Debt Issuance Manual 2007

LEAGUE OF OREGON CITIES
DEBT ISSUANCE
MANUAL
S E P T EMBER 2007
Published by the League of

Oregon Cities
DEBT ISSUANCE
MANUAL
____________________________________________________________
1201 Court Street NE, Suite 200
Salem, Oregon 97301
Phone: (503) 588-6550
Fax: (503) 399-4863
Web: www.orcities.org
www.orcities.org
DISCLAIMER: Nothing in this manual should be construed or relied upon as legal or financial advice.
Instead, this manual is intended to serve as an introduction to the general subject of debt issuance, from
which better informed requests for advice, legal and financial, can be formulated.
All rights reserved. No part of the League of Oregon Cities Debt Issuance Manual may be reproduced or
transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or
any other storage and retrieval system, without written credit given to the League of Oregon Cities.
ACKNOWLEDGMENTS
The inaugural 2007 edition of the League of Oregon Cities Debt Issuance Manual has been
developed to assist city officials with public finance and debt issues, taking into account the laws
governing public finance in Oregon. This significant undertaking developed as a result of
comments and conversations at the annual Bonds and Ballots conference which the League of
Oregon Cities Oregon Local Leadership Institute jointly offers with the Oregon School Boards
Association.
The Manual covers the basic financing tools available to fund public projects and many of the
requirements for using each tool. In addition, steps for the approval and issuance of bonds and
levies have been included. This publication will be useful for the lay council person or citizen,
as well as the citys finance professionals, the city manager, city attorney and others.
This document represents the combined work effort of the staffs of the League of Oregon Cities,
the Pacific Northwest offices of the law firm Orrick, Herrington & Sutcliffe LLP, the investment
banking firm Seattle Northwest Securities Corporation and the public relations firm of C&M
Communications.
The principal inspirations for this publication are Jennie Messmer of the League of Oregon Cities
and Douglas Goe, partner in-charge of the Pacific Northwest offices of Orrick, Herrington &
Sutcliffe LLP. David Taylor, Vice President, Seattle Northwest Securities Corporation, is
especially commended for his singular authorship of many of the chapters in the Manual.
Sincere thanks goes to Jeanne Magmer of C&M Communications for her contribution to the
Bond Election Process chapter. Our appreciation to Naomi Keck of the investment services
advisory firm Bond Logistix LLC for her review of the Eligible Investments and Bond Related
Funds chapter. The other team members from Orricks staff include Michael Schrader, Scott
Schickli, Courtney Muraski, Christine Reynolds, Greg Blonde, Angela Trout and Lee Helgerson.
Many thanks also to Dawn Evans for her review and word processing expertise and assistance in
assembling the final product.
Special recognition and acknowledgment goes to the California Debt and Investment Advisory
Commission for the use of the General Federal Tax Requirements chapter in this publication.
The 2007 Manual incorporates current requirements and laws as of June, 2007. The League
intends to periodically update the information contained in this publication in order to maintain
its currency and correctness especially in regards to changes in law or other events.
For printed copies of the Manual contact the League of Oregon Cities at (503) 588-6550 or email
to [email protected].
TABLE OF CONTENTS
PAGE
CHAPTER 1: OVERVIEW OF DEBT FINANCING ................................................................. 1
The Municipal Debt Market............................................................................................... 1
Capital Markets at Work.................................................................................................... 2
Methods of Sale ................................................................................................................. 5
The Bond Sale.................................................................................................................... 6
Frequently Asked Questions .............................................................................................. 7
CHAPTER 2: ROLES AND RESPONSIBILITIES OF PRINCIPAL PARTICIPANTS.......... 11
The Issuer......................................................................................................................... 12
Legal Counsel .................................................................................................................. 13
Financial Services ............................................................................................................ 14
Selecting the Finance Team ............................................................................................. 18
Frequently Asked Questions ............................................................................................ 19
CHAPTER 3: BASIC LEGAL DOCUMENTS ......................................................................... 21
Authorizing Resolution.................................................................................................... 21
Bond Indenture................................................................................................................. 22
Official Statement ............................................................................................................ 23
Bond Purchase Agreement............................................................................................... 23
Official Notice of Sale ..................................................................................................... 24
Continuing Disclosure Certificate.................................................................................... 25
Conduit Borrowing Documents ....................................................................................... 26
Loan Agreement............................................................................................................... 26
Insurance and Credit Enhancement Related Agreements................................................ 27
Tax Certificate ................................................................................................................. 27
Bond Counsel Opinion and Other Legal Opinions .......................................................... 28
Closing Documents.......................................................................................................... 28
CHAPTER 4: SECURITIES LAW AND DISCLOSURE ......................................................... 31
Federal Securities Law..................................................................................................... 31
Disclosure Obligation When Issuing Bonds .................................................................... 32
Disclosure Obligations Following Issuance of Bonds ..................................................... 33
Avoiding Securities Law Claims ..................................................................................... 35
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CHAPTER 5: GENERAL FEDERAL TAX REQUIREMENTS .............................................. 37
Obligations of a State or Political Subdivision ................................................................ 38
Definitions........................................................................................................................ 38
Private Activity Bonds..................................................................................................... 40
Qualified Private Activity Bonds..................................................................................... 47
Arbitrage Bonds ............................................................................................................... 50
Rebate Requirement......................................................................................................... 52
Rebate Exceptions............................................................................................................ 53
Fair Market Value Rules.................................................................................................. 55
Hedge Bond Restrictions ................................................................................................. 55
Refunding Bonds ............................................................................................................. 56
Federal Tax Limitations on Investing Bond Proceeds..................................................... 57
CHAPTER 6: STATE AND LOCAL GOVERNMENT LAW AND DEBT POLICY ............. 61
Home Rule and City Charters .......................................................................................... 61
Initiative and Referendum Powers................................................................................... 62
Debt Policy....................................................................................................................... 63
Capital Improvement Plans.............................................................................................. 64
Municipal Debt Advisory Commission ........................................................................... 65
CHAPTER 7: GENERAL OBLIGATION BONDS .................................................................. 69
Electoral Requirements.................................................................................................... 69
Allowable Use of Proceeds.............................................................................................. 69
Debt limitations................................................................................................................ 70
Notice of Classification of Uses ...................................................................................... 71
Structuring of General Obligation Bonds ........................................................................ 71
Interest Rate Swaps with General Obligation Bonds....................................................... 73
CHAPTER 8: FINANCING AND LEASE PURCHASE AGREEMENTS .............................. 77
Limitations ....................................................................................................................... 77
Financing Agreement Documentation ............................................................................. 78
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Credit Structures .............................................................................................................. 79
CHAPTER 9: TAX INCREMENT AND ASSESSMENT FINANCINGS ............................... 83
Tax Increment Financing ................................................................................................. 83
Assessment Based Financings ......................................................................................... 85
CHAPTER 10: REVENUE BONDS .......................................................................................... 89
Uniform Revenue Bond Act ............................................................................................ 89
Unique Credit Features of Revenue Bonds...................................................................... 90
CHAPTER 11: CONDUIT REVENUE BONDS ....................................................................... 93
Legal Authority: Constitutional, Statutory and Administrative Rule Provisions ........... 93
Policy Considerations and Approval Process .................................................................. 95
Authorized Projects.......................................................................................................... 96
Security and Sources of Repayment Revenues................................................................ 96
General Types and Purposes............................................................................................ 96
Special Tax Considerations.............................................................................................. 98
CHAPTER 12: NOTES, SHORT-TERM AND INTERIM FINANCINGS ............................ 101
Legal Authority.............................................................................................................. 102
Approval Process ........................................................................................................... 102
Manner of Sale............................................................................................................... 102
Security and Source of Repayment Revenues ............................................................... 103
Investment of Proceeds and Interest Earnings ............................................................... 103
General Types of Short-Term Obligations .................................................................... 103
Other Forms of Short-Term Borrowings ....................................................................... 108
CHAPTER 13: REFUNDINGS................................................................................................ 111
Reasons for Refunding................................................................................................... 111
Types of Refundings ...................................................................................................... 113
Frequently Asked Questions .......................................................................................... 114
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PAGE
CHAPTER 14: INTEREST RATE SWAPS AND OTHER DERIVATIVE FINANCIAL
PRODUCTS..................................................................................................... 117
Legal Authority: Constitutional, Statutory, and Administrative Rule Provisions ........ 117
Policy Considerations and Approval Process ................................................................ 118
Using Interest Rate Swaps and Other Hedges ............................................................... 118
Documentation of Interest Rate Swaps.......................................................................... 119
Evaluating and Managing Interest Rate Swap Risk....................................................... 119
Selection of Finance Team and Swap Counterparties ................................................... 121
Disclosure and Financial Reporting............................................................................... 121
CHAPTER 15: LOCAL OPTION OPERATING AND MAINTENANCE LEVY................. 123
Definition and Purpose .................................................................................................. 123
Legal Authority and Approval Process.......................................................................... 123
Security and Source of Repayment................................................................................ 123
CHAPTER 16: BOND ELECTION PROCESS ....................................................................... 127
The Bond Election Process ............................................................................................ 127
Ballot Title Wording Requirements............................................................................... 129
Conducting Successful Bond Elections ......................................................................... 132
Preparing City Information ............................................................................................ 134
Election Dos and Donts for Public Officials ................................................................ 137
Public Employee Election Guidelines ........................................................................... 139
CHAPTER 17: STRUCTURING THE BOND ISSUE ............................................................ 143
Fundamentals of Leveraging.......................................................................................... 143
Sizing Bond Issues......................................................................................................... 144
Issue Affordability ......................................................................................................... 145
Bond Characteristics ...................................................................................................... 146
CHAPTER 18: CREDIT RATINGS AND ANALYSIS .......................................................... 149
Ratings and Rating Agencies ......................................................................................... 149
Determining a Rating..................................................................................................... 150
Assigning Ratings .......................................................................................................... 151
Deciding to Apply for a Rating...................................................................................... 152
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Bond Insurance .............................................................................................................. 152
Letters of Credit ............................................................................................................. 152
CHAPTER 19: ELIGIBLE INVESTMENTS AND BOND RELATED FUNDS ................... 155
Eligible Investments....................................................................................................... 155
Bond Related Funds....................................................................................................... 163
APPENDIX A: GLOSSARY TERMS AND CONCEPTS ................................................... A-1
APPENDIX B: U.S. GOVERNMENT AND AGENCY SECURITIES.................................. B-1
APPENDIX C: LEGAL REFERENCES.................................................................................. C-1
APPENDIX D: PUBLIC FINANCE RESOURCES AND CONTACTS ................................ D-1
CHAPTER 1
OVERVIEW OF DEBT FINANCING
This chapter introduces the financial markets and its players and discusses how debt is sold or
placed with investors. Chapter 2, Roles and Responsibilities of Principal Participants
discusses the roles and responsibilities of the issuers elected officials and staff and other market
participants.
Oregon municipalities are frequent issuers of tax-exempt bonds. From 1997 through 2006,
Oregon municipalities (defined as all municipal issuers except the State of Oregon and education
districts such as K-12 and community colleges) issued $15.4 billion of debt. This represented
about 37 percent of the total tax-exempt debt issued in Oregon by all issuers during that period.
For perspective, during the same period, the total municipal bond volume nationally was more
than $3 trillion. The total Oregon market represented about 1.4 percent of the national market,
and Oregon municipalities represented less than half of one percent of the national market.
Why Debt? Borrowing for major project and infrastructure needs has a clear place in good
public policy decision making. Borrowing allows municipalities to preserve existing resources
for current needs. Borrowing accelerates the delivery of a needed asset or project. Borrowing
can better allow a municipality to match expenditure of funds with a projects useful life and
establish better ongoing fiscal discipline. In some cases, such as general obligation (GO) bonds,
borrowing can provide new sources of funds to repay debt service not otherwise available to the
municipality. Borrowing also may be necessary to bridge short term cash flow mismatches
between operating needs and availability and timing of certain revenues.
THE MUNICIPAL DEBT MARKET

The municipal bond market is characterized by several key features. First, the market is
populated with an enormous variety of credits. Second, most municipal bonds are issued as
tax-exempt, which means the interest earned by bondholders is not subject to federal (and also
usually state, if applicable) income taxation.
A VARIETY OF CREDITS
Nationwide, thousands of municipal bonds are issued every year. In some years more than
10,000 issuers sell tax-exempt debt. Issuers include the full range of municipal jurisdictions such
as:
States, cities, counties
School districts and community colleges
Chapter 1 Overview of Debt Financing
Municipal power authorities
Transportation districts
Urban renewal agencies
Hospital districts
Housing agencies
Park, fire and water districts
Private universities and other types of 501(c)(3) non-profits such as museums
Oregon has all of these types of municipal entities and numerous others, all of whom have
varying kinds of issuance authority. No two authorities are exactly the same.
Because these issues are sold under different state laws, the municipal market is sometimes more
regional than national. While Oregon municipal bonds usually are sold to investors nationwide,
issuers are likely to find that financial consultants and bond counsel for their issues often come
from regional or local service providers who understand local laws, regulations and customs.
This is true for local issuers in other parts of the country as well.
TAX EXEMPTION OF INTEREST
Federal tax law allows municipal issuers to sell tax exempt debt under certain circumstances.
The interest paid by these securities is exempt from federal, and in the case of Oregon issuers,
Oregon personal income taxes. This tax-exempt status makes municipal bonds a desirable
investment for investors who are willing to accept lower interest rates in exchange for the tax
advantages municipal bonds offer. Tax-exempt status is a significant benefit to the issuer
because of the lower interest cost.
Tax exemption comes at a cost. Issuers must comply with numerous federal rules regarding the
use of proceeds, the investment of proceeds and other aspects of the transaction. Chapter 5,
General Federal Tax Requirements discusses federal tax law requirements and compliance. It
is also worth noting that tax exemption of municipal bond interest is not constitutionally
protected. Congress may revoke tax exemption of interest or otherwise change aspects of the
federal tax law at any time.
Issuers both in Oregon and nationally also sell some taxable debt because those issues may not
comply with all the aspects required of tax-exempt debt.
CAPITAL MARKETS AT WORK

Most municipal debt issues are sold through the basic capital market mechanism. Rather than
sell the debt directly to investors, municipalities typically use the services of an underwriter. The
underwriter purchases the debt from the issuer and resells the bonds to investors. Issuers find
this efficient because they do not need to maintain the specialized expertise needed to place debt.
This method also typically results in the lowest cost of capital. Rather than try to find a single
lender who will lend the issuer the needed amount of money, the issuer is, via the underwriter,
able to tap into dozens or hundreds of investors all willing to loan the issuer smaller amounts by
purchasing specific pieces or maturities of a larger bond issue.
The debt markets are different than the stock markets. Stock markets provide for a single
exchange where all stock of a company is bought and sold. Stock markets provide for a single
price discovery function; that is, buy or sell orders for a security that are placed at the same
time are all executed at the same price. Bond markets are different in that the bond market is
made up of hundreds of firms trading bonds. There is no central pricing function like in a stock
exchange. Electronic trading, improved secondary market disclosure and increased price
transparency has substantially improved bond pricing in the last decade, but the municipal bond
market is still less commoditized than the market for U.S. Treasury securities.
In order for capital markets like the bond market to work well, investors need to:
Have confidence in the integrity of the system
Have belief they will be repaid
Have adequate information about the securities traded and sold and
Have liquidity (the ability to get in and out of an investment)
All of these themes form the foundation of much of the underlying details in this manual. To the
extent a bond issue can fulfill the above criteria, the issue will be well received in the
marketplace and, for example, obtain the best possible interest rates. To the extent any of these
factors are weak, the ability of the issuer to obtain the best price, or at some point to sell the issue
at all, will be diminished.
To better understand the roles of the key participants in the bond markets, we briefly discuss the
role of the investor and the underwriter and how bonds are sold in the marketplace.
THE INVESTORS
Investors purchase the municipalities debt. Because interest on municipal debt is usually
exempt from federal and state taxes, these investors are looking to shelter income from taxation.
The demand for tax-exempt debt is always subject to investors evaluation of tax-exempt
securities versus higher yielding but taxable investments such as corporate stocks and bonds or
U.S. Treasury bonds.
The following table shows why an investor will accept substantially lower interest rates on tax
exempt bonds.
Tax Exemption Benefit
Type of Bond
Cash Investment
Annual interest payment
Less: federal income tax (33%)
Net after tax return
4.00% Tax exempt

$10,000
$400
$0
$400
5.97% Taxable
$10,000
$597
$197
$400
After tax yield
4.00%
4.00%
(1)Assumes a marginal federal tax rate of 33%

and no effect of State of Oregon income taxes.
(2) Does not adjust comparable yields for
credit quality.
The investors willingness to accept a much lower interest rate on tax exempt debt directly
benefits the municipal issuer.
Municipal issuers typically have no direct contact with the investors who purchase the
municipalitys bonds. Municipalities rely on underwriters to act as market intermediaries.
However, issuers should understand what kinds of investors purchase municipal securities, what
their preferences are and how those preferences will impact the issuers debt structure and
security features.
Most investors who purchase municipal securities are seeking a fixed rate of return on their
investment that is exempt from federal (and potentially state) income tax. These investors range
from individuals to large institutional investors such as property and casualty insurance
companies, money market funds and mutual funds. Broadly, the classes of investors who
purchase municipal securities include:
Retail or individual investors
Retail investor proxies such as bank trust departments, investment advisors, taxexempt mutual funds and tax-exempt money market funds
Institutional investors such as property and casualty insurers, corporations and bank
portfolios
Because investors interest in tax-exempt debt fluctuates with the investors profitability or tax
status and the relative supply of tax-exempt bonds in the market, it is the underwriters job to
find the most aggressive set of buyers for an issuers offering on the day it comes to market.
Sometimes municipalities will actually sell their securities directly to investors. This generally
occurs when vendors finance equipment or when municipalities place an issue directly to a bank
portfolio.
UNDERWRITING SYNDICATES, CO-MANAGERS AND THE SELLING GROUP
Underwriters buy the bonds from an issuer and resell them to investors. Underwriters not only
find investors for the issuers bonds, they also take the risk out of the transaction for the issuer.
Once the underwriter makes a firm offer to purchase the bonds, the issuer is not at risk if the
underwriter cannot sell the bonds based solely on interest rate increases in the market.
Sometimes, underwriters join together in a syndicate. Having more than one underwriter
spreads the financial risk if the bond sale does not go well. When there is more than one
underwriter in a deal, one firm leads the transaction while the others take secondary roles. The
lead firm is called the lead underwriter or senior manager. Other underwriters are called
co-managers. There may be one or several co-managers, or none.
The senior manager is responsible for interacting with the issuer, setting pricing terms for the
bonds, managing the sale and allocating bonds to all investors at the sales conclusion.
Co-managers assist in the bond sale itself but generally have limited roles in other aspects of
planning and executing the transaction.
Syndicate firms agree upon a target percentage of the bonds to sell. For example, the senior
manager may get 70 percent while a co-manager may get 30 percent. These percentages are only
guidelines because actual orders dictate the number of bonds each firm receives at the end of the
sale. However, if bonds go unsold, these percentages dictate each managers liability for the
unsold bond inventory.
Selling group members are not syndicate members. Selling group firms are securities firms
that have the right to put in orders for a new bond issue. Unlike co-managers, selling group
members are not guaranteed that bonds will be allocated to them. However, selling group firms
do not have any liability to take bonds if the sale goes poorly, nor are they required to order any
bonds.
METHODS OF SALE
We now know that underwriters buy the bonds from issuers and resell them to investors. But
how do the prices (that is, interest rates and terms) get established if there is no central pricing
function like a stock market? The simple answer is that bond prices are like any other financial
product prices are established by a negotiation between the investors and the underwriters. The
investors clearly want to pay the lowest possible price (that is, get the highest possible interest
rate or return) while underwriters want to get the highest possible price (that is, the lowest
interest rate) for their clients. With dozens of issues in the market on any given day, and with
increased price transparency, the negotiation is often over very small changes in rate or yield, as
little as one or two basis points or 0.01 0.02%. The general level of interest rates for any
given type of security are already pegged to what is going on with overall rates in the Treasury
market.
Municipalities may sell bonds in the public debt markets by:
Putting the bonds out for a public bid (competitive sale)
Working with a designated underwriter (negotiated sale)
Issuers may also privately place debt issues directly with investors. This may take the form of a
direct loan from a commercial bank or a placement to a limited number of sophisticated
investors.
Quality of service, issue size, credit rating, need for flexibility, costs of issuance, and market
conditions, all come into play when deciding whether to privately place a debt issue or sell in the
public markets through either a public bid or a negotiated process.
Issuers choose a method based on which option offers the best overall service at the most
reasonable cost for the time period of the bond sale.
THE BOND SALE

Issuers can choose from any number of financing process models. Some issuers choose to
engage a financial advisor. Many larger municipalities elect to have an ongoing financial
advisory relationship with a firm that advises them on debt related matters. The financial advisor
will assist with the planning and execution of a competitive sale or assist with the selection of an
underwriter in the case of a negotiated sale. Smaller entities may engage a financial advisor to
assist only with a particular debt related project. Some municipalities elect not to use a financial
advisor and work directly with their underwriter of choice on debt related matters.
NEGOTIATED SALE
Bonds may be sold through negotiation with an underwriter. By negotiating the sale of a bond
issue, the municipality maintains control over which underwriting firm markets its bonds. One
underwriting firm may be more qualified than another to structure or market an issue with unique
aspects.
If a municipality negotiates the bond sale with an underwriter, the municipality gains flexibility
in adapting to changing conditions. Within the municipalitys need for project money, the
underwriter recommends the timing of an offering to coincide with a favorable market and
receptive investors in an attempt to get the best interest rate for the issuer.
Once a target sale date is selected, the underwriter continues to monitor the market and advise
the issuer whether the sale should be accelerated or moved back, depending on market
conditions.
When the week of sale arrives, the underwriter provides preliminary interest rate estimates to the
issuer, along with any available information regarding comparable sales. The day before the
sale, the underwater schedules a pricing conference with the issuer to confirm the interest rates
that the underwriter will offer to investors the next day.
On the day of sale, the actual sale happens quickly. Typically, the formal sale or order period
begins early in the morning and is concluded by midmorning. The underwriter tracks the amount
of orders versus the amount of bonds available in each maturity. Where orders strongly exceed
bonds available, the underwriter may be able to lower interest rates. Where orders do not match
the amount of bonds available, the underwriter may need to raise rates in order to attract
sufficient orders to sell the bonds. The underwriter reviews the results with the issuer and
recommends whether any adjustments are necessary to conclude the sale process. The
underwriter often takes a certain amount of unsold bonds into inventory to facilitate the
completion of the underwriting in a timely manner.
Once the issuer and underwriter agree on terms, they will execute a bond purchase agreement
(BPA) that is the legally binding sale document.
COMPETITIVE BID SALE

Bonds may be sold by public competitive sale. In a competitive sale, the terms of the issue, such
as size, structure, maturity dates, amounts and redemption provisions, are determined several
weeks prior to the sale and then published in a official notice of sale. Issuers strive to provide
adequate notice of the sale to potential bidders in order to maximize the number of bids received.
Official Notice of Sale. The official notice of sale contains the bidding rules, constraints,
the amount and handling of the good faith deposit submitted by each bidder with its bid, and the
method for evaluating the bids the issuer receives for the purchase of its bonds. The issuer
establishes these terms in consultation with its financial advisor and bond counsel. Bond counsel
typically prepares the notice of sale.
Bidders (underwriters or syndicates of underwriters) base their bids on the salability of the debt,
the stability of the bond market, and the pool of potential securities purchasers. The successful
bidder establishes its reoffering prices to investors by considering comparable sales, what its
investors are willing to pay, and the supply of bonds in the market waiting to be sold.
In a competitive bid situation, the issuer hopes to receive numerous bids in response to its notice
of bond sale, thereby increasing its chances of paying the lowest possible interest rate on its debt.
To increase the odds of this happening, the bond sale should be set at a date and time when the
bond market is most receptive to a new issue. Bids typically are calculated by the true interest
cost (TIC) method (see Appendix A, Glossary Terms and Concepts).
The financing team should set the bond sale date that best meets the issuers needs to receive
issue proceeds. Ideally, the sale should be held at a time when the market is not saturated with
other similar issues. Sales on Tuesday, Wednesday and Thursday are preferable. Sales
scheduled for Mondays and Fridays and days bracketing holidays and long weekends are less
common but can be successful as well.
Technology continues to change the way competitive sales are conducted to increase the number
of bids an issuer receives. For example, bids are now commonly received electronically via the
Internet-based bidding platforms. Surety policies rather than actual checks typically secure good
faith deposits.
FREQUENTLY ASKED QUESTIONS

I dont understand the difference between what the federal government regulates and what the
states regulate?
State law governs what kinds of borrowing authority a municipality has and how it may be
exercised. Laws differ widely between states what may be legal in one state may not be legal
in another. Federal law governs whether interest on the debt may be exempt from federal
income taxation and certain aspects of public offerings.
Is it true that federal tax exemption of interest is not constitutionally protected?

Yes. Tax-exemption status is completely at the discretion of the United States Congress and
can be expanded, modified, curtailed or revoked by an act of Congress. The last sweeping
changes to tax exemption rules was the Tax Reform Act of 1986, which introduced the arbitrage
and rebate rules and significantly reduced the types of debt that qualified for tax-exempt status.
Do I need to do a bond issue that is sold to the public? Why not a bank loan?
A bank loan may well indeed be a viable financing option for a prospective issuer. In particular,
banks may be excellent options for smaller, shorter termed issues. Public offerings may work
better for larger and longer termed issue. Debt may also be privately placed with a limited
number of qualified investors.
What is the difference between a competitive bid sale and a negotiated sale in a publicly offered
issue?
In negotiated sales, the issuer engages the bond underwriter prior to the bond sale. The
underwriter usually does (or assists in) the structuring and analytical work for the bond issue, and
then, during the sale, the underwriter underwrites and sells the bonds as well.
In a competitive bid sale, the issuer engages a financial consultant to structure the bonds and
provide pre-issue analysis and advice. The bonds are then sold to the lowest bidding underwriter
at an advertised bid opening.
The two sale methods involve different processes, but both have similar sales results.
What official actions must the issuers governing body take on a bond election and sale?
There are two primary actions:
Adopt a resolution or ordinance authorizing the election and ballot title, if required,
and
Adopt a resolution or ordinance authorizing issuance of the bonds after an election
How much the governing body participates in the details of the process outside these actions
varies by issuer. Typically the governing body is more involved in determining the projects and
the size of the bond than in the subsequent details of the bond issuance process.
Can we sell our bonds to members of our own community? Our local brokers want some of the
bonds to sell.
An issuer can direct its underwriter to give preferential treatment to investors from within the
issuers boundaries. To do this, the issuer must use a negotiated sale so that the issuer retains
control over the actions of its underwriters.
Local brokerage offices can be good sources of sales to retail customers and can be included in
the sale as selling group members. (See Chapter 2, Roles and Responsibilities of Principal
8
Participants discussion on underwriting syndicates). However, local investors typically cannot

absorb the entire bond issue.
In addition, local sales campaigns may not be the cheapest way to sell bonds. Consequently,
local sales campaigns can conflict with the issuers responsibility to get the lowest possible
interest rates for its constituents. Municipalities should consult with their financial consultants
about including its community in a bond sale without raising issue costs.
Our council members and staff want to buy some of the bonds to show support for the city. How
do we do that?
The Council and staff must exercise extreme caution here. Technically what is good for the
Council and staff as investors, that is, higher interest rates, is bad for the municipalitys
constituents. Since the Council and staff have responsibility for approving final interest costs,
the potential for a conflict of interest is clear.
10
CHAPTER 2
ROLES AND RESPONSIBILITIES OF
PRINCIPAL PARTICIPANTS
Chapter 1, Overview of Debt Issuance presented a brief overview of how the debt markets
work and how underwriters and investors participate in the sale of bonds. This chapter discusses
the typical roles of the issuer, other key financing team members and explore in more detail what
services a municipality can expect from its financial and legal consultants.
Most municipal debt is sold as publicly offered securities. To issue publicly offered debt,
Oregon municipalities must comply with both State of Oregon and federal securities laws. State
law governs under what conditions, for what purposes and with what authority each kind of
municipality can issue debt. Federal securities laws govern the issuance of securities (bonds and
other debt instruments) to the investing public. Federal tax laws govern under what conditions
an issuer can sell tax-exempt debt. The complexity of complying with state and federal laws
usually requires a municipality to engage numerous legal and financial specialists to assist with a
debt issue. Consequently, the issuers first step in any borrowing should be to identify its
borrowing team. This team should include at a minimum:
The issuer, appropriate staff and councilors or board members
Financial consultants and legal counsel
In addition to these financing team members, issuers will encounter other participants during the
process of issuing and administering municipal bonds. These participants may include but are
not limited to:
Paying agents or trustees who serve as an interface between the municipality and the
investors who own the municipalitys bonds
Escrow agents and escrow verification agents (for refundings)
Firms that calculate and report arbitrage rebate liabilities
Various state and federal regulatory agencies
Project feasibility consultants
Ratings agencies
Bond insurers
Chapter 2 Roles and Responsibilities of Principal Participants
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THE ISSUER
The issuer is the municipality.
requirements for the debt.
The municipality is responsible for fulfilling all legal
The municipal board authorizes the process through an official action such as a resolution or
ordinance. Typically, senior staff are delegated authority by the governing body to execute
transaction details.
The issuers roles in the financing process are as follows.
GOVERNING BODY
The issuers council or board must make the major policy decisions related to any financing.
The key components of the policy decisions are included in resolutions or ordinances. Many
transactions can be authorized by a single action of the governing body, while others may require
two or more actions.
Whether the governing board is involved in a more detailed role or prefers to delegate the
authority to authorized staff is a matter of preference that will vary by municipality. Whether
actively, or through delegation, the governing boards responsibilities include:
Directing the preparation of a long-term capital construction and improvement plan
Determining the funding needs in consultation with members of the financing team
Adopting resolutions or ordinances (prepared by bond counsel) authorizing the

financing (and for general obligation bonds, authorizing the election and ballot title)
Authorizing the method of sale and the execution of all issuance related documents
and contracts
Causing publication of notices as may be required by statute or city charter
MUNICIPAL STAFF
Depending on the issuers size and administrative structure, the chief administrative officer,
finance director or other staff have responsibility for managing financing details. Staff,
following the governing bodys direction, select and oversee the financing team members.
After selecting financial experts and bond counsel, staff work with them through the preliminary
debt analysis and structuring, the election process (if necessary), and the authorization, sale,
execution and delivery of the debt investment. Specifically, staff responsibilities include:
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Providing financial consultants with the required disclosure information for the
preliminary and final official statements and providing bond counsel with project
descriptions
Providing information required by rating agencies and bond insurers
Budgeting for debt service for the specific type of bonded indebtedness and obtaining
budget committee and board approval as required by the Oregon Local Budget Law
(currently, Oregon Revised Statutes (ORS) 294.305 to 294.565)
Overseeing and participating in the bond sale process. This includes approving bond
pricing (either through negotiation or bid) and assisting bond counsel by providing all
requested closing documentation
Directing establishment of capital project funds or accounts for the deposit and
investment of bond proceeds (including calculating and paying rebates, if any, during
the life of the bonds) and debt service funds to account for the payment of principal
and interest on the bonded debt
LEGAL COUNSEL
Municipalities need at least one key legal service for a debt transaction. Specialized attorneys
called bond counsel provide two essential services in completing a debt financing:
Ensure all state and federal tax law requirements are met (and in some cases also
opine on compliance with federal securities law)
In the case of tax-exempt debt, provide an opinion to investors that the issuers debt is
valid and binding and that interest paid on the debt is exempt from federal and state
income taxes
Bond counsel firms must be nationally recognized as attorneys specializing in municipal debt
and tax law. This means that their bond opinions regarding the validity and tax-exempt status
of municipal bonds are accepted by underwriters, major banks and financial institutions and they
are included in the listing of municipal bond attorneys published in The Bond Buyers Municipal
Marketplace (commonly known as the Red Book).
In addition to bond counsel, other legal service providers may be engaged by one or more
financing team participants. Some municipalities choose to involve their local attorney in some
manner. Underwriters may require the use an underwriters counsel. In some other cases,
underwriters or the issuer may engage another firm of bond attorneys as disclosure counsel to
provided guidance and opinions on the adequacy of the debt offerings disclosure document
(generally, the official statement). Each of these legal services roles are discussed below.
BOND COUNSEL
The bond counsel assists the issuer by:
Determining which financing options comply with state statutes, the Oregon
Constitution and federal tax laws
For general obligation bonds, drafting the election and the issuers ballot title for
consideration, approval and adoption
Drafting all authorizing resolutions or ordinances necessary to complete the financing
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Reviewing and commenting on portions of the preliminary and final official

statements, directing the bid opening for a competitive bid sale, or reviewing the bond
purchase agreement for a negotiated sale
Preparing closing documents, including a non-litigation certificate, no-arbitrage

certificate and the Internal Revenue Service (IRS) information filing for execution by
the authorized municipal representative
Coordinating the delivery of the bonds and the receipt of the bond proceeds
Issuing an approving legal opinion
Preparing and distributing transcripts of the proceedings to the financing team
LOCAL ATTORNEY
While bond counsel provides the key financing documents and resolution forms, some
municipalities involve their local attorney to ensure that the municipality remains in compliance
with local laws relating to meetings, filings and other official actions related to the financing.
The local attorney may:
Provide legal counsel to the governing board and staff
Help monitor governing board meetings to insure compliance with public meetings
laws and with the municipalitys policies and procedures
Provide assistance to the bond counsel in evaluating any litigation risk regarding the
transaction
UNDERWRITERS COUNSEL
Underwriters may elect to engage their own counsel for any given transaction. Underwriters
counsel often is engaged to assist in preparation of the disclosure document, the underwriters
basic documents (such as a bond purchase agreement) and to assist in negotiating certain
transaction details. Because underwriters counsel is usually paid through an increase in the
underwriting fee, issuers typically are given some input over the selection of the firm and the
amount of their fees.
DISCLOSURE COUNSEL
In some cases, a separate bond counsel firm may be engaged to provide either the issuer or the
underwriter a specific opinion on the adequacy of the disclosure document for an issue.
FINANCIAL SERVICES
Financial services firms provide two key services for debt issuers:
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assisting in sizing and structuring the debt issue and preparing the bonds for sale to
investors
underwriting the bonds and selling the bonds to investors
Firms providing these services specialize in municipal debt issuance. Financial advisory firms
perform the first function only but do not provide underwriting services. Investment or
commercial banks may have the capability to perform either function or both.
There are many models of how financial services firms can work for a municipality. Some
issuers engage a financial advisor first then decide on whether to engage an underwriter for a
negotiated sale or sell the bonds via competitive bidding. Other issuers forego engaging a
financial advisor and work directly with an underwriting firm. Either way, the issuer can tap the
specific expertise of the financial services professionals.
FINANCIAL ADVISORS
A municipality that wishes to sell its debt by sealed bid (competitive sale) typically engages a
financial advisor. The financial advisors responsibilities for a competitive sale are similar to the
presale preparation in a negotiated sale. These responsibilities include:
Preparing recommendations on bond issue structure and timing of sale
Providing estimates of proposed debt structure tax rate impacts for general obligation
bonds
Preparing the preliminary and final official statement
Recommending and assisting the issuer in evaluating the need for a rating
Developing a ratings strategy and/or examining the feasibility of credit enhancements

such as bond insurance, if a rating is sought
Developing bid specifications for use in the official notice of sale
Assisting in closing the transaction
Financial advisors may also be asked to provide assistance in developing an investment strategy
for bond issue proceeds.
UNDERWRITERS
Underwriters are securities firms that purchase debt from the issuer and resell it to investors in
the bond market. The underwriter may purchase the bonds by bid at a public sale or through
direct negotiation with the issuer. Depending on whether the issuer additionally engages a
financial advisor, in a negotiated sale, the underwriter typically performs some or all of the
structuring and advisory duties required by the issuer prior to the bond sale.
In a negotiated sale, the underwriters investment bankers assist the municipality by:
Evaluating the issues cost by:

1) Analyzing different issue structures and their impacts on the tax rates or general
fund resources required to repay the debt
2) Providing the issuer with a cost of issuance estimate for inclusion in the size of an
issue
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Providing debt service and tax rate information for use in an election required for
general obligation bonds
Structuring the bond issue
Preparing the preliminary and final official statements in consultation with the issuer
and bond counsel
Evaluating advisability of obtaining a rating and bond insurance
Contacting rating agencies on behalf of the issuer and assisting the issuer in obtaining
a rating on the bonds, if appropriate
Establishing a marketing program and scheduling the offering and pricing
After pricing, the underwriter:
Finalizes the bond purchase agreement for approval by the governing board and
execution by city staff
Arranges for transfer of funds
Executes documentation required for the transcript of proceedings
REGISTRAR/PAYING AGENT/TRUSTEE
Generally the same entity, the registrar and paying agent are agents of a corporate trust
department of a commercial bank. Their principal functions are to:
Keep the official records on behalf of the issuer relating to bond ownership
Receive debt payments from the municipality that the paying agent uses to make
interest payments to registered bond owners on the payment dates and to redeem
principal on redemption dates
Act as Trustee for more complicated financings that require additional fiduciary
responsibilities
ESCROW TRUSTEE
For refundings, the escrow trustee (usually the same firm as the paying agent) holds funds
deposited in a refunding escrow that are dedicated to paying off the issuers outstanding debt.
The escrow trustee publishes the redemption notice, as required, and makes the refunded debt
payments from the escrow fund. There also is an escrow trustee on lease-purchase and financing
agreement transactions. The escrow trustee is the issuer of the certificated interests in the
issuers financing agreement and also performs the tasks of the paying agent. See Chapter 9,
Tax Increment and Assessment Financings and Chapter 13, Refundings for a discussion of
the legal structure of these types of financings.
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RATINGS AGENCIES
Rating agencies provide an independent evaluation of the issuers credit relative to other bond
issues and similar credits nationally. Through the rating system, an investor anywhere can
quickly judge the credit quality of an Oregon issuer even though that investor knows nothing
specifically about the issuer or its community. Chapter 18, Credit Rating and Analysis,
discusses ratings in more detail.
CREDIT ENHANCERS
Credit enhancers are firms that provide investors with additional protection against payment
default.
Bond insurance firms provide direct irrevocable insurance policies that additionally secure the
debt being insured. Bond insurance premiums are one time fees charged at closing. Insurance
policies are irrevocable once issued. Once an issue is insured, the issue can be assigned the
rating of the bond insurer. Most bond insurers are rated the highest rating level by the large
national rating agencies.
Commercial banks may provide letters of credit to certain types of transactions as well. Letter of
credit fees are charged based on the outstanding balance of the loan covered.
Purchasing bond insurance or a letter of credit is an economic decision, not a legal requirement.
The analysis is simply whether purchasing the credit enhancement will improve the interest rates
on the bond issue enough to more than offset the cost of the credit enhancement.
ARBITRAGE REBATE SERVICES
There are firms that specialize in providing arbitrage rebate services to tax-exempt bond issuers.
Many issuers engage these firms to calculate rebate liability. See Chapter 5, General Federal
Tax Requirements for an explanation of arbitrage rebate rules.
Oregon State Treasury Debt Management Division. The Debt Management Division
of the Oregon State Treasury serves as a clearinghouse for municipal debt information. With the
exception of approval of advance refunding and certain derivative oversight functions, the
Treasury does not approve or disapprove of any local debt issuance plans or take positions on
local debt issuance. However, for advance refundings, the Debt Management Division must
review and approve preliminary and final advance refunding plans submitted by the underwriter
or financial advisor.
PROJECT FEASIBILITY CONSULTANTS
Certain project based transactions require the use of a consultant with specific knowledge in
evaluating the projects feasibility. These may include consulting engineers or outside financial
analysts and project consultants.
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INDEPENDENT AUDITORS
Typically, the municipalitys auditors are not directly involved in a debt transaction. However,
under some circumstances, the underwriter may seek additional assurances from the
municipalitys auditors regarding an updated status of the issuers financial statements.
INVESTMENT ADVISORS
A municipality may engage financial experts to advise or assist them with developing and
executing an investment strategy for bond issue proceeds. The municipality may find this
service expertise in its regular financial advisor or investment banker as well.
SWAP ADVISORS
With the increased use of interest rate exchange agreements (swaps), municipalities increasingly
engage a specialized advisor with specific expertise in developing swap policies, analyzing and
advising on swap transactions and tracking the performance of swap contracts. The issuers
financial advisor or investment banker may also have such expertise.
INTERNAL REVENUE SERVICE
The IRS conducts both random and targeted audits of tax exempt issues for compliance with
federal tax law. However, under normal circumstances, an issuer will have no contact with the
IRS during the course of a typical tax exempt debt issue.
SELECTING THE FINANCE TEAM

Oregon municipalities have tremendous flexibility in selecting finance team members. Bond
counsel, underwriters and financial advisors and other consultants and service providers are
considered personal services under Oregon procurement statutes.
Consequently,
municipalities are not required to go through formal bidding processes for these services.
Municipalities in Oregon may engage finance team professionals in a manner and process that
best fits each municipalitys preferences and procedures. Municipalities with a formal debt
management policy may have addressed debt related services procurement through the policy.
Others may have procurement policies that address personal services contracts in general.
Some municipalities prefer or require a formal Request For Proposal (RFP) or Request for
Qualifications (RFQ) process. Such a process may entail a formal written RFP or RFQ
circulated with written acknowledgements of addendums and formal protest and award process
specified. The process may entail written responses to questions, a formal evaluation process
and interviews with some or all of the proposers.
Formal processes result in formal agreements for specified periods of time with a requirement
that engagements be reexamined at specific points in the future.
Many Oregon municipalities use less formal processes for selection of service professionals.
Some rely on long standing relationships with lawyers, investment bankers or financial advisors.
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Others survey their peer network and make ad hoc decisions based on each individual financing
need.

How much time does staff have to spend on a bond issue? Cant we just hire someone to take
care of it?
An issuer relies on a number of financial industry professionals to guide it through the issuance
process. However, the ultimate responsibility for the bond issue is the issuers. Consequently,
municipal officials must understand the process and all the implications of actions taken.
How does a municipality engage finance industry professionals?
Finance and legal professional engagements are considered personal services contracts. As
such, issuers have authority to engage service professionals, according to governing board
policy, in any manner that best fits the issuers particular situation. Some use very formal RFP
processes. Others make more direct and less process driven decisions.
When should a municipality engage financial consultants and bond counsel? How are they paid
if the issuer doesnt have the money for fees unless the bond passes?
Municipalities should engage financial consultants and bond counsel as early as possible. Many
finance industry professionals are paid on a contingency basis. This means they do not charge
for services until the bond issue passes and sells. Issuers should ask potential service providers
whether they would work on a contingency fee basis. Frequent issuers may have ongoing
relationships with their finance and legal professionals.
Why cant our municipal attorney do the legal work for a bond issue?
There is no statute that requires an issuer to engage a bond counsel firm for a debt issue.
However, the market, particularly for any publicly offered issue, will require a legal opinion
from a nationally recognized bond counsel. Law firms that specialize in debt-related municipal
securities have developed the recognized expertise in municipal, federal securities and federal
tax law necessary to analyze and opine on the required areas of investor concern. Local counsel
can still play an important role by advising staff on relevant aspects of the financing and
providing a non litigation check before closing.
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CHAPTER 3
BASIC LEGAL DOCUMENTS
This chapter describes the basic legal documents that may be required in connection with the
undertaking of a project and the subsequent issuance of bonds, full faith and credit obligations or
other forms of debt by a city or other local government issuer in Oregon. The legal documents
that are required will depend on the type of bonds or debt being issued by a city or local
government and whether the bonds are being sold in the public market or being privately placed
with a bank.
The summaries below provide general descriptions of the purpose of the various documents, the
party who typically drafts the documents and descriptions of the important sections (from the
issuers perspective) of the documents. Because of the wide variety of transactions that can be
undertaken, these descriptions should be used as a general guide and are not a complete
representation of the legal documentation for a public finance transaction in todays marketplace.
To address the variation in legal documents depending on the type of transaction, the
descriptions of each type of document include a list of alternate documents that may be used in a
given transaction.
AUTHORIZING RESOLUTION
Before issuing bonds or debt, the governing body of the city or other local government issuer
must take official action to authorize the issuance of debt for the project. The governing body
adopts the Authorizing Resolution or Ordinance to, among other things:
approve the sale and issuance of the bonds
direct staff to take action to complete documentation for the sale of the bonds
authorize execution and delivery of documents
declare the issuers official intent to be reimbursed from bond proceeds for
expenditures incurred in advance of the issuance of the bonds in compliance with the
Internal Revenue Code and related Treasury Regulations
The reimbursement declaration is often described as a Reimbursement Resolution and may be

adopted by the issuer as a stand-alone resolution prior to adopting the authorizing resolution.
Tax counsel should be consulted to be sure the appropriate project descriptions and tax language
are included in any resolution that includes a declaration of intent to be reimbursed from bond
proceeds.
The authorizing resolution may establish or delegate authority to an authorized representative to
establish the terms of the bonds including payment dates, maturities, redemption provisions,
Chapter 3 Basic Legal Documents
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registration, transfer, exchange and other matters. The authorizing resolution may also include
the legal structure for the bonds as described below under the description of the bond indenture.
Generally, an authorizing resolution for general obligation bonds would include the legal
structure for the bonds.
Alternate Documents: Authorizing Ordinance
Principal Drafter: Bond counsel
Party: Issuer
BOND INDENTURE
For some bond issues, the Bond Indenture establishes the legal structure for the security of the
bonds, including the terms of the bonds, the principal and interest payment dates, maturities and
redemption provisions. The bond indenture may contain the following provisions:
pledge of revenues or other collateral to secure the payment of the bonds, and the
creation and granting of the trust estate
representations and covenants, including affirmative covenants to maintain facilities

or negative covenants to not pledge the revenues that secure the bonds to other debt
flow of funds from bond proceeds and from debt service payments and establishment
of the priority of uses of the revenues pledged to pay the bonds
additional bonds test or parity debt provisions for issuance of future bonds
events of default and remedies
defeasance provisions to refund the bonds
trustee related provisions, if necessary, including removal of trustee, appointment of

new trustee, indemnification and rights and duties of the trustee
The issuer should carefully weigh each of the elements described above and should keep in mind
how these provisions may be structured to maintain the issuers flexibility to issue debt in the
future.
Alternate Documents: Bond Ordinance, Trust Agreement, Master Resolution, Master
Ordinance. For example, many cities and other local governments use a Master Resolution to
establish the legal documentation and structure of their water or sewer utility revenue bonds. For
example, when a Master Resolution is used the issuer will issue each series of bonds under the
umbrella of the legal terms and conditions established pursuant to the Master Resolution,
either on parity with or subordinate to other outstanding series of bond issued under the Master
Resolution. A supplemental resolution may also be adopted in connection with subsequent series
of bonds to establish terms and conditions specific only to that series of bonds.
Parties: Issuer and trustee, if any
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OFFICIAL STATEMENT
The Official Statement (OS) is the offering document that is delivered to prospective investors
for bonds that are being sold in the public market. Federal securities laws require that an OS
must provide complete and accurate information to potential investors. Full and complete
disclosure should be made in the OS of any adverse condition that could materially affect the
sale of the bonds or the ability of the issuer to service the debt. The OS should inform potential
investors of all levels of sophistication about the financial and economic standing of the city or
other local government issuer. The OS should include a description of the bonds, including but
not limited to the following:
project and purpose for issuing the bonds
pledge and security to repay the bonds
economic and financial condition of the issuer and/or the conduit borrower
The OS also should provide potential investors with information about the bonds including
scheduled debt service and the sources and uses of the bond proceeds, including the sale amount
and any underwriting discount or premium. Summaries of the bond documents and the form of
Bond Opinion are included in the OS. Because the OS is considered the issuers document,
the issuer should carefully review all portions of the OS for completeness and accuracy.
See Chapter 4, Securities Law and Disclosure for a more detailed discussion about the
OS and disclosure obligations of the city or other local government when issuing bonds and
subsequent to issuance.
Related Documents: Prior to pricing, a Preliminary Official Statement (POS) is usually
distributed that includes substantially the same information as the OS, except for the final
numbers and pricing data that are updated in the OS after pricing. In certain transactions, such as
certain variable rate issues, there is no requirement for a POS.
Principal Drafter: Varies. The OS may be drafted by the underwriter or its counsel or
by the issuer or bond counsel. Either bond counsel or underwriters counsel may be engaged to
serve as disclosure counsel and prepare the OS. In some circumstances, the financial advisor or
another third party may prepare the OS.
Parties: Issuer
BOND PURCHASE AGREEMENT

In connection with a negotiated sale or a private placement of bonds, a Bond Purchase
Contract or Bond Purchase Agreement (BPA) is executed and delivered by the issuer and the
underwriter(s) or bank and the other parties, if any, to the financing, for the purchase and sale of
the bonds. In a conduit financing the BPA can be a three party agreement among the issuer, the
conduit borrower and the underwriter, or, the borrower can enter into a separate Letter of
Representations.
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The BPA will include the offer to purchase the bonds by the underwriter or bank and the
acceptance of the issuer to sell the bonds to the underwriter or bank. The BPA will generally
include the following:
a description of the bonds and the authority of the issuer to sell the bonds
the sale price
representations of the issuer and the underwriter or bank
certain outs circumstances under which the underwriter or bank is not obligated
to purchase the bonds
indemnification or liquidated damages provisions
the fee for the underwriter or bank
a breakdown of bond issuance costs and specification of what costs the issuer pays
and what costs the underwriter or bank pays
for a public offering, the BPA will include a description of the end of the
underwriting period: (i) occurs at closing or when underwriter has sold all of the
bonds; (ii) starts the 25 day clock ticking whereby issuer must update the Official
Statement if material event occurs
conditions to and expectations of the parties for closing delivery of closing

certificates and opinions
OFFICIAL NOTICE OF SALE

Bonds may be sold through a public competitive bid process by which the terms of the bonds
including the size, maturity dates, redemption provisions and structure are determined several
weeks prior to the sale and published in the Official Notice of Sale (NOS). In a competitive sale,
the issuer is hoping to receive a large number of bids in response to the NOS, thereby increasing
the chances of a competitive interest rate environment that results in a lower interest rate on the
debt. The competitive bid process is set forth in the NOS which includes, among other things:
the bidding rules and constraints
the amount and procedure for handling the good faith deposit that each bidder must
submit with its bids
the standards that the issuer will use for evaluating the bids
The NOS and authorizing resolution are often prepared and adopted simultaneously. After the
NOS is approved, it must be published according to the procedures established under Oregon
law.
See Chapter 17, Structuring the Bond Issue and Chapter 1, Overview of Debt
Issuance for further details on structuring the bond issue and the process of the debt sale in a
negotiated sale, private placement or through a competitive bid process.
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Alternate Document: Placement Agreement used in connection with a private placement

of the debt with a bank
Principal Drafter for BPA: Underwriter or underwriters counsel, or bank for a private
placement
Principal Drafter for NOS: Bond counsel
Parties: Underwriter or Bank, issuer, conduit borrower
CONTINUING DISCLOSURE CERTIFICATE

Continuing disclosure refers to the process of providing financial and other information to the
financial market on a regular basis so long as any bonds are outstanding. Under Securities and
Exchange Commission (SEC) Rule 15c2-12 (the Rule), an underwriter cannot purchase or sell
securities in an offering of more than $1 million unless it has reasonably determined that an
obligated person has undertaken to provide ongoing information. In most cases the obligated
person is the city or local government that is issuing bonds. To comply with the Rule, the issuer
will execute a continuing disclosure certificate under which it will agree to provide annual
financial information, similar to the financial disclosure in the Official Statement, and
information about specific material events for the benefit of the holders of the bonds. The
obligations of the issuer under the continuing disclosure certificate are enforceable by the holders
of the bonds. See Chapter 4, Securities Law and Disclosure for a more detailed discussion of
the requirements of the Rule.
The issuer should carefully review the provisions of the continuing disclosure certificate that
describe the annual financial information it is obligated to provide, the deadline for filing annual
financial information, the list of material events that require notice and the amendment
provisions.
Alternate Document Names: Continuing Disclosure Undertaking, Continuing Disclosure
Agreement
Principal Drafter: Bond counsel or underwriters counsel
Parties: Issuer, other obligated persons. In some cases, the trustee may be a party to a
continuing disclosure agreement pursuant to which it serves as the issuers or obligated persons
dissemination agent for purposes of distributing the annual financial information required under
the Rule.
See Chapter 5, Securities Law and Disclosure for a more detailed discussion of the
standards for continuing disclosure under the Rule, your obligations as an issuer to make annual
disclosure filings under the Rule and tips for how to best manage your annual reporting
obligations using the DisclosureUSA website (www.disclosureusa.org.). The DisclosureUSA
website is operated by The Municipal Advisory Council of Texas. It is a web-based system that
enables issuers to meet the filing requirements of Rule 15c2-12 by means of a single filing
location. If you file through DisclosureUSA, you do not need to make a separate filing with any
of the NRMSIRs or SIDs. (See Appendix A, Glossary Terms and Concepts)
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CONDUIT BORROWING DOCUMENTS

In a conduit borrowing, a city, county or other authorized public body acts as the issuer of bonds
and then loans the proceeds of the bonds to a qualified borrower. The borrower agrees to repay
principal and interest on the bonds typically through loan repayments.
See Chapter 11, Conduit Revenue Bonds for a more detailed description of conduit
borrowing generally and what is a qualified borrower.
LOAN AGREEMENT
In conduit borrowings, the Loan Agreement between the issuer and the borrower establishes the
obligations of the borrower to repay the loan of the bond proceeds. The Loan Agreement
generally establishes the terms and conditions of the loan and the repayment provisions, and
includes the following:
description of the project
the pledge of revenues and establishment of the trust estate to repay the loan
covenants of the borrower, including financial and general covenants
representations of borrower
repayment provisions
restrictions on sale/merger/acquisition/disposition of the borrower
restrictions on encumbrances of the revenues, security and trust estate pledged to

repay the loan
permitted indebtedness
requirements for the project to be insured
provisions concerning the imposition of taxes
tax covenants
covenants to maintain the project
additional bonds test for future debt
Principal Drafter: Bond Counsel

Parties: Issuer, Conduit Borrower
See Chapter 11, Conduit Revenue Bonds for a more detailed description of the process
and documents required for a conduit revenue bond issue.
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INSURANCE AND CREDIT ENHANCEMENT RELATED AGREEMENTS

Credit Enhancement is the use of the credit of an entity other than the issuer to provide
additional security for the bonds or other debt financing. Typically credit enhancement refers to
the use of bond insurance, bank letters of credit and other facilities, and credit programs of
federal or state governments or federal agencies, but also may refer more broadly to the use of
any form of guaranty, secondary source of payment or similar credit-improving instruments.
BOND INSURANCE
An issuer may purchase a financial guarantee insurance policy from a bond insurer for the
payment of the principal of and interest on municipal bonds as they become due should the issuer
fail to make required payments. Bond insurance typically is acquired in conjunction with a new
issue of municipal securities, although insurance also is available for outstanding bonds trading
in the secondary market. In the case of insurance obtained at the time of issuance, the issuer of
the policy typically is provided extensive rights under the bond indenture or through a side
agreement to establish the terms for payment under the policy and repayment by the issuer and
to allow the insurer to control remedies in the event of a default. Bond insurance may also be
purchased to provide funds required to meet a debt service reserve requirement under the bond
indenture.
Other credit enhancement devices, such as letters of credit or standby bond purchase agreements
require the issuer and the credit enhancement provider to enter into agreements that among other
things establish the terms for drawing on the credit enhancement source for payment of the
principal or interest due on the bonds and the subsequent repayment by the issuer of any funds so
drawn to pay the bonds.
Possible Documents: Financial Guaranty Insurance Policy (Bond Insurance Policy);
Surety Bond Policy; Letter of Credit Security Agreement; Reimbursement Agreement; and
Standby Bond Purchase Agreement
Possible Drafters: Insurance company and/or its counsel; Bank/Credit Provider and/or
its counsel
Parties: Issuer, Credit Provider
TAX CERTIFICATE
In the Tax Certificate, the issuer, or in the case of a conduit issue, the borrower, is required to
make certifications to satisfy the requirements of the Internal Revenue Code (the Code) and
the regulations thereunder for the interest on the bonds to be tax-exempt. The tax certificate may
contain certain elections required by the Code at the time the bonds are issued. The rules that
apply to investment of bond proceeds and the timing for spending bond proceeds are also set
forth in the tax certificate. The issuer or borrower should review the tax certificate carefully,
particularly the section on use of proceeds and should consult with bond counsel. See
Chapter 5, General Federal Tax Requirements for a more detailed description of the tax
certificate and an analysis of the rules and requirements under the Code.
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Alternate Document: Tax Agreement, Arbitrage or Non-arbitrage Certificate

Parties: Issuer, borrower
BOND COUNSEL OPINION AND OTHER LEGAL OPINIONS

The attorney or firm of attorneys serving as bond counsel to the issuer delivers the legal opinion
in connection with the issuance of bonds. The opinion confirms that the bonds are valid and
binding obligations of the issuer and are issued in accordance with the law. The bond counsel
opinion typically includes a tax opinion that interest on the bonds is exempt from federal and
state income taxes. In some circumstances, the bonds or debt being issued by the city or local
government issuer may not qualify for the exemption from federal and/or state income taxation.
In these cases, the bond counsel opinion is limited to the validity of the obligations and may run
only to exemption for state income tax purposes, if applicable.
SUPPLEMENTAL OPINION
In addition to the final opinion, the issuer may also engage its bond counsel to deliver a
Supplemental Opinion that covers matters related to the official statement and the bond
purchase agreement. The supplemental opinion is addressed to the underwriter and generally
includes an opinion that the bonds and the bond indenture are exempt from registration or
qualification under certain federal securities laws (the Securities Law Opinion), that the
purchase contract was duly executed and delivered and that the official statement does not
contain any untrue statement of a material fact or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they were made, not
misleading (a 10b-5 Opinion). The supplemental opinion is delivered by bond counsel in
addition to the final opinion and, as a result, should be specifically requested under the terms of
the issuers engagement of its bond counsel.
CLOSING DOCUMENTS
Closing documents are the certificates, receipts, notices, written requests or directions and
similar documents that are delivered at the closing of a transaction. The closing documents
generally:
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document the factual representations required under the bond purchase agreement and
the accuracy and completeness of the disclosure
document compliance with the requirements of law, including state and federal
securities laws, for the issuance of the bonds and the disclosure, including the
effectiveness of resolutions, due execution of documents and conduct of meetings in
accordance with applicable law
instruct parties to take certain actions such as depositing funds, delivering required
notices, recording documents and releasing security
The closing documents are designed to establish all the factual issues required for bond counsel
to deliver its final opinion, and if so engaged, the supplemental opinion, and for the underwriters
to complete their due diligence and purchase the bonds. The issuer should carefully review the
closing documents to verify the accuracy of all amounts for receipt and deposit of funds,
accuracy of representations, warranties and certifications.
Parties: All parties to the transaction

What official action is required to authorize a bond issue?
The governing body of a city or other local government issuer must adopt a resolution or
ordinance to approve the sale and issuance of the bonds, and delegate authority to staff to take
action to complete the documentation for the sale of the bonds. The authorizing resolution or
ordinance may also include a Reimbursement Resolution which is a declaration of the issuers
intent to be reimbursed from bond proceeds for expenditures incurred in advance of the bond
issue that meets the requirements of the Internal Revenue Code and related Treasury
Regulations.
What is the difference between an authorizing resolution and a bond or master resolution?
In some cases, the authorizing resolution and bond resolution may be combined into a single
document that authorizes the issuance of bonds and establishes the legal structure and security
for the bonds. Frequently, general obligation bonds are issued with a combine resolution
following voter approval of the bond levy. For other issues, such as revenue bonds, a city may
decided to adopt a general authorizing resolution to provide general authority for the bond issue
and then later adopt a more detailed master borrowing resolution that specifies in detail the legal
terms of the bonds, such as revenue covenants and procedures for issuing additional bonds. See
Chapter 7, General Obligation Bonds and Chapter 10, Revenue Bonds for more information.
What is the difference between primary and secondary market-disclosure?
The Official Statement that is delivered to prospective investors for bonds that are being sold in
the public market is a primary disclosure document. The preliminary and final Official
Statements are the first information investors receive about bonds that an issuer is offering for
sale in the public market.
Secondary market disclosure refers to any time any issuer speaks to the market after its bonds are
issued. Examples of secondary market disclosure include the annual financial information that
an issuer provides under the Continuing Disclosure Certificate or Undertaking and notices of any
of the material events defined under SEC Rule 15c2-12, such as a ratings upgrade, bond call or
defeasance, that the issuer provides to pursuant to its Continuing Disclosure Certificate.
See Chapter 4, Securities Law and Disclosure for more information.
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What is the difference between a Closing Memorandum and a Settlement Memorandum?

