The URL can be used to link to this page

Home My WebLink AboutCity Council Packet 01-22-1997 SpecialSPECIAL COUNCIL MEETING WEDNESDAY, JANUARY 22, 1997 6:00 P.M. Public Safety Training Room I. Presentation by Springsted Companies Municipal Bond Essentials for Decision Makers Presentation to City of Plymouth, Minnesota January 22, 1997 Presented By: David N. MacGillivray, Principal Paul R. Donna, Project Manager Minneapolis Office: 120 South Sixth Street Minneapolis, MN 55402-1800 612)333-9177 Home Office: 85 East Seventh Place Suite 100 St. Paul, MN 55101-2143 612)223-3000 Iowa Office: 30 Dunuggen Court Iowa City, IA 52240-2831 319) 351-4614 Wisconsin Office: Washington Office: Kansas Office: 16655 West Bluemound Road 1850 K Street NW 4500 College Boulevard Suite 290 Suite 215 Suite 110 Brookfield, WI 53005-5935 Washington, D.C. 20006 Overland Park, KS 66211-1799 414)782-8222 (202)466-3344 (913)345-8062 Municipal Bond Essentials IM Decision Makers The objectives of this presentation are: to make you familiar with the process of issuing municipal bonds, to introduce you to the participants in the process, and to help you identify key decision points throughout the process. Municipal Bond Essentials FINANCING PHILOSOPHY AND DISCIPLINE Fiscal Management Policies.......................................................................... 1 Capital Improvement Plan............................................................................. 1 DETERMINING FINANCING METHODS Pay -as -You -Go (Cash)............................................................................... 2 Pay -as -You -Use (Debt)............................................................................... 2 Factorsto Consider............................................................................... 2 Examples............................................................................... 3 TYPES OF DEBT MunicipalBonds............................................................................. 4 Types of Municipal Bonds............................................................................. 5-7 Certificates of Participation (Lease Purchase Financing) ............................. 8 BOND FINANCING PARTICIPANTS The More Visible Participants...................................................................... 9-10 The Less Visible Participants...................................................................... 11-12 BOND FINANCING PROCESS AND PLAYERS Financing Timetable........................................................................... 13 Process Flow Chart ........................................................................... 14 Service Provision Comparison...................................................................... 15 CREDIT RATING PROCESS............................................................................... 16 Purpose......................................................................................................... 16 RatingAgencies............................................................................................ 16 Factors Affecting Credit................................................................................ 16 What is a Credit Rating Worth?..................................................................... 16 GLOSSARY OF TERMINOLOGY....................................................................... 1-4 SUPPLEMENT: MUNIBOND ESSENTIALS FOR MINNESOTA ISSUERS ...... 1-7 SPRINGSTED Municipal Bond Essentials Financing Philosophy and Discipline Fiscal Management Policies Revenues Expenditures Risk Management Debt Management Investment Management Cash Flow Analysis Capital Improvement Plan Identifies projects to be funded, funding sources and expenditures. Establishes project priorities and available funding. Demonstrates commitment to improvements. Provides evidence of a long-term plan. Coordinates a physical development plan with a financial plan. Facilitates more efficient public investment. VA SPRINGSTED Page 1 Municipal Bond Essentials Determining Financing Methods Pay -as -You -Go (Cash) Pay project costs from cash on hand using either current revenues or reserve funds. Pay -as -You -Use (Debt) Issue debt and pay project costs from bond proceeds. Debt is repaid over time by the users of the project. 4 Factors to Consider Equity — Are the beneficiaries of the project or service paying for it? Effectiveness — Will the funding be sufficient and received in a timely fashion? Efficiency — What financing method is most cost- effective? Page 2 U SPRINGSTED Municipal Bond Essentials Examples Pay -as -You -Go (Cash) Budgetary Items/Replacement Items Computers Vehicles Minor improvements/maintenance Pay -as -You -Use (Debt) Large Capital Costs/Long Useful Life Buildings Utilities Major improvements SPRINGSTED Page 3 Municipal Bond Essentials Types of Debt Municipal Bonds An obligation to pay a stated amount of money at a fixed future date made for the purpose of incurring debt. (A contract between the issuer and the bond owner.) Authority to Issue Federal Law Tax -Exempt or Taxable Arbitrage Compliance Bank Qualification ($10.0 million ceiling) Reimbursement Regulations (18 months) Secondary Market Disclosure State Statutes/Charter Debt Limit Voter Approval (reverse referendum) Method of Sale Tax Levies Interest Rates Term Prepayment Option Refundings Page 4 2 SPRINGSTED Municipal Bond Essentials Types of Municipal Bonds General Obligation Bonds/Notes (unlimited tax) - pledge the full faith and credit and unlimited taxing power to pay debt service. Key Characteristics Source of Payment: Property taxes. Purposes: Projects that benefit whole community (e.g., city halls, fire stations, parks). State Law/Charter: Risk/Cost: Credit Rating Impact: Debt limit? Voter approval required? Reverse referendum? Highest security — lowest cost. Full impact. VA SPRINGSTED Page 5 Municipal Bond Essentials Revenue Bonds — pledge the revenues of a specified source to pay debt service. Additional assurances are covenanted within the bond documents. Key Characteristics Source of Payment: Specified revenues. Purposes: Projects that benefit specific users (e.g., water, electric, sales tax, tax increment). State Law/Charter: Debt limit? Voter approval required? Reverse referendum? Risk/Cost: Higher than general obligations because of limited revenue stream. The degree of risk depends on the individual financing package. Credit Rating Impact: Credit rating is dependent on the degree of security the financing package has. The credit rating for a revenue bond is independent of an issuer's general obligation bond rating. Page 6 2 SPRINGSTED Municipal Bond Essentials General Obligation Revenue Bonds — pledge specified revenues and the issuer's full faith and credit and unlimited taxing powers. Key Characteristics Source of Payment: Specified revenues and property taxes. Purposes: Whole community and/or specific areas (e.g., internal improvements, sales tax, tax increment). State Law/Charter: Risk/Cost: Credit Rating Impact Debt limit? Voter approval required? Yes: Sales tax/tax increment reverse referendum.) Same as general obligations. Usually a full impact on the credit rating. May be mitigated depending on the revenue stream. VA SPRINGSTED Page 7 Municipal Bond Essentials Certificates of Participation (Lease/Purchase Financing) A government agency (public building commission) enters into an agreement with another party (lessor) to lease an asset. Lease payments are sufficient to pay the purchase price and associated interest cost of acquiring the asset. Key Characteristics Source of Payment: State Law/Charter: Tax revenues subject to annual appropriations (budget process). Debt limit? Voter approval required? Reverse referendum? Risk/Cost: Higher than general obligation depending on essentiality of project/use. Credit Rating Impact: Full impact, usually half grade to full grade lower than general obligation debt. Page 8 2 SPRINGSTED Municinal Bond Essentials Bond Financing Participants The More Visible Participants Issuer — Elected Officials/Staff Involved throughout entire process Information providers Decision makers Independent Financial Advisor Works solely for issuer to develop financing plan and assist through process Responsibilities can include assistance in: Issue structuring Method of sale Marketing Credit rating Award of sale Settlement and bond record SPRINGSTED Page 9 Municipal Bond Essentials The More Visible Participants (continued) Bond Counsel Interprets federal laws, state laws and charter provisions applicable to the financing. Legal opinion Certifies legal authorization to issue. Gives opinion on federal and state tax status. Prepares bond documents such as ordinances, resolutions, lease agreements, etc. Page 10 R SPRINGSTED Municipal Bond Essentials The Less Visible Participants Credit Rating Agencies Moody's Investors Service Standard & Poor's Ratings Services Fitch Investors Service Representatives of the investor community. Credit Enhancement Providers Municipal bond insurance companies: AMBAC, Capital Guaranty, FGIC, FSA, MBIA. Underwriters Purchase your bonds and resell them to investors. Can be more visible in a negotiated transaction. Investors The "lender" (purchaser of your bonds). Consist of individuals (retail) or commercial banks, insurance companies (institutional) and bond funds retail proxies). VA SPRINGSTED Page 11 Municipal Bond Essentials The Less Visible Participants (continued) Other Registrar/Paying Agent — receives your funds and makes payments to bondholders. Trustee — fiduciary agent for bondholders. U.S. Treasury — has enacted specific regulations for issuance of tax-exempt debt: arbitrage, rebate, reimbursement, bank qualifications, taxable vs. tax- exempt. Depository — agency which provides book -entry settlement services, such as registration of bond ownership and distribution of debt service payments. Underwriter's Counsel — responsible for compiling disclosure document. Page 12 2 SPRINGSTED i Municipal Bond Essentials Financing Timetable I Task Name 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 H 1 12 1 Staff Provides Financing Needs and Requirements Finance Plan is Formulated Springsted's Recommendations and Bond Counsel Resolution Printing and Mailing I Issuer Sets Sale Drafting of Official Statement and Documents Review of Draft Official Statement and Documents and Printing and Mailing Credit Rating/Marketing to Underwriters Negotiate Terms, Issuer Considers Award Settlement: Closing Papers Processed Bond Proceeds Received EM W VA SPRINGSTED Page 13 Municipal Bond Essentials Process and Steps of Bond Issuance Negotiated Sale Issuer Staff Financial Issuer* Staff Bond Counsel Financial Advisor Advisor Underwriter Bond Counsel Issuer* Issuer* Bond Counsel Issuer Financial Advisor Financial Underwriter's Financial Advisor Issuer* Bond Counsel Advisor Counsel Underwriter Identifies Need Structures Issues Underwriter Prepares Credit Rating Decides to Presents Selection Preliminary Credit Use Debt Recommendations Official Enhancement Statement & Distributes Issuer Financial Advisor Issuer* Staff Bond Counsel Financial Advisor Financial Advisor Underwriter Bond Counsel Underwriter Settlements 4— Consideration ~ Negotiate Interest of Award of Sale Rates & Terms Issuer decision point. Page 14 2 SPRINGSTED Service Provision Comparison Negotiated vs. Competitive Sales 1. Financial Planning Develop financing objectives Analyze options, recommend structure Special planning studies (cash flow analysis, refunding feasibility, revenue adequacy, etc.) 2. Issue Structuring/Documentation Municipal Bond Essentials Negotiated Sales Financial Investment Advisor Banker S S S Competitive Sales Financial Investment Advisor Banker S S S Prepare and present sale recommendations J J S Underwriter selection S NA Coordinate timetable and parties L R S Attend all document sessions J J S Draft/review financing documents R L S Coordinate selection of trustee, S printer, other services L R S 3. Credit Structuring/ Enhancement Analyze and recommend use of credit enhancement and ratings J J S Select and negotiate terms with enhancement provider, if deemed appropriate J J S Prepare materials and staff for rating presentation, and attend presentation L R S 4. Marketing Monitor market conditions and advise on market entry J J S Pre -market bonds J J J J Official Statement distribution S S Advise on pricing terms (interest rates and compensation) S S Purchase bonds or other securities S S Assist with investment of bond proceeds S S 5. Closing i • Coordinate closing process including printing of bonds and receipt of proceeds J J J J Deliver bond record J J S Responsibility Levels S = Sole J = Joint L = Lead R = Review NA = Not Applicable 2 SPRINGSTED Page 15 Municipal Bond Essentials Credit Rating Process Purpose Provides an understandable measure of the degree of risk of an issuer's securities. Ratings are used by investors to aid them in making investment decisions. Rating Agencies Moody's Investors Service Standard & Poor's Ratings Services Fitch Investors Service Moody's(a) S&P(b) Fitch(b) Highest Aaa AAA AAA Aa AA AA A A A Lowest (Investment Grade) Baa BBB BBB a) Bonds in the Aa, A and Baa groups which Moody's believes possess the strongest investment attributes are designated by the addition of the numeral one (1). b) The ratings from "AA" to "BBB" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. Factors Affecting Credit: Debt management Administrative issues Financial performance Economic base/position What is a credit rating worth? Page 16 N SPRINGSTED Municipal Bond Essentials Glossary of Terminology Ad Valorem Tax — [Latin: to the value added] A tax based on the value (or assessed value) of property. Agency Transaction — A sale and purchase of bonds when the dealer places bonds with the buyer on a commission basis rather than selling bonds he owns. Arbitrage — Investment earnings representing the difference between interest paid on bonds and the interest earned on purpose and nonpurpose securities in which bond proceeds are invested. The Internal Revenue Code regulates the amount and conditions under which arbitrage on the investment of bond proceeds is permissible and the 1986 Tax Reform Act requires, with limited exceptions, that arbitrage from nonpurpose investments must be rebated to the federal government. Bank Qualified — In general, an obligation is described in this clause when the issuer reasonably expects to issue $10,000,000 or less in tax-exempt obligations during such calendar year. Typically, these "bank -qualified" bonds are more attractive to financial institutions due to the tax treatment, which creates greater competition and may lower interest rates. Basis Point — Shorthand reference to 1/100 of 1 percent (0.01 percent). Bond Insurance — Insurance as to timely payment of interest and principal of a bond issue. The cost of insurance is usually paid by the issuer in the case of a new issue of bonds, and the insurance is not purchased unless the cost is more than offset by the lower interest rate that can be incurred by the use of the insurance. Bond Year— An element in calculating average life of an issue and in calculating net interest cost and net interest rate on an issue. A bond year is the number of 12 -month intervals between the date of the bond and its maturity date, measured in $1,000 increments. For example, the "bond years" allocable to a $5,000 bond dated April 1, 1980, and maturing June 1, 1981, is 5.830 [1.166 (14 months divided by 12 months) x 5 (number of $1,000 increments in $5,000 bond)]. Usual computations include "bond years" per maturity or per an interest rate, and total "bond years" for the issue. Call — Actions taken to pay the principal amount of the bonds prior to the stated maturity date, j in accordance with the provisions for "call' stated in the proceedings and the bonds. Callable — Subject to payment of the principal amount (and accrued interest) prior to the stated maturity date, with or without payment of a call premium. Call Premium — A dollar amount, usually stated as a percentage of the principal amount called, paid as a "penalty" or a "premium" for the exercise of a call provision. Closing Date — The date on which a new issuance of bonds is delivered to the purchaser upon payment of the purchase price and the satisfaction of all conditions specified in the bond purchase agreement. 2 SPRINGSTED Page 1 Municipal Bond Essentials Coverage — This is a term usually connected with revenue bonds. The margin of safety for payment of debt service, reflecting the number of times (e.g., "120 percent coverage") by which annual revenues either on a gross or net basis exceed annual debt service. Dated Date (or Issue Date) — The date of a bond issue from which the bondholder is entitled to receive interest, even though the bonds may actually be delivered at some other date. Debt Limit — Statutory or constitutional limit on the principal amount of debt that an issuer may incur (or that it may have outstanding at any one time). Debt Service — Principal and interest. Depository — A clearing agency registered with the Securities and Exchange Commission which provides immobilization, safekeeping and book -entry settlement services to its participants. The four registered depositories are The Depository Trust Company (New York), the Midwest Securities Trust Company (Chicago), the Pacific Securities Depository Trust Company (Chicago) and the Philadelphia Depository Trust Company. Discount — (1) Amount (stated in dollars or a percent) by which the selling or purchase price of a security is less than its face amount. (2) Amount by which the amount bid for an issue is less than the aggregate principal amount of that issue. Expenses — A component of the underwriter's discount which covers the expenses incurred by the underwriter. Joint Managers — Underwriting accounts are headed by a manager. When an account is made up of several groups of underwriting firms that normally function as separate accounts, the larger account is often managed by several underwriters, usually one from each of the several groups, and these managers are referred to as "joint managers." Legal Opinion — An opinion of bond counsel concerning the validity of a securities issue with respect to statutory authority, constitutionality, procedural conformity, and usually the exemption of interest from federal income taxes. Letter Of Credit (LOC) — A security document usually issued by a bank that back -stops, or enhances, the basic security behind a bond. In the case of a direct pay "LOC," the bondholder can request the bank to make payment directly rather than through the issuer. Level Debt Service — The result of a maturity schedule that has increasing principal amounts maturing each year so that the debt service in all years is essentially "level." "Level debt service" is often used with revenue bond issues (and, in a familiar area, in the traditional approach to monthly payments on home mortgages). Management Fee — A component of the underwriter's discount which represents the fee the underwriter will collect for managing the transaction. Maturity Date — The stated date on which all or a stated portion of the principal amount of a security is due and payable. Maturity Schedule — The schedule (by dates and amounts) of principal