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<br />e <br /> <br />e <br /> <br />e <br /> <br />City of Elk River, Minnesota <br />November 3,1994 <br /> <br />Federal Arbitrage/Rebate <br /> <br />These issues are subject to federal arbitrage regulations. Generally speaking. all arbitrage <br />profits (the yield difference between the earnings on the investment of proceeds and the yield <br />on the obligations) must be rebated to the U.S. Treasury. There are some exemptions to the <br />rebate requirement, which include: <br /> <br />(i) A small issuer exemption if the obligations are for governmental purposes and the issuer <br />reasonably expects to issue not more than $5,000,000 of tax-exempt obligations during <br />the calendar year. <br /> <br />(ii) A 6-month exemption if all of the proceeds are expended within 6 months of issuance. <br /> <br />(iii) An 18-month expenditure test if at least 15% of proceeds are expended within 6 months. <br />60% within 12 months and 100% within 18 months. <br /> <br />(iv) A 2-year expenditure test if at least 75% of the proceeds of the issue are used for <br />construction and if 10% is expended within 6 months, 45% within 12 months, 75% within <br />18 months and 100% within 2 years. If it is reasonably required that a retainage be <br />maintained to enforce the completion of a contract, up to 5% of the proceeds may be <br />retained for an additional 12 months. <br /> <br />Please note that exemptions (ii). (iii) and (iv) are based on a test of absolute requirements <br />which include the additional income earned from the reinvestment of proceeds. <br /> <br />The City should be able to meet the requirements of items (iii) or (iv) for these issues. If there <br />is some question about meeting the exemption requirements for any of the issues, then the City <br />can elect to either rebate the arbitrage earnings on the unexpended portion. or pay a penalty <br />with respect to the close of each 6-month period after the date the obligations are issued equal <br />to 1.5% of the amount by which unexpended proceeds exceed the percentages allowed during <br />each period. The penalty is effectively 3% per year and is computed on any excess <br />unexpended proceeds until the obligations are no longer outstanding. <br /> <br />A 1993 change in the arbitrage regulations will require special attention be paid to the <br />accumulation and investment of monies in the debt service fund for each issue. Investments of <br />funds which exceed a bona fide fund level will have to be restricted to the yield of the bonds. <br /> <br />A bona fide debt service fund is defined as a fund which is used to achieve a proper matching <br />of revenues with principal and interest payments within each bond year and is depleted at least <br />once each bond year except for a reasonable carryover amount which may not exceed the <br />greater of: <br /> <br />1. The earnings on the fund for the preceding bond year; or <br /> <br />2. One-twelfth of the principal and interest payments on the issue for the immediately <br />preceding bond year. <br /> <br />Any earnings from the City's bona fide debt service fund are exempt from rebate. <br /> <br />Amounts in a debt service fund in excess of the amount of a bona fide debt service fund are <br />restricted to an investment rate equal to or less than the bond yield and may be invested in <br />market rate obligations, if their yield is at or below the bond yield: in specially restricted State <br />and Local Government Series (SLGS) issued by the U.S. Treasury; or in eligible tax-exempt <br />obligations. <br /> <br />Pace 4 <br />