Siebert Brandford Shank & Co., L.L.C.

Transcription

1 NEW ISSUE Book-Entry-Only Ratings: Moody s Investor Service: A1 Standard & Poor s Rating Service: AA- In the opinion of Co-Bond Counsel and the Attorney General of the State of Michigan, under existing law, the Series Bonds and the interest thereon are exempt from all taxation provided by the laws of the State of Michigan, except for estate taxes and taxes on gains realized from the sale, payment or other disposition of the Series Bonds. Interest on the Series Bonds is not excluded from gross income for federal income tax purposes under the Internal Revenue Code of 1986, as amended. See TAX MATTERS herein. $100,000,000 MICHIGAN FINANCE AUTHORITY Local Government Loan Program Revenue Bonds, Series 2010E (City of Detroit Unlimited Tax General Obligation Local Project Bonds) (Federally Taxable) Dated: Date of Delivery Due: as shown on inside cover page The Local Government Loan Program Revenue Bonds, Series 2010E (City of Detroit Unlimited Tax General Obligation Local Project Bonds) (Federally Taxable) (the Series Bonds ), will be issued by the Michigan Finance Authority (the Authority ) in fully registered form in denominations of $5,000 or any integral multiple thereof and will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York, which will act as securities depository for the Series Bonds. Bondowners will not receive certificates representing their ownership interest in the Series Bonds purchased. See THE SERIES BONDS - Book-Entry-Only System. Interest on the Series Bonds will be payable semiannually on May 1 and November 1, commencing May 1, The Series Bonds are subject to redemption prior to maturity as described herein. The Authority is the successor to the Michigan Municipal Bond Authority ( MMBA ). The Series Bonds described below are being issued under Bond Resolution , adopted by the MMBA on September 21, 1989, as amended (the Resolution ) and the Supplemental Resolution of the Authority to finance the purchase by the Authority of Municipal Obligations issued by certain political subdivisions of the State of Michigan (the Governmental Units ), and to pay the costs of issuance. The only Governmental Unit whose Municipal Obligations will be purchased is the City of Detroit, Michigan (the City ). The City will use proceeds of the Municipal Obligations for the purposes described herein, including the financing of public improvements and other municipal purposes. The Series Bonds are limited obligations of the Authority. The Series Bonds shall be issued as the Type: City of Detroit Unlimited Tax General Obligation Local Project Bonds. The Bonds of each Type are separately secured from Bonds of other Types and are payable solely from the revenues pledged therefor, including payments on the Municipal Obligations corresponding to such Type and the moneys on deposit in funds and accounts corresponding to such Type held by the applicable Depository and Trustee under the Resolution. The Depository and Trustee for the Series Bonds identified above is U.S. Bank National Association, Lansing, Michigan. The Series Bonds will be the only Bonds of that Type authorized to be outstanding under the Resolution and the Authority will not issue additional bonds under the Resolution or supplemental resolution that are equally or ratable secured with the Series Bonds. The Series Bonds shall not be in any way a debt or liability of the State of Michigan or of any political subdivision thereof and shall not create or constitute any indebtedness, liability or obligation of the State of Michigan or of any political subdivision thereof or be or constitute a pledge of the full faith and credit or the taxing power of the State of Michigan or of any political subdivision thereof. The Authority has no taxing power. The maturity schedule for the Series Bonds is set forth on the inside of this cover page. The Series Bonds are offered when, as and if issued and received by the underwriters listed below (the Underwriters ), subject to approval of legality by the Attorney General of the State of Michigan, and by Co-Bond Counsel, Dickinson Wright PLLC, Lansing, Michigan and Miller, Canfield, Paddock and Stone P.L.C., Lansing, Michigan. Certain legal matters will be passed upon by Bodman LLP, Detroit, Michigan, counsel to the Underwriters. It is expected that the Series Bonds described above will be ready for delivery in New York, New York on or about December 16, This cover page contains certain information for quick reference only. It is not a summary of this issue. Investors must read the entire Official Statement. Siebert Brandford Shank & Co., L.L.C. BofA Merrill Lynch Dated: December 9, 2010 J.P. Morgan Morgan Stanley

