BABs, Stimulus Bonds, Midwest Recovery Bonds Compliance

1. BABs, Stimulus Bonds, Midwest Recovery Bonds Compliance Dawn Gunderson September 16,2010

2. General Tax-Exempt Bonds • Tax Exempt bonds have existed for a long time • Requirements • "Private Activity" Restriction • Limits financing of non-governmental projects; business use • Arbitrage and Yield Limits • Limits the ability to earn interest on borrowed funds in excess of the bond yield(i.e. construction fund, debt service funds, etc.) • Small issuer exemptions and spend down exceptions to the rules allow for unlimited interest earnings • Other Considerations • Bank Qualification • Up to $10 million ($30 million during 2009-10) in a calendar year that can be designated “bank qualified” • BQ debt enjoys lower interest rates (presently, spread is narrow)

3. Stimulus Act • New Debt Instruments: • Direct Payment Bonds • Build America Bonds (Direct Payment BABs) • Recovery Zone Economic Development Bonds (Direct Payment RZEDBs) • Tax Credit Bonds • Build America Bonds (Tax Credit BABs) • New Clean Renewable Energy Bonds (CREBs) • Qualified Energy Conservation Bonds (QECBs) • Qualified School Construction Bonds (QSCBs) • Qualified Zone Academy Bonds (QZABs) • Tax-Exempt Private Activity Bonds • Recovery Zone Facility Bonds • Midwestern Disaster Area Bonds

4. Features to Understand • Future of the Programs • How Subsidy is applied and amount • Permitted Projects • Requirements for allocation of funds (How to Get it) • Other Requirements and Limitations • Limits on Cost of Issuance • Limits on Refunding Purposes • Davis Bacon / Prevailing Wage Requirement • Other • Maximum Term • Sinking fund restrictions

5. Build America Bonds (Direct Payment) • Issued as Taxable Debt • Subsidy • 35% of interest direct payment subsidy to issuer; investor gets taxable interest • Purposes • Any governmental purpose for which qualify for traditional tax-exempt financing (but only capital projects), no private activity • Allocation Requirement • None • Additional Requirements & Limitations • Cost of Issuance Limited to 2% of Proceeds • Refundings not eligible unless for "temporary short-term borrowings" • 8038-CP Filing Requirement: Prior to each interest payment date (more than 45 less than 90 days)

6. Recovery Zone Economic Development Bonds • Issued as Taxable Debt • Subsidy • 45% of interest subsidy to issuers; investor gets taxable interest • Purposes • promoting "economic activity" within a recovery zone (capital expenditures; public infrastructure; job training). "Recovery zone" is an area designated as having significant foreclosure rates, job loss, or economic distress • Allocation Requirement • Counties and municipalities with populations over 100,000 receive allocations in proportion to their comparative 2008 decline in employment. • Additional Requirements & Limitations • Compliance with Davis Bacon/Prevailing Wage • Cost of issuance limited to 2% of Proceeds • Only "temporary short-term borrowings“ refunding allowed • 8038-CP filing requirement: Prior to each interest payment date

7. Private Activity: Recovery Zone Facility Bonds • Tax Exempt Qualified Private Activity Bonds (Conduit Financing) • Subsidy (Does not apply) • Purposes • construction, renovation and acquisition of recovery zone property occurring after designation of a recovery zone (area of significant foreclose, job loss, economic distress), and financed property is used in active conduct of a qualified business • Qualified Business • Any trade or business except residential rental; expanded from limits of prior law (e.g. "small manufacturing", 501(c)(3)) but no golf courses, country clubs, massage parlors, hot tubs, suntans, racetracks, gambling, or liquor stores. • Allocation Requirement • Counties and municipalities with populations over 100,000 receive allocations in proportion to their comparative 2008 decline in employment. Allocation over to State in 2009 • Additional Limitations • Cost of Issuance Limited to 2% of Proceeds • Refundings not allowed under current guidance.

8. Private Activity: Midwestern Disaster Area Bonds • Tax-Exempt Qualified Private Activity Bonds (Conduit Financing) • Subsidy (Does not apply) • Purposes • Among others, projects may include acquisition, construction, reconstruction and renovation of nonresidential real property located in a Midwestern disaster area, not used for equipment • Qualified Business • Business that suffered a loss caused by natural disaster or, • Business that is carrying on or replacing a business which suffered a loss caused by natural disaster • Allocation Requirement • Wisconsin has $3.8 billion, to be administered by the Department of Commerce. • Additional Limitations • Cost of Issuance Limited to 2% of Proceeds • Refundings not allowed under current guidance • Issue by January 1, 2013

9. MDABs Eligible Counties

10. Green: New Clean Renewable Energy Bonds • Subsidy • Tax Credit to investors (70% of Treasury rate, determined as of sale date; paid to investors quarterly); issuers get lower rate • Purposes • Qualified renewable energy facilities that generate electricity from wind, biomass, geothermal, solar, landfill gas, trash combustion and more… • Allocation Requirement • Yes ($2.4 billion nationally; apply to U.S. Treasury) • Additional Limitations • Maximum Term which is published monthly • Must comply with Davis Bacon/Prevailing wage • Cost of Issuance Limited to 2% of Proceeds • Refundings not allowed under current guidance.

