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RES 2008-14 DEBT MGMT PROCEDURES AND POLICIESRESOLUTION of the City of Bainbridge Island, Washington, establishing Ibt Management Procedures and Policies. WHEREAS, the City seeks to develop financial procedures and policies that are fiscally prudent and that incorporate principals of budget sustainability, and WHEREAS, the City seeps to establish conditions for the use of debt and to create procedures and policies that minimize the City's debt service and issuance costs, retain the highest practical er dit rating, 'and maintain full arra complete financial disclosure arra reporting; now therefore, THE CITY COUNCIL OF THE CITY of BAINBRIDGE ISLAND DOLS RESOLVE AS FOLLOWS, FART I -- DEBT ADMINISTRATION AND PROCESS 1. Role ofFinance Committee. Th Finance and Personnel Committee will provide advice to the Mayor, City Council, and Director of Finance in all natters pertaining to the incurrence of dent. The Finance and Personnel Committee also has oversight of these Debt Policies, and will recommend amendments from time to time to the Mayer and Gini Council. . General Mules. Neither the City, nor any City department, agency, nor unit will incur indebtedness without the approval of the City Council, Any proposal to finance a capital project that involves pledge or other extension of the City's credit through a sale of bonds or notes, the execution of loans .or leases, marketing guarantees, or otherwise involving directly or indirectly the lending or pledging f the City's credit, shall be reviewed through the Budget process, In addition, a review of proposed funding sources (including, by way of example, debt) shall be a regular feature ofthe City's Capital Facilities Plan Process; however, the adoption of a Capital Facilities Plan shall not bar the Gini from incurring debt at a level that differs from the Plan to the extent that the Gini Council subsequently approves a debt issuance, in connection with its Budget process (including any Budget amendments that may be adopted from time to time throughout the year), that differs in amount from the CFP of record. . Requests for Debt Financing. It is the policy of the City to utilize debt financing only for capital protects (potentially including hard costs and/or soft costs of a CounGil-approved capital project), but not for operating expenses. Any proposal to finance a capital project with debt issued by the City will e presented to the City Council through the Bridget and Capital Facilities Plan process with additional detail described below. The requests for debt financing mut specify the purpose of the borrowing, any options for financing the project without borrowing, and speeific sources of payment of debt service. It should include, as specified by the Director of Finance, a detailed project budget, specifying sources and uses. The bond or other indebtedness will be considered to have been authorized for purposes of compliance with RCW 35A.33.130 of the date of the approval by the Council of the applicable budget ordinance for: the year- in which: the -bond, or other debt is to be issu . . Preparation for Bond Sale... After obtaining approval by the City Council through the Budget process, the Director of Finance, the City Attorney and the City's bond counsel will produce appropriate ordinance(s) and resolutions for review and approval by the City Council, At the earliest possible date in any Budget Year a Reimbursement Resolution will be prepared by the Finance Page I Director for review by the Finance Committee and subsequent presentation to the City Council which will detail all projects to be funded through each respective debt issuance. . Scheduling. The Director of Finance is responsible for creating a schedule for the issuance of bonds or notes by the City in consultation with the City's financial advisor and''bond counsel. For the purpose of minimizing transaction costs arra achieving efficiencies, effort will be made to consolidate the issurancef debt into as few -transactions per year as is feasible, consistent with the' cash flow needs of the City. A preliminaryschedule will he provided to the members the Financ 'and Personnel Committee as soon as practical after such a schedule is determined by the Director of Finance. 6. Preparation of official Statement. The members of the Finance and Personnel Committee will be provided with copies of the preliminary official statement for review and comment Orior td its publication. . Baud ordinance, All ordinances authorizing issuance of bonds or notes are to be presented to the City Council for first reading at least two weeks before the scheduled sale date. At first reading, public comment will be afforded, and the City Council will hear a presentation from the Director of Finance, and the City's bond eounsel and financial advisor will be available to answer lue tions. It is understood that at the time of Council's final consideration i.e., second reading) of the hand ordinance, which shall' not be later than the day prior to the sale date of the bonds, ars offer to purchase the bonds will be presented to the City contingent on the Council's adoption ofthe ordinance with no changes, and thus any concerns or amendments to the authorizing ordinance should be raised by the Council at the time offirst reading. Not later than the day prior to the sale date, at the second reading, the final ordinance will be presented to the City Council, and a black -lined version will be made available shoving the changes. . Closing arra P t- Issuance Compliance. The Director of Finance and the Mayor will participate in the closing of each bond issue. The Director ofFinance will take such actions as may be required t monitor the City's ongoing compliance with federal tax and arbitrage regulations, continuing disclosure obligations and covenants contained in the bond documents. PART 11— DEBT MANAGEMENT POLICIES CREDITWORTHINESS OBJECTIVES Policy 1. Credit Datings. The City of Bainbridge Island seeks to maintain the highest possible credit ratings for all categories of short- and long-term General Obligation debt that can be achieved without compromising delivery of basic City services and achievement of adopted City policy objectives. The City recognizes that external .economic, natural, "or :other events may from time to time affect the creditworthiness of its debt. Nevertheless, the Mayor and City Council are committed to ensuring that actions within their control are prudent and consistent with