2 MATURITY SCHEDULE $100,000,000 MICHIGAN FINANCE AUTHORITY Local Government Loan Program Revenue Bonds, Series 2010E (City of Detroit Unlimited Tax General Obligation Local Project Bonds) (Federally Taxable) The Series Bonds mature on the dates, in the years and in the amounts set forth in the table below. Maturity November 1 Principal Amount Interest Rate Yield CUSIP 2014 $1,885, % 5.129% 59447PCW ,985, % 5.429% 59447PCX ,105, % 6.087% 59447PCY ,240, % 6.337% 59447PCZ2 $13,900, % City of Detroit Unlimited Tax General Obligation Local Project Bonds, (Federally Taxable) Due November 1, Price 100% CUSIP 59447PDB4 $77,885, % City of Detroit Unlimited Tax General Obligation Local Project Bonds, (Federally Taxable) Due November 1, Price 100% CUSIP 59447PDA6 Copyright 2010, American Bankers Association. CUSIP data herein is provided by Standard and Poor s CUSIP Service Bureau, a division of the McGraw Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP service. CUSIP numbers are provided for reference only. Neither the Authority, the Series Bond Trustee nor the Underwriters take any responsibility for the accuracy of such numbers.

3 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICES OF THE SERIES BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITERS MAY OFFER AND SELL THE SERIES BONDS TO CERTAIN DEALERS AND DEALER BANKS ACTING AS AGENT AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES STATED ON THE INSIDE COVER OF THIS OFFICIAL STATEMENT. SUCH PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITERS. No dealer, broker, salesman or other person has been authorized by the Michigan Finance Authority (the Authority ) or the Underwriters to make any representation other than as contained in this Official Statement and, if given or made, such other information or representation must not be relied upon as having been authorized by the Authority or the Underwriters. The information set forth in this Official Statement has been obtained from the Authority or the Underwriters. The information set forth in this Official Statement has been obtained from the Authority, the State, the City of Detroit, Michigan (the City ), The Depository Trust Company ( DTC ), and other sources that are deemed to be reliable, but as to information from sources other than themselves, is not to be construed as a representation by the Authority, the State of Michigan (the State ), the City, DTC, or the Underwriters respectively. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor the sale of the Series Bonds shall under any circumstances create any implication that there has been no change in the affairs of the Authority, the State, the City or DTC since the date of this Official Statement. None of the information contained in this Official Statement has been supplied or verified by the Depository or the Series Bond Trustee, and the Depository and the Series Bond Trustee make no representations, warranties or guarantee as to the accuracy or completeness of any information in this Official Statement. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there by any sale of the Series Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. This Official Statement is not to be construed as a contract or agreement between the Authority and the purchasers or holders of any of the Series Bonds. IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE AUTHORITY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. i

4 Certain statements contained in this Official Statement reflect not historical facts but forecasts and forward-looking statements. In this respect, the words estimate, project, anticipate, expect, intend, believe, and similar expressions are intended to identify forward-looking statements. The achievement of certain results or other expectations contained in such forward-looking statements involves known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. All projections, forecasts, assumptions, expressions of opinions, estimates, and other forward-looking statements are expressly qualified in their entirety by the foregoing and the other cautionary statements set forth in this Official Statement. ii

