1. The Arbitrage Advantage in Tax-Exempt Financing HFMA Region 11 Healthcare Symposium Anne Pelej, Vice President Randal Webb, Principal Consultant

2. | 2Continuing Disclosure Issues – Material Events| 2| 2 What is Arbitrage?

3. | 3Continuing Disclosure Issues – Material Events| 3| 3 Tax-Exempt Bonds Arbitrage Taxable Securities Investment Opportunity

4. | 4Continuing Disclosure Issues – Material Events| 4| 4 Two Sets of Rules Compares Yield on Investments to Interest Paid to Bondholders Limits Investment Yield to Bond Yield Arbitrage RebateYield Restriction

5. | 5Continuing Disclosure Issues – Material Events| 5| 5 Multiple Leverage Points  Temporary Periods  13 months  3 years  Reserve Funds  Escrows Funds Yield RestrictionArbitrage Rebate  Small issuer  Spending Exceptions  6 months  18 months  24 months  Bona fide debt service

6. | 6Continuing Disclosure Issues – Material Events| 6| 6 Graphic Illustration of Arbitrage 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% Jan-00Jul-00Jan-01Jul-01Jan-02Jul-02Jan-03Jul-03Jan-04Jul-04 Investment Yield Bond Yield Positive Arbitrage Bond Yield Negative Arbitrage

7. | 7Continuing Disclosure Issues – Material Events| 7| 7 Understand the Financing

8. | 8Continuing Disclosure Issues – Material Events| 8| 8 Bond Structure  Is this a tax-exempt bond?  Are the bonds fixed or variable rate?  Is the bond hedged and/or insured?  What is the purpose of the issue?  Is the issue an advance or current refunding issue?  Is there a Construction Fund? Reserve Fund?

9. | 9Continuing Disclosure Issues – Material Events| 9| 9 Transaction Activity  Have the bonds been refunded?  Were bond proceeds remaining at the time of the refunding?  Are monies remaining in a construction fund after 3 years?  Are any funds commingled?  Is there a parity reserve?  Are you trying to meet a spending exception?

10. | 10Continuing Disclosure Issues – Material Events| 10| 10 Compliance Status  Have you passed a required payment date?  Have you had a prior computation?  Were there any special elections made?  Is the bond hedged or insured?  Do you have all required bond and transactional documentation?

11. | 11Continuing Disclosure Issues – Material Events| 11| 11 Managing Arbitrage Rebate Compliance

12. | 12 “It’s funny how two intelligent people can have such opposite interpretations of the tax code!”

13. | 13Continuing Disclosure Issues – Material Events| 13| 13 Substance vs. Form  Economic consequences overrule verbal characterization  Rules focus on - Timing - Purpose - Security

14. | 14Continuing Disclosure Issues – Material Events| 14| 14 Plan for the Future  Promote due diligence  Educate elected officials  Prepare for staff turnover  Document….document…..document…  Remember the good news

15. | 15Continuing Disclosure Issues – Material Events| 15| 15 Customize the Flow of Information  Monitor spending  Track escrowed investments  Be aware of special elections  Review investment strategies  Strategically place “gatekeepers”

16. | 16Continuing Disclosure Issues – Material Events| 16| 16 Achieve Optimum Payback  Leverage investments  Meet exceptions  Earn arbitrage  Retire bonds early  Be prepared for an audit

17. | 17Continuing Disclosure Issues – Material Events| 17| 17 Gaining an Edge Rebate Payment Fully Leveraged Investments Under Leveraged Investments Lost Opportunity Bond Yield

18. | 18Continuing Disclosure Issues – Material Events| 18| 18 Consequences of Noncompliance  Stiff financial penalties  Loss of tax-exempt status  Open season for IRS audits

19. | 19Continuing Disclosure Issues – Material Events| 19| 19 Arbitrage Rebate Reporting & Payment

20. | 20Continuing Disclosure Issues – Material Events| 20| 20 Required Documents  Official Statement  Tax Certificate  8038G  Trust Indenture  Escrow Verification Report (Refundings Only)  Cash flow transactions/ Asset Statements  SWAP Agreement

21. | 21Continuing Disclosure Issues – Material Events| 21| 21 Fund Analysis Tracking proceed investment by fund provides easy audit. Cash flow analysis helps to meet expenditure tests.

22. | 22Continuing Disclosure Issues – Material Events| 22| 22 Calculation Summary Snapshot analysis puts critical detail at your finger tips.

23. | 23Continuing Disclosure Issues – Material Events| 23| 23 Compliance Monitoring Agency Arbitrage Rebate Compliance Summary as of 1/31/04 Issue Date Original Principal Issue Name Last Report LiabilityNext Report 10/07/1993$2,405,000.00Peacock Gap Refunding10/01/1998($26,061.00)10/01/2003 01/28/1997$5,250,000.001997 Revenue Bonds05/31/2003($42,382.16)01/28/2007 06/30/1999$23,504,004.001999 TAB06/30/2003$215,345.8906/30/2004 12/06/2001$3,220,000.002001 Revenue, Series A--- 12/06/2006 10/20/2002$25,020,000.00TARB Series 2002--- 10/20/2007 04/17/2003$7,605,000.002003 Lease Revenue Bonds--- 04/17/2008

24. | 24Continuing Disclosure Issues – Material Events| 24| 24 Computation Schedules  Annual calculation on all variable rate issues and fixed rate bonds that have accrued liabilities.  1 st year, 3 rd year, 5 th year schedule for fixed rate bonds with no accruing liability.  Minimum computation schedule, every 5 years.