the highest standards of public financial `managem: ent, and supportive of the creditworthiness objectives defined in this policy. Page 2 Policy 2, Financial Disclosure. The City is committed 'to full and complete financial disclosure, and to cooperating fully with rating agencies, institutional and individual investors, City departments and agencies, other levels of government, and the general p blit to share clear, comprehensible, and aceur to financial information. The City - is committed to meeting disclosure requirements on a timely and comprehensive .basis. - -Official statements accompanying debt issues, Comprehensive Annual Financial Reports, and continuing disclosure statements will meet at a minimum the standards articulated by the Municipal Standards Rulemaking Board MSRB, the Government Accounting Standards Board (GASB) (to the extent applicable to Washington code cities), the National Federation of Municipal Analysts FMA , the Securities and Exchange Commission (SEC), and Generally Accepted Accounting Principles (GAAP), The Department of Finance shall be responsible for ongoing disclosure to established national information repositories - (NRMSIRs) and - for maintaining compliance with disclosure standards promulgated by state and national regulatory bodies. Policy -, Capital Planning, To enhance creditworthiness and prudent financial management, the City of Bainbridge Island is committed to systematic capital planning, intergovernmental cooperation arra coordination,. and long. terra :financia.l planning. evidence of this commitment to systematic capital planning will be demonstrated through adoption. and periodic adjustment of a Comprehensive Flan pursuant to - the Growth Management Act and the adoption of a Six -Year Capital Facilities Plan. The City is committed to public participation in establishing a Capital Facilities Plan and t -identifying sources and uses of Bands in each such plan at the project level. Policy 4. Councilmanic Debt Capacity and Reserve. The City will keep outstanding debt within the limits prescribed by Mate statute and at,levels consistent with its creditworthiness objectives. The City will preserve o million of limited tax (councilmanic) general obligation debt capacity, or % of the total legal limit (which statutory limit is 1.5% of total city-wide assessed value), whichever is larger, for emergencies. For purposes of this policy, an "emergency" means a situation which the City Council has determined to be an emergency for purposes of this policy, such as respon' ses to major natural disasters or other significant threats or disruptions to City infrastructure or to public health or safety. Policy 5. Net Councilmanic Debt Service. The City will monitor and limit the net debt service being pard from the Tax Supported Funds. "Net debt service" is defined as the total annual debt service on limited tax . general obligation (councilmanic).debt minus any revenues generated by the debt-financed projects to pay this debt service. e. Except in emergencies as defined in Policy , additional councilmanic debt shall not be issued to the extent it would cause the net debt service that would become payable from the Tax Supported funds to exceed 25% of the total budgeted Tax Supported funds revenues for the current year or a subsequent year, Page Policy 6. Annual Debt Report. The Department of Finance shall prepare an annual report on City debt and present it to tho' Council at the time the Mayor submits his or her Proposed Budget.- This report will describe any bond - issues planned for the corning year and will dcscribe bonds issued to- dame during -the' current year. The report shall also provide historical and projected information on debt, including debt ca pacit y and debt service analyses. The report will cover all forms of City debt, including utility debt, and debt guarantees. PURPOSES AND USES OF DEBT Policy .. Capital Financing. The City will normally rely on e i ting funds, project revenues, and grants from other governments to finance capital projects or major maintenance, equipment acquisition,. and small development projects. Debt may be used for capital projects only when a project generates revenues over time that are used to retire the debt, b debt is an appropriate means to achieve a fair allocation of costs between' current ard future beneficiaries, or c in emergencies. Debt may not be used for non - capital purposes. Debt may be used not only for hard construction and implementation costs, but also for services to spe ify the supe, engineering or design, or to manage the implementation, of a capital project planned by the Council, but debt may not be used for analysis of the feasibility of a project. Policy 8. - Bisset Life. The City will consider the use of debt for the acquisition, development, replacement, maintenance, or expansion of an asset only if it has a useful life of at least five years. Debt will not be issued for periods exceeding the useful life or average useful lives of the project or projects to be financed. Policy 90' Use of C uncilrrranic (LTGO or N nv ted Debt. Before issuing limited tax general obligation TGO) debt, the City will consider all othr financing alternatives or funding sources, including non -debt financing. The City will use limited tax general obligation debt only: • If the debt service will be payable from a specified revenue source (such as a new non -property tax revenue source, a voter --approved property tax increase, or project revenues) which i expected to be sufficient to pay at least a substantial portion of the debt service as determined by the Finance Committee); or • If the project is expected to significantly reduce City operating costs within the first five years; or • If an equal or greater amount of non -City snatching funds will be lost if City LTGO funds are not applied in a timely manner; or • Under catastrophic or emergency conditions; or • If the project to be financed either i is a project in the City's Capital Facilities Plass for which the Council has designated LTGO debt as a funding source,(ii) provides essential City services, or (iii) would so advance core City policy objectives such that its importance exceeds the value that would be added by seeking voter approval. Page Policy 1 . Issuance of voted (UT Debt. The Department of Finance will identify, in the annual capital facilities plan update, potential candidates for voter -approved finanein'g and will work with the Mayor and City Council to develop ars election