11. Green: Qualified Energy Conservation Bonds • Subsidy (same as new CREBs) • Tax Credit to investors (70% of Treasury rate, determined as of sale date; paid to investors quarterly); issuers get lower rate • Purposes • Capital expenditures incurred for purposes of reducing energy consumption in publicly-owned buildings, implementing green community programs, rural development involving production of electricity, mass commuting, demonstration projects, and public education campaigns. • Allocation Requirement • States get allocation (Wisconsin has $58 million); from that amount, municipalities and counties with populations over 100,000 get a portion in proportion to population (can reallocate or surrender to State) • Additional Limitations • Maximum Term which is published monthly • Must comply with Davis Bacon/Prevailing Wage • Cost of Issuance Limited to 2% of Proceeds • Refundings not allowed under current guidance.

12. “After Issuance” Compliance • Post-Issuance Compliance • IRS • 8038-CP (Request for Rebate) • Arbitrage • Initiatives • Questionnaire • Continuing Disclosure • SEC (Security and Exchange Commission) • MSRB (Municipal Security Rule Making Board) • EMMA (Electronic Municipal Market Access) • Future Policy Considerations

13. Issues subject to the Arbitrage Regulations • Governmental Bonds • Tax-Exempt Bonds • Taxable • Build America Bonds (BABs) • Recovery Zone Economic Development Bonds (RZEDBs) • Tax Credit Bonds • Qualified School Construction Bonds (QSCBs) • Qualified Zone Academy Bonds (QZABs) • Qualified Energy Conservation Bonds (QECBs) • New Clean Renewable Energy Bonds (CREBs) • Private Activity Bonds, including 501(c)(3)

14. Arbitrage Regulations • Yield Restriction Requirements • Govern WHEN issuers may invest gross proceeds in higher yielding taxable securities • Rebate Requirements • Govern HOW MUCH arbitrage an issuer may retain • Any yield reduction or rebate payment must be remitted to IRS within 60 days after • each 5th year anniversary date; OR • The date in which the bonds are no longer outstanding (i.e. redemption date or final maturity date)…whichever comes sooner.

15. IRS Initiatives & Questionnaires • Additional Headcount • new hires (almost doubled in size) • tax law specialists and field agents • significant private sector experience • spurred by ARRA program • Education • Special focus on educating state employees (finance, attorney general) • Compliance Questionnaires • Charitable Organizations (Summer 2007) • State and Local Governments (January 2009) • Build America Bond Issuers (2010)

16. Continuing Disclosure • The Security Exchange Commission (SEC) wants municipal issuers to provide ongoing information about their debt issues • To ensure market transparency • Annual issuer information will ensure bonds sold to investors on the secondary market are priced properly • Since the SEC can not regulate issuers, the SEC regulates the underwriter or bond purchaser. • Small Issuers (Limited Disclosure) • Large Issuers (Full Disclosure)

17. Continuing Disclosure • Underwriters in complying with SEC Rule 15 c 2-12 can only buy debt if the issuer approves a “Continuing Disclosure Agreement” • Requires all issuers to give notice if any of the following events are determined to be material: • Principal and interest payment delinquencies • Non-payment related defaults • Unscheduled draws on debt reserves • Unscheduled draws on credit enhancements • Substitution of credit or liquidity providers • Events affecting the tax-exempt status of bonds • Modification of rights to security holders • Bond calls • Defeasances • Changes to property securing repayment • Rating changes • Any other fact determined to be material

18. Continuing Disclosure • In addition, large issuers must annually update agreed to sections of the Official Statement and provide financials • Effective July 1, 2009 • All new issuers (even small issuers) required to submit annual financial information • All information is posted on Electronic Municipal Market Access (EMMA) operated by the Municipal Securities Rulemaking Board (MSRB) • emma.msrb.org, provides an introduction to EMMA and a guide to municipal bond information available on the site, including real-time trade data, disclosure documents for bonds and market statistics. • All information is free

19. Policy Considerations • Issuers are encouraged to establish post-issuance compliance policy to address: • IRS concerns • Continuing Disclosure Obligation • Debt covenants • Issuance of pass through debt as 501-c-3 debt or IDB’s • Why? • Prepare for likely IRS inquires • Have a process in place to track all debt post issuance obligations and ensure that the obligations are met • Policy should: • Recognize the fact that issuers have post issuance obligations • Assign a staff position to manage policy • Direct that a process and procedure is established for each debt issue

20. Questions? Dawn Gunderson, CPFO, CIPFA Vice President/Financial Advisor Ehlers (262) 796-6166 E-mail: dgunderson@ehlers-inc.com