5 TABLE OF CONTENTS Page INTRODUCTORY STATEMENT... 2 THE AUTHORITY... 2 Powers and Duties... 2 Membership... 3 AUTHORIZATION FOR AND PURPOSES OF THE SERIES BONDS... 4 The Act... 4 THE SERIES BONDS... 4 General... 4 Book-Entry-Only System... 4 Replacement Bonds... 7 Estimated Sources and Uses of Funds... 7 Mandatory Redemption... 8 Make-Whole Optional Redemption... 9 Extraordinary Optional Redemption Redemption Procedures SOURCES OF PAYMENT FOR THE SERIES BONDS Pledge of Municipal Obligations Information on the City of Detroit, Michigan Reserve Accounts for Bonds of Certain Types ADDITIONAL BONDS THE LOCAL PROJECT MUNICIPAL OBLIGATION Local Project Municipal Obligation SOURCES OF PAYMENT FOR THE LOCAL PROJECT MUNICIPAL OBLIGATION Security for the Local Project Municipal Obligation Revenue Sharing and Distributable State Aid Set-Aside Requirements for the 2010 Senior Bonds Set-Aside Requirements for the Local Project Municipal Obligation Limitation on Remedies of Holder of the Local Project Municipal Obligation SPECIAL INVESTOR CONSIDERATIONS CONCERNING BANKRUPTCY OF THE CITY The Local Government Fiscal Responsibility Act Treatment of Lien on Tax Revenues after a Bankruptcy Filing RISK FACTORS REGARDING THE LOCAL PROJECT MUNICIPAL OBLIGATION Risk Factors Affecting Distributable State Aid Receipts Economic and Other Factors Affecting the Financial Condition of the City Special Investor Considerations TAX MATTERS General Circular LITIGATION LEGALITY OF SERIES BONDS FOR INVESTMENT AND DEPOSIT STATE NOT LIABLE ON SERIES BONDS CONTINUING DISCLOSURE UNDERTAKING LEGAL MATTERS RATINGS UNDERWRITING OTHER MATTERS APPENDIX I SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION... I-1 APPENDIX II INFORMATION CONCERNING THE CITY OF DETROIT... II-1 APPENDIX III AGREEMENT TO DEPOSIT DISTRIBUTABLE STATE AID... III-1 APPENDIX IV SUMMARIES OF CERTAIN PROVISIONS OF THE MASTER INDENTURE AND THE DEPOSIT AGREEMENT FOR THE LOCAL PROJECT MUNICIPAL OBLIGATION... IV-1 APPENDIX V FORMS OF AUTHORITY CONTINUING DISCLOSURE UNDERTAKING AND CITY CONTINUING DISCLOSURE UNDERTAKING... V-1 APPENDIX VI FORMS OF LEGAL OPINIONS... VI-1 APPENDIX VII AUDITED BASIC FINANCIAL STATEMENTS OF THE CITY OF DETROIT, MICHIGAN... VII-1 iii

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7 OFFICIAL STATEMENT Relating to $100,000,000 MICHIGAN FINANCE AUTHORITY Local Government Loan Program Revenue Bonds, Series 2010E (City of Detroit Unlimited Tax General Obligation Local Project Bonds) (Federally Taxable) This Official Statement (including the cover pages and appendices hereto) is being distributed in order to furnish information in connection with the sale of the Series Bonds (defined below) of the Michigan Finance Authority (the Authority ) as successor to the Michigan Municipal Bond Authority ( MMBA ). The Series Bonds are issued in accordance with Executive Order , Act 227 of the Michigan Public Acts of 1985, as amended (the Act ) and pursuant to Bond Resolution , adopted by the MMBA on September 21, 1989, as amended and supplemented by resolutions adopted by the MMBA and the Authority (the Resolution ). Bonds issued under the Resolution shall be referred to as the Bonds. The Resolution authorizes the issuance and sale of Bonds, pursuant to Supplemental Resolutions and Supplemental Indentures, in any one or more of several Types. The particular Bonds being sold at this time are Bonds designated as the Type: The Local Government Loan Program Revenue Bonds, Series 2010E (City of Detroit Unlimited Tax General Obligation Local Project Bonds), (Federally Taxable) (the Series Bonds ) in the aggregate principal amount of $100,000,000. Upon their issuance, the Series Bonds will be the only Bonds of this Type authorized to be outstanding under the Resolution. Capitalized terms used in this Official Statement that are not otherwise defined herein have the meanings set forth in Appendix I - Summary of Certain Provisions of the Resolution attached hereto. The proceeds of the Series Bonds, after payment of Costs of Issuance, are being used to acquire the Local Project Municipal Obligation (defined below) as described in greater detail herein. 1

