Agenda - Council - 02/28/1995 - Laserfiche WebLink

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"1 I City of Ramsey,i Minnesota February 23, lg95 Federal Arbitralle Regulations Rebate All tax-exempt I~onds are subject to federal arbitrage regulations, including rebating arbitrage profits to the UiS. Treasury. Generally speaking, all arbitrage profits (the yield difference between the ea~ings on the investments and the yield on the obligations) must be rebated to the U.S. Treasu~. There are some exemptions to this rebate requirement which include: (i) A small i~isuer exemption if the obligations are for governmental purposes and the issuer reasonably expects to issue not more than $5,000,000 tax-exempt obligations during the calendar ,year. (~) A six-moSth exemption if all of the proceeds of the obligations are expected within six months of issuance of the obligations. An 18-m0. nth expenditure test if at least 15% of the proceeds are expended within 6 months, (]0% within 12 months and 100% within 18 months. (iv) A two-year expenditure test if at least 75% of the proceeds of the issue are used for construction and if 10% is expended within 6 months, 45% within 12 months, 75% within 18 month~and 100% within two years. For items (iii) and_ (iv), if it is reasonably required that a retainage be maintained to enforce the completion of a icontract, up to 5% of the proceeds may be retained for an additional 12 months. Net proceeds subject to these expenditure tests include investment earnings on the original bond proqeeds. The City expects~to meet the small issuer test (i) above, and will therefore be exempt from reporting and reb,~te requirements. Yield Restriction I I I I Debt service fund~ created to pay debt service on new issues are subject to yield restriction unless they fall un~er the definition of "bona fide" debt service funds as described below. Prior " "~ o sr leased ~n June1993 h small,ss e to the 1993 final iarbitrage regulati n e ' , t e ' u r exemption had exempted any de~ service funds from yield restriction requirements. The 1993 regulations now permit only bona f~de debt service funds to be exempt from yield restriction for small issuers. A bona fide debt se~ice fund is defined as a fund for which there is an equal matching of revenue to debt service e)~pense with a carryover permitted equal to the greater of the investment earnings in the fudd dudng that year or 1/12 of the debt service of that year. The debt service fund for this issueican lose its bona fide status if too much tax increment revenue collections are deposited into !he debt service fund. It is important to monitor the debt service fund for this issue to assure cdmpliance with the regulations. Any portion in excess of a bona fide debt service fund must l~e restricted in yield to the yield on the bonds. I I I I Economic Life o_f Fbanced Projects The 1993 "final" arbitrage regulations brought all tax-exempt issues into the calculation of "economic life." Pr!,eviously this requirement was only for private activity bonds. The intent of this requirement is !to limit tax-exempt issues which are outstanding longer than is necessary, [ thus creating more~tax-exempt bonds in the marketplace than are needed. The general safe harbor for assuring that bonds comply with the regulations is if the average maturity of the bonds does not exl;eed 120% of the economic life of the financed projects. The bonds are issued for street ahd utility improvements, which, under the U.S. Treasury guidelines, have Page 3