maturities of an issue. Page 2 ® SPRINGSTED Municipal Bond Essentials Net Direct Debt — Total direct debt of a municipality less all self-supporting debt, any sinking funds, and short-term debt such as tax anticipation notes and revenue anticipation notes. Net Interest Cost — The traditional method of calculating bids for new issues of municipal securities. The total dollar amount of interest over the life of the bonds is adjusted by the amount of premium or discount bid, and then reduced to an average annual rate. The other method is known as the true interest cost (see "True Interest Cost"). Net Price — This is the price paid to a dealer for bonds when the dealer acts as principal in a transaction, i.e., the dealer sells bonds that he owns, as opposed to an agency transaction. Notice Of Sale — An official document disseminated by an issuer of municipal securities that gives pertinent information regarding an upcoming bond issue and invites bids from prospective underwriters. Optional Redemption — A right to retire an issue or a portion thereof prior to the stated maturity thereof during a specified period of years. The right can be exercised at the option of the issuer or, in pass-through issues, of the primary obligor. "Optional redemption" may require the payment of a premium for its exercise with the amount of the premium decreasing the nearer the option exercise date is to the final maturity date of the issue. Overlapping Debt — On a municipal issuer's financial statement "overlapping debt" is the debt of other issuers which is payable in whole or in part by taxpayers of the subject issuer. As an example, a county usually includes several smaller government units and its debt is apportioned to them for payment based on the ratio of the assessed value of each smaller unit to the assessed value of the county. Another example is when a school district includes two or more municipalities within its bounds. In each example "overlapping debt" is the proportionate share of the county and/or of the school district borne by included subject issuer. Par Value — The principal amount of a bond or note due at maturity. Paving Agent — Place where principal and interest are payable. Usually a designated bank or the office of the treasurer of the issuer. Syndicate — A group of underwriters formed for the purpose of participating jointly in the initial public offering of a new issue of municipal securities. The terms under which a "syndicate" is formed and operates are typically set forth in the "agreement among underwriters." Those terms will establish the pro rata participation of each syndicate member, the methods by which offering prices and other terms of sale will be established, in what priority orders for securities will be taken and confirmed and the joint or several nature of the liability assumed by each member for the purchase of unsold securities. The purpose of a "syndicate" formation is to share the risk of the offering among participating underwriters and to establish a distribution network in which to market the offered securities. One or more underwriters will act as manager of the "syndicate" and one of the managers will act as lead manager and "run the books." A "syndicate" is also often referred to as an "account" or "underwriting account." Takedown — The discount from the list price allowed to a member of an underwriting account on any bonds purchased from the account, i.e., the commission paid to the sales force for reoffering the bonds to investors. 2 SPRINGSTED Page 3 Municipal Bond Essentials True Interest Cost — A method of calculating bids for new issues of municipal securities that takes into consideration the time value of money (see "Net Interest Cost"). Trust Indenture — Agreement between an issuer and a trustee acting on behalf of bondholders 1) authorizing and securing the bonds; (2) containing the issuer's covenants and obligations with respect to the project and payment of debt service; (3) specifying the events of default; and 4) outlining the trustee's fiduciary responsibilities and bondholders' rights. Trustee — A bank designated by the issuer as the custodian of funds and official representative of bondholders. "Trustees" are appointed to insure compliance with the contract and represent bondholders to enforce their contract with the issuers. Underwriter's Counsel — Advises the underwriter and helps prepare the official statement. Underwriting Spread — The difference between the offering price to the public by the underwriter and the purchase price the underwriter pays to the issuer. The underwriter's profit, expenses and selling costs are usually paid from this amount. Glossary Source: Public Securities Association, Fundamentals of Municipal Bonds, Third Edition. Page 4 ® SPRINGSTED Supplement Municipal Bond Essentials for Minnesota Issuers Supplement to Municipal Bond Essentials An 'obligation" is defined in Minnesota Statutes, Chapter 475, as a promise to pay a stated amount of money at a fixed future date, or on demand, made for the purpose of incurring debt for which funds are not appropriated in the current years budget. A municipal bond is in effect a contract between the issuer and the bond owner. They can be classified by (i) the security behind the bond, (ii) the purpose for which the proceeds of the bonds will be used and (iii) the user of the capital facility financed by the proceeds of the bonds. Bonds by Type of Security General Obligation Bond. Chapter 475 defines a general obligation as an obligation that pledges the full faith and credit of the issuing governmental unit to payment of principal and interest. The bond owner correctly understands this to mean that all available assets and resources of the issuer, including the unlimited power to tax, will be used by the issuer to fulfill the contract to pay back the amount of the bond with the amount of interest agreed upon. The security for a general obligation bond is the pledge of those resources and taxing powers. Revenue Bond. A revenue bond pledges to pay the bond owner principal and interest only from a specified source of revenues most often from the facility or enterprise financed by the bond proceeds. The issuer gives the owner additional assurances in the bond documents that it will operate the facility efficiently and impose the necessary charges for the use of the facility to insure prompt and full payment of the bond and gives the holder rights to enforce those assurances, or "covenants," as they are known. This type of bond is used typically for self-supporting utilities, such as electric utilities, recreational facilities and municipal liquor stores. Revenue bonds typically also carry higher interest rates than general obligations because of the slightly higher risk of repayment. Normally, "net" revenues are pledged, but a gross revenue pledge is permitted by some statutes. Issuers may also issue tax increment revenue bonds payable solely from the tax increment generated by the TIF financing district, or in some instances even issue sales tax revenue bonds. General Obligation Revenue Bonds. Some statutes permit the issuer to pledge the full faith and credit and the revenues of the facility. Presumably, this should result in more favorable interest rates because of the enhanced security, but experience has shown that the 2 SPRINGSTED Page 1 Supplement to Municipal Bond Essentials bond investor looks primarily to the general obligation pledge in analyzing the underlying credit. Other common bonds of this type, although not generally known as such, are general obligation improvement bonds and general obligation tax increment bonds, that pledge special assessments against benefited property or tax increments from a financing district = as security. These bonds are viewed by the investor as straight general obligations since the special assessments and increments are roughly equivalent to property taxes in their imposition and collection. Bonds by Purpose. Municipal bonds are generally identified by the use of the proceeds, and their titles give an indication of both the purpose and security. Thus a bond payable in whole or in part from special assessments levied to pay for a public improvement will be called a "General Obligation Improvement Bond;" a bond for a new community center may be a "General Obligation Building Bond;" a sewer utility bond, a "General Obligation Revenue Sewer Bond." Grouping an issuer's outstanding bonds in this way is normally done in the issuer's financial reports and in bond offering statements, providing a useful way of presenting an issuer's overall debt picture. Rating agencies also analyze the debt burden and debt ratios (dollars of debt per capita, valuation, etc.) in terms of the availability and utilization of other revenues to pay general obligation debt. Bonds by User. Many issuers in Minnesota have issued bonds to provide direct aid to private persons or corporations. In federal law terms, these are "private activity" bonds. Common examples are industrial development revenue bonds and housing revenue bonds. The bonds are issued for some redevelopment or economic development purpose, and the proceeds are either loaned to private entities or inure to their benefit in one way or another. There usually are no direct financial obligations on the part of the issuer to pay the bonds and if so they do not affect the issuer's debt structure or bond i rating. Laws Governing Bonds The Bond Code. The basic statute governing Minnesota municipal bonds is Minnesota Statutes, Chapter 475. The principal provisions of Chapter 475 are as follows: Page 2 ® SPRINGSTED I Supplement to Municipal Bond Essentials Debt