 10b-5: A regulation of the Securities and Exchange Commission, adopted pursuant to the Securities Exchange Act of 1934, which makes it unlawful for any person to employ any device, scheme, or artifice to defraud; to make any untrue statement of a material fact or to omit a statement of material fact necessary in order to make the statements made, not misleading, or to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

SECURITY: Generally, an instrument evidencing debt or equity in a common enterprise in which a person invests on the expectation of financial gain. The term includes notes, stocks, bonds, debentures or other forms of negotiable and non-negotiable evidence of indebtedness or ownership.

SECURITY FOR THE BONDS or SECURITY: The specific revenue sources or assets of an issuer which are pledged for payment of debt service on a series of bonds, as well as the covenants or other legal provisions protecting the bondholders.

SELF-SUPPORTING DEBT or SELF-LIQUIDATING DEBT: Debt that is to be repaid exclusively from revenues generated by the enterprise activity for which the debt was issued.

SELLING GROUP: A group of broker-dealers that assists in the distribution of a new issue of municipal securities. Selling group members are able to acquire new issue securities from the underwriting syndicate at a concession or dealer’s allowance (i.e., at a discount from the public offering price, which discount may be less than or equal to the total takedown) but do not participate in residual syndicate profits or share any liability for any unsold balance.

SELLING GROUP AGREEMENT: Agreement whereby broker-dealers may participate in the distribution of a new issue of municipal securities as members of a selling group without being members of the underwriting syndicate. Compare: AGREEMENT AMONG UNDERWRITERS. See: SELLING GROUP.


SENIOR LIEN BONDS: Bonds having the priority claim against pledged revenues. Compare: JUNIOR LIEN BONDS; PARITY BONDS.

SERIAL BONDS: Bonds of an issue that mature in consecutive years. Compare: TERM BONDS.

SERIES OF BONDS: Bonds of an issue sharing the same lien on revenues and other basic characteristics. A series of bonds may consist of serial bonds, term bonds or both. An issue of bonds can consist of one or more series of bonds. Typically, where a single issue consists of more than one series of bonds, the series are distinguished from one another based on one or more key characteristics. For example, one series may be senior lien bonds and the other may be junior lien bonds; two series may have liens on different revenue sources; one series may consist of capital appreciation bonds and the other may consist of current interest paying bonds; one series may be tax-exempt bonds and the other may be taxable municipal securities; one series may bear interest at a fixed rate and the other may bear interest at a variable rate.

SETTLEMENT: Delivery of payment for a security. In the case of a new issue of municipal securities, settlement usually occurs within 30 days after the securities are awarded to the underwriters, this time allows for printing of the securities and the completion of certain legal matters. In the case of the purchase of a security in the secondary market, settlement occurs upon delivery of and payment for the security, usually five business days after purchase.

SETTLEMENT DATE: The date on which settlement of a transaction is presumed to occur. This date is used in price and interest computations, and is usually the date of delivery.

SHORT-TERM DEBT: Debt with a maturity of one year or less after the date of issuance. Short-term debt usually includes floating debt, bond anticipation notes, tax anticipation notes, and interim warrants.

SIFMA: The Securities Industry and Financial Markets Association (SIFMA), formerly known as the Bond Market Association.

SIFMA SWAP INDEX: Produced by Municipal Data (MMD), the SIFMA Swap Index is a 7-day high grade market index comprised of tax-exempt variable rate demand obligations (VRD)) from MMD’s data base. The index tracks market movements and is often used as a benchmark variable rate in swap transactions.

SINKER: A colloquial term for a term maturity of a bond issue that is subject to sinking fund redemptions.

SINKING FUND: 1) A fund established by the bond contract of an issue into which the issuer makes periodic deposits to assure the timely availability of sufficient moneys for the payment of debt service requirements. The amounts of the revenues to be deposited into the sinking fund and the payments therefrom are determined by the terms of the bond contract. Under a typical revenue pledge this fund is the first (under a gross revenue pledge) or the second (under a net revenue pledge) to be funded out of the revenue fund. This fund is sometimes referred to as “Debt Service Fund.” 2) A separate account in the overall sinking fund into which


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moneys are placed to be used to redeem securities, by open-market purchase, request for tenders or call, in accordance with a redemption schedule in the bond contract.

SLGS: An acronym (pronounced “slugs”) for “State and Local Government Series.” SLGS are special United States Government securities sold by the Treasury to states, municipalities and other local government bodies through individual subscription agreements. The interest rates and maturities of SLGS are arranged to comply with arbitrage restrictions imposed under Section 103 of the Internal Revenue Code. SLGS are most commonly used for deposit in escrow in connection with the issuance of refunding bonds. The Bureau of Public Debt offers two types of SLGS that are commonly referred to as “Demand Deposit SLGS” or “Time Deposit SLGS.” Generally, Time Deposit SLGS are acquired in connection with an Advance Refunding. The SLGS are held in escrow and principal and interest received on the SLGS are sued to pay debt service on the prior issue. Because the issuer can specify the rate (subject to the maximum rate specified in a weekly schedule) earned on the SLGS, the issuer may design the escrow investment to meet any yield restrictions while maximizing its permitted investment return.

Demand Deposit SLGS are intended for the investment of moneys subject to the rebate requirements of the Internal Revenue Code. Earnings on Demand Deposit SLGS are not subject to rebate. The interest rate on the Demand Deposit SLGS is determined weekly, effective each Monday and is calculated based upon a formula which takes into account the Federal Funds Rate which is published by the Federal Reserve Board and an estimated average marginal tax rate of owners of short-term municipal securities and an administrative fee. The estimated marginal tax rate and the administrative fee may be changed periodically by the Bureau of Public Debt.

SOPHISTICATED INVESTOR: Typically, an investor viewed by an issuer or underwriter as having sufficient resources, market knowledge and experience to understand and bear the risks involved in a particular investment.

SPECIAL DISTRICTS: Single-purpose or limited-purpose units of government formed under state enabling legislation to meet certain local needs not satisfied by existing general purpose governments in a given geographical area. In some states, special districts (such as school districts) may be granted taxing powers.