plan as far in advance of the proposed financing date as practical. Policy 11. Use of revenue Debt. Revenue bonds shall be issued only when projected operating revenues are insufficient to meet the enterprise's financing creeds. Each enterprise fund will maintain an adequate rate structure to cover the full cost of its operations including: maintenance, depreciation, capital and debt service. The City will insure that net operating revenues constitute a minimum of 1.25 times the annual cleft serviec requirements. Net revenue is defined as Gross Revenue less Maintenance and operation Expensc where Maintenance and Operating Expenses are defined as all reasonable expenses incurred by the City in causing the Waterworks.Utility of the City to be. operated and maintained in good repair, working order and condition, including payments made to any other municipal corporation or private entity for water service and for sewage treatment and disposal service or other utility service in the evert the City combines such service into the Waterworks Utility and enters 'Into a contra t for such service, but not including any depreciation or taxes levied or imposed by the City or payments to the City in lieu of taxes, or capital additions or capital replacements to the Waterworks Utility. Policy 1. Second Lien Deist The City will issue second lien debt very rarely, and only if it is financially beneficial to the City and consistent with creditworthiness objectives. Policy 1. LIDS. The City may issue notes, interfund certificates, or other financial instruments ments a necessary to finance Local Improvement Districts (LIDS) or Business Improvement Districts (BIDS) or other special puurpose financing as authorized by the City Council. Policy 1. Capital Leases. The City may consider entering into long -terra capital leases on the same basis as it considers councilmani debt, -and such proposals must be considered through the City's Budget and Capital Facilities Plan processes. Consistent with ICw 35.42.030, capital leases may not exceed 50 years (unless otherwise authorized by state law), may be subject to renewal and may include an option to purchase. For purposes of. Policy 4, payments on a capital lease do not count a "debt" unless the City has entered into an arrangement for the issuance of Certificates of Participation or has otherwise securitized its payment obligation on that lease in which case only those portions of each lease payment allocated as principal will be counted as "debt"). Nonetheless, for purposes of compliance with RCW 5.42.200, if the aggregated portions oflease payments over the term of the lease that are allocable to principal would cause the City to exceed its statutory debt limit for eouncilmanic dust, the question of whether to execute the lease must be submitted to the voters. Policy 1. , Short -terra Borrowing. Except for LIDS and similar situations, the use of short -terra borrowing, such as bond anticipation 'age motes BA1 and tax-exempt commer ial paper will be undertaken only if the transaction costs plus interest of the debt are less than the cost of ars interfund interloan, or available cash is insufficient to meet working g capital requirements. Policy 16. Public -Private -Partnerships; Debt Guarantees. The City may consider, on a ease -by -ease basis, the use of its debt capacity for legally allowable capital projects by public development authorities, non-profit housing agencies and special purpose units of government, so long as total City debt guarantees do not exceed 15% of the City's total legal authority for non.-vofed general obligation debt and o long as the guarantees do not infringe on the debt capacity reserve established in Policy 4. City participation in such projects will be considered only if consistent withstatutory and constitutional authority and orifi: • After the prior. commitment f the full assets and .resources of the projeot developer r the project, as appropriate) to debt service coverage; If project revenues r -devel pment authority rev nues, as appropriate) pledged to debt service, are at least equal to debt service (average eoverage of 1.0 during the terra of the debt); • If debt service preserves are provided by the development authority's own resources acid ' are equal to at least six months' debt service; If all other viable means of finanuing have been examined, including, but not limited to, revenue debt, letters and lines of credit, and extension ofcredit by other governmental agencies; and • . After completion of a fiscal review and approval by the City Council. DEBT STANDARDS; ST .UCT E; METHOD SALE Policy 17. Lengthlo Maturity. Debt will be structured for the shortest period consistent with a fair allocation of costs tourrent and future beneficiaries or users. Policy 18. Debt Structure. To the extent possible, the City will design the repayment of its overall debt so as to recapture rapidly its credit capacity for future use. To this end, the City will strive to repay at least 18% ofthe principal amount ofits total general obIi gation debt within five years and at least 3 5 % within tern years. Policy 19. Net Cost Debt will be structured to achieve the lowest possible net cost to the City given market conditions, the urgency of the capital project, net revenues a pe ted from the project i any), and the nature and type f security provided. Policy 20. Level Cost The City will seek to structure debt with level principal and interest costs over the life of the debt. "Bach loading" of costs will be considered only when natural disasters or extraordinary or unanticipated external factors male the short-term cost of the - debt prohibitive, the benefits derived from the debt issuance can clearly be demonstrated to be greater in the future than in the present, such Page structuring is beneficial to the City's overall amortization schedule, or such structuring will allow debt service to more closely match project revenues during the early years of the project's operation. Policy 21. Method ofSale, In general, negotiated sales of debt will be used for issuances maller than $3 million par value and will be considered in those circumstances when the complexity of the issue requires specialized expertise, when the negotiated sale would result in substantial savings in tune or money, or when market conditions r City credit are .unusually yolatile or uncertain. In general, competitive- bidding is. -the preferred method of sale except in those circumstances when the complexity of the