Handouts and presentations are available online at Full Disclosure: Your City's Responsibilities in Bond Sales Michael Maloney, Vice President, D.A. Davidson & Co. Chip Schultz, Managing Director, D.A. Davidson & Co. Gail Biggart, Associate, D.A. Davidson & Co.

Initial Overview Most every city has issued or contemplated issuing debt to finance various projects in their community, through sources including: ― Municipal Bond Market ― Local Banks ― State or Federal Loan Programs (Iowa Finance Authority/USDA) As the level of required transparency increases due to regulations, it is important for City officials to understand their obligations to current debt holders and potential purchasers of debt when they consider future financing. ― Awareness ― Responsibility ― Ongoing Compliance 2

Municipal Securities Are Unique Municipal issuers enjoy tax-exempt status: ― IRS code subtitle 18, part III, section 103(a) allows for the issuance of tax-exempt securities. Municipalities may issue debt on their own behalf or act as a conduit for other governmental entities or private entity borrowers. ― Repayment of debt is subject to legal agreements. Issuers are authorized by State law to issue debt for a variety of different purposes such as street or utility financing. ― Financings may be limited by legal (debt capacity), credit (debt burden) or market (tax or utility rates) factors, depending on the type of debt to be issued. ― There may be unique procedural requirements (public hearings, referendum, etc.) for each issue. 3

Types of Financing for Iowa Municipalities General Obligation (G.O.) Essential Corporate Purpose General Obligation (G.O.) General Purpose Urban Renewal (Tax Increment) – G.O. or Revenue Bonds Local Option Sales Tax – G.O. or Revenue Bonds Special Assessments – Revenue Bonds Enterprise Fund (Utility) Revenue Bonds Interim Financing (Project Notes) Lease Purchase Contract (General Fund) Disaster Recovery 4

Parties Involved in Debt Issuance Issuer – entity planning to issue debt. Bond Counsel - provides an objective legal opinion on the validity (a state law issue) and tax exemption (primarily a federal tax law issue, but occasionally both a federal and state law issue). * Debt cannot be sold without the opinion of a recognized bond counsel. Financial Advisor/Municipal Advisor – provides advice related to financing plans, proposals and documents. Bond Underwriter - purchases a new issue of municipal securities for resale. Underwriter’s/Disclosure Counsel - prepares the official statement disclosing all information pertinent to a potential bond investor. Paying Agent/Trustee - distributes funds according to the intended purpose of the bond issue. 5

Key Documents Official Statement – document that describes bond issue to the marketplace. This is the key item of communication between the issuer and potential investors. * Issuer is responsible for document regardless of who assists in assembly. Bond Resolution/Indenture Loan Agreement Bond Purchase Agreement Legal Opinion – provided by bond counsel to confirm that the bonds are valid and binding obligations of the issuer and that interest on the bonds are tax exempt (federal and/or state). Continuing Disclosure Certificate – base document that establishes the issuers ongoing requirement to provide updated financial information. 6

My City will be issuing debt, what steps should we take? Contact your legal/financial professionals. Determine if you have any existing debt currently outstanding. If so, what type (G.O./Revenue/New Project/Refinance)? Who is the current holder (local bank/municipal market)? Decide whether the City will reimburse prior expenditures with bond proceeds. Does the City have reimbursement resolution(s) in place? Identify events that have occurred that would be important to potential investors. Confirm that the necessary financial information been properly communicated to holders of existing debt per the requirements established by related issuing documents. Refer to Continuing Disclosure Certificate Consider what documents will be prepared for new issue. Official Statement Credit Highlights/Term Sheet 7

From Start to Closing Review the timeline provided by your legal/financial professionals. When will public hearings be held? How much lead time will local media outlets need for posting public hearing notices? How will documents be prepared? Does the schedule allow for adequate document review time for staff and Council members?  Official Statements should be approved by Council.  Issuer (Council/Staff) is responsible for content regardless of who prepared document. Who will contact potential investors? What documentation and analysis will be prepared for Council review? What are the wiring instructions for lender and City’s bank (if different)? What parties are responsible for closing? 8