SPREAD: 1) With respect to new issue municipal securities, the differential between the price paid to the issuer for the new issue and the prices at which the securities are initially offered to the investing public; this is also termed the “gross spread” or “gross underwriting spread.” Also often called the underwriters discount. To the extent that the syndicate subsequently lowers the initial offering prices, the syndicate may not realize the full amount of the spread. The spread is usually expressed in points or fractions thereof. The spread generally has four components:

Expenses: The costs of operating the syndicate for which the lead management may be reimbursed.

Management Fee: The amount paid to the lead manager for handling the affairs of the syndicate.


Takedown: Normally the largest component of the spread, similar to a commission, which represents the income derived from the sale of the securities. If bonds are sold by a member of the syndicate, the seller is entitled to a full takedown (also called the “total takedown”); if bonds are sold by a dealer which is not a member of the syndicate, such seller receives only that portion of the takedown known as the concession or dealer’s allowance, with the balance (often termed the “additional takedown”) retained by the syndicate.

Risk or Residual: The amount of profit or spread left in a syndicate account after meeting all other expenses or deductions. A portion of the residual pro rata basis according to the number of bonds each dealer has committed to sell without regard to the actual sales by each member.

2) With respect to securities trading in the secondary market, the differential between the bid price and the offering price in two-sided market quotation. 3) The difference in yields, expressed in basis points, between two securities or groups of securities (e.g., credit rating categories).

STANDARD & POOR’S CORPORATION or S & P: An independent financial service company, a subsidiary of McGraw-Hill Company, which provides ratings for municipal securities and other financial information to investors.

STANDBY BOND PURCHASE AGREEMENT: An agreement with a third party, typically a bank, in which the third party agrees to purchase tender option bonds (typically variable rate demand obligations) tendered for purchase in the event that they cannot be remarketed. Unlike a letter of credit, a standby bond purchase agreement does not guarantee the payment of principal and interest by the issuer and is not an unconditional obligation to purchase the tender option bonds.

STANDBY LETTER OF CREDIT: Another term for standby bond purchase agreement. See: STANDBY BOND PURCHASE AGREEMENT.

STATE AND LOCAL GOVERNMENT SERIES: See: SLGS.

STRUCTURING AN ISSUE: The process of formulating an issue within the issuer’s legal and financial constraints so that the security is marketable. In structuring a new issue of municipal securities the issuer must determine the maturities, the method of repayment, redemption provisions, application of proceeds, security provisions and covenants.

SUBORDINATE LIEN BONDS: See: JUNIOR LIEN BONDS.

SUPER SINKER: A colloquial term for a term maturity, usually from a single family mortgage revenue issue with several term maturities, that will be the first to be called from a sinking fund into which all proceeds from prepayments of mortgages financed by the issue are deposited. The maturity’s priority status under the call provisions means that it is likely to be redeemed in its entirety well before the stated maturity date. Therefore, the super sinker maturity may be considered attractive to investors because it offers long-term interest rates on what is effectively a short-term security.


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SUPPLEMENTAL INDENTURE: An agreement entered into by an issuer that supplements the issuer’s master indenture or trust indenture. Often, a supplemental indenture is executed in connection with the issuance of one or more series of additional bonds under the master or trust indenture. In some cases, a supplemental indenture merely amends terms of the master or trust indenture without providing for the issuance of additional bonds.

SURETY: In the public finance context, a surety policy is a form of insurance provided by a bond insurer to satisfy a reserve fund requirement for a bond issue. Under this arrangement, instead of depositing cash in a reserve fund, the issuer buys a surety policy by paying a one-time premium equal to some percentage of the face amount of the policy. If the reserve fund is needed to make a debt service payment, the trustee notifies the surety provider and the providers makes the payment, up to the face amount of the policy. The issuer then has an obligation to reimburse the provider for the payment, plus interest.

SYNDICATE: A group of underwriters formed to purchase (underwriter) a new issue of municipal securities from the issuer and offer it for resale to the general public. The syndicate is organized for the purposes of sharing the risks of underwriting the issue, obtaining sufficient capital to purchase an issue and for broader distribution of the issue to the investing public. One of the underwriting firms will be designated as the syndicate manager or lead manager to administer the operations of the syndicate. There are two major types of syndication agreements:

Divided or Western Account: A method of determining liability stated in the agreement among underwriters in which each member of an underwriting syndicate is liable only for the amount of its participation in the issue, and not for any unsold portion of the participation amounts allocated to the other underwriters.

Undivided or Eastern Account: A method for determining liability stated in the underwriting agreement in which each member of the underwriting syndicate is liable for any unsold portion of the issue according to each member’s percentage participation in the syndicate.

TAX or TAXES: Compulsory charges levied by a governmental unit for the purpose of raising revenue. Taxes should be distinguished from special assessments, which are levied according to the actual benefits derived, and from fees, which must bear a reasonable relating to the costs of administration or regulation, and are imposed under a government’s police power. Tax revenues are used to pay for services or improvements provided for the general public benefit.

TAX ANTICIPATION NOTES (TANs) (Also called WARRANTS): Notes issued in anticipation of collection of taxes usually retirable only from tax collections, and frequently only from the proceeds of the tax levy whose collection is anticipated at the time of issuance. TANs are a form of short-term financing.

TAX-EXEMPT BOND: Another term for a municipal bond. Interest on many municipal securities is exempt from federal income taxation pursuant to Section 103 of the Internal Revenue Code, and may or may not be exempt from state income or personal property taxation in the jurisdiction where issue. If the bond is exempt from state income tax, it possesses


“double exemption” status. “Triple exemption” bonds are exempt from municipal or local income taxes, as well as from federal and state income tax. The Tax Reform Act of 1986 changed the status of certain bonds that previously were tax exempt.

TAX RATE: The amount of tax stated in terms of a unit of the tax base; for example, $1.25 per thousand dollars of assessed valuation.

TEFRA NOTICE, HEARING AND APPROVAL: Acronym for “Tax Equity and Fiscal Responsibility Act” of 1982. As a pre-condition for the exclusion from gross income for federal income tax purposes of interest on all qualified private activity bonds, TEFRA requires, among other things, that the issue be approved (a “TEFRA approval”) either by an elected official or body of elected officials of the applicable governmental entity after a public hearing (a “TEFRA hearing”) following reasonable public notice (a “TEFRA notice”) or by voter referendum of such governmental entity. See: PRIVATE ACTIVITY BOND; QUALIFIED BOND.