issue requires specialized expertise,. when the negotiated sale would result in substantial savings in time or money, or when market conditions or City credit are unusually volatile or uncertain ertain Bids will be awarded on a true interest cost basis (TIC), provided other bidding requirements are satisfied, In the . unlil ely, event that the City receives more than one bid with identical TICs the tie may be brol en by a. coin toss. In instances where the City, in a competitive bidding, deems the bids received unsatisfactory, the Director of Finance may enter into negotiation for sale of the securities. Policy 22. Refundings. Periodic reviews of all outstanding debt itl. be .under�tal en to determine refunding opportunities. Refunding will be considered (within federal tax later constraints) if and when there is a net economic benefit of the refunding or if the refunding is valuable in order to modernize covenants to thereby impro e operations and management. In general, the Director of Finance shall report to the Finance Committee whenever there are opportunities for advance refundings that will provide a net present value savings of at least 5% of the refunded debt (taken as a whole and not on a maturity -by -maturity basis) can be achieved. Current refundings which produce a net present value savings of less than 5% may be considered on a case - by -ease basis. Refundings with negative savings will not be considered unless there is a compelling public policy objective. Policy 23. Credit Enhancements. Credit enhancement (letters of credit, bond insurance, etc.) may be used, but only when net debt service on the bonds is reduced by more than the costs of the enhancement. Policy 2, Arbitrage Compliance. The Director ctor of Finance shall maintain a system of record keeping ing acrd reporting to meet the arbitrage rebate compliance requirements of federal tax code, Page PASSED: by the City Council this:. 13 th daf August, 200 8. APPROVED the Mayor this 20'h day of August, 2008, ATTEST/AUTHENTICATE: 4 . Rosalind .,Las off, MC City Clerk' FILED WITH THE. CITY CLERK: PASSED BY THE CITY COUNCIL; RESOLUTION NO. April 1, 2008 August 13, 2008 2008-14 Page 8 i Q FOSTER PEPPIERPL... Bond Basics Glossa ry F , Acceleration — A re dy for default that allows the bondholder or lender to declare the unpaid balance immediately due and payable. Ari Valorem Tax — Property tax. Additional Bonds Test — A covenant that an issuer will not issue new additional bonds that will have a claim -to revenues already pledged to outstanding bonds, unless certain financial or other requirements are met. Advance Refunding — Issuance of new bonds to repay an outstanding bond issue prior to its first call date in order to capture savings (ire the form of a lower interest rate), or to change covenants or other provisions. Generally, the proceeds of the new issue are invested in government securities, which are placed in escrow. The trustee or escrow agent uses these maturing government securities to pay interest the old issue until its first call date, at which point it is called and repaid. Agreement Among Underwriters (AAI,) -- The contract set up between members of an underwriting syndicate, stipulating the activities of each member. Amortization Schedule — The schedule ofprincipal and interest payments for the elimination of debt. Appropriation --- An authorization by a legislative body to set aside cash for a specific purpose. Arbitrage -- The practice of buying and selling in different markets to profit from a spread in prices or Melds . resulting from market conditions. Except in limited circumstances, municipal issuers are generally prohibited from selling bonds in the tax-exempt market, and turning around to invest the proceeds in higher -yielding taxable market et in order to earn profits. Any such arbitrage profits must be rebated to the U.S. Treasury. Assessment Bonds, or Local Improvement District Bonds)— Bonds the repayment of which is secured by special assessments paid by property owners whose property receives a special benefit from. the bond -financed improvement. Auction Rate Securities (ARS) — Variable rate securities in which the interest rate is reset periodically (daily, weekly or monthly), based on the results of a dutch auction. Average Annual Debt Service (AADS) — The average amount of total debt service due in each year over the life of the bonds. Average Life — The average length of time an issue of bonds with mandatory for in ing funds is expected to remain outstanding. Baby Bond — A denomination issued in less than 1,000, also known as a mini -bond. Balloon Maturity or Balloon Payment— An large proportion of bond principal maturing in a single year. Bach -Loaded Debt — A debt service structure in which total debt service, payments are lower in the early years and increase toward the final maturity. This is typically accomplished with smaller principal maturities in the early gears, balloon payments, "zero-coupon"' bonds or capitalized interest bonds. Bank Qualifled — Bonds issued by municipalities that anticipate selling less than 10 milli n in bonds in a given calendar year. Certain financial institutions that buy these securities are allowed to deduct 80 percent o the interest expense incurred to buy them. Bond Basics Glossary { Basis point — One one-hundredth of a percent (0.01%). One hundred basis points equal l percent. Used in discussing the pricing and yields ofbond issues. Blue Sky Law —A terra referring to various state laws enacted to protect the public against securities fraud. Bond --- A promise by an issuer to repay a stated principal amount, which obligation will accrue interest at a stated rate. Bonds typically have an average life of 3 years or more. Securities with shorter maturities are termed motes gears or less) or commercial paper 12 months or less). Bond Anticipation Note (BAN) — A short -terra borrowing (usually 3 years or less) that the issuer anticipates retiring with the proceeds of a bond sale. Typically used during a construction period before final costs are known. See also Tax Anticipation Noe (TAN), Revenue Anticipation Vote (RAN), Tex and Revenud Anticipation Note TRA , Graaf Anticipation Not (GAN), Bond Bank — State bond banks bundle debt offerings from small issuers into larger- offerings, to create advantages of scale, Bond Counsel — A lawyer who typically represents the bond issuer, reviews the transaction, and writes an opinion on its legality, security, and tax status. Bond Election — The process by which voters approve or reject the sale of unlimited tax general obligation U TG bonds, Bond Bund — An issuer's debt service repayment fund, into which all money collected for the repayment of bonds is deposited. Bond Insurance — A policy written by a mono -line insurance company that guarantees payment to bondholders of principal and interest payments when flue, resulting in a higher credit rating, lower borrowing cost, or enhanced marketability for the bonds. Bond Ordinance or Bond Resolution — A legal document describing the terms and conditions of the offering, the rights of the bondholder, and the obligations of the issuer. Borrel proceeds — The amount of money received by the issuer in exchange for an issue of bonds, Bond Purchase Agreement (BPA) or Bond purchase Contract (Bpi} — The contract between the issuer and the underwriter setting the terms, prices, and conditions of the sale. Bond Rating — The series of letters, numbers, and symbols used by rating agencies to designatethe credit quality of an -issuer's securities. Bond Register -- A record, kept by a transfer agent or bond registrar on behalf of an issuer, of the names and addresses ofregistered bond owners. Bond registrar — The person or entity who maintains the bond register. to Washington, typically the State"s Fiscal Agent (currently The Bark of New York) acts as registrar for most governmental issuers. A trustee, treasurer or finance officer may alternatively be appointed as bond registrar, Bond Transcript — The legal documents associated with a bond offering. Beaded Debt — The portion of an issuer's total indebtedness as represented by outstanding bonds, Book -Entry — Securities in the form of entries in the issuer's or a clearing house's books, rather than in the fornix of paper certificates with coupons, All but the smallest bond issues are sold in book -entry format, 0918092A 2 FOSTER PEPPERPL LC Bond Basics Glossary Broker — An agent between buyers and sellers of securities. Brokers' brokers handle inter -dealer transactions. Calendar —"The list of upcoming bond sales. Call Provision — A provision permittingan issuer to redeem a bond prior to its stated maturity date. Call Premium — An amount, usually stated as a - percentage of the principal am unt, paid as a "'penalty"' or' a "premium" for the exercise of a call provision. Callable Bonds — Bonds that may be redeemed by the issuer prior to the stated maturity date. Typically, a first call date is .10 years from issuance, at a .price of par plus interest accrued to the call date. Other call provisions (and premiums) can be negotiated. Capital Appreciation Bond (CAB) — A bond purchased at a deep discount to face valine, for which principal and all interest are clue at maturity. Also called a capitalized -interest bond or compound interest bond: Closing T- The point in the sale at whibh an. issuer delivers: se ritie ,to the underwriters; and receives the proceeds'. Com etitive Sale or Competitive Bid — The s'al.e of bands to a- purchaser based On bids submitted electronically at a specified time. r .. Conduit Financing — A financing structure in which an issuer sells bonds and then lends the proceeds, pursuant to loan agreement, to. a borrower. The bond issuer promises to repay the bonds using the loan repayment amounts received from the borrower, Contingent Loan Agreement — A form of credit enhancement -whereby an entity independent of the issuer agrees to provide credit enhanc anent to n issuer in the farm of one or more loans, For example, a public development authority (PDA) may obtain a guarantee from the city that created it that if the PDA is unable to reale debt service payments, -the city will provide additional funds to the PISA to be used for that purpose. See also GutAgreement. Continuing Disclosure ---- An issuer's obligation to provide ongoing updates of information regarding the issuer's financial condition, pursuant to a written Undertaking to Provide Continuing Disclosure, to the NRMSIRs and other specified market participants. oun ilmanic Debt — Bonds authorized to be issued by a City Council or other local governing body) without a vote of the people. Coupon — The rate of interest to be paid by the issuer. Formerly, physical coupons were attached to bond certificates. They would literally be clipped and brought to a bank or paying agent and presented for payment. Such certificated bonds are very rare today. Covenant — A legally binding commitment by the issuer to the bondholder. Cover- Bid — The second-best bid received at a competitive sale. Coverage ratio of the amount of project or utility revenues to the expected debt service requirements during a given 12 -month period. Typically expressed in a covenant as a promise, e.g., to keep utility rates high enough to produce 1.25 times average annual debt service. Credit Enhancement or Credit Support — Additional security provided for an issue of bonds. Examples of credit enhancement include bond insurance, guarantee agreements, contingent loan agreements, and letters of credit. Dated Date — The date from which interest on a bond will accrue, usually the issue date. 50919092. FOSTER PEPPERMIL, Bond Basics Glossary Debt Per Capita — The ratio of bonded debt divided by population. Debt Service Reserve Fund S — A separate fund established in revenue bond issues as a reserve for the payment of debt service, into which ars issuer may typically deposit cash, securities or reserve sur ti s. ,See Reserve Requirement. Default - Failure .t comply with terms of a bond issue, which may include making timely payment of pHncip l and interest and other covenants, Defeasance, Placement of cash or securities into an escrow or trust account to be used by the escrow s ent or trustee for the payment of principal of and interest on bonds when due, l efeased bonds are no longer treated as "outstanding" debt. Discount Bonds — A bonds initially sold at a price -that is less than par, meaning that the issuer receives less in payment than the stated face value of the bonds. The amount of premium is usually described as a percentage below par. (For example, a $100,000 face value bond might sell for 99% or $99,000.) A purchaser buying discount bonds must consult their tax', advisor!regarding the tai treatment of discount bonds. 