Foreword. First some very basic questions and answers which are fundamental to the process:

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1 Foreword Municipal Bonds 101 was written by the Treasurer s Office to demystify the bond sale process for interested observers. The format is an outline representing the major activities and elements associated with this complex process. Included and useful to the reader is a glossary of terms as well as a schedules of bond documents, public hearing requirements and the excerpted State Code Section defining and contrasting the activities that can be financed by essential corporate purpose bonds (Subsection 3a-u) or general corporate purpose bonds (Subsection 4a-1). First some very basic questions and answers which are fundamental to the process: What is a bond? A bond is a debt instrument that promises repayment of money borrowed over a specified period of time at a specified rate of interest. Bonds are usually sold/purchased in the universal amount of $5,000. Why sell bonds in the first place? The sale of municipal bonds through a competitive bid process allows the City to access capital markets in order to raise money for projects (infrastructure) and equipment. Financing large projects with extended useful lives generally precludes the ability to adhere to a pay-as-you-go philosophy. Why all the fuss about a bond rating? A good credit rating translates to more and lower (better) bids for debt being issued resulting in savings of interest costs to the issuer. The major rating agencies actually represent the investor (investment community) and determine credit quality based upon measurement against established criteria including, but not limited to, trends (both positive and negative) in the local economic base, the issuer s financial and debt management as well as actual financial performance and other administrative issues. The rating is the agency s independent judgment of the issuer s ability to repay debt on time and in full.

2 Bonds 101 I. Maintenance Activity A. Retain bond counsel. B. Retain an independent financial advisory firm (FAF) through RFP every four years. C. Coordinate resolution(s) of reimbursement if required for inclusion in a future financing. II. III. Plan and Structure the Issue A. Determine the components of the issue (sizing) and net resource requirements through the CIP process taking into account any outstanding resolutions of reimbursement. B. Estimate costs of issuance based upon a benchmark of 1.25% of the total par issuance. C. Test thresholds for arbitrage rebate implications (< $5 million exempt; > $5 million subject to rebate of interest earned over and above the internal rate of return of the bonds) and bank qualification eligibility ( < $10 million banks are afforded a tax break for holding municipal bonds what can result in a lower borrowing rate for the issuer). D. FAF structures bond maturities (amount of debt to be repaid by year) based upon the projected useful life, following Finance s general accounting schedule, of the specific improvement or equipment (20 years maximum; certain flood related expenditures 30 years). E. FAF generates the computer model of the optimal allocations and maturities into a projected debt service schedule that wraps the new issuance around existing debt to avoid spikes in the debt service property tax levy or utility rates (structuring). F. Calculate the benchmark percentage of debt paid out in 10 years. G. FAF submits components and debt schedules to city and bond counsel for review of tax-exempt versus taxable status to determine, if necessary, the amount of taxable debt (up to 5%) that can be safe harbored within the tax-exempt portion of the issuance. H. Bond sale calendar coordinated with city, bond counsel and financial advisor. Publish the Official Statement (bond prospectus) A. FAF merges the new issuance debt schedule with existing debt schedules and research and update data in the various demographic and statistical information tables in the P.O.S., as well as the liftable financial statements from the Comprehensive Annual Financial Report (CAFR). B. FAF submits preliminary official statement (P.O.S.) for review by bond counsel and the city. C. Cold review, if necessary, of the P.O.S. s contents and events subsequent to the last audited financial statements by the City s external auditor. D. Upon approval of the P.O.S. by all bond counsel and city the FAF lists the P.O.S. and bid forms via PDF file on the financial advisor s web site and the MSRB s Electronic Municipal Market Access System ( EMMA ). E. Underwriters and investment bankers are notified by financial advisor of the new issue P.O.S. approximately 10 days prior to sale date.

3 IV. Credit Rating Review A. Application made to Moody s Investors Services by the financial advisor for credit rating (required for each issuance). B. Electronic delivery of the P.O.S. and the most current budget, capital improvement program and CAFR to Moody s for their scrutiny. C. Collaborate with other members of the City Finance Department in preparation of a presentation to Moody s, if required. D. Respond to questions from the credit analyst(s) assigned by Moody s regarding local economic trends, financial management and other criteria (either by phone, in Chicago or during an on-site presentation). E. Await the release of the rating and Moody s report (ususally 2 or 3 business days prior to the sale date). V. Pre-Sale Activity A. Field any pertinent questions from underwriters who may be interested in formulating a competitive bid on the issuance. B. Receive blank bid forms with original signatures from underwriters along with good faith deposit (1% of par), or evidence of a Sure-Bid (bond for good faith deposit), for faxed or written bids. C. FAF obtains user ID and password from TM3 (Parity ) in order for city and FAF to access electronic bidding web site on date of sale. D. Resolution(s) fixing date(s) for a meeting (public hearing) on the proposition to issue. E. Publish public hearing notice(s) (Gazette). Mail affidavit of publishing to bond attorney. F. Conduct public hearing(s) on the issuance. G. Resolution instituting proceedings to take additional action and approve electronic bidding. H. Publish Notice of Bond Sale (Gazette) VI. VII. Sale Activity A. Receive competitive electronic bids via Parity, faxed bids subsequently sealed in an envelope, or written bids in the Council Chambers, or other duly designated location, until the City Clerk closes bidding. B. Faxed or written bid opening conducted by the City Attorney or designee in Council chambers. Electronic bids reviewed by financial advisory firm representatives and presented to City representatives. C. Winning bid determined by lowest true interest cost (TIC) expressed as a percentage. D. Verification of winning bid(s) by financial advisor. E. Notification given to winning bidder(s). Post-Sale Activity A. Tabulation of bids prepared by financial advisor. B. Prepare press release. C. Resolution(s) directing the sale of the bonds. D. Review addendum, as prepared by the financial advisor, and provide along with Official Statements (Final O.S.) for shipment of predetermined quantities to winning bidder within one week after the sale. E. Set up bank accounts for the investment of bond proceeds. F. Deposit good-faith check if submitted; or verify good faith EFT. G. Review and approve settlement letter.