TEMPORARY PERIODS: The periods during which the federal tax rules relating to arbitrate yield restriction permit certain gross proceeds of an issue to be invested at a yield that is materially higher than the yield on the issue.

The most important of these is the temporary period generally available for the investment of monies in construction funds or loan acquisition funds after the date the governmental obligations are issued. In addition, a 13-month temporary period is provided for monies in certain debt service funds – generally including funds used primarily to achieve a proper matching of revenues and debt service within each year.

10b-5 OPINION: See: DUE DILIGENCE OPINION.

TERM: With respect to a single bond, the period of time until the maturity date of the bond and with respect to an issue, the period until the maturity date of the last bond of the issue to mature.

TERM BONDS: Bonds comprising a large part of all of a particular issue that come due in a single maturity. The issuer usually agrees to make periodic payments into a sinking fund for mandatory redemption of term bonds before maturity for payment at maturity.

TERM ISSUE: An issue of municipal securities that has a single stated maturity.

TIC: See: TRUE INTEREST COST.

TRANSFER: The process of effecting a change in the ownership of a registered security by 1) updating the list of registered holders of an issue and 2) issuing a new securities certificate (or, in some cases, reissuing the old certificate) with the new registered owner’s name imprinted on it. Both of these functions are most typically performed by the same entity, although in certain cases different entities may be used to perform each function.


50

TREASURY REGULATIONS: The federal income tax regulations adopted by the U.S. Department of Treasury. Treasury Regulations are designed to provide additional detail an interpretation of the Tax Code.

TREASURY SECURITIES: Debt obligations of the United States Government sold by the Treasury Department in the form of Bills, Notes and Bonds:

Bills: Short-term obligations that mature in one year or less and are sold on the basis of a rate of discount.

Notes: Obligations that mature between one year and ten years.

Bonds: Long-term obligations that generally mature in ten years or more.

TRUE INTEREST COST (TIC): Under this method of computing the borrowing issuer’s cost, interest cost is defined as the rate, compounded semi-annually, necessary to discount the amounts payable on the respective principal and interest payment dates to the proceeds received for the new issue securities. TIC computations produce a figure slightly different from the net interest cost (NIC) method since TIC considers the time value of money while NIC dopes not. The obligation to pay a dollar today is not the same as the obligation to pay a dollar ten years from now. Presumably, one could take a much smaller sum, invest it today and let the interest on that investment accumulate and compound until you have a dollar on the date ten years from now. The smaller sum is called the “present value” of having the dollar ten years from now, and the interest rate necessary to accumulate and compound that smaller sum up to that dollar ten years from now is called the “discount rate.” If one knows the “future value” (the dollar ten years from now) and the discount rate, the process of calculating the present value is called “discounting” the future value to the present. With these general concepts in mind, the TIC of an issue can be more fully defined and compared to the Net Interest Cost (NIC) for the same issue. The TIC is sometimes also called the “internal rate-of-return” or the “net effective interest rate” or the “Canadian Interest Cost.”

The TIC for an Issue is the annual discount rate which, when used to discount all debt service payments on the issue to the date of initial delivery of the issue, using a compounding interval equal to the interest payment periods for the issue, results in the aggregate present value of such debt service payments being equal to the original purchase price (including Accrued Interest) of the issue. For the purpose of calculating the TIC, Sinking Fund Payments for any Term Bonds are considered principal payments. Because there is no algebraic formula for the direct computation of the TIC, it must be determined either by successive approximation on a computer or calculator or by using present value tables.

TRUSTEE: A financial institution with trust powers which acts in a fiduciary capacity for the benefit of the bondholders in enforcing the terms of the bond contract.

TRUST INDENTURE: A contract between the issuer of municipal securities and a trustee, for the benefit of the bondholders. The trustee administers the funds or property specified in the indenture in a fiduciary capacity on behalf of the bondholders. The trust indenture, which is generally a part of the bond contract, establishes the rights, duties, responsibilities and remedies of the issuer and trustee and determines the exact nature of the


security for the bonds. The trustee is generally empowered to enforce the bond contract on behalf of the bondholders.

UNDERLYING DEBT: The debt of smaller geopolitical units within a given government’s jurisdiction.

UNDERLYING RATING: In the case of a security for which credit enhancement has been obtained, the rating assigned by a rating agency to such security without regard to credit enhancement or assigned to other securities of the same issuer having the same features and security structure but without the credit enhancement.

UNDERWRITE or UNDERWRITING: The process of purchasing all or any part of a new issue of municipal securities from the issuer, and offering such securities for sale to investors.

UNDERWRITER: A dealer that purchases a new issue of securities for resale. The underwriter may acquire the securities either by negotiations with the issuer or by award on the basis of competitive bidding. The underwriter does not structure bond issues. They often work as traders and have contacts with large bond buyers. They normally price the bonds for sale by the traders and salespeople.

UNDERWRITER’S COUNSEL: A lawyer who is selected by and represents the Underwriter in a bond sale. His primary role is to protect the Underwriter’s firm from lawsuits resulting from bond purchasers.

UNDERWRITER’S GROSS SPREAD (UNDERWRITER’S DISCOUNT): The difference between the purchase price paid to the Issuer for a new Issue and the sum of the prices at which the bonds are initially offered to the investing public by the underwriter.

To the extent that the underwriter subsequently lowers the initial offering prices, the underwriter may not realize the full amount of the spread. The spread is usually expressed in Points or fractions thereof. The spread generally consists of:

(i) Management Fee – a fee paid to the managing underwriter for handling the affairs of the syndicate, including, in the case of a Negotiated Sale, structuring the issue and negotiating with the issuer;

(ii) Expenses – any advertising and printing costs to the underwriter, underwriter’s counsel’s fees and expenses, computer expenses, travel expenses, MSRB fees, and other similar expenses;

(iii) Takedown – normally the largest component of the spread, similar to a commission, which represents the income derived by the selling broker or dealer from the sale of the bonds; if bonds are sold by a member of a syndicate, the seller is entitled to the full takedown (also called the “total takedown”); if bonds are sold by a dealer which is not a member of the syndicate, such seller receives only that portion of the takedown known as the concession or dealers allowance, with the balance (often termed the “additional takedown”) retained by the syndicate; and


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(iv) Risk – the amount of compensation for risks incurred by the underwriter in underwriting the bond issue, relating to the difficulty of marketing the issue, bond market conditions, and the amount of bonds remaining to be resold after the execution of the bond purchase agreement.