1 Double -Barreled Bond — A-bond'with two -distinct revenue sourc sfple.dged to repay enti-most typically a specific (but often -narrow and subject to fluctuation) revenue stream and a broader stream such as a general obligation pledge. Downgrade — A reduction in a bond rating. Dutch Auction — An auction at which purchasers submit bids stating the lowest interest rate they will accept for a stated amount of bonds, and bonds are distributed among the purchasers, beginning with the lowest bidder, at the price bid by the last bidder to receive an allocation (the "clearing price"'). Bids will be filled frorii the lowest yield (price offering the highest premium) until the entire issue has been allocated. In the following example, bids for $10 million of bonds maturing in ten years with a 5.125 % coupon might be received as shown below. This auction will "clear" i.e., all of the 10 million will have been allocated) 5.13 % and the bonds will be sold at a price reflecting the bid yield: Bidder Bid Amount Yield Bid Allocation Received Yield 1 $1,000,000 5.115% $'1,000,000 6.130% 2 20600,000 5120 21500;000 6.130 31600,000 6.126 3;5OOjOOO 5.130 4 4,500,000 5,130 3,000,000 5.130 3,750,000 5,135 21760,000 5.140 � ... .r 7 1,600,000 5.145... _.. .-.... TOTAL. 1,010 Escrow Account — A trust account established for a particular purpose, typically in conjunction with a r funding or defeasance ofbonds, Face Amount — The principal amount stated on a bond. See also Pat- Value. Federal Tax Code or Code) — The Internal Revenue Code of 1954, as amended, and related interpretations. Financial Adviser FA — A finance professional hired to advise ars issuer on finance matters including structuring of a proposed transaction, appropriateness of issuing debt and related issues. Floating Rate Bond or Floater -- An obligation bearing interest at a variable rate that is reset periodically, ranging from daily to annually. 509180911 4 FOSTER PIEPPERPLLC Bond Basics Glossary Flow ofFunds — 'Typically a covenant r quiri F ng amountsto be paid into and out of specificfunds in a particular order, ensuring that available money is applied first to the highest priority uses. Full Faith and Credit pledge of any and all resources available to an issuer, including general taxing power, to repay its debt obligations. General Obligation — A security backed by the full faith and credit of a municipality. General obligation debt is typically thought of as being backed by cid valorem property takes. See also LIM'ited Tax General Obligation and Unlimited ax General Obligation, Grant Anticipation Note Al R-- Short -terra debt (usually three years or less) that is issued in anticipation of receiving a grant and is secured by those grant funds. Gross Revenues — Typically includes all revenues received by a project or an issuer) before payment of expenses for operation, maintenance or debt service. Guaranteed Investment Contract (GIC) — An investment vehicle in which a financial institution guarantees specified rate of return on investment. In Washington, true GICs are rare, and more commonly issuers invest bond proceeds in repurchase agreements or "repos" in which a financial institution sells investment securities to the issuer and promises to repurchase those securities at a definite time in the future for a stated price. Guaranty (Guarantee) Agreement — A form ofcredit enhancement whereby an entity independent of the issuer agrees to provide credit enhancement to an issuer. For example, a public development authority (PISA) may obtain a guarantee from the city that created it that if .the PDA is unable to make debt service payments, the city will provide additional funds to the PDA to be used for that purpose. See also Contingent Loan Agreement. Indenture or Trust Indenture — A legal document creating a "'trust estate" comprising the security for repayment of bonds. The indenture describes the terms and conditions of a bond offering, the rights of the bondholder, and the obligations of the issuer to the bondholder. Typically used in revenue transactions, and replaced by a bond ordinance or bond resolution for most general obligation bonds. Industrial Development Bead (IIIA) (ter Industrial Revenue Bond I — Tax-exempt securities sold by public agency to fin rrc-e qualifying facilities for private enterprises, such as water and air pollution control, ports, airports, resource recovery plants, and housing. The bonds are usually repaid by revenues from the corporate beneficiary. Interest Rate Scrap — An agreement between two parties to exchange future flows of interest payments. One pari agrees to pay the other a fixed rate; the other pars the first party an variable rate usually tied to a short -terra index. Inverted Field Curve — A market environment when short -terra interest rates are higher than long -terra rates. A typical yield curve slows lower short -terra interest rates and higher long-term rates. Junior Lien Bonds — Bonds issued with a subordinate claire against pledged revenues. Not associated with general obligation bonds. Lease Financings — A financing structure in which an issuer enters into.a lease for equipment and/or facilities that it typically will acquire at the end of a stipulated period. Legal Opinion — The written conclusion of lawyer about a bond's security, legality, and tax status. Letter of Credit Lf — A form of security that provides liquidity and credit support, primarily for variable rate transactions. A financial institution promises to make cash available under certain conditions for debt service payments on behalf of the issuer or to be drawn during a remarketing or mode le reset of variable rate demand and obligations. 5091802.1 5 POSTER PIEPPERFUC Bond Basics Glossary Level Debt Service — A debt service structure in which total principal and interest payments are approximately equal in each year over the life a of the debt, Limited Tax General obligation Bonds LT os — A general obligation bond that is secured by the pifedge of the full faith and credit of ars issuer, including ad valorem tax revenues, all within the property tax limits under the state constitution n withouttate law vote. SLS also o 4 n i!'maniDebt or No F'ote Debt. r Line of Credit — A type of debt instrument in which a borrower may draw funds, up to a rna imu'm amdunt, and repay the principal plus interest, which is usually a variable rate that is set at the time a draw is made. Frequently used for short -tern notes and during construction periods. i Mandatory Redemption — A required redemption of bonds or a portion of a Maturity of bonds, prior to the stated maturity. Used with terra bonds or under extraordinary circurnstances such as a default or sale ofbe d-finan ed property, Maturity ---- The date on which the principal amount of a security is due and payable. Maximum Annum Debt Service (MADS) — The highest total debt service due in any given year over the life of a bond issue. Mode or Interest Rate Mode — Provision in bond documents permitting a charge in how interest is calculated, permitting changes between f l e l rate and variable rate options, under specified circumstances, Multi -Modal Bunds •--µ A bond issue in which the method of calculating interest may be changed from one interest rate mode to another under specified circumstances. MSRII — The Municipal Securities Rulemaking ing Board. Negotiated Sale — The sale of bonds to an underwriter selected by the issuer before the sale date. Net Interest Cost NI —Represents the average coupon rate of a bond issue, weighted to reflect the te`i m of the bonds and adjusted for the premium or discount. It does not consider the time value of money, as does true interest cost (TIC).