Agreement with Investors Whether it is the local bank or national bond investors, the City likely entered into an agreement to provide information as well as make timely payments. ― This may be as simple as providing an annual audit, but needs to be noted and maintained for each separate debt issue of the City. Bond Covenants – the City may have agreed to maintain revenue stream or other terms as contained in the bond documents. ― For example, in utility revenue bond issues, the City may have agreed to a rate covenant that ensures rates are set to produce enough revenue will be generated annually to support the operation of the system as well as make debt payments. Continuing Disclosure – the City may have agreed to enter into a agreement to make certain financial information publicly available for the life of the debt issue, including: ― Annual update of financial information provided in the official statement. ― Dates specified for when information must be posted. ― Reporting of Significant Events as specified in Continuing Disclosure Certificate. ― Location where information must be made available (such as EMMA). 9

What are my City’s ongoing responsibilities? Who is purchasing the debt (local bank/municipal market)? Do you meet an exception (small issue, small issuer)? What information has the City promised to provide to investors? ― Audited Financials ― Financial and/or Operating Data ― Rate Sufficiency (debt coverage) Information ― Other Considerations When is this information due to be compiled and how does this align with the City’s audit preparation? ― Typical milestones can include 180, 270 or 360 days after Fiscal Year End. ― Key reporting deadlines should be built into the appropriate audit/budget cycle. ― Document where this information must be filed (such has EMMA). ― Identify who will compile this information (staff, dissemination agent). 10

Authority and Actions The SEC does not regulate municipal issuers, but issuers are subject to civil penalties. The SEC can bring action against issuer staff members, Council/Board members and other officials as well as professionals working with the issuer brought unprecedented actions: ― SEC penalties assessed against a municipal issuer. ― SEC charges issuer with violation of a cease and desist order. ― SEC charges a municipal issuer with false statements to bond investors. ― SEC charges a municipal issuer for materially misleading statements. 11

If my City is not regulated by SEC, then why does this matter? Just because debt was issued tax-exempt initially does not mean that the interest to the investor will remain tax-exempt. ― This is the key benefit that keeps interest rates low for municipalities. ― Post-sale requirements also include managing the spending of bond proceeds and arbitrage considerations. Investors will consider the City’s actions for all future debt issues. The SEC regulates underwriters that purchase the City’s bonds and ultimately distribute those bonds to investors. ― Rule 15c2-12 prohibits an underwriter from purchasing or selling bonds without determining the issuer has agreed to provide ongoing disclosure. ― Underwriters and purchasers of debt obligations are completing their due diligence to determine if the issuer has followed through on its obligations. ― The recent Municipal Continuing Disclosure Cooperation (MCDC) Initiative has helped bring attention to these matters. 12

MCDC Initiative – What does the City need to do? Conduct your own internal review of bond issues from the last five years. Contact your legal and financial professionals that worked on these transactions. Communicate with the underwriters that purchased these bond issues. ― Those that have contacted you already may have informed you of their intent to file or not file. Consult with staff and legal professionals to determine whether or not to self-report. ― Consider contacting underwriters to let them know your intent in advance of deadline. 13

How can the City stay in compliance going forward? Identify what requirements have been established for each outstanding debt issuance. Determine what steps are needed each year to ensure information is accurate and available by the required deadlines for filing. Designate responsible individuals (either staff members or dissemination agent) that will work annually to update and disclose necessary information. ― If a third-party is retained, consider what staff member(s) will coordinate the information gathering process. Adopt formal policies that outline the necessary steps and responsible parties so that the City has direction moving forward. ― Ensure that, if possible, more than one individual at the City has an understanding of these requirements and knows the legal/financial professionals that can assist with questions. 14

Questions? Please don’t hesitate to ask any questions you may have related to the presentation. We will do our best to answer or to direct you to best available subject matter expert. For questions related specifically to your City, we strongly suggest you consult your legal and financial professionals. 15 Michael MaloneyChip SchultzGail Biggart