In the case of a syndicated offering, a portion of any residual is generally paid to each underwriter within the syndicate on a pro rata basis according to the number of bonds each dealer has committed to sell without regard to the actual sales by each member.

UPGRADE: The raising of a rating by a rating service due to the improved credit quality of the issue or issuer. The term also refers to the replacing of a security in an investment portfolio with one of a higher quality.

UNQUALIFIED LEGAL OPINION: A legal opinion of bond counsel that does not contain any qualifications. An unqualified legal opinion is frequently distinguished from a qualified or “reasoned” opinion expressing a lesser degree of confidence by the counsel delivering the opinion. A legal opinion generally is not considered to be qualified if it is subject to customary assumptions, limitations and qualifications or if the opinion is otherwise explained. In the municipal securities market, legal opinions generally are unqualified.

VARIABLE RATE: An Interest Rate that periodically changes based upon an index or a pricing procedure.

For example, the interest rate may be a specified percentage of the weekly Treasury bill auction rate or of the Federal Home Loan Bank borrowing rate, or the Remarketing Agent may establish the rate as the rate necessary to remarket the bonds at Par. The variable rate may change on a daily, weekly, monthly or other periodic basis.

Variable rate bonds generally have a demand feature allowing the owner to demand that the issuer or another party repurchase the bond upon a specified number of days’ notice or at certain times that reflect the intervals at which the rate varies. For example, a variable rate bond bearing interest at a rate that is set each week customarily has a demand feature allowing the bondholder to put the bond on one week’s notice. Investors treat such a bond as having a Term of one week. Because interest charged on money borrowed for a short term is normally less than interest on money borrowed for a long term, variable rates are normally lower than long-term fixed rates.

A Variable Rate is often called a Floating Rate. Since variable rates are lower than long-term Fixed rates, variable rate bonds are also referred to as “lower floaters.”

VARIABLE RATE DEMAND OBLIGATION (VRDO): Floating rate obligations that have a nominal long-term maturity but have a coupon rate that is reset periodically (e.g., daily or weekly). The investor has the option to put the issue back to the trustee or tender agent at any time with specified (e.g., seven days’) notice. The put price is par plus accrued interest.

VERIFICATION REPORT: In a refunding, a report, prepared by a certified public accountant or other independent third party, that demonstrates that the cash flow from investments purchased with the proceeds of the refunding bonds and other moneys are sufficient to pay the principal of and interest on the refunded bonds that are being defeased.


VOLUME CAP: Under federal tax law, the limit on the aggregate amount of tax-exempt Private Activity Bonds that may be issued during any calendar year. Beginning in 1998, the limit for any state is the greater of $50 per capita or $150,000,000.

WARRANT: A security, generally sold attached to another security of the same issuer, which gives the owner the right to purchase a third security of the same issuer, described on the warrant, within a stated period of time at a stated price. The warrant generally is detachable and tradable separately from the security with which it was originally sold. Warrants have occasionally been used in the municipal market by a few larger issuers.

YIELD: The rate earned on an investment based on the price paid for the investment, the interest earned during the period held and the selling price or redemption value of the investment.

YIELD BURNING: In an advance refunding, the sale to an issuer of securities (typically Treasury securities) at above-market prices to be held in escrow for the purpose of reducing the yield on those securities to avoid arbitrage regulations. The SEC and Internal Revenue Service view such practice as illegal.

YIELD RESTRICTION: A general requirement under the Internal Revenue Code that proceeds of tax-exempt bonds not be used to make investments at a higher yield than the yield on the bonds. The Internal Revenue Code provides certain exceptions, such as for investment of bond proceeds for reasonable temporary periods pending expenditure and investments held in “reasonably required” debt service reserve funds.

ZERO COUPON BOND: An original issue discount bond on which no periodic interest payments are made but which is issued at a deep discount from par, accreting (at the rate represented by the offering yield at issuance) to its full value at maturity.

Appendix B – U.S. Government and Agency Securities 1

Appendix B U.S. GOVERNMENT AND AGENCY

SECURITIES

The Oregon State Treasurer, pursuant to ORS 294.046, is required to prepare and keep current a list of all agencies and instrumentalities of the United States with available obligations that any county, municipality, political subdivision or school district may invest in under ORS 294.035(3)(a) and 294.040. The following listing of eligible U.S. Government and Agency Securities is provided by the Finance Division of the Office of the State Treasurer. Updates to this information can be obtained from Treasury’s website at www.ost.state.or.us.

U.S. TREASURY ISSUES

Generally, all U.S. Treasuries listed below are appropriate investments for excess cash funds including bond related funds if the maturities of such instruments are within the local government’s investment guidelines.

1. U.S. Treasury Bills

2. U.S. Treasury Notes

3. U.S. Treasury Bonds

4. U.S. Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities)

5. BECCS (Bearer Borpora Conversions)

6. CUBES (Coupons Under Book-Entry Safekeeping)

7. U.S. Treasury Inflation-Indexed Bonds

All Treasury notes and bonds are strippable. STRIPS are created by separating the interest (coupon) and principal (the note or bond itself), thereby creating zero coupon securities that are sold at a deep discount and payment is received at maturity. STRIPS are direct obligations of the U.S. Treasury and are backed by the full faith and credit of the United States. Strips are not to be confused with CAT's, TIGR's, etc. which are proprietary products that represent a security interest in an underlying U.S. Treasury security. These latter investments ARE NOT permissible investments for local governments.