Bond counsel typically prepares a closing memorandum or closing list that outlines the
documents that are required to be provided and executed as conditions to closing the bond sale
and identifies the responsible parties for each document.
The underwriter typically prepares a closing or settlement memorandum prior to closing that sets
out the purchase price of the bonds, itemizes how the bond proceeds are being applied to costs of
issuance, such as insurance premiums and the underwriters discount, and shows the amounts
and locations of wire transfers of the bond proceeds that will occur at closing.
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CHAPTER 4
SECURITIES LAW AND DISCLOSURE
Federal and state securities laws govern how stocks, bonds and other securities are offered, sold
and traded. Bonds and other debt obligations issued by Oregon cities are securities and, as
such, are subject to certain federal securities laws. Bonds and other debt obligations issued by
cities are not, however, subject to the same securities law requirements that apply to stocks,
bonds and other securities issued by corporations and other non-governmental entities. City
officials and staff must concern themselves with securities law compliance at the time bonds are
issued and as long as the bonds are outstanding.
FEDERAL SECURITIES LAW

The primary federal securities laws are the Securities Act of 1933 (the Securities Act) and the
Securities Exchange Act of 1934 (the Exchange Act). The Securities Act, as a general matter,
requires any bond or other security that is offered for sale to be registered with the Securities and
Exchange Commission (SEC) unless it is either an exempt security or is sold in an exempt
transaction. Section 3(a)(2) of the Securities Act exempts from registration any security issued
or guaranteed by...any State of the United States, or by any political subdivision of a state, or any
public instrumentality of one or more states... Because Oregon cities are political subdivisions
of a state bonds issued by them are exempt securities exempt from registration with the
SEC under the Securities Act.
While bonds issued by Oregon cities are exempt from registration under the Securities Act, they
are not exempt from the antifraud rules of the Securities Act and the Exchange Act. Oregons
securities laws also contain antifraud rules that closely parallel these federal rules. Section 17(a)
of the Securities Act and SEC Rule 10b-5, promulgated under the authority granted to the SEC
by Section 10(b) of the Exchange Act, make it:
Unlawful for any person, directly or indirectly, by use of any means or instrumentality of
interstate commerce, or of the mails or any facility of any national securities exchange:
To employ any device, scheme, or artifice to defraud
To make any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statement made, in the light of the circumstances
under which they were made, not misleading, or
To engage in any act, practice, or course of business which operates or would operate
as a fraud or deceit upon any person, in connection with the purchase or sale of any
security
Chapter 4 Securities Law and Disclosure
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These antifraud rules have very broad application -- despite the use of terms such as scheme,
misleading, fraud and deceit. The term statement, for example, refers to any release of
information that can reasonably be expected to reach investors and the financial marketplace. In
turn, a statement is material if there is a substantial likelihood that a reasonable investor or
prospective investor would consider the information important in deciding whether or not to
invest. As a result, a city must be concerned about its securities law obligations not only when
making statements in an Official Statement or other offering document as part of a primary or
initial offering of its bonds, but at any time it has bond or other obligations outstanding and it
makes a material statement. These material statements can impart the value of the bonds
trading in the secondary market and could take any variety of forms, including the release of city
financial statements, formal press releases, postings on the citys web site or statements by public
officials. According to the SEC, press releases, public statements, interviews and information
on issuer websites, even though not necessarily made or published for the express purpose of
informing the securities markets, should be treated with the same care as information included in
an Official Statement. Exchange Act Release No 20,560, 3 Fed. Sec. L. Rep. (CCH) 23,120B,
at 17,095-3 (January 13, 1984).
Regardless of the form of the statement, federal securities law requires that all information that is
provided to or can be expected to reach investors and prospective investors, and that can
reasonably be expected to be relied on by such investors in making investment decisions must be
accurate and complete. This requirement applies at the time the bonds are issued and continues
as long as the bonds are outstanding.
DISCLOSURE OBLIGATION WHEN ISSUING BONDS

To ensure that the material statements that are made when a city sells its bonds to the public are
accurate and complete, a city will typically prepare and formally approve an official statement or
similar disclosure document. While there is no legally prescribed form for an official statement
or disclosure document, standard practices have developed among types of issuers and
obligations. Despite the standardization, elected officials, city staff and advisors should always
review disclosure documents carefully and consider, from the perspective of the investor,
whether the information contained in the document is both accurate and complete providing the
investor with all information that is material to the investment decision.
The importance of a hands-on approach to disclosure by city officials is underscored by the
SECs findings in its report issued following its investigation of Orange County, California
more than a decade ago. The failure of elected and other officials to review municipal securities
disclosure documents was highlighted in the SEC report that was critical of the supervisors of
Orange County, California. Report of Investigation in the Matter of County of Orange,
California as it Relates to the Conduct of the Members of the Board of Supervisors, Exchange
Act Release No. 36761 (January 24, 1996). As stated by the SEC in the Orange County matter:
In authorizing the issuance of securities and related disclosure documents, a
public official may not authorize disclosure that the official knows to be false; nor
may a public official authorize disclosure while recklessly disregarding facts that
indicate that there is a risk that the disclosure may be misleading. When, for
example, a public official has knowledge of facts bringing into question the
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issuers ability to repay the securities, it is reckless for that official to approve
disclosure to investors without taking steps appropriate under the circumstances to
prevent the dissemination of materially false or misleading information regarding
those facts. In this matter, such steps could have included becoming familiar with
the disclosure documents and questioning the Issuers officials, employees or
other agents about the disclosure of those facts.
The message communicated by the statements of the SEC in the Orange County report, and more
recently by the SEC in its investigation of the City of San Diego, California is that public
officials must engage in a meaningful review of the disclosure document as part of its approval
of the document and cannot simply rubber-stamp the document.
In connection with the public sale of bonds by a city, the city will enter into a bond purchase or
similar agreement with the underwriter or bond purchaser. This agreement will contain specific
representations and warranties as to the accuracy and completeness of the official statement or
other disclosure document. The underwriter or other purchaser will typically require, as a
condition to completing the issuance and sale of the bonds, that the city deliver certificates and
opinions confirming that the representations and warranties contained in the purchase agreement
related to the official statement are both accurate and complete as of the date of issuance.
DISCLOSURE OBLIGATIONS FOLLOWING ISSUANCE OF BONDS

The obligations of a city to provide information to investors after bonds are issued comes
primarily from SEC Rule 15c2-12 (the Rule) promulgated by the SEC pursuant to
Section 15(c) of the Exchange Act. While the Rule initially created obligations with respect to
the use and delivery of an official statement in connection with the initial offering of municipal
securities, it was amended in 1995 to require disclosures to be made after municipal securities
were issued, and continuing so long as the securities are outstanding.
While the Rule technically applies to underwriters and not directly to cities and other
municipalities (which the SEC is prohibited by federal law from regulating directly), it operates
to prohibit a public offering of bonds by a city unless the city has agreed to be obligated to take
the actions necessary to ensure compliance with the continuing disclosure requirements of the
Rule, unless the bonds are exempt from the Rule. Specifically, an underwriter may not purchase
and sell municipal securities in a public offering unless the issuer has undertaken in a written
agreement or contract for the benefit of the bondholders to provide to each nationally recognized
municipal securities information repository (NRMSIR) and to the appropriate state information
depository (SID) both (1) annual financial information, and (2) notice of the occurrence of
certain listed material events.
Annual financial information is described in the Rule to include annual financial information
for each obligated person for whom financing information or operating data is presented in the
final official statement and, if not included as part of this annual financial information, audited
financial statements for each obligated person.
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Events that must be disclosed when they occur, if they are material, are:
Principal and interest payment delinquencies
Non-payment related defaults
Unscheduled draws on debt service reserves reflecting financial difficulties
Unscheduled draws on credit enhancement reflecting financing difficulties
Substitution of credit or liquidity providers, or their failure to perform
Adverse tax opinions or events affecting the tax-exempt status of the security
Modifications to rights of security holders
Bond calls
Defeasances
Release, substitution, or sale of property securing repayment of the securities, and
Rating changes
In addition to providing annual financial information and material event notices to NRMSIRs
and any SID, issuers or other obligated persons are required to provide notices to the NRMSIRs
and SID of any failure to provide annual financial information on or before the date they have
agreed to do so in their written contract or agreement. NRMSIR filings can be made by cities
directly, including through the use of websites such as DisclosureUSA.org, or accomplished
through the use of a dissemination agent or other third-party service provider.
While the continuing disclosure obligations created by the Rule have broad application, the Rule
includes exemptions for certain types of bonds and offerings. The continuing disclosure
provisions of the Rule do not apply to a primary offering of bonds by a city if the bonds are in
authorized denominations of $100,000 or more and such securities:
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Are sold to no more than thirty-five (35) persons, each of whom the underwriter
reasonably believes:
A.
Has such knowledge and experience in financial and business matters that
it is capable of evaluating the merits and risks of the prospective
investment; and
B.
Is not purchasing for more than one account or with a view to distributing
the securities; or
Have a maturity of nine months or less; or
At the option of the holder thereof may be tendered to an issuer of such securities or
its designated agent for redemption or purchase at par value or more at least as
frequently as every nine months until maturity, earlier redemption, or purchase by an
issuer or its designated agent.
In addition, the Rule contains the two partial exemptions from continuing disclosure. For bonds
that have a final maturity date of eighteen months or less, there is no obligation to file annual
financial information (though there is still an obligation to file material event notices).
Additionally, the Rule contains a limited exemption for small issuers having less than
$10,000,000 in municipal securities outstanding.
AVOIDING SECURITIES LAW CLAIMS

To avoid potential securities law liability in connection with bonds or other obligations that a
city may issue or have outstanding, cities should take steps to ensure that: (1) official statements
are subject to meaningful review and formal approval by elected and other officials of the city;
(2) that material information is provided to bondholders whenever the city is obligated to provide
such information; (3) that all material statements made by the city or its representatives that
could potentially impact an investors decision to purchase or sell a bond are accurate and
complete; and (4) that all material information and statements that are provided are provided on a
timely, nonselective basis, so no investor has an unfair information advantage over another in
making investment decisions.
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CHAPTER 5
GENERAL FEDERAL TAX REQUIREMENTS
This chapter provides an overview of the basic federal tax concepts and rules applicable to public
finance. Under the Internal Revenue Code of 1986 (the tax code), bonds issued by states and
local governmental units generally bear interest that is excluded from gross income for federal
income tax purposes. The term bond includes any evidence of indebtedness, including notes,
installment sale agreements, or financing leases. Although exempt from federal income tax,
interest on bonds may be taken into account in determining other federal income tax
consequences, such as personal or corporate alternative minimum tax, interest expense
deductions, taxation of social security benefits and the like.
Notwithstanding the general rule that governmental bonds are tax-exempt, interest on bonds is
taxable if the bonds are not treated as obligations of a state or political subdivision of a state (see
below), if the bonds are arbitrage bonds, if the bonds are hedge bonds, or if the bonds violate
various other prohibitions contained in the tax code. Furthermore, while governmental bonds
that are private activity bonds (that is, the bonds or the project financed by the bonds
substantially benefits private businesses) generally are not tax-exempt, certain qualified private
activity bonds are tax-exempt.
The discussion below sets forth the principal federal tax rules in sufficient detail, it is hoped, to
give the reader a basic understanding of the concepts and limitations listed above. In addition to
the requirements covered in detail in this chapter, the following universal requirements apply to
all tax-exempt bonds:
An IRS information return (Form 8038) must be filed for the bonds
Bonds must be issued in registered form and
Bonds may not be directly or indirectly guaranteed by the federal government
In many cases (typically with bonds issued to fund public infrastructure and payable from
general governmental revenues) the tax rules discussed in this chapter will not have a significant
effect on the way a bond issue is put together, at least from the issuers perspective. Bond
counsel will be analyzing the requirements and taking steps to help the issuer comply, but the tax
aspects of the transaction will not be particularly difficult. In other financings, for example
qualified private activity bonds or financings (such as single family housing bonds) involving
underlying loans, the tax rules are critical to the structuring and success of the transaction, and
much of the effort of the financing team will be devoted to ensuring compliance with these
complex requirements. In all financings, care must be taken to comply with all of the tax codes
requirements.
Chapter 5 General Federal Tax Requirements
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OBLIGATIONS OF A STATE OR POLITICAL SUBDIVISION

In order to be tax-exempt, bonds must be issued by or on behalf of a state or a political
subdivision of a state. Political subdivisions are public agencies that can independently exercise
a substantial amount of one or more of the following governmental powers:
Eminent domain
Police power
Taxing power
Public agencies such as joint powers authorities that are not political subdivisions but issue
bonds at the direction of, or are completely controlled by, a political subdivision typically are
treated as issuing bonds on behalf of a political subdivision. Tax lawyers sometimes refer to
these issuers as On Behalf Of issuers.
DEFINITIONS
The following definitions are crucial to an understanding of how the tax law applies to public
finance. The reader may wish to refer back to this section as these concepts come up in the later
discussion.
ISSUE OF BONDS
In general, the various federal tax limitations and requirements apply to an issue of bonds
rather than individual bonds. In other words, to determine whether bonds are private activity
bonds, arbitrage bonds, or hedge bonds, one must first determine which bonds are part of the
same issue. Bonds are part of the same issue if the bonds are sold at substantially the same time
(for example, less than 15 days apart), are reasonably expected to be paid from substantially the
same source of funds and are sold pursuant to the same financing plan. Typically, all of the
bonds that are sold pursuant to the same official statement are part of the same issue.
PROCEEDS
Just as the federal tax rules primarily apply to an issue of bonds, the application of the federal tax
rules requires an analysis of the investment and ultimate use of the proceeds of a bond issue.
For example, it is the timing and manner of the ultimate use of proceeds that determines whether
bonds are private activity bonds, qualified private activity bonds, or hedge bonds. Proceeds are
comprised of the following:
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Sale proceeds. The amount paid to the issuer by the original purchasers for the bonds
Investment proceeds.
compounded earnings
Transferred proceeds. For refundings, the unspent sale proceeds and investment
proceeds of the issue of bonds being refunded
The investment earnings on sale proceeds, including
Gross Proceeds. All proceeds (sale proceeds, investment proceeds and transferred
proceeds) plus amounts that are reasonably expected to be used to repay the bonds,
such as revenues deposited in a debt service fund, and amounts that are pledged as
security for the repayment of the bonds
EXPENDITURE OF GROSS PROCEEDS

Understanding whether funds held by an issuer are proceeds at any given time requires an
understanding of how funds related to a bond issue are treated as having been spent. The
following are concepts important to an understanding of expenditures:
Expenditures related to purpose of issue. Generally, proceeds may be spent only on

capital costs of facilities and costs of issuing the bonds. Once proceeds are allocated
to an ultimate expenditure, the use and nature of any facility paid for with the
proceeds is tracked for private activity bond and qualified private activity bond
purposes. If the purpose of the bonds is to finance working capital expenditures, the
Treasury Regulations provide that proceeds are spent only at times in which the issuer
has no other moneys on hand available to cover those working capital expenses (See
Chapter 12, Notes, Short-Term and Interim Financing).
Investments. Gross proceeds are not spent when they are used to acquire investment
securities; they are simply allocated to those investments temporarily and return to the
issuer for ultimate use or reinvestment as the investment securities mature or are sold.
During the time gross proceeds are allocated to investment securities, they are tracked
for arbitrage purposes, as well as to determine the amount of investment proceeds that
has accumulated.
Payment of Debt Service. Generally, gross proceeds that are not sale, investment or
transferred proceeds are spent only when they are used to pay debt service on the
bonds.
Reimbursements. Issuers and conduit borrowers often wish to use bond proceeds to
reimburse themselves for costs paid prior to the issuance of the bonds. Bond
proceeds allocated to such reimbursement costs will be treated as spent only if
certain requirements are satisfied. (See text box Reimbursement Rules) If these
requirements are not satisfied, any bond proceeds that the issuer or conduit borrower
attempts to allocate to the reimbursement costs will not be treated as spent and will
continue to be subject to the arbitrage yield restriction rules and the rebate
requirement discussed in more detail below.
YIELD
The yield on a bond issue is the discount rate or interest rate that allows all of the payments of
principal and interest on the bonds, (net of payments or receipts from certain interest rate
hedging transactions such as swap agreements) plus any payments for credit enhancement, to
equal, on a present value basis and as of the date the bonds are issued, the aggregate amount paid
by the original bond holders for the bonds. It is important to remember that underwriters
discount or fees do not affect the aggregate amount paid by the original bond holders for the
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bonds and, therefore, do not affect the calculation of yield on the bonds. In other words,
although from the issuers perspective the payment of underwriters discount increases
borrowing costs, it does not increase the yield on the bonds.
Reimbursement Rules
Intent. The issuer must demonstrate that an intent to use bonds to reimburse itself existed or around the time
the cost was paid.
9 The issuer must adopt an official intent resolution no later than 60 days after the reimbursement cost in
question was paid
9 The official intent resolution must contain a description of the project, the maximum amount of bonds
expected to be issued for the project, and state the issuers reasonable expectation to reimburse itself
Reimbursable Costs. Generally, reimbursement costs are limited to capital expenditures and cost of
issuance items.
Timing of Reimbursement. Reimbursement must be made no later than 18 months after the later of (i) the
date the cost is paid, or (ii) the date the project is placed in service or abandoned (but in no event more than 3
years after the cost is paid).
Preliminary Expenditures Exception. Soft costs (such as architectural, engineering, surveying, soil
testing, costs of issuance, and similar costs) may always be reimbursed whether or not a resolution was
adopted and regardless of timing of the reimbursement.
PRIVATE ACTIVITY BONDS

If a bond is a private activity bond, it is not tax-exempt unless it meets the requirements for
one of the categories of qualified private activity bonds. This section describes the conditions
under which a bond will be determined to be a private activity bond. The following section
describes the categories of qualified private activity bonds.
BASIC PRIVATE ACTIVITY BOND TESTS
An issue of bonds is an issue of private activity bonds if it satisfies both of the following tests,
known as the Private Business Tests:
Private Business Use Test. More than 10% of the proceeds of the issue are to be used
for any private business use.
Private Payment or Security Test. The payment of principal or interest on more than
10% of the issue is to be secured by or derived from payments in respect of property
used for a private business use.
If a facility is used disproportionately by a private business or is used by a private business in a

manner that is unrelated to the governmental entitys use, the 10% limitations of the Private
Business Tests become 5% limitations. Moreover, the total dollar amount of private business use
typically is limited to $15 million per issue, regardless of the percentage.
Private Loan Test. Even if the Private Business Tests are not satisfied, an issue will
nevertheless be an issue of private activity bonds if the lesser of 5% of the proceeds or $5 million
are used to make or finance loans to persons other than governmental units.
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Reasonable Expectations. Generally, the determination of whether an issue of bonds is

an issue of private activity bonds is based upon the issuers reasonable expectations as of the date
the bonds are issued. With certain limited exceptions, it is important that issuers reasonably
expect to own and use a bond financed facility for at least the shorter of the entire economic
useful life of the facility or the term of the bonds. If the issuer does not have these expectations,
special mandatory call provisions may be required, providing for a redemption of bonds at the
time of sale or other change in use of the financed property. The average maturity of bonds
generally cannot exceed 120% of the reasonably expected average useful life of the financed
property.
Notwithstanding an issuers reasonable expectations of governmental use, certain deliberate
actions of an issuer or independent actions of third parties may cause the Private Business Tests
or the Private Loan Test to be satisfied with respect to an issue. A more detailed description of
these rules is set forth in Change in Use below.
PRIVATE BUSINESS USE
What is Private Business Use? Private business use is defined as any use (direct or
indirect) in a trade or business carried on by any person other than a governmental unit. For
purpose of this definition, any activity carried on by a person other than a natural person is
treated as a trade or a business.
The trade or business use of proceeds or bond-financed facilities by a nongovernmental person
by way of special legal entitlements such as loans, ownership, or leases, and certain management
or service contracts, output contracts, or research contracts constitutes private business use. Use
by an employee of the issuer or an individual who is not carrying on a trade or business is not
private business use. In addition, use by the general public (for example, use by individuals and
business on the same basis) is not private business use. The U.S. Treasury regulations provide
useful guidance with respect to facilities that have a close connection to privately used facilities
but with respect to which there is no special legal entitlement by a nongovernmental person; for
example, private business use of a governmentally owned and operated parking garage adjacent
to an airport, a sports stadium, or a shopping center.
To the extent (i) no private business user has a special legal entitlement to the facility (for
example, a lease, a management contract, or a priority use right) and (ii) the facility is intended
to be available and in fact is reasonably available to the general public, actual use of the facility
by nongovernmental persons will not constitute private business use. Use by the general public
contemplates use by individuals not acting in a trade or business. Any fees charged for such use
must be generally applied. Monthly or longer arrangements for use (such as a monthly parking
pass) can satisfy this requirement, so long as the term of the arrangement does not exceed 180
days of use, and the arrangement is not required to be renewed at the end of its term.
To the extent a facility is not intended to be available or is not reasonably available to the general
public, but no private business user has a special legal entitlement to the facility, the analysis
shifts to whether any private business receives a special economic benefit from the facility.
Factors taken into account to make this determination include the proximity of the facility to and
41
functional relationship of the facility with any activities of a private business, as well as the
number of private businesses receiving any special economic benefits.
De Minimis Private Business Use Exceptions. Certain minor or insignificant (so called
de minimis) private business uses of bond financed facilities are not deemed to be sufficient to
satisfy the private business use test. The following sections describe these de minimis
exceptions:
Short-Term Rate Scale Arrangements with Private Businesses. Use by a private business
pursuant to a lease or contract does not constitute private business use if all of the following are
true:
The term of the lease or contract is not more than 100 days
Similar arrangements are generally available to, and expected to be executed with,
private businesses on a nondiscriminatory, rate scale basis
The facility is not financed for a principal purpose of providing it for use by the
private business
The 100-day time limit relates to the number of days of actual use under the contract, not the
time period the contract is in place.
Short-Term Specially Negotiated Arrangements with Private Businesses. Use by a
private business pursuant to a lease or contract does not constitute private business use if all of
the following are true:
The term of the lease or contract is not more than 50 days
The arrangement is arms-length and compensation is fair market value
The facility is not financed for a principal purpose of providing it for use by the
private business
The 50-day time limit also relates to days of actual use under the contract. This exception
generally should apply to facilities such as municipal auditoriums, convention facilities, and the
like when rate scale arrangements are not available.
Private Business Use Example
A state uses the proceeds from a bond issue with a 20 year term to reimburse itself for the acquisition of a 10
story office building. The facility is used solely for governmental purposes for 18 years. At the end of the
18th year, state officials lease the entire building for two years to a corporation for its private business use.
Two years of 100% private business use averages over the 20 year measurement period to only 10% private
business use, and the Private Business Use Test is not satisfied. However, if state sold the building to the
corporation, private business use of the building would be equal to the greatest percentage of private
business use for any one-year period. Thus, the facility will have 100% private business for its entire life
and will therefore satisfy the Private Business Use Test.
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Measuring Private Business Use. As described above, the Private Business Use Test is
met if more than 10% (in some cases 5%) of the proceeds of the issue are used directly or
indirectly in trades or businesses carried on by nongovernmental persons. Private business use
generally is measured by determining the average annual amount of private business use that
occurs during the period of time beginning on the later of the date the bonds are issued or the
date the financed facility is placed in service and ending on the earlier of the date the bonds
mature or the end of the reasonably expected useful life of the facility. In general, average
private business use of the facility for any given year is equal to the amount (that is, number of
days) of private business use during that year divided by the amount (that is, number of days) of
total use of the facility during that year. However, uses may need to be weighted if the fair
market value of the uses varies.
Simultaneous private business use and governmental use may require more complicated methods
of measuring the amount of private business use. Private business use that takes place before or
after the measurement period described above is ignored. Special rules exist for measuring the
amount of private business use attributable to certain contractual rights to the output of electric
and gas generation, transmission and related facilities and certain water facilities.
If the private business use of a financed facility is the result of ownership of the facility by a
private business, then the amount of private business use is determined based on the highest
percentage of private business use during any of the annual periods that make up the general
measurement period.
Management or Service Provider Contracts. Any contract between a governmental
entity and a private business providing services with respect to a bond financed facility is a
potential source of private business use and must be examined when determining whether the
10% private business use limitation has been or will be exceeded. Generally, the determination
of whether a service contract between a governmental person and a service provider gives rise to
private business use is based upon all the facts and circumstances of the arrangement.
Private Business Use Contracts. Two types of contracts almost always result in private
business use:
A contract that provides for compensation based upon net profits of the bond financed
facility
A contract under which the service provider is considered the lessee or owner of the
facility for federal tax purposes
Exempted Contracts. The Treasury regulations provide a list of arrangements that are not
considered service contracts and in doing so answer many questions. The following contracts
are explicitly not included within the definition of service contracts:
Employment contracts (as distinguished from service contracts with an independent

contractor)
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Contracts for service solely incidental to the primary governmental function of the
facility (for example, janitorial contracts, equipment repair contracts, contracts for
billing services)
Granting of admitting privileges to doctors in hospitals, even if conditioned on the

provision of de minimis services, if available to all qualified physicians in the area
Contracts relating to the operation of public utility property where the only
compensation is reimbursement of direct out of pocket costs and reasonable
administrative overhead expenses
Contracts to provide services where the only compensation is reimbursement of direct

out of pocket costs paid to unrelated third parties
What is a Safe Harbor?
A safe harbor is a set of requirements which, if satisfied, protect the arrangement from being determined
by the IRS from violating a given rule. Being outside the safe harbor does not necessarily mean that you
have violated the rule, but most tax counsel will not give an unqualified opinion regarding an arrangement
which is outside the safe harbor absent obtaining a specific ruling from the IRS.
Safe Harbors for Certain Compensation Arrangements. There are certain safe
harbors for compensation arrangements in management or service contracts. In order to meet
the safe harbors, the compensation to the service provider under the contract must not be based
on net profits, the service provider must not be in a position to limit the governmental entitys
rights under the contract, and the contract must fall within one of the following six categories:
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95% Fixed Fee Contracts. At least 95% of the compensation is based on a periodic
fixed fee, and the contract term does not exceed the lesser of 15 years or 80% of the
reasonably expected useful life of the managed facility. A one-time, fixed incentive
payment based on gross revenue or expense targets is allowed to be paid to the
service provider without affecting the fixed fee payment requirement.
80% Fixed Fee Contracts. At least 80% of the compensation is based on a periodic
fixed fee, and the contract term does not exceed the lesser of 10 years or 80% of the
reasonably expected useful life of the managed facility. A one-time, fixed incentive
payment based on gross revenue or expense targets is allowed to be paid to the
service provider without affecting the fixed fee payment requirement.
Public Utility Property. If the facility is predominantly public utility property, the
15 and 10 year requirements described above are substituted with a 20 year
requirement.
50% Fixed Fee or Capitation Contracts. 50% of the compensation is based on a

periodic fixed fee, or 100% is based on a capitation (per person) fee or a combination
of the two, and the contract term does not exceed 5 years. The issuer must have the
power to terminate the contract without penalty after three years.
Per-Unit Fee Contracts. 100% of the compensation is based on a per-unit fee, or a

combination of a per-unit fee and a periodic fixed fee, and the contract term does not
exceed 3 years. The issuer must have the power to terminate the contract without
penalty after two years.
Percentage of Revenue or Expense Contracts. Applies only to contracts (i) under

which the service provider primarily provides service to third parties (for example, a
radiologist) or (ii) during the start-up phase of a new facility. 100% of the
compensation is based on a percentage of fees charged, or a combination of a per-unit
fee and a percentage of revenue or expense fee, and the contract term does not exceed
2 years. The issuer must have the ability to terminate the contract without penalty
after one year.
Renewal Options. For purposes of the six categories above, renewal options by the
service provider that are enforceable against the issuer are counted in the term limitation.
Renewal options by the issuer and automatic renewal provisions subject to cancellation by either
party do not count.
Indexing. The payments under the fixed fee contract may change over time if tied to an
objective external standard, such as the consumer price index.
Prohibited Relationships. The service provider must not have any relationship with the
governmental entity that, in effect, substantially limits the governmental entitys ability to
exercise its rights under the contract. A safe harbor from this relationship limitation is provided
if all of the following three requirements are satisfied:
The service provider does not control more than 20% of the voting power of the
board of the governmental entity.
Overlapping board members do not include the chief executive officers of either
party.
The service provider and the governmental entity are not related parties.
Change in Use. As described above, the private activity bond analysis at the time bonds
are issued focuses on the issuers expectations as to private business use. However, once bonds
are outstanding, voluntary or deliberate actions by an issuer that allow in fact for the Private
Business Tests to be satisfied can cause bonds retroactively to lose their tax-exempt status. A
number of specific remedies have been provided for such a change in use problem. In general,
and subject to a number of detailed limitations, issuers can redeem or defease bonds, can make
sure that the new use of the project qualifies for tax-exempt financing on some alternate basis, or,
in the case of a sale of the project, can use any consideration paid for the project to finance a new
facility that does not satisfy the Private Business Tests.
PRIVATE PAYMENT OR SECURITY TEST
As its name implies, the Private Payment or Security Test looks at the moneys paid toward debt
service (directly or indirectly) and the security provided for the bonds by nongovernmental
persons. The Private Payment or Security Test is met if the aggregate present value of the
private payments and private security exceeds 10% of the present value of the debt service on the
bonds, with certain adjustments. Absent deliberate actions by the issuer, satisfaction of the
45
Private Payment or Security Test is based upon reasonable expectations as of the date on which
the bonds are issued. Present values are computed using the yield on the bonds as a discount
rate.
Private Security. The Treasury regulations provide only limited guidance in interpreting
the private security provisions of the Private Payment or Security Test. They do reiterate that
pledged property provided by a user of the proceeds of the bonds need not be financed by the
bonds and clarify that property used by nongovernmental persons is to be valued at its fair
market value (rather than its historical cost), as of the date when the property first secures the
bonds.
Private Payments. In general, the Treasury regulations seem to take into account all
payments to the issuer or to any related entity by any nongovernmental person that uses the bond
proceeds or financed facilities, even if such payments are made by nongovernmental persons
who use the property as members of the general public, to the extent the payments either:
Are to be used to pay debt service on the bonds, or
Are to be made in respect of bond financed facilities
However, the amount of the payments is decreased by the allocable operating and maintenance
expenses paid by the issuer with respect to the financed facilities. In addition, the amount of
private payments to be taken into account is limited to the amount of private business use.
Private Payment Example
A state issues 20-year general obligation bonds to finance a new office building which is not pledged to secure the
bonds and which is used exclusively by the state during years through 18. During years 19 and 20, the entire building
is leased to a nongovernmental person. If the annual payments during years 19 and 20 equal annual debt service plus
annual operating expenses during those two years, the Private Payments or Security Test should not be met because
present value of adjusted lease rentals in years 19 and 20 exceeds 10% of the present value of the service on the bonds.
What if the rental payments during years 19 and 20 could be enough so that the present value of those payments
exceeds 10% of the present value of the service on the bonds? The total percentage of average annual private business
use is 10%, and the payments to be taken into account under the Private Payment or Security Test is, therefore, limited
to 10% of the debt service on the bonds. Private Payment or Security Test is not satisfied.
Exception for Generally Applicable Taxes. Payments of generally applicable taxes are
disregarded for purposes of the Private Payment or Security Test. This includes both payments
of taxes and payments in lieu of taxes, to the extent such taxes are imposed at a uniform rate
and are applied to all persons in the jurisdiction of the same classification. Real property
assessments and payments for a special privilege granted or service rendered are not generally
applicable taxes. The amount of payments made by nongovernmental persons required to be
taken into account is limited to the amount of debt service attributable to the portion of the bond
financed facility used by such nongovernmental persons.
PRIVATE LOAN TEST
An issue of bonds is an issue of private activity bonds if it satisfies either the Private Business
Tests or the Private Loan Test. The Private Loan Test is met if more than the lesser of 5% of the
proceeds or $5 million of the proceeds of the issue is used to make or finance loans to
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nongovernmental persons. In determining if the Private Loan Test is met, all loans must be
identified. A loan is any transaction that is characterized as a loan under general federal
income tax principles. The substance of the transaction is determinative. For example, a lease or
a management contract might be considered a loan if federal tax ownership of the facility is
transferred to the lessee or manager. Likewise, an output contract might be considered a loan if
the agreement shifts significant burdens and benefits of ownership to the output purchaser. An
arrangement is not a loan for purposes of the Private Loan test if it arises from the imposition
of a mandatory tax or other assessment of general application, if the assessment is imposed for
essential governmental functions and if an equal basis requirement is met.
QUALIFIED PRIVATE ACTIVITY BONDS

As described above, the interest on private activity bonds is not excluded from federal gross
income unless such bonds are qualified private activity bonds. There are a number of different
types of qualified private activity bonds. Each type is based on the specific manner in which the
proceeds of the bonds are used. Most of the types of qualified private activity bonds are
comprised of exempt facility bonds, mortgage revenue bonds, qualified small issue bonds,
and qualified 501(c) (3) bonds.
EXEMPT FACILITY BONDS
Exempt facility bonds are bonds at least 95% of the net proceeds of which are to be used to
finance capital costs of facilities that constitute:
Airports
Docks and wharves
Mass commuting facilities
Facilities for the furnishing of water
Sewage facilities
Solid waste disposal facilities
Qualified residential rental projects
Facilities for the local furnishing of electric energy or gas
Local district heating or cooling facilities
Qualified hazardous waste facilities, or
High speed intercity rail facilities
Net proceeds are comprised of all proceeds, less amounts in a debt service reserve fund and less
investment proceeds earned after completion of the project. The Treasury regulations contain
specific rules and definitions covering each of these exempt facility categories. In the case of
the first three categories listed above, the facilities must be owned by a governmental unit.
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MORTGAGE REVENUE BONDS

Mortgage revenue bonds are bonds, the proceeds of which are loaned to certain home buyers as
acquisition financing for a personal residence.
STUDENT LOAN BONDS
Student loan bonds are bonds, the proceeds of which are used to make loans to students for
educational purposes. A number of detailed federal tax limitations apply to student loan bonds.
Since student loan bonds are not frequently issued and are highly specialized, they are not
discussed in detail in this book.
QUALIFIED SMALL ISSUE BONDS
Qualified small issue bonds, also known as industrial development bonds or IDBs, are bonds at
least 95% of the net proceeds of which are used to finance a small manufacturing operation and
at least 75% of the net proceeds of which are used to provide the actual production facilities of
the manufacturing operation, as opposed to office and warehouse structures and equipment. An
incredibly complicated set of requirements apply to IDBs and are beyond the scope of this
manual.
QUALIFIED 501(C)(3) BONDS
Qualified 501(c)(3) bonds are bonds the proceeds of which are loaned to and/or used by
charitable nonprofit corporations described in section 501(c)(3) of the tax code. The most
common use of these bonds is to finance health care and higher education facilities. Qualified
501(c)(3) bonds are also regularly used to finance low-income housing projects and various other
charitable facilities.
The primary requirements for qualified 501(c)(3) bonds are that any financed facilities must be
owned by a public agency or a 501(c)(3) corporation and the Private Business Tests must not be
satisfied. For purposes of the Private Business Tests in connection with 501(c)(3) bonds,
501(c)(3) corporations are treated as governmental units to the extent their use of the
financed facilities is not an unrelated trade or business use
The allowable amount of private business use or private payments or security is

limited to 5% rather than 10%
Therefore, all of the Private Business Use Test concerns about leases and service contracts apply.
Until recently, each group of affiliated 501(c)(3) corporations was limited to being the
beneficiary of no more than $150 million of tax-exempt bonds. This limitation did not apply to
bonds issued to finance hospital facilities. This limitation was repealed with respect to bonds
issued after August 5, 1997 to finance or refinance capital expenditures paid after August 5,
1997.
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ADDITIONAL REQUIREMENTS APPLICABLE TO QUALIFIED PRIVATE ACTIVITY BONDS

A number of miscellaneous restrictions apply to some or all of the qualified private
activity bond categories.
Volume Cap. In general, the aggregate amount of all tax-exempt qualified private
activity bonds issued by all issuers in a state may not exceed the so-called volume cap. The
volume cap for each state is calculated annually and is equal to $75 multiplied by the population
of the state (approximately $291 million for Oregon in 2006). In order to issue tax-exempt
qualified private activity bonds, certain issuers must apply to the Oregon Private Activity Bond
Committee (PABC) to be assigned a portion of this state ceiling (the volume cap).
Exemptions. The following types of qualified private activity bonds do not require
volume cap:
Qualified 501(c) (3) bonds
Airports
Ports
Governmentally owned solid waste disposal facilities
TEFRA Public Hearing Requirements. The Tax Equity and Fiscal Responsibility Act
of 1982, or TEFRA, requires that prior to the issuance of any qualified private activity bond, a
public hearing must be held by or on behalf of an applicable elected public official or elected
legislative body. Reasonable Public Notice must be given in advance, containing certain basic
information regarding the nongovernmental borrower, the project to be financed (such as
purpose and location), and the amount of bonds to be issued. The notice must be published in a
newspaper of general circulation in the locality of the project at least 14 days prior to the
scheduled hearing. After the hearing, the elected official or body must formally approve the
bond issue. For State of Oregon issuing authorities, this approval is given by the Governor; for
local agencies, the elected legislative body (city council, board or supervisors) typically gives the
approval.
A TEFRA hearing and governmental approval are not necessary for an issue of current refunding
bonds unless the average maturity date of the refunding issue is later than the average maturity
date of the bonds being refunded. See Refunding Bonds below.
Substantial User Restriction. Any private activity bond (other than a qualified
501(c)(3) bond) will cease to be a qualified private activity bond and will lose its tax-exempt
status during any period in which such bond is owned by a substantial user of the financed
facility or by a related person of such substantial user. A substantial user is an owner or lessee
of the financed facility.
Useful Life Limitations. The average maturity of an issue of qualified private activity
bonds may not exceed 120% of the average reasonably expected economic life of the facilities
being financed with such issue.
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Land and Used Property Limits. No more than 25% of the net proceeds of a qualified
private activity bond issue (other than an issue of qualified 501(c)(3) bonds) may be used
directly or indirectly for the acquisition of land or any interest therein, and no part of the net
proceeds of any such issue may be used for the acquisition of previously used property or any
interest therein. The latter restriction does not apply, however, with respect to any building (and
equipment) if rehabilitation expenditures with respect to such building (and equipment) are at
least equal to 15% of the cost of acquiring such building (and equipment) financed with the net
proceeds of the issue.
Cost of Issuance Limit. No more than 2% of the aggregate face amount of any qualified
private activity bond issue may be used to finance the costs of issuance thereof. Certain costs,
such as letter of credit commitment fees, are not treated as costs of issuance for purposes of this
limitation. This limitation is particularly important in the case of smaller issues because the
actual costs of issuance often exceed the 2% threshold. In these cases, the issuer or conduit
borrower will have to pay the excess amount out of cash or a separate, taxable borrowing.
Certain Prohibited Facilities. None of the proceeds of qualified private activity bonds
may be used to provide any airplane, skybox or other private luxury box, health club facility,
facility primarily used for gambling, or store the principal business of which is the sale of
alcoholic beverages for consumption off premises. The prohibition against financing health club
facilities does not apply to qualified 501(c)(3) bonds.
ARBITRAGE BONDS
ARBITRAGE YIELD RESTRICTIONS
The tax code generally prohibits municipalities from issuing tax-exempt bonds if the
issuer reasonably expects to use the proceeds of such bonds, directly or indirectly to:
Acquire securities or obligations with a yield materially higher than the yield on such
bonds, or
Replace funds used to acquire such higher yielding securities or obligations
Thus, the tax code generally restricts the rate of return on investments purchased with gross
proceeds to a yield that is not materially higher than the yield on the bonds. As with the rebate
requirement discussed below, in connection with any analysis of the arbitrage yield restrictions,
the issuer must be assured that the fair market value rules are applied to determine the yield on
any investment. See Fair Market Value Rules below.
PURPOSE AND NONPURPOSE INVESTMENTS
The arbitrage limitations apply to all investments purchased with gross proceeds. This
includes two kinds of investments.
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Nonpurpose Investments. The temporary investment of gross proceeds in various

securities, such as United States Treasury obligations pending use of the gross
proceeds to finance the project or pay debt service on the bonds
Purpose Investments. Investment of proceeds in a loan to a borrower to fulfill the

purpose of issuing the bonds, such as a loan to a conduit borrower
The exceptions to arbitrage yield restriction described below only apply to Nonpurpose
Investments. However, Purpose Investments are allowed to yield either 1/8% or 1.5% higher
than the yield on the bonds depending on certain factors. Furthermore, Purpose Investments are
not subject to the rebate requirements (described below), so that issuers may retain any excess
investment return derived from the allowable 1/8% or 1.5% spread.
ARBITRAGE YIELD RESTRICTION EXCEPTIONS
There are several important exceptions to the arbitrage yield restriction rule. Almost all
bond issues take advantage of one or more of these exceptions. As a result of the reasonably
required reserve or replacement fund exception, the three-year temporary period exception and
the bona fide debt service fund exception each described below, none of the proceeds of a
typical, new money governmental financing will be subject, at least initially, to an arbitrage
yield restriction.
Reserve Funds. A debt service reserve fund will be considered to be a reasonably
required reserve or replacement fund only if the amount of bond proceeds used to provide the
fund is limited to the lesser of:
Maximum annual debt service on the bonds
10% of the proceeds of the bonds
125% of average annual debt service on the bonds
If a reserve fund qualifies as a reasonably required reserve or replacement fund, then amounts on
deposit in such fund may be invested without regard to the arbitrage yield restriction. (As
described below, however, unless an exception to the rebate requirement is satisfied, the issuer
will have to pay 100% of any excess earnings (over the bond yield) to the federal government as
rebate.)
Three Year Temporary Period. Perhaps the most important arbitrage exception is the
so-called three-year temporary period, during which the arbitrage yield restriction does not
apply to the proceeds of bonds to be used to finance the project and to pay the costs of issuing
the bonds. The issuer gets a three year period (from the date of issuance of the bonds) during
which proceeds may be invested without regard to yield so long as the issuer reasonably expects
to meet the following requirements:
Spend 5% of the net proceeds in 6 months
Spend 85% of the net proceeds in three years
Diligently work to complete the project and spend the net proceeds
Net proceeds are the proceeds net of qualified reserve funds as described above. The 5% in six
months requirement can be satisfied either by expenditure or by entering into a binding contract.
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To the extent proceeds, other than those held in a qualifying reserve fund, remain unexpended
after the end of the three-year period, such proceeds generally may not be invested at a yield in
excess of 1/8% above the yield on the bonds.
Bona Fide Debt Service Funds. Another significant temporary period is the 13-month
temporary period for amounts deposited in a bona fide debt service fund. A bona fide debt
service fund is one that is used primarily to achieve a proper matching of revenues and debt
service during each year by depositing revenues in the fund until they are needed to pay debt
service. The fund must be depleted at least once each year, except for a carryover amount not
exceeding one months debt service on the bonds or one years earnings on the fund.
Other Temporary Periods. As described in Chapter 12, Notes, Short-Term and
Interim Financing, different temporary period rules apply to proceeds of a working capital
borrowing. Additionally, more restrictive temporary period rules apply to certain types of
refundings, where the bond proceeds are to be used to retire previously issued bonds (see below).
Regardless of the application of a temporary period, the rebate requirement (described below)
applies to all gross proceeds, including all proceeds, unless an exception is satisfied.
Exemption for Tax-Exempt Investments. Regardless of the availability of any of the
above arbitrage yield restriction exceptions described above, gross proceeds generally may be
invested in other tax-exempt bonds without regard to the yield on the tax-exempt investments.
Yield Reduction Payments. Yield reduction payments are akin to rebate requirement
payments (described below), but may be allowed in additional situations where investing bond
proceeds at an unrestricted yield would not otherwise be permitted, freeing the issuer from
having to artificially restrict the yield on investments. Bond proceeds qualifying for yield
reduction payments include proceeds of an issue which initially qualified for one of the
temporary periods described above, but for which the temporary period has expired, amounts
held in reserve funds in excess of the limitations described above, and certain limited types of
proceeds arising in refunding transactions.
REBATE REQUIREMENT
Generally, the tax code requires that, to the extent gross proceeds are invested, on an aggregate,
blended basis, in Nonpurpose Investments at a yield in excess of the bond yield, such excess,
often referred to as arbitrage earnings, must be rebated to the federal government. The rebate
requirement also applies to arbitrage earnings on investments held in qualifying reserve funds.
Periods during which gross proceeds are invested at a yield below the yield on the bonds offset
gross arbitrage earnings. Thus, even though, as described above, certain exceptions to the
arbitrage yield restriction requirement permit gross proceeds to be invested at an unrestricted
yield during certain times or when held in certain funds, the rebate requirement generally
requires that all net arbitrage earnings be paid to the federal government.
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Simplified Rebate Example

(actual payment will be larger due to future valuing of effects)
Bond yield = 6%
$100,000 proceeds invested at 6.5% for 5 years
Investment earnings = $32,500
Rebate Payment = $32,500 (actual earnings)
- 30,000 (earnings at bond yield)
$ 2,500
REBATE EXCEPTIONS
There are four important exceptions to the rebate requirement which should be carefully
considered by the issuer and bond counsel when structuring a bond issue.
SMALL ISSUER EXCEPTION
The small issuer exception allows a public agency to retain all arbitrage earnings realized from
the investment of the gross proceeds of certain bond issues that are not qualified private activity
bonds. The small issuer exception is available only to issuers that possess general taxing powers
(even if those powers may only be exercised after voter approval of the tax). The exception may
be applied to a bond issue if the amount of such issue, together with the amount of any other
bonds issued or expected to be issued by the issuer and all closely related public agencies during
the same calendar year, does not exceed $5,000,000. Additionally, the issuer must expect to
spend at least 95% of the net proceeds of the bonds for the governmental purpose for which the
bonds are issued. The $5,000,000 limit is raised to $15,000,000 to the extent the additional
bonds are issued to finance construction of public school facilities.
SIX MONTH EXPENDITURE EXCEPTION
Under the six month expenditure exception, proceeds are not subject to the rebate requirement if
the issuer actually spends all proceeds of the issue within six months of the date the bonds are
issued. The six month exception is based on actual expenditures. Solely for purposes of
determining compliance with the six month expenditure exception, amounts held in a qualifying
reserve fund are not treated as proceeds. Therefore, the normal rebate requirement applies to
amounts held in a reserve fund. The six month expenditure exception is most likely to apply to
acquisition financings (where the project is being acquired rather than constructed), to TRAN
financings, to reimbursement financings, and to current refundings.
EIGHTEEN MONTH EXPENDITURE EXCEPTION
As with the six month exception, proceeds of an issue that are not held in a reserve fund are not
subject to the rebate requirement if all such proceeds (including investment proceeds) are
expended within eighteen months from the issue date, provided that at least:
15% of such proceeds are spent within six months
60% are spent within 12 months; and
100% are spent within 18 months
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Compliance with the eighteen month exception, like compliance with the six month exception, is
based on actual expenditures, although the 15% and 60% expenditure requirements are measured
based on the sale proceeds plus the aggregate investment proceeds expected to be earned during
the eighteen month period, in accordance with the issuers reasonable estimate of investment
earnings at closing. Additionally, as with the six month exception, amounts held in a reserve
fund are not treated as proceeds for purposes of satisfying the expenditure requirements. The
eighteen month expenditure exception does not apply to refundings.
TWO YEAR EXPENDITURE EXCEPTION
Under the two year rule, an issue is not subject to the rebate requirement if all proceeds
(including investment proceeds) except for amounts held in a reserve fund are expended within
two years from the issue date, provided that at least:
10% of the such proceeds are spent within six months
75% are spent within 18 months; and
Compliance with the two year exception, like compliance with the six month exception, is based
on actual expenditures, although the 10%, 45%, and 75% expenditure requirements are measured
based on the sale proceeds plus the aggregate investment proceeds expected to be earned during
the two year period. Additionally, as with the other expenditure exceptions, amounts held in a
reserve fund are not treated as bond proceeds for purposes of satisfying the expenditure
requirements. The two year expenditure exception does not apply to refundings.
In order to qualify for the two year expenditure exception, at least 75% of the proceeds of the
bond issue must be expected to be expended for construction costs, as opposed to acquisition or
refinancing costs. If the 75% construction cost requirement is not expected to be met by the
bond issue as a whole, the tax code allows the issuer to treat the bond issue as two separate
issues. If one of such issues (the construction portion) meets the 75% construction cost
requirement, then the construction portion is eligible for the two year expenditure exception.
The six month expenditure exception (but not the eighteen month expenditure exception) or the
normal rebate requirements would apply to the remaining portion. Special rules apply to pooled
financings.
PENALTY IN LIEU OF REBATE
If the proceeds of a construction issue (or construction portion) are not spent as required within
the two-year period, the issuer generally will be required to rebate all arbitrage earnings under
the normal rebate requirement. However, the tax code allows the issuer to pay a penalty in lieu
of such rebate, if the issuer so elects at the time its bonds are issued. The penalty is 1.5% of the
amount of proceeds of the bond issue which, as of the close of each six month period described
above, are not spent in accordance with the expenditure schedule. For example, if the issuer was
required to have spent $450,000 within 12 months (45%), but has spent only $400,000, the issuer
54
would pay a penalty of 1.5% of $50,000, or $750. The penalty must be paid within 90 days of
the end of the relevant six month period.
The election to pay the penalty in lieu of rebate may be useful for issuers wishing to avoid the
complications normally encountered in calculating rebate. Also, the penalty election permits
issuers to retain arbitrage earnings during the temporary period, which may exceed the amount of
the penalty even if the proceeds are not spent entirely within the expenditure schedule specified
by the two year expenditure exception. However, the benefit to be gained by balancing penalty
payments against potential arbitrage earnings depends entirely on issuers ability to invest
proceeds at interest rates above the bond yield. A delay in construction expenditure together
with a drop in interest rates can result in significant penalty payments every six months in a
circumstance where no arbitrage earnings are achieved. Extreme caution is therefore advised
and issuers should consult with their bond counsel and financial or investment advisor in
deciding whether to elect the penalty in lieu of the normal rebate requirement.
FAIR MARKET VALUE RULES

One fundamental requirement of all of the yield related limitations (for example, the arbitrage
yield restriction and the rebate requirement) is that Nonpurpose Investments must be purchased
by issuers at a fair market value price. Without this fair market value requirement, issuers could
simply direct otherwise prohibited investment profits or profits that would otherwise be paid to
the federal government to entities other than the United States. The process of purchasing
investments at an inflated price, known as yield burning, is receiving significant attention and
enforcement efforts from federal authorities. Issuers must be careful to comply with the fair
market value requirement. Reliance on a fair market value certificate of the seller of securities,
in circumstances where the seller will profit from an inflated price and the issuer will not be
harmed, is inherently suspect.
The federal government has established a special program through the Bureau of Public Debt in
which issuers can purchase special United States Treasury obligations - State and Local
Government Series (SLGS) at below market yields in order to comply with the arbitrage yield
restriction. SLGS purchased with a below market yield are deemed to be purchased at fair
market value.
HEDGE BOND RESTRICTIONS

The tax code generally prohibits tax-exempt bonds from being issued far in advance of the time
money is required to construct or acquire the assets to be financed. The temporary period rules
exceptions to the rebate requirement described above often provide good reason to issue bonds
close to the time when the proceeds will be spent. Similarly, economics dictate this result
whenever the short-term interest rates at which proceeds may be invested are lower than the long
term rates at which the bonds accrue interest.
In general, bonds will be considered hedge bonds and will not be tax-exempt unless the issuer
reasonably expects either:
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To spend at least 85% of the net sale proceeds (generally, sale proceeds, less any
amounts deposited into a debt service reserve fund) within three years of the issuance
of the bonds, or
To spend at least 10% of the net sale proceeds within one year, 30% within two years,
60% within three years, and 85% within five years, of the date the bonds are issued
These expenditure requirements do not apply to refundings, and they do not apply to new money
bonds in which virtually all of the proceeds of the bonds are invested in other tax-exempt bonds
until such proceeds are expended.
REFUNDING BONDS
Refunding bonds are bonds, the proceeds of which will be used to pay debt service on another
issue of bonds. Refunding bonds often involve complex federal tax issues and invoke a number
of very technical requirements. Although a complete description of these requirements is beyond
the scope of this book, some of the more important concepts are described generally below.
TYPES OF REFUNDINGS.
For federal tax purposes, there are two important categories of refunding bonds:
Advance Refunding - bonds issued more than 90 days before the bonds being
refunded will be retired
Current Refunding - bonds issued within 90 days of the date the bonds being refunded
will be retired
Advance Refunding Example
City of X issued bonds to finance a new library in 1980. City of X advance refunded those bonds in 1982, in 1984 and
again in 1992. City of X may not issue any further advance refunding bonds for this project since it has used up its
allowable two advance refundings: the 1982 and 1984 refundings count as the first and the 1992 refunding counts as
the second. If the 1992 refunding had instead been completed in 1985, City of X would still have one more advance
refunding left, since 1982, 1984 and 1985 refundings would only be counted as one advance refunding.
LIMITATION ON NUMBER OF REFUNDINGS

In general, issuers are limited to only one advance refunding of any particular bond issue. This
is one of the main reasons that issuers should be concerned about the total savings they are
receiving in a refunding, because they only get one bite at the apple. For bonds originally
issued prior to January 1, 1986, an issuer gets up to two advance refundings, and for this
purpose, all advance refundings issued prior to March 15, 1986 are counted as one. There are no
limitations on the number of current refundings. In general, qualified private activity bonds may
not be advance refunded at all.
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LIMITATION ON REFUNDING NONCALLABLE BONDS

In an advance refunding, the tax law generally does not permit refunding any portion of the issue
being refunded which is not callable prior to maturity. This is because, except for savings
resulting from exploiting the difference between taxable and tax-exempt interest rates, there can
be no economic savings from refunding noncallable bonds, since the higher rate of interest they
bear will have to be paid to their full maturity. An exception to this rule allows noncallable
bonds to be advance refunded for independent business reasons, for example, the need to
eliminate a restrictive covenant contained in the indenture for the refunded bonds which can only
be eliminated if all bonds issued under that indenture are defeased.
FIRST CALL DATE RULE
For advance refundings issued for the purpose of debt service savings, the refunded bonds must
be paid off with the proceeds of the refunding bonds no later than the first date that they may be
redeemed at the option of the issuer. For pre-1986 bonds, this is defined to be the first date at
which they can be refunded at a premium of 3% or less. Thus, if bonds being refunded may be
redeemed at a premium of 2% on 1/1/2008, 1% on 1/1/2009, and 0% on 1/1/2010 and thereafter,
the proceeds of the refunding bonds must be used to redeem the bonds no later than 1/1/2008.
This is true even if it would be financially advantageous to the issuer to wait until 1/1/2010 to
avoid paying the 2% penalty. The policy behind this rule is to have tax exempt bonds (in this
case the refunded bonds) in the market for the least amount of time possible.
ARBITRAGE YIELD RESTRICTION
Unlike new money financings, refunding transactions, in particular advance refundings, typically
pose significant arbitrage yield restriction issues. Proceeds of an advance refunding held in an
escrow are not allowed to be invested at a yield that exceeds the yield on the advance refunding
bonds. Often, however, the yield of investments purchased in the open market at fair market
value will exceed the yield of the advance refunding bonds. This is because even though these
investments are typically of a shorter maturity (which tends to lower yield) they are also
typically taxable investments like United States Treasury obligations (which increases yield
sometimes above the tax-exempt yield on the refunding bonds). For that reason, advance
refunding escrows provide significant opportunities for yield burning. See Fair Market Value
Rules above. In order to avoid any yield burning concerns, many issuers purchase SLGS for
their advance refunding escrows.
FEDERAL TAX LIMITATIONS ON INVESTING BOND PROCEEDS

Sections 103 and 148 of the Internal Revenue Code and related regulations and rulings generally
describe the requirements (the Federal Requirements) which must be met for the interest paid
on state and local governmental debt to be excluded from gross Income for federal income tax
reporting purposes. Among the Federal Requirements are those related to arbitrage (the
Arbitrage Considerations) and those related to use of tax-exempt financing by private
individuals or entities (the Private Activity Considerations). The following describes the
rationale for, and basic mechanics and principles of the Arbitrage Considerations.
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WASHINGTONS REGULATORY RATIONALE

The federal government considers the exclusion of interest received on state and local
governmental debt from gross income for federal income reporting purposes to be a very large
subsidy, or revenue transfer, program. The benefit of lower tax-exempt borrowing costs are
paid for by foregone federal income tax receipts from bondholders who otherwise would have
paid income tax on their interest earnings. Relative to most federal revenue transfer or subsidy
programs, tax-exempt borrowing works with minimal federal regulation and bureaucracy.
Washington believes, however, and with some justification, that the subsidy is rife with potential
for benefits accruing to particular jurisdictions and private individuals/entities in a manner
disproportionate to the costs borne by those entities or persons.
For example, a local agency which issues tax-exempt bonds at a five percent (5%) interest cost
for the sole purpose of investing those proceeds in identical duration U.S. Treasury bonds
yielding six percent (6%) would have the one-percent positive interest differential left over as an
additional revenue or income source. While one percent (1%) difference would benefit the
constituents of the agency, its cost would be borne by all federal taxpayers and, as such, would
be considered unfair and, from Washingtons perspective, abusive. Similarly, if the benefits of
tax-exempt interest rates are provided through a conduit financing to a private entity, from
Washingtons perspective, that entity would have otherwise borrowed in the taxable market,
producing income tax revenue to the federal government.
In order to keep the costs and benefits of the federal interest subsidy in some semblance of
proportion, the Federal Requirements have evolved primarily to limit tax-exempt financing to
projects and uses that are of a size and scope closely related to the needs of the local
constituency.
THE ARBITRAGE CONSIDERATIONS
In the public finance context, arbitrage is most easily understood as borrowing at one rate and
investing at another. Because state and local governmental entities can borrow at relatively low,
tax-exempt rates and do not pay income taxes on earnings from relatively high, taxable rate
securities, they are often in a position to earn so-called positive arbitrage (that is, earn more
than they are paying). Historically, the relationship between long-term (greater than 10 years)
tax-exempt borrowing rates and short-term (less than 3 years) taxable investment rates generally
allowed tax-exempt borrowers to earn positive arbitrage even on bond proceeds which were
spent relatively quickly. These circumstances gave tax-exempt issuers and their financing teams
an incentive to modify transaction structures to maximize arbitrage benefits, even if these
modifications caused bond issues to be:
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Larger than necessary
Issued earlier than necessary
Left outstanding longer than necessary to accomplish the immediate public purpose
of the project being financed
In response to what it perceived as costly abuses, in 1979 the U.S. Department of the Treasury
(Treasury) began imposing restrictions designed to curb these abuses. By the early 1980s it
became apparent that piecemeal regulation had not sufficiently reduced abusive transaction
structuring. As part of the Tax Reform Act of 1986, the United States Congress imposed the
arbitrage rebate requirement on issuers of tax exempt bonds, effectively requiring them to pay, or
rebate, to the United States any positive arbitrage they did earn. The rebate requirement, while
arguably unnecessarily burdensome for particular issuers that were not engaging in abusive
arbitrage transactions, has dramatically reduced arbitrage-related abuses industry-wide. With the
rationale and effectiveness of the Arbitrage Considerations firmly established, issuers and
Treasury have focused recently on real world implementation of arbitrage-related laws and
regulations.
Mechanically, the rebate amount, if any, periodically due to the United States is the difference
between amounts earned on investment property allocable to gross proceeds (as that term is
defined in the Federal Requirements) of a bond issue and the amount that would have been
earned had such gross proceeds been invested at the borrowing cost (the arbitrage yield) of that
bond issue. It follows then that to comply with the Arbitrage Considerations, an issuer must first
be able to (1) identify the particular bond issue to which monies or investments are allocable and
(2) calculate the arbitrage yield of that bond issue.
A second aspect of public finance arbitrage is so-called negative arbitrage, which is incurred
when investment rates are lower than borrowing rates. While negative arbitrage is not a
compliance issue, it is a very important economic consideration. In general, tax-exempt issuers
incur much more negative arbitrage than is necessary in any given interest rate environment.
This is due to a variety of reasons, not the least of which is difficulty in knowing when an
economically advantageous investment strategy is running afoul of Arbitrage Considerations
from a compliance perspective. In other words, an accounting system which allows for accurate
tracking of bond yields, amounts that are allocable to particular bond issues, and accumulated
positive and/or negative arbitrage is required before investment strategies can be optimized from
an after-tax perspective. Further, an issuer should always be cognizant of the fact that for a
specific bond issue, negative arbitrage on a fund that requires liquidity can be offset by positive
arbitrage on another fund where liquidity is not as essential.
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CHAPTER 6
STATE AND LOCAL GOVERNMENT LAW
AND DEBT POLICY
HOME RULE AND CITY CHARTERS
Generally, the power of local governments is derived from the authorities granted by the state
legislature, unless a specific grant of power has been made in the state constitution. State
legislatures possess great flexibility in determining the organization and structure of local
government units. However, the power of the state legislature over local governments is
retained, in states such as Oregon, that grant local governments home rule powers within the
states constitution.
HOME RULE
The Oregon Constitution authorizes cities to operate under home rule. Article XI, Section 2 of
the Oregon Constitution provides as follows:
Formation of corporations; municipal charters; intoxicating liquor
regulation. Corporations may be formed under general laws, but shall not be
created by the Legislative Assembly by special laws. The Legislative Assembly
shall not enact, amend or repeal any charter or act of incorporation for any
municipality, city or town. The legal voters of every city and town are hereby
granted power to enact and amend their municipal charter, subject to the
Constitution and criminal laws of the State of Oregon, and the exclusive power to
license, regulate, control, or to suppress or prohibit, the sale of intoxicating
liquors therein is vested in such municipality; but such municipality shall within
its limits be subject to the provisions of the local option law of the State of
Oregon.
Article XI, Section 2 grants local electors the power to enact laws that were previously vested in
the Oregon Legislative Assembly and limits to a certain extent the power of the Oregon
Legislative Assembly to enact laws affecting cities. Under the home rule authority granted in the
Oregon Constitution, cities have the power to enact and amend Charters that establish the
governing principles of the city with respect to municipal affairs, subject to the limitations
contained in the City Charter, the provisions of the Oregon Constitution and the provisions of the
criminal law and local option law of the State of Oregon.
In addition to the home rule authority granted to cities by Article XI, Section 2 of the Oregon
Constitution, in 1958, the Oregon Constitution was amended to authorize counties to adopt home
rule Charters, and under Oregon law, counties are authorized to exercise broad home rule
Chapter 6 State and Local Government Law
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authority. Nine counties have adopted home rule Charters, wherein voters have the power to
adopt and amend their own county government organization. Lane and Washington were the
first to adopt home rule in 1962, followed by Hood River (1964), Multnomah (1967), Benton
(1972), Jackson (1978), Josephine (1980), Clatsop (1988) and Umatilla (1993).
CITY CHARTERS
City Charters can range from relatively short, simple documents to long, complex documents. A
City Charter establishes the governing principles of the city, including its governing body and
the powers and form of the governing body. The City Charter generally authorizes the governing
body to enact ordinances and adopt resolutions and to otherwise conduct the affairs of the city.
More complex City Charters may include detailed procedures and restrictions on the exercise of
municipal power by the citys governing body and officials such as debt limitations or other
restrictions on the finances of the city. Except as to matters that are addressed in the Charter of a
city, the provisions of the Oregon Revised Statutes will apply. In connection with any municipal
financing matters, it is critical that the provisions of the City Charter and relevant provisions of a
citys municipal code and governing ordinances are reviewed in advance of any financing
transactions to be sure that all relevant requirements under the citys Charter and other governing
legal documents as well as under the provisions of Oregon law are satisfied.
INITIATIVE AND REFERENDUM POWERS