Limit. Municipalities, except cities of the first class and school districts, may not incur debt in excess of 2% of the market value of taxable property in the municipality. The limit is 10% in first class cities and school districts. But subtracted from this overall 2% limit are almost all debt obligations for which some other source of revenue is pledged as security. Thus, improvement bonds, tax increment bonds, utility revenue bonds, pure revenue bonds and similar bonds may be issued without regard to the debt limit. The result is that, with only a few exceptions, the only types of obligations subject to the debt limit are general obligation bonds payable solely from ad valorem property taxes. The legal debt limit has nothing to do with the practical debt limit of a municipality which is the debt burden beyond which the creditworthiness of the municipality is put in question. Voter Approval. Another general rule in the bond code is that the issuance of bonds must be approved by a majority of voters voting on the question. But as in the case of the debt limit, a number of exceptions limit this rule to a very few bond issues. The exceptions are: a. bonds to pay a judgment; b. refunding bonds; C. improvement bonds or tax increment bonds where special assessments or tax increments pay at least 20% of the cost of the project financed; d. revenue bonds; e. bonds issued under a charter provision or statute that permits the issuance without an election. The effect of those exceptions is that, in almost all cases, only general obligation bonds payable solely from ad valorem property taxes need be approved by the voters. If a bond election fails, the same question for the same amount may not be resubmitted to the voters for six months, and if it fails a second time, a one-year delay is required. The statute read literally means that a change of $1 in the amount would permit an early resubmission, but general practice requires at least a 5% reduction in amount or a substantive change in the purpose. Public Sale. A third general rule riddled with exceptions is that bonds must be sold, after published notice, to the highest bidder on a purely competitive basis. The principal exceptions are: 2 SPRINGSTED Page 3 Supplement to Municipal Bond Essentials a. whenever a law or charter provision permits negotiated non-competitive) sale; b. bonds sold by an issuer in amounts not exceeding 1,200,000 in any period of 12 consecutive months; C. tax anticipation bonds; d. bonds sold to state or federal agencies; e. pension funding bonds, variable rate bonds and crossover refunding bonds; f. taxable bonds; g. installment sale contracts and lease purchase agreements; and h. bonds issued with the advice and assistance of an independent financial advisor. The last exception covers most municipal bonds issued in Minnesota. But because of the desirability of the competitive bidding process, most financial advisors, in all but the most exotic financings, will advise the issuer to, in effect, obtain competitive offers or proposals. Industrial development bonds, described above, are rarely, if ever, sold competitively. They are, in effect, private financings and the benefitting company chooses its own underwriter to market the bonds. Tax Levies for General Obligations. Chapter 475 requires that in the case of general obligations, the issuer must, at the time the bonds are sold (usually in the resolution awarding the sale), levy an irrepealable ad valorem tax for each of the years of the bonds equal to 105% of the principal and interest due in that year. The purpose of the 5% overlevy is to cover possible deficiencies in tax collection. The resolution must be filed with the county auditor who must then levy the tax for the years indicated. If, however, other revenues are pledged as security for the bonds (special assessments, tax increments, utility revenues) the amount of reasonably expected revenues from those sources may be subtracted from the 105% levy. If there is excess revenue in the debt service fund for the bonds (from prepayments, investments or irrevocable appropriations) the issuer may notify the auditor of the excess and request that the levy for the ensuing year be reduced by that amount. Interest Rates. The interest rate on a municipal bond (sometimes referred to as the "coupon rate") is currently not subject to any statutory limitation. (It is possible for a charter to limit rates, but such limits seldom exist.) The rates are determined solely by the market Page 4 2 SPRINGSTED IL A SPRINGSTED Supplement to Municipal Bond Essentials considerations the day the bonds are sold or negotiated. The total interest cost of an issue is the sum of the coupon rates for each maturity year of the issue plus any discount taken or plus any premium paid; the net effective interest rate is the total interest cost divided by the total number of bond years (the weighted average duration the bonds are outstanding); the true interest cost or rate is the percentage rate at which the total payments of principal and interest are discounted to produce the purchase price of the total issue of bonds. Chapter 475 permits, the sale of an issue of bonds at a price lower than the face amount (par amount) of the bonds. This amount, called discount," may not exceed 2% of the amount of bonds otherwise authorized to be sold. Discount is simply interest, and in the computation of total interest cost the amount of the discount is added to the total coupon interest. A discount is routinely provided in public offerings of municipal bonds by issuers in order to provide the underwriters who buy the bonds some working capital to cover their sale and administrative costs in marketing the bonds to the ultimate bond owner. Thus, a $1 million offering of bonds may specify that the purchaser must pay not less than $990,000 for the issue, the $10,000 representing a 1 % discount. One curious aspect of the discount is that in the case of general obligation bonds authorized by the voters the discount amount may be added to the amount of the authorization. Thus, if the voters authorized $1 million, a total of $1,020,000 may be sold, the additional $20,000 of bonds representing the discount. If not fully used by the purchaser, the excess must be placed in the debt service fund. Maturities. Minnesota municipal bonds, except private activity bonds, must mature serially over a term not to exceed 30 years, that is, a certain portion of the principal amount of the issue comes due annually. Generally speaking, no amount in a given maturity year may exceed a maturity amount in a previous year ending three years after date of issue by more than five times. Thus, if the first maturity is three years after the date of the issue and is $50,000, no subsequent maturity may exceed $250,000. The law permits, however, the issuer to combine the maturity schedule of a bond issue with another new or outstanding issue, generally payable from the same source of revenues, to comply with this "five times" rule. Call Redemptions. Bonds are normally issued with the issuer retaining the right to prepay the bonds (call for redemption) after Page 5 Supplement to Municipal Bond Essentials some specified future date. Issuers find it useful to be able to retire the debt early if possible or to refund the bonds at a more favorable rate, but bondholders need to ensure the benefit of their investment for at least some period of time. Therefore, there is typically an initial lock -out" period, often ten years, during which the bonds may not be prepaid. Notice to the bondholder is required, and at least 30 days mailed and published noticed is the industry standard although j published notice is not required if the bonds are registered bonds. Notice is normally handled by the bond registrar or paying agent at the request of the issuer. The call amount is normally the par amount of the bonds redeemed plus accrued interest to the date of redemption. Refundings. Chapter 475 permits issuers to refund outstanding bonds if permitted by the bonds themselves (refunding is another term for refinancing, just like refinancing a mortgage). A refunding may be (i) a current refunding, that is, the refinancing takes place on a date the bonds are subject to redemption; or (ii) an advance refunding, where the refunding takes place well before the redemption date, the proceeds placed in escrow and held until the first redemption date when the refunded bonds are paid. Refundings are done and permitted for a number of reasons, the most common being to reduce interest costs. The calculation of the amount of savings from a particular refunding is important due to the fact that the savings in real terms is the "present value" of these savings after the costs of issuing the refunding bonds. The concept of present value involves recognizing that $1 today is worth more than $1 five years hence and discounting the value of that future dollar to reflect that the dollar will not be available to generate income until that future date. Lease Purchase Financings Section 465.71 permits municipalities to enter into lease purchase agreements to acquire real or personal property. The lease payments are applied to the purchase price and associated interest cost of acquiring the capital asset. The statute provides that such obligations are not subject to debt limit and no election is required. But the agreement must give the municipality the right to terminate the agreement at the end of any fiscal year during its term by a provision called a "non -appropriation" clause. Thus, a municipality may at any time simply declare that it will not appropriate money in the coming year for