The "Stimulus" and South Dakota Bonds

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The "Stimulus" and South Dakota Bonds

• August 6, 2009

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Presenters

• Presented by Thomas Grimmond, Dougherty
  Company LLC

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ARRA Overview

• Signed into law February 17, 2009
• Full text available at www.tinyurl.com/avu66p
• Section-by-section summary available at
  www.tinyurl.com/cx64tg

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New Taxable Bonds Overview

• Tax credit bonds in brief
• - Investors receive interest credits
• - Interest and credits taxable
• - New under ARRA credit vs. direct pay
• Three new kinds under ARRA
• - Qualified School Construction Bonds
• - Build America Bonds
• - Recovery Zone Economic Development Bonds

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New Taxable Bonds Overview

• New for federal (not state) law purposes
• May be issued in 2009 and 2010
• Most requirements of tax-exempt bonds,
  including arbitrage rules (subject to certain
  exceptions) apply to all of the new taxable
  bonds

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Qualified School Construction Bonds

• Authorized Uses
• - Build, rehabilitate, repair public schools
• - Acquire land for public schools
• - Acquire equipment for use in financed facility
• - Costs of issuance (up to 2)
• Volume Cap
• - 11 billion for each of 2009 / 2010 nationwide
• 29,884,000 for 2009 for South Dakota
• Marketability

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Qualified School Construction Bonds

• Bondholder Credit Only (no direct pay option)
• - Maximum maturity and credit amount determined
  according to schedule published by Bureau of
  Public Debt as of sale date
• - Credit amount determined to allow no
  discount, 0 financing to issuer
• - Tax Credit Rate 7.17 on a 15 year term

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Qualified School Construction Bonds

• Pending further guidance, issuance must be
  reported on Form 8038
• Federal prevailing wage (Davis Bacon Act)
  requirements apply
• - Bidders must pay the prevailing union wage for
  the project

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Qualified School Construction Bonds

• Advantage of QSCB
• - 0 Interest expense to school district
• - Interest expense savings on a 2.4 million QSCB
• 866,000
• Disadvantages
• - Marketability

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Build America Bonds (BABs)

• Issuer may elect direct payment in lieu of
  bondholder credit
• - Direct payment or credit 35 of interest
  payable
• BAB are taxable bonds why would a tax-exempt
  issuer want to issue taxable bonds
• Authorized Uses are same as tax-exempt
  governmental (non-private activity) bonds,
  except
• - Direct pay BAB proceeds usable only for new
  capital expenditures, reasonably required
  reserve funds, COI (up to 2)

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Build America Bonds (BABs)
Potential savings to Issuer
On a 10 million bond issue this savings could be
over a 1 million
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Build America Bonds

• No national volume cap
• Direct payment mechanics
• - Issuers must file new Form 8038-CP for each
  interest payment date
• - Fixed rate BABs Form 8038-CP must be filed
  45-90 days before applicable interest
  payment date issuer receives payment
  within 45 days after IRS receives form
• Variable rate BABs issuer receives payments
  reimbursing quarterly interest costs Form
  8038-CP must be filed 1-45 days after the last
  interest payment date within the applicable
  quarterly period

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Build America Bonds

• BABs may not be issued with more than a de
  minimis amount of premium
• Issuance of BABs must be reported on Form 8038-G
  in accordance with more detailed IRS guidance
• Federal prevailing wage (Davis Bacon Act)
  requirements do not apply

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Recovery Zone Economic Development Bonds

• A subspecies of direct pay BABs
• - Direct payment 45 of interest payable
• Proceeds must be spent for projects within
  certain geographic areas
• - Federally designated empowerment zones or
  renewal communities
• - Issuer-designated recovery zones areas
  with significant general distress, home
  foreclosure, unemployment, or poverty
  rates, and areas economically
  distressed because of military base
  closure/realignment

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Recovery Zone Economic Development Bonds

• Authorized Uses
• - Capital expenditures for property in zone
• - Public infrastructure and facilities in zone
• - Job training and educational programs
• - Reasonably required reserve funds
• - Costs of issuance (up to 2)