The Oregon Constitution also grants to the local electors of municipalities and districts initiative
and referendum powers. Specifically, Article IV, Section 1(5) of the Oregon Constitution
provides:
The initiative and referendum powers reserved to the people by subsections (2)
and (3) of this section are further reserved to the qualified voters of each
municipality and district as to all local, special and municipal legislation of every
character in or for their municipality or district.
The initiative and referendum powers granted to local electors by the Oregon Constitution may
be more specifically established by a city pursuant to the City Charter, City Code or by reference
to the applicable provisions of the Oregon Constitution and Oregon Revised Statutes, including
ORS Chapter 250.
Initiatives are an electoral process whereby a certain percentage of electors within a city can
propose and compel a vote on legislation. Initiatives can impact public finance transactions in
various ways. For example, the initiative process could be used to impose limitations on the
powers of the governing body to issue certain types of debt by imposing voter approval
requirements or limitations on the use of proceeds. Revenues, such as fees for water or sewer
utilities, could be impacted through the use of an initiative to limit future rate increases.
Referendum is the process of referring an action of the governing body to the local electors for
approval by popular vote. Typically, if a governing body takes action that is legislative in
nature, the people have the opportunity to submit a petition containing the requisite number of
signatures to cause the action to be placed on the ballot for approval at the next election. The
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governing body may also choose to refer an action to the voters for approval. When considering
the timing of transactions it is important to keep the referendum power in mind. For example,
under the provisions of Oregon law governing revenue bonds, a city or other local government
issuer may not sell revenue bonds authorized by non-emergency ordinance until the period for
referral of the ordinance has expired or if the issuer has authorized the revenue bonds by a
resolution, the issuer is required to publish notice of its intent to sell revenue bonds and wait 60
days following publication of such notice before the sale.
DEBT POLICY
Sound financial management relies upon sound financial policies. Municipalities can benefit
from development of and reliance upon a well thought out debt policy. Debt policies can help
ensure that debt issuance is coordinated with an issuers overall financial planning for capital
needs and ongoing operating requirements.
Debt policies provide a key set of guidelines for staff decision making. Debt polices reduce the
politicization of debt issuance by rationalizing the debt issuance objectives and processes. While
no policy should be so rigid as to exclude special circumstances, general adherence to a good
policy should increase a municipalitys financial standing by demonstrating a long-term
commitment to sound planning.
DEBT POLICY BASICS
A debt policy must answer the key question of when to borrow versus using a pay-as-you-go
strategy. The most suitable answer will differ for each municipality. However, the basics of a
good policy are similar across all jurisdictions. A good policy addresses these fundamental
questions:
For what purposes may debt be considered?
How are debt and capital improvement planning policies integrated?
What kinds of debt (general obligation bonds, revenue bonds, etc.) may be considered
and for what kinds of purposes?
What kinds of limits (in addition to constitutional or statutory) should be placed on

the amount of debt?
How will the municipality measure affordability for various kinds of debt?
What are the issuers credit objectives for each type of debt?
When and how will refunding opportunities be evaluated?
Under what circumstances will derivative products such as swaps be considered? (see
below)
How will secondary market disclosure be handled?
How will various kinds of debt be sold?
Under what circumstances will the issuer consider serving as a conduit issuer?
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How and when will the issuer engage financial services and legal professionals?
How will bond proceeds be invested?
How will ongoing compliance with federal tax law be ensured?
How and when will the policy be reviewed and how will the municipality measure
compliance?
Once a policy has been developed, it should be formally adopted by the governing body. As
noted above, there should be some form of built in compliance testing or review and the policy
itself should be reviewed and updated from time to time to ensure it serves the changing financial
condition of the municipality over time.
While a thorough and formally adopted policy are excellent goals for a municipality, many
infrequent issuers may not have the resources, staff or time to develop a formal policy.
However, the general questions posed above should be considered, even if informally, as a
potential issuer begins to think through its borrowing options.
SWAP POLICIES
Swaps (or more formally interest rate exchange agreements) are subject to specific legal
requirements regarding policy development. Specifically, Oregon statutes require that a
municipality have formally adopted a policy regarding use of derivative products before
proceeding with a swap or other derivative based transaction. See Chapter 14, Interest Rate
Swaps and Other Derivative Financial Products for a discussion of swap policy
considerations.
CAPITAL IMPROVEMENT PLANS

A key component of sound municipal financial management is a capital improvement plan (CIP)
for significant municipal infrastructure. A well thought out CIP, that is regularly updated, is
critical to long term financial planning and debt analysis. Because municipal resources are not
infinite, a CIP will allow for a more thoughtful approach to prioritizing critical needs and
assessing how best to pay for them.
Typical CIPs have five year horizons and the best CIPs are updated on a regular basis. The most
useful CIPs will identify 1) key capital projects and prioritize them; 2) timelines for various
project completion (assessing the municipalities ability to complete the work load as
appropriate); 3) cash flows associated with each project; 4) means of funding each project,
identifying pay-as-you go availability and debt options and viability.
CIPs should be integrated into long range budget planning as well. For example, development of
new capital projects may entail significant new operating costs not specifically accounted for in
the CIP.
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MUNICIPAL DEBT ADVISORY COMMISSION

The Municipal Debt Advisory Commission (MDAC or Commission) was created by the
Oregon Legislature to provide assistance to state and local governments in the issuance of
municipal bonds. The Commission collects and disseminates debt and financial information,
undertakes studies and makes recommendations to state law and local practices to improve the
sale and servicing of local government bonds. The Commission consists of seven members,
including:
the State Treasurer or designate
three local government finance officers, appointed by the Governor, one each
recommended by the Association of Oregon Counties, the League of Oregon
Cities, the Oregon School Boards Association
one representative of special districts appointed by the Governor
two other public members appointed by the Governor
The MDAC is staffed by the Oregon State Treasury Debt Management Division and is available
to provide assistance and consultation in the planning, preparation, marketing and sale of new
bond issues. Generally, any communication with or notice directed to the Oregon State
Treasurys Debt Management Division (DMD) is considered the same as to the Commission.
BOND SALE INFORMATION REPORTING
MDAC staff collect, maintain and make available information on local government bonds and
serve as a clearinghouse for all local Oregon municipal bond issues. Oregon cities, local
governments and other public bodies are required to give the Commission prior notice of the
proposed sale of new publicly offered bonds, appropriation credits, notes and other debt
obligations. Local governments are also required to provide a post-bond marketing report for
both publicly offered and non-publicly offered issuances. OAR 170-061-0000 Notice and
Reporting Requirements by Public Bodies When Issuing Bonds is the governing rule for
reporting bond sale information to the Commission.
MDAC Form 1. This form provides local government notice of a proposed bond sale to
the Commission. It is required not less than ten (10) days preceding the bond marketing date for
all publicly offered bonds. The notice provides preliminary bond sale information with updates
if postponement, cancellation or other significant changes occur. On receipt of notice the
Commission will provide a letter of compliance with OAR 170-061-0000 to the issuers bond
counsel. In the event of non-compliance, a letter will be sent to both the issuer and its bond
counsel stating the reason for non-compliance.
MDAC Form 2. The results of a bond sale are reported to the Commission by filing an
MDAC Form 2 within five (5) business days after the bond marketing date. In addition, a final
official statement is to be submitted to the Oregon State Treasury, Debt Management Division
within five (5) business days after closing. The Commission will provide a written notice of
non-compliance to the issuer and its bond counsel if the bond sales information is not submitted.
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MDAC Form 1, MDAC Form 2 and MDAC reporting requirements are available on the Debt
Management Divisions website at www.ost.state.or.us/divisions/DMD/MDAC/.
REPORTING REQUIREMENTS FOR EXCHANGE OF INTEREST RATES AGREEMENTS
Cities, local governments and other public bodies that enter into an exchange of interest
agreement or interest rate swap are required by Oregon law to notify the State Treasurer of the
execution of any such agreement. OAR 170-060-1010 Terms, Conditions, and Reporting
Requirements for an Agreement for Exchange of Interest Rates is the governing administrative
rule for swap transactions.
MDAC Form 3. Issuers must notify the Oregon State Treasury, Debt Management
Division of a swap agreement within 30-days of its execution or modification. Notification
requirements, as specified in OAR 170-060-1000, include filing an MDAC Form 3, an executed
copy of the swap authorization directive or resolution, the issuers swap policy and a legal
opinion.
The MDAC Form 3, governing rule and a sample swap policy are available on the Debt
Management Divisions website at www.ost.state.or.us/divisions/DMD/MDAC/.
MUNICIPAL DEBT INFORMATION COLLECTION, DISSEMINATION AND VERIFICATION
Treasurys Debt Management Division collects and records the MDAC Form 1, Form 2 and
Form 3 data in a comprehensive database of all long-term municipal debt issued by Oregon
cities, local governments, special districts and public agencies. The data is supplemented by
population statistics and true cash or market valuation data of all Oregon municipal tax code
districts. The Division also monitors upcoming local government bond sales, current interest
rates and interest rate trends in both the Oregon and national bond markets. Some of the MDAC
information services that may be interest to city and local government issuers include:
Oregon Bond Calendar. The MDAC sponsors this publication as a service to local
bond issuers and the investing public. The Oregon Bond Calendar lists recent and planned sales
of Oregon state and local government bonds. It provides selected bond call and redemption
information, public meeting information for the MDAC and the Private Activity Bond
Committee (PAB), information on upcoming bond measures and initiatives and election
schedules, filing deadlines and election results. The Oregon Bond Calendar has current local
and national market interest rate statistics in the form of the Oregon Bond Index and the Bond
Buyer Index.
Information on the Calendar is updated daily and is available on Treasurys website at
www.ost.state.or.us/divisions/DMD/MDAC/.
Overlapping Debt Report. Debt for a particular city may include not only the bonds
issued by the city itself but also bonds sold by other overlapping taxing authorities or
jurisdictions. These might include the county in which the city is located as well as school and
library districts, parks and recreation, water and sewer and other taxing districts. The
overlapping debt report for a city will list its own outstanding debt and debt service schedules
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and provide the overlapping debt percentages for all general obligation debt issued by
overlapping tax jurisdictions to which the city is subject.
Overlapping debt reports are available for a fee directly from Oregon State Treasury. Request
forms can be found on Treasurys website at www.ost.state.or.us/divisions/DMD/.
Debt Information Verification. Cities and other local governments that issue bonds are
required by Oregon law to verify their outstanding debt with the MDAC at least once every
biennium. The MDAC staff will send out debt verification requests to all cities and local
governments to confirm their outstanding debt every odd numbered year.

What is Home Rule?
Home rule refers to the authority of local governments, such as cities and counties, to define the
form and organization of local government by a locally-approved charter rather than by a general
or specific state law. Article IV, Section 1(5) of the Oregon Constitution grants the power to
adopt home rule charters to the voters of municipalities and Article XI, Section 2 establishes
immunity from legislative control and provides that only voters have the power to enact, amend
or repeal a charter, subject to the constitution and criminal laws of the state.
See Home Rule in Oregon Cities: 100 Years in the Making 1906-2006, a League of Oregon
Cities publication for a detailed history of Home Rule authority in Oregon.
What is a Charter?
Under Article XI, Section 2 of the Oregon Constitution, cities are authorized to operate under
home rule subject to the adoption of a City Charter. The Charter establishes the governing
principles of a city including its governing body and the powers and form of the governing body.
City Charters may be long or short, complex or simple depending on the form proposed to and
approved by the voters of a city.
What is the difference between an initiative and a referendum?
Citizens can propose legislation for a vote by the electors of a city, county or the entire state, if
they gather the required number of signatures to place the proposed legislation on the ballot. A
measure that is initiated by the people, and not by a governing body, is referred to as an
initiative.
Referendum describes the process whereby an action of a governing body, such as a City
Council or the state Legislative Assembly, is referred to a vote of the electors. For example, a
City Council could approve an increase in a tax, subject to a referral to the electors of the city for
approval.
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CHAPTER 7
GENERAL OBLIGATION BONDS
General obligation bonds are secured by the unlimited ad valorem property taxing authority
bonds of a municipality. In Oregon, general obligation (GO) bonds must be approved by the
municipalitys voters. Oregon municipalities are authorized to issue general obligation bonds
only to finance capital construction and improvements. Voter approval of a bond measure
authorizes a municipality to sell bonds in an amount not to exceed the amount specified on the
ballot and levy taxes in the amount necessary to pay the principal and interest on the bonds. GOs
are primarily used to fund the construction of facilities that are non-revenue producing such as
libraries, police and fire stations and parks and recreational facilities. However, GOs can be used
to fund any capital construction or improvement project so long as the municipality complies
with voter approval requirements and applicable State law.
ELECTORAL REQUIREMENTS
General obligation bonds must be approved by a majority of the voters voting in an election with
at least a 50 percent voter turnout. The so called double majority requirement was imposed by
the passage of Measure 50 in 1997. The only exception is the November general election in even
numbered years, which has no turnout requirement. The March, May and September elections
each year and the November election in odd numbered years are all subject to the double
majority requirement.
ALLOWABLE USE OF PROCEEDS

If a general obligation bond is to be secured by unlimited property taxing authority, the proceeds
can be used only for capital construction and improvements as defined by Article XI, Sections 11
and 11b of the Oregon Constitution. The Constitution specifically prohibits using GO bond
proceeds for reasonably anticipated maintenance and repair and for supplies and equipment that
are not intrinsic to the structure.
In addition to meeting the constitutional and statutory capital construction and improvement
restrictions, Oregon municipalities may only issue bonds for the purposes authorized in the
statutes that give those entities the authority to issue bonds.
The use of bond proceeds (and any interest earned on investment of the proceeds) are also
limited to the purposes that are identified in the ballot title authorizing the issuance of the bonds.
For example, a city whose ballot title specifically sought authorization to build and equip a fire
station cannot then use some remaining portion of the bond proceeds to remodel the city hall.
Municipalities wishing to maintain flexibility in the use of bond proceeds should be careful not
to restrict the ballot title language too severely. A discussion of the ballot title requirements for
general obligation bonds is included in Chapter 16, Bond Election Process.
Chapter 7 General Obligation Bonds
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The statutory definitions of allowable use of proceeds are somewhat broader than the
constitutional definitions. Specifically, statute defines capital construction and improvements to
include the construction, modification, replacement, remodeling, and renovation of a structure, or
an addition to a structure that is expected to have a useful life of more than one year, including
but not limited to:
Acquisition of land, or a legal interest in land, in conjunction with capital

construction of a structure
Acquisition and installation of machinery or equipment, furnishings, or materials that

will become an integral part of a structure
Activities related to the capital construction, including planning, design, authorizing,

issuing, carrying or repaying interim or permanent financing, research, land use and
environmental impact studies, acquisition of permits or licenses, or other services
connected with the construction
Acquisition of existing structures, or legal interests in structures, in conjunction with

the capital construction
Both the constitution and statutes also allow purchase of public safety and law enforcement
vehicles with a useful life of five years or more.
The constitutional definition of capital construction and improvements excludes maintenance and
repairs, the need for which could be reasonably anticipated. Under ORS 310.140, maintenance
and repairs, the need for which could be reasonably anticipated include activities which may be
deducted as an expense under the provisions of the Internal Revenue Code of 1986, as amended,
and that do not add materially to the value of the property nor appreciably prolong its life.
The constitutional definition of capital construction and improvements also excludes supplies
and equipment that are not intrinsic to the structure. Under ORS 310.140, supplies and
equipment intrinsic to the structure include those items that are necessary to permit a structure
to perform the functions for which the structure was constructed, or that will, upon installation,
constitute fixtures considered to be part of the real property that is comprised, in whole or part,
of the structure and land supporting the structure.
The statutory definition of capital construction and improvements also excludes furnishings,
except where the furnishings are acquired in connection with the acquisition, construction,
remodeling or renovation of a structure, or the repair of a structure that is required because of
damage to or destruction of the structure.
DEBT LIMITATIONS
State law limits the principal amount of outstanding general obligation debt Oregon
municipalities may have at any time. The limit is based on the municipalitys Real Market
Value. Note that although Measure 50 reduced Assessed Value, it did not affect Real Market
Value or a municipalitys statutory debt capacity.
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Debt limits are different for each type of municipality. The applicable debt limits for some of the
major general purpose and special district entities are summarized in the following table.
Statutory GO Debt Capacity in Oregon
Issuer Type
% of RMV
City
3.00%
County
2.00%
Park & Recreation District
2.50%
County Service District
13.00%
Rural Fire Protection District
1.25%
NOTICE OF CLASSIFICATION OF USES

The issuing municipality may give notice of its adoption of an ordinance or resolution specifying
the authorized uses of proceeds of bonded indebtedness within 15 days after the adoption of the
authorizing action in its newspaper of record, in the form described in ORS 305.580(9). This
process shortens the time period for challenging the uses of bonded indebtedness proceeds to
within 60 days after the adoption of the resolution or ordinance. If such notice regarding the
authorized use of proceeds is not published, a petition to challenge the use of bonded
indebtedness proceeds may be filed within 180 days after the questioned use of the proceeds is
made.
STRUCTURING OF GENERAL OBLIGATION BONDS

As discussed broadly in Chapter 17, Structuring of the Bond Issue all debt repayment
structures must be tailored to the specific source of repayment and take into account timing and
other related issues specific to that source. In the case of GO bonds, the primary source of
repayment is the annual property tax levy. Consequently, GO bond structuring needs to account
for the timing and amount of property tax levies.
Municipalities must be careful to structure initial bond repayments on a schedule that allows for
adequate collection of the initial years and on going tax levies. For example, a municipality
selling new bonds in the fall will not have any property taxes to make initial debt repayment until
the following November or December.
Municipalities must also account for the levy impact that is created by uncollected taxes in the
levys first few years. Because there are no prior year collections yet to offset uncollected taxes,
the tax rate in the early years can spike up higher than anticipated. Consequently, in the first
years of a new bond property tax levy, a municipality will need to increase the bond tax rate to
account for current year uncollected taxes not offset by prior year tax collections.
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DEBT REPAYMENT OPTIONS FOR GENERAL OBLIGATION BONDS

Several specific structuring options relating to general obligation bonds are discussed here.
Please see also Chapter 17, Structuring the Bond Issue, for a broader discussion of debt
structuring concepts.
STRUCTURING GOALS
The structure of a bond issue, that is, the timing and manner of principal and interest payments,
should coincide with the municipalitys repayment plan. The most important consideration in
determining bond issue size and structure is balancing project requirements with affordability.
Affordability can be measured in a number of ways. However, with general obligation bonds
that are repaid primarily, if not entirely, from property taxes, affordability translates into the tax
rate paid by taxpayers. Taxpayers do not pay an interest rate; they pay dollars expressed in a tax
rate per $1,000 of assessed value of their property.
One measure of affordability then is the tax rates impact on the taxpayer over the life of the
bond issue. The municipality should also consider the cost of any outstanding debt and any
future debt plans.
The optimal repayment plan is one that best matches the debt service to the municipalitys ability
to repay. In the case of general obligation bonds, the municipality does not repay the bonds out
of its own resources, its taxpayers do. Consequently, the question a municipality must answer is,
What repayment plan best fits our taxpayers abilities and inclinations?
Following are several simple repayment plans and their impact on tax rates:
Level Debt Service. In this plan, the new issue is structured to produce a debt
service schedule that is relatively level each year. This is akin to the standard
home mortgage. In the early years, debt service is primarily interest. In the later
years, debt service is primarily principal. Assuming a municipalitys assessed
value grows over the life of the issue, a level debt service structure produces
higher tax rate impacts in the early years and lower tax rates in the later years.
Level Levy Rate. This repayment plan structures debt service so that the resulting
tax levy rates are more or less the same each year. This structure accounts for
estimated growth in assessed value and the corresponding increase in repayment
resources. This structure, on average, defers principal repayment slightly to
account for increasing assessed values.
A level levy rate plan can significantly reduce taxpayers tax rates in the earlier years of the debt
repayment. The lower tax rates produced by rising assessed values are captured early in the
repayment plan rather than later as occurs in the level debt service approach. It is important to
note here that a municipality may not ask voters for a specific level of rate for a GO bond
issue, but may only ask voters to approve a par amount of bonds to be issued. Consequently
level levy type structures are based on assumptions about assessed valuation changes in the
future and can only eventually approximate an actual level rate.
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Comparison of Rating Agency Categories

Investment Grade Credits
Moodys Investors Service
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Standard & Poors

AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBB-
Fitch
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBB-
OTHER STRUCTURING CONCERNS

Municipalities should always take into account the combined effect of new, outstanding, and
anticipated future debt when structuring a new debt issue. In addition, municipalities should also
account for other jurisdictions debt plans and tax rate burdens in anticipating voters reaction to
the financing plan and its costs.
INTEREST RATE SWAPS WITH GENERAL OBLIGATION BONDS

Issuers of general obligation debt face particular issues in using swaps. The risk of an
involuntary termination payment (see Chapter 14, Interest Rate Swaps and Other Derivative
Financial Products) is the biggest concern. Under current Oregon law, the issuer may not levy
a property tax to pay the termination payment. Consequently, a termination payment would have
to be paid from a municipalitys general fund. Because a termination payment could be
substantial, an issuer of property tax based debt would be unlikely to take that risk.

What is the difference between a bond and a general obligation bond?
A bond is simply a type of loan. Investors loan money to a municipality for specific capital
projects. A bond normally carries a fixed interest rate payable semiannually until the bond
matures. A bond issue usually includes bonds that mature on different dates so that the entire
principal does not come due on a single date.
General obligation bonds issued by Oregon municipalities are secured by the issuers ability to
levy unlimited property taxes, not subject Oregon Constitutional tax limits, on all taxable
property within its jurisdiction to repay the bonds debt service.
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Do Oregon municipalities need voter approval to issue general obligation bonds?

Yes. If a municipality wishes to borrow money with an unlimited property tax pledge, the
municipality must have voter approval to do so.
What can general obligation bond proceeds be used for?
General obligation bond proceeds may be used only for those projects and costs listed on the
ballot. Oregon law also limits the use of bond proceeds to capital construction and
improvements.
Can a municipality use general obligation bonds for operating purposes?
No. Bond proceeds may be used only for capital projects and improvements. However, if voters
approve, a municipality may be able to pay for certain continuing capital projects with bond
proceeds, thus removing the need to otherwise cover those costs with general fund money.
What other limitations apply to the use of general obligation bond proceeds?
A municipality should consult bond counsel to discuss the use of proceeds related to any given
bond issue. In general, municipalities should not use general obligation bond proceeds for
supplies, computer software, or reasonably anticipated maintenance and repair work, for
example, regularly scheduled painting, roof patching, parking lot pavement, etc.
Are there legal restrictions on the size of bond issues?
Yes. State law limits the amount of outstanding general obligation debt a municipality may have
at any time. The limit is based on the municipalitys real market value and the kind of entity it
is, for example, city, county or fire district.
Note that even though Measure 50 reduced assessed value, it did not affect real market value
or a municipalitys debt capacity. Also note that a municipalitys debt capacity includes any
outstanding bonded debt.
How long does it take to receive bond proceeds once the voters approve a bond issue?
It depends. If the municipality is ready to proceed with the project immediately, a bond issue
can be structured, sold and closed within six to eight weeks. Generally, however, the issuance
process takes about three months from start to the receipt of money at closing.
How much does it cost to issue general obligation bonds?
A number of issuance expenses are incurred in issuing bonds. The total expense varies
according to issue size, structure and credit quality. Issuance costs may vary greatly. In
addition, the issuer pays underwriting fees, which may vary from 0.20 percent to 2.0 percent of
the bond proceeds. This amount is determined by the size and type of debt issued.
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How does the municipality pay these issuance costs?

Issuance expenses can be paid from bond proceeds. When determining the size of the bond
issue, the municipality should ask its financial consultant to determine the likely issuance costs.
These costs may be added to the bond authorization amount being requested from the
municipalitys electorate.
What kinds of projects can I pay for using left over bond proceeds?
State law limits the use of bond proceeds (including interest earned on the proceeds) to either
items specified in the ballot title or for payment of debt service on the bonds.
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CHAPTER 8
FINANCING AND LEASE PURCHASE
AGREEMENTS
In this chapter, we generally discuss the use of financing agreement authority to issue obligations
backed by the full faith and credit of a municipality. Financing agreement or lease purchase
authority can also be used in conjunction with a limited pledge of revenues.
Oregon municipalities have the authority to enter into financing or lease-purchase agreements
without voter approval. These agreements can be used to finance a wide variety of capital items
including new facilities and equipment and maintenance projects prohibited from general
obligation bond levies under Oregon constitutional tax limitations. These agreements also can be
used to pay for construction of new facilities or major renovation of existing facilities which
might be financed with voter approved bonded debt but may be more easily financed with a
lease-purchase agreement. However, this authority by itself provides no additional tax or
revenue source for debt repayment.
In many ways, a financing or lease-purchase agreement is similar to a bond issue. Money is
borrowed from an investor and lease payments are made to that investor until the obligation is
paid. Payments under such agreements contain a principal component and an interest
component. Just like a bond issue, the interest component can be exempt from federal and state
income taxes, resulting in low borrowing costs.
Lease-purchase based transactions were once commonly marketed under the term certificates of
participation or COPs. In Oregon, lease-purchase transactions that carry the unconditional
promise to pay from the general fund are now typically marketed under the term of full faith
and credit obligations or FFCOs. Lease-purchase agreements that must be subject to annual
appropriation are discussed later in this chapter. For the balance of this chapter, we will use the
term financing agreement.
LIMITATIONS
Under ORS 271.390, the estimated weighted average life of a financing agreement may not
exceed the estimated weighted average life of the real or personal property that is financed. Nor
can the financing term exceed 30 years. For Oregon counties there is a limitation on how much
debt that is not subject to annual appropriation can be outstanding at any one time the limit is
one (1.00%) percent of the countys real market value. Other Oregon municipalities have no
specific restriction on the amount of financing agreements that can be issued or outstanding at
any one time.
Chapter 8 Financing and Lease-Purchase Agreements
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FINANCING AGREEMENT DOCUMENTATION

Oregon municipalities may enter into a financing agreement (and authorize the issuance of debt
certificates) for which the obligation to repay is binding and can be enforced in court. In effect,
this makes a financing agreement an obligation payable from the issuers general fund.
Because this obligation is binding, a municipality typically will not need to provide additional
security. In most instances, the issuers promise to repay the financing obligation from its
general fund is more valuable to investors than a security interest in the property being financed.
Financing agreements are often broken into smaller pieces and marketed to investors as full
faith and credit obligations (FFCOs) or special obligations.
Two basic documents are required for a financing agreement transaction. A third document is
required if the issue is sold to public investors. Bond counsel (typically referred to as special
counsel for a financing agreement) should draft the required documents. The three documents
are (1) resolutions; (2) financing agreements; and (3) escrow agreements. These documents are
slightly different for full faith and credit obligations than they are for other types of financings
because of the unique structures of these transactions.
RESOLUTION
A Resolution or Ordinance that authorize the terms of the financing agreement must:
Include the principal amount, interest, maturity, and prepayment provisions
Authorize the execution of other documents and the taking of other actions necessary
to complete a financing transaction
Approve the selection of the lessor and appointment of the financing team members
such as bond counsel and underwriter
The resolution may deal with these items in detail but more typically delegates the responsibility
for setting terms, such as interest rates and redemption provisions, to the appropriate designated
staff. In such cases, parameters such as maximum principal amount and interest rate may be set
in the resolution with the actual amounts and rates set later by staff in conjunction with the
financing team.
FINANCING AGREEMENT
The Financing Agreement is between the municipality as the lessee and the institution serving
as the lessor. The lessor may be a third-party financial institution, especially if the financing
agreement is divided into FFCOs. The agreement may include language specifying the issuance
of FFCOs and the use of an escrow agreement. The agreement incorporates terms established in
the resolution and provides details of the property to be financed, payment schedules, security
provisions, and other matters.
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The form of a financing agreement should always be subject to negotiation. An issuer should not
execute any financing agreement without having it reviewed by special (bond) counsel and the
districts general counsel.
ESCROW AGREEMENT
An Escrow Agreement is required for a financing agreement that will be broken into smaller
pieces and sold to investors through the bond market. The parties to this document are the issuer
and the escrow agent. The escrow agreement is needed because the issuers repayment
obligation is being sold to investors as separate units and documentation is needed to provide the
terms of this division. The escrow agreement usually is a separate document but may be
combined with the financing agreement.
An escrow agreement will define the duties of the escrow agent, how payments are to be made to
the investors, the actions that the escrow agent may take if the terms of the financing agreement
or the escrow agreement are violated, and other items.
CREDIT STRUCTURES
Financing agreements can employ very flexible underlying credit structures. In this chapter, we
have generally assumed the use of the full faith and credit structure where the municipality
pledges all generally available resources for repayment of the debt. However, a municipality can
use the financing agreement authority much like a revenue bond. In this format the municipality
pledges only a specific stream of resources for debt repayment. Both general types of credit
structures are briefly discussed below.
FULL FAITH AND CREDIT OBLIGATIONS
Full faith and credit obligations is a marketing term used to describe a certificated stream of
financing payments. Another common marketing name is Special Obligations. In this case,
the financing agreement pledges all generally available resources for debt repayment and does
not other wise limit a governments obligation to repay thus the full faith and credit moniker.
FFCOs can be used by a municipality to self insure a project that may be difficult to finance on a
stand alone basis. For example, a city may need to finance improvements at its general aviation
airport. The improvements are expected to pay for themselves through increased lease revenues.
However, using an airport revenue bond structure for a small airport may prove difficult or
impossible to finance because of investor reluctance. The municipality may choose to use its full
faith and credit as the pledged security while actually paying the debt from the increased airport
lease revenues. Self insuring using this method transfers any risks of the financing risk to the
citys general fund so appropriate care should be exercised in when substituting the general fund
as credit enhancement.
A FFCO issue usually bears only slightly higher interest rates than a general obligation bond.
Because there is no ability to levy additional property taxes to pay the debt service, investors do
not consider FFCOs to be as well secured as a General Obligation Bond and therefore expect a
somewhat higher interest rate to compensate for the perceived higher risk. FFCOs are often
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rated or additionally secured by municipal bond insurance policies. Ratings tend to be slightly
lower than for the same issuers General Obligation Bonds and bond insurance premiums
somewhat higher than those for General Obligation Bonds, all reflecting the perceived difference
in credit.
REVENUE SPECIFIC OBLIGATIONS
Financing agreements can be structured to mimic a typical revenue bond structure (see
Chapter 10, Revenue Bonds for additional discussion of revenue bond characteristics). In this
format, the repayment stream is limited to a pledge of specific revenues. Such a structure may
include debt service reserve requirements, coverage requirements and additional debt limits
much like a more traditional revenue bond structure. In this way financing agreements provide a
municipality with an extremely flexible financing tool.
ADDITIONAL STRUCTURING CONSIDERATIONS FOR FINANCING AGREEMENTS
Financing agreements or FFCO transactions are exceptionally flexible financing tools. Multiple
projects can be wrapped into a single transaction. Separate underlying amortization schedules
for disparate types of projects can be aggregated into a single overarching transaction.
Repayment schedules can be tailored to differing sources of repayment. As noted above, specific
revenue streams can be pledged instead of the entire general fund resources of the issuer.
Because of the credit strength of a municipalitys binding obligation to pay debt service from its
general resources, cash or surety reserves are not usually necessary in a FFCO structure.
However, issuers should note that equipment vendors may have different requirements for
financing acquisitions of their equipment.
OTHER FULL FAITH AND CREDIT AUTHORITIES
Generally, full faith and credit authority requires financing of some type of capitalizable asset.
However, Oregon law allows specifically for the use of limited tax or full faith and credit
obligations to finance unfunded pension liabilities. ORS 238.694 allows a municipality to use
either the limited tax authority found in ORS 288.150 or the revenue bond authority found in
ORS 288.805 to finance unfunded pension liabilities.
SUBJECT-TO-APPROPRIATION CREDITS
Before broad authority existed for Oregon municipalities to make unconditional pledges of
available resources, lease-purchase transactions were almost always subject-to-annual
appropriation. Terms of the lease-purchase agreement stipulated that annual debt service
payments were subject to the issuers annual budgeting process. This was necessary because of
constitutional or statutory limits on debt incurred without voter approval. Lease-purchases that
were subject to the annual appropriation process were not considered debt because there was
no long term commitment to repay. If a municipality ever failed to appropriate the annual debt
service for a lease, the lease legally terminated (it was not technically an event of default) and
the items financed were returned to the trustee. This often made sense in the case of an
equipment financing, but as this financing structure was extended for use on larger projects (such
as a sewer system project or the construction of a controversial city hall), the subject-toappropriation lease became a problem. This structure became notorious for defaults (though
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technically not a default under terms of the financing documents, a failure to appropriate is
generally considered a default by the bond market) in the 1990s. While this structure is still
used in other states where borrowing authority is more limited, in Oregon, this form of financing
has virtually disappeared.

How do financing agreement issues differ from a General Obligation bond issue?
In most respects they are similar. The issues are sold to investors at low interest rates because
the interest is typically exempt from federal and state income taxes. Interest on financing
agreement issues is paid semi-annually and principal is paid annually.
There are two important differences:
A municipality cannot levy additional property taxes to pay debt service on a

financing agreement issue as it can to pay debt service on a GO bond. Principal and
interest on a financing agreement issue must be paid from an issuers existing
resources.
A financing agreement issue usually bears a higher interest rate than a GO bond
because there is no ability to levy additional property taxes to pay debt service.
Consequently, investors do not consider financing agreement issues as safe as GO
bonds and, therefore, demand a higher interest rate to compensate for the higher risk.
How do they differ from revenue bonds?

A financing agreement can be structured very similarly to a classic revenue bond if the issuer
wishes. For example, a financing agreement could specify a revenue stream and incorporate rate
covenants and reserves. A revenue bond is subject to certain public notification and referral
process whereas a financing agreement is not. However, revenue bonds can be used for a wider
range of applications (including even operating capital) that financing agreements. Revenue
bonds (at least those with a classic structure) are widely understood and accepted by investors
whereas a financing agreement backed issue may take additional investor education before they
are accepted.
Is voter approval needed to use financing agreements?
No. Voter approval is not required.
What can be financed with financing agreements?
In general, the proceeds of a financing agreement may be used for the same purposes as the
proceeds of a bond issue plus items for which bonds may not be issued. Therefore, a financing
agreement may be used to finance the acquisition and construction of new buildings or additions
to or renovations of existing buildings, the acquisition of land, as well as to purchase equipment
and supplies, and to pay for maintenance which cannot be financed with general obligation bond
proceeds. Financing agreement proceeds cannot be used to finance working capital.
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What are full faith and credit obligations?

This is simply a marketing name for financing agreements that are divided into smaller pieces
and sold in the public markets like bond issues. Because most Oregon municipalities have
authority to enter into financing agreements, they also have authority to authorize an escrow
agent to issue securities based on those agreements.
Will the municipality have to give a mortgage or security interest in the property financed with
the financing agreement?
No. Investors usually do not believe that the property financed under a financing agreement has
value to them if an issuer defaults on debt service. Therefore, investors typically do not believe a
mortgage or security interest on that security has value. Instead, investors rely on the binding
nature of the underlying financing agreement, and the ability to sue and obtain monies from an
issuers legally available funds.
How large can a financing agreement issue be?
There is no legal limitation, except for Oregon counties. However, the issuer must be
comfortable with its ability to pay the debt and satisfy the underwriter and investors that it will
have sufficient resources to pay debt service over the life of the financing. Once issued, debt
service on a financing agreement is a binding obligation. (Financing agreements or FFCOs may
be redeemed, or paid off, early, however, depending on the specific terms of the issue.)
The issuer also must be able to show potential purchasers where it will get the monies to pay
debt service. Will it redirect current resources or have additional resources to service the debt?
How long does the municipality have to spend the proceeds of a financing agreement?
Any financing agreement that is designed to be tax-exempt must comply with all the federal
rules regarding a tax-exempt issue. For example, most proceeds of a financing agreement for
capital construction generally must be spent within three years of the date of issue.
How long will it take to get the money from a financing agreement?
It will take approximately eight to 10 weeks to get the money through a financing agreement
once the issuer has made a decision to proceed.
What is the maximum term for financing agreements?
The estimated weighted average life of the financing agreement cannot exceed the estimated
dollar weighted average life of the property financed. The most reasonable term or maturity for
the financing agreement issue is determined by the issuers available resources and by the
property being financed. Under ORS 332.155, the maximum term is 30 years.
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CHAPTER 9
TAX INCREMENT AND ASSESSMENT
FINANCINGS
This chapter focuses on two distinct types of financings that do not generally fall under the
category of general obligation bonds, financing agreements or revenue bonds. Tax increment
borrowings are a financing tool for urban renewal, while assessment debt results from the
creation of a local improvement district. We discuss each separately.
TAX INCREMENT FINANCING

DEFINITION AND PURPOSE
Tax increment financing was developed in connection with urban renewal areas. In fact, urban
renewal agencies must technically be in debt in order to continue to collect tax increment
revenues. The purpose of urban renewal is to leverage (that is, borrow against) future tax
increment revenues in order to accelerate development opportunities within area targeted plan
area. Proceeds of a tax increment financing can only be used for projects identified under the
urban renewal plan. Projects are often widely defined and, unlike many municipal financings,
often include programs (through both loans and grants) directly aimed at private sector
development. Consequently, parts of tax increment financings are often done on a taxable basis
as opposed to on a tax-exempt basis.
LEGAL AUTHORITY AND APPROVAL PROCESS
Tax increment financings rely first on the creation and development of an urban renewal agency
and plan area by a city or a county. We do not discuss the creation of plan areas here but assume
that the issuer has already created the urban renewal agency and plan area.
An individual tax increment financing can be authorized by a single resolution of the urban
renewal agency. Depending on federal tax status of the projects financed, additional actions such
as TEFRA hearings (see Chapter 5, General Federal Tax Requirements) may be required.
SECURITY AND SOURCE OF REPAYMENT
In the case of tax increment financings, the pledge is typically of the divide the taxes revenue
stream coming to the urban renewal agency. In the case of certain grandfathered urban renewal
areas, additional property tax revenue may be available through a special levy. Some
municipalities opt to use their full faith and credit authority (see Chapter 8, Financing and
Lease Purchase Agreements) to self insure urban renewal credits while still intending to make
debt service payments from available tax increment revenues.
Chapter 9 Tax Increment and Assessment Financings
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Tax increment debt poses some very special considerations for an issuing urban renewal agency.
Tax increment obligations can be backed solely by one or two different sources, depending on
when the urban renewal area was created or significantly amended. For areas created prior to the
adoption of Measure 50 in 1997, agencies had a one time option of collecting both the traditional
divide the taxes (or tax increment) revenue and levying a special levy up to a certain
amount. For newer areas, or for areas that have undergone significant plan modifications since
the passage of Measure 50, only the divide the taxes revenue is available.
Division of tax revenues depend on growth in the assessed valuation in the urban renewal area.
By making improvements in the targeted plan area, it is expected that property values will
increase due to private investments that would not otherwise occur. This increase in value is
called increment. All properties in the urban renewal area are taxed exactly as before the plan
area was created, but the revenue from applying the tax rates of overlapping jurisdictions to the
incremental value goes to the urban renewal agency for improvements. Changes in the
incremental assessed value and or changes in the tax rates cause fluctuation in the available tax
increment revenue. Generally, the larger the area and the more diversified and established the
properties, the more robust the revenue stream from divide the taxes.
Agencies with the ability to levy the additional special levy tend to fare somewhat better as
credits. The special levy authority improves the predictability of the agencys cash flow by
providing an additional source of revenue that somewhat offsets the potential fluctuations in the
divide the taxes source. This is true except in situations where the incremental assessed value of
the area declines, which erodes the value of the special levy at the same time that divide the taxes
revenue falls.
Tax increment bonds may not be cross collateralized by tax increment streams from other urban
renewal areas in the same city or county.
RATINGS AND MARKETING CONSIDERATIONS
The unique nature of tax increment collections creates challenges for ratings agencies or bond
insurers, and thus for underwriters of tax increment debt. As with any financing, the ratings
analysts, bond insurers and investment bankers will evaluate the size and predictability of the tax
increment stream. Factors include size and diversity of the area, concentration of major
taxpayers, historical collections, overlapping tax rates (and Measure 5 compression threats) and
the presence of a special levy. Only the largest and most secure tax increment financings tend to
get high grade ratings. Most areas have difficulty getting ratings in the A category. Likewise,
bond insurers are reluctant to qualify many tax increment financings for insurance.
Without high grade ratings or bond insurance, underwriters audience of investors is
limited. Successful publicly marketed issues are usually smaller issues that can be absorbed at
reasonable interest cost by the more limited investor audience, or extremely high grade urban
renewal credits with a good rating and/or insurance. Other issuers must usually rely on placing
the debt with a commercial bank portfolio. This is particularly true with start up areas with little
or no tax increment collection history.
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While investors can make informed decisions about the quality and volatility of the
divide the taxes revenues, many investors place a high level of concern on the uncertainty
generated by Oregons initiative system that can (and has) inadvertently or intentionally
dramatically affected tax increment collections. Tax increment investors have little protection
against radical alterations of the Oregon property tax system that either intentionally or
unintentionally alter the amount of money an urban renewal agency receives from the divide the
taxes sources.
ASSESSMENT BASED FINANCINGS

Assessment borrowings are allowed under Oregon state law to provide cities or counties a viable
financing tool to fulfill their obligations under the local improvement district statutes. When a
local improvement district is formed, the forming agency (city or county) must allow benefited
property owners the ability to finance their assessments. The assessment borrowing statutes
were developed long before other more robust financing mechanisms existed. The assessment
borrowing authority has been modified numerous times by the imposition of constitutional
restrictions imposed by Measures 5 and 50.
Prior to Measure 5, assessment financings could be issued as full blown unlimited tax
general obligation bonds of the issuer. Measure 5 eliminated that ability and since then, Local
Improvement District assessments have been financed using other forms of security (see below).
State law allows municipalities to borrow to finance signed assessment contracts. The amount of
borrowing is limited to the principal amount of assessment contracts outstanding. A single
authorizing resolution of the governing body is required with authority to execute the financing
details and terms typically delegated to appropriate staff.
For assessment issues, Oregon state law allows the pledge of all assessment payments and
proceeds from the sale of foreclosed properties. In addition, most municipalities use some form
of limited pledge of the municipalitys unobligated general fund resources.
Local Improvement District financing is one of the more complicated challenges for a
municipality. The unique combination of relatively small dollar amounts, risks posed by the
nature of property-based financings, state law restrictions and federal tax law restrictions
combine to make a properly executed LID financing a significant accomplishment.
Lets begin with a simple explanation of a typical LID financing. A city or county may form a
Local Improvement District. Once formed and the project completed, the cost of the project is
spread among the benefited properties based on some agreed upon assessment formula.
Benefited property owners have a period of time where they can either pay the assessment in full
or sign assessment contracts with the municipality. Assessment contracts must be for a term of
at least 10 years (or the assessments are considered property taxes and are subject to the Measure
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5 limits). Once signed assessment contracts are in hand, the municipality may (but is not
required to) issue limited tax assessment bonds to finance the contract. The actual project costs
are typically financed either internally, by issuing a short term note or by using a bank line of
credit.
State law poses several challenges for a municipality wishing to form and finance a local
improvement district. First, Oregon Revised Statutes impose an obligation on the municipality
to offer financing for any property owner wishing to finance their assessment, regardless of the
value of the property or the financial status of the property owner. Second, Oregon Revised
Statutes require that the assessment contract allow for prepayment in full at any time. Third, the
municipality can only issue debt in the maximum amount of the total assessment contracts it
receives (after any cash payments). How do these requirements impose a challenge for the
municipality? First, the potential issuer needs to understand the kind of risk associated with
financing local improvement districts.
Assessment contracts are a lien on the property assessed. While the lien is a powerful tool, it is
only valuable if the property is worth more (perhaps significantly more) than the outstanding
balance on the assessment contract. The risk to a municipality is that property owners default (or
become significantly in arrears) on their assessment payments. Assessment financings do not
allow for cross collateralization (that is, other property owner assessments do not rise in order to
pay off a delinquent neighbors obligation). Consequently, any default can pose a serious threat
to the overall level of resources available to pay off an assessment bond. Normally, under a
default scenario, the propertys real market value is less than the amount of the contract, so even
a foreclosure sale may not be sufficient to fulfill the remaining assessment obligation.
Foreclosure sales take time to complete so the municipality faces additional cash flow timing risk
depending on the structure of the outstanding debt. Some municipalities are reluctant to
foreclose for political reasons. And assessment payments from one LID cannot be used to make
debt service payments on another LID so the municipality cannot cross collateralize across
diverse LIDs either.
In summary, the only way to control the amount of risk in an LID transaction is to control what
kinds of properties are included in an LID. Some municipalities have adopted LID policies that
restrict the types of properties that may be included in any one LID. For example, the policy
may say that all properties must have a certain Real Market Value to assessment ratio. While
these policies reduce the amount of risk the city absorbs, implementing such policies may prove
difficult either because of the nature of projects or because of political pressure to complete a
particular project.
So, now that the LID is established and the amount of risk determined, the question becomes,
who takes the risk? Most Oregon municipalities elect to take the risk in their general funds.
This is because they finance the assessments using limited tax obligations. These obligations are
payable first from assessments and proceeds of property foreclosures but ultimately have a
limited pledge of available general fund resources. So, to the extent assessment are insufficient
to repay the debt, the municipality ends up covering the delinquencies and defaults through its
general resources.
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Theoretically, a municipality could choose not to pledge its general fund (state law does not
require such an additional pledge beyond assessment payments). Such a pure assessment bond
would, in theory, transfer the risk of any inability to cover debt service to the investors who
owned the bonds. However, pure assessment based financings are exceedingly difficult to place
with investors because of the very risks already discussed. Consequently, use of a pure
assessment deal to transfer risk proves impractical.
There are several other challenges for municipalities using LID financing. Because assessment
contracts are prepayable at any time and, as property liens are always cleared whenever a
property changes hands, the municipality must be able to properly deal with prepayments. Here
federal tax law creates a problem. Because LID transactions are typically issued as tax exempt
obligations, federal tax law generally restricts the investment yield on proceeds of the issue to the
yield on the bonds. Prepayments then become a liability if retained by the municipality. If
current investment yields are lower than the rate being paid on the bonds, the municipality begins
to dig itself into a hole. Lending money at 6% and reinvesting it at 4% is a recipe for disaster (for
example, as in the savings and loan industry). Should investment rates actually rise above the
rate being paid on the bonds, then federal tax law demands the excess earning be rebated to the
federal government. Consequently, the municipality has all the downside and no upside on
prepayments. The issue structure of the debt needs to provide for adequate redemption
provisions to allow a municipality to use prepayments to reduce it debt service account balances
to comply with federal tax law and optimize long term viability of the debt service repayment.
One final risk remains to be considered. Since municipalities can only finance the amount of
assessment contracts signed and outstanding, it is critical that the municipality fully burden the
total assessment project with the full costs of the project, including interim and estimated long
term financing costs. Failure to do so will result in the inability to recover those additional costs.
This, of course, can produce the perverse outcome of raising the assessment costs for property
owners who choose not to finance their contracts.
Finally, because of the complications, the risks and the relatively small size of many LIDs, many
municipalities choose to finance assessment contracts through a larger, more robust streams of
revenue. For example, sewer and water improvements LIDs may be rolled into the
municipalitys regular enterprise fund financings for those particular systems.

We just established a new urban renewal area. How can I get money for projects when there is
no increment yet to leverage?
Start up financing for urban renewal areas is challenging. Typically, the bond market will want
to see several years history of robust tax increment before extending long term credit to an
urban renewal agency. Most new areas start off with modest lines of credit from a commercial
bank while establishing their ability to generate tax increment.
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CHAPTER 10
REVENUE BONDS
Revenue bonds are bonds that are payable only from a revenue source specified by the issuer.
Generally, a city can designate any revenue source to support revenue bonds. Such sources of
revenues commonly include amounts generated from utilities, enterprises or other revenue
producing assets owned or operated by a city but many other revenue sources, and combination
of sources, can be used as well.
Revenue bonds are not payable from the general revenues of a city or from a citys general fund.
Furthermore, the full faith and credit and taxing power of a city do not stand behind the payment
of debt service on revenue bonds. A holder of revenue bonds has recourse only to the revenue
source or sources specified by a city in the legal instrument creating the bonds.
A city has great flexibility when determining what kind of project will be financed with revenue
bonds. Generally, subject to federal tax law restrictions if tax-exempt revenue bonds are utilized,
cities can use revenue bonds to finance any lawful public project. Because revenue bonds are
only payable from specified revenues, they are useful when financing revenue producing
facilities. For example, a city seeking to construct or improve a water distribution system might
choose to finance the system with revenue bonds and designate revenues from the system as the
source of revenue pledged to bond repayment.
UNIFORM REVENUE BOND ACT

GENERALLY
The Oregon Uniform Revenue Bonds Act (URBA) forms the legal authority under which a
city can issue revenue bonds to finance public projects.
ISSUANCE BY RESOLUTION OR NON-EMERGENCY ORDINANCE
A city can issue revenue bonds pursuant to a resolution or non-emergency ordinance authorizing
the issuance. Emergency ordinances are prohibited for this purpose. A typical resolution or nonemergency ordinance will approve issuance of the revenue bonds, authorize agreements related
to the bonds (including indentures, financing agreements and official statements) and delegate
authority to specified city officials to executed related documents and take actions necessary to
complete the financing.
NOTICE TO VOTERS AND REFERRAL OF REVENUE BONDS
If revenue bonds are approved by resolution, at least 60 days before the issuance of revenue
bonds, a notice of bond issuance must be published in at least one newspaper of general
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circulation in the city. The notice must describe the revenue bonds to be issued including the
projects to be financed, the source of revenue designated for bond repayment, the estimated
principal amount of bonds to be issued and other terms of the bonds. After notice is published,
voters in the city have 60 days to refer the revenue bonds to a vote. Such a referral requires valid
signatures of 5% of the electors in a city. If a revenue bond issuance is referred, the bonds will
be voted upon at the next legally available election. URBA also gives cities the option of
voluntarily submitting revenue bonds to a vote of city electors.
SOURCES OF REVENUE TO REPAY REVENUE BONDS UNDER URBA
Pursuant to URBA, a city can designate nearly any lawfully available revenue source to repay all
or part of revenue bonds including but not limited to amounts generated from revenue producing
facilities, public utilities, enterprises or systems. More than one revenue source may be
designated if desired. However, URBA does require that a city prepare and adopt a plan
showing that the estimated net revenues to be pledged and designated towards revenue bonds are
sufficient to pay the estimated debt service on such revenue bonds.
URBA also allows cities to encumber city-owned assets to provide additional security for
revenue bonds. For example, as part of the security package offered to holders of revenue bonds,
a city may mortgage, create a lien on, or otherwise grant a security interest in facilities, projects,
utilities or systems owned or operated by the city.
Any revenues pledged to bonds, or any assets encumbered in favor of bondholders, may also be
pledged or encumbered in favor of banks or other financial institutions that provide credit
enhancement for revenue bonds, including bond insurers and letters of credit providers. This
flexibility can be crucial to the successful engagement of credit enhancement providers, as such
providers often want at least as much security as the bondholders have themselves.
METHOD OF REVENUE BOND SALE UNDER URBA
Pursuant to URBA, a city may sell revenue bonds by means of a public competitive sale or by
private negotiated sale to a selected underwriter. If a private negotiated sale is utilized, the
governing body of the city must make a finding that such method of sale is desirable. No such
finding is necessary for public competitive sales. When using a private negotiated sale, a city
may retain a financial advisor to evaluate the terms of the proposed sale, the pricing of the
proposed sale and any other relevant aspects of the sale. Such evaluation must be made in
writing or orally at the public meeting of the city authorizing the revenue bond sale.
UNIQUE CREDIT FEATURES OF REVENUE BONDS

From the perspective of a bondholder, the credit concerns associated with revenue bonds are
very different than those associated with other types of obligations that might be issued by a city.
Rather than focusing on the general credit quality of a city, a holder of revenue bonds issued by a
city will instead evaluate the credit quality of the revenue source designated for payment of debt
service. For example, when issuing revenue bonds payable from the revenues of a utility, an
operating history of the utility or a feasibility study are commonly used to determine that
revenues from the utility are projected to be sufficient to pay operation and maintenance
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expenses of the utility, debt service on the revenue bonds, and an additional amount known as
debt service coverage. Debt service coverage is often expressed as the ratio of net revenues (that
is, revenues less operation and maintenance expenses other than depreciation) to debt service (for
example, 1.2 times coverage).
These unique credit concerns often lead cities to offer additional security features in connection
with the issuance of revenue bonds. For example, pursuant to the agreements executed in
connection with revenue bonds, a city might enter into a rate covenant whereby the city would
agree to set rates and charges in connection with enterprises or utilities such that revenues
generated will produce 1.25 times debt service coverage (or some higher ratio). Another
common security feature is an additional bonds test. An additional bonds test prohibits a city
from issuing additional revenue bonds payable from the same revenue source unless certain
levels of debt service coverage are achieved or projected.