[NIC = (total coupon interest +(-) discount premium / bond years] Net Revenues — Typically defined as gross revenues less operating and maintenance expenses. Notes — Short -tern borrowings, usually maturing in less than three years. Used to cover seasonal cash flow needs or interim financing. NRMSIR — A nationally recognized municipal securities information repository designated by the SEC. Official. Statement S — A document prepared to provide potential bond purchasers with all material information about a bond issue, the security and sources of repayment for the bonds, the issuer and its financial condition. The SEC requires that an underwriter obtain from the issuer an 0 S for any publicly marketed bond issue of over 1 million. Original Issue Discount 01 / original Issue Premium IP --- The discount or premium below r above) the stated par amount of a bond that the initial purchaser pays to the issuer of a bond. For example, the coupon may be 4.00%, but the initial purchaser may offer to pay a price of 4.05% or 3.95%. The IIS has detailed rules on how bond purchasers must treat 01D or 01P for income tax purposes. Overlapping Debt — The proportionate share of debt issued by overlapping taxing jurisdictions (such as a park district or school district), in addition to an issuer's own direct debt obligations, for which the issuer's taxpayers may also be responsible. Used as a measure by bond rating agencies and potential purchasers to gauge the taxpayers' overall debt burden and their ability to repay. 50919092.1 FOSTER VIEPPE PUC Bond Basics Glossary Parity Bonds -- More than one series of bonds, which may be issued at different times, but are payable from the same source ofpledged funds and hold the same lien position against those funds. Paying Agent — A bank or trust company appointed by an issuer to receive the money necessary for principal and interest payments from the issuer and distribute those payments to bondholders.. Pay -As -You -Go Basis — A financial policy that states that capital outlays will be paid from current revenues rather than from borrowing. Pledge — The legal term for the promise of repayment, specifying the sources of repayment and any repayment - related covenants. Pledged Revenues or Pledged Funds — The money set aside or revenue stream promised to be used solely for the payment ofdebt service and to provide security for payment of debt service, as specified in the bond documents. Point — One percent of par value. Because bond prices are quoted as a percentage of $1,000#. a point is worth 10, regardless of the actual denomination of the security. Preliminary official Statement (POS) — A version of the Official Statement that is often used by analysts and potential purchasers to form preliminary assessments of creditworthiness. The POS is "deemed final" by the issuer, and contains all material information about the bond issue except for pricing, yield and maturity information (and details related to pri n , yield and rnatrur ity). 1t contains a "red herring"'disclaimer, printed in reel ink, prominently displayed along the edge of the cover, stating that orders may not be taken bald on the document. Premium Bonds — A bonds initially sold at a price that is above par, meaning that the issuer receives more in payment than the stated face value of the bonds. The amount of premium is: usually described as a percentage above par, (For example, a $100,000 face value bond might sell for 10 1 % or 101,000, producing 1 ,O 0 0 of prerniurn for the issuer..A purchaser buying premium bonds must consult their tax advisor regarding the tax treatment of premium bonds. Present Value — The current value of a cash payment or revenue stream -to be received in the future, calculated using n assumed rate of inflation or interest that could otherwise be earned, had that cash been received today. Principal — The amount borrowed on a loan, or the par value (face amount) of.a bond, A principal payment is also referred to as a "maturity" of bonds. Private Activity Bonds — Bonds the proceeds of which will be used in a private trade or business "private use" and will be repaid with funds received from a private trade or business "private payments"'). A minimal amount of private use and private payment may not cause an issue of bonds to be treated as private activity bonds. Private activity bonds may not be issued as tax-exempt bonds unless they meet the requirements under the Federal Tax Code for "qualified" private activity bonds, which may include receiving an allocation of volume cap. Private Placement — An issue of bonds that is sold directly to one or more investors. many private placements are sold as a single bond or note held by a bank and structured very similarly to a commercial loan. Other private placements may involve sophisticated security structures and may be sold to sophisticated investors. Most private placements may not be sold or remarketed by the initial purchaser to future bondholders. Qualified 501c Bonds — Bonds issued by a nonprofit 5 0 1c organization that may be treated as tax-exempt under the Federal Tax Code. Rate Covenant — A provision common to utility (arid similar enterprise) avenue bonds, in which the issuer pledges to maintain utility rates or other income streams that are necessary for bond repayment or for operations and 50918092.1 7 FoSTER Boned Basics Glossary maintenance of the bond -financed facilities) at the levels that are necessary to meet annual debt service requirements, Ratings — An evaluation performed by an independent rating service indicating the