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Recovery Zone Economic Development Bonds

• Volume Cap
• - 10 billion for 2009 / 2010 combined
  nationwide
• - Allocation procedures expected to be
  released by IRS within next few weeks
• Federal prevailing wage (Davis Bacon Act)
  requirements apply

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New Tax-Exempt Bonds

• Recovery Zone Facility Bonds
• - A new kind of private activity bond
• - Proceeds may be used for depreciable property
  within a recovery zone, used in connection
  with borrowers conduct of a qualified
  business
• Tribal Economic Development Bonds
• - Tribal governments may issue these bonds for
  the same purposes as state or local
  governments issue tax-exempt bonds

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South Dakota Considerations Overview

• Does it constitute debt for constitutional
  purposes
• - School Districts 10
• - Cities 5 for any purpose, additional 10
  for water sewer with 50 voter approval

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South Dakota Considerations School Districts

• General Obligations
• - SDCL ch. 13-19 voter approval 60
• Capital Outlay Certificates (3 per 1000)
• - SDCL ch. 13-16
• ? Under 1.5 by resolution
• ? Over 1.5 hearing and resolution (referable)
• Covenants of outstanding indebtedness

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Expanded Bonding Authority

• Qualified Zone Academy Bonds (QZABs)
• - Provide no discount, 0 financing for
  qualified zone academies
• - Authorized uses renovate buildings, acquire
  equipment, develop course material, train
  teachers and personnel
• - Impact of ARRA raises nationwide 2009 volume
  cap to 1.4 billion (3,538,000 for SD)
  authorizes 1.4 billion for 2010

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Expanded Bonding Authority

• New Clean Renewable Energy Bonds (New
  CREBs)
• - Finance facilities that generate electricity
  from renewable sources
• - Impact of ARRA raises nationwide volume cap
  to 2.4 billion, to be divided equally among
  three purposes state and local government
  projects projects of public power providers
  projects of electric co-ops

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Incentives for Investors

• Additional interest expense deduction
• - 80 of interest expense allocable pro rata to
  tax- exempt bonds now deductible for financial
  institutions (for investment of up to 2 of
  their assets in tax- exempt bonds issued for
  new projects in 2009 / 2010)

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Incentives for Investors

• New bank qualification rules for bonds issued in
  2009 / 2010
• - Annual per-issuer limit raised from 10
  million to 30 million
• - Limit passes through issuers to 501(c)(3)
  borrowers in conduit deals

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Incentives for Investors

• Alternative Minimum Tax Changes for bonds
  issued in 2009 / 2010
• - Interest on private activity bonds not
  subject to AMT
• - Interest on tax-exempt bonds not included in
  corporate AMT adjustment
• - For above purposes, refunding bonds treated
  as issued on date of issuance of refunded
  bonds

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Incentives for Investors

• Alternative Minimum Tax Changes for bonds
  issued in 2009 / 2010, continued
• - For bonds issued in 2009 and 2010 to refund
  bonds issued in 2004, 2005, 2006, 2007, or
  2008, interest not subject to AMT and not
  included in corporate AMT adjustment based on
  current earnings

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For More Information

• For more information on any of todays topics
  after the seminar, please contact
• Thomas Grimmond, Dougherty Company LLC
• 605-339-9800 or tgrimmond_at_doughertymarkets.com

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Presenter Biographies

• THOMAS GRIMMOND is a senior vice president at
  Dougherty Company based in Sioux Falls. As an
  investment banker, Tom handles the financial
  modeling of issuers' capital requirements. Since
  joining Dougherty in 1992, Tom has structured
  financings for colleges, school districts,
  municipalities, and counties using certificates
  of participation, general obligation bonds,
  revenue bonds, and other obligations and revenue
  sources. His notable projects include financings
  for the Sioux Falls Convention Center and Sioux
  Falls Lewis Clark Project. Tom is a past
  council member for the City of Tea and served on
  the Revenue and Taxation Policy Committee of the
  South Dakota Municipal league. He was also a
  member of the South Dakota Army National Guard
  and served an 11-month activation in support of
  Operation Enduring Freedom in 2003.