8 INTRODUCTORY STATEMENT Pursuant to the Act, the Authority s local government loan programs have been established for the purpose of making loans to political subdivisions of the State for financing public improvements and for other municipal purposes. The Authority accomplishes this purpose by purchasing obligations (the Municipal Obligations ) issued by counties, cities, townships, villages, school districts, community colleges, public universities, authorities, districts or other political subdivisions of the State (the Governmental Units ). The only Governmental Unit whose Municipal Obligation (the Local Project Municipal Obligation ) will be purchased with the proceeds of the Series Bonds is the City of Detroit, Michigan (the City ). Pursuant to the Resolution, proceeds of the Series Bonds, after payment of Costs of Issuance, will be used by the Authority to purchase the Local Project Municipal Obligation. The City will use the proceeds of the Local Project Municipal Obligation to finance public improvements, to refinance outstanding indebtedness and for other municipal purposes, as described herein under the caption THE LOCAL PROJECT MUNICIPAL OBLIGATION. See SOURCES OF PAYMENT FOR THE LOCAL PROJECT MUNICIPAL OBLIGATION herein. The Series Bonds are payable solely from the revenues pledged therefor, including Loan Repayments on the Local Project Municipal Obligation corresponding to the Bonds of such Type. See SOURCES OF PAYMENT FOR THE SERIES BONDS herein. The Series Bonds are not in any way a debt or liability of the State and do not constitute a pledge of the faith and credit or taxing power of the State. U.S. Bank National Association, with corporate trust offices located in Lansing, Michigan, has been appointed to act as Trustee, Depository and Bond Registrar and Paying Agent under the Resolution with respect to the Series Bonds. The following are summary descriptions of and information regarding, among other things, the Authority, the authorization for and purpose of the Series Bonds and the Authority s Local Government Loan Program, the Series Bonds and the Local Project Municipal Obligation, the sources of payment for the Series Bonds and the Local Project Municipal Obligation, and the tax status of the Series Bonds. A summary of certain provisions of the Resolution and the Supplemental Resolution is contained in Appendix I attached hereto. Such descriptions and information do not purport to be comprehensive and the descriptions of documents herein are qualified in their entirety by reference to such documents and to laws and principles of equity relating to creditors rights. Copies of the Resolution and the Supplemental Resolution and other documents are available for inspection at the corporate trust office of the Trustee. Powers and Duties THE AUTHORITY The Authority is an autonomous public body corporate and politic, separate and distinct from the State, created by Executive Order No issued by the Governor on March 4, 2010 (the "Executive Order") and effective by its terms on May 30, Under the Executive Order, among 2

9 other things, the Authority is the successor to the MMBA, which was created by statute in 1985 for the purposes of fostering and promoting the borrowing of money by governmental units within the State for financing public improvements and for other municipal purposes. In order to effectuate such purposes, the Authority is authorized to issue its bonds or notes and to make money available to governmental units by the purchase of their municipal obligations. In addition to the Series Bonds, the Authority (including its various predecessor authorities under the Executive Order) has outstanding, and the Authority expects to issue in the future, short and long term obligations under other Authority programs. The security for the Series Bonds does not serve as security for the Authority s other program obligations. Under the Executive Order, the Authority is within the State Department of Treasury but exercises its powers, duties and functions independently of the State Treasurer (except for the State Treasurer s appointment of administrative staff and exercise of certain administrative functions related to staff, pursuant to the Governor s Executive Order ). The Authority s address is Richard H. Austin Building, 430 West Allegan Street, Lansing, Michigan 48922, and its telephone number is (517) Membership The Authority is governed by a board of directors (the Board ). The State Treasurer serves as the Chairperson of the Board. The Authority is authorized to employ an Executive Director, legal and technical experts and other officers, agents or employees, permanent or temporary. The members of the Board are appointed by the Governor of the State with the advice and consent of the State Senate. The members serve for various terms and continue to serve until successors are appointed and file the oath of office. The members of the Board are: Robert J. Kleine, Chairperson Stephen N. Cassin MaryLee Davis Charlotte P. Edwards Don Gilmer Julie Ann Karkosak David S. Mittleman State Treasurer Executive Director, Macomb County Planning & Economic Development Professor, Michigan State University Assistant Vice President, Citizens Bank Retired County Administrator Vice President and General Counsel, Toyota Boshoku America, Inc. Shareholder, Church Wyble, P.C. The Resolution provides that the covenants, stipulations, promises, agreements and obligations of the Authority contained in the Resolution are those of the Authority and not of any member of the Board or any officer or employee of the Authority in his or her individual capacity and that no recourse shall be had for the payment of the principal of or interest on the Series Bonds or for any claim based thereon or on the Resolution against any member of the Board, any officer or employee of the Authority or any person executing the Series Bonds. 3