Previously when U.S. Treasury Bonds were in physical form, they were literally separated into serial coupons from their respective bonds. This was before book entry; before proprietary products created by dealers that were security interests in some underlying not or bond; and, before the U.S. Treasury itself allowed stripping of its longer debt issues. These old physically


separated instruments (basically bearer securities) were converted by the Federal Reserve into wireable book entry form to make the STRIPS market more uniform. These former physical securities that have been so converted are called Coupons Under Book Entry Safekeeping (hence the acronym CUBES). These CUBES are very rare, trade at a higher rate than on-the-run comparable U.S. Treasury STRIPS, and are extremely illiquid. Being old U.S. Treasury securities, CUBES carry the same full faith and credit of the United States Government.

In January, 1997, the United States Treasury started issuing Treasury Inflation Protected Securities (TIPS). Inflation indexed note auctions are usually announced on the first Wednesday of January and July, with the auction process occurring the second week of January and July. Issuance is the 15th of the same month. These bonds will be fully strippable. Like other bonds, they will be offered in denominations of $1,000.00. More detailed information beyond this cursory description is available from the internet (www.publicdebt.treas.gov), The Securities Industry and Financial Markets Association (formerly The Bond Market Association) at www.SIFMA.org, and research data from brokers/dealers.

DEBT OBLIGATIONS OF U.S. GOVERNMENT AGENCIES AND ENTERPRISES

The debt obligations of U.S. Government Agencies and Government Sponsored Enterprises (GSE’s) are collectively referred to as “Agency Securities” or “Agencies.” Those Agency Securities listed in 1 through 8 below are considered appropriate investments for excess cash funds including bond related funds if the maturities of such instruments are within the local government’s investment guidelines.

Attention should be paid to any peculiar characteristics of some of the instruments in this listing. For example, mortgage-backed securities like Government National Mortgage Association (Ginnie Mae’s) mortgage-backed securities may have volatile prepayment characteristics that may make their final maturities unknown. In falling interest rate cycles, borrowers’ whose underlying mortgages are the security for the Ginnie Mae bonds may refinance their loans accelerating the principal return to the investor. Therefore, the term for a Ginnie Mae cannot be relied upon to perform, for example, a debt defeasance.

Agencies listed in 9 through 21 are viewed as less appropriate for local government investments, may be infrequently traded, and can be characterized by thin, illiquid markets.

International institutions in which the United States Government owns capital stock (paid-in or callable) are not eligible investments for local governments and are not listed here (World Bank, Asian Development Bank, Inter-American Development Bank, etc.).

1. Federal Home Loan Banks (FHLB) – Discount Notes, Consolidated bonds, Floating Rate Notes, and MTNS. www.fhlb-of.com

2. Federal Farm Credit Banks (FFCB) – Consolidated systemwide notes and bonds, Discount notes, Floating Rate Notes, MTNs, and Master notes. www.farmcredit-ffcb.com

3. Federal National Mortgage Association ("Fannie Mae") – Discount Notes, MTNS, Senior and Subordinated Benchmark Notes (fixed and floating), strips, zero-coupon securities, and mortgage-backed securities. www.fanniemae.com


4. Federal Home Loan Mortgage Corporation ("Freddie Mac") - Discount Notes, MTNs, Senior and Subordinated Reference Notes (fixed and floating), Mortgage Participation Certificates (PC's), collateralized Mortgage Obligations (CMO's) and Strips. www.freddiemac.com

5. Government National Mortgage Association ("Ginnie Mae") – Mortgage-Backed Securities in 15- and 30-year maturities – guaranteed by the full faith and credit of the U.S. Government. Collateralized by FHA, VA, and FMHA insured mortgage loans. www.ginniemae.gov

6. Financing Corporation (FICO) – Long-term bonds (none issued since 9/89) – Principal repayment defeased by zero coupon Treasuries.

7. Resolution Funding Corporation (FEFCORP) – Strips and Bonds – 30 & 40 year issues – Principal collateralized by U.S. Treasuries, interest payments backed by the U.S. Treasury and FIRREA.

8. Tennessee Valley Authority (TVA) – Discount Notes, Strips, Notes, and Bonds – Issues available in maturities 5 to 50 years. www.tva.gov

9. Financial Assistance Corporation (FAC) – 15 year bonds, guaranteed by the Treasury, first issues in 7/88. This entity provides capital to Farm Credit System Institutions.

10. Federal Land Banks (FLB) – Bonds – Currently issued through FFCB. (Banks for Cooperative and Federal Intermediate Credit Bank also issues through FFCB and have no direct issues outstanding.)

11. Federal Housing Administration (FHA) – Debentures – Backed by the full faith and credit of the U.S. Government.

12. Farmers Home Administration (FMHA) = Certificates of Beneficial Ownership (CBO's). Backed by the full faith and credit of the U.S. Government. Discontinues in 1975, small amount remains outstanding.

13. General Services Administration (GSA) – Participation Certificates – Secured by the full faith and credit of the U.S. Government. No new issues since 1974. www.gsa.gov

14. Maritime Administration – Bonds – Collateralized by ship mortgages, further backed by the full faith and credit of the U.S. Government in the event of default.

15. Washington Metropolitan Area Transit Authority – Bonds – Backed by the full faith and credit of the U.S. Government. Small amount remains outstanding.

16. Small Business Administration (SBA) – Debentures – Backed by the full faith and credit of the U.S. Government. Small amount remains outstanding. www.sba.gov

17. Department of Housing and Urban Development (HUD) – Notes, New Housing Authority Bonds – 40-year issues with 15-year calls. Backed by the full faith and


credit of the U.S. Government. No new issues since 1974. Small amount remains outstanding.

18. United States Postal Service – Bonds – May be backed by the full faith and credit of the U.S. Government. Issues with maturities of 20 year or longer. www.usps.com

19. United States Department of Veterans' Affairs Guaranteed REMIC Pass-Through Certificates Vendee Mortgage Trust 1992-1 ("Vinnie Mae"). The full and timely payment of principal and interest of these certificates is guaranteed by the Department of Veterans' Affairs and this guarantee is further backed by the full faith and credit of the United States of America.

