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<br />o! <br /> <br />City of Elk River, Minnesota <br />May 5, 1999 <br /> <br />. <br /> <br />10. Federal Treasury Regulations <br />Concerning Tax-Exempt Obligations <br /> <br />(a) Bank Qualification <br /> <br />(b) Rebate Requirements <br /> <br />. <br /> <br />(c) Bona Fide Debt Service Fund <br /> <br />. <br /> <br />This issue is designated as bank qualified. <br />Under Federal Tax Law, financial <br />institutions cannot deduct from income for <br />federal income tax purposes, income <br />expense that is allocable to carrying and <br />acquiring tax-exempt bonds. There is an <br />exemption to this for "bank qualified" bonds, <br />which can be so designated if the issuer <br />does not issue more than $10 million of tax <br />exempt bonds in a calendar year. Issues <br />that are bank qualified receive slightly lower <br />interest rates than issues that are not bank <br />qualified. <br /> <br />All tax-exempt issues are subject to the <br />federal arbitrage and rebate requirements, <br />which require all excess earnings created <br />by the financing to be rebated to the U.S. <br />Treasury. The requirements generally cover <br />two categories: bond proceeds and debt <br />service funds. There are exemptions from <br />rebate in both of these categories. <br /> <br />Bond proceeds, defined generally as both <br />the original principal of the issue and the <br />investment earnings on the principal, have <br />6, 18, and 24 month spend down exemption <br />periods. If all of the proceeds are expended <br />during one of those exemption periods, the <br />issuer is exempt from rebate and may retain <br />the excess earnings. The City should be <br />aware that this test is an "actual" test, not <br />one of "reasonable expectations" and you <br />will need to determine if the spend down <br />was met or if rebate may be required. A <br />more complete discussion of rebate is <br />contained in the Arbitrage and Rebate <br />Primer transmitted to your finance staff <br />under separate cover. Springsted can <br />provide rebate calculation services to the <br />City, if the City so desires. An addendum to <br />the current contract between the City and <br />Springsted to include rebate calculation <br />services has been provided to the City staff. <br /> <br />The City must maintain a bona fide debt <br />service fund for the bonds or be subject to <br />yield restriction. This requires restricting the <br />investments held in the debt service fund to <br />the yield on the bonds and/or paying back <br />excess investment earnings in the debt <br />service fund to the federal government. A <br /> <br />Page 3 <br />