10 The Act The Executive Director of the Authority is Joseph L. Fielek. AUTHORIZATION FOR AND PURPOSES OF THE SERIES BONDS The Act authorizes the Authority to issue Bonds under the Resolution to assist Governmental Units in the orderly financing of public improvements and for other municipal purposes at reduced rates of interest or on more favorable terms than might otherwise be obtained by the Governmental Units. The Authority accomplishes this by purchasing the Municipal Obligations issued by Governmental Units. Qualifying Governmental Units include the State of Michigan, Michigan counties, cities, townships, villages, school districts, intermediate school districts, community colleges, public universities, authorities, districts or any other bodies corporate and politic or other political subdivisions, any agency or instrumentality of the foregoing, certain group self-insurance pools, certain Indian Tribes and certain water suppliers of the State. The Series Bonds are being issued to purchase the City s Local Project Municipal Obligation. See THE LOCAL PROJECT MUNICIPAL OBLIGATION, herein. General THE SERIES BONDS The Series Bonds will consist of the Local Government Loan Program Revenue Bonds, Series 2010E (City of Detroit Unlimited Tax General Obligation Local Project Bonds) (Federally Taxable) and will be used to finance the purchase of the Local Project Municipal Obligation issued by the City and to pay the costs of issuance. The Series Bonds described in this Official Statement will mature on the dates and in the principal amounts set forth on the inside cover page of this Official Statement. The Series Bonds will bear interest from their dated date of delivery until maturity or prior redemption, payable as indicated on the inside cover of the Official Statement. See APPENDIX I - SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION, attached hereto. The Series Bonds will be issued as fully registered bonds in denominations of $5,000 and integral multiples thereof. Book-Entry-Only System The information in this section Book-Entry-Only System has been furnished by The Depository Trust Company, New York, New York ( DTC ). No representation is made by the Authority, the State, the Trustee or the Underwriters as to the completeness or accuracy of such information or as to the absence of material adverse changes in such information subsequent to the date hereof. No attempt has been made by the Authority, the State, the Trustee or the Underwriters to determine whether DTC is or will be financially or otherwise capable of fulfilling its obligations. Neither the Authority, the State nor the Trustee will have any responsibility or obligation to DTC participants, indirect participants or the persons for which they act as nominees with respect to the Series Bonds, or for any principal, premium, if any, or interest payment thereof. 4

11 DTC will act as securities depository for the Series Bonds. The Series Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Series Bond certificate will be issued for each maturity the Series Bonds, in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has Standard & Poor s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at and Purchases of the Series Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series Bonds on DTC s records. The ownership interest of each actual purchaser of each Series Bond ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interest in the Series Bonds, except in the event that use of the book-entry system for the Series Bonds is discontinued. To facilitate subsequent transfers, all Series Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Series Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect 5

12 any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Series Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of the Series Bonds may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Series Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Series Bonds may wish to ascertain that the nominee holding the Series Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Series Bonds unless authorized by a Direct Participant in accordance with DTC s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts the Series Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the Series Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the Authority or the Trustee, on the payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC nor its nominee, the Trustee, or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Series Bonds at any time by giving reasonable notice to the Authority or Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Series Bond certificates are required to be printed and delivered. 6