20. Private Export Funding Corporation (PEFCO) – Secured Notes with maturities of 5 years or longer. Interest is guaranteed by the Export-Import Bank of the United States (Eximbank, a federal agency) and whose principal is secured by either cash, securities backed by the full faith and credit of the United States, or Guaranteed Importer Notes, which are guaranteed by the Eximbank. The Secured Notes, which are rated AAA. www.pefco.com

21. Federal Agricultural Mortgage Corporation ("Farmer Mac"), a federally chartered instrumentality of the United States was created to provide capital for agricultural real estate and rural housing. Instruments include discount notes, medium-term notes, and mortgage backed securities. www.farmermac.com

Appendix C – Legal References

1

Appendix C Legal References

OREGON STATE CONSTITUTIONAL PROVISIONS The following are selected Oregon State Constitution references of interest in connection with public finance bond an debt obligation transactions.

Article II – Suffrage and Elections

Section 14. Time of holding of elections and assuming duties of office.

Section 14a. Time of holding elections in incorporated cities and towns.

Section 23. Approval by more than majority required for certain measures submitted to people.

Article IV – Legislative Department

Section 1. Legislative power; initiative and referendum.

Article VI Administrative Department

Section 10. County home rule under county charter.

Article IX Finance

Section 1c. Financing redevelopment and urban renewal projects.

Article XI Corporations and Internal Improvements

Section 2. Formation of corporations; municipal charters; intoxicating liquor regulation.

Section 5. Restriction of municipal powers in Acts of incorporation.

Section 8. State not to assume debts of counties, towns, or other corporations.

Section 9. Limitations on powers of county or city to assist corporations.

Section 10. County debt limitation.

Section 11. Property tax limitations on assessed value and rate of tax; exceptions.

Section 11b. Property tax categories; limitations on categories; exceptions.

Appendix C – Legal References 2

Section 12. People’s utility districts.

Section 14. Metropolitan service district charter.


3

OREGON REVISED STATUTES

This manual was published prior to the availability of the 2007 Oregon Laws compilation of laws enacted during the 74th Oregon Legislative Assembly – 2007 Regular Session or the official record copy of the 2007 Oregon Revised Statutes. The manual does not reflect any acts that became law as a result of the 2007 Regular Legislative Session or any subsequent session.

The following are selected Oregon Revised Statutes (ORS) references of interest in connection with public finance bond an debt obligation transaction

Chapter 203. County Governing Bodies; County Home Rule

Chapter 221. Organization and Government of Cities

Chapter 223. Local Improvements and Works Generally

Chapter 250. Initiative and Referendum

Chapter 251. Voters’ Pamphlet

Chapter 255. Special District Elections

Chapter 280. Financing of Local Public Projects and Improvements; City and County Economic Development

Chapter 285B. Economic Development II (specifically, ORS 285B.320 to 285.371)

Chapter 286. State Bonds

Chapter 287. Borrowing and Bonds of Local Governments

Chapter 288. Public Borrowing and Bonds Generally

Chapter 294. County and Municipal Financial Administration

Chapter 308. Assessment of Property for Taxation

Chapter 210. Property Tax Rates and Amounts; Tax Limitations; Tax Reduction Programs


OREGON ADMINISTRATIVE RULES

The following are selected Oregon Administrative Rules (OAR) references of interest in connection with public finance bond an debt obligation transaction

Oregon State Treasury and Municipal Debt Advisory Commission

170-055-0005 Procedure to Effect Cash Defeasance of Outstanding Bonds

170-060-1010 Terms, Conditions, and Reporting Requirements for an Agreement for Exchange of Interest Rates.

170-061-0000 Notice and Reporting Requirements by Public Bodies When Issuing Bonds

170-061-0015 Fees Charged by the Debt Management Division

170-061-0020 Requirements for Notice of Call

170-062-0100 Procedures for the Issuance of State of Oregon Industrial Development Bonds

170-062-0000 Procedure for Submission, Review and Approval of An Advance Refunding Plan

170-071-0005 Allocation of Private Activity Bond Limit

Oregon Facilities Authority

172-005-0000 to 0070 Evaluating and Approving Projects which Qualify for Tax-Exempt Financing

Oregon Economic and Community Development Department

123-011-0020 to 0050 Oregon Economic Development Revenue Bonds

Secretary of State, Elections Division

165-007-0030 to 0280 Conduct of Elections

165-0012-0005 to 0240 Campaign Finance Regulations

165-013-0010 Election Offences

165-014-0005 to 0260 Initiative, Referendum and Recall

165-016-0040 to 0095 Voters’ Pamphlet


5

165- 018-0005 to 0030 Election Boards and Persons with Disabilities

165-020-0005 to 0430 Special District Elections

165-021-0000 to 0010 Publication of Special District Election Notices

165-022-0000 to 0070 County Voters’ Pamphlet


FEDERAL SECURITIES LAW

The following are selected federal statutes and regulations of general interest in connection with public finance bond an debt obligation transaction

Federal Securities Laws

Securities Act of 1933 Section 3. Exempted Securities

Section 5. Prohibitions Relating to Interstate Commerce and the Mails

Section 17. Fraudulent Interstate Transactions

Section 131. Definition of Security Issued Under Governmental Obligations

Securities Exchange Act of 1934 Section 10 Regulation of the use of Manipulative and Deceptive Devices

Rule 10b-5 Employment of Manipulative and Deceptive Devices

Rule 15c2-12 Municipal Securities Disclosure

Appendix D – Public Finance Resources and Contacts 1

Appendix D Public Finance

Resources and Contacts This appendix provides a list of useful resources relevant to public finance and debt management. The listing includes Oregon state and local governments, the federal government and many local and national groups and organizations.