25. | 25Continuing Disclosure Issues – Material Events| 25| 25 Payment Requirements  Installment Dates –Every 5 years from issue date or bond year –Bond year election – first year can be shorter than a year –90% payments due within 60 days  Final Maturity –Date bonds matured or redeemed early –100% payment due within 60 days

26. | 26Continuing Disclosure Issues – Material Events| 26| 26 Filing for a Refund  Use Form 8038R for filing.  Overpayment of less than $5,000 may not be recovered before the final computation date.  Overpayment is limited to actual dollars paid.

27. | 27Continuing Disclosure Issues – Material Events| 27| 27 Leveraging the Arbitrage Regulations

28. | 28Continuing Disclosure Issues – Material Events| 28| 28 Rules of the Game  The computation uses a “future value” method for computing arbitrage rebate.  All transactions must be at market rate.  Issuers may not manipulate the rate in order to decrease the amount of receipts, or increase the purchase price to avoid rebate.

29. | 29Continuing Disclosure Issues – Material Events| 29| 29 Maximizing Cash at Issue  Parity Reserve -runs risk if all bonds default at once  Surety Bond -can be costly for disclosure reporting

30. | 30Continuing Disclosure Issues – Material Events| 30| 30 Creating the Best Bond Yield  Fixed Rate Bond Cost of credit enhancements increases arbitrage yield  Variable Rate Bond Manipulation of annual periods prior to the 5 th bond year can reduce liability

31. | 31Continuing Disclosure Issues – Material Events| 31| 31 Allocation & Accounting Rules  Common sense principals  Consistently applied  Methodology - first in first out (FIFO) - specific tracing - ratable allocation - gross proceeds spent first (GPSF)

32. | 32Continuing Disclosure Issues – Material Events| 32| 32 Maximizing Cash Flow  Goal is to meet a spending exception, expenditures should be recorded on the on earliest date possible.  Goal is to calculate the lowest possible rebate liability on a construction fund, expenditures should be recorded on the last possible date.

33. | 33Continuing Disclosure Issues – Material Events| 33| 33 Applying Exceptions to Rebate

34. | 34Continuing Disclosure Issues – Material Events| 34| 34 Common Exceptions  Small Issuer Exception  Spending Exceptions  Bona Fide Debt Service Funds

35. | 35Continuing Disclosure Issues – Material Events| 35| 35 Small Issuer Exception  General taxing powers  Not “Private Activity” Bonds  95% or more proceeds used toward local government activities  Aggregate tax-exempt debt must not exceed $5 million within a calendar year

36. | 36Continuing Disclosure Issues – Material Events| 36| 36 Spending Exceptions  Six Month Spending Exception  Eighteen Month Spending Exception  Twenty-Four Month Spending Exception

37. | 37Continuing Disclosure Issues – Material Events| 37| 37 Six Month Exception Applies to any type of tax- exempt issue 501(c)(3) have additional 6 months to spend 5% of proceeds Private activity bonds are not afforded the additional 6 months

38. | 38Continuing Disclosure Issues – Material Events| 38| 38 Eighteen Month Exception Applies to any type of tax-exempt issuance for a capital project including industrial bonds or qualified mortgage bonds

39. | 39Continuing Disclosure Issues – Material Events| 39| 39 Twenty-Four Month Exception Governmental bonds, 501(c)(3), or private activity construction bonds. 75% of proceeds to be used for construction Expenditures must be on property owned by a governmental unit or 501( c)(3).

40. | 40Continuing Disclosure Issues – Material Events| 40| 40 Bona Fide Debt Service Funds  Used primarily to match revenue and debt service in a bond year.  Must deplete annually minus a reasonable carryover.

41. | 41Continuing Disclosure Issues – Material Events| 41| 41 Enhancing Earnings

42. | 42Continuing Disclosure Issues – Material Events| 42| 42 Control Yield Restriction  Leverage Temporary Periods  Maximize Reserve Fund Earnings  Carefully match liquidity to need

43. | 43Continuing Disclosure Issues – Material Events| 43| 43 Temporary Periods  Three Year Temporary Period  Five Year Temporary Period  Working Capital Expenditures/Operating Expenses  Pooled Financings

44. | 44Continuing Disclosure Issues – Material Events| 44| 44 Reasonable Required Reserve  Should not exceed the lesser of –10% of principal amount –Maximum annual debt service –125% of the average annual debt service  Excess Reserve Portion must be yield restricted

45. | 45Continuing Disclosure Issues – Material Events| 45| 45 Match Liquidity to Need  Ladder long-term investments  Monitor construction schedules  Review overall all performance

46. | 46Continuing Disclosure Issues – Material Events| 46| 46 Common Errors

47. | 47Continuing Disclosure Issues – Material Events| 47| 47  Comply with both the arbitrage rebate and yield restriction regulations  Pay on time  Take into account all “Gross Proceeds”  Verify the bond yield Failure To:

48. | 48Continuing Disclosure Issues – Material Events| 48| 48  Understand the Exceptions  Remember a bond year election  Consider the impact of a refunding  Spend construction proceeds Failure To: