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<br />City of Elk River <br />September 9, 1999 <br /> <br />. <br /> <br />7. <br /> <br />Prepayment Provisions <br /> <br />8. <br /> <br />Credit Rating Comments <br /> <br />9. Federal Treasury Regulations Concerning <br />Tax-Exempt Obligations <br /> <br />(a) Bank Qualification <br /> <br />. <br /> <br />(b) Rebate Requirements <br /> <br />. <br /> <br />The Council may elect on February 1, 2008, <br />and on any day thereafter, to prepay the <br />Bonds due on or after February 1, 2009 at a <br />price of par plus accrued interest. <br /> <br />An application will be made to Moody's <br />Investors Service for a rating on the Bonds. <br />The City is currently rated "A3" by Moody's <br />Investors Service. <br /> <br />Under Federal Tax Law, financial institutions <br />cannot deduct from income for federal <br />income tax purposes, income expense that <br />is allocable to carrying and acquiring tax- <br />exempt bonds. There is an exemption to <br />this for "bank qualified" bonds, which can be <br />so designated if the issuer does not issue <br />more than $10 million of tax exempt bonds <br />in a calendar year. Issues that are bank <br />qualified receive slightly lower interest rates <br />than issues that are not bank qualified. This <br />issue is designated as bank qualified. <br /> <br />All tax-exempt issues are subject to the <br />federal arbitrage and rebate requirements, <br />which require all excess earnings created by <br />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. Regarding Bond proceeds, <br />the City will not owe any rebate from the <br />investment of proceeds because the <br />proceeds will be invested in an escrow <br />account at a rate at or less than the yield on <br />the Bonds. <br /> <br />The City recently made a rebate payment for <br />the Series 1994A Bonds. The IRS requires <br />that only 90% of the rebate liability be paid <br />unless it is a final calculation. Therefore, <br />when the Series 1994A Bonds are called, a <br />final rebate calculation will need to be <br />completed. Although moving the Series <br />1994A Bond proceeds into an escrow <br />account yielding lower than the Series <br />1994A Bond yield will reduce the <br />outstanding rebate liability, the City should <br />be aware that another small payment may <br />need to be made within 60 days of the call <br />date of the Series 1994A Bonds (February <br />1, 2001). <br /> <br />Page 2 <br />