State of Oregon Governmental Resources

ELECTED OFFICES

State of Oregon Governor’s Office State Capitol Building 900 Court Street NE Salem, OR 97301 Tel: (503) 378-4582 www.or.gov

Oregon State Legislature State Capitol Building 900 Court St NE Salem, OR 97301 Tel: 503-986-1187 (Information Line) www.leg.state.or.us

Oregon Secretary of State Public Service Building Suite 151 255 Capitol Street NE Salem, OR 97310 Tel: (503) 986-2200 www.sos.state.or.us

Oregon State Treasury 350 Winter Street NE, Suite 100 Salem, OR 97301-3896 Tel: (503) 378-4000 www.ost.state.or.us

Department of Justice 1162 Court Street NE Salem, OR 97301-4096 Tel: (503) 378-4400 www.doj.state.or.us

Superintendent of Public Instruction 255 Capitol Street NE Salem, OR 97310-0203 Tel: (503) 947-5600 www.ode.state.or.us//

Labor Commissioner Bureau of Labor and Industries (BOLI) 800 NE Oregon St., Suite 1045 Portland, OR 97232 Tel: 971-673-0761 www.oregon.gov/BOLI/


GOVERNMENTAL OFFICES

Administrative Services, Department of (DAS) 155 Cottage St. NE, U20 Salem, OR 97301-3972 Tel: (503) 378-3104 www.oregon.gov/DAS/

Debt Management Division (DMD) Office of the State Treasurer 350 Winter Street NE, Suite 100 Salem, OR 97301-3896 Tel: (503) 378-4930 www.ost.state.or.us/divisions/dmd/

Economic and Community Development Department (OECDD) 775 Summer St. NE, Suite 200 Salem, OR 97301-1280 Tel: (503) 986-0123 www.econ.oregon.gov

Education, Department of 255 Capitol Street NE Salem, OR 97310-0203 Tel: (503) 947-5600 www.ode.state.or.us

Elections Division Office of the Secretary of State 141 State Capitol Salem, OR 97310 Tel: (503) 986-1518 or (866) ORE VOTES www.sos.state.or.us/elections

Environmental Quality, Department of (DEQ) 811 SW Sixth Ave. Portland, OR 97204 Tel: (503-229-5696 www.oregon.gov.deq

Finance Division Office of the State Treasurer 350 Winter Street NE, Suite 100 Salem, OR 97301-3896 Tel: (503) 378-4633 www.ost.state.or.us/divisions/finance/

Housing and Community Services Department North Mall Office Building 725 Summer St NE, Suite B Salem, OR 97301-1266 Tel: (503) 986-2005 www.oregon.gov/OHCS/

Transportation, Department of (ODOT) 355 Capitol Street NE Room 135 Salem, OR 97301-3871 Tel: (503) 986-4000 www.oregon.gov/odot

Veterans’ Affairs, Department of (ODVA) Oregon Veterans’ Building 700 Summer St. NE Salem, OR 97301-1285 Tel: (503) 373-2000 or (800) 828-8801 www.oregon.gov/ODVA

Water Resources Department 725 Summer Street NE, Suite A Salem, OR 97301 Tel: (503) 986-0900 www.wrd.state.or.us


COMMISSIONS AND AUTHORITIES Municipal Debt Advisory Commission 350 Winter Street NE, Suite 100 Salem, OR 97301-3896 Tel: (503) 378-4930 www.ost.state.or.us/divisions/DMD/MDAC/

Oregon Facilities Authority 350 Winter Street NE, Suite 100 Salem, OR 97301-3896 Tel: (503) 378-4930 www.ost.state.or.us/divisions/DMD/OFA/

Private Activity Bond Committee 350 Winter Street NE, Suite 100 Salem, OR 97301-3896 Tel: (503) 378-4930 www.ost.state.or.us/divisions/DMD/PAB/

State Debt Advisory Commission 350 Winter Street NE, Suite 100 Salem, OR 97301-3896 Tel: (503) 378-4930 www.ost.state.or.us/divisions/DMD/SDPAC

MISCELLANEOUS WEBSITES

Oregon Revised Statutes (ORS) www.leg.state.or.us/bills_laws/

Oregon Administrative Rules (OAR) http://www.sos.state.or.us/archives/

State of Oregon Agencies and Contacts www.oregon.gov/state_contact.shtml

Population Research Center Portland State University Tel: (503) 725-3922 www.pdx.edu/prc/

Oregon Associations and Organizations

Association of Oregon Counties 1201 Court St. NE, Ste. 201 Salem, OR Tel: (503) 585-8351 www.aocweb.org

League of Oregon Cities 1201 Court St. NE, Suite 200 Salem, OR 97301 Tel: (503) 588-6550 www.orcities.org

Oregon Municipal Finance Officers Association PO Box 13308 Portland, OR 97213 Tel: (503) 282-9288 www.omfoa.org

Oregon School Boards Association 1201 Court Street NE, Suite 400 Salem, OR 97301 Tel: (503) 588-2800 or (800)-578-OSBA www.osba.org

Special Districts Association PO Box 12613 Salem, OR 97309-0613 Tel: (503) 371-8667 or (800) 285-5461 www.sdao.com


State and National Agencies and Organizations

American Bar Association Tel: (800) 285-2221 www.abanet.org

Association of Financial Guaranty Insurers Tel: (518) 449-4698 www.afgi.org

California Debt and Investment Advisory Commission (CDIAC) Tel: (916) 563-3269 www.treasurer.ca.gov/cdiac/

Council of Development Finance Agencies (CDFA) Tel: (216) 920-3073 www.cdfa.net

Federal Reserve Board of San Francisco Tel: (415) 974-2000 www.frbsf.org

Government Finance Officers Association (GFOA) Tel: (312) 977-9700 www.gfoa.org

International Swaps & Derivatives Assoc., Inc. (ISDA) Tel: (212) 901-6000 www.isda.org

Municipal Securities Rulemaking Board (MSRB) Tel: (703) 797-6600 www.msrb.org

MuniNet Guide www.muninetguide.com An online guide and directory to web sites for state, county and local governments and other municipal related topics

National Association of Bond Lawyers (NABL) Tel: (312) 648-9590 www.nabl.org

National Association of Counties (NACO) Tel: (202) 393-6226 www.naco.org

National Assoc. of Housing & Redevelopment Officials (NAHRO) Tel: (202) 289-3500 www.nahro.org

National Association of Securities Dealers (NASD) Tel: (301) 590-6500 www.nasd.com

National Association of State Auditors, Comptrollers and Treasurers (NASACT) Tel: (859) 276-1147 www.nasact.org

National Association of State Budget Officers (NASBO) Tel: (202) 624-5382 www.nasbo.org

National Association of State Housing Agencies (NCSHA) Tel: (202) 624-7710 www.ncsha.org


National Association of State Treasurers (NAST) Tel: (606) 244-8175 www.nast.org

National League of Cities (NLC) Tel: (202) 626-3000 www.nlc.org

SIFMA – Securities Industry and Financial Market Association (formerly The Bond Market Association) Tel: (212) 608-1500 www.sifma.org

Thomas – Library of Congress Law Library of Congress Tel: (202) 707-5079 http://thomas.loc.gov/

U.S. Census Bureau www.census.gov

U.S. Department of the Treasury Bureau of Public Debt www.publicdebt.treas.gov State and Local Government Series (SLGS) www.treasurydirect.gov/govt/govt.htm

U.S. Economical and Statistical Information https://www.esa.doc.gov/ Useful for background information when preparing Official Statements. The Economics and Statistics Administration (ESA) is a bureau within the U.S. Department of Commerce.

U.S. Internal Revenue Service (IRS) Telephone Assistance for Government Entities Tel: (877) 829-5500 www.irs.gov Information for the Tax Exempt Bond Community www.irs.gov/taxexemptbond/

U.S. Securities and Exchange Commission (SEC) Tel: (800) SEC-0330 www.sec.gov


Financial Information and Services Bloomberg www.bloomberg.com

Bond Logistix Tel: (866) 342-5259 www.bondlogistix.com

BondBuyer Tel: (800) 221-1809 www.bondbuyer.com

CUSIP Service Bureau – Standard & Poor’s Tel: (212) 438-6500 www.cusip.com

Depository Trust Corporation (DTC) Depository Trust & Clearing Corporation (DTCC) Tel: (212) 855-1000 www.dtcc.com

Digital Assurance Corporation LLC Tel: (407) 515-1100 or (888) 824-2663 www.dacbond.com/

DisclosureUSA www.disclosureusa.org Secondary market securities disclosure website.

eMuni – Electronic Municipal Statistics Tel: (510) 658-2655 www.emuni.com Documents, news and financial information relating to the U.S. municipal bond market.

FedWorld www.fedworld.gov Download IRS tax forms; search government information and databases.

Investing In Bonds (SIFMA) www.investinginbonds.com

Legal Information Institute (LII) www.law.cornell.edu/ Research and electronic publishing activity of the Cornell University Law School. Popular collections include: State statutes, the U.S. Code, and Supreme Court opinions.

Orrick, Herrington & Suttcliffe LLP Tel: (503) 943-4800 www.orrick.com Nation’s leading public finance law firm providing bond counsel services to state and local governments.

Seattle-Northwest Securities Corporation Tel: Oregon – 800.452.9911 Seattle – 866.38-BONDS www.seattlenorthwest.com Pacific Northwest’s premier investment banking, bond underwriting and financial advisory firm.

Securities Lawyer’s Deskbook http://www.law.uc.edu/CCL/index.html Text of Securities Act of 1933 and the Securities Exchange Act of 1934


SLGS – State and Local Government Series Securities www.treasurydirect.gov/govt/govt.htm Information about the purchase of SLGS

Thompson Financial www.thomson.com

Credit Enhancement Agencies Ambac Financial Group Tel: (212) 668-0340 or (800) 221-1854 www.ambac.com

American Capital Access (ACA) ACA Financial Guaranty Corporation Tel: (212) 375-2000 www.aca.com

Assured Guaranty Corporation (AGC) Tel: (212) 974-0100 www.assuredguaranty.com

CIFG IXIS Financial Guaranty Tel: (212) 909-0432 www.cifg.com

Financial Guaranty Insurance Company (FGIC) Tel: (212) 312-3093 www.fgic.com

Financial Security Assurance (FSA) Tel: (415) 995-8000 www.fsa.com www.dexia.com

MBIA Inc. Tel: (914) 765-3060 www.mbia.com

XL Capital Assurance Tel: (212) 478-3434 http://xlfa.scafg.com/


Credit Rating Agencies National Headquarters West Coast Office

Fitch Ratings One State Street Plaza New York, NY 10004 Tel: (212) 908-0500 or (800) 75-FITCH www.fitchratings.com

Fitch Ratings 650 California Street, 8th Floor San Francisco, CA 94108 Tel: (415) 732-1754 or (800) 95 FITCH www.fitchratings.com

Moody’s Investors Service 99 Church Street New York, NY 10007-2796 Tel: (212) 553-0300 www.moodys.com

Moody’s Investors Service Public Finance Regional Office One Front Street, Suite 1900 San Francisco, CA 94111 Tel: (415) 274-1700 www.moodys.com

Standard & Poor’s Ratings Group 55 Water Street New York, NY 10004 Tel: (212) 438-2000 www.standardandpoors.com

Standard & Poor’s Ratings Group Steuart Towers, Suite 1500 One Market San Francisco, CA 94105 Tel: (415) 371-5000 or (415) 268-5372 www.standardandpoors.com


SEC 15c2-12 Securities Disclosure

DisclosureUSA

Nationally Recognized Municipal Securities Disclosure Organizations (NRMSIRs)

DisclosureUSA www.disclosureusa.org

This site is a result of the efforts of the Muni Council to improve secondary market disclosure. The Municipal Advisory Council of Texas was chosen to develop and operate a system that enables issuers to meet the filing requirements of Rule 15c2-12 by means of a single filing location. If you file through DisclosureUSA, you do not need to make a separate filing with any of the NRMSIRs or SIDs. Bloomberg Municipal Repository 100 Business Park Drive Skillman, New Jersey 08448-3629 Tel: (609) 279-3225 Fax: (609) 279-2066 or (800) 395-9403 Email: [email protected] www.bloomberg.com/markets/rates/municontacts.html

DPC Data Inc. Attn: NRMSIR One Executive Drive Fort Lee, NY 97024 Tel: (201) 346-0701 Fax: (201) 947-0107 Email: [email protected] www.munifilings.com www.dpcdata.com

Standard & Poor’s Securities Evaluations, Inc. 55 Water Street, 45th Floor New York, NY 10041 Tel: (212) 428-4595 Fax: (212) 438-3975 Email: [email protected] www.disclosuredirectory.standardandpoors.com

FT Interactive Data Attn: NRMSIR 100 William Street, 15th Floor New York, NY 10038 Tel: (212) 771-6999 or (800) 689-8466 Fax: (212) 771-7390 Email: [email protected] www.ftid.com

Debt Issuance Manual 2007

Documents

Transcript of Debt Issuance Manual 2007