How do revenue bonds differ from general obligation bonds?
Unlike general obligation bonds, revenue bonds are not general obligations of a city and are
payable only from the revenue source specified by the issuer. The full faith and credit and taxing
power of a city do not stand behind revenue bonds.
What kinds of revenue sources can be designated to repay revenue bonds?
Any revenues legally available to a city can be pledged to pay debt service on revenue bonds.
The most common sources of revenue are amounts generated from revenue producing facilities
such a utilities, enterprises and systems owned and operated by a city. If tax-exempt revenue
bonds are utilized, certain federal tax law limitations may apply.
What types of projects can be financed with revenue bonds?
Any lawful public project can be financed with revenue bonds. The most common projects are
those associated with constructing or improving revenue producing utilities, enterprises and
systems. If tax-exempt revenue bonds are utilized, certain federal tax law limitations may apply.
Do voters have a say in the issuance of revenue bonds?
Yes, if revenue bonds are approved by resolution, voters may refer the issuance of revenue bonds
to a vote with the valid signatures of 5% of the electors collected within 60 days of the citys
action authorizing the revenue bonds.
Must revenue bonds be sold by public or private sale?
URBA allows a city to sell revenue bonds by both public competitive sale and private negotiated
sale. If a private negotiated sale is utilized, the governing body of the city must make a finding
that such method is desirable. A city may retain a financial advisor in connection with a private
negotiated sale.
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CHAPTER 11
CONDUIT REVENUE BONDS
This chapter describes the basic authority for the issuance of conduit revenue bonds, the
applicable legal framework that governs their structure, and the types of entities that can benefit
from the issuance of conduit revenue bonds. To understand these bonds and their structure, there
are some important definitions and terms that provide a basis for the following discussion.
The Municipal Securities Rulemaking Board Glossary of Municipal Securities Terms defines
Conduit Financing as follows:
The issuance of municipal securities by a governmental unit (referred to as the
conduit issuer) to finance a project to be used primarily by a third party, usually
a for-profit entity engaged in private enterprise or a 501(c)(3) organization
(referred to as the conduit borrower). The security for this type of issue is
customarily the credit of the conduit borrower or pledged revenues from the
project financed, rather than the credit of the conduit issuer. Such securities do
not constitute general obligations of the conduit issuer because the conduit
borrower is liable for generating the pledged revenues. Industrial development
bonds, multi-family housing revenue bonds and qualified 501(c)(3) bonds are
common types of conduit financings.
The key components of this definition are addressed in this chapter, and the roles of the various
parties to a conduit financing are important to understanding the legal structure of these
transactions.
The term conduit refers to the pass-through nature of the bonds where the conduit issuer issues
the bonds, and the conduit borrower is the one responsible for payment on the bonds. Conduit
financing allows nongovernmental borrowers to take advantage of tax-exempt interest rates that
would otherwise not be available to them if a governmental entity such as a city or a county were
not involved. Conduit issuers can include cities, counties, state financing authorities,
redevelopment agencies and housing authorities. Depending on the particular type of financing,
conduit borrowers can include for-profit corporations, partnerships, nonprofit 501(c)(3)
corporations and other legal entities.
LEGAL AUTHORITY: CONSTITUTIONAL, STATUTORY AND ADMINISTRATIVE

RULE PROVISIONS
Examining the legal authority to issue conduit bonds from both a state law and a federal tax law
perspective is important early on in the process for issuing conduit revenue bonds because it
provides the legal framework in which a conduit issuer may evaluate a particular issue, the
procedural steps a conduit issuer will follow to issue the bonds, and the restrictions and
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limitations upon the use of bond proceeds that a conduit borrower must focus on to finance a
project. State and local governments have statutory authority to issue conduit or pass-through
revenue bonds based on various provisions and sources of authority. Examining the relevant
source of authority to issue such conduit bonds is important so that all requirements are satisfied
and any potential issues are identified. The constitutional, statutory, and administrative rule
provisions applicable to conduit bonds may differ depending on the type of conduit bonds being
issued.
One important general principle is that conduit bonds are usually not limited by constitutional or
statutory debt limitation provisions because they are not considered debt within the meaning of
such debt limitations.
In the area of economic development, conduit revenue bonds can be issued by different entities
including cities, counties, and the Oregon State Treasurer. Under ORS 280.410 to 280.485, for
example, cities with a population over 70,000 can issue revenue bonds for economic
development projects. The purpose of such bonds is to reduce the occurrence of economic
conditions requiring more expensive remedial actions. Economic development projects can
include any properties, real or personal, used or useful in connection with a revenue producing
enterprise and can include multiple unit residential housing developments subject to certain
restrictions. The statutes broadly authorize cities to, among other things, (1) acquire by
agreement, donation or exercise of eminent domain, construct and hold in whole or in part any
lands, buildings, easements, water and air rights, improvements to lands and buildings and
capital equipment to be located permanently or used exclusively on such lands or in such
buildings that are deemed necessary in connection with an eligible project; (2) sell and convey
all properties acquired in connection with eligible projects; and (3) make or participate in the
making of loans, including mortgage loans, to provide for the construction, substantial
rehabilitation or permanent financing of eligible projects and undertake commitments to make
such loans. In addition, the statutes authorize cities to, among other things, (1) make loans from
bond proceeds to finance eligible projects; (2) acquire, sell and enter into installment sale
contracts and land sale contracts for eligible projects; (3) pledge and assign to the holders of such
bonds or a trustee all or any part of the revenues of one or more eligible projects owned or to be
acquired by the city; (4) encumber eligible projects in favor of the holders of such bonds or a
trustee; and (5) purchase, service, sell mortgage loans originated by private lending institutions
for residential housing for owner-occupied dwelling units subject to certain restrictions.
Similarly, under ORS 468.263 to 468.265, counties also have statutory authority to issue conduit
revenue bonds to finance pollution control facilities. Pollution control facilities include any land,
building or other improvement, appurtenance, fixture, item of machinery or equipment, and all
other real and personal property which are to be used in furtherance of the purpose of abating,
controlling or preventing, altering, disposing or storing solid waste, thermal, noise, atmospheric
or water pollutants, contaminants, or products therefrom. Under these statutes, counties have
broad powers, among other things, (1) to acquire, construct, improve, maintain, equip and
furnish pollution control facilities; (2) to enter into leases, (3) to issue revenue bonds for the
purpose of carrying out any of its powers; and (4) to make loans for the purpose of financing the
acquisition, construction, improvement or equipping of a facility.
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Chapter 11 Conduit Revenue Bonds
Finally, the State Treasurer of the State of Oregon may issue conduit revenue bonds for the
assembling and financing of lands for industrial, solid waste disposal, commercial and research
and uses pursuant to the authority of ORS 285B.320 to 285B.371. The Oregon Economic and
Community Development Commission must determine whether an eligible project satisfies
certain criteria.
In the area of education, under ORS 352.790 to 352.820, municipalities, which includes both
cities and counties, are authorized to issue conduit bonds to finance education facilities, which
include real or personal property owned or operated by an educational institution and used to
provide post-secondary education. The statutes also grant municipalities the power: (1) to
borrow money and to issue revenue bonds to finance education facilities costs or to refund
revenue bonds; (2) to pledge education facility revenues to pay revenue bonds; (3) to loan money
to educational institutions to finance education facilities and to enter into loan contracts; (4) to
enter into covenants with the owners of revenue bonds which are intended to protect the rights of
such owners; (5) to contract with trustees to hold and administer education facility revenues and
the proceeds of revenue bonds; and (6) to take any other action necessary to carry out their
powers.
Apart from the areas of economic development and education, local governments can also create
or establish subordinate entities such as authorities, including for example, housing authorities,
hospital facility authorities, or forest authorities, and can provide them with the power to issue
conduit bonds and loan the proceeds thereof to conduit borrowers. As a procedural matter, the
governing body adopts an ordinance or resolution establishing the authority, prescribing the
number of directors who will serve on the Board of Directors, and appointing the initial Board.
The Board of Directors of the authority then has the ability to consider and approve specific
transactions in which conduit bonds are issued.
Finally, municipalities can issue revenue bonds under the Uniform Revenue Bond Act for other
general purposes. For additional information related to the URBA, see Chapter 10, Revenue
Bonds.
In addition, some cities may have charter authority, by ordinance, to authorize the issuance and
sale of revenue bonds to provide funds with which to acquire, construct, equip or improve
revenue producing public purpose facilities. The ordinance authorizing such issuances and sale
may be subject to referendum.
Administrative rules may affect the procedural process for issuing conduit revenue bonds in
certain circumstances. For example, conduit revenue bonds issued by a city or a county that are
being issued to advance refund prior bonds must comply with the administrative rules
promulgated by the Oregon State Treasurer related to advance refundings. For additional
information related to refundings, see Chapter 13, Refundings.
POLICY CONSIDERATIONS AND APPROVAL PROCESS

Policy considerations for conduit bonds are different than other governmental bonds because the
direct credit of the governmental issuer is not involved and the projects are not owned or
operated by the governmental issuer. The issuance of conduit bonds typically needs to be
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approved by both the conduit issuer pursuant to a resolution or ordinance adopted or enacted by
its governing body and by the conduit borrower pursuant to a resolution adopted by its governing
body. The conduit issuer often will be required to make a finding that the financing is in the
public interest. Issuers will typically have guidelines related to what types of conduit bonds they
will issue that include credit quality limitations and public purpose or benefits of the facility.
Generally, conduit bonds do not require voter approval.
TEFRA HEARINGS
Federal tax law requires that a public hearing be held in connection with certain conduit bonds
that are private activity bonds. The so-called TEFRA-approval process, which is named after
the Tax Equity and Fiscal Responsibility Act of 1982, requires that certain conduit bonds be
approved by the governmental unit which issued such bonds or on behalf of which such bonds
were issued and each governmental unit having jurisdiction over the area in which any facility is
located. An issue is treated as having been approved by any governmental unit if such issue is
approved by the applicable elected representative of such governmental unit after a public
hearing following reasonable public notice or by voter referendum of such governmental unit.
Reasonable public notice has been interpreted to require publication of a notice describing the
project to be financed in a newspaper of general circulation at least 14-days in advance of a
public hearing. After the TEFRA hearing, the governing body of the conduit issuer considers a
resolution that formally approves of the financing for federal tax purposes.
AUTHORIZED PROJECTS
Conduit revenue bonds can be issued for a variety of projects depending on the applicable
authorizing statutes and the financial circumstances of the conduit borrower. Eligible project
costs can often include costs of acquiring, constructing and improving certain facilities, and
capitalized interest, reserves, costs of credit enhancements and costs of issuing and paying
revenue bonds.
SECURITY AND SOURCES OF REPAYMENT REVENUES

Conduit bonds are typically paid from sources of revenues provided for by the conduit borrower.
The revenues can be ones that are generated by the project or facility being financed with conduit
bonds, and the security for the bonds is derived from the revenues pledged by the issuer to their
payment. Conduit bonds are not regarded as obligations of the city or county issuing the conduit
bonds or creating an authority, and they are not considered a charge on its tax revenues. Ad
valorem property taxes of a governmental entity are not levied or pledged to repay the bonds,
and often a conduit issuer such as a hospital authority or a forest authority will not have taxing
power. This allows local governments to retain their taxing power for other purposes. Conduit
bonds may also be credit enhanced by a bond insurance policy or a letter of credit. For
additional information on credit enhancement, see Chapter 17, Structuring the Bond Issue.
GENERAL TYPES AND PURPOSES

Conduit bonds can be issued in a number of different forms and for a variety of purposes that are
described in more detail below. Conduit bonds can be issued as fixed rate, variable rate or
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auction rate bonds, and they can be sold either on a negotiated or a competitive basis. For
additional information about types of bond sales, see Chapter 1, Overview of Debt Issuance.
The basic authorizing documents and bond documents typically include a bond resolution, a trust
indenture, and a loan agreement. The bonds are issued under the trust indenture, which is a
contract between the conduit issuer and the bond trustee that contains the description of the
security for the bonds. The proceeds of the bonds are loaned to the conduit borrower for
purposes that are permitted for qualified private activity bonds pursuant to the loan agreement,
which is a contract between the conduit issuer and the conduit borrower. Typically, loan
repayments are assigned directly to the bond trustee, so the borrower sends the money directly to
the trustee to be held in the trust estate for ultimate distribution to the bondholders. For
additional information on the types of legal documents involved in a conduit financing, see
Chapter 3, Basic Legal Documents.
PRIVATE ACTIVITY BONDS
Private activity bonds are bonds that are issued to benefit private businesses. The federal tax
code imposes specific limitations on these types of bonds. Private activity bonds can be issued
for the following purposes: single family mortgage, small issue industrial development, student
loans, water, sewer, solid waste, hazardous waste, and tax-increment financing. For additional
tax issues related to private activity bonds, see Chapter 5, General Federal Tax Requirements.
ECONOMIC AND INDUSTRIAL DEVELOPMENT REVENUE BONDS
Industrial development bonds (IDBs) are private activity bonds issued by a state or local
government that are used to finance construction of facilities for certain private enterprises, and
they can promote economic development. In Oregon, they can be issued through the State of
Oregon Economic Community Development Department, port districts and cities that have
populations greater than 70,000. IDBs can finance the costs of construction, property
acquisition, demolition, eligible machinery and equipment and certain costs of issuing the bonds.
IDBs are payable from the revenues of the facility and money or other property received from
the company or other private sources. They are not a debt or obligation of the state or the
municipality. Investors purchase IDBs depending on the nature of the investment and the
security for repayment offered. For additional tax limitations applicable to IDBs, see Chapter 5,
General Federal Tax Requirements.
NON-PROFIT 501(C)(3) BORROWINGS
501(c)(3) organizations often benefit from tax-exempt financings for capital projects, refinancing
prior debt, reimbursing prior expenditures, working capital, and financing costs. 501(c)(3)
organizations are nonprofit organizations that are established for one or more of the following
purposes: religious, charitable, scientific, testing for public safety, literacy, education or
prevention of cruelty to children or animals. The types of nonprofit corporations that are
described in Section 501(c)(3) of the Internal Revenue Code and that receive an IRS
determination letter to the effect that they are eligible to benefit from tax-exempt financing are
the ones who take advantage of the types of tax-exempt financing through conduit bonds that are
described in this chapter.
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Such entities can obtain the benefit of tax-exempt financing by having a governmental entity
issue bonds on their behalf and then loan the proceeds to the 501(c)(3) organization. The
501(c)(3) organization is responsible for making the payments on the bonds. For additional
information about non-profit borrowings, see Chapter 5, General Federal Tax Requirements.
Hospital and Healthcare Facilities. Conduit bonds may be used to finance the
following types of hospital and healthcare facilities using tax-exempt bonds: hospitals, clinics,
multilevel care, assisted living, and congregate care. Conduit healthcare bonds are payable
solely from the loan or installment payments made by the hospital/healthcare facility conduit
borrower that is the beneficiary of the issue. Debt service on the bonds may be secured by bond
insurance, a letter of credit, a deed of trust, or a guarantee.
Educational and Cultural Facilities. Conduit bonds may be used to finance the
following types of educational and cultural facilities using tax-exempt bonds: colleges and
universities, schools, research institutions, museums, libraries, aquariums, cultural venues,
historical preservation, and public broadcasting stations. Eligible facilities do not include any
facility used or to be used for sectarian instruction or as a place of religious worship.
Single and Multi-family Housing. Conduit bonds may be used to finance the following
types of housing: low-income housing corporations and lessening the burden of government
corporations. Conduit bonds for single and family multi-family housing purposes are subject to
numerous state and federal tax law limitations, some of which related to occupancy requirements
and income restrictions. Multifamily housing revenue bonds are conduit bonds issued to finance
the acquisition, construction, rehabilitation or development of rental housing developments by
private developers. Bond counsel should be consulted early in the process to review applicable
limitations on eligible projects.
SPECIAL TAX CONSIDERATIONS

There are numerous special tax considerations that arise in connection with the issuance of
conduit revenue bonds, and the tax considerations affect whether or not conduit revenue bonds
can be issued on a tax-exempt basis. For a description of the federal tax issues associated with
conduit revenue bonds, see Chapter 5, General Federal Tax Requirements.

What are conduit revenue bonds?
Conduit revenue bonds are bonds issued by a governmental entity where the proceeds are loaned
to a conduit borrower who is responsible for making all payments on the bonds.
Who is the issuer?
The issuer is a governmental entity, but the issuer is not responsible for the payment on the
bonds.
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Who benefits or can take advantage of conduit revenue bonds?

The conduit borrower is the primary beneficiary of conduit revenue bonds. Conduit borrowers
can include partnerships, for-profit corporations, or nonprofit corporations.
What is the legal authority to issue conduit revenue bonds?
The specific statutory authority to issue conduit revenues bonds depends on the nature of the
project and the contemplated conduit issuer. There are different sources of authority for different
types of financings.
What is the source of repayment for conduit revenue bonds?
The primary source of repayment for conduit revenue bonds are the revenues from the facility
being financed with the conduit revenue bonds.
How are conduit revenue bonds sold?
Conduit revenue bonds can be sold on either a competitive or a negotiated basis.
What are the advantages of issuing conduit revenue bonds?
Conduit borrowers can take advantage of lower rates and better terms than other
conventional financing through the use of tax-exempt financing.
The conduit borrower is responsible for payments on the bonds, and conduit issuers
can reserve their power to tax for services other than those provided by the issuance
of conduit bonds.
Voter approval is typically not required.
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CHAPTER 12
NOTES, SHORT-TERM AND INTERIM
FINANCINGS
Short-term debt is generally defined as debt with a stated final maturity of one year or less at the
time of sale, although the stated maturity can sometimes be longer under certain circumstances.
A city issues short-term debt primarily (i) to even out cash flow discrepancies attributable to
mismatches between the collection of the budgeted tax revenues or other income and
expenditures arising throughout the fiscal year or (ii) to provide temporary funding for the costs
of capital projects. To even out cash flows or supplement working capital, a city may issue:
Tax Anticipation Notes (TANs) and Warrants. Tax Anticipation Notes (TANs)
and warrants are issued in anticipation of tax revenues to be collected pursuant to the
citys taxing authority and are generally retired from the proceeds of the specific tax
levy they anticipate.
Revenue Anticipation Notes (RANs). Revenue Anticipation Notes (RANs) are

issued in anticipation of some other specified revenue source, such as revenues to be
generated by a municipal enterprise (e.g., a water and sewer system), and are
generally retired when the city receives the proceeds from the pledged revenue
source.
Tax and Revenue Anticipation Notes (TRANs). Tax and Revenue Anticipation
Notes (TRANs) are issued in anticipation of both a specified tax levy and other
revenue source.
To finance temporarily the costs of capital improvements or capital assets in anticipation of a

permanent financing, a city may issue:
Grant Anticipation Notes (GANs). Grant Anticipation Notes (GANs) are issued in
anticipation of receipt of a Federal or state grant.
Bond Anticipation Notes (BANs). Bond Anticipation Notes (BANs) are shorterterm interest bearing notes issued by a city in anticipation of a future issuance of
long-term bonds.
A city may also issue or enter into additional forms of short term indebtedness, including:
Tax Exempt Commercial Paper (TXCP). Tax-exempt commercial paper

(TXCP) is a form of short-term, often unsecured promissory note issued in
registered form, in denominations of $100,000 or more, with maturities ranging from
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1 to 270 days and usually backed by a direct-pay letter of credit or a line of credit
with a bank or a combination of bond insurance and line of credit or other liquidity
facility.
Line of Credit. A line of credit is a contract between a city and a financial

institution, usually a bank, that provides a loan to the city as a substitute for publicly
offered TANs or RANs or in the event that insufficient moneys are available to the
city to pay debt service (e.g., on commercial paper) or to purchase a demand bond.
LEGAL AUTHORITY
Oregon law authorizes a city to borrow money by entering into a credit agreement or by issuing
notes, warrants, short-term promissory notes, commercial paper or other obligations evidencing
the indebtedness. The city may issue such obligations: (a) in anticipation of tax revenues or
other income for purposes that include, but are not limited to, payment of current expenses; (b) to
provide interim financing for capital assets to be undertaken by the city; or (c) to refund
outstanding obligations. The issuing citys ability to incur short-term debt is subject to
applicable limitations imposed by the Oregon State Constitution or the laws of the State of
Oregon, or its charter, ordinance or resolution. Limitations on the amount of indebtedness an
issuing city may incur set forth its charter or bylaws do not affect such citys right to issue shortterm obligations, and neither the short-term indebtedness nor any refunding obligations are taken
into consideration when determining whether the city is in compliance with any debt limitations.
APPROVAL PROCESS
Generally, voter approval is not required to issue short-term debt, although voter approval may
be required to authorize the underlying debt, as in the case of BANs. To issue short-term debt,
the citys governing body need only enact an ordinance or adopt a resolution authorizing the
issuance and setting forth the terms of the short-term debt, including the maximum effective rate
of interest, manner of sale, discount the issuer may allow, if any, redemption terms and
conditions, maturities, form and denominations of the obligations, and all other terms and
conditions related to sale of the obligations. Subject to the applicable requirements of law and
limitations set forth in the in the authorizing ordinance or resolution, the citys governing body
may delegate the authority to determine maturity dates, principal amounts, redemption
provisions, interest rates or the method for determining a variable or adjustable interest rate,
denominations and other terms and conditions not appropriately determined at the time the
authorizing ordinance is enacted or resolutions are adopted.
MANNER OF SALE
The issuing city may sell the short-term debt in either a public or private sale upon such terms as
the city may find advantageous and with such disclosure as the city deems appropriate and may
contract with third parties to serve as the issuing, paying or authenticating agents for such sale.
Although the Debt Management Division (MDAC) does not track municipal debt with terms
of less than 13 months, when issuing short-term debt the city must still comply with certain
statutory provisions regarding notice to MDAC of a proposed debt issuance.
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SECURITY AND SOURCE OF REPAYMENT REVENUES

The issuing city may secure the repayment of the short-term debt by (1) pledging the anticipated
tax revenues or other income, such as with TANs, RANs, TRANs, or GANs, the proceeds of any
bonds or other permanent financing, as with BANs, or any combination thereof; (2) segregating
pledged funds in separate accounts held by the city or by third parties; (3) contracting with third
parties to obtain standby lines of credit or other financial commitments designated to provide
additional security for such obligations; (4) establishing any reserves deemed necessary for
payment of the obligations; and (5) adopting resolutions and entering into agreements containing
covenants and provisions for the protection and security of the owners of the obligations,
constituting enforceable contracts with such owners.
INVESTMENT OF PROCEEDS AND INTEREST EARNINGS

Oregon law permits an issuing city to invest the proceeds of the issuance of any short-term
obligations and any funds set aside to repay such obligations in investments maturing no later
than the maturity dates of the obligations. Subject to limitations of federal tax law described in
Chapter 5, General Federal Tax Requirements, a city may borrow money at tax-exempt
interest rates and invest the proceeds in higher rate taxable securities, or arbitrage the proceeds
of the obligations, and retain the investment income earned above the yield on the obligations,
provided the city follows federal requirements regarding sizing the short-term borrowing. The
city may not issue short-term obligations for the sole purpose of investing the proceeds, but must
use at least a portion of the proceeds of the sale of the short-term obligations to alleviate the
cash-flow deficit justifying the issuance. Over the life of the short-term borrowing, the
investment earnings may offset the interest expense and costs of the issuance to the city and the
city may even legally make money on the borrowing, provided it complies with certain federal
tax law requirements. See Chapter 5, General Federal Tax Requirements.
GENERAL TYPES OF SHORT-TERM OBLIGATIONS

As described above, Oregon law permits a city to borrow money on a short-term basis in a
number of forms, including notes and warrants. The specific terms and limitations applicable
short-term obligations are based on the purposes for which the short-term obligations are issued
and the sources of repayment securing the short-term obligation, rather than to the form of the
obligation itself. For example, the provisions relating to short-term obligations issued to fund
working capital shortfalls and secured by anticipated tax revenues or other income, excluding
grants, discussed in the context of TANs, RANs, TRANs and tax anticipation warrants are
applicable to other forms of short-term obligations issued to finance working secured by
anticipated tax revenues or other income. Similarly, the provisions relating to short-term
obligations issued to finance temporarily capital projects and secured by proceeds from
anticipated long-term bond issues or grants discussed in the context of BANs and GANs,
respectively, are applicable to other forms of short-term obligations issued for similar purposes
and with similar security.
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TAX AND REVENUE ANTICIPATION NOTES AND TAX ANTICIPATION WARRANTS (TANS,
TRANS, RANS AND WARRANTS)
Purposes and Policies. Because a city does not enjoy a steady, consistent revenue
stream during the fiscal year, it may issue short-term obligations, such as TANs, RANs, TRANs
and warrants, to provide interim financing for operations to which the pledged tax revenues or
other budgeted, but not yet collected, income have been committed. The city generally deposits
the proceeds from the sale of the TANs, RANs, TRANs and warrants into its general fund and
uses them to pay current expenses and expenditures, repay indebtedness and invest and reinvest.
Issue Size. Under Oregon law, the principal amount of TANs, RANs, TRANs and
warrants a city may issue is limited to 80 percent of the pledged tax revenues or other income
budgeted to be received by the city in the fiscal year in which such TANs, RANs, TRANs and
warrants are issued. The size of any issue is also restricted by federal tax law, as discussed
below in Special Tax Considerations and in Chapter 5, General Federal Tax
Requirements.
Term, Issuance and Maturity. Generally, a city may not issue the TANs, RANs,
TRANs and warrants, or any short-term obligation refunding the TANs, RANs, TRANs or
warrants, prior to the beginning of fiscal year in which the issuing city expects to receive the
pledged tax revenues or other income, and the TANs, RANs, TRANS or warrants must mature
no later than the end of the fiscal year in which the city expects to receive the pledged tax
revenues or other income. A city incorporated on or after January 1, 1990, and located within an
urban growth boundary, however, may issue TANs, RANs, TRANs or warrants prior to the
beginning of the fiscal year in which the city expects to receive the tax revenues or other income
if such obligations (i) mature no later than 18 months after issuance and (ii) are issued in an
amount not exceeding 80 percent of the amount of lawfully available funds that the city
reasonably expects to receive.
Security and Repayment. The issuing city secures the TANs, RANs, TRANs and
warrants by pledging, designating or setting aside the proceeds of the specified tax or revenue
source for repayment of the notes as they are received during the fiscal year. The city must
establish an account for purposes of repaying the obligations into which it must deposit property
taxes, revenues, and earnings upon receipt and must maintain the account until it holds sufficient
funds to retire the notes. To provide an additional measure of security to the noteholders, the
city may want to pledge the tax or other revenues securing the notes to a third-party trustee that
is obligated to use the pledged funds to pay the notes upon maturity. The city may also secure
the TANs, RANs, TRANs and warrants with a general obligation pledge, legally obligating the
city to use its full taxing powers and available revenues to pay the noteholders in the event the
specified tax and other revenue sources are insufficient to repay the notes, or by a third-party
credit enhancement, such as a letter of credit.
Generally, the city must repay the TANs, RANs, TRANs and warrants no later than one year
after issuance. The obligations are payable from not less than 100 percent of the proceeds of the
pledged tax revenues or levies or other budgeted income whose collection the TANs, RANs,
TRANS or warrants anticipated at the time of issuance, plus any earnings on the proceeds and on
the amounts deposited in the repayment fund.
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Structuring of TANs, RANs and TRANs. A city may structure the short-term
borrowing to fit its particular needs. For example, the city may issue fixed-rate notes, floatingrate notes and/or notes backed by a letter of credit or other credit or liquidity enhancement, or
may issue the notes for the longest term possible or for a term as short as the anticipated cash
flow deficit. The issuer should consult with its financial advisors and with bond counsel early in
the planning process to determine the most suitable structure.
Special Tax Considerations. In addition to the limitations described above, federal tax
law places limits on the timing and size of tax-exempt short-term obligations. With respect to
short-term obligations issued to provide working capital, such as TANs, RANs and TRANs, the
issuing city may generally only allocate the proceeds of an issue to working capital expenditures
when and to the extent the issuer has no available amounts, excluding any reasonable
working capital reserve. To properly size a short-term working capital borrowing, the issuing
city must identify all available amounts currently on hand and anticipated to be received for such
working capital expenditures and develop a cash flow projection that estimates deficit and
surplus periods. The working capital borrowing is limited to the largest actual cash flow deficit
expected in the 13 months following the issue date, plus the amount of the reasonable working
capital reserve. The acceptable amount of the reasonable working capital reserve depends on a
number of factors, although generally a working capital reserve is reasonable if it does not
exceed 5 percent of the issuers actual working capital expenditures in the fiscal year
immediately preceding the fiscal year in which the short-term obligations are issued. See also
Chapter 5, General Federal Tax Requirements.
The primary federal tax constraints on TANs, RANs and TRANs issued to provide working
capital financing are the arbitrage bond limitations discussed in Chapter 5, General Federal
Tax Requirements. Generally, the issuing City may qualify for a temporary period, an
exception to the arbitrage yield limitations, during which it may invest the proceeds of the TAN,
RAN or TRAN issue at rates exceeding the yield on such short-term obligations, provided the
issuing city reasonably expects to spend all of the proceeds on working capital expenditures
within 13 months of the issue date. See Chapter 5, General Federal Tax Requirements. For
working capital financings, the city may retain the arbitrage proceeds if it satisfies either the
small issuer or the six month expenditure exceptions described in Chapter 5, General Federal
Tax Requirements.
GRANT ANTICIPATION NOTES (GANS)
Purposes and Policies. Cities issue GANs to cover anticipated shortfalls in project
funding, pending receipt of the proceeds of a committed state or federal grant yet to be received.
The issuing city deposits the proceeds of the GANs into the fund designated for the related
project and uses them to pay or to reimburse the city for approved project costs.
Issue Size. The issuing city may finance both the interest expense of the GANs and its
costs in issuing the GANs, so the size of a GANs issue should reflect the amount of the
anticipated grant proceeds yet to be received, the anticipated interest expense of the GANs and
the issuers costs relating to the GANs.
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Term and Maturity. GANs must mature no later than five years from the date of
issuance and may be redeemed beginning no later than one year after the city expects to receive
the grant.
Security and Repayment. If the sole security for the GANs is the citys assurance that it
will receive the anticipated grant, investors are unlikely to purchase the GANs unless they are
confident the city will receive the grant and/or the grant has already been approved. If approval
is still pending, the issuing city should disclose to investors the pending status, the remaining
conditions to approval and the likelihood that all conditions to approval will be met. If at the
time the GANs are issued the grant is approved, but the funds are yet to be received, the city
should disclose any additional conditions to receipt of the grant funds. The city may also elect to
pledge an additional source of repayment if approval of the grant is still too uncertain.
Often with GANs, the issuing city incurs and pays the expenditures associated with the project
related to the grant and retires the GANs with the grant proceeds received as reimbursements for
project expenditures that are authorized for reimbursement under the terms of the grant. Because
the city will only receive grant proceeds for expenditures approved for repayment under the
terms of the grant, the issuing city should also disclose to investors any known conditions to
reimbursement imposed by the underlying grant.
Special Tax Considerations. The Treasury Regulations do not provide specific guidance
relating to GANs; however, general arbitrage bond limitations continue to apply.
BOND ANTICIPATION NOTES (BANS)
Purposes and Policy. A city may issue BANs (i) to finance the initial stages of a
project; (ii) finance the initial stages of several unrelated projects, the financings of which will be
consolidated in a single offering of long-term bonds to retire all of the BANs; or (iii) to delay
selling long-term bonds until market conditions become more favorable to the issuing city. The
proceeds from the sale of the BANs are deposited in fund(s) designated for the project(s) and are
usually pledged to the noteholders until expended on project costs.
Issue Size. The statutory provisions authorizing the issuance of short-term obligations in
anticipation of bond proceeds do not specifically limit the aggregate principal amount of BANs a
city may issue; however, the issuing city should confirm that no other limitations apply prior to
issuing the BANs.
Term and Maturity. Short-term obligations issued to provide interim financing for a
capital asset, such as BANs, must mature no later than five years after issuance and may be
redeemed beginning not later than one year after the capital asset is projected to be completed as
of the time the BANs are issued. The issuing city may refund BANs by (i) issuing long-term
bonds or (ii) issuing short-term refunding obligations, such as a subsequent BANs issue,
provided that such refunding short-term obligations mature not later than five (5) years after their
date of issuance.
Security and Repayment. The primary security for BANs is the citys ability to sell the
related long-term bonds, although the issuing city may also secure the BANs by the citys
general obligation pledge or other revenue. BANs may be repaid according to the schedule
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determined by the governing body and are retired either from the proceeds of the bond issue to
which they are related, the revenue pledged by the city or from the proceeds of a subsequent
BAN issuance.
Special Tax Considerations. Cities primarily issue BANs to provide interim financing
for capital assets. See Chapter 5, General Federal Tax Requirements for a discussion of the
federal tax implications associated with financing capital assets.
TAX-EXEMPT COMMERCIAL PAPER (TXCP)
Purpose and Policy. The issuing city may use a TXCP program to fund both operating
expenses and capital expenditures. TXCP notes issued to fund a citys current operating
expenses generally are structured as TANs, RANs or TRANs specifically tailored to the TXCP
market and are subject to the same limitations discussed above with respect to TANS, RANs and
TRANs. TXCP notes issued to provide interim financing for capital expenditures generally are
subject to the same limitations discussed above with respect to BANs.
A TXCP program may appeal to a city because: (i) the lower interest rates on TXCP
notes, as opposed to those on long-term, fixed-rate indebtedness, allow the city to borrow funds
at a lower cost; and (ii) TXCP notes can be sold without a long-form disclosure document,
simplifying documentation, provided the TXCP is backed by (1) a direct-pay letter of credit or
(2) under some circumstances, a combination of bond insurance and a line of credit. Before
adopting a TXCP program, however, an issuing city should consider whether the administrative
costs of maintaining an on-going TXCP program outweigh these benefits.
Issue Size. To establish a TXCP program, the issuing citys governing body must enact
an ordinance or adopt a resolution authorizing the issuance of TXCP notes and execution of any
necessary accompanying documentation, such as a dealer agreement, a direct pay letter of credit
agreement or other credit and/or liquidity facility and issuing and paying agent agreements,
engage one or more TXCP dealers and have its bond counsel prepare a transcript of the executed
documents authorizing the TXCP program, including an opinion of bond counsel. As the issuing
city requires cash, its designated representative contacts the dealer to discuss the citys cash
needs and the probable interest rates and maturities for its TXCP. The dealer then markets the
TXCP notes and the paying agent collects the proceeds the same day.
When adopting the resolution or ordinance establishing the TXCP program, the citys
governing body should authorize the full amount of TXCP program; however, the aggregate
principal amount of TXCP notes a city may issue at any particular time depends on the stated
purposes for issuing the TXCP notes and the source of revenue securing repayment.
Term and Maturity. The issuing city may either (i) retire the maturing TXCP notes
from the proceeds of the sale of long-term bonds or from some other specified source of funds or
(ii) rollover the outstanding TXCP notes by paying the maturing principal with newly issued
TXCP notes, allowing the issuing city to borrow funds on a short-term basis over an extended
period of time. TXCP notes issued to fund a citys current operating expenses as forms of
modified TANs, RANs or TRANs are subject to the same limitations relating to issuance and
maturity discussed above with respect to TANs, RANs and TRANs. Although Oregon law
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allows for a final stated maturity of up to five years for short-term obligations issued to provide
interim financing for capital assets or for short-term obligations refunding such obligations, the
terms of TXCP notes issued to provide interim financing for a capital asset are limited to 270
days because SEC Rule 15c2-12(d)(1)(ii) exempts from the general requirement of Rule 15c2-12
that brokers, dealers, and municipal securities dealers to obtain an official statement from
municipal issuers issues of municipal securities in authorized denominations of $100,000 or
more if the securities mature in nine months or less.
Security and Sources of Repayment. Although TXCP notes may represent obligations
payable from a specified source of the citys funds, TXCP programs are often backed by a directpay letter of credit from a commercial bank, in which case the TXCP noteholders look solely to
the bank for repayment of the TXCP notes, not the issuing city. The letter of credit is drawn
upon to make any required payments to the TXCP noteholders and any payments by the city are
used to reimburse the bank for the draws against the letter of credit.
Disclosure Requirements. One of the most attractive features of a TXCP program is the
simplicity in documentation, provided the TXCP program is secured by a direct-pay letter of
credit or occasionally by another combination of liquidity and credit facilities. Dealers have
traditionally sold TXCP notes secured by a direct-pay letter of credit without a long-form
disclosure document, using instead a short termsheet describing the TXCP issue. In recent years,
dealers have requested that issuers provide them with (i) an issuer-prepared disclosure document
to use in marketing the TXCP notes, (ii) Rule 10b-5 disclosure representations and (iii) a 10b-5
opinion of the issuers counsel. Many issuers refuse to do so, noting that TXCP notes are
exempt from SEC Rule 15c2-12, which requires that brokers, dealers, and municipal securities
dealers obtain an official statement from municipal issuers. This issue generally does not arise if
the issuer secures the TXCP program with a direct-pay letter of credit because investors base
their decisions to invest in the TXCP notes on the creditworthiness of the bank providing the
direct-pay letter of credit, not of the issuer.
Special Tax Considerations. The same federal tax limitations and requirements that
apply to other forms of tax-exempt short-term debt obligations also apply to TXCP, depending
on whether the TXCP notes are issued to provide finance working capital financing or interim
financing for capital projects. Defining what constitutes a single issue of TXCP notes to which
federal tax law should be applied, however, may be difficult because TXCP notes issued under
the same TXCP program may be issued with varying amounts and interest rates. Generally, the
issuing city may treat TXCP notes issued pursuant to the same TXCP program documents as part
of a single issue, the issue date of which is the first date the aggregate amount of TXCP notes
issued under the TXCP program exceeds the lesser of $50,000 or 5 percent of the aggregate issue
price of the TXCP in the program, provided the city issues the TXCP notes during an 18-month
period beginning on the deemed issue date and complies with certain procedures set forth in the
Treasury Regulations.
OTHER FORMS OF SHORT-TERM BORROWINGS

In addition to the short-term obligations described above, Oregon law permits a city to borrow
money on a short-term basis in a number of ways, including entering into a credit agreement or
issuing notes, warrants, short-term promissory notes, or other obligations: (a) in anticipation of
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tax revenues or other income for purposes that include, among other things, payment of current
expenses; (b) to provide interim financing for capital assets to be undertaken by the city; or (c) to
refund outstanding obligations. An example of another form of short-term obligation is a line of
credit.
LINE OF CREDIT
Authorized Amount. To establish a line of credit, the issuing citys governing body
must enact an ordinance or adopt a resolution authorizing the aggregate principal amount it
wishes to have available under the line of credit and the deliverance and pledging of the security
for the repayment of the borrowings and execution of any necessary accompanying
documentation, such as a revolving line of credit agreement with a bank or consortium of banks.
The line of credit functions similarly to a revolving loan: the bank authorizes a line of credit up
to a specified limit; the city authorizes the incurrence of debt up to that amount (plus interest and
bank fees) and delivers to the bank a note in that amount; as the city requires cash, it draws
against the line of credit by notifying the bank and executing a note for the loan amount; as the
city repays the principal on the loans outstanding under the line of credit, the available credit
increases again until all loans are repaid and the full amount of the authorized line of credit is
available.
Term. The line of credit extends for a specified term, usually three (3) years, which the
bank may agree to renew. The terms of the individual loans made pursuant to the line of credit
depend on the terms of the line of credit.
Security and Sources of Repayment. A line of credit may generally be secured by
revenues from a specified project, such as a water system, or other available funds.
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CHAPTER 13
REFUNDINGS
From time to time a municipality may find it in its best interest to refinance bonded debt. The
process of refinancing bonded debt is called refunding. Typically municipalities refund bond
issues to:
Take advantage of lower interest rates to achieve debt service savings,
Restructure the debt service repayment schedule, and/or
Make a change in the legal status of debt covenants.
In a refunding, new bonds are sold and the proceeds are used to make the interest and principal
payments on some or all of existing bonded debt. Once a bond issue is refunded, its old or
refunded debt service is paid by an escrow funded by the new issue. The issuer only pays the
new debt service on the refunding debt issue. An issue can even be refinanced before it is
callable by using the technique known as advance refunding. (See section on Advance
Refundings, below).
Issuance of general obligation refunding debt in Oregon does not require voter approval.
Property taxes levied to pay principal and interest on such general obligation refunding bonds are
not subject to Oregon Constitutional limits.
Refundings are subject to specific and technical Internal Revenue Service regulations that
materially impact the structure and timing of refunding transactions. Additionally, State law
regulates refundings beyond the normal regulations of new money debt issues.
Because of the complexity and regulations involved in a refunding transaction, issuers
contemplating refundings should seek the advice of bond counsel and underwriters or financial
consultants very early in the process.
REASONS FOR REFUNDING

Following is a more detailed discussion of the three reasons issuers typically refund bond issues.
The math of refundings works the same for refunding general obligation bonds and refunding
other kinds of debt issues. There are, however, some differences in the legal requirements
between refunding other debt issues and refunding general obligation bonds.
DEBT SERVICE SAVINGS
The most common reason for refunding an outstanding issue is to take advantage of lower
interest rates. Just as with a home mortgage, if interest rates decline substantially after the
Chapter 13 Refundings
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issuance of a debt issue, an issuer may be able to refund the old issue with a new issue and
achieve substantial debt service savings, even after paying all costs associated with the new
issue.
In the case of a general obligation bond, the debt service savings are returned to the issuers
taxpayers in the form of lower tax rates for funded debt. In the case of other kinds of debt, the
debt service savings become an additional resource to the issuers funds or accounts that had
been responsible for making debt service payments.
Savings usually are measured by their present value, (that is, the total savings over the life of
the refunding discounted to their value in todays dollars). In the case of an advance refunding,
the Oregon State Treasury requires that present value savings from a refunding be at least three
(3.00%) percent of the new refunding issues proceeds amount.
In refunding for debt service savings, an issuer often refunds only a portion of the outstanding
bond issue, rather than the entire outstanding amount. This is because the savings from a
refunding come only from the callable portion of the old issue, that is, that portion that can be
redeemed before its maturity date. While an escrow can be designed to pay the interest and
principal on bonds that are not callable (as must be done in a refunding for defeasance purposes),
there are no additional savings attributable to those bonds because the issuer is still paying the
original interest cost on the non-callable bonds.
When only a portion of an outstanding bond issue is refunded for savings purposes, for a period
of time, the municipality actually has two issues outstanding after the refunding: (1) the
unrefunded portion of the old issue and (2) the new refunding issue. However, the combined
debt service for these two issues will be lower than the old issues original debt service.
DEBT RESTRUCTURING
Refunding an issue allows a municipality to restructure its outstanding debt. The old debt is now
paid by the new refunding issue proceeds and the municipality can structure its new debt to
better suit current circumstances. For example, a municipality may wish to consolidate several
debt issues into a single new issue and restructure the debt in a way to produce a different tax or
utility rate impact. Or, a municipality may wish to restructure a borrowing to better match the
issuers changing cash resources.
CHANGING LEGAL COVENANTS
Once an issue is refunded it may be possible to have any legal restrictions relating to the original
issue voided. This is called legal defeasance. Legal defeasance allows the issuer to remove
restrictive legal covenants.
While unlikely to be a concern with general obligation bonds, legal restrictions may be a concern
with other kinds of debt instruments such as revenue bonds. For example, a city may have
pledged a reserve fund and certain revenue coverage covenants for a utility system revenue bond.
Improved financial results may allow the city to improve on coverage or reserve requirements.
A new refunding revenue bond may be sold (with more favorable legal covenants) to refund and
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defease the old bond, thus releasing the municipality from the old issues more restrictive
covenants.
A refunding may be undertaken to accomplish any one or a combination of these three
advantages. However, in the case of general obligation bonds, refundings are almost always
undertaken to produce debt service savings.
TYPES OF REFUNDINGS
There are three general types of refundings: current refundings, advance refundings and forward
refundings. The type of refunding an issuer must use depends on the transactions timing
compared to the first available date on which the outstanding debt may be called or redeemed.
The State of Oregon and the Internal Revenue Service currently have different definitions for
current and advance refundings.
CURRENT REFUNDINGS
Under Oregon law, a current refunding is one in which the new refunding bond transaction is
closed within one year of the next available call date of the debt to be refunded. Current
refundings are not subject to any regulations other than those that apply to bonds in general. In a
current refunding, the new debt proceeds are held (sometimes in an escrow) to make one
payment, that is, the payment required to call and retire all of the old debt and pay any accrued
interest costs to the date of redemption.
Under federal tax law, current refundings are bonds that refund another bond if the new bond is
issued within 90 days of the refunded bonds next redemption date. As discussed below, federal
law treats current and advance refundings differently.
ADVANCE REFUNDINGS
Under Oregon law, an advance refunding is one in which the new refunding bond transaction is
closed more than one year before the first available call date of the debt being refunded. In an
advance refunding, an escrow is required. The escrow must make all interest and principal
payments on the debt being refunded until the first available call date of the old debt. In Oregon,
advance refundings of debt must be approved by the State Treasurers office and are subject to
certain requirements as part of that approval process. The Treasurers office charges a fee to
review advance refundings.
Under federal tax law, advance refundings are bonds that refund another bond if the new bond is
issued more than 90 days before the refunded bonds redemption. Municipalities should note
that bonds originally issued after December 31, 1985, may not be advance refunded more than
once. Additionally, federal law stipulates that escrows established with proceeds of advance
refunding bonds may not yield investment returns greater than the yield on the advance
refunding issue.
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FORWARD REFUNDINGS
A forward refunding is used where the bonds to be refunded are not permitted to be advance
refunded under federal tax law. Rather than wait until the bonds call date (and exposing itself to
the risk of rising interest rates), the issuer wishes to lock in interest rates now available. The
issuer agrees now to issue bonds on a specified future date when the issuance would become a
current refunding under federal tax law.
Forward refundings are not as common as advance and current refundings. They are more
complicated and carry an interest rate premium. The economic benefit of forward refundings
also can be achieved through the use of interest rate swaps. For example, the issuer can enter
into a swap agreement now that does not start until a future date. In that way, the issuer can lock
in future fixed rates and insure the success of the refunding without waiting to see what happens
to interest rates in the future. Interest rate swaps, however, entail certain risks that must be
carefully evaluated before an issuer commits to a financing plan. Chapter 14 discusses interest
rate swaps in greater detail.

What is a refunding?
A refunding is a refinancing of outstanding debt. A new issue of debt is sold and the proceeds
are used (usually in an escrow) to pay off some or all of an old issue. A refunding does not raise
new money but simply provides for the refinancing of outstanding debt.
Why would a municipality want to refund an old issue?
The most common reason is to reduce debt service costs when interest rates decline. Refundings
also may be used to change legal debt covenants or restructure an outstanding debt issues
payment schedule and terms.
Do municipalities need voter approval to refund general obligation bond issues? How about
refunding for a lease-purchase or revenue issue?
State law allows issuers to sell general obligation refunding issues without voter approval.
Neither is voter approval required for financing or refinancing other kinds of debt. However, in
Oregon, advance refundings closing more than one year before the next call date of the refunded
bonds must be approved by the Oregon State Treasury.
How far do interest rates have to decline before a refunding might produce savings?
Generally, rates must be one to three percentage points lower before refunding is economically
feasible. The ultimate feasibility depends on the size of the issue, call date, call price and other
factors.
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Are refundings subject to different federal and state laws than other kinds of debt issues?
Yes. Both the U.S. Treasury and the State of Oregon have rules that apply specifically to
refundings. These rules are often more restrictive than rules applying to new money bond issues.
Issuers should involve bond counsel and financial consultant(s) early in the process to ensure
compliance with all federal and state laws and regulations.
Is there a limit to how many times a debt issue can be refinanced?
Yes. Federal regulations set limits on the number of times a debt issue can be refinanced. Check
with bond counsel or underwriter for a specific ruling on your particular circumstances.
Who gets the savings on a refunding?
Whoever is paying the debt service. For a general obligation bond, the savings are returned to
the districts taxpayers in the form of lower tax rates. For other kinds of debt, the debt service
savings become an additional resource to whatever funds or accounts are responsible for the debt
service.
What is an advance refunding?
Unlike a home mortgage, most bond issues cannot be prepaid at any time but can be retired
(redeemed or called) only after a certain date. In an advance refunding, the issuer sells new
bonds before the old debt issue can be redeemed or called. The money is deposited in an escrow
that makes all principal and interest payments on the refunded debt until that first call date, then
provides the funds to call and retire all the refunded debt. An advance refunding allows an issuer
to lock in savings now even though the old debt cannot be called for years.
What is a forward refunding?
A forward refunding allows the issuer to lock in interest rates now available rather than wait until
the bonds call date (and exposing itself to the risk of rising interest rates). A forward refunding
is used when the bonds to be refunded are not permitted to be advance refunded under federal
tax law. Under a forward refunding the issuer agrees now to issue bonds on a specified future
date when the issuance would become a current refunding under federal tax law.
Why refund only a portion of an old issue?
A municipality can save money only on the portion of the old debt that is callable. Therefore,
issuers often only refinance the callable portion of the debt. That means that, after the refunding,
for a period of time, the district may have two issues outstanding: (1) the unrefunded portion of
the old issue and (2) the new refunding issue.
Does a municipality need to budget for the old debt once it is refunded?
No budget is required for the portion of the old debt that is being paid by the escrow. However,
the issuer must continue to budget any portion of the old debt that was not refunded.
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What are present value savings?

Present value is an economic term that translates future savings/costs into current dollars.
Present value incorporates the concept that a dollar received today is worth more than a dollar
received tomorrow. In a refunding, most debt service savings occur over a five- to 10-year
period. The present value of those savings provides an issuer with a means of valuing the
savings in todays dollars.
Under Oregon law, in advance refundings, present value savings must be at least 3 percent of the
refunding bonds proceeds.
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CHAPTER 14
INTEREST RATE SWAPS AND OTHER
DERIVATIVE FINANCIAL PRODUCTS
A swap or an interest rate payment agreement is a contract between an issuer and a swap
provider to exchange cash flows. The cash flows exchanged in each period are calculated by
applying interest rates or interest rate indexes to the relevant amount in each period, called the
notional amount. Swaps agreements are done for two main purposes: to reduce exposure to
changes in interest rates, and to reduce the cost of financing. Typically, swaps are used by
issuers to achieve results that are better than or not available in the bond market. Swap
agreements can specify dates in the future upon which the agreement becomes effective (a
forward agreement), and may include options for one of the parties to exercise a right to enter
into a swap under specified conditions or at a specified time.
In Oregon, a swap must be related to a bond issue. Similar to the amortization schedule for a
bond issue, the swap has a notional amount on which interest payments are calculated. The
notional amount typically amortizes on the same schedule as the bond issue, and has the same
term. Below is a diagram illustrating a typical swap transaction in which the issuer issues
variable rate debt and uses a swap to achieve fixed payments.
Issuer
Fixed Swap Rate
Swap Provider
Variable Rate
Formula
Variable Rate Bonds
Other derivative products include agreements with a provider to hedge the issuer against
payment, rate, spread, or other exposure. These products include interest rate caps or floors with
respect to variable interest rates, interest rate locks, and put or call options.
LEGAL AUTHORITY: CONSTITUTIONAL, STATUTORY, AND ADMINISTRATIVE

RULE PROVISIONS
Statutory authority for municipalities to enter into interest rate swaps is contained in ORS
287.025, as amended by Chapter 443 Oregon Laws 2005. The administrative rule for swaps
Chapter 14 Interest Rate Swaps and Other Derivative Financial Products
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promulgated by the Oregon Municipal Debt Advisory Committee (MDAC) is OAR 170-0601010, which sets forth terms, conditions, and reporting requirements for swaps. Issuers should
consult with bond counsel to ensure the purpose for which the swap is done is authorized, and
that they are adhering to statutory requirements and associated regulations.
Authorizing Resolution. The issuer must pass a resolution authorizing participation in a
swap, in which the issuer makes a finding that the particular swap agreement is being executed
for permitted purposes and in compliance with the statute and administrative rule.
MDAC Submittal. Within 30 days of executing or modifying a swap agreement, the
issuer must notify MDAC and provide a number of items that are listed in the OAR. Refer to
OAR 170-060-1010 for the list of required items.
POLICY CONSIDERATIONS AND APPROVAL PROCESS

Swap Policies. Swaps can provide results that are not available in the regular bond
market. However, they involve risks that are different than issuers usually face in the bond
market. To ensure that issuers know the benefits and risks of the agreements and has a
framework for proceeding with swaps, OAR 170-060-1010 requires an issuer to adopt a swap
policy before entering into a swap. Two excellent sources of guidance for swap policies are the
MDAC Sample Interest Rate Swap Policy and the Government Finance Officers Association
Recommended Practice Use of Debt-Related Derivatives Products and the Development of a
Derivatives Policy. To comply with OAR 170-060-1010, swap policies must provide that the
issuer to analyze all the risks, cost and benefits before executing a swap agreement. Swap
policies typically describe the types of agreements that are authorized uses, provide for
monitoring, and specify who in the organization may execute swaps once they are approved.
Specific Bond Issue Considerations. An issuers ability to execute a swap agreement is
dependent on the bond ordinance or trust indenture that governs the related bonds. Early in the
process, issuers should check with bond counsel to explore legal issues relating to their ability to
enter into swaps. If the ordinance authorizing the bonds did not contemplate swaps, the
ordinance may need to be amended, or the swap payments may need to be on a lien that is
subordinate to that of existing bonds. If the bond ordinance did contemplate swaps, the issuer
will want to know what priority in the flow of funds regularly scheduled swap payments and
potential termination payments have. For insured bonds, there may be a requirement for the
insurer to consent to a change in the bond ordinance or to the swap.
Swap Authorization. The issuers governing body must pass a resolution approving the
swap.
USING INTEREST RATE SWAPS AND OTHER HEDGES

The best use of swaps is to achieve results that cant be achieved in the regular bond market.
Swaps should not be used for speculation, or for betting on the future direction of interest rates.
Two of the most common uses of swaps for municipal issuers are 1) to lock in a fixed swap rate
for a financing which is lower than the rate available in the bond market, and 2) to lock in a fixed
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rate for a swap that begins at a future date, either to hedge against rate increases for a new money
bond issue, or to lock in refunding savings for bonds that cannot be advance refunded. A third
use of swaps is to convert fixed rate exposure to variable rate exposure. This is typically done to
hedge interest rate exposure on the asset side of the balance sheet. Variable rate exposure can be
achieved through a swap without actually issuing variable rate bonds and incurring issuance and
ongoing carrying costs of the bonds.
Other commonly used hedging instruments are interest rate caps, floors, and collars. In a cap
agreement, a provider agrees to pay the issuer whenever an index rate rises above the cap level.
The issuer pays for this insurance either in an upfront payment or as an ongoing payment.
DOCUMENTATION OF INTEREST RATE SWAPS

A swap agreement is documented by agreements written by the International Swap of Dealers
Association (ISDA) and contains four parts:
The ISDA Master Agreement
A Schedule to the Master Agreement, which amends sections of the Master

agreement to be specific to the issuer and the swap provider
A Credit Support Annex which sets forth the security for both the issuer and the
swap provider
A Confirmation that sets forth the specific details of the swap itself, such as rates,
indices to be used, start and end dates, amortization schedules, payment frequencies,
and other details
These four documents, taken together, constitute the documentation for a swap. Issuers should
be aware that the documents, as written, favor swap providers. The documents are notoriously
convoluted, abstruse, and confusing, and are full of cross-references, double negatives, and
nearly unintelligible language. This is an area where issuers need to consult with their bond
attorney and swap advisor to wade through the verbiage and be able to negotiate terms and
conditions intelligently with the swap provider.
The swap agreement contains terms and conditions relating to each partys obligations and other
terms and conditions under the swap, including payment terms, schedule of notional amounts,
events of default, collateral requirements, rating requirements, insurance provisions (if any), the
rates to be paid and the index on which they will be calculated, and other items.
EVALUATING AND MANAGING INTEREST RATE SWAP RISK

A city should evaluate all derivative financial products with respect to the unique risks with
which they are associated, and make a determination that the expected benefits exceed the
identified risks by an adequate margin over those available in the traditional cash market.
Potential risk factors may include the following, and the issuer should answer these questions
before entering into a swap:
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Termination Risk Under what circumstances might the transaction be terminated?

What is the probable range of termination values? How would a possible termination
payment be funded?
Basis Risk/Tax Risk Do the anticipated payments the issuer will receive match the
payments it makes? If not, is the basis risk justified by the expected benefits?
Rating Risk Will the proposed transaction have an adverse affect on the issuers
bond ratings?
Risk Of Uncommitted Funding Does the transaction entail the risk of future
refinancing needs?
Reporting Considerations Has the issuer consulted its accounting staff and auditors
to determine the impact the transaction will have on its financial statements?
Subsequent Business Conditions Does the transaction or its benefits depend upon
the continuation, or realization, of specific industry business conditions?
The risks amenable to numerical analysis are the assessment of termination risk and basis risk.
Termination Risk. Regardless of who is at fault in a termination event a termination
payment may be owed from one party to the other, and the payment depends on both the level of
interest rates at the time of termination, and the time left in the original term of the swap. Unlike
the issuer, the swap provider does not have the option to end the swap early, but the issuer still
needs to have a plan to handle termination risk, which can occur because of a swap provider
default. Termination risk can be evaluated in two ways: looking at how much the potential
payment would be at various times during the swap for hypothetical future interest rate
environments, and looking at peak exposure, which takes into account the fact that a sudden
shift in rates is unlikely therefore the peak exposure is a point at which interest rates have had
time to shift.
Management of termination risk can involve several actions before and during the swap:
requiring the swap provider to post collateral if ratings fall below specified levels (minimum
levels are required by statute); monitoring the providers credit ratings; monitoring the market
value of the swap (i.e. the potential termination payment); spreading the swap among several
counterparties; making the swap transferable to another party; and making sure there are
balances available for a termination payment if it occurs.
Basis Risk. Swap agreements providing the greatest savings to the issuer typically
involve tax risk to the issuer, which is the risk that the tax advantage of municipal bonds is
diminished in the future. The issuer taking advantage of low fixed rates available in the swap
market has typically issued variable rate bonds. The bonds theoretically trade at a rate close to
the Bond Market Association swap index rate (BMA), now known as SIFMA. In exchange
for paying a fixed rate to a swap provider, the issuer receives a percentage of a variable rate from
the taxable market, typically 1-month LIBOR. In theory, an investor is indifferent between
receiving a tax-exempt interest payment, and a percent of taxable interest that reflects his
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marginal tax rate. Over the years that BMA (SIFMA) has been in existence, it has traded (on
average) at about 70% of 1-month LIBOR. If the issuer has a swap agreement where the plan is
to have 70% of LIBOR payments match payments to bondholders, the provider payment will be
insufficient to pay bond interest if tax rates go down, or a flat tax is implemented.
Management of basis risk includes budgeting enough cushion in issuers debt service funds to
handle deviations from the historical average pattern of rates. Before entering a swap, the issuer
should have an analysis that shows the impact of a change in the relationship of BMA (SIFMA)
to LIBOR, and choose the formula for the payments to be received to make expected results
consistent with appetite for risk. If you have read this far, you are more diligent than most
issuers.
SELECTION OF FINANCE TEAM AND SWAP COUNTERPARTIES

Swap Advisor. It is highly recommended that issuers hire a swap advisor to assist in
evaluating swap ideas, assisting with the swap policy, and assisting with swap provider selection,
document negotiation, and competitive or negotiated swap pricing. The swap advisor may be a
person from the financial advisor or underwriting team, as long as the advisor is not representing
any firm that wishes to participate as a swap provider. The issuer may want to conduct an RFP
process to select a swap advisor.
Swap Provider Selection. Some issuers want to open up competition to serve as swap
provider to the most firms possible, while others want to limit counterparties to underwriters or
banks that they already do business with. In any case, the first step is for the issuer to develop a
term sheet with the assistance of the swap advisor and bond counsel. The term sheet will have
the major deal points that the issuer wants in the swap agreement. The term sheet is circulated to
the pool of potential providers, and the issuer can then choose counterparties based on which
ones are willing to accept the key deal points.
Swap Pricing. Pricing can be done in a competitive bid process, on a negotiated basis or
a hybrid of these two. Counterparties may be reluctant to go to the expense of negotiating
documents if they dont have a reasonable probability of winning part of the business. In
recognition of this, some issuers hold a competitive bid to determine pricing, and award, for
example, 60% of the swap to the winning bidder. If the next best bidder is willing to match the
best bid price, they are awarded 40% of the swap. Pricing can also be done through negotiation
with the swap provider. It is recommended that the issuer have a swap advisor assist with price
negotiations. The swap advisor can inform the issuer where the mid-market level is for the swap
and inform the issuer how much profit & overhead is built into the suggested pricing.
DISCLOSURE AND FINANCIAL REPORTING

Disclosure in Official Statements: Bonds being issued that have an associated swap
transaction or with the intent of having an associated swap transaction should include disclosure
in the official statement describing the authority to enter into the transaction, the purpose of the
transaction, where regularly scheduled payments and termination payments fall in the flow of
funds, and the consequences of termination prior to the maturity of the swap (e.g., a termination
payment, loss of the interest rate hedge, etc.). The official statement should indicate whether
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swap payments are insured, and if the swap counterparty or counterparties have been identified,
that information should also be included.
Financial Reporting. The Governmental Accounting Standards Board (GASB) issued a
proposed statement for Accounting and Financial Reporting for Derivative Instruments on
June 29, 2007. A comment period runs through October 26, 2007, after which GASB will hold a
public hearing on the statement. For more information, log on to the GASB website at
www.gasb.org, where a full text of the proposed accounting treatment can be found. As a very
brief summary, GASB is proposing that derivative instruments be reported on the statement of
net assets at fair market value. The draft proposes that changes in fair values of derivative
instruments be recognized as investment income, unless the derivative instrument is a hedging
derivative instrument, in which case hedge accounting should be applied. In hedge accounting,
changes in fair market values of a hedging derivative instrument are reported as either deferred
inflows or deferred outflows, regardless of the measurement focus or basis of accounting of the
reporting unit. Until GASB issues its final statement, many governments are using footnotes to
describe their derivative activity.
In notes to the financial statements, governments should include a description of their objectives
for any swaps or other derivative instruments, plus any context needed to understand the
objectives, the start and end dates, the notional amount, the indexes and/or interest rates upon
which cash flows are calculated, any embedded options, a summary of derivative activity during
the reporting period and balances at the end of the reporting period. This information should
include the fair value and the change in fair value during the period and location in the financial
statements where they are reported.
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CHAPTER 15
LOCAL OPTION OPERATING AND
MAINTENANCE LEVY
This chapter focuses on local option levies for both operating and capital purposes. While the
levies for operating and capital purposes have differing terms and purposes, they share certain
authorization and functional characteristics. We will discuss the similar characteristics, then
discuss each type of levy individually. Please note that school district and community colleges
face additional and differing restrictions on their local option levy authority that is not discussed
in this chapter.
Local option levies present Oregon municipalities an alternative for raising additional operating
or capital construction funds from property taxes above their constitutional permanent rate. This
authority was created under Measure 50 in 1997. Local option levies are subject to voter
approval and other restrictions.

Local options levies are property tax levies imposed in the gap between Measure 50 taxes
collected and Measure 5 tax rate limits. Levies for operating purposes may only extend for five
years. Levies for capital purposes may extend for ten years or the useful life of the project,
whichever is shorter. Levy authority can be expressed as a target total dollar amount or as a rate
per thousand.

As a property tax increase, local options levies can be imposed only with voter approval. Local
options levy elections are subject to the same double majority requirements as general
obligation bonds, except in general elections in even numbered years. Levy election
requirements are similar to those for a general obligation bond issue, requiring submission of
ballot title and other language at least 60 days prior to the election date. Ballot titles require
approval of the relevant governing body before submission to the county clerk. Once voter
approval is received and the election results validated, imposition of the levy is executed via the
normal budget process.

Local option levies for operating money are typically not leveraged. Theoretically, a
municipality could use its revenue bonding authority to issue revenue bonds for operating
purposes - payable from local option taxes. This type of borrowing would be taxable under
Chapter 15 Local Option Operating and Maintenance Levy
123
federal tax law because tax law generally does not allow tax exempt status for operating debt.
Local option levies for capital may be leveraged. Please refer to the discussion below under the
Capital Levy section.
OPERATING LEVIES
Local options levies for operating purposes provide local governments with the possibility of
collecting additional operating dollars from property taxes. Although these collections are
subject to Measure 50 compression, local option levies may present the most significant,
efficient and equitable form of revenue raising options for local governments.
Calculating Local Option Capacity. One of the most difficult problems with local
option levies is calculating the levys capacity to generate tax revenue. That is because the
capacity is a moving target depending on a number of factors. In order to understand how
local option levies work, one must understand the nuances of Oregons convoluted property tax
system. We provide a brief explanation and history lesson.
Prior to Measure 5s passage in 1990, Oregons property tax system was levy based.
Municipalities sought voter approval for a dollar amount of taxes that could be levied in any
given year. That levy authority was allowed to increase by up to six percent per year without
further voter approval. So, tax rates were simply a matter of arithmetic divide the approved
levy amount by the assessed valuation (AV) of taxable property and the result was a tax rate that
would be applied to each property. The assessed value of property was defined by law to also be
the real market value (RMV), that is, the value at which a property would sell on the open
market.
Measure 5 changed the property tax system by adding a rate limit on top of the levy based
system. The rate limit for all local governments (not including educational districts) was $10 per
thousand. This applied property by property in other words, each individual property was
subject to the $10 rate limit. If, when the tax rates were calculated for each single property, the
combined rate exceeded the limit, all taxes for that property had to be reduced pro rata so that the
combined rate did not exceed the limit for that property.
Measure 50 imposed new changes on the property tax system in 1997. Measure 50 changed the
tax system in two fundamental ways. First, it changed the definition of AV and decoupled it
from RMV. Assessed Values for each individual property were reset by rolling back the value of
each property to its 1995-96 Assessed Value and then further reducing it by 10%. Future
increases in Assessed Value were limited to 3% per year unless substantial improvements were
made to the property.
Second, Measure 50 converted the property tax system to a rate based system. Each municipality
was assigned a permanent rate that was recalculated based on the new lower AV. Henceforth, all
tax collections would be based on the permanent rate calculated on the assessed value of each
property, rather than on a specific dollar levy. However, importantly, the tax collections on each
property were still subject to the Measure 5 overall rate limits, which were calculated based on
real market value.
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To summarize:
Each single property has a Measure 50 tax rate based on Assessed Value
Each single property has Measure 5 tax rate limit based on Real Market Value
The Measure 5 limits still rule: Measure 50 collections cannot exceed Measure 5
limits when translated to a Real Market Value base
Each property has a unique Measure 50/Measure 5 relationship: some have a gap
between them; some have no gap
The total of all gaps for each individual property in the taxing district equals the total
local option capacity
The existence of a gap (or no gap) will change every year based on differential growth rates of
Assessed Value versus Real Market Value and changes in taxes levied. So, the total capacity of
a local option levy changes each year as well.
A Capacity Example. Lets analyze city ABCs local option capacity.
Assumptions:
The city has an AV of $1.40 billion and a RMV of $1.60 billion
The consolidated governmental permanent rate (the combined total of all

overlapping governments Measure 50 rates) in the city is $11.23 per thousand
Under Measure 5, the local governments may collect up to $10 /$1,000 (RMV) x $1.6 billion =
$16.000 mm
Actual (Measure 50) collections are $11.23/$1,000 (AV) x $1.4 billion = $15.722 mm
The local option capacity for City ABC is $278,000.
Local Option Tax Collections Are Unpredictable. Because Measure 5 limits affect
each property differently, the amount collected by a municipality can be very difficult to
calculate and will vary from year to year. Since some properties may already be at the limit, not
every property will pay a local option tax, and some properties will pay more than others.
Unless every property is raised to the Measure 5 maximum, the municipality will not receive an
amount equal to its local option capacity. The only way to ensure maximum collections is to
identify the single property with the lowest Measure 5 rate and impose the rate necessary to
bring it to the maximum Measure 5 rate.
Because local option taxes can fall more heavily (or lightly) on certain properties, explaining the
impact of a proposed local option levy is difficult. During an election campaign, some
municipalities provide some kind of online local option tax calculator that gives a property
owner some better idea of how much that property would pay in local option taxes, depending on
its own gap. While it is true that a local option levy will cause some properties to pay more than
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others, it is also true that a local option levy tends to equalize current differentials in property
tax bills for similarly valued properties.
Compression of Local Option Levies. Under Measure 5, if the combined taxes on any
given property exceed the Measure 5 limit of $10/$1,000 (RMV), then the taxes imposed are
compressed pro rata until the $10 limit is reached. Local option levies are compressed before
any other levy, including tax increment collections. Local option levies therefore can be
compressed to zero before any tax increment and permanent tax levies are affected.
Rate versus Levy Amount? Local option levies can be approved as either a rate per
thousand of Assessed Value or as a dollar amount of annual levy. A fixed dollar levy will
always produce less (sometimes substantially less) than the total dollars levied. That is because
the levy amount will be translated into a rate which is subject to compression. This can also lead
to confusion with the public when they believe they have voted for more operating dollars than
will actually be received.
Rate per thousand levies are more popular. Rate levies can also produce rising tax collections
over the levy life as the gap between Measure 5 and Measure 50 tends to grow each year.
CAPITAL LEVIES
Local option levies can be used for capital purposes. Levies for capital purposes can extend up
to the lesser of 10 years or the useful life of the financed capital items. Capital items can include
any capitalizable asset, including items that are specifically excluded from general obligation
debt by Measure 50.
Capital local options levies are rarely seen in Oregon. Because the levy is subject to the same
voter approval requirement as GO bonds but the revenue stream is less predictable and shorter
lived, municipalities tend to favor GO bond authority over the local option. However, because
general obligation bond proceeds are more limited in usage, some jurisdictions have opted for
local option levies to pay for things that would otherwise be disallowed under general obligation
bond provisions (for example, supplies and equipment).
Local options for capital can be leveraged to accelerate delivery of the assets or the project. A
municipality could use either revenue bonds or a financing/lease-purchase agreement to turn the
stream of tax revenues into an upfront amount of cash. In the case of a revenue bond with only
the local option taxes pledged, the unpredictability of the local option stream makes leveraging
trickier as lenders will likely require some cushion against anticipated fluctuations in available
revenues from the levy. Using a financing agreement with a pledge of the municipalitys full
faith and credit maximizes the issues ability to leverage the anticipated local option revenues.
However, the risk of revenue fluctuation is thereby transferred to the issuers general fund.
Local option for capital can also be used on a pay as you go basis for capital projects or assets
over the life of the levy.
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CHAPTER 16
BOND ELECTION PROCESS
Clearly the need for successful finance elections has never been greater. City populations are
growing, many facilities are worn, outdated and in need of major improvements. At the same
time operating funds are dwindling.
The large and aging boomer generation is a now a major force at the ballot box. The
majority of the most frequent voters are over age 45 and often in no mood to vote for higher
taxes. Unless we approach the business of finance campaigns as a critical component of a
citys leadership agenda, we will fail to provide our communities with the resources they
need for the quality of life residents expect.
The most important work in winning elections occurs long before a measure is placed on the
ballot. Communities expect to be involved. They expect their public institutions to
communicate with them year-round. They want a voice in the planning and decision-making.
Following are the steps to take for involving your community in the decision-making
regarding a bond proposal and developing the organization needed for a successful bond
election. This chapter describes proven strategies to:
Organize and use a City Council appointed community advisory committee to work with
city staff in prioritizing facility needs and recommending a bond levy amount
Conduct community research surveys, focus groups, neighborhood and community

meetings to determine voters understanding of the need and support for proposed
project(s)
Use survey research and follow recommendations of community advisory committee as

closely as possible in determining bond measure projects and amount
Set an election date and follow Oregon statutes for placing the bond measure on the
ballot and conducting the election
Determine city and community representatives roles and responsibilities in providing

information about and advocating for the bond measure
Establish an information timeline and identify the kinds of information the city should
provide voters about the bond measure
Establish an advocacy timeline and identify the activities an advocacy committee can
complete 100 percent for turning out a majority yes vote
THE BOND ELECTION PROCESS

Oregon cities and other local governments can issue general obligation bonds only if voters
approve a bond levy authorizing them to do so. Cities and other jurisdictions can receive this
authorization at any election with at least a 50 percent turnout and a majority approving the
Chapter 16 Bond Election Process
127
measure. The only election with no turnout requirement is the general election in even numbered
years (ORS 254.056).
ELECTION DATES
Bond measures can be submitted to voters on the following dates (ORS 221.230 and 254.056).
March second Tuesday
May third Tuesday
September third Tuesday
November first Tuesday after the first Monday
The general election is held on the first Tuesday after the first Monday in November of each
even-numbered year (ORS 254.056).
DOUBLE MAJORITY REQUIREMENT
Under Article XI, Section 8 of the Oregon Constitution, a double majority is required for any
increase in property taxes, including levies to pay general obligation bonds. The double majority
requirement means that a bond measure must be approved with a majority of the voters and that
turnout at the election must be at least 50 percent of the registered voters eligible to vote in the
election. The only exception is the November general election in even numbered years. There is
no turnout requirement for that election. If the turnout requirement is met, then a simple
majority, one more than 50 percent, is required to approve the measure. (Note: a legislative
referral to add the May primary and May and November elections in odd numbered years to
election dates exempt from the turnout requirement is on the November 2008 ballot.)
Due to the double majority requirement, a majority of local governments are using the November
general election for money measures. As a result, according to the League of Oregon Cities
Local Property Tax Election Study:
As of May 2007, 168 out of 1,336 property tax measures failed due to the double
majority requirement. Eighty-one percent of those failures had a voter turnout of at
least 40 percent. Eighty-nine of those measures would have passed if all the needed
votes for a 50 percent turnout had been cast as no.
General election ballot (not subject to the double majority) are overloaded with tax
and bond measures, forcing local governments to compete. More than half of all the
property tax measures since 1997 were placed on general election ballots, an average
of 146 measures per election statewide. In November 2006, there were 161 money
measures on the ballot.
Under ORS 258.036, if voters approve a bond measure but the election misses the turnout
requirement, a city resident has until the 40th day after the election or the completion of a
recount to file a petition challenging the eligibility of voters identified as moved out of the city or
deceased. The petition must be filed in the circuit court in the county where the election was
held.
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Information sufficient to change a voters eligibility includes U.S. Postal Service change of
residence address or published death notice, information provided by the voter, or written
notification from family of a death or the official death notice.
Since county voter data are being linked statewide and most counties have systems for regularly
purging ineligible voters from their voter lists, any city considering challenging voter eligibility
should talk with their county clerk and city attorney before engaging community members in the
challenge process.
OTHER LIMITATIONS
ORS Chapter 287 limits the amount of general obligation bonds issued or outstanding by a city
to 3 percent of the real market value of all taxable property within the citys boundaries. This
limitation applies unless a lesser limitation is otherwise provided by law or charter, computed in
accordance with ORS 308.207, after deducting from outstanding bonds such cash funds and
sinking funds as are applicable to the payment of principal thereof. The limitation does not
apply to bonds issued for water, sanitary or storm sewers, sewage disposal plants, hospitals,
infirmaries, gas power of lighting purposes or the acquisition, establishment, construction or
reconstruction of any off-street motor vehicle parking facility to bonds issued pursuant to
applications to pay assessments for improvements in installments under statutory or charter
authority.
NOTICE OF ELECTION
Cities must prepare a notice of election and file it with the county clerk 61 days prior to the
election date (ORS 255.085). Bond counsel prepares the notice of election as an attachment to
the city council resolution calling an election. The notice must include:
The purpose for which the bonds will be used
The amount and term of the bonds
The kind of bonds proposed for issue
A statement that an elector may file a petition for review of the ballot title not later
than the seventh business day after the title is filed with the county elections officer
The notice of election must be filed with the county clerk 61 days prior to the election date (ORS
254.095) and must be published once in a newspaper of general circulation in the district (ORS
255.095). The Oregon Secretary of State maintains a current election calendar with the filing
deadlines on its Web site: http://www.sos.state.or.us/elections/ .
BALLOT TITLE WORDING REQUIREMENTS

The notice of election includes the ballot title, which is the actual wording of the bond measure
as it appears on the ballot that voters receive. Oregon law requires wording of the ballot title to
provide a reasonably detailed, yet simple and understandable description of the use of bond
proceeds (ORS 250.037(3)). The ballot title must satisfy the specific requirements of section 11,
Article XI of the Oregon Constitution and the applicable provisions of the Oregon Revised
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Statutes. It is necessary to prepare the ballot title with the assistance of legal counsel, including
bond counsel and the city attorney, to be sure that all legal and statutory requirements are
satisfied. The ballot title must include:
Caption. A caption of not more than 10 words that reasonably identifies the subject
of the bond measure. (ORS 250.035)
Suggested wording: (city name) Bond to (verb, for example: build/construct/upgrade/

renovate) (key bond component(s)). The first words voters should see are the citys name and
primary use for the bonds.
Question. A question of not more than 20 words that plainly phrases the chief
purposes of the bond measure so that an affirmative response to the question
corresponds to an affirmative vote on the bond measure. (ORS 250.035)
Suggested wording: Shall city (verb, for example: build/construct/upgrade/renovate) (key bond
component(s)) by issuing (amount) in general obligation bonds?
In addition to the question, Oregon Revised Statutes require the following second sentence that
does not count as part of the word limit.
Required second sentence: If the bonds are approved they will be payable from taxes on
property or property ownership that are not subject to the limits of sections 11 and 11b, Article
XI of the Oregon Constitution.
Summary. A summary statement of not more than 175 words (ORS 250.035) that
provides a concise and impartial statement of the bond measure and its major effect.
In addition, for all elections except the general election, the following first sentence
must be used: This measure may be passed only at an election with at least 50
percent voter turnout. (ORS 250.036)
The summary can be prepared using a bulleted list of items and information, including data from
any community surveys conducted to determine the priorities and interests of the community.
The summary should describe the proposed bond measure in terms that reflect the concerns and
priorities of the community. The summary should be easy for all voters to read and understand.
Contact the League of Oregon Cities in Salem at (503) 588-6550 or [email protected] for
sample ballot titles from other cities.
EXPLANATION
In addition to the ballot title, which includes the caption, question and summary, the city may
provide an explanation of not more than 500 words. however, this is available only to cities that
are located in counties that publish voters pamphlets for elections. (ors 251.345 and oar 165022-0040) the 500-word explanation can provide a more detailed description of the ballot
measure than what is included in the ballot title summary. the explanation should also be easy to
read and understand. lists, bulleted items and bold type are helpful in making concise points that
capture the attention of voters. the explanation should be drafted using information gathered
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from any community surveys or other sources of information about community concerns and
priorities.
OTHER LEGAL REQUIREMENTS OF THE ELECTION
The Oregon Constitution, Article XI, Section 11(g)(3)(d) and ORS 250.037(4) require that if the
bond measure election is conducted by mail, the front of the outer envelope that is mailed to
voters must contain the following statement printed clearly, boldly and in red: CONTAINS
VOTE ON PROPOSED TAX INCREASE.
PUBLICATION AND PETITION FOR REVIEW
Under ORS 250.275(5) the ballot title must be published in the next available edition of a
newspaper of general distribution in the city. Any elector that is dissatisfied with the ballot title
filed by the city may petition the circuit court of the judicial district in which the city is located.
Such a petition must be filed not later than the seventh business day after the ballot title is filed.
(ORS 250.296)
VOTING BY MAIL
County clerks in all Oregon counties now conduct all elections by mail. The law requires ballots
to be mailed to registered voters not sooner than 20 days before the date of the election and not
later than 5 days before the election. To be counted ballots must be received by the county clerk
by 8 p.m. on Election Day.
Voters may return ballots by mail, in person or to any elections office designated drop off
location (ORS 254.456). Cities and advocacy committees may collect ballots and deliver them to
the elections office provided they clearly indicate the collection, either in person or at a drop off
location, is not an official ballot box or an official drop off location.
SETTING BOND AMOUNT WITH COMMUNITY INPUT
Because of the difficulty of meeting Oregons double majority voting requirement for bond
levies, cities need to generate community ownership of their bond proposals. To generate this
ownership cities should:
Involve key community leaders in an advisory committee or task force to review and
set priorities for city facility needs, and
Hire a professional survey firm to conduct a random-sample telephone survey to

assess voter understanding of the need and support for the proposed measure.
Conducting such surveys is a legitimate city research expense providing the results
are used to give the community advisory committee or city council data for making
recommendations and/or decisions about a bond measure that reflect community
priorities.
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MAKING ADVISORY COMMITTEES EFFECTIVE

Involve up to 30 community members who represent key community groups to review and
prioritize facility needs. Consider including representatives such as builders, realtors, Chamber
of Commerce or other key community group members, county planners, the fire marshals
office, the ministerial association, senior citizens, representatives from other city boards,
commissions and neighborhood associations, any other organization agency or individual that
has recent experience with major public building or renovation projects, and voters who vote in
every election. (Voters names, addresses, age and voting frequency are available from the
county elections office.)
Clearly define the committees role and responsibilities for reviewing the citys
facility needs and establish a timeline based on the desired completion date and
election date.
Recruit members by sending personal invitations asking them to serve on the

committee. The letter should describe the task and provide a timeline, which indicates
the approximate number of meetings, or hours, required to complete the task.
Provide appropriate administrative, city planning staff and secretarial support.
Follow open meetings law requirements. The facility review committee or task force
is an advisory committee to the city council. Its meetings are public meetings. Notice
requirements are the same as for city council meetings.
Make sure meeting minutes and the committees final report are distributed widely so
that other community members become aware of the citys needs.
Follow the committees advice as closely as possible in determining bond levy

projects and amount.
CONDUCTING A COMMUNITY SURVEY

A reliable way of testing voter understanding of and support for an issue is to conduct a random
sample survey of city voters. For statistically accurate results, the number of voters polled will
depend on the number of registered voters in a city. Survey costs vary depending on city size.
Generally, cities should conduct a 10- to 15-minute survey (25 to 30 questions, including two to
four open-ended questions) with at least + 5 percent reliability. Questions about the measure
should be specific, including the amount of the levy, what it will pay for and the tax rate.
A number of Oregon polling firms conduct surveys for local governments. For a list of the firms
and guidelines for writing a request for survey proposal, contact the League of Oregon Cities in
Salem at (503) 588-6550 or [email protected].
CONDUCTING SUCCESSFUL BOND ELECTIONS

A city councils decision to put a bond levy on the ballot should trigger a number of city
information and community-sponsored activities. These activities should involve a cross-section
of key community members in the decision-making process, show voters the merits of the citys
proposal, and help advocacy committees focus on effective methods of gaining voter support.
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Following are roles and responsibilities for city council members, administrators, staff, and key
community members in a bond election campaign.
CITY COUNCIL MEMBERS
Involve community members in determining building/bond priorities. Follow

community advice as closely as possible in determining bond levy projects and
amount.
Conduct a community survey to determine community understanding of and support

for the bond proposal and its various components.
Vote unanimously on final bond proposal.
Become advocates. Participate in community-run campaign activities; volunteer to

accompany city personnel giving informational presentations so that you can
encourage those present to vote yes. As long as city council position are not paid
positions and council members are not using city staff time or resources, they can,
and have a responsibility to, advocate for passage of measures they vote to put on the
ballot. (See Election Dos and Donts for Public Officials below)
CITY ADMINISTRATORS
Help council members identify key community members who should be involved in
planning and/or campaign processes.
Provide information about the bond levy to staff, volunteers and community
groups/members and be prepared to answer their questions.
Assist in voter registration efforts and in providing opportunities for public discussion
of the bond measure.
Support advocacy activities as appropriate. (See Election Dos and Donts for Public
Officials and Public Employee Election Guidelines below)
CITY STAFF
Know about the bond levy measure and be prepared to answer community members
questions.
Volunteer to work with the community advocacy campaign during non-work time.
(See Public Employee Election Guidelines, below)
KEY COMMUNITY LEADERS
Know about the bond levy measure and be prepared to answer questions.
Volunteer to take leadership roles in or work with the community advocacy

campaign.
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PREPARING CITY INFORMATION
Use survey data to write the 175-word ballot title summary and 500-word voters
pamphlet ballot explanation. Have bond counsel review ballot title and explanation
after it is written using key messages from survey data. In addition, have the Elections
Division of the Oregon Secretary of States office review the 500-word explanation
for advocacy language. Edit copy following the Secretary of States guidelines.
Use approved 500-word explanation to prepare a brief (one-page), factual and

impartial summary of the bond proposal to use at presentations and for staff and
others to use as a quick reference in talking or answering questions about the bond
proposal.
Meet with all staff, city boards, commissions and volunteers to discuss the bond
proposal. Discuss importance of their being informed and able to answer questions
from the public. Respond to and record all staff/community questions for reference in
producing city publications, and maintaining a questions and answers section on the
city Web site.
Meet with neighborhood associations and community groups, as requested, to discuss

bond proposal. Consider presentations that include a city representative to present the
facts and a city council member or advocacy committee representative to advocate
support and solicit campaign contributions.
Consider producing two mailings to community members regarding the bond

proposal. Information in the mailings must be factual and impartial but should be
based on survey data.
The first mailing, sent to all households and out-of-state absentee voters as soon as a decision
about a bond measure is made, should include a summary of the facilities committees report;
details regarding the bond levy amount and its estimated cost to taxpayers; the ballot title and
explanation; and election and voter registration information.
For the second mailing to all registered voter households, sent when the measure is filed with the
county clerk, consider sending an 8 X 5 postal card using key messages, including the
cost to taxpayers; where to get further information; and where and when to vote.
COMMUNITY ADVOCACY CAMPAIGN ACTIVITIES
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Ideally, an advocacy committee should have six months to year to conduct a

campaign.
The advocacy committee should have a simple organization focused on identifying

and turning out the number of yes voters required to pass the bond measure. (See
the following section for a suggested campaign organization.)
Activities to reach identified voters should be personalized, for example, telephoning,

personalized letters, hand-written postal cards, hand-addressed flyers, knock and talk
door-to-door canvassing in key precincts.
Advocacy efforts should be aimed at reaching those voters survey data indicates are
most likely to vote in favor of the measure.
The advocacy committee should check city board, commission, committee,

neighborhood association and staff lists against the voter registration list to see if a
voter registration drive is required to get more of these individuals registered to vote.
This activity should take place early in the campaign. (Actually, cities should provide
voter registration materials in all city offices, libraries and senior centers as a regular
city service.)
Activities should be prioritized based on available resources volunteers, dollars

and in-kind contributions and a campaign calendar should be developed for
accomplishing these activities 100 percent.
A delegation of city and advocacy committee members should attend an

OSBA/LOC/AOC Bonds and Ballots Workshop to find out more about successful
campaign strategies and available resources.
Decide on the Structure of Your Campaign. City election campaigns dont require a
complicated campaign structure:
Keep the organization simple
Assign one person to coordinate the overall campaign
Hire a campaign consultant to provide this coordination if your city is large enough
and the advocacy campaign has the resources to do so.
Set up specific subcommittees to handle all the other facets of the campaign
For campaigns that do not involve consultant assistance, use the following sample campaign
structure and job descriptions to get organized and assign tasks to subcommittees. Be sure to give
one person overall responsibility in each area.
Keep Organization Simple. Bond election campaigns dont require a complicated
structure. However, successful campaigns do require a research-based plan with dedicated
volunteers committed to completing agreed upon campaign activities 100 percent.
Have One Leader. Campaign organizations tend to be democratic. While this is
necessary to attract dedicated volunteers, make every effort to ensure that one person is in charge
and that campaign goals are clear. That person is either the hired campaign consultant or the
committee chair(s). People move in and out of campaigns with both good and bad ideas. The
consultant or chairs job is to keep the campaign on target and on schedule.
Some campaigns name co-chairs. Others have a chair and a consultant. The chair usually is a
leading community member who adds credibility to the campaign. The second person or
consultant has the organizational skills to make sure all the campaign tasks are coordinated and
accomplished.
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Campaign Chair(s)/Consultant:
Prepares agendas for meetings
Establishes subcommittees with the following assignments, responsibilities and

subcommittee chairs who will take responsibility for subcommittee assignments
Keeps in contact with all subcommittee chairs to be sure their tasks are being
accomplished as scheduled
Finance Subcommittee. Raises the dollars and finds the in-kind contributions needed
for the campaign. The treasurer files all of the required forms and reports with the county
elections office.
Data Subcommittee. Is responsible for making sure the campaign has all of the voter
information and lists needed for phoning, mailings and door-to-door canvassing.
Database manager works with software program or other means of keeping track of
voter identification data.
Data lists manager orders labels, phone lists and walking lists from database manager
or commercial list service for phoning, mailing and door-to-door activities. The data
lists manager also orders returned ballots lists and other required data from the county
elections office for poll watching activities.
Publicity Subcommittee. Prepares all campaign literature based on the research, themes
and key messages. This committee designs the materials that meet campaign requirements and
has them produced in time to meet campaign deadlines.
Volunteers Subcommittee. Is key to the campaigns success.
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Volunteer coordinator recruits and assigns volunteers by distributing sign-up sheets

to all groups willing to sign up volunteers and coordinating the times each group is
assigned to work. The most important task is to follow up to be sure the required
number of volunteers is present for each phoning, mailing and door-to-door activity.
Mailing chair is responsible for all campaign mailings. This person should be familiar
with first class and bulk mailing procedures. The mailing chair also works with the
volunteer coordinator to be sure there are enough volunteers for the dates scheduled
for mailings.
Telephone chair must be available each night that phone calling takes place to be sure
the volunteers have direction and guidance. This person is responsible for providing
training as well as for supervising the phoning.
Door-to-door chair is responsible for any scheduled door-to-door activity. This

person will need to work closely with the data lists manager to get walking lists and
with union representatives to organize materials and assignments for door-to-door
volunteers.
Refreshments chair is responsible for making sure there are beverages and snacks for
all activities that involve volunteers.
Involve Key City Groups. Most referenda campaigns are not large enough to
necessitate more subcommittees than those listed here. However, you may want representation
from city boards, commissions, neighborhood associations or other key city groups on the
campaigns central committee. Also, be sure you include representatives from employee unions
and key local businesses/community groups on the central committee.
Using a Consultant. The primary purpose of any advocacy committee is to identify
yes voters and get them to the polls. If a city has fewer than 10,000 registered voters, a
researched-based plan and a strong, committed cadre of community volunteers, it should be able
to succeed without outside assistance. In larger cities those with more than 10,000 registered
voters getting help to organize or for coordinating campaign activities may be beneficial. In
fact, when cities have 40,000 or more voters, using outside consultant assistance usually is
essential.
Whether the advocacy committee has consultant help or not, success continues to depend on
broad-based support and volunteer efforts.
Consultant help can range from community PR or marketing firms that offer to design your
campaign flyers and mailers as an in-kind contribution, to someone the city hires to analyze the
survey data and other research and recommend strategies for both the citys information
campaign and the community-run advocacy campaign, to a political consultant hired by the
advocacy committee to coordinate the campaign and all of its activities. The kind of consultant
help used will depend on the citys size, resources and available professionals. Using a
consultant also changes the campaign structure based on the consultants recommendations.
ELECTION DOS AND DONTS FOR PUBLIC OFFICIALS

The following guidelines provide some general legal principles found in case and statutory law.
City council members and administrators are encouraged to consult with LOC or their citys
attorney when specific questions arise.
Dont Use City Resources. Public agencies, including cities, cannot use public
resources to advocate a position on a ballot measure.
Public resources mean money, staff time during working hours, vehicles or travel
allowances, or facilities and equipment.
Examples: Employees cannot be used to do research or write speeches designed to
advocate a position on a ballot measure. Employees cannot charge travel expenses to the city for
attending a meeting at which they advocate a campaign position. A city administrator or
secretary cannot draft a city council resolution that takes a position on a ballot measure before
the city council takes official action on the resolution. (Following a city council action, the city
administrator/secretary can format the resolution to comply with a standard format used for
resolutions.)
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Do Provide Information. Elected city council members may use public resources to
develop and distribute objective material on the effects of a ballot measure. Such material must
be informational, providing the public with a fair presentation of all relevant facts and may not
advocate a position.
Examples: Employees can be asked to do research and prepare impartial, factual
information that fairly assesses the effects of a measure on the city and the community. City
councils and staff can use such information in meetings with individuals, organizations, the news
media, legislators, civic leaders, special interest groups and others to explain objectively the
measures impact. Because the information is a public record, measure proponents or opponents
also can use the information gathered.
Do Check Content, Intent. Give careful consideration to style, tenor and timing when
creating information documents. The distinction between legitimate research/information efforts
and improper campaign advocacy may be difficult to determine for specific cases. When in
doubt, check with the citys attorney or send the information document to the Secretary of States
Elections Division for review.
Do Speak Out. Elected city council members may campaign fully for or against any
ballot measure as long as they dont use public resources. The courts recognize the right, if not
the duty, of elected officials to speak out on major issues, particularly on matters that affect the
constituents they serve. City council members can speak without restriction as long as public
resources are not involved in any way. The city council member can use city-prepared materials
for reference because these materials are public records available to anyone.
Do Take Positions. Elected officials, including city council members, can take a
position on a ballot measure provided public resources are not used to advocate that position.
A member of the city council, not city administrator or city council secretary, must draft city
Council resolutions for or against a ballot measure. The city administrator/council secretary can
make copies of the proposed resolution and include the drafted resolution in the city Council
packet sent out before the city council meeting.
On resolutions that take a position on a ballot measure, city staff can prepare information that
indicates the impact that ballot measure will have on the city, but must make that information
balanced and impartial.
Following passage of a resolution, the city council secretary can retype the resolution to conform
to the citys format. The mayor or city manager/administrator may not endorse the city councils
action, but can sign the resolution strictly attesting to the action taken and as the official clerk.
Language labeling the signature as such should be part of the signature line.
If the city normally includes information on city council meeting actions in a regular city
publication or on the citys Web site, the action the city council took on the ballot measure
resolution can be included as part of the listing of city council actions, but should not be
specifically highlighted. City council action to support or oppose a ballot measure should be
included in the city councils official minutes.
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Do Provide Public Forums. Public agencies, including cities, may provide at public
expense, a forum in which the opponents and proponents for a ballot measure are given equal
time to present their views. (ORS 260.432)
For further information see Restrictions on Political Campaigning by Public Employees from the
Elections Division, Secretary of States Office, www.sos.state.or.us/elections/
PUBLIC EMPLOYEE ELECTION GUIDELINES

The following guidelines were developed to assist public agencies deal with the legal
requirements for what employees can and cant do during elections. For further clarification,
review city council policies and administrative rules or contact legal counsel.
CAMPAIGNING. Public employees can campaign outside their hours of employment and without
the expenditures of public funds. Employees must not be required nor coerced to aid in a
campaign.
During working hours employees can say, Here are the facts; please vote. They can say, Vote
yes, on their own time.
Examples: A public employee attending a meeting as the representative of the public agency
cannot advocate for or against a ballot measure. The employee can provide information on how a
ballot measure will impact the city but should provide information that is balanced and impartial.
If a public employee wants to advocate a position on a ballot measure, that employee must make
it perfectly clear before speaking at a public gathering that such opinions are personal and are not
given in the employees official position. If such opinions are given at a public gathering the city
cannot pay for any part of that employees appearance, such as the cost of the meal or travel
expenses.
BUTTONS. Wearing campaign buttons is an expression of personal political views and is
permitted under Oregon law. This does not authorize employees to engage in a political lecture
of fellow employees or members of the public while at work, and supervisors may stop such
conduct if it occurs. Buttons may be prohibited in limited circumstances when the messages
cause a disruption or the buttons in some way interfere with an employees job duties.
WORKDAY. Federal and state laws specifically prohibit active campaigning, including soliciting
funds, during employee work hours. Employees may express personal political views and wear
political buttons, but may not otherwise campaign or disrupt the workplace. Employees may
participate in campaigns of their choice during non-work hours.
STAFF MEETINGS. Agency policies and contract language may allow union representatives to
speak during staff meetings under the topic of union business. If time limits are specified, such
as 5 or 10 minutes, such limits should always be enforced, especially for election issue
discussions.
BULLETIN BOARDS. City policies, contract language and city practices typically allow employee
unions to have designated bulletin boards to post information regarding union business. The
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requirement of union business is a broad term. The Employment Relations Board has defined
union business as matters directly related and central to the collective bargaining relationship
between the employer and the exclusive representative, the local union. The Secretary of State
advises that public resources cannot be used to advocate a position on a ballot measure. Public
resources mean city funds, city employees during working hours or city facilities and equipment.
A union may use its bulletin board or bulletin board space for information on ballot measures
that are directly related and central to the collective bargaining relationship between an employer
and local employee unions. Information on other measures is not union business and may not be
posted. Advocacy materials on any ballot measure may not be posted on a bulletin board since a
bulletin board or bulletin board space is a publicly-owned facility.
FLYERS. City policies or practices govern procedures regarding distribution of flyers or other
information from community, state or national organizations. Distribution, if any, should strictly
follow policy or procedures. Election flyers and other election information from outside groups
should not be distributed or made available in public areas unless policies currently allow
community and other outside groups to distribute information in this manner.
EQUIPMENT (TELEPHONES, COMPUTERS, INCLUDING E-MAIL, ETC.). City policies and contract
language may allow union representatives to use city equipment, such as telephones, for union
business. Union business is narrowly defined and must relate to local collective bargaining
issues. City equipment may not be used to advocate a position on election issues or candidates.
The Government Standards and Practices Commission has issued a formal opinion regarding
public employer equipment, including regular and cell phones, computers and Internet access.
That opinion prohibits the use of such equipment for personal purposes, with limited exceptions.
Election issues are not exceptions.
LOC recommends a thorough review of relevant policies and procedures and applicable contract
language. Union representatives should then be reminded about restrictions on equipment use
during campaign seasons.
FACILITIES, INTERNAL MAIL, EMPLOYEE MAILBOXES. City policies and contract language
may allow a union to use facilities and internal mail systems, including employee mailboxes,
under certain conditions for union business. As with bulletin boards and equipment, union
business has a narrow definition. Election information on ballot measures that are directly
related to the collective bargaining relationship is permitted. Campaign advocacy is prohibited.
LOC recommends a review of relevant policies and procedures and applicable contract language;
and outlining restrictions to union representatives.
If policies exist regarding community use of facilities, including a fee for use, a union may rent
space as any other group does and then proceed with its discussion of and work on campaign
issues. Any community group that wishes to use facilities for any purpose connected to an
election, including employee unions, must pay a fee to use facilities or equipment, including
telephones, even if under policy it would not otherwise be required to do so. This requirement
will comply with guidelines from the Secretary of State stating public resources cannot be used
for campaign advocacy purposes.
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For further information see Restrictions on Political Campaigning by Public Employees from the
Elections Division, Secretary of States Office, www.sos.or.us/elections/.

Is the double majority a requirement for all elections?
No. There is no turnout requirement for the November general election in even numbered years.
A legislative referral to add the May primary and May and November elections in odd numbered
years to election dates exempt from the turnout requirement is on the November 2008 ballot.
Is there any limit to the number of times a city can submit a measure to voters?
No. However, the county does charge the city to cover the election costs for each election. Since
elections also are costly in staff time and community resources, including volunteer time,
cities should engage community members in the decision- making process and do the survey
research required to present proposals that match community priorities so that measures will
have the voter support they need to for approval the first time they are placed on the ballot.
Which election is the best for city bond measures?
Due to the double majority requirement, a majority of local governments are using the
November general election for money measures when there is no 50 percent turnout requirement.
Cities that vote at other election dates need to study area election turnout statistics to determine if
there is a good chance of meeting the 50 percent turnout requirement. Local governments appear
to be more successful in passing measures and meeting the 50 percent turnout requirement in the
May primary election in even numbered years. In high turnout areas, May and November in odd
numbered years may be possibilities. September and March elections are difficult in most
jurisdictions because elections during these months tend to generate much lower public interest.
(For a complete discussion of this issue, see the League of Oregon Cities Local Property Tax
Election Study.)
What can a city tell voters about the election?
Cities can provide factual and impartial information about the measure and tell voters what the
results will be if the measure passes or doesnt pass.
City information must be unbiased and avoid advocacy. For example, The ABC city is asking
voters to consider a bond levy is information. The ABC city is asking voters to approve a bond
levy is advocacy.
Who decides whats advocacy and whats information? Whats the penalty for violating the law?
The city has the responsibility to review all election-related materials and activities paid for with
public funds or involving public employees to be sure they are advocacy free. If a community
believes information a city provides advocates a positive or negative vote, that individual can file
a complaint with the Secretary of State.
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The Secretary of States Elections Division reviews the complaint. If the city and/or employees
are found in violation of the law, they may be fined.
Or if a public official expends any public money in excess of the amounts, or for any other or
different purposes than authorized by law, that official can be sued by the county district
attorney or a taxpayer from that city (ORS 294.100 (2)).
Can city Council members and city employees engage in advocacy activities?
Yes. City council members can engage in advocacy activities at any time as long as no public
funds are involved. City employees can engage in advocacy activities as long as these activities
take place outside of work hours and do not involve use of public resources.
Can the advocacy committee hold meetings in city buildings or use city equipment?
Yes, as long as the advocacy committee pays a fee to use facilities or equipment, including
telephones, even if under city policy it would not otherwise be required to do so. This
requirement complies with guidelines from the Secretary of State stating public resources cannot
be used for campaign advocacy purposes.
The advocacy committee should find and use non-city resources and e-mail addresses. City
employees should not use city phones or e-mail for any advocacy activities, although they can
respond to requests for public information from community residents and advocacy committee
members that they receive by phone, fax or e-mail.
Can the city include a link to the advocacy committee on its Web site?
No. The city can only provide factual information about the bond measure. However, if the
advocacy committee has a Web site, that Web site can and should have a link to the factual
information on the citys Web site.
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CHAPTER 17
STRUCTURING THE BOND ISSUE
Oregon municipalities have substantial leeway in structuring debt issues for the public debt
markets. Given the complexity and constantly changing nature of debt investors preferences,
issuers are encouraged to hold early consultations with their financial consultants about market
expectations and the likely repayment implications of the debt plans. Such early consultation
will assist the municipality in developing the best possible debt management plan.
In general, a municipal issuer has three primary goals in any given debt financing:
Raise sufficient funds to meet the issuers financing requirements
Match the debt service structure to anticipated repayment sources and related cash
flows, and
Raise the funds in the most cost-effective manner possible
FUNDAMENTALS OF LEVERAGING
Leveraging is really just a way to accelerate use of anticipated future financial assets or cash
flows. Debt structures can be evaluated in light of the following key fundamental concepts.
Characteristics of Available Revenue Stream. When a municipality issues debt, the
municipality is counting on future streams of money to be available to pay off the debt. The first
question is what is the revenue steam available to repay the debt? For example, a general
obligations. Bond issue provides a clear (and additional) source of revenue from which the debt
is repaid. How about a municipality using a full faith and credit borrowing to construct a new
city hall? Without additional new revenue, the municipality needs to ask how it intends to
redirect its future revenue stream to make debt payments. Clearly, the debt repayment structure
needs to take into account the nature of the revenue stream, its volatility and timing. The more
volatile or uncertain the revenue stream is, the less efficient the revenue stream will be to
leverage. Investors will be willing to loan less money up front for a revenue stream that is
considered unpredictable.
Matching Useful Life to Structure. A second key concept is to make sure the financing
term does not exceed the useful life of the assets financed. For example, it would not be prudent
to finance computers with useful lives of 3-5 years by using a 20 year issue. However, that
doesnt mean that assets with shorter useful lives than say 20 years cant prudently be financed
as part of a larger debt issue that overall stretches 20 years. Bond issue principal payments are
usually amortized annually such that portions of the debt are repaid over shorter periods of time.
Chapter 17 Structuring the Bond Issue
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In general, a municipality should strive to ensure the weighted average life of all its projects
financed matches or exceeds the weighted average life of any related financing.
Interest Cost versus Affordability. Typically, the longer one borrows the higher the
overall interest rate and expense. The interest rate is usually higher because investors demand
higher rates of return in order to loan money for longer periods. Since most debt obligations
carry fixed interest rates, the longer the loan, the more uncertainty an investor faces regarding
future of inflation, changes in tax law and other investment opportunities. The overall interest
cost is higher the longer one borrows simply because interest continues to accrue as long as
principal remains outstanding. However, interest cost by itself is not necessarily a bad thing.
Paying interest allows the cost of the project to be spread over a more affordable (and
appropriate) period of time, rather than squeezed into a less affordable shorter period.
Risk versus Return Tradeoff. Credit and structure determine relative interest rate. The
riskier the perceived credit, the higher the interest rate will be relative to other more secure
credits. Overall interest rate levels are determined by general market levels.
SIZING BOND ISSUES

Each of the following issues directly impacts the size of a potential issue and the municipalitys
ability to repay that debt in the most cost-effective manner possible.
PROJECT FUND REQUIREMENTS
The most important variable affecting debt issue size is the projects projected cost. Normally,
estimates include the estimated cost of the project(s) and a reasonable contingency amount to
cover unexpected events. If a municipality is concerned about the affordability of a project, it
may also consider using expected project fund earnings to reduce the par amount of the bond
issue. The municipalitys underwriter or financial consultant can estimate project fund earnings
and advise the municipality regarding using project fund earnings to reduce the amount of the
borrowing.
The money in the project fund will earn interest until it is expended. In the case of a construction
project, these interest earnings, even if subject to arbitrage rebate (see Chapter 5, General
Federal Tax Requirements), can be substantial. These additional earnings are considered
bond proceeds just like the initial sale proceeds received from the underwriter at closing.
Under most circumstances, these proceeds must be used for the project or to pay debt service on
the bonds.
CAPITALIZED INTEREST
In certain cases, most typically in project financings of new revenue producing facilities, the
issuer may wish to capitalize interest payments until the facility is producing revenue. The issuer
literally borrows additional capital sufficient to make all interest payments on the debt for the
specified period of time.
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ISSUANCE COSTS
The sale of debt in the public markets is highly regulated. Bringing a debt issue to market
generally requires the use of a number of experts who specialize in municipal bond transactions.
Consequently, the issuance of debt comes with certain transaction costs that should be included
when considering the bond issues size. The municipalitys financial consultant or underwriter
can determine the likely issuance and underwriting expenses. The issue size can be properly
adjusted to pay for these expenses and still have sufficient funds remaining to pay all project
costs.
Issuance costs generally include, but are not limited to, fees for bond and other legal counsel,
financial consultants, project feasibility consultants, registrar/paying agents, escrow agents,
official statement printing, rating agencies and bond insurance fees and underwriting fees. There
also may be travel expenses related to rating presentations and other miscellaneous expenses.
It is impossible to generalize about these costs because they vary depending on the size, credit
quality, term, and complexity of the debt issue. Issuance costs (exclusive of underwriting fees)
may range from $20,000 for a small issue to more than several hundred thousand dollars for
large transactions. Underwriting fees may vary from 0.25 percent or less of the issue amount for
a very large, highly rated, issue to 2.0 percent or more for smaller, unrated issues. These
expenses are almost always paid from bond proceeds.
ISSUE AFFORDABILITY
Once a municipality decides on the size of its bond issue, the municipality can then determine
how to structure bond issue terms to best achieve its affordability goals. The most cost-effective
method of financing is the method that best matches the issue size and repayment structure with
the municipalitys financial ability to meet the debt obligation.
Adding the size of the issue and the total interest expense incurred is the simplest way of judging
the cost of any financing. However, this computation, if used in isolation, is misleading because
it does not consider what resources are available over time to repay the cost of the project. A
large issue may well be affordable if spread over 20 years, while a smaller issue may not be
affordable if spread over only five years.
Another way of measuring an issues costs is to compare the true interest cost (TIC) of various
alternatives. The TIC is an accurate measure of the all-in interest costs, weighted for time value,
of an issues repayment schedule. However, looking at TIC alone does not guarantee the most
affordable financing structure.
Comparing the TIC of two structuring alternatives of the same maturity length will indicate
which is the lowest cost alternative. But, again, TIC alone does not take into account the timing
and availability of repayment resources.
The question of affordability then really must be translated into debt service and, for GO bonds,
tax rate schedules that can be compared to the resources available for repayment.
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BOND CHARACTERISTICS
A bond is simply a formal written promise to repay a specified dollar amount at a certain time
with a stated rate of interest. Bonds can be issued with characteristics that vary when and how
interest is paid. Four basic interest rate structures exist for fixed income debt:
Current coupon bonds
Convertible deferred bonds
Deferred interest (or zero coupon) bonds, or
Variable rate bonds
CURRENT COUPON BONDS

These are the most frequently issued bonds in the public debt markets. Current coupon bonds
pay interest at a fixed interest rate every six months until they are redeemed or mature. The
interest payment date is almost always the first or 15th day of the month.
The first interest payment date may or may not be exactly six months from the date of issue. It is
not unusual for the first interest payment date to be as short as three months (a short first
coupon) or as long as 12 months (a long first coupon). Varying the first coupon period is
often necessary to put a municipality on its preferred interest payment schedule regardless of the
date the bonds are initially sold. Once the first coupon date is set all following interest payments
occur at six-month intervals.
Current coupon bonds are almost always sold with serial maturities. By using serial maturity
dates, the bond issues total principal amount is split into pieces that mature each year, that is,
serially, over the life of the issue as opposed to having the entire principal amount come due in a
single year.
Current coupon bonds usually are sold in minimum principal denomination sizes of $5,000.
Because these bonds are the most common instruments in the public debt markets, they usually
carry lower interest rates than deferred interest bonds of similar maturities.
A municipalitys underwriter or financial consultant may recommend combining some of the
serial maturities into one or more term bonds. Term bonds are consecutively maturing current
coupon bonds aggregated together and sold as a single nominal maturity. For example, rather
than find investors to purchase bonds maturing serially in years 2021, 2022, 2023 and 2024, the
bonds could be sold as a term bond maturing in 2024.
A term bond is subject to mandatory redemption (repayment) according to the serial current
coupon bonds that were aggregated to form the term bond. Term bonds carry a single rate of
interest despite the mandatory redemption schedule.
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DEFERRED INTEREST BONDS

Deferred interest bonds (also known as zero coupon or capital appreciation bonds) are bonds that
pay no interest until the bonds mature. The interest accrues and is paid in a lump sum at
maturity. Deferred interest bonds sell at prices far lower than their maturity value.
Issuers like deferred interest bonds because they can use bond proceeds now without paying
periodic interest for a specified period. For general obligation bonds for example, this can lower
tax rates in the early years of debt repayment. However, the drawback to issuers is that deferred
interest bonds have higher interest rates than current coupon bonds. In addition, they usually are
non-callable (that is, may not be redeemed before maturity) and are more expensive for
underwriters to sell.
Investors like deferred interest bonds because they can buy more bonds for their money and lock
in their long-term yield. The drawback to investors, however, is that deferred interest bonds are
extremely volatile and thus less liquid in the secondary market. If investors need to sell the
deferred interest bonds prior to maturity, the bonds may not sell as well as current interest bonds.
CONVERTIBLE DEFERRED BONDS
Convertible deferred bonds are bonds that combine the features of deferred interest bonds and
current interest bonds. Typically, a convertible deferred bond starts as a deferred interest bond
then converts to paying current interest at a specified future date. The conversion date is
usually not more than two years from the original issuance date.
Convertible deferred bonds are sometimes used to bridge short-term debt service spikes caused
when a new issue is layered on top of existing debt. Convertible deferred bonds can only be
used under certain market conditions and issue sizes. Convertible deferred bonds typically carry
higher interest rates than regular current coupon bonds but may be more cost effective than using
deferred interest bonds for the same purpose.
VARIABLE RATE DEBT
Variable rate debt is debt where the interest rate is reset on a very short-term basis, usually
weekly. Because the rate is a very short-term rate, variable rate bonds usually carry very low
interest rates compared to contemporaneously issued fixed rate bonds. However, because the
rate floats with market conditions, variable rate bonds involve interest rate risk. Even though
variable rate debt can have many advantages, the difficulty of correctly calculating and levying
property taxes to support a floating rate debt instrument makes variable rate debt problematic for
general obligation bond issuers. Variable rate debt cash flows may also be simulated by using
interest rates swaps (see Chapter 14, Interest Rate Swaps and Other Derivative Financial
Products)
Variable rate debt can be issued as variable rate demand bonds (typically backed by a letter of
credit) or as auction rate securities. Variable rate demand bonds are remarketed by the
underwriter every interest rate reset period (daily, weekly, monthly, etc.). Interest rates for
auction rate securities are set via an auction process with investors submitting buy orders at
certain prices.
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MATURITY SCHEDULE
Most new issues of municipal bonds are sold to mature over a period of 20 or more years.
Shorter or longer maturities are somewhat less common. The most important rule is to match
maturity with available repayment resources and with the useful project life. State law provides
no limit on the maturity of a general obligation bond. However, the not-to-exceed maturity must
be clearly stated in the ballot title which voters approve. For General Obligation Bonds, the
optimal maturity period for any individual municipality depends on the relative tax rates that a
longer or a shorter maturity produces and which rate is most acceptable to taxpayers.
EARLY REDEMPTION PROVISIONS
Bonds are normally sold with provisions that allow an issuer to prepay the bonds prior to their
stated maturity date. In the municipal bond market, prepayment is referred to as redeeming or
calling the bonds. For example, early redemption may allow a municipality to refinance the
bonds to take advantage of lower interest rates (see Chapter 13, Refundings). The two
variables in early redemption provisions are:
The date(s) on which the bonds may be redeemed, and
The price(s) at which the bonds may be redeemed
Investors do not like early redemption provisions because they create uncertainty. However, the
market does not penalize issues with early redemption provisions if the provisions conform to
reasonable market standards. The market standards change over time.
Municipalities should consult with their underwriter or financial consultant to determine which
redemption provisions are most appropriate for the municipalitys issue.
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CHAPTER 18
CREDIT RATINGS AND ANALYSIS
A municipalitys primary goal in issuing any type of debt is to obtain the lowest possible interest
rates while accomplishing other key financing objectives. The interest rate on any debt issue is
directly related to investors perceptions of the bonds value. Consequently, credit quality is a
major factor investors use in determining a bonds value as an investment.
This chapter describes bond ratings and the rating agencies that assign them. After reviewing the
information in this chapter, municipalities may consider applying for a rating or purchasing bond
insurance to enhance their ratings. Potential issuers should seek the advice of their financial
consultants on which option best suits the municipalitys individual circumstances.
RATINGS AND RATING AGENCIES

A municipality can often enhance the perceived credit quality of its debt and obtain lower
interest rates by obtaining a debt rating from a national credit rating agency. These agencies are
for-profit corporations that analyze the credit quality of debt issues. The issuer pays the rating
fee, usually as a cost of issuance.
The rating agency assigns one of a number of standardized ratings, for example, A, AA, AAA, to
the issue. In general, the higher the debt rating, the lower the interest rate investors will accept.
The three major rating agencies that analyze municipal debt are:
Standard & Poors
Fitch Ratings
All three agencies use a standardized series of rating symbols. For example, Moodys rates longterm debt issues on a scale of Aaa (the highest category) to D (a security that is in default). The
lowest rating that Moodys considers investment grade is Baa3. The other agencies use similar
symbols. (See Comparison of Rating Agency Categories chart below)
Separate rating symbols are assigned to short-term debt obligations such as tax and revenue
anticipation notes (TRANS) or variable rate bonds.
An assigned rating represents the rating for all of a municipalitys outstanding debt of that kind.
Different kinds of debt may have different ratings. For example, a municipality may have one
rating for its general obligation bond debt and another for its full faith and credit obligation debt
and yet another for its enterprise fund or utility system debt.
Chapter 18 Credit Ratings and Analysis
149
City XYZ $15MM Bonds- Levy Rate Structuring Options

2.00
Levy Rate ($/$1,000 AV)
Level Levy Rate
Level Debt Service
1.50
1.00
0.50
20 Years
DETERMINING A RATING
In general, a particular rating is assigned to a debt issue based on a rating agencys opinion
regarding the probability of timely principal and interest payments. Rating agencies consider a
number of factors in determining the probability of repayment including:
FINANCIAL ANALYSIS
A rating agency reviews prior budgets and audited financial statements to determine if adequate
resources are available to operate the district and pay debt service. For debt being repaid
primarily from property tax collections, a rating agency considers: general fund balance levels,
tax levies, concentration of property ownership by large taxpayers, real market value growth, tax
delinquencies and similar items. For revenue secured debt, the analysis focuses more on the
strength of the revenue stream, its volatility and other demands that may be eventually put on the
revenue stream (such as additional debt issues).
DEBT STRUCTURE
A rating agency examines how the debt issue is structured to determine:
150
Whether repayment is deferred or accelerated
The length of the debt related to the financed improvements useful life
The issuers plans or need for future debt issuance
If the issuers plan for future and current capital financing needs is adequate
LOCAL ECONOMIC CONDITIONS

A rating agency evaluates the municipalitys local economy and factors which could affect its
ability to repay debt including:
Levels of income and growth or decline
Diversity and strength of the local employment base
Building activity, and
Population growth
A rating agency also may evaluate a number of other economic and demographic criteria in
determining a municipalitys long-term ability to repay its debt.
ADMINISTRATION AND MANAGEMENT
The expertise and stability of a municipalitys top management is considered an important factor
in assigning a rating. This evaluation is based on contact with administrative personnel,
examination of financial reports and other documents as well as other more objective criteria.
Please note that there is no completely objective means used to assign a rating. The factors
described here and other criteria used by a rating agency are subject to interpretation.
Consequently, municipalities with seemingly similar financial, economic and geographic
conditions may be awarded somewhat different ratings.
ASSIGNING RATINGS
Rating agencies use similar procedures for assigning a rating to a debt. An analyst evaluates the
credit quality of the issue under review. This analysis is used to develop a rating
recommendation. The lead analyst is sometimes assisted by another analyst.
The analyst then takes the recommendation to a rating committee. The rating committee usually
consists of two or more members, usually senior in experience to the analyst. The committee
reviews the recommendation and votes to assign a rating. Generally, the rating assigned is the
one recommended. However, it is not unusual for a rating committee to assign a rating other
than the recommended rating or to send the lead analyst back to review additional information
before assigning a rating. Once committee has assigned a rating, the analyst will call the issuer
or its financial consultant and ask for approval to release (that is, publish) the rating.
A municipality may attempt to appeal a rating if it feels the proposed assigned rating is
inappropriate. Any effort to change a proposed rating must be undertaken before the rating is
released to the financial markets. Appeals are seldom granted and then only on the basis of
relevant new information that changes the committees view.
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DECIDING TO APPLY FOR A RATING

Municipalities are not required by law to seek a rating. Some kinds of debt can be successfully
placed without a rating. (Some conduit issuing entities see Chapter 11, Conduit and PassThrough Revenue Bonds may require a rating at or above a certain level before agreeing to
serve a the conduit issuer). In fact, issuing debt without a rating may sometimes produce a better
result than issuing debt with a very low rating.
A municipality should apply for a bond or other debt issue rating if:
The rating will save the issuer money through lower interest costs, or
The issuer has rated bonds outstanding of the same type and wishes to maintain its
rating on that debt
Determining whether to apply for a rating should be made only after consultation with the
financing team. In addition, the rating fee and costs for preparing ratings materials should be
more than offset by lower interest costs before a rating is obtained. Very small issues may not
benefit enough from a rating to justify the cost of the rating.
BOND INSURANCE
Issuers may also enhance investors reception of their bonds by obtaining a municipal bond
insurance policy. Certain insurance companies specialize in issuing these policies. For payment
of a one-time premium at the time of issuance, these companies will insure the principal and
interest payments on bonds or other debt obligations. The premium is a one-time cost and the
policy is irrevocable once issued.
Municipal issuers frequently purchase bond insurance because the rating agencies will then
substitute the bond insurers rating for the issuers rating. The highest grade bond insurers have
Aaa or AAA ratings from the rating agencies.
Unless an issuer has a relatively high rating on its own, substitution of the bond insurers rating
can result in substantially lower interest costs over the life of a bond or other debt issue.
Investors will purchase an issuers debt based on the higher rating of the bond insurer and they
will accept lower interest rates based on that higher rating.
To make an informed decision regarding bond insurance, a municipality should consult with its
financial consultant(s) or underwriter. The cost for bond insurance can be substantial.
Consequently, issuers should incur this cost only when the interest rate savings from the higher
rating exceed the insurance premium.
LETTERS OF CREDIT
Letters of Credit (LOCs) function much like bond insurance. LOCs are agreements between a
commercial bank and the bond issue trustee. The bank irrevocably agrees to pay to the trustee on
demand amounts sufficient to meet debt service payments on a bond issue should the issue
default on its obligation to pay. This effectively substitutes the banks credit quality for that of
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the issuer. A rating on the bond issue can then be based not only on the underlying credit but
also on the banks rating.
LOCs are used to provide liquidity in case of variable rate obligations. In this case, the bank
agrees to advance money to purchase variable rate bonds tendered by investors when a
remarketing of the debt fails.
LOC fees are based on the amount and type of debt service being guaranteed. LOCs are
usually issued for periods much shorter than the longer term of a bond issue and thuis usually
must be renegotiated from time to time.

Does an issuer need credit enhancement? If it does, is something wrong with the issuers credit?
No, seeking credit enhancement does not mean an issuer has poor credit. Credit enhancement
generally provides a method for evaluating or improving an issuers credit. Investors rely on
credit enhancement (via a rating) to provide an independent evaluation of the issuers credit or
(via a bond insurance policy) to guarantee debt service payments. Most investors will not buy
bonds unless some form of credit enhancement is used.
How large an issue can be sold without a rating or insurance?
A rating or bond insurance substantially increases the number of buyers who are willing to
consider purchasing an issuers bonds, providing the interest rate is reasonable. The market for
non-rated and uninsured issues is limited. Issues of as little as $1 million can benefit from a
rating or insurance.
How many ratings should a municipal issuer get?
Whether or not to get a rating and how many to get is a judgment call. The issuers financial
consultant can help determine the pros and cons of applying for more than one rating. Generally,
the larger the issue, the more likely multiple ratings may be advantageous.
Does the issuer have to make an in person presentation to a rating agency?
No. Face-to-face presentations with rating analysts are not necessary. Typically, presentations
are handled by sending documents and information to the rating agencies then following up with
a phone call to answer questions. However, there may be occasions where a personal
presentation is best. In such situations, the ratings analyst may well want to come to the issuer
rather than vice versa.
What is the difference between interest rates on insured bonds and interest rates on rated bonds
that are not insured?
The difference depends on the market and the price of insurance. Even though insured issues are
automatically rated Aaa, the issues tend to command interest rates similar to issues that are rated
at Aa but not insured. The reason is investors still give more weight to a natural Aa credit rating
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than to an insured Aaa credit rating. Insurance can improve interest rates over an A-level credit
by a more significant amount.
Is there a difference between bond insurance companies?
Yes, for certain types of bond issues. However, the major insurers are comparable when insuring
general obligation bonds or plain vanilla revenue bonds. The lowest priced insurer is usually
the issuers best choice. However, as an issue becomes more complex and the credit more
difficult to analyze, the number of insurers willing to look at the credit will dwindle.
What can a municipality do to influence its general obligation bond rating?
Much of the rating for a general obligation bond issue hinges on the municipalitys economic
base, employment levels and other factors that are out of its control. Controlled factors include
balanced budgets, adequate fund balances and good management. However, since these are
analyzed over at least five years, the issuer must plan ahead if it hopes to influence its rating by
improving these factors. Generally, even the best financial performance does not change
substantially the rating level on a GO bond because the base level is set by the municipalitys
economic base.
Are there other forms of credit enhancement? What about letters of credit?
Other kinds of credit enhancement are unusual for fixed rate issues but more likely found on
variable rate issues. Letters of credit are issued by commercial banks to back certain kinds of
municipal debt, most typically variable rate bonds.
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CHAPTER 19
ELIGIBLE INVESTMENTS AND BOND
RELATED FUNDS
When a municipality sells its bonds, interest costs immediately start to accrue and debt service
payments begin. The bond proceeds received by the issuer are deposited to one or more bond
funds or accounts in accordance with the bond resolution, trust indenture and other bond contract
documents. These bond funds then provide for the payment of land acquisition, construction and
project costs, ongoing debt service payments, debt service reserves, arbitrage rebate and other
purposes.
Some of the proceeds will be used immediately but most of the monies deposited to the bond
fund accounts will be spent over time in accordance with project or construction draw schedules
and debt service schedules. In the meanwhile, these funds are available for investment.
Investing tax-exempt bond proceeds is complex and needs to be considered early in the bond
issuance process. Issuers should have a formal investment policy that can serve as a guideline
for the investment of bond funds. The investment strategy used for each of the different bond
funds will be unique but the foremost objectives are basically the same. Bond fund investment
strategies should be prudently designed to earn the maximum interest earnings allowable while
adhering to the primary objectives of preservation and safety of principal and the maintenance of
sufficient liquidity to meet cash flow requirements.
Those responsible for managing and administering the investment of bond proceeds need to
consider the appropriateness of each investment, their potential rewards and their potential risks.
Some cities may have the requisite in-house financial investment skills necessary to confidently
manage and administer their own investment accounts and portfolios. Others will need to
employ an investment advisor to assist with the development of a suitable strategy and
identification of various investment options. The issuer also needs to consider both state and
federal laws that may restrict the use of public funds for certain types of investments.
ELIGIBLE INVESTMENTS
Oregon Revised Statutes (ORS) 294.035 permits cities and other local governments to invest
sinking funds, bond funds or surplus funds in bank accounts, securities, insurance contracts and
other investments but only after obtaining written authorization from their governing body. Per
ORS 294.135, investment maturity dates may not exceed 18 months or the date of anticipated
use of the funds, whichever is shorter, without a written investment policy reviewed by the
Oregon Short-term Fund Board and adopted by the governing body of the municipality or other
political subdivision.
Cities and other local governments are authorized by ORS 294.035 to invest in the following
types of investments:
Obligations of, or obligations guaranteed by government agencies, enterprises or

entities
Certificates of deposit, share accounts, savings accounts and money market accounts
Guaranteed investment contracts
Bankers acceptances
Corporate debt securities and commercial paper
Mutual funds
Repurchase agreements
Investment pools
The types of investments permitted by ORS 294.035 are briefly described below.
FEDERAL AND STATE GOVERNMENT OBLIGATIONS
This category of permitted investments includes securities and obligations of the U.S.
government or its agencies and instrumentalities as well as debt obligations of the State of
Oregon, its agencies and political subdivisions. Also available for investment are debt
obligations of the states of California, Idaho and Washington and their political subdivisions.
U.S. Treasury Obligations. U.S. Treasury marketable securities are debt instruments
issued to raise money needed to operate the federal government and pay off maturing
obligations. These liquid securities are considered to be one of the most secure forms of
investment and are fully guaranteed by the U.S. government. As described below, U.S. Treasury
marketable securities can be stripped into interest and principal components within the secondary
market or can be converted from bearer securities into those that can be held in commercial
book-entry accounts. (ORS 294.035(3)(a))
Eligible U.S. Treasury obligation investments include:
a) U.S. Treasury Bills, or T-bills, are liquid short-term securities issued at a discount
from their face value and mature in one year or less. They are normally sold at
weekly auctions with 4-week, 13-week and 26-week maturities. Cash management
bills are auctioned on an irregular schedule based on Treasurys financing needs and
are generally issued in variable terms, usually for only a matter of days. Treasury
bills pay interest only at maturity and are sold in increments of $1,000 with a
minimum purchase amount of $1,000.
b) U. S. Treasury Notes, or T-notes, are liquid medium-term interest bearing securities
with a fixed maturity of not less than 1 year and not more than 10 years. They are
currently issued in terms of 2, 3, 5 and 10 years. The 2-year and 5-year notes are
auctioned every month, 3-year notes every quarter, and 10-year notes eight times a
156 Chapter 19 Eligible Investments and Bond Related Funds
year. They earn a fixed rate of interest every six months until maturity and are sold in
increments of $1,000 with a minimum purchase amount of $1,000.
c) U.S. Treasury Bonds, or long bonds, are liquid long-term interest bearing securities
with maturities over 10 years. Treasury bonds pay interest semi-annually and the
investor receives the face value of the bond at maturity. The U.S. Treasury stopped
issuing the 30-year bond in 2001 in favor of shorter-term debt, issuance resumed with
a 30-year auction in February 2006. In 2007, the U.S. Treasury is scheduled to
conduct quarterly auctions in February, May, August and November.
d) U.S. Treasury Inflation-Protected Securities (TIPS) are inflation indexed investments
first issued by the U.S. Treasury in 1997. The principal of a TIPS will increase with
inflation and decrease with deflation. When a TIPS matures, the investment pays the
inflation-adjusted principal or the original principal, whichever is greater. A TIPS
pays interest semiannually at a fixed rate with the rate being applied to the adjusted
principal. TIPS are currently offered in 5, 10 and 20-year maturities with the 5-year
and 20-year maturities being sold at auction semiannually and the 10-year maturity at
quarterly auctions.
e) STRIPS or Separate Trading of Registered Interest and Principal of Securities are
zero-coupon Treasury securities that can be purchased only through financial
institutions and government securities brokers and dealers. They are sold in
minimum denominations of $1,000 at deep discount with interest and principal paid
out at maturity. STRIPS are created by separating or stripping the principal and the
interest (coupon) components of U.S. Treasury notes or bonds or US. Treasury
inflation-protected securities (TIPS) into separate zero-coupon securities. Each
separated component is assigned its own identifying number through the commercial
book-entry system (CBES) and can be held or traded as separate securities in the
secondary market.
f) BECCS and CUBES are U.S. Treasury programs that convert stripped bearer
securities into book-entry securities that can be held in commercial book-entry
accounts with brokers and financial institutions. A bearer security or bearer
bond is one that is issued in paper or physical form. The interest bearing coupons
are then physically separated or clipped from the bearer bond and then sold
individually as separate securities.
BECCS (BEarer Corpora ConversionS) are the principal portions, or corpora, of

U.S. Treasury bearer securities that have been stripped of all non-callable coupons
and converted to book-entry form.
CUBES (Coupons Under Book-Entry Safekeeping) are detached bearer coupons

that have been converted to book-entry form securities.
Once BECCS and CUBES are converted to book-entry form, their return conversion to physical
form is prohibited.
Securities of U.S. Government Agencies and Government Sponsored Enterprises.

Securities issued by U.S. government agencies and government sponsored enterprises are
considered the next most credit worthy investment after U.S. Treasury securities. Both U.S.
government agencies and government sponsored enterprises are created by Congress (ORS
294.035(3)(a) and 294.040).
U.S. Government Agencies: U.S. government or federal agencies include such

organizations as the U.S. Department of Housing and Urban Development (HUD),
the U.S. Postal Service (USPS), Small Business Administration (SBA) and the
General Services Administration (GSA). Securities issued by federal agencies are
directly backed by the full faith and credit of the United States. Most federal agencies
no longer issue significant amounts of their own securities directly to the public.
Rather, federal agency debt is issued by the Federal Financing Bank (FFB), a
government corporation, created by Congress in 1973 and administered by the
Secretary of the Treasury. The most common U.S. government agency security
offered to the public today is the Government National Mortgage Association
(GNMA) security or Ginnie Mae.
Government Sponsored Enterprises (GSE): Government sponsored enterprises are

private corporations chartered by the federal government and granted privileges for
the advancement of specific purposes. These securities are not directly backed by the
U.S. government, but their credit risk is considered to be very low and have an
implicit guarantee and the moral backing of the U.S. government. Examples of
GSEs include the Federal National Mortgage Association (FNMA), commonly called
Fannie Mae and the Federal Home Loan Mortgage Corporation, known as Freddie
Mac.
The debt obligations of federal agencies and GSEs are collectively referred to as Agency
Securities or agencies. See Appendix B, U.S. Government and Agency Securities and also
the Oregon State Treasury website at www.ost.state.or.us for a listing of U.S. government and
federal agency securities that are available for local government investment under ORS 294.035
and 294.040.
Municipal Debt Obligations. Municipal bonds, notes and other debt obligations of the
State of Oregon and its agencies, counties, cities and other political subdivisions are authorized
as long as they have been rated by a nationally recognized rating agency such as Moodys
Investors Service, Standard & Poors or Fitch Rating and have a long-term rating of not less than
A or an equivalent rating. For short-term municipal debt, the securities must be rated in the
highest category by a nationally recognized rating agency (ORS 294.035(3)(b) and 294.040).
Also included in this category are the debt obligations of the states of California, Idaho and
Washington and their political subdivisions. These securities must have a long-term rating of not
less than AA or an equivalent rating or better. For short-term municipal debt, the securities
must be rated in the highest category by a nationally recognized rating agency (ORS
294.035(3)(c) and 294.040).
CERTIFICATES OF DEPOSIT, SAVINGS ACCOUNTS AND MONEY MARKET ACCOUNTS

Certificates of Deposit and Share Certificates. Certificates of deposit (CD) and share
certificates are basically the same type of financial product. Both offer a variety of maturities,
interest rates and minimum deposit amounts. Share certificate is the name generally used by
credit unions; the more familiar term certificate of deposit is used by banks, thrifts and many
other financial institutions.
A certificate of deposit is a time deposit promissory note commonly issued by banks, thrifts,
credit unions and other qualified financial institutions. CDs are similar to savings accounts in
that they are insured and relatively low risk investments that can be easily converted into cash.
An advantage of a CD is that they generally offer higher rates of interest than regular savings
accounts. CDs differ from savings accounts in that they are time deposits that restrict the
purchaser from withdrawing the funds on demand. Generally, CDs are offered with specific
terms or maturities and at fixed interest rates. Although traditionally purchased through local
banks and credit unions, they are also available from deposit brokers.
Unlike many other types of securities investments, a CD issued by a U.S. bank or credit union
has the added safety feature of being insured in the total aggregate amount of $100,000 for each
depositor and backed by the full faith and credit of the U.S. government either through the
Federal Deposit Insurance Corporation (FDIC) for banks or by the National Credit Union
Association (NCUA) for credit unions. For more information about deposit insurance, visit the
FDICs website at http://www.fdic.gov/index.html or the NCUAs website at
http://www.ncua.gov/.
Typically, CDs require a minimum deposit ranging from $500 to $100,000 or more. They are
usually purchased in fixed amounts for fixed periods of time six months, one year, five years or
more and pay interest either periodically or at a specified maturity date. Variable rate CDs,
long-term CDs, and CDs with other special features are also available. Some long-term, high
yield CDs have call features that allow the issuing bank to terminate or call its high yield CD if
interest rates fall. This option may not be available to the purchaser and in fact there may be
early withdrawal penalties if the CDs are redeemed before their stated maturities.
Savings Accounts, Share Accounts and Money Market Accounts. Savings accounts,
passbook savings accounts and share accounts are deposit accounts maintained by banks, savings
and loan associations, credit unions and other financial institutions. They generally pay interest
on the money in the account and on any interest earned. They are highly liquid and are often
referred to as near money.
A money market account (MMA) is a demand type savings account offered by banks and credit
unions. They generally pay a higher rate of return than a regular savings account but require a
higher minimum balance and restrict the number of transactions per month to generally six or
fewer.
Certificates of Deposit, share and savings accounts, and money market accounts are authorized
investments if they were issued or maintained by a state or national savings bank, or a state or
federal credit union located in Oregon, are guaranteed or insured by the FDIC or the NCUA and
are 25 percent collateralized and guaranteed by the bank of deposit (ORS 294.035(3)(d)).
GUARANTEED INVESTMENT CONTRACTS
Municipalities may invest bond funds in fixed or variable life insurance or annuity contracts as
defined in ORS 731.170 and guaranteed investment contracts issued by life insurance companies
authorized to do business in the State of Oregon (ORS 294.035(3)(f)).
A guaranteed investment contract or GIC is an insured group annuity contract issued by a life
insurance company. GICs are reasonably secure investments and are typically AA or AAA
rated. They are predictable and useful instruments for the investment of bond proceeds that
provide relatively high yields in comparison to U.S. Treasuries. They offer guaranteed
repayment of principal with either fixed or variable interest rates and fixed maturities. GICs are
offered in a wide variety of contract types and terms that provide the liquidity and flexible access
to funds necessary to meet the requirements of bond proceed drawdown schedules.
BANKERS ACCEPTANCES
A bankers acceptance is a short-term credit instrument, negotiable time draft, or bill of exchange
that is payable at maturity, drawn on and guaranteed or accepted by a bank. The acceptance
represents an irrevocable commitment to pay the stated amount on the draft at the specified
maturity. The bank will actually stamp or write the word Accepted on the face of the draft.
Bankers acceptances are used primarily for international trade purposes to finance the export,
import, shipment or storage of goods. Acceptances are often traded in the secondary market at a
discount and are popular money market fund investments.
Bankers acceptances are authorized investments for Oregon municipalities if they:
have a stated maturity of 270 days or less
are guaranteed by, and carried on the books of, a qualified financial institution that is
located and licensed to do banking business in the State of Oregon
are eligible for discount by the Federal Reserve System
are issued by a qualified financial institution whose short-term letter of credit rating is
rated in the highest category by one or more nationally recognized rating agency
A local government is limited to not more than 25 percent of the monies available to the local
government for investment, as determined on the settlement date, to be invested in bankers
acceptances of any qualified financial institution (ORS 294.035).
CORPORATE DEBT SECURITIES AND COMMERCIAL PAPER
Corporate debt securities and commercial paper are issued by a wide variety of corporations
involved in financial, commercial, industrial and utility enterprises. Corporate debt securities are
generally taxable and typically issued in denominations of $1,000 and/or $5,000 with varying
maturities that can be loosely categorized as follows:
short-term note (maturities up to 5 years)
medium-term note/bond (maturities from 5 to 12 years)
long-term bond (maturities greater that 12 years)
Commercial paper is a form of short-term, unsecured security issued primarily by banks and
corporations with high credit ratings but also increasingly by foreign governments and municipal
issuers. This security is generally used to finance short-term credit or cashflow requirements
rather than fixed or long-term capital assets on a permanent basis. Commercial paper is
considered to be a relatively low-risk investment as well as a lower cost alternative to bank loans
and lines of credit. The maturities of commercial paper typically range from 2 to 45 days and
rarely exceed 270 day. This exempts the paper from costly Securities and Exchange
Commission (SEC) registration under the 1933 Act, as well as public disclosure requirements
and the issuance of an official offering prospectus. Commercial paper denominations are
generally high, with minimum denominations of $100,000 common; since most investors are
institutions and money market funds, the typical face amounts are in multiples of $1 million.
Commercial paper can be interest bearing (fixed or variable) but is normally offered at discount
from face value as a zero coupon. There is a limited to non-existent secondary market for
commercial paper, so it is not considered to be a very liquid investment, but it can generally be
sold back to the original issuer.
Oregon state law requires that corporate notes, bonds and commercial paper invested in by local
governments carry a minimum rating of P-1 or Aa or better by Moodys and A-1 or AA or better
by Standard and Poors or an equivalent rating by a nationally recognized rating agency. For
Oregon companies the minimum ratings are P-2 or A by Moodys and A-2 or A by Standard and
Poors or an equivalent rating by a nationally recognized rating agency. These types of
investments are limited to 35 percent of a local governments monies that are available for
investment and a maximum of 5 percent in any one company (ORS 394.035(3)(i)).
MUTUAL FUNDS AND MONEY MARKET MUTUAL FUNDS
Securities of any open ended or closed ended management investment company or investment
trust are allowable investments but only if the investment does not cause the municipality to
become a stockholder in a joint company, corporation or association. These investments include
mutual funds and money market mutual funds that invest money in stocks, bonds and short-term
money market instruments.
REPURCHASE AGREEMENTS
Repurchase agreements (repo) or sale and repurchase agreements are a form of short-term
borrowing in general obligations of the United States or its federal agencies. They are classified
as a money market instrument whereby one party acquires funds by agreeing to sell securities to
another party with a commitment to repurchase the same or similar security at a future date and a
specified price or interest rate. The transaction is termed a repurchase or repo for the party
selling the securities, acquiring the funds and repurchasing the security at a later date. For the
party on the other end of the transaction, that is the purchaser of the securities and supplier of the
funds with an agreement to sell back the securities at a future date, it is a reverse repurchase or
reverse repo.
Most repos are short-term transactions, usually overnight or for a few days, though, longer term
maturities extending from a few weeks to a few months are common and maturities as long as a
couple of years are not unusual. Repurchase transactions are usually arranged in large dollar
amounts of $10 to $25 million or more. The minimum denomination is typically $100,000
although for most transactions the smallest customary denomination is $1 million.
Oregon state law requires that repurchase agreements be secured and fully collateralized by
obligations of the U.S. government, its agencies or instrumentalities and that such securities have
a maturity of not longer than three years. A master repurchase agreement, that governs all
repurchase transactions such as prescribed by the Securities Industry and Financial Markets
Association (SIFMA) (formerly the The Bond Market Association) must be in place and
executed prior to any securities purchase. The term or maturity of a repurchase agreement is
limited to a maximum of 90 days and the maximum percentages for prices paid for such
securities are set by the Oregon Investment Council or the Oregon Short Term Fund Board. The
minimum repurchase agreement pricing percentages as prescribed by the Oregon Short Term
Fund Board are currently as follows:
U.S. Treasury Securities:
102%
U.S. Agency Discount and Coupon

Securities:
102%
Mortgage Backed and Other:
103%
LOCAL GOVERNMENT INVESTMENT POOL

Local governments within the state are authorized, with the consent of its governing body, to
participate in the Oregon Local Government Investment Pool (LGIP) operated by Oregon State
Treasurys Finance Division. The LGIP was established to provide local governments a low
cost, low risk investment option for the investment of available funds. The LGIP is a very safe,
highly efficient and professionally managed open-ended, no-load diversified securities portfolio.
The LGIP invests primarily in high quality, low risk securities such as money market
instruments, U.S. government and federal agency securities, corporate securities, certificates of
deposit, repurchase agreements and other eligible investments. It provides a competitive income
yield for participating local governments by investing and managing their pooled funds in
securities that offer a high degree of security while maintaining liquidity. Funds in the LGIP are
commingled with other state funds in the Oregon Short Term Fund (OSTF). The primary
objectives of the LGIP and OSTF are safety of principal, liquidity and return on investment.
While the LGIP and OSTF seek to preserve principal and maintain a stable net asset value, the
prospect of a market decline and its impact on the funds value need to be considered as general
market risks. The OSTF is not currently rated by an independent rating agency.
As of April 2007, investments in the LGIP by a local government are limited to a maximum of
$39,836,066. This amount is adjusted semi-annually by the Consumer Price index for All Urban
Consumers of the Portland, Oregon Area. Oregon State Treasury will notify all LGIP
participants whenever the aggregate deposit amount is adjusted. The current limit may be found
at Oregon State Treasurys Internet website located at http://www.ost.state.or.us.
The maximum limitation does not apply to funds placed in the investment pool on a pass-through
basis or funds invested on behalf of another government unit. The limitation can be temporarily
exceeded but local governments must remove pass-through funds in excess of limitation within
10 business days and county governments must remove such excess funds within 20 business
days. (ORS 294.805 to 294.895)
BOND RELATED FUNDS

Bond funds are used to finance the projects for which the bonds were authorized and to account
for the receipt and disbursement of proceeds from the sale of bonds. The bond resolution,
ordinance, trust indenture, escrow agreement or other agreements will establish various and
separate bond funds or accounts for financial accounting and administrative purposes. The
number of funds established and the nomenclature or labeling of the fund will vary depending on
bond size, complexity and the particular naming conventions used by the issuer and its financial
team. Some of the more common categories of bond funds in a typical transaction include:
Project Fund
Debt Service Fund
Sinking Fund
Debt Service Reserve Fund
Capitalized Interest Fund
Refunding Escrow Fund
PROJECT FUND
The project fund, also known as the construction fund or the acquisition and construction
fund, contains monies from the bond sale that are used to finance the costs of the project. The
fund is sized to cover costs for land acquisition, architectural planning, site preparation,
construction or renovation, facility equipment expenditures, as well as funds to pay interest costs
during the project or construction phase. Project fund monies are typically paid out to
contractors and other parties in installments over the construction period which can range from
six months to two years or more. The project fund usually receives the largest share of bond sale
proceeds except in the case of refunding transactions.
Determination of the size and structure of a bond issue is best developed from the project cashflow and spending plan. The spending plan or draw schedule is an estimate of the dates and
expenditure amounts needed to fund construction over the life of the project period. Project fund
draw schedules provide estimates for what amount and timing of funds needed; it is integral to
the determination of the size of the bond issue and the amount of funds available for investment.
Issuers should begin formulating investment strategies for project fund monies as soon as the
structure and size of the bond issue is determined. The project fund investment plan is tailored
with consideration of the expected draw and expenditure schedules, prevailing market rates,
bond covenant requirements and investment policy guidelines. While the overall plan should be
designed to earn the maximum allowable investment return, the strategy also needs to be flexible
or liquid enough to adjust to changing construction and expenditure requirements.
Options for project fund investments, especially those tailored to minimize liquidity and
reinvestment risk, may include:
Investment agreements
U.S. Treasury securities
Money market funds
Most project funds are designed so that any interest earnings that exceed the amount estimated to
pay project costs or any fund balance that remains after project completion will be transferred to
other funds such as a debt service fund or a sinking fund to make bond principal and interest
payments.
DEBT SERVICE FUND
The debt service fund (DSF) is a trust account used to accumulate monies deposited by the issuer
to make required interest and principal payments on its bonds, notes, capital leases, certificates
of participation and other long-term obligations. Types of bonds that would typically use a DSF
for interest and principal accounting include serial bonds and term bonds. Serial bonds are
generally structured with semi-annual interest payments and annual principal payments. Term
bonds have semi-annual interest payments but no principal payments until the bonds mature
when the entire principal amount would be due. DSFs are normally required to be advance
funded with monthly deposit amounts. So, for a serial bond, the issuer would typically make
monthly pro-rata deposits into the DSF in amounts equal to one-sixth of the next scheduled
interest payment and one-twelfth of the next scheduled principal payment. For term bonds,
adequate funding of the DSF is essential to ensure that sufficient monies are available to make
the single repayment of principal at the bond maturity date. The amount deposited in the DSF
for term bond principal payment will depend on present value calculations as well as realistic
estimates of DSF investment earnings.
Investments of the monies set aside in the DSF will need to be scheduled to mature on the debt
service payment date. This means that DSF investment maturities for serial bonds will generally
average less than six months. The resulting short investment maturities of course result in
corresponding low investment returns or yields. DSF investment candidates would typically
include tailored investment agreements, forward purchase agreements and certain pooled
investment funds (other than money market funds).
SINKING FUND
With a sinking fund, the borrower is generally required to deposit sufficient monies for the
purpose of paying, by mandatory redemption, all or part of a long-term debt obligation that is
due in a subsequent year. A sinking fund, or interchangeably, a mandatory redemption fund, is
a common feature of governmental and corporate revenue bonds, most notably, term bonds or
bonds of lesser credit quality. A trustee or agent generally accounts for the monies in the sinking
fund and may be responsible for any fund investments. The structure of the fund is normally
detailed in the bond indenture whereby the borrower is required to make periodic payments to
the trustee based on either a specific timetable or criteria such as gross or net project revenues.
Indenture provisions will provide for mandatory sinking fund redemptions either on a specific
schedule or when a certain dollar amount accumulates in the sinking fund. In either case, a
certain number of the outstanding bonds would be retired prior to their stated maturity. This
provision is designed to reduce the investment risk to bondholders by assuring that monies are
available for debt service payments and that the debt is being retired. For the borrower, use of a
sinking fund may also result in lower financing costs.
Depending on the sinking fund provisions, the borrower may have the option to postpone or
accelerate the scheduled early retirement of the bonds. This option allows the borrower more
flexibility in a changing interest rate environment than the typical serial bond with a strict
principal and interest payment schedule. So, if interest rates decrease, a borrower would likely
opt to redeem or call its higher interest rate bonds in accordance with the mandatory redemption
provisions of the indenture. In a rising interest rate environment, if the provisions permit, the
borrower may choose to defease the bonds in-substance through the purchase and deposit with a
trustee of no-risk government securities for the purpose of paying bond principal and interest.
Another option may be to re-purchase the bonds in the open or secondary market.
Bonds that are to be redeemed by mandatory sinking fund redemption are usually selected by the
trustee by lot from among the bonds subject to redemption. The trustee will give notice to
bondholders, in accordance with the provisions of the indenture or other bond contract
documents, that certain bonds are being called for redemption on a specified date and should be
presented for payment as interest on the bonds will cease to accrue after the designated
redemption date.
Any sinking fund monies not needed for immediate payment of bonds should be invested in
accordance with the municipalitys investment policy. Preferred sinking fund investments ought
to be essentially risk free such as U.S. government securities, municipal securities supported by
general taxation, time or savings deposits, and money market mutual funds. In all cases, the
investments need to be either very liquid, such as interest bearing bank accounts, or scheduled to
mature and be available to pay for the sinking fund bonds being called for mandatory
redemption.
DEBT SERVICE RESERVE FUND
The Debt Service Reserve Fund (DSRF) is an account established to provide a ready source of
funds in the event that there are insufficient revenues to make a scheduled debt service payment.
This is a common feature of most revenue bonds but may not be required for general obligation
bonds, variable rate bonds or bonds that utilize a financial guaranty product. Debt service
reserve funds may be fully funded at closing with bond proceeds or only partly funded initially
and then filled over time from revenues generated by the project, received from other pledged
revenue sources, or from cash contributions. For some issuers, a DSRF may be optional or not
required at all unless some specific event or breach of a bond covenant occurs. An example of
such a trigger is when the project debt service coverage ratio drops below a specified minimum
threshold indicating that the issuers cash flow may be inadequate to cover principal and interest
payments on an ongoing basis. An alternative, in lieu of a cash-funded DSRF, is to fund the
account with a financial guaranty product such as a surety bond, insurance policy, letter of credit,
line of credit or other similar guaranty.
The initial sizing and amount required to be maintained in the DSRF (that is the debt service
reserve fund requirement) should be clearly stated in the bond resolution or ordinance and the
indenture. Debt service reserve funds are subject to maximum size limitations. The funded
amount or size that qualifies as a reasonably required reserve or replacement fund is defined
by U.S. Treasury regulation, and may not exceed an amount equal to the lesser of:
10% of the original principal amount of the bond issue
the maximum annual principal and interest payment on the bonds
125% of the average annual debt service
In the event there is an unscheduled use of the reserve fund to pay debt service, or the fund falls
below a minimum balance, the issuer will normally be required to refill the account from first
available revenues. Again, this process should be clearly defined in the indenture and other bond
contract documents. The same is true when a surety bond or other financial guaranty product is
accessed to make principal and interest payments on the issuers bonds. In this case, the issuer,
pursuant to an agreement with the insurer, will be required to reimburse the insurer the amount
of any debt service payments made, plus an agreed upon interest charge.
The indenture should contain provisions describing how reserve fund monies are to be invested
and provide the types of eligible or permitted interest bearing instruments. The general
investment philosophy should be one designed to earn the maximum permitted interest but also
avoid extreme volatility in the market value of the DSRF. Reserve fund restrictions may be
limited to eligible investments that permit withdrawals without penalty or have maturities that
dont exceed a specified term. Many issuer investment policies will require that investment
maturities not exceed five years, while others may permit investments with longer maturities or
some combination of maturities such as five, ten or twenty years. In all cases, investments
should not exceed the final maturity date of the bond issue itself. Typical permitted DSRF
investments would include:
U.S. Treasuries such as bills, notes, bonds and strips
U.S. government agency securities, such as those offered by Ginnie Mae, Fannie
Mae, Freddie Mac, and Sallie Mae
Municipal obligations or securities rated, for example, AA or higher
Guaranteed investment contracts or GICs, repurchase agreements and forward

purchase agreements
Most of the bond funds, such as the project fund and the capitalized interest fund, described
below, allow for only short-term, highly liquid investments in order to have monies available to
pay the ongoing project construction costs. Consequently, their investment return or yield will
likely be less than the yield paid on the bonds themselves. With the DSRF, investment liquidity
is less of a concern because the monies are only required on debt service payment dates. Also,
for most municipalities with good credit ratings and strong revenue resources, the DSRF will
never be accessed. This allows the issuer the opportunity to invest in higher yielding securities
of longer duration with a rate of return that may be equal to or above the borrowing costs of the
bonds. While the retention by the issuer of such positive arbitrage earnings is generally
prohibited by the Internal Revenue Code, the tax law does allow for positive and negative
arbitrage offset from fund to fund and over time for the life of the bond issue. Incorporating a
comprehensive investment strategy that includes investing DSRF monies in higher yielding
securities provides the issuer with a valuable opportunity to offset some or all of the negative
arbitrage earned in other funds. Generally, any excess DSRF investment earnings will be
transferred to the bond sinking fund or debt service fund to make scheduled principal and interest
payments on the outstanding bonds. These provisions will be set forth in the bond indenture or
other bond contract document.
CAPITALIZED INTEREST FUND
There are circumstances, such as during the construction phase of a revenue-producing project,
when bond interest payments become due prior to the availability of project revenues or the
receipt of sufficient taxes, special assessments, fees or other resources for debt service payment.
An option available to the issuer is to fund interest payments from bond proceeds for a specified
period of time. This capitalized interest period is typically from closing until the end of
construction phase or some short period after the date the project is expected to be available for
use. Capitalized interest periods may last between six months to about three years.
Capitalized interest is the amount of the bond proceeds used to pay interest during the project
construction or start up phase. The capitalized interest amount produced from the bonds is
usually deposited in a separate account or capitalized interest fund. The fund account will be
either gross or net funded. For a gross or fully funded account, the total interest amount
estimated to become due during the capitalized interest period is deposited to the account and
any interest earned will flow into a debt service fund, sinking fund or other separate account. In
most cases the capitalized interest fund is net-funded. The amount deposited in the account,
combined with the fund investment earnings, plus any interest from other bond funds, will be
used to make the required interest payments during the capitalized interest period.
Monies in the capitalized interest fund are generally invested for the life of the fund. The fund
investment strategy needs to ensure that sufficient invested amounts mature and are available,
along with any interest earnings, to pay the interest on the scheduled payment dates throughout
the capitalized interest period. Typical capitalized interest fund investments include, for
example, short-term U.S. Treasury and government agency securities or municipal securities
with maturities matched to bond interest payment dates. Other investments might consist of
tailored investment agreements, forward purchase agreements and guaranteed investment
agreements.
REFUNDING ESCROW FUND
Municipalities may choose to issue refunding bonds to redeem or retire outstanding bonds at or
before their stated maturity. The purpose of most bond refundings is to achieve savings in debt
service costs by issuing new debt (the refunding bonds) at a lower interest rate than the debt
being refunded (the refunded bonds). Other reasons to refund bonds would be to effect a
favorable reorganization of the debt structure to defer or stretch out debt service payments or to
remove bond covenants that are too restrictive.
A refunding within 90 days of the call date of the outstanding bonds is termed a current
refunding and the new debt proceeds from the current refunding are used to immediately or
currently repay the old debt. If the refunding takes place more than 90 days in advance of the
outstanding bonds call date, then the refunding is referred to as an advance refunding.
Most advance refundings result in the defeasance of the old bonds: the refunding bond proceeds
are irrevocably deposited in an escrow fund or account for the sole purpose of making scheduled
debt service payments on the refunded but still outstanding bonds. Refunding escrow funds are
subject to highly complex and restrictive Internal Revenue Code regulations; which investment
yield restrictions and arbitrage limitations are of primary concern. Issuers will generally enter
into an escrow deposit agreement with an escrow trustee that will provide for the on-going debt
service payment of the refunded bonds and early redemption, if any. The agreement will also
direct the trustee to invest the refunding proceeds in eligible securities that are essentially risk
free.
The investment of refunding escrow funds are generally, but not always, limited to U.S. Treasury
notes or other direct or guaranteed obligations of the U.S. government. In most cases, the escrow
agent, on behalf of the issuer, will purchase directly from the U.S. Treasury special securities
known as State and Local Government Series securities or SLGS. SLGS securities are
issued in book-entry form only and are not transferable. They are sold to issuers or their agents
at tailored interest rates and maturities that can be structured so that the investments purchased
with the refunding bond proceeds will not earn a higher yield than the original refunded bonds.
This ensures that the advance refunding bonds comply with arbitrage and yield restrictions
imposed under the Internal Revenue Code. For more information on SLGS see the U.S.
Treasury website at www.treasurydirect.gov.

Why should a city finance manager be concerned with investing bond proceeds and monies in
bond fund accounts?
The basic reason is that bond interest costs begin accruing immediately. Actively and
professionally managing the available funds will result in lower overall borrowing costs and
reduce the amount of monies required from taxes or other resources such as the General Fund or
Enterprise Funds.
What primary objectives should be considered when investing bond proceeds and available bond
fund monies?
The primary objectives of bond proceed investment management are:
1) Safety the foremost objective of every investment program. Investments should
seek to minimize both credit risk and interest rate risk.
2) Liquidity the investment portfolio needs to be sufficiently liquid to ensure that
funds are available for project costs, debt service payments and reasonably
anticipated emergent cash demands. Investments should minimize both market price
risk and reinvestment rate risk.
3) Yield market return on investment is of tertiary importance compared to safety of
principal and liquidity considerations but still important. The investment portfolio
should be limited to low risk securities in anticipation of generating a consistent riskadjusted rate of return.
Where can I find out what types of securities and investment instruments are authorized for the
investment of city bond proceeds funds and accounts?
Oregon Revised Statute (ORS) 294.035 authorizes cities and other political subdivisions to
invest any sinking fund or bond fund in a variety investment instruments. These include but are
not limited to U.S. government and agency debt instruments, certain municipal debt obligations,
savings accounts, and certificates of deposit. The Oregon State Treasury is required to prepare
and keep current a listing of eligible investments. Issuers should also refer to bond declarations,
trust indentures or other bond documents that generally provide investment guidance restrictions.
Because of the complex rules affecting tax-exempt debt, issuers should confer with their advisors
and especially seek the advise of financial/investment experts and especially legal counsel
regarding bond proceed investments.
What are SLGS?
The term SLGS refers to State and Local Government Series (SLGS) securities which are
U.S. Treasury obligations that can be purchased by state and local government entities directly
from the U.S. Treasury. They are not available for purchase or trading on the open market.
SLGS securities are offered by the U.S. Treasury in order to assist issuers of tax-exempt debt
with compliance regarding yield restrictions or arbitrage rebate provisions of the Internal
Revenue Code. SLGS are most commonly used for deposit in an escrow account in connection
with the issuance of refunding bonds. These U.S. Treasury securities are purchased to match the
yield on the refunding bonds and the debt service payment schedule on the refunded bonds. This
allows the issuer in an advance refunding to achieve maximum investment returns while
ensuring that the purchased investments comply with escrow restrictions and avoid yield
burning. Failure to comply with Internal Revenue Code arbitrage restrictions could result in the
issuers bonds being declared arbitrage bonds by the Internal Revenue Service and thus
become taxable.
APPENDICES
Appendix A
GLOSSARY TERMS AND CONCEPTS
Many of the definitions contained in this Glossary are adapted and/or
reprinted from the Municipal Securities Rule Making Boards (MSRB) Glossary
of Municipal Securities Terms, with permission of the MSRB. Some additional
terms and concepts are adapted from the Oregon Bond Manual and from the
California Debt Issuance Primer.
ACCREDITED INVESTOR: An investor to whom a security otherwise required to be
registered under the Securities Act of 1933 may be sold in a limited offering without registration
under the SECs Regulation D and who does not count against the maximum limit of 35
investors. In addition to a variety of categories of institutional investors (including banks,
insurance companies, investment companies, business development companies and employee
benefit plans, as well as certain 501(c)(3) organizations, corporations, business trusts and
partnerships), an accredited investor includes high net worth or high income individuals.
Municipal securities generally are not subject to registration under the Securities Act of 1933 but
sometimes their sales are restricted to accredited investors to ensure that they are sold only to
persons who are capable of understanding the risk and bearing the potential loss of an investment
in the securities.
ACCELERATION: A contract term providing for the principal amount of and any
accrued interest on an obligation to become due and payable prior to the originally scheduled due
date upon occurrence of a contractually stipulated event (typically, certain specified events of
default).
ACCOUNTING SYSTEM: The total set of records and procedures which are used to
record, classify, and report information on the financial status and operations of an entity.
ACCRUED INTEREST: In an original governmental bond sale, accrued interest is the
amount which has accumulated on the bonds from the dated date of the issue up to, but not
including, the date of delivery or closing. Where a governmental unit purchases a bond, accrued
interest is the amount which has accumulated on the bond from the last interest date up to, but
not including, the date of purchase.
ADDITIONAL BONDS: Additional bonds is a term found in indentures, trust
agreements, bond resolutions, and other bond issuance documents referring to bonds that may be
issued in the future in addition to bonds being issued under the current document. Almost
always, these bonds are on a parity with the bonds being issued initially and may not be issued
without meeting certain conditions involving the level of revenues available to repay the initial
bonds and additional bonds, maximum amount limitations, and other conditions. These
conditions are often referred to as the additional bonds test.
Appendix A Glossary Terms and Concepts
ADDITIONAL BONDS COVENANT or TEST: The financial test, sometimes

referred to as a parity test, that must be satisfied under the bond contract securing outstanding
revenue bonds as a condition to issuing additional bonds. Typically, the test would require that
historical revenues (plus, in some cases, future estimated revenues) exceed projected debt service
requirements for both the outstanding issue and the proposed issue by a certain ratio.
AD VALOREM TAX: A direct tax calculated according to value of property. Ad
valorem tax is based on an assigned valuation (market or assessed) of real property and, in
certain cases, on a valuation of tangible or intangible personal property. In virtually all
jurisdictions, an ad valorem tax is a lien on the property enforceable by seizure and sale of the
property. An ad valorem tax is normally the one substantial tax that may be raised or lowered by
a local governing body without the sanction of superior levels of government (although statutory
restrictions such as tax rate limitations may exist on the exercise of this right). Thus, ad valorem
taxes often function as the element used by local governments to assure that their budgets remain
in balance.
ADVANCE REFUNDING: Advance refunding on a municipal bond refers to the sale
of a refunding issue several years prior to the first call date of the issue to be refunded, with
proceeds held in trust. See also Advance Refunding Bonds and Refunding.
ADVANCE REFUNDING BONDS: Bonds issued to refund an outstanding bond issue
prior to the date on which the outstanding bonds become due or callable. Proceeds of the
advance refunding bonds are deposited in escrow with a fiduciary institution, invested in U.S.
Treasury Bonds or other authorized securities, and used to redeem the underlying bonds at
maturity or call date and to pay interest on the bonds being refunded or the advance refunding
bonds. Issuers are usually able to attain debt service savings as a result of this process.
Refunded bonds are considered escrowed to maturity when the proceeds of the refunding
bonds are placed in escrow, invested and applied to payments on the refunded bonds when due,
without redemption prior to maturity.
Refunded bonds are considered pre-refunded when the proceeds of the refunding bonds are
placed in escrow and invested until a date upon which the refunded bonds may be redeemed.
The escrow (including earnings thereon) is applied to the payment of interest, principal maturing
prior to the redemption date and the redemption price of the refunded bonds.
A Crossover Refunding is a refunding in which the revenues originally pledged to secure the
refunded bonds continue to be applied to pay the refunded bonds until the refunded bonds mature
or are redeemed. On the date the refunded bonds are paid in full, the pledged revenues cross
over and are thereafter pledged to pay the refunding bonds. Curing the period when both the
refunded and the refunding bonds are outstanding, the escrow containing the proceeds of the
refunding bonds pays interest on the refunding bonds. Then on the crossover date, the escrow
pays the principal on the refunded bonds.
A Current Refunding is a refunding in which refunding bonds are issued less than 90 days before
the date upon which the refunded bonds will be paid.
Generally, in an advance refunding, the revenues originally pledged to the payment of the
refunded bonds become pledged to the payment of the refunding bonds on the date the refunding
bonds are issued. Payment of the refunded bonds is then secured by the escrow.
AGENT: One who acts on behalf of another party (i.e., the principal) and usually is paid
a fee by the principal. The agent is presumed to be subject to the control of the principal.
AGREED UPON PROCEDURES LETTER: A letter from an auditor to the
underwriters of a new issue of municipal securities setting forth the procedures undertaken with
respect to the review of specified financial information (e.g., interim period financial statements
or other information not covered by audited statements)appearing in the official statement and
providing certain conclusions regarding the information with respect to which such review
procedures were applied. May be also be called a Comfort Letter.
AGREEMENT AMONG UNDERWRITERS (AAU): The contract among the
members of an underwriting syndicate establishing the syndicate rules, including the rights,
duties and commitments of the senior manager and the other syndicate members with respect to
the new issue of municipal securities being underwritten. In a competitive bid underwriting, the
AAU is sometimes referred to as a syndicate account letter. The agreement among underwriters
is also sometimes referred to as the underwriting agreement.
ALL IN COST or ALL INCLUSIVE COST (AIC):
(i)
A measurement of the total cost of a bond financing, expressed as a discount rate

calculated using the present value of all debt service payments on the issue and
the total proceeds of the issue. For purposes of this calculation, the amount of
proceeds is adjusted by any accrued interest, original issue discount, original issue
premium and costs of the financing (e.g., costs of issuance, credit enhancement
fees, underwriters spread, etc.).
(ii)
For a variable rate demand obligation issue, the measure of costs expressed as a
percentage that includes the cost of the liquidity facility, remarketing fees, interest
payments and administrative fees.
ALTERNATIVE MINIMUM TAX (AMT): An income tax based on a separate bond

and alternative method of calculating taxable income and a separate and alternative schedule of
rates. The interest on certain types of Private Activity Bonds may be included in income for
purposes of the individual and corporate alternative minimum tax.
AMORTIZATION:
(i)
A reduction of debt by means of periodic payments sufficient to meet current

interest and liquidate the debt at maturity.
(ii)
Provision for the extinguishment of a debt by means of a debt service fund.
(iii)
Accounting for expenses or charges as they apply rather than as they are paid.
AMORTIZATION SCHEDULE: A table showing the gradual repayment of an issue

of securities by periodic payments either directly to security holders or to a sinking fund for the
benefit of security holders.
ANNUAL REPORT: The annual report is the report containing annual financial and
operating data prepared and filed with the Nationally Recognized Municipal Securities
Information Repositories (NRMSIRs) and state information depository (SID) if any pursuant
to Securities and Exchange Commission (SEC) Rule 15c2-12.
ARBITRAGE:
(i)
The practice of investing bond proceeds at a yield greater than the coupon rate
being paid on the bonds. With respect to municipal bonds, arbitrage is the
profit made by issuing bonds bearing interest at tax-exempt rates, and investing
the proceeds at materially higher taxable yields. The Internal Revenue Service
strictly limits this profit.
(ii)
The profit derived from the more or less simultaneous purchase and sale of
governmental securities.
(iii)
A technique used to take advantage of price differences in separate markets, such

as tax-free municipal bonds and taxable corporate issues.
ARBITRAGE BONDS: Bonds that violate federal arbitrage regulations. If the Internal
Revenue Service finds that bonds are arbitrage bonds, the interest becomes taxable and therefore
must be included in each bondholder's gross income for federal tax purposes.
ASSESSMENTS: Assessments are charges in the nature of taxes upon property owners
to pay the costs of facilities or improvements that benefit the property owner. Payment of the
amount assessed (together with interest if not paid upon assessment) is secured by a direct fixed
lien on the property. The assessed payments are either used directly to pay the costs of the
facilities or improvements or, if paid over time, are used to repay bonds issued to finance such
costs. Special Assessment financing proceeds are used for improvements relating to the
property, such as sidewalks, streets, gutters, sewers and water systems.
ASSESSED VALUATION (AV): The valuation placed on real estate or other property
by a government for the purpose of levying taxes.
ASSESSMENT RATIO: The ratio of the assessed value of property to the full or true
market value. Full value may be defined as fair market value at the bid sale of the market less a
reasonable allowance for sales and other expenses.
AUCTION: An electronic competitive process through which auction rate securities
(ARS) are sold at the lowest yield rate (priced at par) at which sufficient bids are received to sell
all securities offered. ARS are sold at the clearing yield established by the auction to the
investors placing bids at or below the clearing yield. All ARS in a series will bear interest at the
clearing auction rate for the next auction period.
4
AUCTION AGENT: A third-party institution responsible for conducting the auction

used in connection with the periodic reset of the interest rate.
AUCTION DATE: The business day immediately preceding the first day of each
auction rate period for an ARS.
AUCTION PROCEDURES: The process and timing for conducting the auction as set
forth in the bond indenture or trust agreement and summarized in the auction agreement.
AUCTION RATE: The rate of interest per annum resulting from the implementation of
the auction, provided such rate does not exceed a maximum rate specified in the bond indenture
or trust agreement.
AUCTION RATE PERIOD: The initial auction rate period established by the
underwriter at the time of issuance of the ARS and, subsequently, each period during which a
specified auction rate is in effect as a result of an auction. The auction rate period commences
on the business day after the auction date and ends and includes the day preceding the next
interest rate reset date.
AUCTION RATE SECURITIES: Variable rate bonds whose interest rate is reset
periodically under the Dutch auction process.
AUTHORITY: A governmental unit or public agency created to perform a single
function or a restricted group of related activities. Usually such units are financed from service
charges, fees and tolls, but in some instances they also have taxing powers. An authority can be
completely independent of other governmental units, or in some cases it may be partially
dependent upon other governments for its creation, its financing or the exercise of certain
powers.
AUTHORITY BONDS: Bonds payable from the earnings or other revenues of a
specific authority created by governmental action for a public purpose. Since such authorities
usually have no revenue other than charges for services, their bonds are ordinarily revenue
bonds.
AUTHORIZATION: Permission to issue the bonds. In addition to the constitution,
statute or charter enabling language, an election is often also required.
AUTHORIZING RESOLUTION or ORDINANCE: With respect to an issue of
municipal securities the document adopted by the issuer that implements its power to issue the
securities. The legal grant of such authority may be found in the enabling provisions of the
constitution, statutes, charters and ordinances applicable to the issuer. Adoption of an
authorizing resolution or ordinance by the issuer's governing body is a condition precedent to the
issuance of the proposed securities.
AVERAGE LIFE or AVERAGE MATURITY OF BOND ISSUE: The aggregate life
of all bonds (in years) divided by the number of bonds. The average maturity reflects how
rapidly the principal of an issue is expected to be paid and is important to underwriters in
calculating bids for new issues of municipal securities.
AWARD: Acceptance by the issuer of a bid by an underwriter to purchase a new issue

of municipal securities.
BALANCE SHEET: A statement purporting to present the financial position of an
entity by disclosing the value of its assets, liabilities and equities as of a specified date.
BALLOON MATURITY: A maturity within a serial issue of securities (usually the last
maturity) that contains a disproportionately large percentage of the principal amount of the issue.
The payment of the balloon may be contingent upon or presume some form of refinancing or
other event.
BALLOON PAYMENT: The principal payment on a balloon maturity.
BANK QUALIFIED: Designation given to a public purpose bond offering by the issuer
if it reasonably expects to issue in the calendar year of such offering no more than $10 million
par amount of bonds of the type required to be included in making such calculation under the
Internal Revenue Code. When purchased by a commercial bank for its portfolio, the bank may
receive an 80% tax deduction for the interest cost of carry for the issue. A bond that is bank
qualified is also known as a qualified tax-exempt obligation.
BASIS POINT: One one-hundreth of one-percent (0.0001).
BEARER BOND: A bond which does not have the owner's name registered to the
books of the issuer or it's paying agent/registrar. The bearer or the person who holds it owns it.
The Tax Equity and Fiscal Responsibility Act of 1982 requires the issuance of municipal bonds
in fully registered form, with minor exceptions.
BID: A statement of what a bank or syndicate of banks will pay for an entire bond issue,
implying an offer to purchase the bonds. The lowest bid, i.e., the bid with lowest net or true
interest cost, is the winning bid.
BLUE-SKY LAWS: A colloquial term for state securities laws, derived from a
statement that such laws were directed at unethical promoters who would sell building lots in
the blue sky. Although these laws vary from state to state, most contain provisions concerning
(a) prohibitions against fraud, (b) regulation of broker-dealers doing business in the state, and (c)
registration of securities. Municipal securities are generally exempt from state securities
registration requirements, although broker-dealers selling them are subject to many states
registration and regulatory requirements.
BLUE-SKY MEMORANDUM: A memorandum typically prepared by underwriters
counsel describing the treatment of a particular new issue of municipal securities under the bluesky laws of the various states.
BMA: Bond Market Association is now known as the Securities Industry and Financial
Markets Association (SIFMA).
BMA INDEX: See SIFMA SWAP INDEX.
BOND: A certificate representing a promise to pay a specified sum of money, called the
face value or principal amount, at a specified date or dates in the future, called the maturity
date(s), together with periodic interest at a specified rate. The difference between a note and a
bond is that the latter runs for a longer period of time, is usually a permanent financing tool and
requires greater legal formality, while a note is typically an interim device. The term bond
may also mean the par value of $1,000 par value. Although bonds may be issued in any
denomination, municipal bond dealers and others use the term to mean $1,000 par value,
regardless of the actual denomination. Thus, a $25,000 bond would be referred to as 25 bonds.
Many transactions, e.g., the spread between the purchase and sales price by investment bankers,
are expressed in terms of the amount per bond, i.e., per $1,000 par value.
BOND ANTICIPATION NOTES (BANS): Short-term interest-bearing notes issued by
a government in anticipation of bonds to be issued at a later date. The notes are retired from the
proceeds of the bond issue to which they are related. BANS may also be retired from current
revenue.
BOND BUYER: A daily trade paper of the municipal bond market. Its New Yorkbased publisher also publishes the weekly Credit Markets, which is devoted to capital market
news and provides a summary of the week's municipal news.
BOND BUYER INDEX: An index published weekly by The Bond Buyer to indicate the
level of long-term municipal bond yields.
BOND COUNSEL: Legal firm hired to advise the issuer regarding the legal and tax
aspects of the sale. Bond counsel writes the legal opinion for the bond issue. This lawyer, in
theory, represents the ultimate bond purchaser. The bond opinion provides assurance to the bond
purchaser that the bond was legally issued and is tax-exempt. Generally responsible for
producing the legal documents required for the sale.
BONDED DEBT: The portion of the an issuer's total indebtedness represented by
outstanding bonds.
BOND ELECTION or BOND REFERENDUM: A process whereby the qualified
voters of a governmental unit are given the opportunity to approve a proposed issue of municipal
securities. An election is most commonly required in connection with general obligation bonds.
The constitution, statute or local ordinance may impose requirements for voter approval.
BOND FUND: A portfolio of bonds administered by a manager, who offers shares in
such fund to investors. Open-end bond funds offer shares continuously to the investing public,
while closed-end bond funds contain a limited number of shares, and new investors must
purchase shares from previous investors in such funds.
BONDHOLDER: The owner of a municipal bond. The owner of a bearer bond is the
person having possession of it, while the owner of a registered bond is the person whose name is
noted on the bond register.
BOND INSURANCE: Non-cancelable insurance purchased by the issuer from a bond
insurer to which the insurer promises to make scheduled payments of interest, principal and
mandatory sinking fund payments on an issue if the issuer fails to make timely payments. When
an issue is insured, the investor relies upon the creditworthiness of the insurer rather than the
issuer (or in addition to the issuer).
BOND ORDINANCE or RESOLUTION: The document or documents in which the
issuer authorizes the issuance and sale of municipal securities. Issuance of the securities is
usually approved in the authorizing resolution, and sale is usually authorized in a separate
document known as the sale or award resolution. All such resolutions, read together,
constitute the bond resolution, which describes the nature of the obligation, the issuer's duties to
the bondholders and the issuer's rights with respect to the obligations and the security for the
obligations. In certain jurisdictions, the governing body will act by means of an ordinance
(bond ordinance) rather than by resolution.
BOND PROCEEDS: The money paid to the issuer by the purchaser or underwriter of a
new issue of municipal securities. These monies are used to finance the project or purpose for
which the securities were issued and to pay certain costs of issuance as may be provided in the
bond contract.
BOND PURCHASE AGREEMENT: In a Negotiated Sale, the bond purchase contract
is an agreement between an issuer and an Underwriter or a group of underwriters (a Syndicate or
a Selling Group) who have agreed to purchase the issue. A bond purchase contract generally
contains the following:
(i)
The purchase price to be paid by the underwriter (including any premium or

discount);
(ii)
certain terms of the bonds, such as interest rates, maturities, redemption

provisions, and original issue discount;
(iii)
the circumstances under which the underwriter may cancel its obligation to
purchase the issue (e.g., changes in the tax treatment of the bonds and other
events which would make it substantially more difficult for the underwriter to sell
the bonds to investors);
(iv)
good faith deposit, if any;
(v)
the conditions to the closing of the issue, which often include documents,
certificates and opinions which are to be delivered on the closing date; and
(vi)
any restrictions on the liability of the issuer. Other common names for a bond
purchase contract are contract of purchase or bond purchase agreement.
In a competitive sale, the notice of sale, the underwriter's bid and the issuer's acceptance of the
bid constitutes a bond purchase contract. Generally, these three items, taken together, contain
items similar to those in a negotiated bond purchase contract.
BOND TRANSCRIPT: All legal documents, including minutes of appropriate meetings

of the issuer, associated with the offering of a new issue of municipal securities. Bond counsel's
opinion is given after a review of the transcript and becomes a part thereof.
BOND YEAR: A unit of $1,000 of debt outstanding for one year. The number of bond
years in an issue is equal to the product of the number of bonds (with one bond equal to $1,000
regardless of actual authorized denominations) and the number of years from the dated date (or
other stated date) to the stated maturity. The total number of bond years is used in calculating
the average life of an issue and its net interest cost. Computations are often made of bond years
for each maturity or for each coupon rate, as well as total bond years for an entire issue
BONDS AUTHORIZED AND UN-ISSUED: Bonds which have been legally
authorized but not issued and which can be offered and sold without further authorization. This
term should not be confused with the term margin of borrowing power or legal debt margin
either one of which represents the difference between the legal debt limit of a governmental unit
and the debt outstanding against it.
BROKER: A person or firm, other than a bank, which acts as an intermediary by
purchasing and selling securities for others rather than for its own account.
BOOK-ENTRY ONLY (BEO) or BOOK-ENTRY SECURITY: A security that is not
available to purchasers in physical form. Such a security may be held either as a computer entry
on the records of a central holder (as is the case with certain U.S. Government securities) or in
the form of a single, global certificate. Ownership interests of, and transfers of ownership by,
investors are reflected solely by appropriate books and records entries. Most municipal
securities issued in recent years have been in book-entry only form.
BUDGET: A plan of financial operation embodying an estimate of proposed
expenditures for a given period and the proposed means of financing them. Used without any
modifier, the term usually indicates a financial plan for a single fiscal year. The term budget is
used in two senses in practice. Sometimes it designates the financial plan presented to the
appropriating body for adoption and sometimes the plan finally approved by that body. It is
usually necessary to specify whether the budget under consideration is preliminary and tentative
or whether the appropriating body has approved it.
CALL: To give notice of redemption; to redeem.
CALLABLE BOND: A bond which the issuer is permitted or required to redeem before
the stated maturity date at a specified price, usually at or above par, by giving notice of
redemption in a manner specified in the bond contract.
CALL DATE: The date on which a bond may be redeemed before maturity at the option
of the issuer.
CALL PRICE: The price established in the bond contract at which bonds will be
redeemed, if called. Call price is generally at a premium and stated as a percentage of the
principal amount called.
CAPITAL APPRECIATION BOND: A municipal security on which the investment

return on the initial principal amount is reinvested at a stated compounded rate until maturity, at
which time the investor receives a single payment (the maturity value) representing both the
initial principal amount and the total investment return. CABs typically are sold.
CARRY: The interest cost of financing the holding of securities. Negative Carry: The
cost incurred in excess of income when borrowing to finance the holding of securities. Positive
Carry: A condition where the yield on a security is greater than the interest cost of borrowed
funds to finance its operative.
CASH FLOW: A comparison of cash receipts (revenues) to required payments
(generally, debt service and operating expenses).
A cash flow may demonstrate that receipts by an issuer from a project's revenues or a mortgage
portfolio, or from collection of a tax, fee, or other charge will be sufficient to equal or exceed, in
each year the sum of payments of principal and interest on an issue and related expenses,
generally on the basis of specified assumptions, which may include a worst case scenario.
A cash flow may also be used in the context of showing that payments of principal and interest
received on investments held in escrow will be received at such times and in sufficient amounts
to equal or exceed debt service on the issue for which the escrow fund has been established, such
as is required for an advance refunding.
Finally, in a tax and revenue anticipation note financing, a cash flow may be used to determine
the amount of the issuer's operating deficit, which is a factor in determining the permitted size of
the issue under federal tax rules.
CERTIFICATE OF DEPOSIT or CD: A negotiable or non-negotiable receipt for
moneys deposited in a bank or financial institution for a specified period at a specified rate of
interest.
CERTIFICATE OF PARTICIPATION (COP): An instrument evidencing a pro rata
share in a specific pledged revenue stream, usually lease payments by the issuer that are subject
to annual appropriation. The certificate generally entitles the holder to receive a share, or
participation, in the lease payments from a particular project. The lease payments are passed
through the lessor to the certificate holders. The lessor typically assigns the lease and lease
payments to a trustee, which then distributes the lease payments to the certificate holders.
CLOSING, DELIVERY or SETTLEMENT: The exchange of securities for payment
in a new issue. This generally involves participation of representatives of the issuer, bond
counsel, the underwriter and other relevant parties on the date of delivery of a new issue of
municipal securities. On the closing date, the issuer delivers the securities and the requisite legal
documents in exchange for the purchase price. In the case of book-entry securities, global
certificates typically are delivered to a registered clearing agency in advance of closing, with the
registered clearing agency effecting final delivery of the securities to the underwriter on the
closing date by means of book entries. Sometimes a pre-closing is held before delivery,
typically on the day preceding closing, to review the adequacy of the closing procedures and
documents.
10 Appendix A Glossary Terms and Concepts
COMMERCIAL PAPER or TAX-EXEMPT COMMERCIAL PAPER: Short-term,

unsecured promissory notes issued in either registered or bearer form, and usually backed by a
line of credit with a bank. Maturities do not exceed one year and often average 30-45 days.
COMPETITIVE SALE: The sale of bonds to the bidder presenting the best sealed bid
at the time and place specified in a published notice of sale (also called a public sale).
When bonds are to be sold at a competitive sale, the issuer typically specifies all of the terms of
the issue other than interest rates and purchase price. When the issue is ready to market, the
issuer solicits bids by placing a notice of sale in one or more industry publications such as The
Wall Street Journal or The Bond Buyer and, if required by law, in a local newspaper of general
circulation. In the notice of sale, the issuer announces that it will accept sealed bids until a
certain date and time. Prior to presenting the bids the underwriters evaluate the credit quality of
the issue and the municipal market and may form syndicates or selling groups. The bonds are
awarded to the underwriters presenting the best bid based on the criteria specified in the notice of
sale. Possible criteria include the Net Interest Cost (NIC) method or the net effective interest
rate or True Interest Cost (TIC) method of comparing the cost to the issuer of the financing.
COMPOUND: To treat accrued interest as if it were principal, so that interest thereafter
accrues on the sum of the principal and the compounded interest.
CONDUIT FINANCING: A financing in which the proceeds of the issue are loaned to
a non-governmental borrower who then applies the proceeds for a Project Financing or (if
permitted by federal tax law for a Qualified 501(c)(3) Bond) for working capital purposes. The
issuance of securities are by a governmental unit to finance a project to be used primarily by a
third party, usually a corporation engaged in private enterprise. The security for this type of
issue is the credit of the private user rather than the governmental issuer. Usually such securities
do not constitute general obligations of the issuer because the corporate obligor is liable for
generating the pledged revenues.
CONDUIT ISSUER: A governmental agency that issues bonds in connection with a
conduit financing.
CONFIRMATION: A written summary of a transaction involving the purchase or sale
of municipal securities, which the broker or dealer provides to the customer. The confirmation
must contain certain information describing the securities and the parties to the transaction. The
contents of the customer confirmation are prescribed by Municipal Securities Rule Making
Board Rule G-15.
CONTINUING DISCLOSURE: The ongoing disclosure provided by an issuer or
obligated person pursuant to an undertaking entered into to allow the underwriter to comply with
SEC Rule 15c2-12.
CONTINUING DISCLOSURE AGREEMENT/CERTIFICATE: An agreement
(sometimes a certificate) of an issuer or an obligated person containing undertakings to provide
annual reports and event notices pursuant to SEC Rule 15c2-12.
11
COSTS OF ISSUANCE: The expenses associated with the sale of new issue of
municipal securities, including such items as underwriter's spread, printing, legal fees and rating
costs. In certain cases, the underwriters discount may be considered one of the costs of
issuance. The Internal Revenue Code restricts the use of bond proceeds to pay costs of issuance
for certain types of tax-exempt bonds, such as private activity bonds.
COUPON: The detachable part of a bond that specifies the date, place and dollar
amount of interest payable. Bondholders detach the coupons from bonds, usually semi-annually,
and present them to the issuer's paying agent for payment or to the bondholder's bank for
collection.
COUPON BOND: A bearer bond, or a bond registered as to principal only, carrying
coupons as evidence of future interest payments. As of July 1, 1983, virtually all bonds of one
year or greater maturity must be registered under the provisions of the Tax Equity and Fiscal
Responsibility Act of 1982.
COUPON RATE: The annual rate of interest payable on a security expressed as a
percentage of the principal amount. The coupon rate, sometimes referred to as the nominal
interest rate, does not take into account any discount (or premium) in the purchase price of the
security.
COVENANT or BOND COVENANT: The issuer's enforceable promise to do or
refrain from doing some act. With respect to municipal bonds, covenants are generally stated in
the bond contract. Covenants commonly made in connection with a bond issue include
covenants to charge fees for use of the financial project sufficient to provide required pledged
revenues (rate covenant); to maintain casualty insurance on the project; to complete, maintain
and operate the project; not to sell or encumber the project; not to issue parity bonds unless
certain earnings tests are met (additional bonds covenant); and not to take actions which would
cause the bonds to be arbitrage bonds.
COVER: The spread between the winning bid and the next highest bid. It is useful as a
basis for evaluation of the bids.
COVERAGE: The ratio of pledged revenues available annually to pay debt service
requirement. This ratio is one indication of the margin of safety for payment of debt service.
CREDIT ENHANCEMENT: The use of credit of an entity other than the issuer or
obligor to provide additional security in a bond or note financing. This term typically is used in
the context of bond insurance, bank letters of credit and other facilities, state school guarantees
and credit programs of federal or state governments or federal agencies, but also may refer more
broadly to the use of any form of guaranty, secondary source of payment or similar additional
credit-improving instruments.
CURRENT COUPON: An interest rate that is in line with interest rates on new issues
of securities being sold at the current time. A bond with a current coupon would be trading at
a price close to par and would have a yield-to-maturity approximately equal to its interest rate.
CUSIP NUMBERS (Committee on Uniform Security Identification Procedures):

Identification numbers assigned each maturity of a bond issue, and usually printed on the face of
each individual bond in the issue. The CUSIP numbers are intended to facilitate identification
and clearance of municipal securities.
DATED DATE: The date of a bond issue, printed on each bond, from which interest
usually starts to accrue, even though the bonds may actually be delivered at some later date.
DATE OF ISSUANCE/ORIGINAL ISSUANCE DATE: The date of issuance is the
same as the closing date. However, the original issuance date, as used on the standard registered
bond form, is the same as the dated date.
DEALER: A securities firm or department of a commercial bank that engages in the
underwriting, trading and selling of municipal securities.
DEBT: An obligation resulting from the borrowing of money or from the purchase of
goods and services. Debt of governmental units includes bonds, time warrants, notes, and
floating debt.
Bond: An interest-bearing promise to pay with a specific maturity.
Note: In general, an unconditional written promise signed by the maker to pay a certain
sum of
money on demand or at a fixed or determinable time either to the bearer or
to the order of a person
therein.
Time Warrant: A negotiable obligation of a governmental unit having a term shorter
than bonds
and frequently tendered to individuals and firms in exchange for
contractual services, capital acquisitions, or equipment purchases.
Floating Debt: Liabilities other than bonded debt and time warrants which are payable
on demand or at an early date. Examples are accounts payable, notes and bank loans.
DEBT LIMITATIONS: The maximum amount of debt which an issuer of municipal
securities is permitted to incur under constitutional, statutory or charter provisions. The
limitation is usually a percentage of assessed valuation and may be fixed upon either gross or net
debt. If the later is the case, the legal provision will usually specify what deductions from gross
debt are allowed in order to determine net debt.
DEBT SERVICE: The amount of money necessary to pay interest on an outstanding
debt, the serial maturities of principal for serial bonds and the required contributions to an
amortization or sinking fund for term bonds. Debt service on bonds may be calculated on a
calendar year, fiscal year or bond fiscal year basis.
DEBT SERVICE FUND: A fund established to account for the payment of interest and
principal on all general obligation debt, both serial and term. Usually separate funds are created
for special assessment and revenue debt issued for and serviced by a government enterprise.
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DEFAULT: Breach of some covenant, promise or duty imposed by the bond contract.
The most serious default occurs when the issuer fails to pay principal or interest or both, when
due. Other, technical defaults result when specifically defined events of default occur, such
as failure to perform covenants. Technical defaults may include failing to charge rates sufficient
to meet rate covenants or failing to maintain insurance on the project. If the issuer defaults in the
payment of principal, interest or both, or if a technical default is not cured within a specified
period of time, the bondholders or trustee may exercise legally available rights and remedies or
enforcement of the bond contract.
DEFEASANCE: Termination of the rights and interests of the bondholders and of their
lien on the pledged revenues in accordance with the terms of the bond contract for the prior issue
of bonds. Defeasance usually occurs in connection with the refunding of an outstanding issue by
the final payment, or provision for future payment, of principal and interest on a prior issue.
DEFICIT: 1) The excess of an entity's liabilities over its asset; 2) The excess of
expenditures or expenses over revenues during a single accounting period.
DELIVERY DATE: Date on which the bonds are physically delivered in exchange for
the payment of the purchase price. In the case of new issues, the delivery date, not the dated date
is considered the date of issuance.
DEMAND BOND: A long-term-maturity security which is subject to a frequently
available put option or tender option feature under which the holder may put the security back to
the issuer or its agent at a predetermined price (generally par) after giving specified notice. The
put option or tender option right is typically available to the investor on a weekly or monthly
basis, although on some demand securities the investor has a daily right to exercise the put
option. Many of these securities are floating or variable rate securities, with the put option
exercisable on dates on which the floating rate changes. These latter securities are often called
variable rate demand notes or, colloquially, lower floaters.
DENOMINATION: The face amount or par value of a bond that the issuer promises to
pay on the maturity date. Most municipal bonds are issued in the minimum denomination of
$5,000, although a few issues are available in smaller denominations. Registered bonds may be
issued in larger denominations.
DEPRECIATION: 1) Expiration of the service life of capital assets attributable to wear
and tear, deterioration, of the physical elements, inadequacy or obsolescence. 2) That portion of
the cost of a capital asset that is charged as an expense during a particular period.
DESCRIPTION OF THE BONDS: A summary of the terms and provisions of the
bond issue, including the denomination and form of the bonds, purpose of the bonds, lien status,
security, covenants and provisions for redemption. Identifying features of a bond include the
dated date, issuer, interest rate, maturity date and CUSIP number.
DISCOUNT: The amount by which par value exceeds the price paid for a security and
which generally represents the difference between the nominal interest rate and the actual or
effective return to the investor.
DISSEMINATION AGENT: An agent appointed pursuant to a continuing disclosure

agreement for the purpose of filing annual reports and event notices with NRMSIRs and state
information depositories.
DOUBLE-BARRELED BOND: A bond secured by both a defined source of revenue
(other than property taxes) and the full faith and credit of an issuer that has taxing powers. The
term is occasionally, although erroneously, used in reference to bonds secured by any two
sources of pledged revenues.
DUE DILIGENCE: The process of thorough investigation of a bond issue. Such
inquiry is made to assure that all material facts are fully disclosed to potential investors and that
there have been no material omissions or misstatements of fact. The issuer, the obligation of the
bonds, and the true obligor in a conduit financing are investigated. Further inquiry may be
required if the investigation reveals facts that are incomplete, suspect or inconsistent, either on
their face or in light of other facts known to counsel. Due diligence with respect to municipal
securities is not the same process as the more formal due diligence required with respect to
corporate debt and equity securities.
DUE DILIGENCE OPINION: A letter of counsel, often referred to as a 10b-5
opinion, generally based upon an investigation of specified facts, and addressing the accuracy
and completeness of the official statement. A due diligence opinion addressed to an underwriter
by underwriters counsel customarily states that, based on certain specified inquiries, nothing has
come to such counsels attention indicating that the official statement contains any misstatements
of material facts or any material omissions. A due diligence opinion by counsel to an issuer or
conduit borrower may use similar or different language to address the adequacy and accuracy of
the disclosure made. A due diligence opinion may or may not be issued, depending on the nature
and complexities of the new issue of municipal securities.
ECONOMIC USEFUL LIFE: The period over which an asset may reasonably be
expected to yield economic benefit to its owner.
Because economic factors can render property useless for its intended purpose long before the
property deteriorates physically, the economic life of an asset is often different from its physical
life. The maturity of an issue of bonds generally may not exceed 120 percent of the weighted
average useful life of financed facilities if interest on the bonds is to be tax-exempt. In
determining the economic useful life for this purpose, a safe harbor is available by reference to
periods prescribed by the Internal Revenue Service under its Asset Depreciation Range (ADR)
system.
ENCUMBRANCES: Obligations in the form of purchase orders, contracts or salary
commitments which are chargeable to an appropriation and for which a part of the appropriation
is reserved. They cease to be encumbrances when paid or when an actual liability is established.
EFFECTIVE INTEREST COST: The rate at which the total debt service payable on a
new issue of municipal securities would be discounted to provide a present value equal to the
amount bid on the new issue.
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EFFECTIVE INTEREST RATE: The actual rate of interest earned by the investor on
securities, which takes into account the amortization of any premium or the accretion of any
discount over the period of the investment.
ELIGIBLE SECURITIES: Typically refers to the types of securities authorized under
the bond contract to be held in escrow for the purpose of defeasing bonds.
ENTERPRISE: A defined revenue producing life set of facilities that are optionally
integrated and which have a common service purpose.
An enterprise may consist of all of the facilities of a special district, such as a municipal water
district, or may consist of only a portion of the assets of a general purpose governmental entity,
such as the water system of a city.
ENTERPRISE ACTIVITY: A revenue-generating facility or system that provides
funds necessary to pay debt service on securities issued to finance its construction or
improvement. The debt incurred for such facility or system is self-liquidating when the facility
or system produces sufficient revenues to cover all debt service and other requirements imposed
under the bond contract. Common examples include water and sewer systems and power supply
systems.
ENTERPRISE FUND: A fund established by a governmental entity to account for
operations of an enterprise activity. Enterprise funds generally are segregated as to purpose and
use from other funds and accounts of the governmental entity with the intent that revenues
generated by the enterprise activity and deposited to the enterprise fund will be devoted
principally to funding all operations of the enterprise activity, including payment of debt service
on securities issued to finance such activity. In some cases, however, the governmental entity
may be permitted to use moneys in an enterprise fund for other purposes and to use other funds
to pay costs otherwise payable from the enterprise fund.
ESCROW ACCOUNT: A fund established to hold moneys pledged and to be used
solely for a designated purpose, typically to pay debt service on an outstanding bond issue in a
refunding.
ESCROW DEPOSIT AGREEMENT: An agreement that typically provides for the
deposit of moneys or securities in an escrow account to refund an outstanding issue of municipal
securities. The agreement sets forth the manner in which funds are to be invested (generally in
eligible securities) pending their expenditure and the schedule on which on-going debt service
payments are to be made and early redemptions, if any, of securities are to occur.
EXEMPT SECURITIES or EXEMPTED SECURITIES: Issues not subject to the
registration requirements of the Securities Act of 1933 or the reporting requirements of the
Securities Exchange Act of 1934. In general, obligations of the United States Government,
states, municipalities or other political subdivisions are exempted.
EXPENDITURES: Where accounts are kept on the accrual or modified accrual basis of
accounting, the cost of goods received or services rendered whether cash payments have been
made or not. Where accounts are kept on a cash basis, expenditures are recognized only when
the cash payments for the above purposes are made.
FAIL: A transaction between municipal securities brokers or dealers on which delivery
does not take place on the settlement date. A transaction in which a dealer has yet to deliver
securities is referred to as a fail to deliver, a transaction in which a dealer has not yet received
securities is referred to as a fail to receive.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) OR
(FREDDIE MAC): One of the two presently existing corporations that formerly comprised the
FNMA. As it currently exists, FNMA is a government-sponsored private corporation authorized
to purchase and sell mortgages and to otherwise facilitate the orderly operation of a secondary
market for home mortgages. The purchase of mortgages by FNMA is financed by the sale of its
corporate debentures and notes. Sellers of mortgages may be required to purchased FNMA stock
in connection with some transactions.
FINANCIAL ADVISOR or CONSULTANT: With respect to a new issue of
municipal bonds, a consultant who advises the issuer on matters pertinent to the issue, such as
structure, timing, marketing, fairness of pricing, terms and bond ratings. Such consultant may be
employed in a capacity unrelated to a new issue of municipal securities, such as advising on cash
flow and investment matters. Provides similar services to those of an Investment Banker during
the sale process, but does not underwrite bonds. Additionally serves as agent for the issue during
the pricing of bonds during a negotiated sale.
FIRST COUPON or FIRST INTEREST PAYMENT: The date on which an issuers
initial interest payment to bondholders on a particular security is due.
FISCAL AGENT: An agent (usually an incorporated bank or trust company) designated
by a government to act for it in any of several capacities in the sale, administration and payment
of bonds and coupons.
FISCAL YEAR: A 12-month period of time to which the annual budget applies and at
the end of which a governmental unit determines its financial position and the results of its
operations. For example, the State of Oregon's fiscal year starts July 1 and ends June 30 of the
succeeding calendar year.
FITCH RATINGS: A nationally recognized statistical rating organization that provides
ratings for municipal securities and other financial information to market participants.
FIXED RATE: An interest rate that is set at the time a bond issued and that does not
vary during the term of the bond.
FLOAT: The amount of money represented by checks outstanding and in the process of
collection.
FLOATING or VARIABLE INTEREST RATE: A method of determining the
interest to be paid on a bond issue by reference to an index or according to a formula or other
standard of measurement at intervals as stated in the bond contract. One common method is to
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calculate the interest rate as a percentage of the prime rate published by a named financial
institution on specified dates.
FLOW OF FUNDS: The order and priority of handling, depositing and disbursing
pledged revenues, as set forth in the bond contract. Generally, the revenues are deposited, as
received, into a general collection account or revenue fund for disbursement into the other
accounts established by the bond contract. Such other accounts generally provide for payment of
debt service, debt service reserve, operation and maintenance costs, redemption, renewal and
replacement and other requirements.
FORECLOSURE: A lawsuit by which the issuer of assessments or Mello-Roos bonds
enforces the payment obligation against a defaulting landowner by suing to have the property
sold to repay the debt. Issuers in these land-secured financings promise in the bond documents
to prosecute foreclosure actions against defaulting landowners.
FULL FAITH AND CREDIT: A pledge of the general taxing power for the payment
of debt obligation. Bonds carrying such a pledge are usually referred to as general obligation
bonds or full faith and credit bonds.
FUND: An independent fiscal and accounting entity with a self-balancing set of
accounts recording cash and/or other resources together with all related liabilities, obligations,
reserves, and equities which are segregated for the purpose of carrying on specific activities or
attaining certain objectives.
FUND BALANCE: The excess of an entity's assets over its liabilities. A negative fund
balance is sometimes called a deficit.
GENERAL OBLIGATION BONDS (GO BONDS): Bonds that are secured by the full
faith and credit of the issuer. In Oregon, state general obligation bonds are secured by the state's
full taxing power not otherwise pledged to trust funds. General Obligation bonds issued by local
units of government are secured by a pledge of the issuer's ad valorem taxing power. Ad
valorem taxes necessary to pay debt service on general obligation bonds are not subject to the
constitutional property tax millage limits. Such bonds constitute debts of the issuer and normally
require approval by election prior to issuance. In the event of default, the holders of general
obligation bonds have the right to compel a tax levy or legislative appropriation, by mandamus
or injunction, in order to satisfy the issuer's obligation on the defaulted bonds.
GOOD FAITH DEPOSIT: A sum of money, usually in an amount from 1 percent to 5
percent of the par value of the bond issue, and generally in the form of a certified or cashier's
check, which is enclosed with the bid in a competitive sale. The check is returned to the bidder
if the bid is not accepted, but the check of the successful bidder is retained by the issuer and
applied against the purchase price if the bonds are delivered. In the event the winning bidder
fails to pay for the bonds on the delivery date, the check is usually retained by the issuer as full
or partial liquidated damages.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) or
(GINNIE MAE): One of two corporations formerly comprising the FNMA, GNMA is an
agency of the federal Department of Housing and Urban Development empowered to provide
special assistance in financing home mortgages and is responsible for management and
liquidation of federally owned mortgage portfolios. GNMA's special assistance functions are
carried out by issuing two types of securities pledging the full faith and credit of the United
States Government pass-through securities by which principal and interest payments on
mortgages in specified pools are passed on to the holders of such certificates; and mortgagebacked bonds. Its liquidation functions involve the issuance of participation certificates (PCs)
representing beneficial interest in future payments on a pool of mortgages.
GOVERNMENTAL BONDS: Bonds that are issued by a public agency and not private
activity bonds.
HEDGE BONDS: Bonds and substantially in advance of when monies will be needed
for the purpose being financed, in order to hedge against subsequent interest rate increases.
The Internal Revenue Code contains specific limitations on tax-exempt hedge bonds (as defined
therein).
HIGH-YIELD BOND: A bond with unfavorable credit characteristics that is typically
non-rated or rated below investment grade. A high-yield bond trades at yields substantially
higher than bonds with more favorable credit characteristics and often suffers from lack of
liquidity and marketability.
HOUSING REVENUE BONDS: A bond that is secured by revenues derived from
rentals from financed housing projects or house mortgages. There are two major types of
housing revenue securities:
Single-Family Mortgage Revenue Bonds: Bonds issued to finance mortgages on
single-family homes, either directly by purchasing newly originated or existing mortgage
loans or indirectly by allowing lenders to purchase mortgage loans using bond proceeds.
Repayment of the mortgages may be guaranteed under federal programs or through
private mortgage insurance. The issuance of single-family mortgage revenue bonds is
subject to stringent requirements under Section 103A of the Internal Revenue Code.
Multi-Family Housing Revenue Bonds: Bonds issued to finance construction of multifamily housing projects, typically for the elderly or for moderate-and low-income
families. These securities also may provide financing either directly or through a loansto-lenders program, and may be secured, in whole or in part, by federal guarantees or
subsidies.
INDENTURE: See TRUST INDENTURE.
INDUCEMENT RESOLUTION: The first official action or evidence of official
intent indicating an issuers intent to issue certain types of private activity bonds. Because the
proceeds of such bonds generally may be used on a tax-exempt basis only to finance capital costs
incurred after official action has been taken toward issuing the bonds, the inducement resolution
determines the point after which the user of the project being financed can be reimbursed for
capital costs paid or incurred in connection with the acquisition and construction of the project
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(subject to exceptions for certain expenditures incurred prior to the date of the inducement
resolution).
INDUSTRIAL DEVELOPMENT REVENUE BOND (IDBs, IDRBs, IRBs): Bonds
issued by governmental units, the proceeds of which are used to construct plan facilities for
private industrial concerns. Lease payments made by the industrial concern to the governmental
unit are used to service the bonds. Such bonds may be in the form of general obligation bonds,
revenue bonds, or a combination thereof.
INSTITUTIONAL SALES: Sales of securities to banks, financial institutions,
insurance companies or other business organizations (institutional investors) that possess control
over considerable assets for large scale investing.
INTEREST: Compensation paid or to be paid for the use of money, including amounts
payable at periodic intervals or as discount at the time a loan is made. Interest may be paid or
may Compound at intervals different from the period used to express the interest rate. For
example, interest on current interest Fixed-Rate bonds generally is expressed as an annual rate,
but is paid semiannually, with each semiannual payment being one-half of the amount that would
accrue over an entire year. Interest on Compound Interest Fixed-Rate bonds generally is
compounded semiannually and paid at Maturity. Interest on Variable Rate bonds accrues at a
rate that changes from time to time (perhaps as often as daily), but each such rate is nevertheless
generally expressed as a percentage per year.
The amount of interest that has accrued over a period shorter than the payment or compounding
interval may be determined by one of several different rules. For example, if interest accrues on
the basis of a 360-day year of 12 30-day months, the amount of interest that has accrued since
the last payment or compounding date is calculated assuming that 1/12 of one year's interest
accrues for each complete calendar month and 1/360 of one year's interest accrues for each
additional day. On the other hand, if interest is calculated on the basis of a year of 365 days and
the actual number of days elapsed, the amount of interest accrued since the last payment or
compounding date is calculated assuming that 1/365 of one year's interest accrues each day.
Generally, interest on fixed-rate bonds is calculated on the basis of a 360-day year and interest
on variable rate bonds is calculated on the basis of a 365-day year.
INTEREST RATE: The annual percentage of principal payable for the use of borrowed
money.
INTEREST RATE EXCHANGE AGREEMENT or SWAP: A contract entered into
by an issuer or obligor with a swap provider to exchange periodic interest payments. Typically,
one party agrees to make payments to the other based upon a fixed rate of interest in exchange
for payments based upon a variable rate. Interest rate swap contracts typically are used as
hedges against interest rate risk or to provide fixed debt service payments to an issuer or conduit
borrower dependent on a specified revenue stream for payment of such debt. For example, an
issuer may issue variable rate debt and simultaneously enter into an interest rate swap contract.
The swap contract may provide that the issuer will pay to the swap counter-party a fixed rate of
interest in exchange for the counter-party making variable payments equal to the amount payable
on the variable rate debt. See: SWAP.
INVESTMENT AGREEMENT: An agreement, typically purchased by the Trustee for
an Issue from a financial institution, in which the financial institution agrees to guarantee a
certain investment return on moneys, often Proceeds of the issue, invested under the agreement.
The return provided by the investment agreement may be fixed at a stated interest rate for each
fund or account held by the trustee, or may float at a level related to the Yield on the bonds (if
the bonds bear interest at a Variable Rate) or some other index. Moneys that may be invested
include a fund for the construction or acquisition of the project or the program loans to be
financed, a Reserve Account, and a fund in which moneys to pay debt service on the issue are
accumulated. An investment agreement is usually provided by a highly rated financial
institution, in most instances a commercial bank or insurance company, because the Credit
Rating on the bonds may be used in part on the credit rating (or the rating of the claims-paying
ability) of the institution providing the investment agreement.
Investment agreements are sometimes used as a convenient means of managing the investment
of moneys that are subject to Arbitrage Yield Restriction or Rebate.
INVESTMENT BANKER: A person who works in the Finance Department at a
banking firm and normally works in the field with the security issuer. These people normally do
not work on the underwriting desk nor are they registered to sell or trade bonds. They aid the
issuer in preparing bonds for sale to the underwriter.
INVESTMENT GRADE: The broad credit designation given bonds that have a high
probability of being paid. Such bonds have minor, if any, speculative features and are rated as
least BBB by Standard & Poors Corporation, BBB by Fitch Ratings, or Baa by Moody's
Investors Service. Bank examiners require that most bonds held in bank portfolios be investment
grade.
INVESTMENT OF PROCEEDS: The investment of Proceeds and other moneys
relating to an issue is typically governed by state law and by the indenture or bond resolution.
Either document may prescribe both the types of investments which may be purchased (e.g., U.S.
Treasury obligations, bank certificates of deposit, or corporate obligations with a specified
rating) and the maximum maturity of investments of certain funds (e.g., short term investments
for moneys to be used to make the next debt service payment, longer term investments for
reserves). The Arbitrage rules under federal tax law may regulate the Yield at which proceeds
may be invested.
INVESTOR or BONDHOLDER: Ultimate buyer of any number of bonds from an
issue who intends to hold the bonds for investment purposes.
INVESTOR LETTER: A letter signed by an investor acknowledging the risks
associated with the securities being purchased and usually containing one or more
representations of the investor as to its financial ability to take such risks, its access to
information on the securities, its intent to hold the securities for investment purposes (i.e., not for
21
resale), and/or such other matters determined by the issuer or underwriter of the securities.
Typically, an issuer or underwriter will establish such standards in connection with more risky
securities that it believes should be held only by investors with sufficient resources and market
sophistication to understand and bear the risks involved in such investment. This letter is
sometimes referred to as a big boy letter or sophisticated investor letter. When used in a
private placement, this letter may be referred to as a private placement letter. Some letters
may be said to travel if they include a representation on the part of the investor to the effect
that, if the investor resells the securities, it will require the purchaser to sign an identical letter.
Such a letter is often referred to as a traveling letter.
IRREVOCABLE LETTER OF INSTRUCTIONS: A letter sometimes delivered by
the issuer to the bond trustee and/or escrow agent appointed under an escrow deposit agreement
setting forth the issuers irrevocable instructions to apply moneys held under the escrow deposit
agreement to payment of debt service on a refunded issue of securities and to call such issue for
redemption on a specified date. These instructions often are contained in the escrow deposit
agreement itself, in which case an irrevocable letter of instructions is not necessary.
ISSUER: A state, political subdivision, agency or authority that borrows money through
the sale of bonds or notes.
JUNIOR LIEN BONDS or JUNIOR LIEN REVENUE BONDS: Bonds that have a
subordinate claim against pledged revenues or other security, also known as subordinate lien
bonds.
LEASE or LEASE-PURCHASE BONDS: Revenue bonds paid from lease payments
made on projects financed by bonds.
LEGAL OPINION or APPROVING OPINION: The written conclusions of bond
counsel that the issuance of municipal securities and the proceedings taken in connection
therewith comply with applicable laws, and that interest on the bonds will be exempt from
federal income taxation and, where applicable, from state and local taxation.
LETTER OF CREDIT or LC or L.O.C.: An agreement, usually with a commercial
bank, to honor demands for payment upon compliance with conditions established in the
agreement. Bank letters of credit are sometimes used as additional sources of security for
municipal bond and note issues. Examples are to secure commercial paper and put bonds with
letters of credit.
Customarily, a letter of credit is issued by a commercial bank directly to the trustee and is
irrevocable until a specified date. The letter of credit entitles the trustee, if certain conditions are
met, to draw upon the letter of credit by submitting to the bank a written request for payment (a
draft) and other carefully specified documents and certificates. If the documents submitted for
the draw meet the requirements specified in the letter of credit, the bank must pay as provided in
the letter of credit.
Letters of credit are also used as Liquidity Facilities in connection with obligations such as
Commercial Paper or Demand Bonds. The trustee may draw upon the letter of credit if
commercial paper has matured and not been rolled over by issuing new commercial paper, or
if demand bond owners put them to the issuer, and the Remarketing Agent is unable to find
new purchasers.
A draw on a letter of credit results in an obligation by the account party on the letter of credit
to reimburse the bank for the amount of the draw, plus interest if the reimbursement is not
immediate. The account party may be either the issuer or, in the case of a Conduit Financing, the
Non-governmental Borrower.
A letter of credit may be either a direct pay letter of credit or a standby letter of credit. A
direct pay letter of credit entitles the trustee to draw on the letter of credit for all debt service
payments. Moneys that would otherwise be available to pay debt service are then used to
reimburse the bank. Because payments of principal and interest are made from moneys of the
bank rather than of the issuer, receipts by the owners of bonds are not subject to being reclaimed
from the owners of bonds under the federal Bankruptcy Code.
In the case of a standby letter of credit, the trustee only draws on the letter of credit in the event
moneys available to pay debt service are insufficient. In this type of financing, to assure that
payments to owners of bonds are not subject to being reclaimed in a bankruptcy, moneys for debt
service are typically required to be on deposit several months in advance of the date on which
payments are made to the owners of bonds. These moneys are then seasoned for the period
required extinguishing any potential claim to them in a bankruptcy.
LEVEL DEBT SERVICE: An arrangements of serial maturities in which the amount
of principal maturing increases at approximately the same rate as the amount of taxes, special
assessments or service charges imposed by a governmental unit.
LIABILITY: Debt or other legal obligations arising out of transactions in the past which
must be liquidated, renewed or refunded at some future date. Note: The term does not include
encumbrances.
LIBOR: A benchmark interest rate upon which many transactions are based.
Obligations of parties to such transactions are typically expressed as a spread to LIBOR. The
term is an acronym for London Inter-Bank Offered Rate.
LIMITED OFFERING: An offering of a new issue of municipal securities sold to a
limited number of investors that meet certain established standards for qualifying as a purchaser
of the securities. The term typically refers to an offering exempt from the provisions of Rule
15c2-12 as a primary offering of municipal securities in authorized denominations of $100,000
that are sold to no more than 35 persons each of whom the underwriters reasonably believe: (A)
has such knowledge and experience in financial and business matters that it is capable of
evaluating the merits and risks of the investment; and (B) is not purchasing for more than one
account or with a view to distributing the securities.
LIMITED TAX BOND: A bond secured by the pledge of a specified tax or category of
taxes.
LIMITED TAX GENERAL OBLIGATION BOND: A general obligation bond
secured by the pledge of ad valorem tax that is limited as to rate or amount.
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LINE OF CREDIT: A line of credit is a contract between the Issuer and a bank that
provides a source of borrowed moneys to the issuer in the event that moneys available to pay
Debt Service (e.g., on Commercial Paper) or to purchase a Demand Bond are insufficient for that
purpose. If a draw on line of credit is necessary, the issuer notifies the bank and executes a note
for the amount of the loan.
LIQUIDITY (of investment): The ability to convert an investment to cash promptly
with minimum risk to principal or accrued interest.
LIQUIDITY FACILITY: A letter of credit, standby bond purchase agreement or other
arrangement used to provide liquidity to purchase securities that have been tendered to the issuer
or its agent but which cannot be immediately remarketed to new investors. The provider of the
liquidity facility, typically a bank, purchases the securities (or provides funds to the issuer or its
agent to purchase the securities) until such time as they can be remarketed.
LOAN AGREEMENT: An agreement under which the Proceeds of a Conduit
Financing are loaned to the non-governmental borrower and the borrower agrees to pay to the
Issuer or the Trustee the amounts necessary to pay Debt Service on the Issue.
A loan agreement usually includes a set of Covenants, financial tests and restrictive provisions
governing the borrower and the project financed.
LOCAL GOVERNMENT INVESTMENT POOL (LGIP): An investment trust
established by a state or local governmental entity or instrumentality that serves as a vehicle for
the pooled investment of public moneys of participating governmental units. Participants
purchase shares or units in the trust and trust assets are invested in a manner consistent with the
trusts stated investment objectives.
LONG-TERM DEBT: Debt with a maturity of more than one year after the date of
issuance.
MANAGEMENT FEE: (1) A component of the underwriters discount. See: SPREAD
or UNDERWRITERS GROSS SPREAD.
(2) A fee paid by an issuer of municipal fund securities to its investment advisor for
management of the underlying investment portfolio and other services rendered. Typically, the
management fee is based on a percentage of the portfolios asset value and is paid from portfolio
assets. Thus, the management fee ultimately is paid by the investor.
MANAGER: The leading member or members of an underwriting syndicate charged
with primary responsibility for conducting the affairs of the syndicate. The manager generally
takes the largest underwriting commitment.
Lead or Senior Manager: A single underwriter serving as head of the syndicate. The
lead manager generally handles negotiations in a negotiated underwriting of a new issue
of municipal securities and directs the processes by which bids are calculated for a
competitive underwriting. The lead manager generally signs contracts on behalf of the
syndicate and is charged with allocating bonds among the members of the syndicate
according to the terms of the syndicate account and orders received.
Joint or Co-Manager: The terms may be used in two contexts. In a negotiated
underwriting, the issuer may appoint multiple underwriters, each of which is referred to
as a joint or co-manager. When a large syndicate is composed of several smaller
syndicates that may operate as syndicates themselves, each such smaller syndicate will be
represented by its manager in the consolidation of syndicates.
Each group's
representative is a joint manager of the consolidated syndicate. In either event, one of the
joint managers is selected as lead manager.
MANDATORY TENDER: The requirement that a holder of a security surrender the
security to the issuer or its agent (e.g., a tender agent) for purchase. The tender date may be
established under the bond contract or may be specified by the issuer upon the occurrence of an
event specified in the bond contract. The purchase price typically is at par. This term is
sometimes referred to as a mandatory put.
MARKET VALUE: The price at which a security can be currently traded in the market,
also known as the market price.
MARK-DOWN: A form of remuneration received by a broker-dealer when purchasing
securities as principal from a customer. Mark-down generally is considered to be the differential
between the prevailing market price of the security at the time the broker-dealer purchases the
security from the customer and the lower price paid to the customer by the broker-dealer. MSRB
rules require that the price at which a broker-dealer purchases a municipal security from a
customer be fair and reasonable, taking into consideration all relevant factors. MSRB rules do
not provide numerical guidelines regulating the amount of mark-down but do recognize that the
mark-down can affect whether the total price paid to a customer is fair and reasonable.
MARK-TO-MARKET: A process whereby the carrying value of a security is adjusted
to reflect its current market value. Certain regulatory requirements mandate that broker-dealers
carry positions at prices that reflect current market values. Issuers or their agents also must
generally adjust the value of securities held in a debt service reserve fund or other bond-related
fund, or of investments held in a local government investment pool, to reflect current market
value.
MARK-UP: A form of remuneration received by a broker-dealer when selling securities
as principal to a customer. Mark-up generally is considered to be the differential between the
prevailing market price of the security at the time the broker-dealer sells the security to the
customer and the higher price paid by the customer to the broker-dealer. MSRB rules require
that the price at which a broker-dealer sells a municipal security to a customer be fair and
reasonable, taking into consideration all relevant factors. MSRB rules do not provide numerical
guidelines regulating the amount of mark-up but do recognize that the mark-up can affect
whether the total price paid by a customer is fair and reasonable.
MARKETABILITY: The ease or difficulty with which securities can be sold in the
market. An issues marketability depends upon many factors, including its coupon, security
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provisions, maturity, credit quality and the existence of ratings. In the case of a new issue,
marketability also depends upon the size of the issue, the timing of its issuance, and the volume
of comparable issues being sold.
MASTER RESOLUTION or MASTER INDENTURE: The document stating the
general terms and conditions under which an issuer can offer more than one series of bonds.
Among the terms that generally must be satisfied in order for a new series of bonds to be issued
is the additional bonds test. Typically, an issuer will enter into a supplemental indenture in
connection with each series of bonds issued under a master indenture.
MATERIAL/MATERIAL FACTS: Facts that a reasonably prudent investor would
want to know in making an investment decision.
MATERIAL EVENT DISCLOSURE: Disclosure of certain enumerated events
affecting a municipal security required to be made under a continuing disclosure agreement
meeting the requirements of Rule 15c2-12. These events include the following, if material: (1)
principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled
draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit
enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or
their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the
security; (7) modifications to rights of securities holders; (8) bond calls; (9) defeasances; (10)
release, substitution, or sale of property securing repayment of the securities; (11) rating
changes; and (12) failure to provide annual financial information as required.
MATERIAL OMISSION: The failure to include in an official statement or other
offering document any information that is necessary to produce full disclosure. The term arises
from the language of Rule 10b-5, which provides that it is unlawful in connection with the
purchase or sale of securities to make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the light of the circumstances
under which they were made, not misleading.
MATURITY or MATURITY DATE: The date the principal of a municipal security
becomes due and payable to the security holder.
MATURITY SCHEDULE: An amortization schedule listing the maturity dates and
maturity values of each maturity of an issue of bonds.
MATURITY VALUE: The amount (other than a periodic interest payment) that will be
received at the time a security is redeemed at its maturity. On most securities the maturity value
equals the par value; on zero coupon, compound interest and multiplier bonds, however, the
maturity value will equal the principal amount of the security at issuance plus the accumulated
investment return on the security.
MONEY MARKET INSTRUMENTS: Obligations that are commonly traded in the
money market. Money market instruments are generally short-term and highly liquid. In
addition to certain U.S. Government securities, the following are commonly traded in the money
market:
Bankers Acceptance or BA: A draft or bill of exchange most commonly generated in

import or export transactions, representing moneys due at a future date in connection with
the transaction, the payment of which has been guaranteed by the accepting bank. Bas
are typically sold on a discounted basis in a wide variety of denominations. Many BAs
are eligible for discounting at the Federal Reserve.
Certificate of Deposit or CD: A negotiable instrument representing a large time deposit
at a commercial bank. Most CDs are interest bearing (typically paying interest at
maturity), but some discounted CDs are issued. CDs are typically sold in denominations
of from $100,000 to $1,000,000 principal amount.
Eurodollar Deposit: A time deposit of Eurodollars. Eurodollars are U.S. dollars on
deposit at a branch of a U.S. bank or a foreign bank located outside the United States.
Repurchase Agreement or RP or REPO: An agreement consisting of two
simultaneous transactions whereby one party purchases securities from a second party,
and the second party agrees to repurchase the securities on a certain future date at a price
which produces an agreed-upon rate-of-return.
Reverse Repurchase Agreement or Reverse REPO or Reverse: An agreement
consisting of two simultaneous transactions whereby one party purchases securities from
a second party, and the second party agrees to repurchase the securities on a certain future
date at a price which produces an agreed upon rate-of-return.
MOODY'S INVESTORS SERVICE: A nationally recognized statistical rating
organization that provides ratings for municipal securities and other financial information to
market participants.
MORAL OBLIGATION BOND: A bond, usually issued by a state agency or authority,
that is secured by a non-binding covenant that any amount necessary to make up any deficiency
in pledged revenues available for debt service will be included in the budget recommendation
made to the state legislature or other legislative body, which may appropriate moneys to make up
the shortfall. The legislature or other legislative body, however, is not legally obligated to make
such an appropriation.
MORTGAGE REVENUE BONDS (Housing Bonds): Revenue bonds paid from
mortgage payments or rental payments from housing projects financed by bonds (e.g., State
Housing Division Low-Income Housing Bonds). Note: State of Oregon bonds issued for the
elderly are General Obligation Housing Bonds.
MUNICIPAL BONDS or MUNICIPALS: A general term referring to bonds of local
government subdivisions such as cities, towns, villages, counties and special districts as well as
states and subdivisions thereof, which are exempt from federal income taxation.
MUNICIPAL SECURITIES: A general term referring to securities issued by local
governments subdivisions such as cities, towns, villages, counties, or special districts, as well as
securities issued by states and political subdivisions or agencies of states. A prime feature of
these securities is that interest on them is generally exempt from federal income taxation.
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MUNICIPAL SECURITIES RULEMAKING BOARD (MSRB): The Municipal

Securities Rulemaking Board is an independent self-regulatory organization, consisting of
representatives of securities firms, dealer banks and the public, that is charged with primary
rulemaking authority over dealers, dealer banks and brokers in connection with their municipal
securities activities. MSRB rules are approved by the SEC and enforced by NASD for brokerdealers other than dealer banks and by the appropriate regulatory agencies for dealer banks.
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. (NASD: A selfregulatory organization, formerly known as the National Association of Securities Dealers, Inc.,
that enforces MSRB rules applicable to the municipal securities activities of its member brokerdealers, administers the MSRBs professional qualification examinations and handles arbitration
proceedings relating to municipal securities for its member broker-dealers and for dealer banks.
NASD also adopts rules governing the conduct of its members with respect to most types of
securities other than municipal securities.
NATIONAL ASSOCIATION OF BOND LAWYERS (NABL): A professional
organization of bond counsel and other public finance lawyers organized to provide education in
the law relating to municipal securities, a forum for the exchange of ideas as to law and practice,
and advice and comment with respect to legislation, regulations, rulings and other action or
proposals relating to municipal securities.
NATIONALLY RECOGNIZED MUNICIPAL SECURITIES INFORMATION
REPOSITORY (NRMSIR): An entity designated by the SEC to receive final official
statements, material event notices and annual financial information under Rule 15c2-12.
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION
(NRSRO): A rating organization designated by the SEC as being nationally recognized. See:
FITCH RATINGS; MOODYS INVESTORS SERVICE, INC.; RATING AGENCY;
STANDARD & POORS.
NEGATIVE COVENANTS: Promises contained in the bond contract, whereby the
issuer obligates itself to refrain from performing certain actions. One common example of a
negative covenant is a promise to sell or encumber the project.
NEGOTIATED SALE: The sale of a new issue of municipal securities by an issuer
through an exclusive agreement with an underwriter or underwriting syndicate selected by the
issuer. A negotiated sale is distinguished from a competitive sale, which requires public bidding,
by the underwriters. The primary points of negotiation for an issuer are the interest rate and
purchase price on the issue. The sale of a new issue of securities in this manner is also known as
a negotiated underwriting. Unlike a Competitive Sale, the underwriter is customarily active in
all aspects of structuring the negotiated deal. Selection of the underwriter can be based on many
different considerations including, but not limited to, expertise with a particular type of issue,
market expertise, reputation, guaranties of maintaining a maximum gross spread as well as prior
relationships with the issuer.
NET INTEREST COST (NIC): A method of computing the interest expense to the
issuer of bonds, which may serve as the basis of award in a competitive sale. NIC takes into
account any premium or discount applicable to the issue, as well as the dollar amount of coupon
interest payable over the life of the issue. NIC does not take into account the time value of
money (as would be done in other calculation methods, such as the true interest cost (TIC)
method). The term net interest cost refers to the overall rate of interest to be paid by the issuer
over the life of the bonds. The formula for calculating the NIC rate is:
Total Coupon Interest Payments + Discount (- Premium)
Bond Years
NET OFFERING: An offering made at a net price without any concession.
NET PRICE: The price at which a security is offered to the general public. The price of
a transaction between municipal securities professionals is generally the net price less a
concession.
NET PROCEEDS: Bond proceeds less costs of issuance, costs of any bond insurance or
other credit enhancement and any reserves.
NET REVENUES: The amount of money available after subtracting from gross
revenues such costs and expenses as may be provided for in the bond contract. The costs and
expenses most often deducted are operations and maintenance expenses.
NEW ISSUE: Municipal securities sold during the initial distribution of the issue in a
primary offering by the underwriter or underwriting syndicate. For purposes of MSRB rules,
new issue municipal securities are municipal securities (other than commercial paper) that are
sold by a broker-dealer during the issues underwriting period. All broker-dealers selling a new
issue of municipal securities to customers or to other broker-dealers must meet certain
requirements regarding delivery of official statements and certain other information. This
obligation is not limited to broker-dealers acting as underwriters or selling group members.
NON-AMT BOND: A tax-exempt bond, interest on which is not subject to the federal
alternative minimum tax.
NON-APPROPRIATION CLAUSE: A provision of a bond contract that allows the
government to terminate a lease securing a long-term certificate of participation or other revenue
obligation financing if its appropriating body does not appropriate funds for the lease payments.
This clause permits a long-term financing without technically incurring debt. Such obligations
are not considered debt in most states and thereby generally are not subject to debt limitations
because the lease payments are characterized as payments for use of the facilities rather than as
payments on a promise to repay bonded debt.
NON-CALLABLE BOND: A bond that cannot be redeemed at the issuer's option
before its stated maturity date.
NON-LITIGATION CERTIFICATE: A certificate signed on behalf of the issuer and
dated as of and delivered at the Closing to the effect that there is no litigation known to the issuer
to be currently pending, threatened, or contemplated that would affect in any materially adverse
manner the validity or security of the bonds issued; the issuance, execution or delivery of the
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bonds issued; the existence or boundaries of the issuing entity (on general obligation bonds); or
the validity or legality of provisions authorizing the payment of principal and interest on the
bonds. The non-litigation certificate may also affirm the incumbency of specified officers, or
this may be done in a separate document.
If litigation is pending, it is customarily described in the non-litigation certificate, presuming that
the bonds are to be issued in spite of such litigation, the issuer and the purchasers of the bonds
must be able to conclude that the litigation does not present a Material risk to the Investors. One
method of reaching that conclusion is to obtain, if available, an opinion of counsel to the effect
that there is no merit to the adverse claims presented in the litigation.
NOTE: A short-term obligation of an issuer to repay a specified principal amount on a
certain date, together with interest at a stated rate, usually payable from a defined source of
anticipated revenues. Notes usually mature in one year or less, although notes of longer
maturities are also issued. The following types of notes are common in the municipal market:
Bond anticipation notes (BANs) Notes issued by a governmental unit, usually for
capital projects, that are paid from the proceeds of the issuance of long-term bonds.
Commercial paper (CP) See: COMMERCIAL PAPER.
Construction loan notes (CLNs) Notes issued to fund construction of projects
(typically housing projects). CLNs are repaid by the permanent financing, which may be
provided from bond proceeds or some pre-arranged commitment, such as a GNMA
takeout.
Grant anticipation notes (GANs) Notes issued on the expectation of receiving grant
moneys, usually from the federal government. The notes are payable from the grant
funds, when received.
Revenue anticipation notes (RANs) Notes issued in anticipation of receiving revenues
at a future date.
Tax anticipation notes (TANs) Notes issued in anticipation of future tax receipts, such
as receipts of ad valorem taxes that are due and payable at a set time of year.
Tax and revenue anticipation notes (TRANs) Notes issued in anticipation of
receiving future tax receipts and revenues at a future date.
NOTICE OF REDEMPTION: A publication announcing the issuers intention to call
some or all outstanding bonds prior to their stated maturity dates.
NOTICE OF SALE: A publication by an issuer describing the terms of sale of an
anticipated new offering of municipal securities. It generally contains the date, time and place of
sale, amount of issue, type of security, amount of good faith deposit, basis of award, name of
bond counsel, maturity schedule, method of delivery, time and place of delivery, and bid form.
Issuers use it to solicit bids from prospective Underwriters for a competitive sale of bonds.
The notice will commonly be published in a financial industry journal, usually The Bond Buyer
or The Wall Street Journal (and, if required by law, a local newspaper of general circulation) and
will list the details concerning an issue. This my include the date, time and place of the sale, the
amount of the Issue, Maturity schedule and Redemption provisions; legal authority for sale; the
manner in which the bid is to be delivered; the type of Security (general obligation, pledge of
Revenues, etc.); limitations on Interest Rates and interest payment dates; Denominations and
Registration provisions (registered, Book Entry, etc.); names of Bond Counsel and any other
attorney delivering opinions, Credit Enhancement facilities, and other details.
The notice of sale, the winning bid and the issuer's acceptance of the winning bid together
constitute an agreement for the purchase and sale of the issue in a competitive sale.
OBLIGATED PERSON: Any person, including an issuer of municipal securities, who
is either generally or through an enterprise, fund, or account of such person committed by
contract or other arrangement to support payment of all, or part, of the obligations on the
municipal securities (other than providers of credit enhancement).
OBLIGOR: The party having an obligation with respect to the payment of debt service
on bonds, typically but not always the borrower (such as a conduit borrower) of bond proceeds.
ODD COUPON: An interest payment for a period other than the standard six months.
A payment for a period of less than six months is a short coupon; a payment for a period of
more than six months is a long coupon. Usually only the first interest payment on an issue of
bonds is an odd coupon, but some issues have an odd last coupon. See: FIRST COUPON.
ODD LOT: A principal amount of securities that is smaller than what is considered a
normal trading unit. An odd lot is often traded at a price that includes a differential attributable
to the size of the lot (e.g., a broker-dealer may bid lower for an odd lot than for a larger block).
OFFER: A proposal to sell securities at a stated price or yield.
OFFERING CIRCULAR: A document generally prepared by the underwriters about
an issue of securities expected to be offered in the primary market. The document discloses to
the investor basic information regarding the securities to be offered and is used as an
advertisement for the sale of the securities. The term is also used to refer to a document prepared
and used by broker-dealers when selling large blocks of previously issued securities in the
secondary market.
OFFERING PRICE: The price or yield at which broker-dealers offer securities to
investors.
OFFICIAL ACTION: See: INDUCEMENT RESOLUTION.
OFFICIAL STATEMENT or FINAL OFFICIAL STATEMENT or OS: A
document discloses material information on a new issue of municipal securities including the
purposes of the issue, how the securities including the purposes of the issue, how the securities
will be repaid, and the financial, economic and social characteristics of the issuing government.
31
Investors, analysts and rating agencies may use this information to evaluate the credit quality of
the securities.
Federal securities laws generally require that if an official statement is used to market an issue, it
must fully disclose all facts that would be of interest (material) to a potential buyer of bonds of
the issue. For example, for a general obligation issue, the most important information may
concern the financial health of the issuer, its tax base, and the economic health of the
jurisdiction. For a water revenue issue, the most important information may be the financial
health and physical condition of the water system enterprise, water supply and economic health
of the service area. For a conduit financing, the most important information may concern the
financial health of the Non-governmental Borrower. The materiality of such information may
also depend upon whether or not Credit Enhancement is used.
Under MSRB rules, a final official statement (which is printed only after the final terms of the
bonds are available) must (if available) be delivered by the broker or dealer to purchasers of
bonds no later than the settlement date of the transaction. An official statement may also be
called an offering circular, offering memorandum or bond prospectus.
OPEN END LIEN: Provisions in a bond contract that permit the issuer to issue
additional bonds that have an equal claim on the pledged revenues under certain circumstances
(typically upon satisfaction of an additional bonds test).
ORDER PERIOD: The period of time following the competitive sale of a new issue
during which non-priority orders submitted by account members are allocated without
consideration of time of submission. The manager usually determines the length of the order
period. In a negotiated sale the order period is the period of time established by the manager
during which orders are accepted from account members. The order period generally precedes
the sale by the issuer. At times, order periods are established at subsequent points in the life of a
syndicate. Such order periods occur when securities are repriced or market conditions improve
dramatically.
ORDINANCE: The official action of the governing body of an issuer, typically enacted
by a vote of the members of the governing body at a public meeting. The procedures for
enacting an ordinance are often more formal than those for adopting a resolution. For example,
in many jurisdictions, an ordinance cannot be finally enacted at the same meeting at which it is
introduced, whereas a resolution may often be adopted at the same meeting. Some jurisdictions
permit the incurrence of debt through adoption of a resolution while others require enactment of
an ordinance. Compare: RESOLUTION.
ORIGINAL ISSUE DISCOUNT (O.I.D.): An amount by which the par value of a
security exceeded its public offering price at the time of its original issuance. The original issue
discount is amortized over the life of the security and, on a municipal security, is generally
treated as tax-exempt interest. When the investor sells the security before maturity, any profit
realized on such sale is calculated (for tax purposes) on the adjusted book value, which is
calculated for each year the security is outstanding by adding the accretion value to the original
offering price. The amount of the accretion value (and the existence and total amount of original
issue discount) is determined in accordance with the provisions of the Internal Revenue Code
and the rules and regulations of the Internal Revenue Service.
ORIGINAL ISSUE DISCOUNT BOND or O.I.D. BOND: A bond that was sold at the
time of issue at a price that included an original issue discount.
ORIGINAL ISSUE PREMIUM: The amount by which the public offering price of a
security at the time of its original issuance exceeded its par value. The original issue premium is
amortized over the life of the security and results in an adjustment to the basis of the security.
Original issue premium generally is not deductible for federal income tax purposes. The amount
of original issue premium received by the issuer in a primary offering, also known as the bond
premium, is generally treated as proceeds of the issue.
OUTSTANDING: In general as used with respect to the Principal of an Issue,
remaining unpaid. However, the terms of Indentures and Bond Resolutions often provide that
bonds that are not yet paid but are the subject of a Defeasance or an Advance Refunding are
treated as no longer being outstanding.
OVERLAPPING DEBT: That portion of the debt of other governmental units for
which residents of a particular municipality are responsible. Normally, an issuer is located either
wholly or partly within geographic limits of other units. Debt is generally apportioned based on
relative assessed values. Generally, the amount of debt attributed to a municipality from an
overlapping district is determined by multiplying the total assessed value of the overlapping
jurisdiction by the percentage that lies within the limits of the reporting municipality. Special
assessment debt is allocated on the basis of the ratio of assessments receivable in each
jurisdiction.
PAR: 100 percent of face value of a security. Par or par value refers to the Principal
amount of a bond. A bond may be purchased 1) at par, meaning the price of the bond is equal
to its principal amount; 2) below par, meaning the price is below its principal amount; or 3)
above par, meaning the price is above its principal amount.
PARITY BONDS: Two or more issues of bonds that have the same priority of claim or
lien against pledged revenues. Parity bonds are also referred to as pari passu bonds. For
example, two issues of revenue bonds are said to be on a parity with each other if the Revenues,
projects, program loans and other assets securing the first issue also secure the second issue, and
vice versa.
PARITY TEST: See: ADDITIONAL BONDS TEST.
PARTICIPANT: An organization that has access to and uses the facilities of a
registered clearing agency for the confirmation, clearance and/or settlement of securities
transactions. An organization that is a member of a registered clearing agency is referred to as a
direct participant; one which is not a member but which uses a clearing agent who is a member
is considered an indirect participant.
PAR VALUE: The amount of principal that must be paid at maturity. The par value is
also referred to as the face amount of a security.
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PAY-AS-YOU-GO STRATEGY: A term used to describe the financial policy of a

governmental unit that finances all of its capital outlays from current revenues rather than by
borrowing. A governmental unit that pays for some improvements from current revenues and
others by borrowing is said to employ a partial or modified pay-as-you-go strategy.
PAYING AGENT: The entity responsible for transmitting payments of interest and
principal from an issuer of municipal securities to the security holders. The paying agent is
usually a bank or trust company, but may be the treasurer or some other officer of the issuer.
The paying agent may also provide other services for the issuer such as reconciliation of the
securities and coupons paid, destruction of paid securities and coupons, and similar services.
PAYMENT DATE: The date on which interest, or principal and interest, is payable on
a municipal security. Interest payment dates usually occur semi-annually for bonds.
PERMITTED INVESTMENTS: The instruments in which moneys held in various
funds and accounts may be invested pursuant to the provisions of the bond contract. Compare:
ELIGIBLE SECURITIES.
PLACEMENT AGENT: A broker-dealer acting as agent who places a new issue of
municipal securities directly with investors on behalf of the issuer.
PLEDGE: To grant a security interest in or lien on an asset to provide security for the
repayment of bonds or the performance of some other obligation.
PLEDGED REVENUES: The moneys obligated for the payment of debt service and
other deposits required by the bond contract.
Gross Pledge or Gross Revenue Pledge: A pledge that all revenues received will be
used for debt service prior to deductions for any costs or expenses.
Net Pledge or Net Revenue Pledge: A pledge that all funds remaining after certain
operational and maintenance costs and expenses are paid will be used for payment of debt
service.
POINT/BASIS POINT: One percent of par value. Because municipal dollar prices are
typically quoted in terms of a percentage of $1,000, a point is worth $10 regardless of the actual
denomination of a security. A security discounted 2 points, or $25, is quoted at 97 (97
percent of its value), or $975 per $1,000.
PRELIMINARY OFFICIAL STATEMENT or RED HERRING or POS: A
preliminary version of the official statement which is used by an issuer or underwriters to
describe the proposed issue of municipal securities prior to the determination of the interest
rate(s) and offering price(s). The preliminary official statement may be used by issuers to gauge
underwriters' interest in an issue and is often relied upon by potential purchasers in making their
investment decisions. Normally, offers for the sale of or acceptance of securities are not made
on the basis of the preliminary official statement, and a statement to that effect appears on the
face of the document generally in red print, which gives the document its nickname red
herring. The preliminary official statement is technically a draft.
PREMIUM: The amount by which the price of a bond exceeds its Principal amount or
Par value. A Redemption premium is the premium an issuer is required (by the terms of a bond)
to pay to redeem (Call) the bond prior to it's stated maturity.
PREMIUM CALL PRICE: A price, in excess of par value (or compound accreted
value, in the case of certain original issue discount or zero coupon bonds) and expressed as a
percentage of par (or compound accreted value), that the issuer agrees to pay upon redemption of
its outstanding bonds prior to the stated maturity date. The amount of premium to be paid often
declines as the possible redemption date approaches the maturity date.
PRE-SALE ORDER: An order given to the syndicate manager, prior to the purchase of
securities from the issuer, that indicates a prospective investors intention to purchase the
securities at a predetermined price level. Pre-sale orders, almost exclusively seen in competitive
sales, are normally afforded top priority in allocation of securities from the syndicate.
PRESENT VALUE: The value at the current time of a cash payment which is expected
to be received in the future, allowing for the fact that an amount received today could be invested
to earn interest for the period to the future date.
PRESENT VALUE SAVINGS: Difference expressed in terms of current dollars
between the debt service on an refunded bond issue and the debt service on a refunding bond
issue for an issuer. It is calculated by discounting the difference in the future debt service
payments on the two issues at a given rate.
PRICE: The amount to be paid for a bond, usually expressed as a percentage of par
value but also sometimes expressed as the yield that the purchaser will realize based on the dollar
amount paid for the bond.
PRICING: The determination (or redetermination) by the Underwriters in a Negotiated
Sale of the Interest Rates and Reoffering prices at which an Issue will be offered to Investors.
Generally, the underwriters will have mailed a Preliminary Official Statement to potential
investors and to other underwriters approximately one to two weeks prior to the pricing date. On
the pricing date the underwriters will price the issue at the lowest marketable interest cost to the
issuer. The price must be agreeable to the issuer. The underwriters then offer the bonds to
investors on the agreed terms and if an appropriate number of orders are received, the issuer and
the underwriters enter into a Bond Purchase Contract on those terms. If not enough or too many
orders are received on the original terms, the issue may be repriced to be more attractive to
investors or to give a better rate to the issuer, as the case may be.
PRIMARY MARKET: The market for new issues of municipal securities.
PRIMARY OFFERING: For purposes of Rule 15c2-12 and MSRB Rule G-36, an
offering of municipal securities directly or indirectly by or on behalf of the issuer, including
certain remarketings of municipal securities.
PRINCIPAL: The face amount or par value of a security payable on the maturity date.
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PRIOR ISSUE: An issuers outstanding issue of municipal bonds. The term is often
used in the context of a refunding to denote the obligations being refinanced, sometimes called
refunded bonds.
PRIORITY PROVISIONS: The rules adopted by an underwriting syndicate specifying
the priority to be given different types of orders received by the syndicate. MSRB rules require
syndicates to adopt priority provisions in writing and to make them available to all interested
parties. For competitive underwritings, orders received prior to the sale (pre-sale orders)
generally are given top priority. In some negotiated offerings, retail orders or other restrictions
designated by the issuer are given priority. Once the order period begins for either negotiated or
competitive underwritings, the most common priority provision gives group net orders top
priority, followed by designated orders and member orders. These types of orders are described
below:
Designated Order An order submitted by a syndicate member on behalf of a buyer on
which all or a portion of the takedown is to be credited to certain members of the
syndicate. The buyer directs the percentage of the total designation each member will
receive. Generally two or more syndicate members will be designated to receive a
portion of the takedown.
Group Net Order An order that, if allocated, is allocated at the public offering price
without deducting the concession or takedown. A group net order benefits all syndicate
members according to their percentage participation in the account and consequently is
normally accorded the highest priority of all orders received during the order period.
Member Order An order submitted by a syndicate member where the securities would
be confirmed to that member at syndicate terms (e.g., less the total takedown).
Other priorities, such as retail orders or orders from local residents, may supercede those noted
above.
PRIVATE ACTIVITY BONDS: Under federal tax law, bonds of which
(i) 10 percent or more of the Proceeds are used in the trade or business of nongovernmental persons and 10 percent or more of the Debt Service is secured by or
derived from property used in the trade or business of non-governmental persona; or
(ii) 5 percent or more of the Proceeds are loaned to non-governmental persons.
For this purpose, non-governmental persons are treated users of facilities that they
lease and of facilities that they lease and of facilities the output of which they agree to purchase.
Non-governmental persons may be treated as users of facilities by reason of long-term
management contracts. The United States government is treated as a non-governmental person.
Interest on Private Activity Bonds is tax-exempt only if certain requirements are satisfied.
In particular, private activity bonds are tax-exempt only
(i) if they relate to certain qualified single family mortgage loan programs, qualified
small issues for manufacturing facilities, qualified redevelopment programs, qualified
student loan programs, qualified 501(c)(3) Bonds; or
(ii) if at least 95 percent of the proceeds are used to provide one or more Exempt
Facilities.
With the exception of qualified 501(c)(3) bonds and certain bonds for government owned
seaports or airports, private activity bonds are tax-exempt only if they are allocated a portion of
the State's Volume Cap.
PRIVATE PLACEMENT: With respect to municipal securities, a negotiated sale in
which the new issue securities are sold directly to institutional or private investors rather than
through a public offering. Issuers often require investors purchasing privately placed securities
to agree to restriction as to resale; the investors may provide a signed agreement to abide by
those restrictions.
PRIVATE PLACEMENT MEMORANDUM: A document functionally similar to an
official statement used in connection with an offering of municipal securities in a private
placement. Circulation of a private placement memorandum often is strictly controlled to avoid
distribution to investors who may not be qualified to purchase the securities.
PROCEEDS/ORIGINAL PROCEEDS/GROSS PROCEEDS: The amount paid to
the Issuer by the first purchaser (usually an Underwriter) of a new Issue. Bond proceeds are
equal to the Principal amount of the bonds issued, plus Premium or less Discount, and plus
Accrued Interest.
For example, with respect to an issue in the Par amount of $1,000,000, with an underwriters'
discount of 2 percent, and $3,000 of accrued interest to the Closing Date, the underwriters would
purchase the issue for $983,000 ($1,000,000, minus $20,000, plus $3,000). Under the federal tax
regulations, this amount is called the original proceeds.
The term Gross Proceeds refers to all of the moneys relating to an issue which are subject to
Arbitrage limitations and Rebate under the Internal Revenue Code. Gross proceeds include
original proceeds, investment earnings on proceeds, moneys in a Sinking Fund, moneys in a
Reserve Account, and securities Pledged by the Issuer or a Non-governmental Borrower as
security for the payment of Debt Service.
PRODUCTION: The expected spread in a new issue offering.
PUBLIC OFFERING: The sale of bonds (generally through an underwriter) to the
general public (or a limited section of the general public).
The offer is usually disclosed by an Official Statement in which the terms of the financing and its
structure are set forth, allowing the investor to make an informed decision about the merits of the
proposed securities. The issuer may market a proposed public offering either via Competitive
Sale or Negotiated Sale. In addition to public offerings, bonds are also sold in limited public
offerings and Private Placements.
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PUBLIC OFFERING PRICE: The price at which a new issue of municipal securities
is offered to the public at the time of original issuance. This price, sometimes referred to as the
initial offering price, is equal to the par value less original issue discount or the par value plus
original issue premium, as appropriate, usually expressed as a percentage of par.
QUALIFIED 501(c)(3) BONDS: Private Activity Bonds issued for certain nonprofit
organizations (including hospitals and universities) descried in Section 501(c)(3) of the Internal
Revenue Code.
To the extent bonds do not finance hospital facilities, they will be treated as Qualified 501(c)(3)
Bonds only if the bonds allocated to any given 501(c)(3) organization, together with the
outstanding aggregate face amount of all prior tax exempt bonds allocated to the same
organization, does not exceed $150 million.
QUALIFIED BOND: A private activity bond that meets certain requirements under the
Internal Revenue Code in order for the interest thereon to be excluded from gross income for
federal income tax purposes. Also sometimes referred to as a qualified private activity bond.
See: PRIVATE ACTIVITY BOND.
QUALIFIED INSTITUTIONAL BUYER (QIB): An entity to whom a security
otherwise required to be registered under the Securities Act of 1933 may be sold without such
registration under SEC Rule 144A. In general, a QIB must own and invest on a discretionary
basis at least $100 million in securities and must be an insurance company, investment company,
employee benefit plan, trust fund, business development company, 501(c)(3) organization,
corporation (other than a bank with net worth less than $25 million), partnership, business trust
or investment adviser.
QUALIFIED LEGAL OPINION: A legal opinion of bond counsel, sometimes referred
to as a reasoned opinion, that is conditional or otherwise subject to qualifications. A legal
opinion generally is not considered to be qualified if it is subject to customary assumptions,
limitations and qualifications or if the opinion is otherwise explained. In the municipal securities
market, legal opinions have traditionally been unqualified.
RATING AGENCIES: The organizations that provide publicly available ratings of the
credit quality of securities issuers. The term is most often used to refer to the three nationally
recognized agencies, Moody's Investors Service, Inc., Standard & Poors Corporation, and Fitch
Ratings. See: NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION.
RATINGS: Evaluations of the credit quality of notes and bonds usually made by
independent rating services. Ratings are intended to measure the probability of the timely
repayment of principal of and interest on municipal securities. Ratings are initially made before
issuance and are periodically reviewed and may be amended to reflect changes in the issuer's
credit position. The information required by the rating agencies varies with each issue, but
generally includes, information regarding the issuer's demographics, debt burden, economic
base, finances and management structure. Many financial institutions also assign their own
individual ratings to securities.
REBATE: To pay to the United States government (or in the case of certain qualified
single family mortgage revenue bonds, to mortgagors) amounts earned from the investment of
Gross Proceeds at a Yield in excess of the yield on the Issue.
Generally, the amount of this Rebate must be computed at least annually, and at least 90 percent
of the cumulative rebate amount must be paid to the federal government every five years.
Exceptions are provided (and no rebate of Arbitrage need be paid) if
(i) all Proceeds (other than certain Debt Service funds) are spent within six months after
the date of issuance; or
(ii) the amounts are earned with respect to moneys in Debt Service funds that generate
gross investment receipts of not more than $100,000 during the year.
REDEMPTION: A transaction in which the issuer returns the principal amount
represented by an outstanding security (plus, in certain cases, an additional amount).
Redemption can be made under several different circumstances; at maturity of the security, as a
result of the issuer's call of the securities or (in rare cases) as a result of the security holder's
election to exercise at put or tender option privilege.
REDEMPTION PREMIUM: An amount paid to the holder of the security called for
redemption in addition to the principal amount of (and any accrued interest on) the security.
Redemption premiums typically are paid only in the case of certain optional redemptions.
REDEMPTION PRICE: See: CALL PRICE.
REDEMPTION PROVISIONS or CALL FEATURES: The terms of the bond
contract giving the issuer the right or requiring the issuer to redeem or call all or a portion of
an outstanding issue of bonds prior to their stated dates of maturity at a specified price, usually at
or above par. Common types of redemption provisions include:
Optional Redemption: The issuer has the right to redeem bonds, usually after a stated
date and at a premium, but is not required to do so.
Mandatory Redemption: The issuer is required to call outstanding bonds based on a
predetermined schedule or as otherwise provided in the bond contract. Frequently, the
issuer is allowed to make open market purchases in lieu of calling the bonds.
Extraordinary Optional Redemption: The issuer has the right to call or redeem an
issue of bonds upon the occurrence of certain events. For example, the right to
extraordinary optional redemption of an issue of bonds may be exercised when mortgages
are prepaid in connection with a housing revenue bond issue.
Extraordinary Mandatory Redemption: The issuer is required to call or redeem all or
part of an issue of bonds upon the occurrence of certain events. For example, the issuer
may be required to call or redeem bonds when proceeds of an issue are not expended for
the purpose of the issue as of a given time; when excess bond proceeds exist after
completion of a project; or when the facility has been substantially destroyed during
39
construction due to an accident. The latter situation is also known as calamity call or
catastrophe call.
RED HERRING: See PRELIMINARY OFFICIAL STATEMENT.
REFINANCING: Retiring existing securities by the sale of new issues. The object may
be to save interest costs or to extend the maturity of the loan.
REFUNDING: A procedure whereby an issuer refinances an outstanding bond issue by
issuing new bonds. There are generally two major reasons for refunding: to reduce the
restrictive covenant imposed by the terms of the bonds being refinanced. The proceeds of the
new bonds are either deposited in escrow to pay the debt service on the outstanding obligations,
when due (in which case the financing is known as an advance refunding), or used to
immediately retire the outstanding obligations. The new obligations are referred to as the
refunding bonds, and the outstanding obligations being refinanced are referred to as the
refunded bonds or the prior issue. For accounting purposes, refunded obligations are not
considered a part of the issuer's debt because the line of the holders of the refunded bonds, in the
first instance, is on the escrowed funds, not on the originally pledged source of revenues. The
refunded bonds, however, will continue to hold a lien on the originally pledged source of
revenues unless provisions have been made in the bond contract on the refunded bonds for
defeasance of the bonds prior to redemption.
REFUNDING BOND: A bond issued to retire a bond already outstanding. Refunding
bonds may be sold for cash and outstanding bonds redeemed in cash, or the refunding bonds may
be exchanged with holders of outstanding bonds.
REGISTERED BOND: A bond whose owner is designated on records maintained for
this purpose by a registrar, the ownership of which cannot be transferred without the registrar
recording the transfer on these records. The principal and interest on fully registered bonds is
paid directly by check (or other funds transfer) to the registered owner. Bonds issued prior to
July 1983 may sometimes be registered as to principal only; in this form coupons reflecting the
interest payments due remain attached to the bonds and must be detached and redeemed in order
to receive the interest due. Most municipal securities issued after June 1983 are in fully
registered form due to provisions of the Internal Revenue Code which deny exemption to
interest paid on issues (other than those exempt from this provision) which are not in registered
form. Generally, interest payments on a registered bond are made by check or wire sent to the
registered owner. The registered owner may not be the beneficial owner of the bond, but rather a
nominee for the beneficial owner. If the registered owner is a broker/dealer acting as a nominee
for a client, the bond is referred to as being held in street name. Registered bonds are often
held in the name of a securities depository or in the name of a nominee for a securities
depository, such as Depository Trust Company, which then keeps a record of the broker/dealers
whose clients are the beneficial owners of the bonds.
REGISTRAR: The person or entity responsible for maintaining records on behalf of the
issuer for the purpose of noting the owners of registered bonds.
REIMBURSEMENT RESOLUTION: A resolution declaring an issuer's official intent

to reimburse an original expenditure with proceeds of an obligation. Under federal tax laws, an
issuer may reimburse itself with proceeds of tax-exempt bonds for certain expenditures made
within 60 days prior to the issuer adopting an official intent.
REMARKET: To buy and resell to the public previously-issued bonds that have been or
are required to be purchased from the original or subsequent holders of the bonds by the issuer or
another party upon the occurrence of certain events specified in the legal documents.
With respect to Variable Rate bonds, remarketings commonly occur in connection with
i) a tender of the bonds at the option of the holder;
(ii) the conversion from one interest rate mode (e.g., weekly variation) to another interest
rate mode (e.g., quarterly variation);
(iii) the conversion of the variable rate bonds to Fixed Rate bonds; or
(iv) the termination or other alteration of the Letter of Credit, Standby Purchase
Agreement or other Credit Enhancement facility or Liquidity facility.
With respect to an issue the proceeds of which were escrowed upon Closing, a remarketing
would occur upon satisfaction of the requirements for breaking the escrow and disbursing the
proceeds for the purposes for which the bonds were issued.
In a remarketing, bonds tendered by their holders for purchase are sold to new purchasers. A
remarketing is usually conducted on behalf of the issuer by an investment bank or commercial
bank acting as Remarketing Agent pursuant to a remarketing agreement entered into at the time
of the original issuance of the bonds. Frequently, the remarketing agent is the same firm that
acted as the Managing Underwriter for the original issue.
In many instances, including a conversion to fixed-rate or the breaking of escrow, a remarketing
will resemble a new issue in many respects, including the preparation and distribution of the new
Official Statement, often called a reoffering circular. Unlike a new issue, however, the
proceeds of remarketing do not go to the issuer. Rather, remarketing proceeds are used to pay
the purchase price of the tendered bonds to the previous owners or to reimburse the credit facility
provider for draws made on the credit facility for such purchase.
REOFFERING: This term is used in two contexts. First, it is used to describe the
offering of bonds by the Underwriter to the public. For example, the initial offering price to the
public is often referred to in shorthand as the reoffering price. Second, the term reoffering
is used to describe a form of Remarketing in which an issuer exercises the right to require
bondholders to mandatorily tender their bonds for reoffering to the public customarily in the
context of a conversion from a Variable Rate to a Fixed Rate.
REOFFERING SCALE: The prices and/or yields, listed by maturity, at which new
issue securities are offered for sale to the public by the underwriter.
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REQUEST FOR PROPOSAL (RFP): A formal process by which an issuer gathers

written information from professionals for the purpose of selecting underwriters, financial
advisors, attorneys, architects, and providers of other services.
RESERVE: An account used to indicate that a portion of fund equity is legally
restricted for a specific purpose or not available for appropriation and subsequent spending.
RESOLUTION: The official action of the governing body of an issuer, typically
adopted by a vote of the members of the governing body at a public meeting. Compare:
ORDINANCE.
RETAIL CUSTOMER: Any customer other than an institutional customer. Retail
customers generally include individual investors and small organizations.
RETAIL SALES: Sales of securities to individual investors and small institutions.
RETENTION: The minimum quantity of bonds allocated to a particular underwriter at
the outset of the order period in a syndicated negotiated offering. The retention amount is
distinct and separate from any other bonds that may be allocated at the end of the order period.
REVENUE BOND: A bond which is payable from a specific source of revenue and to
which the full faith credit of an issuer with taxing power is not pledged. Revenue bonds are
payable from identified sources of revenue, and do not permit the bondholders to compel
taxation or legislative appropriation of funds not pledged for payment of debt service. Pledged
revenues may be derived from operation of the financed project, grants and excise or other
specified non-ad-valorem taxes. Generally, no voter approval is required prior to issuance of
such obligations.
REVENUES or GROSS REVENUES or NET REVENUES: The income produced by
a given source.
In the context of revenue bonds, revenues typically means the income and receipts generated
from the operation of the project or loan program being financed, or from the enterprise of which
the project or loan program is a part, or from other non-tax sources for example, water charges
in the case of water revenue bonds, lease payments in the case of lease revenue bonds, or loan
repayments in the case of mortgage revenue bonds or a conduit financing. Such revenues would
normally be pledged to the payment of the revenue bonds.
Gross revenues refers to the total receipts derived from the operation of the project, program, or
enterprise. Net revenues refers to the amount available after subtracting certain costs and
expenses, most commonly for operation and maintenance, from gross revenues.
REVOLVING FUND: A fund, typically created with bond proceeds and/or grant
moneys, that makes loans to borrowers and uses loan repayments to make additional loans.
ROLL OVER: Payment of maturing commercial paper with a new issue of commercial
paper. See: COMMERCIAL PAPER.
ROUND LOT: The increment in which securities are traded without a potential addition
or deduction of a price differential due to the size of the block. There is no consensus in the
industry as to what constitutes a round lot of municipal securities. Although it depends upon the
size of the broker-dealer and the nature of the investor, at the time of this publication many
industry participants consider $1,000,000 par value to constitute a round lot with respect to
institutional sales and $100,000 par value to constitute a round lot with respect to retail sales.
Compare: ODD LOT.
SCALE: Reoffering terms to the public of a serial bond issue showing price or yield
offered on each maturity. May also refer to the coupon rate on each maturity proposed by
underwriters at the time of sale.
SECONDARY MARKET:
The market in which bonds are purchased from
bondholders who have held such bonds for investment purposes, as opposed to being purchased
directly from the issuer or from the issuer through an underwriter.
SECONDARY MARKET DISCLOSURE: Disclosure of information relating to
outstanding municipal securities made following the end of the underwriting period by or on
behalf of the issuer of or other obligor with respect to the securities. Certain secondary market
disclosure obligations are set forth in Rule 15c2-12. Broker-dealers also have an obligation to
disclose certain material information regarding any security sold to a customer pursuant to
MSRB Rule G-17.
SECURITIES: Bonds, notes, mortgages, or other forms of negotiable or non-negotiable
instruments.
SECURITIES ACT OF 1933: Federal securities legislation originally enacted in 1933
that provides for, among other things, the registration of securities with the SEC and the
preparation and distribution of prospectuses. Issuers of municipal securities are generally
exempt from these requirements, although certain anti-fraud provisions under the Act apply to
such issuers.
SECURITIES AND EXCHANGE COMMISSION or SEC: The federal agency
responsible for supervision and regulating the securities industry. Generally, municipal
securities are exempt from the SECs registration and reporting requirements. Brokers and
dealers in municipal securities, however, are subject to SEC regulations and oversight. The SEC
also has responsibility for the approval of MSRB rules, and has jurisdiction, pursuant to SEC
Rule 10b-5, over fraud in the sale of municipal securities. Reference 15 United States Code
78(d).
SECURITIES EXCHANGE ACT OF 1934: Federal securities legislation originally
enacted in 1934 that provides for, among other things, the regulation of the marketplace for
securities. Regulation of broker-dealer activities in the municipal securities market is primarily
effected through the rules of the MSRB, which was created under Section 15B of the Act. In
addition, certain SEC rules, including but not limited to Rule 10b-5 and Rule 15c2-12, apply to
broker-dealer transactions in municipal securities.
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SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION

(SIFMA): A member network of financial and capital markets industry organizations born of
the merger of The Securities Industry Association and The Bond Market Association.
SEC REGISTRATION: The filing of information with the Securities and Exchange
Commission in accordance with the Securities Act of 1933 as a prerequisite to selling or
marketing the securities. Most bonds issued by or on behalf of state or local governmental
entities are exempt from such registration requirements.
SEC RULE 15c2-12: An SEC rule under the Securities Exchange Act of 1934 setting
forth certain obligations of (i) underwriters to receive, review and disseminate official statements
prepared by issuers of most primary offerings of municipal securities, (ii) underwriters to obtain
continuing disclosure agreements from issuers and other obligated persons to provide material
event disclosures and annual financial information on a continuing basis, and (iii) broker-dealers
to have access to such continuing disclosure in order to make recommendations of municipal
securities in the secondary market.
SEC RULE 10b-5: A regulation of the Securities and Exchange Commission, adopted
pursuant to the Securities Exchange Act of 1934, which makes it unlawful for any person to
employ any device, scheme, or artifice to defraud; to make any untrue statement of a material
fact or to omit a statement of material fact necessary in order to make the statements made, not
misleading, or to engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person, in connection with the purchase or sale of any
security.
SECURITY: Generally, an instrument evidencing debt or equity in a common
enterprise in which a person invests on the expectation of financial gain. The term includes
notes, stocks, bonds, debentures or other forms of negotiable and non-negotiable evidence of
indebtedness or ownership.
SECURITY FOR THE BONDS or SECURITY: The specific revenue sources or
assets of an issuer which are pledged for payment of debt service on a series of bonds, as well as
the covenants or other legal provisions protecting the bondholders.
SELF-SUPPORTING DEBT or SELF-LIQUIDATING DEBT: Debt that is to be
repaid exclusively from revenues generated by the enterprise activity for which the debt was
issued.
SELLING GROUP: A group of broker-dealers that assists in the distribution of a new
issue of municipal securities. Selling group members are able to acquire new issue securities
from the underwriting syndicate at a concession or dealers allowance (i.e., at a discount from the
public offering price, which discount may be less than or equal to the total takedown) but do not
participate in residual syndicate profits or share any liability for any unsold balance.
SELLING GROUP AGREEMENT:
Agreement whereby broker-dealers may
participate in the distribution of a new issue of municipal securities as members of a selling
group without being members of the underwriting syndicate. Compare: AGREEMENT
AMONG UNDERWRITERS. See: SELLING GROUP.
SENIOR LIEN BONDS: Bonds having the priority claim against pledged revenues.
Compare: JUNIOR LIEN BONDS; PARITY BONDS.
SERIAL BONDS: Bonds of an issue that mature in consecutive years. Compare:
TERM BONDS.
SERIES OF BONDS: Bonds of an issue sharing the same lien on revenues and other
basic characteristics. A series of bonds may consist of serial bonds, term bonds or both. An
issue of bonds can consist of one or more series of bonds. Typically, where a single issue
consists of more than one series of bonds, the series are distinguished from one another based on
one or more key characteristics. For example, one series may be senior lien bonds and the other
may be junior lien bonds; two series may have liens on different revenue sources; one series may
consist of capital appreciation bonds and the other may consist of current interest paying bonds;
one series may be tax-exempt bonds and the other may be taxable municipal securities; one
series may bear interest at a fixed rate and the other may bear interest at a variable rate.
SETTLEMENT: Delivery of payment for a security. In the case of a new issue of
municipal securities, settlement usually occurs within 30 days after the securities are awarded to
the underwriters, this time allows for printing of the securities and the completion of certain legal
matters. In the case of the purchase of a security in the secondary market, settlement occurs
upon delivery of and payment for the security, usually five business days after purchase.
SETTLEMENT DATE: The date on which settlement of a transaction is presumed to
occur. This date is used in price and interest computations, and is usually the date of delivery.
SHORT-TERM DEBT: Debt with a maturity of one year or less after the date of
issuance. Short-term debt usually includes floating debt, bond anticipation notes, tax
anticipation notes, and interim warrants.
SIFMA: The Securities Industry and Financial Markets Association (SIFMA), formerly
known as the Bond Market Association.
SIFMA SWAP INDEX: Produced by Municipal Data (MMD), the SIFMA Swap Index
is a 7-day high grade market index comprised of tax-exempt variable rate demand obligations
(VRD)) from MMDs data base. The index tracks market movements and is often used as a
benchmark variable rate in swap transactions.
SINKER: A colloquial term for a term maturity of a bond issue that is subject to sinking
fund redemptions.
SINKING FUND: 1) A fund established by the bond contract of an issue into which the
issuer makes periodic deposits to assure the timely availability of sufficient moneys for the
payment of debt service requirements. The amounts of the revenues to be deposited into the
sinking fund and the payments therefrom are determined by the terms of the bond contract.
Under a typical revenue pledge this fund is the first (under a gross revenue pledge) or the second
(under a net revenue pledge) to be funded out of the revenue fund. This fund is sometimes
referred to as Debt Service Fund. 2) A separate account in the overall sinking fund into which
45
moneys are placed to be used to redeem securities, by open-market purchase, request for tenders
or call, in accordance with a redemption schedule in the bond contract.
SLGS: An acronym (pronounced slugs) for State and Local Government Series.
SLGS are special United States Government securities sold by the Treasury to states,
municipalities and other local government bodies through individual subscription agreements.
The interest rates and maturities of SLGS are arranged to comply with arbitrage restrictions
imposed under Section 103 of the Internal Revenue Code. SLGS are most commonly used for
deposit in escrow in connection with the issuance of refunding bonds. The Bureau of Public
Debt offers two types of SLGS that are commonly referred to as Demand Deposit SLGS or
Time Deposit SLGS. Generally, Time Deposit SLGS are acquired in connection with an
Advance Refunding. The SLGS are held in escrow and principal and interest received on the
SLGS are sued to pay debt service on the prior issue. Because the issuer can specify the rate
(subject to the maximum rate specified in a weekly schedule) earned on the SLGS, the issuer
may design the escrow investment to meet any yield restrictions while maximizing its permitted
investment return.
Demand Deposit SLGS are intended for the investment of moneys subject to the rebate
requirements of the Internal Revenue Code. Earnings on Demand Deposit SLGS are not subject
to rebate. The interest rate on the Demand Deposit SLGS is determined weekly, effective each
Monday and is calculated based upon a formula which takes into account the Federal Funds Rate
which is published by the Federal Reserve Board and an estimated average marginal tax rate of
owners of short-term municipal securities and an administrative fee. The estimated marginal tax
rate and the administrative fee may be changed periodically by the Bureau of Public Debt.
SOPHISTICATED INVESTOR: Typically, an investor viewed by an issuer or
underwriter as having sufficient resources, market knowledge and experience to understand and
bear the risks involved in a particular investment.
SPECIAL DISTRICTS: Single-purpose or limited-purpose units of government formed
under state enabling legislation to meet certain local needs not satisfied by existing general
purpose governments in a given geographical area. In some states, special districts (such as
school districts) may be granted taxing powers.
SPREAD: 1) With respect to new issue municipal securities, the differential between the
price paid to the issuer for the new issue and the prices at which the securities are initially
offered to the investing public; this is also termed the gross spread or gross underwriting
spread. Also often called the underwriters discount. To the extent that the syndicate
subsequently lowers the initial offering prices, the syndicate may not realize the full amount of
the spread. The spread is usually expressed in points or fractions thereof. The spread generally
has four components:
Expenses: The costs of operating the syndicate for which the lead management may be
reimbursed.
Management Fee: The amount paid to the lead manager for handling the affairs of the
syndicate.
Takedown: Normally the largest component of the spread, similar to a commission,

which represents the income derived from the sale of the securities. If bonds are sold by
a member of the syndicate, the seller is entitled to a full takedown (also called the total
takedown); if bonds are sold by a dealer which is not a member of the syndicate, such
seller receives only that portion of the takedown known as the concession or dealers
allowance, with the balance (often termed the additional takedown) retained by the
syndicate.
Risk or Residual: The amount of profit or spread left in a syndicate account after
meeting all other expenses or deductions. A portion of the residual pro rata basis
according to the number of bonds each dealer has committed to sell without regard to the
actual sales by each member.
2) With respect to securities trading in the secondary market, the differential between the bid
price and the offering price in two-sided market quotation. 3) The difference in yields,
expressed in basis points, between two securities or groups of securities (e.g., credit rating
categories).
STANDARD & POORS CORPORATION or S & P: An independent financial
service company, a subsidiary of McGraw-Hill Company, which provides ratings for municipal
securities and other financial information to investors.
STANDBY BOND PURCHASE AGREEMENT: An agreement with a third party,
typically a bank, in which the third party agrees to purchase tender option bonds (typically
variable rate demand obligations) tendered for purchase in the event that they cannot be
remarketed. Unlike a letter of credit, a standby bond purchase agreement does not guarantee the
payment of principal and interest by the issuer and is not an unconditional obligation to purchase
the tender option bonds.
STANDBY LETTER OF CREDIT: Another term for standby bond purchase
agreement. See: STANDBY BOND PURCHASE AGREEMENT.
STATE AND LOCAL GOVERNMENT SERIES: See: SLGS.
STRUCTURING AN ISSUE: The process of formulating an issue within the issuers
legal and financial constraints so that the security is marketable. In structuring a new issue of
municipal securities the issuer must determine the maturities, the method of repayment,
redemption provisions, application of proceeds, security provisions and covenants.
SUBORDINATE LIEN BONDS: See: JUNIOR LIEN BONDS.
SUPER SINKER: A colloquial term for a term maturity, usually from a single family
mortgage revenue issue with several term maturities, that will be the first to be called from a
sinking fund into which all proceeds from prepayments of mortgages financed by the issue are
deposited. The maturitys priority status under the call provisions means that it is likely to be
redeemed in its entirety well before the stated maturity date. Therefore, the super sinker maturity
may be considered attractive to investors because it offers long-term interest rates on what is
effectively a short-term security.
47
SUPPLEMENTAL INDENTURE: An agreement entered into by an issuer that

supplements the issuers master indenture or trust indenture. Often, a supplemental indenture is
executed in connection with the issuance of one or more series of additional bonds under the
master or trust indenture. In some cases, a supplemental indenture merely amends terms of the
master or trust indenture without providing for the issuance of additional bonds.
SURETY: In the public finance context, a surety policy is a form of insurance provided
by a bond insurer to satisfy a reserve fund requirement for a bond issue. Under this arrangement,
instead of depositing cash in a reserve fund, the issuer buys a surety policy by paying a one-time
premium equal to some percentage of the face amount of the policy. If the reserve fund is
needed to make a debt service payment, the trustee notifies the surety provider and the providers
makes the payment, up to the face amount of the policy. The issuer then has an obligation to
reimburse the provider for the payment, plus interest.
SYNDICATE: A group of underwriters formed to purchase (underwriter) a new issue of
municipal securities from the issuer and offer it for resale to the general public. The syndicate is
organized for the purposes of sharing the risks of underwriting the issue, obtaining sufficient
capital to purchase an issue and for broader distribution of the issue to the investing public. One
of the underwriting firms will be designated as the syndicate manager or lead manager to
administer the operations of the syndicate. There are two major types of syndication agreements:
Divided or Western Account: A method of determining liability stated in the
agreement among underwriters in which each member of an underwriting syndicate is
liable only for the amount of its participation in the issue, and not for any unsold portion
of the participation amounts allocated to the other underwriters.
Undivided or Eastern Account: A method for determining liability stated in the
underwriting agreement in which each member of the underwriting syndicate is liable for
any unsold portion of the issue according to each members percentage participation in
the syndicate.
TAX or TAXES: Compulsory charges levied by a governmental unit for the purpose of
raising revenue. Taxes should be distinguished from special assessments, which are levied
according to the actual benefits derived, and from fees, which must bear a reasonable relating to
the costs of administration or regulation, and are imposed under a governments police power.
Tax revenues are used to pay for services or improvements provided for the general public
benefit.
TAX ANTICIPATION NOTES (TANs) (Also called WARRANTS): Notes issued in
anticipation of collection of taxes usually retirable only from tax collections, and frequently only
from the proceeds of the tax levy whose collection is anticipated at the time of issuance. TANs
are a form of short-term financing.
TAX-EXEMPT BOND: Another term for a municipal bond. Interest on many
municipal securities is exempt from federal income taxation pursuant to Section 103 of the
Internal Revenue Code, and may or may not be exempt from state income or personal property
taxation in the jurisdiction where issue. If the bond is exempt from state income tax, it possesses
double exemption status. Triple exemption bonds are exempt from municipal or local
income taxes, as well as from federal and state income tax. The Tax Reform Act of 1986
changed the status of certain bonds that previously were tax exempt.
TAX RATE: The amount of tax stated in terms of a unit of the tax base; for example,
$1.25 per thousand dollars of assessed valuation.
TEFRA NOTICE, HEARING AND APPROVAL: Acronym for Tax Equity and
Fiscal Responsibility Act of 1982. As a pre-condition for the exclusion from gross income for
federal income tax purposes of interest on all qualified private activity bonds, TEFRA requires,
among other things, that the issue be approved (a TEFRA approval) either by an elected
official or body of elected officials of the applicable governmental entity after a public hearing (a
TEFRA hearing) following reasonable public notice (a TEFRA notice) or by voter
referendum of such governmental entity. See: PRIVATE ACTIVITY BOND; QUALIFIED
BOND.
TEMPORARY PERIODS: The periods during which the federal tax rules relating to
arbitrate yield restriction permit certain gross proceeds of an issue to be invested at a yield that is
materially higher than the yield on the issue.
The most important of these is the temporary period generally available for the investment of
monies in construction funds or loan acquisition funds after the date the governmental
obligations are issued. In addition, a 13-month temporary period is provided for monies in
certain debt service funds generally including funds used primarily to achieve a proper
matching of revenues and debt service within each year.
10b-5 OPINION: See: DUE DILIGENCE OPINION.
TERM: With respect to a single bond, the period of time until the maturity date of the
bond and with respect to an issue, the period until the maturity date of the last bond of the issue
to mature.
TERM BONDS: Bonds comprising a large part of all of a particular issue that come due
in a single maturity. The issuer usually agrees to make periodic payments into a sinking fund for
mandatory redemption of term bonds before maturity for payment at maturity.
TERM ISSUE: An issue of municipal securities that has a single stated maturity.
TIC: See: TRUE INTEREST COST.
TRANSFER: The process of effecting a change in the ownership of a registered security
by 1) updating the list of registered holders of an issue and 2) issuing a new securities certificate
(or, in some cases, reissuing the old certificate) with the new registered owners name imprinted
on it. Both of these functions are most typically performed by the same entity, although in
certain cases different entities may be used to perform each function.
49
TREASURY REGULATIONS: The federal income tax regulations adopted by the

U.S. Department of Treasury. Treasury Regulations are designed to provide additional detail an
interpretation of the Tax Code.
TREASURY SECURITIES: Debt obligations of the United States Government sold by
the Treasury Department in the form of Bills, Notes and Bonds:
Bills: Short-term obligations that mature in one year or less and are sold on the basis of a
rate of discount.
Notes: Obligations that mature between one year and ten years.
Bonds: Long-term obligations that generally mature in ten years or more.
TRUE INTEREST COST (TIC): Under this method of computing the borrowing
issuers cost, interest cost is defined as the rate, compounded semi-annually, necessary to
discount the amounts payable on the respective principal and interest payment dates to the
proceeds received for the new issue securities. TIC computations produce a figure slightly
different from the net interest cost (NIC) method since TIC considers the time value of money
while NIC dopes not. The obligation to pay a dollar today is not the same as the obligation to
pay a dollar ten years from now. Presumably, one could take a much smaller sum, invest it today
and let the interest on that investment accumulate and compound until you have a dollar on the
date ten years from now. The smaller sum is called the present value of having the dollar ten
years from now, and the interest rate necessary to accumulate and compound that smaller sum up
to that dollar ten years from now is called the discount rate. If one knows the future value
(the dollar ten years from now) and the discount rate, the process of calculating the present value
is called discounting the future value to the present. With these general concepts in mind, the
TIC of an issue can be more fully defined and compared to the Net Interest Cost (NIC) for the
same issue. The TIC is sometimes also called the internal rate-of-return or the net effective
interest rate or the Canadian Interest Cost.
The TIC for an Issue is the annual discount rate which, when used to discount all debt service
payments on the issue to the date of initial delivery of the issue, using a compounding interval
equal to the interest payment periods for the issue, results in the aggregate present value of such
debt service payments being equal to the original purchase price (including Accrued Interest) of
the issue. For the purpose of calculating the TIC, Sinking Fund Payments for any Term Bonds
are considered principal payments. Because there is no algebraic formula for the direct
computation of the TIC, it must be determined either by successive approximation on a computer
or calculator or by using present value tables.
TRUSTEE: A financial institution with trust powers which acts in a fiduciary capacity
for the benefit of the bondholders in enforcing the terms of the bond contract.
TRUST INDENTURE: A contract between the issuer of municipal securities and a
trustee, for the benefit of the bondholders. The trustee administers the funds or property
specified in the indenture in a fiduciary capacity on behalf of the bondholders. The trust
indenture, which is generally a part of the bond contract, establishes the rights, duties,
responsibilities and remedies of the issuer and trustee and determines the exact nature of the
security for the bonds. The trustee is generally empowered to enforce the bond contract on
behalf of the bondholders.
UNDERLYING DEBT:
governments jurisdiction.
The debt of smaller geopolitical units within a given
UNDERLYING RATING: In the case of a security for which credit enhancement has
been obtained, the rating assigned by a rating agency to such security without regard to credit
enhancement or assigned to other securities of the same issuer having the same features and
security structure but without the credit enhancement.
UNDERWRITE or UNDERWRITING: The process of purchasing all or any part of a
new issue of municipal securities from the issuer, and offering such securities for sale to
investors.
UNDERWRITER: A dealer that purchases a new issue of securities for resale. The
underwriter may acquire the securities either by negotiations with the issuer or by award on the
basis of competitive bidding. The underwriter does not structure bond issues. They often work
as traders and have contacts with large bond buyers. They normally price the bonds for sale by
the traders and salespeople.
UNDERWRITERS COUNSEL: A lawyer who is selected by and represents the
Underwriter in a bond sale. His primary role is to protect the Underwriters firm from lawsuits
resulting from bond purchasers.
UNDERWRITERS GROSS SPREAD (UNDERWRITERS DISCOUNT): The
difference between the purchase price paid to the Issuer for a new Issue and the sum of the prices
at which the bonds are initially offered to the investing public by the underwriter.
To the extent that the underwriter subsequently lowers the initial offering prices, the underwriter
may not realize the full amount of the spread. The spread is usually expressed in Points or
fractions thereof. The spread generally consists of:
(i)
Management Fee a fee paid to the managing underwriter for handling the affairs
of the syndicate, including, in the case of a Negotiated Sale, structuring the issue and
negotiating with the issuer;
(ii)
Expenses any advertising and printing costs to the underwriter, underwriters
counsels fees and expenses, computer expenses, travel expenses, MSRB fees, and other
similar expenses;
(iii)
Takedown normally the largest component of the spread, similar to a
commission, which represents the income derived by the selling broker or dealer from the
sale of the bonds; if bonds are sold by a member of a syndicate, the seller is entitled to the
full takedown (also called the total takedown); if bonds are sold by a dealer which is
not a member of the syndicate, such seller receives only that portion of the takedown
known as the concession or dealers allowance, with the balance (often termed the
additional takedown) retained by the syndicate; and
51
(iv)
Risk the amount of compensation for risks incurred by the underwriter in
underwriting the bond issue, relating to the difficulty of marketing the issue, bond market
conditions, and the amount of bonds remaining to be resold after the execution of the
bond purchase agreement.
In the case of a syndicated offering, a portion of any residual is generally paid to each
underwriter within the syndicate on a pro rata basis according to the number of bonds each dealer
has committed to sell without regard to the actual sales by each member.
UPGRADE: The raising of a rating by a rating service due to the improved credit
quality of the issue or issuer. The term also refers to the replacing of a security in an investment
portfolio with one of a higher quality.
UNQUALIFIED LEGAL OPINION: A legal opinion of bond counsel that does not
contain any qualifications. An unqualified legal opinion is frequently distinguished from a
qualified or reasoned opinion expressing a lesser degree of confidence by the counsel
delivering the opinion. A legal opinion generally is not considered to be qualified if it is subject
to customary assumptions, limitations and qualifications or if the opinion is otherwise explained.
In the municipal securities market, legal opinions generally are unqualified.
VARIABLE RATE: An Interest Rate that periodically changes based upon an index or
a pricing procedure.
For example, the interest rate may be a specified percentage of the weekly Treasury bill auction
rate or of the Federal Home Loan Bank borrowing rate, or the Remarketing Agent may establish
the rate as the rate necessary to remarket the bonds at Par. The variable rate may change on a
daily, weekly, monthly or other periodic basis.
Variable rate bonds generally have a demand feature allowing the owner to demand that the
issuer or another party repurchase the bond upon a specified number of days notice or at certain
times that reflect the intervals at which the rate varies. For example, a variable rate bond bearing
interest at a rate that is set each week customarily has a demand feature allowing the bondholder
to put the bond on one weeks notice. Investors treat such a bond as having a Term of one week.
Because interest charged on money borrowed for a short term is normally less than interest on
money borrowed for a long term, variable rates are normally lower than long-term fixed rates.
A Variable Rate is often called a Floating Rate. Since variable rates are lower than long-term
Fixed rates, variable rate bonds are also referred to as lower floaters.
VARIABLE RATE DEMAND OBLIGATION (VRDO): Floating rate obligations
that have a nominal long-term maturity but have a coupon rate that is reset periodically (e.g.,
daily or weekly). The investor has the option to put the issue back to the trustee or tender agent
at any time with specified (e.g., seven days) notice. The put price is par plus accrued interest.
VERIFICATION REPORT: In a refunding, a report, prepared by a certified public
accountant or other independent third party, that demonstrates that the cash flow from
investments purchased with the proceeds of the refunding bonds and other moneys are sufficient
to pay the principal of and interest on the refunded bonds that are being defeased.
VOLUME CAP: Under federal tax law, the limit on the aggregate amount of taxexempt Private Activity Bonds that may be issued during any calendar year. Beginning in 1998,
the limit for any state is the greater of $50 per capita or $150,000,000.
WARRANT: A security, generally sold attached to another security of the same issuer,
which gives the owner the right to purchase a third security of the same issuer, described on the
warrant, within a stated period of time at a stated price. The warrant generally is detachable and
tradable separately from the security with which it was originally sold. Warrants have
occasionally been used in the municipal market by a few larger issuers.
YIELD: The rate earned on an investment based on the price paid for the investment,
the interest earned during the period held and the selling price or redemption value of the
investment.
YIELD BURNING: In an advance refunding, the sale to an issuer of securities
(typically Treasury securities) at above-market prices to be held in escrow for the purpose of
reducing the yield on those securities to avoid arbitrage regulations. The SEC and Internal
Revenue Service view such practice as illegal.
YIELD RESTRICTION: A general requirement under the Internal Revenue Code that
proceeds of tax-exempt bonds not be used to make investments at a higher yield than the yield on
the bonds. The Internal Revenue Code provides certain exceptions, such as for investment of
bond proceeds for reasonable temporary periods pending expenditure and investments held in
reasonably required debt service reserve funds.
ZERO COUPON BOND: An original issue discount bond on which no periodic
interest payments are made but which is issued at a deep discount from par, accreting (at the rate
represented by the offering yield at issuance) to its full value at maturity.
53
Appendix B
U.S. GOVERNMENT AND AGENCY
SECURITIES
The Oregon State Treasurer, pursuant to ORS 294.046, is required to prepare and keep current a
list of all agencies and instrumentalities of the United States with available obligations that any
county, municipality, political subdivision or school district may invest in under ORS
294.035(3)(a) and 294.040. The following listing of eligible U.S. Government and Agency
Securities is provided by the Finance Division of the Office of the State Treasurer. Updates to
this information can be obtained from Treasurys website at www.ost.state.or.us.
U.S. TREASURY ISSUES

Generally, all U.S. Treasuries listed below are appropriate investments for excess cash funds
including bond related funds if the maturities of such instruments are within the local
governments investment guidelines.
1. U.S. Treasury Bills
2. U.S. Treasury Notes
3. U.S. Treasury Bonds
4. U.S. Treasury STRIPS (Separate Trading of Registered Interest and Principal of
Securities)
5. BECCS (Bearer Borpora Conversions)
6. CUBES (Coupons Under Book-Entry Safekeeping)
7. U.S. Treasury Inflation-Indexed Bonds
All Treasury notes and bonds are strippable. STRIPS are created by separating the interest
(coupon) and principal (the note or bond itself), thereby creating zero coupon securities that are
sold at a deep discount and payment is received at maturity. STRIPS are direct obligations of the
U.S. Treasury and are backed by the full faith and credit of the United States. Strips are not to be
confused with CAT's, TIGR's, etc. which are proprietary products that represent a security
interest in an underlying U.S. Treasury security. These latter investments ARE NOT permissible
investments for local governments.
Previously when U.S. Treasury Bonds were in physical form, they were literally separated into
serial coupons from their respective bonds. This was before book entry; before proprietary
products created by dealers that were security interests in some underlying not or bond; and,
before the U.S. Treasury itself allowed stripping of its longer debt issues. These old physically
Appendix B U.S. Government and Agency Securities
separated instruments (basically bearer securities) were converted by the Federal Reserve into
wireable book entry form to make the STRIPS market more uniform. These former physical
securities that have been so converted are called Coupons Under Book Entry Safekeeping (hence
the acronym CUBES). These CUBES are very rare, trade at a higher rate than on-the-run
comparable U.S. Treasury STRIPS, and are extremely illiquid. Being old U.S. Treasury
securities, CUBES carry the same full faith and credit of the United States Government.
In January, 1997, the United States Treasury started issuing Treasury Inflation Protected
Securities (TIPS). Inflation indexed note auctions are usually announced on the first Wednesday
of January and July, with the auction process occurring the second week of January and July.
Issuance is the 15th of the same month. These bonds will be fully strippable. Like other bonds,
they will be offered in denominations of $1,000.00. More detailed information beyond this
cursory description is available from the internet (www.publicdebt.treas.gov), The Securities
Industry and Financial Markets Association (formerly The Bond Market Association) at
www.SIFMA.org, and research data from brokers/dealers.
DEBT OBLIGATIONS OF U.S. GOVERNMENT AGENCIES AND ENTERPRISES

The debt obligations of U.S. Government Agencies and Government Sponsored Enterprises
(GSEs) are collectively referred to as Agency Securities or Agencies. Those Agency
Securities listed in 1 through 8 below are considered appropriate investments for excess cash
funds including bond related funds if the maturities of such instruments are within the local
governments investment guidelines.
Attention should be paid to any peculiar characteristics of some of the instruments in this listing.
For example, mortgage-backed securities like Government National Mortgage Association
(Ginnie Maes) mortgage-backed securities may have volatile prepayment characteristics that
may make their final maturities unknown. In falling interest rate cycles, borrowers whose
underlying mortgages are the security for the Ginnie Mae bonds may refinance their loans
accelerating the principal return to the investor. Therefore, the term for a Ginnie Mae cannot be
relied upon to perform, for example, a debt defeasance.
Agencies listed in 9 through 21 are viewed as less appropriate for local government investments,
may be infrequently traded, and can be characterized by thin, illiquid markets.
International institutions in which the United States Government owns capital stock (paid-in or
callable) are not eligible investments for local governments and are not listed here (World Bank,
Asian Development Bank, Inter-American Development Bank, etc.).
1. Federal Home Loan Banks (FHLB) Discount Notes, Consolidated bonds, Floating
Rate Notes, and MTNS. www.fhlb-of.com
2. Federal Farm Credit Banks (FFCB) Consolidated systemwide notes and bonds,
Discount notes, Floating Rate Notes, MTNs, and Master notes. www.farmcreditffcb.com
3. Federal National Mortgage Association ("Fannie Mae") Discount Notes, MTNS,
Senior and Subordinated Benchmark Notes (fixed and floating), strips, zero-coupon
securities, and mortgage-backed securities. www.fanniemae.com
2
4. Federal Home Loan Mortgage Corporation ("Freddie Mac") - Discount Notes,

MTNs, Senior and Subordinated Reference Notes (fixed and floating), Mortgage
Participation Certificates (PC's), collateralized Mortgage Obligations (CMO's) and
Strips. www.freddiemac.com
5. Government National Mortgage Association ("Ginnie Mae") Mortgage-Backed
Securities in 15- and 30-year maturities guaranteed by the full faith and credit of the
U.S. Government. Collateralized by FHA, VA, and FMHA insured mortgage loans.
www.ginniemae.gov
6. Financing Corporation (FICO) Long-term bonds (none issued since 9/89)
Principal repayment defeased by zero coupon Treasuries.
7. Resolution Funding Corporation (FEFCORP) Strips and Bonds 30 & 40 year
issues Principal collateralized by U.S. Treasuries, interest payments backed by the
U.S. Treasury and FIRREA.
8. Tennessee Valley Authority (TVA) Discount Notes, Strips, Notes, and Bonds
Issues available in maturities 5 to 50 years. www.tva.gov
9. Financial Assistance Corporation (FAC) 15 year bonds, guaranteed by the Treasury,
first issues in 7/88. This entity provides capital to Farm Credit System Institutions.
10. Federal Land Banks (FLB) Bonds Currently issued through FFCB. (Banks for
Cooperative and Federal Intermediate Credit Bank also issues through FFCB and
have no direct issues outstanding.)
11. Federal Housing Administration (FHA) Debentures Backed by the full faith and
credit of the U.S. Government.
12. Farmers Home Administration (FMHA) = Certificates of Beneficial Ownership
(CBO's). Backed by the full faith and credit of the U.S. Government. Discontinues
in 1975, small amount remains outstanding.
13. General Services Administration (GSA) Participation Certificates Secured by the
full faith and credit of the U.S. Government. No new issues since 1974.
www.gsa.gov
14. Maritime Administration Bonds Collateralized by ship mortgages, further backed
by the full faith and credit of the U.S. Government in the event of default.
15. Washington Metropolitan Area Transit Authority Bonds Backed by the full faith
and credit of the U.S. Government. Small amount remains outstanding.
16. Small Business Administration (SBA) Debentures Backed by the full faith and
credit of the U.S. Government. Small amount remains outstanding. www.sba.gov
17. Department of Housing and Urban Development (HUD) Notes, New Housing
Authority Bonds 40-year issues with 15-year calls. Backed by the full faith and
credit of the U.S. Government. No new issues since 1974. Small amount remains
outstanding.
18. United States Postal Service Bonds May be backed by the full faith and credit of
the U.S. Government. Issues with maturities of 20 year or longer. www.usps.com
19. United States Department of Veterans' Affairs Guaranteed REMIC Pass-Through
Certificates Vendee Mortgage Trust 1992-1 ("Vinnie Mae"). The full and timely
payment of principal and interest of these certificates is guaranteed by the Department
of Veterans' Affairs and this guarantee is further backed by the full faith and credit of
the United States of America.
20. Private Export Funding Corporation (PEFCO) Secured Notes with maturities of 5
years or longer. Interest is guaranteed by the Export-Import Bank of the United States
(Eximbank, a federal agency) and whose principal is secured by either cash, securities
backed by the full faith and credit of the United States, or Guaranteed Importer Notes,
which are guaranteed by the Eximbank. The Secured Notes, which are rated AAA.
www.pefco.com
21. Federal Agricultural Mortgage Corporation ("Farmer Mac"), a federally chartered
instrumentality of the United States was created to provide capital for agricultural real
estate and rural housing. Instruments include discount notes, medium-term notes, and
mortgage backed securities. www.farmermac.com
Appendix C
Legal References
OREGON STATE CONSTITUTIONAL PROVISIONS
The following are selected Oregon State Constitution references of interest in connection with
public finance bond an debt obligation transactions.
Article II Suffrage and Elections
Section 14. Time of holding of elections and assuming duties of office.
Section 14a. Time of holding elections in incorporated cities and towns.
Section 23. Approval by more than majority required for certain measures submitted to
people.
Article IV Legislative Department
Section 1. Legislative power; initiative and referendum.
Article VI Administrative Department
Section 10. County home rule under county charter.
Article IX Finance
Section 1c. Financing redevelopment and urban renewal projects.
Article XI Corporations and Internal Improvements
Section 2. Formation of corporations; municipal charters; intoxicating liquor regulation.
Section 5. Restriction of municipal powers in Acts of incorporation.
Section 8. State not to assume debts of counties, towns, or other corporations.
Section 9. Limitations on powers of county or city to assist corporations.
Section 10. County debt limitation.
Section 11. Property tax limitations on assessed value and rate of tax; exceptions.
Section 11b. Property tax categories; limitations on categories; exceptions.
Appendix C Legal References
Section 12. Peoples utility districts.

Section 14. Metropolitan service district charter.
OREGON REVISED STATUTES

This manual was published prior to the availability of the 2007 Oregon Laws compilation of
laws enacted during the 74th Oregon Legislative Assembly 2007 Regular Session or the official
record copy of the 2007 Oregon Revised Statutes. The manual does not reflect any acts that
became law as a result of the 2007 Regular Legislative Session or any subsequent session.
The following are selected Oregon Revised Statutes (ORS) references of interest in connection
with public finance bond an debt obligation transaction
Chapter 203. County Governing Bodies; County Home Rule
Chapter 221. Organization and Government of Cities
Chapter 223. Local Improvements and Works Generally
Chapter 250. Initiative and Referendum
Chapter 251. Voters Pamphlet
Chapter 255. Special District Elections
Chapter 280. Financing of Local Public Projects and Improvements; City and County Economic
Development
Chapter 285B. Economic Development II (specifically, ORS 285B.320 to 285.371)
Chapter 286. State Bonds
Chapter 287. Borrowing and Bonds of Local Governments
Chapter 288. Public Borrowing and Bonds Generally
Chapter 294. County and Municipal Financial Administration
Chapter 308. Assessment of Property for Taxation
Chapter 210. Property Tax Rates and Amounts; Tax Limitations; Tax Reduction Programs
OREGON ADMINISTRATIVE RULES

The following are selected Oregon Administrative Rules (OAR) references of interest in
connection with public finance bond an debt obligation transaction
Oregon State Treasury and Municipal Debt Advisory Commission
170-055-0005
Procedure to Effect Cash Defeasance of Outstanding Bonds
170-060-1010
Terms, Conditions, and Reporting Requirements for an

Agreement for Exchange of Interest Rates.
170-061-0000
Notice and Reporting Requirements by Public Bodies When

Issuing Bonds
170-061-0015
Fees Charged by the Debt Management Division
170-061-0020
Requirements for Notice of Call
170-062-0100
Procedures for the Issuance of State of Oregon Industrial

Development Bonds
170-062-0000
Procedure for Submission, Review and Approval of An Advance

Refunding Plan
170-071-0005
Allocation of Private Activity Bond Limit
Oregon Facilities Authority

172-005-0000 to 0070
Evaluating and Approving Projects which Qualify for TaxExempt Financing
Oregon Economic and Community Development Department

123-011-0020 to 0050
Oregon Economic Development Revenue Bonds
Secretary of State, Elections Division

165-007-0030 to 0280
Conduct of Elections
165-0012-0005 to 0240
Campaign Finance Regulations
165-013-0010
Election Offences
165-014-0005 to 0260
Initiative, Referendum and Recall
165-016-0040 to 0095
Voters Pamphlet
165- 018-0005 to 0030
Election Boards and Persons with Disabilities
165-020-0005 to 0430
Special District Elections
165-021-0000 to 0010
Publication of Special District Election Notices
165-022-0000 to 0070
County Voters Pamphlet
FEDERAL SECURITIES LAW

The following are selected federal statutes and regulations of general interest in connection with
public finance bond an debt obligation transaction
Federal Securities Laws
Securities Act of 1933
Section 3.
Exempted Securities
Section 5.
Prohibitions Relating to Interstate Commerce and the Mails
Section 17.
Fraudulent Interstate Transactions
Section 131.
Definition of Security Issued Under Governmental Obligations
Securities Exchange Act of 1934
Section 10
Regulation of the use of Manipulative and Deceptive Devices
Rule 10b-5
Employment of Manipulative and Deceptive Devices
Rule 15c2-12
Municipal Securities Disclosure
Appendix D
Public Finance
Resources and Contacts
This appendix provides a list of useful resources relevant to public finance and debt
management. The listing includes Oregon state and local governments, the federal government
and many local and national groups and organizations.
State of Oregon
Governmental Resources
ELECTED OFFICES
State of Oregon
Governors Office
State Capitol Building
900 Court Street NE
Salem, OR 97301
Tel: (503) 378-4582
www.or.gov
Oregon State Legislature

State Capitol Building
900 Court St NE
Salem, OR 97301
Tel: 503-986-1187 (Information Line)
www.leg.state.or.us
Oregon Secretary of State

Public Service Building Suite 151
255 Capitol Street NE
Salem, OR 97310
Tel: (503) 986-2200
www.sos.state.or.us
Oregon State Treasury

350 Winter Street NE, Suite 100
Salem, OR 97301-3896
Tel: (503) 378-4000
www.ost.state.or.us
Department of Justice
1162 Court Street NE
Salem, OR 97301-4096
Tel: (503) 378-4400
www.doj.state.or.us
Superintendent of Public Instruction

Salem, OR 97310-0203
Tel: (503) 947-5600
www.ode.state.or.us//
Labor Commissioner
Bureau of Labor and Industries (BOLI)
800 NE Oregon St., Suite 1045
Portland, OR 97232
Tel: 971-673-0761
www.oregon.gov/BOLI/
Appendix D Public Finance Resources and Contacts
GOVERNMENTAL OFFICES
Administrative Services, Department of (DAS)
155 Cottage St. NE, U20
Salem, OR 97301-3972
Tel: (503) 378-3104
www.oregon.gov/DAS/
Debt Management Division (DMD)

Office of the State Treasurer
Salem, OR 97301-3896
Tel: (503) 378-4930
www.ost.state.or.us/divisions/dmd/
Economic and Community Development

Department (OECDD)
775 Summer St. NE, Suite 200
Salem, OR 97301-1280
Tel: (503) 986-0123
www.econ.oregon.gov
Education, Department of
Salem, OR 97310-0203
Tel: (503) 947-5600
www.ode.state.or.us
Elections Division
Office of the Secretary of State
141 State Capitol
Salem, OR 97310
Tel: (503) 986-1518 or (866) ORE VOTES
www.sos.state.or.us/elections
Environmental Quality, Department of (DEQ)

811 SW Sixth Ave.
Portland, OR 97204
Tel: (503-229-5696
www.oregon.gov.deq
Finance Division
Office of the State Treasurer
Salem, OR 97301-3896
Tel: (503) 378-4633
www.ost.state.or.us/divisions/finance/
Housing and Community Services Department

North Mall Office Building
725 Summer St NE, Suite B
Salem, OR 97301-1266
Tel: (503) 986-2005
www.oregon.gov/OHCS/
Transportation, Department of (ODOT)

Room 135
Salem, OR 97301-3871
Tel: (503) 986-4000
www.oregon.gov/odot
Veterans Affairs, Department of (ODVA)

Oregon Veterans Building
700 Summer St. NE
Salem, OR 97301-1285
Tel: (503) 373-2000 or (800) 828-8801
www.oregon.gov/ODVA
Water Resources Department

725 Summer Street NE, Suite A
Salem, OR 97301
Tel: (503) 986-0900
www.wrd.state.or.us
COMMISSIONS AND AUTHORITIES

Municipal Debt Advisory Commission
Salem, OR 97301-3896
Tel: (503) 378-4930
www.ost.state.or.us/divisions/DMD/MDAC/
Oregon Facilities Authority

Salem, OR 97301-3896
Tel: (503) 378-4930
www.ost.state.or.us/divisions/DMD/OFA/
Private Activity Bond Committee

Salem, OR 97301-3896
Tel: (503) 378-4930
www.ost.state.or.us/divisions/DMD/PAB/
State Debt Advisory Commission

Salem, OR 97301-3896
Tel: (503) 378-4930
www.ost.state.or.us/divisions/DMD/SDPAC
MISCELLANEOUS WEBSITES
Oregon Revised Statutes (ORS)
www.leg.state.or.us/bills_laws/
Oregon Administrative Rules (OAR)

http://www.sos.state.or.us/archives/
State of Oregon Agencies and Contacts

www.oregon.gov/state_contact.shtml
Population Research Center

Portland State University
Tel: (503) 725-3922
www.pdx.edu/prc/
Oregon
Associations and Organizations
Association of Oregon Counties
1201 Court St. NE, Ste. 201
Salem, OR
Tel: (503) 585-8351
www.aocweb.org
League of Oregon Cities

1201 Court St. NE, Suite 200
Salem, OR 97301
Tel: (503) 588-6550
www.orcities.org
Oregon Municipal Finance Officers

Association
PO Box 13308
Portland, OR 97213
Tel: (503) 282-9288
www.omfoa.org
Oregon School Boards Association

1201 Court Street NE, Suite 400
Salem, OR 97301
Tel: (503) 588-2800 or (800)-578-OSBA
www.osba.org
Special Districts Association

PO Box 12613
Salem, OR 97309-0613
Tel: (503) 371-8667 or (800) 285-5461
www.sdao.com
State and National

Agencies and Organizations
American Bar Association
Tel: (800) 285-2221
www.abanet.org
Association of Financial Guaranty Insurers

Tel: (518) 449-4698
www.afgi.org
California Debt and Investment Advisory

Commission (CDIAC)
Tel: (916) 563-3269
www.treasurer.ca.gov/cdiac/
Council of Development Finance Agencies

(CDFA)
Tel: (216) 920-3073
www.cdfa.net
Federal Reserve Board of San Francisco

Tel: (415) 974-2000
www.frbsf.org
Government Finance Officers Association

(GFOA)
Tel: (312) 977-9700
www.gfoa.org
International Swaps & Derivatives Assoc., Inc.

(ISDA)
Tel: (212) 901-6000
www.isda.org
Municipal Securities Rulemaking Board

(MSRB)
Tel: (703) 797-6600
www.msrb.org
MuniNet Guide
www.muninetguide.com
National Association of Bond Lawyers

(NABL)
Tel: (312) 648-9590
www.nabl.org
An online guide and directory to web sites for

state, county and local governments and other
municipal related topics
National Association of Counties (NACO)
Tel: (202) 393-6226
www.naco.org
National Assoc. of Housing & Redevelopment

Officials (NAHRO)
Tel: (202) 289-3500
www.nahro.org
National Association of Securities Dealers

(NASD)
Tel: (301) 590-6500
www.nasd.com
National Association of State Auditors,

Comptrollers and Treasurers (NASACT)
Tel: (859) 276-1147
www.nasact.org
National Association of State Budget Officers

(NASBO)
Tel: (202) 624-5382
www.nasbo.org
National Association of State Housing

Agencies (NCSHA)
Tel: (202) 624-7710
www.ncsha.org
National Association of State Treasurers

(NAST)
Tel: (606) 244-8175
www.nast.org
National League of Cities (NLC)

Tel: (202) 626-3000
www.nlc.org
SIFMA Securities Industry and Financial

Market Association
(formerly The Bond Market Association)
Tel: (212) 608-1500
www.sifma.org
Thomas Library of Congress

Law Library of Congress
Tel: (202) 707-5079
http://thomas.loc.gov/
U.S. Census Bureau

www.census.gov
U.S. Department of the Treasury

Bureau of Public Debt
www.publicdebt.treas.gov
State and Local Government Series (SLGS)
www.treasurydirect.gov/govt/govt.htm
U.S. Economical and Statistical Information

https://www.esa.doc.gov/
Useful for background information when
preparing Official Statements.
The Economics and Statistics Administration
(ESA) is a bureau within the U.S. Department
of Commerce.
U.S. Internal Revenue Service (IRS)

Telephone Assistance for Government Entities
Tel: (877) 829-5500
www.irs.gov
Information for the Tax Exempt Bond
Community
www.irs.gov/taxexemptbond/
U.S. Securities and Exchange Commission

(SEC)
Tel: (800) SEC-0330
www.sec.gov
Financial Information and Services

Bloomberg
www.bloomberg.com
Bond Logistix
Tel: (866) 342-5259
www.bondlogistix.com
BondBuyer
Tel: (800) 221-1809
www.bondbuyer.com
CUSIP Service Bureau Standard & Poors

Tel: (212) 438-6500
www.cusip.com
Depository Trust Corporation (DTC)

Depository Trust & Clearing Corporation
(DTCC)
Tel: (212) 855-1000
www.dtcc.com
Digital Assurance Corporation LLC

Tel: (407) 515-1100 or (888) 824-2663
www.dacbond.com/
DisclosureUSA
www.disclosureusa.org
Secondary market securities disclosure
website.
eMuni Electronic Municipal Statistics

Tel: (510) 658-2655
www.emuni.com
Documents, news and financial information
relating to the U.S. municipal bond market.
FedWorld
www.fedworld.gov
Investing In Bonds (SIFMA)

www.investinginbonds.com
Download IRS tax forms; search government

information and databases.
Legal Information Institute (LII)
www.law.cornell.edu/
Research and electronic publishing activity of
the Cornell University Law School. Popular
collections include: State statutes, the U.S.
Code, and Supreme Court opinions.
Seattle-Northwest Securities Corporation
Tel: Oregon 800.452.9911
Seattle 866.38-BONDS
www.seattlenorthwest.com
Orrick, Herrington & Suttcliffe LLP

Tel: (503) 943-4800
www.orrick.com
Nations leading public finance law firm
providing bond counsel services to state and
local governments.
Securities Lawyers Deskbook
http://www.law.uc.edu/CCL/index.html
Text of Securities Act of 1933 and the
Securities Exchange Act of 1934
Pacific Northwests premier investment

banking, bond underwriting and financial
advisory firm.
SLGS State and Local Government Series

Securities
www.treasurydirect.gov/govt/govt.htm
Thompson Financial
www.thomson.com
Information about the purchase of SLGS
Credit Enhancement Agencies

Ambac Financial Group
Tel: (212) 668-0340 or (800) 221-1854
www.ambac.com
American Capital Access (ACA)

ACA Financial Guaranty Corporation
Tel: (212) 375-2000
www.aca.com
Assured Guaranty Corporation (AGC)

Tel: (212) 974-0100
www.assuredguaranty.com
CIFG IXIS Financial Guaranty

Tel: (212) 909-0432
www.cifg.com
Financial Guaranty Insurance Company

(FGIC)
Tel: (212) 312-3093
www.fgic.com
Financial Security Assurance (FSA)

Tel: (415) 995-8000
www.fsa.com
www.dexia.com
MBIA Inc.
Tel: (914) 765-3060
www.mbia.com
XL Capital Assurance
Tel: (212) 478-3434
http://xlfa.scafg.com/
Credit Rating Agencies

National Headquarters
West Coast Office
Fitch Ratings
One State Street Plaza
New York, NY 10004
Tel: (212) 908-0500 or (800) 75-FITCH
www.fitchratings.com
Fitch Ratings
650 California Street, 8th Floor
San Francisco, CA 94108
Tel: (415) 732-1754 or (800) 95 FITCH
www.fitchratings.com

99 Church Street
New York, NY 10007-2796
Tel: (212) 553-0300
www.moodys.com

Public Finance Regional Office
One Front Street, Suite 1900
Tel: (415) 274-1700
www.moodys.com
Standard & Poors Ratings Group

55 Water Street
New York, NY 10004
Tel: (212) 438-2000
www.standardandpoors.com
Standard & Poors Ratings Group

Steuart Towers, Suite 1500
One Market
Tel: (415) 371-5000 or (415) 268-5372
www.standardandpoors.com
SEC 15c2-12 Securities Disclosure

DisclosureUSA
Nationally Recognized Municipal Securities
Disclosure Organizations (NRMSIRs)
DisclosureUSA
www.disclosureusa.org
This site is a result of the efforts of the Muni Council to improve secondary market disclosure.
The Municipal Advisory Council of Texas was chosen to develop and operate a system that
enables issuers to meet the filing requirements of Rule 15c2-12 by means of a single filing
location. If you file through DisclosureUSA, you do not need to make a separate filing with any
of the NRMSIRs or SIDs.
Bloomberg Municipal Repository
100 Business Park Drive
Skillman, New Jersey 08448-3629
Tel: (609) 279-3225
Fax: (609) 279-2066 or (800) 395-9403
Email: [email protected]
www.bloomberg.com/markets/rates/municontacts.html
Standard & Poors Securities Evaluations, Inc.

55 Water Street, 45th Floor
New York, NY 10041
Tel: (212) 428-4595
Fax: (212) 438-3975
www.disclosuredirectory.standardandpoors.com
DPC Data Inc.

Attn: NRMSIR
One Executive Drive
Fort Lee, NY 97024
Tel: (201) 346-0701
Fax: (201) 947-0107
www.munifilings.com
www.dpcdata.com
FT Interactive Data
Attn: NRMSIR
100 William Street, 15th Floor
New York, NY 10038
Tel: (212) 771-6999 or (800) 689-8466
Fax: (212) 771-7390
www.ftid.com

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LEAGUE OF OREGON CITIES

Published by the League of

LEAGUE OF OREGON CITIES

THE MUNICIPAL DEBT MARKET

States, cities, counties

School districts and community colleges

Chapter 1 Overview of Debt Financing

Municipal power authorities

Urban renewal agencies

Park, fire and water districts

Private universities and other types of 501(c)(3) non-profits such as museums

CAPITAL MARKETS AT WORK

Chapter 1 Overview of Debt Financing

Have confidence in the integrity of the system

Have belief they will be repaid

Have liquidity (the ability to get in and out of an investment)

4.00% Tax exempt

Chapter 1 Overview of Debt Financing

After tax yield

(1)Assumes a marginal federal tax rate of 33%

Retail or individual investors

Chapter 1 Overview of Debt Financing

Putting the bonds out for a public bid (competitive sale)

Working with a designated underwriter (negotiated sale)

Chapter 1 Overview of Debt Financing

THE BOND SALE

Chapter 1 Overview of Debt Financing

COMPETITIVE BID SALE

FREQUENTLY ASKED QUESTIONS

Chapter 1 Overview of Debt Financing

Is it true that federal tax exemption of interest is not constitutionally protected?

Adopt a resolution or ordinance authorizing issuance of the bonds after an election

Chapter 1 Overview of Debt Financing

Participants discussion on underwriting syndicates). However, local investors typically cannot

Chapter 1 Overview of Debt Financing

Chapter 1 Overview of Debt Financing

The issuer, appropriate staff and councilors or board members

Financial consultants and legal counsel

Escrow agents and escrow verification agents (for refundings)

Firms that calculate and report arbitrage rebate liabilities

Various state and federal regulatory agencies

Project feasibility consultants

Chapter 2 Roles and Responsibilities of Principal Participants

The municipality is responsible for fulfilling all legal

Directing the preparation of a long-term capital construction and improvement plan

Adopting resolutions or ordinances (prepared by bond counsel) authorizing the

Causing publication of notices as may be required by statute or city charter

Providing information required by rating agencies and bond insurers

Chapter 2 Roles and Responsibilities of Principal Participants

Drafting all authorizing resolutions or ordinances necessary to complete the financing

Chapter 2 Roles and Responsibilities of Principal Participants

Reviewing and commenting on portions of the preliminary and final official

Preparing closing documents, including a non-litigation certificate, no-arbitrage

Issuing an approving legal opinion

Preparing and distributing transcripts of the proceedings to the financing team

Provide legal counsel to the governing board and staff

underwriting the bonds and selling the bonds to investors

Chapter 2 Roles and Responsibilities of Principal Participants

Preparing recommendations on bond issue structure and timing of sale