the lease payments and the agreement ends. The market for such leases fully understands the risk and analyzes it in terms of the likelihood that a municipality will do such a thing, which Page 6 ® SPRINGSTED U SPRINGSTED Supplement to Municipal Bond Essentials is small. On the other hand, some vendors routinely include rather onerous remedies in the event of early termination, and the municipality should be fully aware of the consequences of non - appropriation. Lease purchases are commonly used for equipment (office equipment motor vehicles, telephone systems), but it is possible to finance major capital expenditures in this way, say a municipal building. If the amount of the transaction is substantial, the lessor may sell certificates of participation (COP's) in the underlying lease. The COP's look like, sound like and are marketed just like municipal revenue bonds, but are not governed by some of the statutory procedures discussed above relating to municipal bonds. Page 7 Municipal Bond Essentials for Decision Makers Attachments for City of PIym o u th, Minnesota January 22, 1997 Summary of Indebtedness Official Statement Bid Tabulation Credit Rating Report Minneapolis Office: 120 South Sixth Street Minneapolis, MN 55402-1800 612)333-9177 Home Office: 85 East Seventh Place Suite 100 St. Paul, MN 55101-2143 612) 223-3000 Iowa Office: 30 Dunuggen Court Iowa City, IA 52240-2831 319) 351-4614 Wisconsin Office: Washington Office: Kansas Office: 16655 West Bluemound Road 1850 K Street NW 4500 College Boulevard Suite 290 Suite 215 Suite 110 Brookfield, WI 53005-5935 Washington, D.C. 20006 Overland Park, KS 6621 1-1 799 414)782-8222 (202)466-3344 (913)345-8062 City of Plymouth, Minnesota Summary of Indebtedness Legal Debt Limit: Estimated Market Value Legal Debt Limit (2% of Estimated Market Value) Less: Outstanding Debt Subject to Limitation Legal Debt Margin as of January 2, 1997 General Obligation Debt Supported by Taxes* Date Original of Issue Amount Purpose 6-16-87 1,700,000 Fire Protection 8-01-95 2,235,000 Open Space These issues are subject to the statutory debt limit. 3,793,659,300 75,873,186 2,640,000) 73,233,186 Final Maturity 2-01-1997 2-01-2011 General Obligation Debt Supported by Taxes and /or Special Assessments Date of Original Issue Amount Purpose 9-1-91 4,900,000 Public Improvements 12-1-93 2,245,000 Public Improvements General Obligation Debt Supported By Tax Increments Date of Original Issue Amount Purpose 12-1-93 895,000 Taxable Tax Increment Rfdng 12-1-95 7,665,000 Tax Increment Final Maturity 2-1-2002 2-1-2002 Final Maturity 2-1-98 2-1-99 Principal Outstanding As of 1-2-97 225,000 2,235,000 2,460,000 Principal Outstanding As of 1-2-97 2,255,000 1,760,000 4,015,000 Principal Outstanding As of 1-2-97 525,000 7,665,000 8,190,000 General Obligation Debt Supported By Revenues Date of Original Issue Amount Purpose 12-1-93 4,510,000 Water Revenue Refunding Annual Calendar Year Debt Service Payments 1997 (@1-2) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total 1997 (@ 1-2) 1998 1999 2000 2001 2002 Total Principal Final Outstanding Maturity As of 1-2-97 2-1-2002 $4,510,000 G.O. Debt Supported G.O. Debt Supported By Taxes by Taxes and/or Special Assessments Principal Principal Interest Principal Principal Interest Principal Interest 225,000 341,651 1,250,000 1,413,475 80,000 188,020 780,000 895,648 90,000 194,530 665,000 746,218 100,000 200,490 610,000 659,713 110,000 205,920 360,000 385,645 120,000 210,800 350,000 358,540 130,000 215,110 145,000 223,713 160,000 231,465 175,000 238,338 190,000 244,300 205,000 249,323 225,000 258,189 240,000 260,863 265,000 272,221 2,460,000 3,534,931 4,015,000 4,459,238 G.O. Debt Supported By Revenues G.O. Debt Supported By Tax Increments Principal Principal Principal Interest Principal Interest 780,000 907,008 2,695,000 2,975,163 810,000 909,565 2,845,000 3,012,025 815,000 885,110 2,650,000 2,704,325 810,000 849,238 280,000 297,843 295,000 301,121 3,790,000 4,149,884 8,190,000 8,691,513 Summary of General Obligation Debt Including a) Estimate for presentation purposes. b) Debt service is paid directly from net revenues of the Enterprise Funds. Lease Purchase Agreements On April 1, 1994, the City entered into a 60 -month lease agreement for two Kodak copiers. The original amount of the lease was $66,796, with monthly payments of $1,346.60. Overlapping Debt Taxing Unit Hennepin County ISD 270 (Hopkins) ISD 279 (Osseo) ISD 284 (Wayzata) Hennepin County Technical College Hennepin Parks Metropolitan Council Regional Transit District Total Debt Ratios Gross G.O. Debt As of 1-2-97 87, 045, 000 53, 590, 000 118,480,000 108, 729, 000 1,080,000 13,955,000 26,460,000 81,455,000 Percent Applicable to city To 1996 Indicated Market Value Per Capita (57,391 - 1994 Metropolitan Council Estimate) 6.43% 2.83% 9.91% 59.30% Net G.O. Debt 5,596,994 1,516,597 11, 741, 368 64,476,297 9.77% Gross Less: Debt Net 3.26% Debt Service Funds(a) Direct Debt General Obligation Debt Supported By Taxes 2,640,000 1,000,000) 1,640,000 General Obligation Debt Supported By taxes and/or Special Assessments 4,015,000 1,800,000) 2,215,000 General Obligation Debt Supported By Tax Increments 8,190,000 950,000) 7,240,000 General Obligation Debt Supported By Revenues 3,790,000 b) 3,790,000 a) Estimate for presentation purposes. b) Debt service is paid directly from net revenues of the Enterprise Funds. Lease Purchase Agreements On April 1, 1994, the City entered into a 60 -month lease agreement for two Kodak copiers. The original amount of the lease was $66,796, with monthly payments of $1,346.60. Overlapping Debt Taxing Unit Hennepin County ISD 270 (Hopkins) ISD 279 (Osseo) ISD 284 (Wayzata) Hennepin County Technical College Hennepin Parks Metropolitan Council Regional Transit District Total Debt Ratios Gross G.O. Debt As of 1-2-97 87, 045, 000 53, 590, 000 118,480,000 108, 729, 000 1,080,000 13,955,000 26,460,000 81,455,000 Percent Applicable to city To 1996 Indicated Market Value Per Capita (57,391 - 1994 Metropolitan Council Estimate) 6.43% 2.83% 9.91% 59.30% Net G.O. Debt 5,596,994 1,516,597 11, 741, 368 64,476,297 9.77% 105,516 9.11% 1,271,301 3.26% 862,596 3.60% 2,932,380 88,503,048 G.O. Net Direct Debt 0.26% 193 G.O. Indirect & Net Direct Debt 2.36% 1,735 OFFICIAL STATEMENT DATED NOVEMBER 8, 1995 Rating: Requested from Moody'sNEWISSUEInvestorsService In the opinion of Best & Flanagan, Professional Limited Liability Partnership, Bond Counsel, on the basis of laws in effect on thedateofissuanceoftheBonds, the interest on the Bonds is not includable in the gross income of the recipient for federal income taxpurposesorintaxablenetincomeofindividuals, estates and trusts for Minnesota income tax purposes, but is includable in taxableincomeofcorporationsandfinancialinstitutionsforpurposesoftheMinnesotafranchisetax. (See Tax Exemption' herein.) 7,665,000 City of Plymouth, Minnesota General Obligation Tax Increment Bonds, Series 1995B Book Entry Only) Dated Date: December 1, 1995 Interest Due: Each February 1 and August 1, commencing February 1, 1996 The Bonds will mature February 1 as follows: 1997 $2,465,000 1998 $2,550,000 1999 $2,650,000 The Bonds will not be subject to payment in advance of their respective stated maturity dates. The Bonds will be general obligations of the City for which the City pledges its full faith and credit and power to levy direct general ad valorem taxes. In addition the City will pledge taxincrementincomegeneratedfromthirteentaxincrementdistricts. The proceeds will be used to finance public improvements within various tax increment financing districts all withinDevelopmentDistrictNo. 7. Proposals must be for not less than $7,626,675 and accrued interest on the total principal amount of the Bonds and must be accompanied by a good faith deposit in the form of a certified or cashier's check or a Financial Surety Bond in the amount of $76,650, payable to the order oftheCity. Proposals shall specify rates in integral multiples of 5/100 or 1/8 of 1%. Rates must be in ascending order. Award will be made on the basis of True Interest Cost (TIC). The Bonds will be bank -qualified tax-exempt obligations pursuant to Section 265(b)(3) of the Internal Revenue Code of 1986, as amended, and will not be subject to the alternative minimum tax for individuals (see 'Tax Exemption" and "Bank -Qualified Tax -Exempt Obligations" herein). The Bonds will be issued as fully registered Bonds without coupons and, when issued, will beregisteredinthenameofCede & Co., as nominee of The Depository Trust Company ("DTC"). DTC will act as securities depository of the Bonds. Individual purchases may be made in bookentryformonly, in the principal amount of $5,000 and integral multiples thereof. Investors will not receive certificates representing their interest in the Bonds purchased. (See "Book EntryFormofOwnership" herein.) PROPOSALS RECEIVED: November 21, 1995 (Tuesday) at 12:00 Noon, Central Time AWARD: November 21, 1995 (Tuesday) at 7:00 P.M.. Central Time SPRINGSTED PUBLIC FINANCE ADVISORS Further information may be obtained from SPRINGSTED Incorporated, Financial Advisor to the Issuer, 85 East Seventh Place, Suite 100, Saint Paul, Minnesota 55101 (612) 223-3000 TABLE OF CONTENTS Paae(s) Termsof Proposal........................................................................................................... i -iv Scheduleof Bond Years.................................................................................................. v IntroductoryStatement..................................................................................................... 1 ContinuingDisclosure....................................................................................................... 1 TheBonds........................................................................................................................ 2-3 Authorityand Purpose...................................................................................................... 3 Securityand Financing...................................................................................................... 3 FutureFinancing............................................................................................................... 4 Litigation........................................................................................................................... 4 Legality............................................................................................................................. 4 TaxExemption.................................................................................................................. 4-5 Bank -Qualified Tax -Exempt Obligations........................................................................... 5 Rating............................................................................................................................... 5 FinancialAdvisor.............................................................................................................. 5 Certification....................................................................................................................... 6 CityProperty Values......................................................................................................... 6-7 CityIndebtedness............................................................................................................. 7-10 City Tax Rates, Levies and Collections............................................................................. 10-11 Fundson Hand................................................................................................................. 12 CityInvestments............................................................................................................... 13 General Information Concerning the City.......................................................................... 13-16 Governmental Organization and Services......................................................................... 17-18 Proposed Form of Legal Opinion............................................................................ Appendix Continuing Disclosure Certificate ............................................................................ Appendix II Summary of Tax Levies, Payment Provisions, and Minnesota Real Property Valuation...................................................................... Appendix III Selected Annual Financial Statements.................................................................... Appendix IV ProposalForms...................................................................................................... Inserted 85 E. SEVENTH PLACE, SUITE 100 SAINT PAUL, MN 55101-2143 612-223-3000 FAX: 612-223-3002 fz SPRINGSTED Public F ince Advisors 7,665,000 CITY OF PLYMOUTH, MINNESOTA GENERAL OBLIGATION TAX INCREMENT BONDS, SERIES 1995B AWARD: DAIN BOSWORTH INCORPORATED SALE: November 21, 1995 Moody's Rating: Aaa JURAN & MOODY, INCORPORATED NORWEST INVESTMENT SERVICES, INC. Interest 1997 $7,628,591.25 $695,394.17 4.1555% Net Interest True Interest Bidder Rates 4.00% Price Cost Rate 1997 $7,642,005.00 $698,772.92 4.1706% MORGAN KEEGAN & CO., INC. 4.00% 1998 4.10% DAIN BOSWORTH INCORPORATED 4.00% 1997-1998 7,656,474.00 688,617.67 4.1054% 4.10% 1999 CRONIN & COMPANY, INCORPORATED 3.80% 1997 7,646,987.25 689,590.25 4.1136% SMITH BARNEY 3.95% 1998 4.10% 1999 STATE STREET BANK & TRUST 4.00% 1997 7,661,934.00 692,878.50 4.1286% 4.10% 1998 4.15% 1999 MILLER & SCHROEDER FINANCIAL, INC. 3.90% 1997 7,646,527.35 695,688.48 4.1508% EVEREN SECURITIES, INC. 4.00% 1998 FIRST OF AMERICA SECURITIES 4.10% 1999 JURAN & MOODY, INCORPORATED NORWEST INVESTMENT SERVICES, INC. 3.75% 1997 $7,628,591.25 $695,394.17 4.1555% FBS INVESTMENT SERVICES, INC. 3.90% 1998 4.00% 1999 PRINCIPAL FINANCIAL SECURITIES INC. 3.85% 1997 $7,642,005.00 $698,772.92 4.1706% MORGAN KEEGAN & CO., INC. 4.00% 1998 4.10% 1999 Continued) SAINT PAUL, MN MINNEAPOLIS, MN • BROOKFIELD, WI • OVERLAND PARK, KS - WASHINGTON, DC - IOWA CITY, IA Interest Net Interest True Interest Bidder Rates Price Cost Rate PIPER JAFFRAY INC. 3.85% 1997 $7,635,106.50 $698,713.08 4.1731% ROBERT W. BAIRD & COMPANY, 3.95% 1998 INCORPORATED 4.05% 1999 American Bank National Association HARRIS TRUST & SAVINGS BANK 3.95% 1997 7,634,724.00 704,733.92 4.2098% 4.00% 4.00% 1998 4.10% 1999 NRO 4.05% 1999 PRUDENTIAL SECURITIES, INC. 3.95% 1997-1998 7,627,046.50 709,648.92 4.2420% ABN AMRO SECURITIES (USA) INC. 4.05% 1999 DEAN WITTER REYNOLDS INCORPORATED OPPENHEIMER & CO., INC. GRIFFIN, KUBIK, STEPHENS & 3.90% 1997 7,631,657.25 710,558,58 4.2452% THOMPSON, INC. 4.00% 1998 4.10% 1999 RAYMOND JAMES & ASSOCIATES 3.90% 1997 7,626,675.00 715,540.83 4.2769% NIKE SECURITIES 4.00% 1998 WILLIAM R. HOUGH & CO. 4.10% 1999 FIDELITY CAPITAL MARKETS 3.90% 1997 7,628,131.35 728,001.15 4.3544% 4.10% 1998 4.20% 1999 MERRILL LYNCH & CO. 3.90% 1997 7,626,675.00 730,890.83 4.3677% 4.05% 1998 4.25% 1999 REOFFERING SCHEDULE OF THE PURCHASER Rate Year Yield 4.00% 1997 3.90% 4.00% 1998 4.00% 4.10% 1999 NRO BBI: 5.65% Average Maturity: 2.19 Years Moody's MunICInPGl Credit Report Plymouth, Minnesota New Issue November 16, 1995 General Obligation/Special Tax sale: 57.665,000 General Obligation Tax Increment Bonds. Series 1995B date: For bids November 21 credit comment: Molds rating: Aga The Aaa rating on the City of Plymouth's general obligation bonds has been confirmed, based upon the following factors: Affluent Minneapolis Suburb Possesses A Diverse and Growing Economic Base This suburb of Minneapolis benefits from its strategic location within the economically vibrant Twin Cities metropolitan area. Strong commercial and industrial development has created a broad employment base within the city, at the same time that rapid develop- ment has swelled the local population. The city's socioeconomic profile is strong, including income and housing values that are among the highest in the state as well as the region. Citv unemployment rates have remained consistently low. Well Managed Financial operations Evidenced By Strong Level of Reserves The city has consistently adhered to its policy of maintaining an undesignated General Fund balance equal to at least 40% of the current General Fund budoet Conservative budgeting racti in nine out of the last ten years, even during recent periods of increased property tax abatements and delinquencies. which were largely attributable to dif- ficulties experienced by the commercial and indus- trial sector. Trend of Declining Level of Debt Expected To Continue Debt levels have declined sharply in recent years as the city has used available reserves to both redeem outstanding bonds as well as internally finance neces- sary capital projects. Additional declines in direct debt ratios are anticipated as the city's five year capital program specifies minimal debt issuance and principal payout for outstanding debt is very rapid. Proceeds of this offering will be used to finance public improvements within various city tax incre- ment financing districts, which are all within one development district. Tax increments venerated within the districts are expected to be sufficient to meet all debt service requirements: consequently, no ces property tax levy will be necessary. o of, are exem- plified by the generation of General Fund surpluses key facts: Debt Burden: Payout, Ten Years: Debt per Capita: Average Annual Growth F.V., 1990-94: 2.8% Per Capita Income, 1989: $21,908 94.2% As % of Statewide Average: 152.3% 1.626 Population Growth, 1970-80: 74.9% 4.1% 1980-90: 81.5% 2 General Obligation/Special Tax November 16, 1995 Plymouth, Minnesota Unemployment Rate, 1994: 2.7% Unreserved General Fund Balance 9/94: 3.3% as % of General Fund Revenue, 9/95: 2.5% 1992: 44.7% 1993: 46.5% 1994: 44.8% update: This offering was not anticipated at the time of our budgeted projections: consequently an operating sur - last report dated July 17, 1995. Credit status remains plus is projected. The proposed General Fund budget essentially unchanged. Officials report that actual for fiscal 1996 is balanced. results to -date for fiscal 1995 are outperforming sale information: Legal Name of Issuer: City of Plymouth, Minnesota. Date of Bonds: December 1, 1995. security: General obligation, unlimited tax. Tax increment revenue generated from thirteen tax incre- ment districts within Development District No. 7 are also pledged. Use of Proceeds: Finances the acquisition of land and improvements to the city's park system. Key Contacts: Chief Financial Officer: Mr. Dale Hahn, Finance Director (612) 550-5000. Advisor: Sprinasted Inc., St. Paul (612) 223- 3000. Bond Counsel: Best and Flanagan, Minneapolis, 612) 339-4331. Auditor: Deloitte and Touche LLp, Minneapolis, FY 1994), (612) 397-4000. rating history: November 1993: Aaa July 1974: Baal November 1990: Aat August 1972: Baa June 1987: Aa June 1970: M Withdrawn December 1978: Al June 1969: Ba June 1975: A November 1964: Baa O No application received. analyst: Steven J. Bocamazo 212) 553-7168 8221Q01 General Obligation/Special Tax November 16, 1995 3 Plymouth, Minnesota s Copyright 1995 by Moody's Investors Service, Inc.. 99 Church Street. New York. New York 10007. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS COPYRIGHTED IN THE NAME OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S"), AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMTITED. TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER. BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors. however. such information is provided "as is" without warranty of any kind and MOODY'S. in particular. makes no representation or warranty. express or implied. as to the accuracy. timeliness. completeness. merchantability or fitness for any particular purpose of any such information. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in pan caused by. resulting from. or relating to, any error (negligent or otherwise) or other circumstance or conuntency within or outside the control of MOODY'S or any of its directors. officers. employees or agents in connection with the procurement. collection. compilation. analysis. interpretation. communication. publication or delivery of any such information. or (b) any direct. indirect. special. consequential, compensatory or incidental damages whatsoever [including without limitation. lost profits). even if MOODY'S is advised in advance of the possibility of such damages. resulting from the use of or inability to use. any such information. The credit ratings. if any. constituting pan of the information contained herein are. and must be construed solely as. statements of opinion and not statements of fact or recommendations to purchase. sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED. AS TO THE ACCURACY, TIMELINESS. COMPLETENESS. MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein. and each such user must accordingly make its own study and evaluation of each security and of each issuer and auarantor of. and each provider of credit support for. each security that it may consider purchasing. holding or selling. Pursuant to Section 17(b) of the Securities Act of 193?. MOODY'S herebv di,cioses that most issues of debt securities i inciuding corporate and municipal bonds. debentures. notes and commercial paper and preferred stock rated by MOODY'S hay e. pnor to usvgnmeni of zny rating. agreed to pa) to MOODY'S for appraisal and rating services rendered by it fees mnRir.e from S 1.000 to 5350.000. Moodys Investors Service Public Finance Department on Municipal January 13, 1997 Moody's Expands Rating Scale for All Public Finance Issues Issues Effective immediately, Moody's will rate new public finance issues using expanded bond rating symbols, to include the numerical modifiers 2 and 3. These modifiers will be added to the existinz numerical modifier 1—used by Moody's since 1981—but none of the modifiers will apply to issues rated Aaa, Caa, Ca, or C. The modifier 1 indicates that the issue ranks in the higher end of its generic rating category; the modifier 2 now indicates that the issue is in the mid- range of its category; and the modifier 3 indicates that it is in the low end. In effect, by using the numerical modifiers 2 and 3 in addition to the numer- ical modifier 1, Moody's has increased the number of possible bond credit ratings for these sectors to 19 from 14. (See Figure 1.) In October 19%, Moody's began assigning numerical modifiers to Aa, A, Baa, Ba, and B ratings relating to outstanding bond issues within the health care, high - Contacts New Rating Symbols George Leung 212) 553-0342 Paul Devine 212) 553-0012 Bradley Gewehr 212) 553-4789 Chee Mee Hu 212) 553-3665 Renee Boicourt 212) 553-7162 er education, and other not-for-profit sectors. In November, Moody's began using the expanded rating scale for state revolving funds. Bond issues rated Aal, Al, Baal, Bal, and B1 remain unaffected. Under the new rating system, the meaning of an Al rating does not change. It indicates that the security meets all of Moody's criteria for a single-A rating and that it ranks at the high end of that generic rating cat- egory. ategory. Figure 1—New and Expanded Public Finance Rating Symbols Previous Rating Symbols New Rating Symbols Aaa Aaa Aal Aal Aa Aa2 Ca Aaa Al Al A A2 A3 Baal Baal Baa Baal Baa3 Bat Bal Ba Bat Ba3 B1 B1 B B2 B3 Caa Caa Ca Ca C C 21 January 13, 1997 Figure 2—Holders of Municipal Debt 75 5o 25 PERSPECTIVE 78 '79 80 81 82 83 U '85 86 '87 '88 '89 90 '91 '92 '93 94 '95 Households M Funds = Insurance Co's — Personal Trusts ® Banks & Thrifts = other Source: Bond Buyer's Yearbook Also, generic ratings Caa, Ca, and C will not have numerical modifiers. The numerical modifier 1 is not meant to signal an imminent upgrade, and the modifi- er 3 is not meant to signal an imminent downgrade. Moody's ratings for short-term debt issues and com- mercial paper issuers have not changed. The decision to refine our bond rating system for Public Finance is the result of careful consideration and research, and follows previous changes to our bond rating system. Moody's rating system remained virtually unchanged for more than 70 years since it was first introduced in 1909 by John Moody. In 1981, the numerical modifier I was added to municipal bond ratings of Aa through B. In 1982, the numerical modifiers 1, 2, and 3 were added to the generic rat- ings of Aa through B for corporate bonds. The final decision to implement the new system was made in response to requests by institutional investors as well as to several secular trends affecting the municipal bond marketplace, including: A fundamental change in the holders of municipal debt (see Figure 2) Increasing credit risk and volatility in public finance A need to make finer risk distinctions among increasingly complex financial instruments A Change in the Holders of Municipal Debt For much of the 20th century, banks have had a signifi- cant presence as holders of municipal debt. Their par- ticipation in the market partly relates to 1917 legisla- tion that was designed to encourage their funding of state and local bond issues. In 1982 and again in 1984, Congress began to roll back the tax advantages of municipal bonds for bank investors. A watershed in the market's development, however, was the Tax Reform Act of 1986 in which the tax advantages of municipal bonds for bank investors was eliminated, except with respect to "bank qualified issuers"— issuers who issue less than $10 million in debt per year. From 1985 to 1995, banks, as a percentage of total municipal bond holdings, went from 32% to 7%. Tax-exempt mutual and money market funds quickly filled the void left by the departure of the banks. In 1985, mutual funds owned less than 9% of municipal debt; a decade later, they control 26% of all municipal debt. The rise of mutual funds has important implica- tions both in terms of the municipal bond market's behavior and its use of credit ratings. Mutual funds promote increased market liquidity consistent with PERSPECTCVE their typical value -based investment philosophy—a stark contrast to the buy -and -hold approach adopted by the banking community. Market liquidity is important to the funds. First, it enables them to more accurately mark to market their holdings and therefore more accurately report their net -asset values. Second, market liquidity allows the funds to meet unanticipated surges in redemption requests. The funds report that a more refined rating system will allow them to make finer assessments of risk versus return, therefore contributing to more accurate measures of net -asset values and, in the long term, increased market liquidity This view is shared by various academic studies.ai In this changed envi- ronment, investors will be better served by a rating system that can provide a sharper perception of tax- exempt debt quality. Increased Credit Risk and Volatility. The credit worthiness of public finance debt is changing more rapidly than in the past several decades. From 1976, municipal defaults started slowly trending upward, reaching a 1991 high of 258 municipal bond defaults affecting $5 billion of debt before declining in num- ber since then. While still low relative to the number of municipal bonds outstanding, the trend toward more defaults nonetheless suggests that the market is undergoing change. Moody's does not believe the low default levels that characterized the market dur- ing the 1950s and 1960s will return. On the contrary, Moody's believes that the future will prove even more exacting in terms of fiscal stress on local gov- ernments overnmentsandotherissuersofmunicipalbonds because of reduced federal involvement in social ser- vice delivery, the declining levels of federal assis- tance to local units of government, disinvestment in infrastructure, taxpayers' revolts nationwide, and severe tax and expenditure limitations. Finer Distinctions Between Debt Instruments. More precise rating gradations provide investors with a better assessment of municipal credit quality. This idea is entirely consistent with Moody's long- standing belief that ratings of long-term debt securi- ties should reflect secular factors rather than short- term swings in the economic cycle. We intend to use Perry. Larry G.: Evans, Dorla A: and Liu. Pu. "Bond Raring Discrepancies and the Effect on Municipal Bond Yields." January 13. 1997/3 the refined rating scale to provide rating opinions that reflect fundamental factors more precisely than has been possible within the scope of the previous rating scale. The purpose of Moody's bond ratings is to convey to investors our opinion of the credit risk of owning a given security and holding it to maturity. This opinion involves an assessment of the probability that interest and principal will be paid in accordance with the terms of the bond issue, as well as an assessment of the bondholders' likely economic return if the bond issue defaults. It also includes an analysis of all fac- tors that may influence the long-term financial stand- ing of the issuing entity and the protection measure- ments that pertain to its debt instruments. To deter- mine investors' probable economic return in case of default, we analyze the economic risk inherent in the character and quality of the available assets, investors' priority of claim, and other features of the instrument Therefore, one advantage of a refined rating system is the ability to indicate more precisely the relative economic risk inherent in each bond and the finan- cial strength of the issuing entities' asset structure. Moody's has always given recognition to the distinc- tion between general obligation bonds and revenue or lease -backed bonds. The numerical modifiers enable us to identify more precisely the relative importance and priority of claims within the issuing entities' capital structure. For many decades, the public finance debt instru- ment of choice was the general obligation unlimited - tax bond. Now, however, in many states, stringent tax and spending limitations inhibit the use of such secu- rities. Issuers have come to rely more on revenue bonds and other financing structures as a way of funding large infrastructure needs, leading to increasing claims on these issuers' revenue streams. Although Moody's has always reflected distinctions in priority of claim and security arrangements in its ratings, rating modifiers will enable us to draw finer distinctions regarding the various priorities of claim on a given revenue stream. 4/ January 13, 1997 Moody's Bond Ratings Purpose. The purpose of Moody's ratings is to pro- vide investors with a simple system of gradation by which the relative investment qualities of bonds may be noted. Changes in Rating. The quality of most bonds is not fixed and steady over a period of time, but tends to undergo change. For this reason changes in ratings occur so as to reflect these variations in the intrinsic position of individual bonds. A change in rating may thus occur at any time in the case of an individual issue. Such rating change should serve notice that Moody's observes some alteration in the investment risks of the bond or that the previous rating did not fully reflect the quality of the bond as now seen. Because of their very nature, changes are to be expected more frequently among bonds of lower rat- ings than among bonds of higher ratings. Nevertheless, the user of bond ratings should keep close and constant check on all ratings—both high and low—in order to note promptly any signs of change in investment status that may occur. Limitations to Uses of Ratings. Bonds carrying the same rating are not claimed to be of absolutely equal quality. In a broad sense, they are alike in posi- tion, but, since there are only nine rating classes used in grading thousands of bonds, the symbols cannot reflect the fine shadings of risks that actually exist. Therefore, it should be evident to the user of ratings that two identically rated bonds are unlikely to be pre- cisely the same in investment quality. As ratings are designed exclusively to grade bonds according to their investment qualities, they should not be used alone as a basis for investment opera- tions. For example, they have no value in forecasting the direction of future trends of market price. Market price movements in bonds are influenced not only by the quality of individual issues, but also by changes in money rates and general economic trends, as well as by the length of maturity, etc. During its life even the best -quality bond may have wide price movements, while its high -investment status remains unchanged The matter of market price has no bearing whatsoev- er on the determination of ratings, which are not to be construed as recommendations with respect to PERSPECTIVE attractiveness." The attractiveness of a given bond may depend on its yield, its maturity date, or other factors for which the investor may search, as well as on its investment quality—the only characteristic to which the rating refers. Since ratings involve judgments about the future, on the one hand, and since they are used by investors as a means of protection, on the other, the effort is made when assigning ratings to look at `worst" poten- tialities in the `visible" future rather than solely at the past record and the status of the present. Therefore, investors using the ratings should not expect to find in them a reflection of statistical factors alone, since they are an appraisal of long-term risks, including recognition of many nonstatistical factors. Moody's ratings represent the opinion of Moody's Investors Service as to the relative investment classi- fication of bonds. As such, they should be used with the description and statistics appearing in Moody's Municipal Government Manual and Municipal Credit Reports. Reference should be made to these state- ments for information regarding the issuer. Moody's ratings are not commercial credit ratings. In no case is default or receivership to be imputed unless expressly so stated in the manual. Absence of Rating. Where no rating has been assigned or where a rating has been suspended or withdrawn, it may be for reasons unrelated to the quality of the issue.Should no rating be assigned, the reason may be one of the following. An application for rating was not received or accepted. The issue or issuer belongs to a group of securities that are not rated as a matter of policy. There is a lack of essential data pertaining to the issue or issuer. The issue was privately placed, in which case the rating is not published in Moody's publications. Suspension or withdrawal may occur if new and mate- rial circumstances arise, the effects of which preclude satisfactory analysis; if up-to-date data are no longer available or reasonable to permit formation of a judgement; if a bond is called for redemption; or for other reasons. PERSPECTIVE January 13 1997/5 Key to Public Finance Ratings Definitions of Bond Ratings Aaa Bonds rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are gener- ally referred to as "gilt edge." Interest payments are protect- ed by a large or by an exceptionally stable margin and prin- cipal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa Bonds rated Aa are judged to be of high quality by all stan- dards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than in Aaa securities. Bonds rated A possess many favorable investment attributes and are to be considered as upper medium grade obliga- tions. Factors giving security to principal and interest are considered adequate, but elements may be present that sug- gest a susceptibility to impairment some time in the future. Baa Bonds rated Baa are considered as medium grade obliga tions, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative char- acteristics as well. Ba Bonds rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Bonds rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or maintenance of other terms of the contract over any long period of time may be small. Caa Bonds rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest Ca Bonds rated Ca represent obligations that are speculative in a high degree. Such issues are often in default or have other marked shortcomings. Bonds rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Can. (... ) Bonds for which the security depends upon the completion of some actor the fulfillment of some condition are rated conditionally- These are bonds secured by: (a) earnings of projects under construction, (b) earnings of projects unsea- soned in operating experience, (c) rentals that begin when facilities are completed, or (d) payments to which some other limiting condition attaches. Parenthetical rating denotes probable credit stature upon completion of con- struction or elimination of basis of condition. P (... ) When applied to forward delivery bonds, indicates that the rating is provisional pending delivery of the bonds. The rat- ing may be revised prior to delivery if changes occur in the legal documents or the underlying credit quality of the bonds. Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa to B. Ile modifier 1 indicates that the issue ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic category- Copyright 1997 by Moody's Investors Service, Inc, 99 Church Street, New York, New York 10007. All rights reseivedALL L14FORMATION CONTAINED HEREIN IS COPYRIGHTED IN THE NAME OF MOODYS INVES'T'ORS SERVICE, INC. MOODM, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODYS PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODYS from sources believed by it to be accurate and reliable.Because of the possibility of human or mechanical error as well as other factors, however, such information is provided "as is" without warranty of any kind and MOODYS, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information.(; nder no cir- cumstances shall MOODYS have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error negligent or otherwise) or other circumstance or contingency within or outside the control of MOODYS or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODYS is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETE- NESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODYS IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of. and each provider of credit support for, each security that it may consider purchasing, holding or selling. Pursuant to Section 17 (b) of the Securities Act of 1933, MOODYS hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODYS have, prior to assignment of any rating, agreed to pay to MOODYS for appraisal and rating services rendered by it fees ranging from $1,000 to $350,000. REG109-A7