4 VIII. Issuance and Closing A. Resolution authorizing the issuance of the bonds. B. Approval of the Tax Exemption Certificate. C. Approval of the Continuing Disclosure Certificate. D. Signing of other closing certificates and documents. 1. Delivery Certificate. 2. Transcript Certificate. 3. City Clerk s Certification to the County Auditor. 4. IRS Form 8038G Information Return. 5. Comfort letter. E. Signing of bonds (one bond per maturity for each series) by the Mayor, City Clerk and Finance Director. F. Compile total costs of issuance to compare to benchmark of 1.25% of the par value of the bonds issued. G. Supply closing wiring instructions to winning bidder(s). H. Return original, executed documents to bond counsel for distribution to winning bidder(s). I. Ship executed bonds to the Depository Trust Company (municipal bond clearinghouse) for arrival no less than three days before closing. J. Prepare wiring instructions to bank for bond proceeds. K. Confirm wire transfer of proceeds through the financial advisor. L. Release the bonds to DTC. IX. Continuing Disclosure (SEC Rule 15c-12) A. Prepare a continuing disclosure annual report filing within 365 days of the previous fiscal year end updating tables from the last O.S. 1. Computation of legal debt margin. 2. General obligation debt statement. 3. General obligation debt service schedule 4. General obligation tax-supported debt (principal only). 5. Overlapping debt. 6. Actual (100%) valuations for the city. 7. Assessed ( rollback ) valuations. 8. Ten largest taxpayers. 9. City tax rate by fund. 10. Property tax levies and collections. B. Convene material events internal staff review committee (City Attorney, City Treasurer, City Controller-Auditor) to determine if other reportable material event(s) have occurred. C. Resolution approving annual report filing and authorizing distribution to the Nationally Recognized Municipal Securities Information Repositories (currently four). D. Distribute annual report through EMMA prior to fiscal year end.

5 Glossary for Bonds 101 A Layperson s Guide to the Bond Sale Process Arbitrage rebate - provisions relative to a prohibition of arbitrage profits Tax Reform Act of 1986; requires an issuer to rebate directly to the IRS any profits derived from investing bond proceeds at a yield that exceeds the yield on the bonds. Bond counsel - specialized attorney (law firm) with primary role to certify both that the issuer has legal authority to issue the bonds and that the securities qualify for applicable tax exemption. Conduit financing - the issuance of securities by a government agency to finance a project of a third party, such as a non-profit organization or other private entity; not a financial obligation of the issuer. Debt service - required payments for principal and interest. DTC - the Depository Trust Company a municipal bond clearinghouse financed by the underwriting/investment community to transact the registration of book-entry municipal bonds and the payment of principal and interest to the individual bondholders. EMMA Electronic Municipal Market Access is a source for official statements and continuing disclosure documents. Financial Advisor - individual (firm) whose role is to guide the issuer through a sale by the provision of a list of potential bidders, interfacing with the rating agency with tax issuer and directing the closing. General Obligation Bonds - Debt issuances typically need to finance government improvements benefiting the community as a whole; secured by an unlimited tax levy of the issuer; Official Statement - disclosure document that outlines pertinent information regarding the debt offering of a government entity otherwise known as the bond prospectus. Contains addendum with sale results information. P.O.S. Preliminary Official Statement (aka Red Herring) is the first release of the disclosure document that outlines pertinent information regarding the debt offering of a government entity otherwise known as the bond prospectus. Refunding - procedure (sale) in which an issuer refinances an outstanding bond issue by issuing new bonds in order to take advantage of a declining interest rate environment or obtain debt structure modification. Resolution of Reimbursement - allows an issuer to reimbursement itself for certain expenditures from a sale concluded up to eighteen months in the future. Revenue bonds - debt issuances used to finance facilities that have a definable user or revenue base; secured by a specific source of funds usually the revenue stream from operations; not generally subject to referendum.

6 True Interest Cost - TIC; a method of computing interest costs for new issues involving discounted present value (consideration of the time value of money). Underwriter - individuals whose primary function in a bond transaction is to purchase securities from a government issuer and resell them to investors either by competitive or negotiated sale. Published by the Treasury Operations Division City of Cedar Rapids, Iowa June, 1999 (revised ) (revised ) (revised )

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