credit quality of an issue of bonds. Ratings for municipal bonds are not necessarily equivalent to ratings on corporate bonds, and potential investors should understand the bond market before making such comparisons. There are currently three major rating companies that provide ratings on municipal bonds: M ody' , Standard & Poors, and Fitch. Red Boob —Formally known as The Bona Buyer's Municipal Marketplace, this is the standard directory of underwriters, bond counsel, financial advisers, rating agencies, credit enhancement firms, and providers of derivatives and investment products. Redemption — The exchange by the issuer of cash for outstanding bonds, upon which the. bonds are no longer outstanding. - Early redemption refers to a redemption prior to the original stated maturity date, pursuant to. mandatory or optional redemption provisions. Redemption provisions are also referred to as "call" Provisions. Refunding. - A method ofrefinancing debt by selling a new bond issue to raise cash to for the redemption or defeasance of an outstanding bond issue. Refundings may be referred to as current refundings or advance refundings. • Current Refunding — A refunding of bonds that are subject to redemption within 90 days of the issuance of the new (refunding) bonds. Advance Refunding— A'refunding of bonds that are not subject to redemption with 9 ' days of thd issuance of the new (refunding) bonds, requiring the establishment of a def asaine trust or escrow for the payment of principal of and interest on the bonds until their first call (redemption) date. Reimbursement Agreement — An agreement to reimburse a provider ofcredit enhancement for any funds provided pursuant to that credit eftha em nt: Remarketing Agent - A financial institution that agrees to periodically-rernarket (arid thus set a new interest rate for) variable rate demand obligations. Remarketing Agreement — The agreement with a remarketing agent regarding its responsibilities in retfnarketing an fissure of variable-rate demand obligations. Reserve Requirement — A covenant by an issuer to maintain a debt service reserve fund & account sufficient to meet upcoming debt service requirements in the event that revenues pledged to a bond issue should be insufficient. A. reasonably required reserve, under the Federal Tac Cade, is equal to the lesser of: maximum annual debt service, 125% of average annual debt service, or 10% of the proceeds of a bond issue. SEC -- The United Mates Securities and Exchange Commission. Sinking Fund — A fund established for the deposit of money available for repayment of bonds at or prior to maturity. SINGS (pronounced "'slugs") — Securities issued by the U.S. Treasury, called the State and focalovernMn nt Series, that provide a stated rate ofinterest. They are typically purchased for deposit into a refunding escrow to carry out a refunding of bonds. Revenue Bonds — Bonds payable solely from a stated revenue stream or revenue source, arra not backed by the full faith and credit of the issuer. TFR — Stands for the federal Tax Equity and Fiscal Responsibility Act of 1982. Shorthand for certain public hearing requirements applicable to tax-exempt private activity bonds under the Federal 'fax Code. 50918092.1 FOSTERPEPPERFILK Bond Basics Glossary Tern Bona — Bonds that are payable in mandatory redemption amounts prior to the stated maturity date. For example, 1,00 0,000of terra bonds maturing in 2020 may be due and parable in mandatory redemption amounts of $300,000 in 2018, $300,000 in 2019 and $400,000 in 2020. Tax—Exempt Bunds — Bonds whose owners may treat the interest income as exempt from federal income tax, Most municipal bonds are issued as tax-exempt. Tax and Non -Arbitrage Certificate — A certificate of the issuer stating the issuer's assumptions and expectations that establish the basis for concluding that a bond issue may be treated as tax-exempt. This document describes expectations about the use of proceeds, the rate and which proceeds will be spent, and the restrictions on investment of proceeds. It also describes certain actions that an issuer may need to take in the future to maintain the tax-exempt status of the bond issue, Taxable Bernd ---- Bonds whose owners may treat not the interest income as exempt from federal income tax. Municipal issuers may issue taxable bonds for portions of projects that do not otherwise qualify for tax- xmptill. Qualified Management Contract — A contract for management of a bond -financed facility that meets requirement under the Federal Tax Code relating to private activity bonds. Typical management contracts are entered into for management of golf course facilities, restaurants and food service, or parking facilities. A management contract that is not "qualified" risks tainting an entire issue of tax-exempt bonds. 'Prue interest cost (TIC) — A method of calculating interest cost while taking into account the time value of money. Unlimited Tax General obligation Bond (UTGO) -- An issue of voted general obligation bonds by a Washington issuer, to which the issuer has pledged its full faith credit and taxing power, including a voter -approved excess property tax levy dedicated soler to repayment of the bonds and is not subject to otherwise applicable tax limitations. Variable Rate ---- An interest rate that is not fixed at a particular rate at issuance, but may change during the life of the bonds in accordance with a specified index or procedure for establishing a new interest rate. Variable hate Demand Obligation VRDO — Variable rate bonds that give a bondholder the right to put (sell) their bonds back to a financial institution at certain specified periods, usually at rate reset dates or interest nate mode change dates, allowing bondholders to decide whether to continue to bold the bonds when a new interest rate is established. Volume Cap — An allocation of private activity bond volume authorized to be issued by a particular }gond issuer, W erwor" Utility - the combined water system of the City, sanitary sewage disposal system of the City and storm and surface water drainage system, and all additions thereto and betterments and extensions thereof at any time made. Yield To Maturity — The total return on a bond, taking into consideration its coupon, length of maturity, and dollar price, Zero -Coupon Bonds — Bonds sold at asleep discount, and without a coupon, appreciating to full value at maturity. Also known as capital appreciation bonds or compound interest beads. 50918092.1 9 FOSTER PE P E PLIC 3