13 The Authority may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Series Bond certificates will be printed and delivered to the Participants for delivery to the Beneficial Owners. THE INFORMATION IN THIS SECTION CONCERNING DTC AND DTC S BOOK- ENTRY SYSTEM HAS BEEN OBTAINED FROM SOURCES THAT THE AUTHORITY BELIEVES TO BE RELIABLE, BUT THE AUTHORITY TAKES NO RESPONSIBILITY FOR THE ACCURACY THEREOF. Replacement Bonds In the event that the book-entry-only system is discontinued, the Trustee will authenticate and make available for delivery replacement Series Bonds in the form of fully registered bond certificates. In addition, the following provisions would apply: a) principal of and redemption premium, if any, on the Series Bonds will be payable in lawful money of the United States of America at the corporate trust office of the Trustee or such other office as may be designated by the Authority; b) interest on the Series Bonds will be payable by check or draft mailed to the registered owners thereof or, upon five days written notice to the Bond Registrar and Paying Agent given by a Registered Owner of a Series Bond or Series Bonds in an aggregate principal amount of at least $100,000, by wire transfer of funds to a bank account in the United States designated by such Registered Owner; and c) interest on the Series Bonds will be payable by check or draft to the Registered Owners whose names appear on the registration books of the Bond Registrar and Paying Agent as of the close of business on the fifteenth day of the calendar month immediately preceding the applicable interest payment date, all as provided more particularly in the Resolution. Estimated Sources and Uses of Funds SOURCES: Total Par Amount of Bonds $100,000, Total Sources $100,000, USES: Purchase of Municipal Obligation $ 99, Costs of Issuance* 955, Total Uses $100,000, *Includes Authority s fees, Co-Bond Counsel fees and expenses, and Underwriters discount. 7

14 Mandatory Redemption The Series Bonds maturing November 1, 2022 are subject to mandatory redemption at a redemption price equal to the principal amount thereof in the principal amounts, plus accrued interest to the date fixed for redemption, and on the dates set forth below: Date Amount (November 1) 2018 $2,395, ,575, ,765, ,970, * 3,195,000 The Series Bonds maturing November 1, 2035 are subject to mandatory redemption at a redemption price equal to the principal amount thereof in the principal amounts, plus accrued interest to the date fixed for redemption, and on the dates set forth below: Date Amount (November 1) 2023 $3,455, ,755, ,085, ,440, ,825, ,250, ,705, ,205, ,750, ,335, ,975, ,675, * 9,430,000 *Final Maturity The principal amount of Series Bonds to be redeemed in each year as set forth in the preceding tables may be reduced through the earlier purchase or redemption thereof by the Authority, with any partial purchase or redemption of such Series Bonds credited against such future sinking fund requirement, as determined by the Authority. 8

15 Make-Whole Optional Redemption The Series Bonds are subject to redemption prior to their respective stated maturity dates, at the option of the Authority and at the direction of the City, from any source of available funds provided or made available by the City, in whole or in part on any date, at a redemption price equal to the Make-Whole Redemption price. The Make-Whole Redemption Price is equal to the greater of: (1) the issue price of the Series Bonds set forth on the inside cover page hereof (but not less than 100%) of the principal amount of the Series Bonds to be redeemed; or (2) the sum of the present value of the remaining scheduled payments of principal and interest to the maturity date of the Series Bonds to be redeemed, not including any portion of those payments of interest accrued and unpaid as of the date on which the Series Bonds are to be redeemed, discounted to the date on which the Series Bonds are to be redeemed on a semi-annual basis, assuming a 360-day year consisting of twelve 30-day months, at the Treasury Rate, plus 50 basis points, date. plus, in each case, accrued interest on the Series Bonds to be redeemed to the redemption The Authority will only exercise the make-whole optional redemption of the Series Bonds at the direction of the City and the City will not direct the Authority to exercise the makewhole optional redemption of the Series Bonds if the Make-Whole Redemption Price is in excess of the maximum redemption price authorized by law (currently 103%). The Treasury Rate is, with respect to any redemption date for a particular Series Bonds, the yield to maturity as of such redemption date of United States Treasury securities with a constant maturity, excluding inflation indexed securities (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two business days prior to the redemption date or, if such Statistical Release is no longer published, any publicly available source of similar market date) most nearly equal to the period from the redemption date to the maturity date of the bond to be redeemed; provided, however, that if the period from the redemption date to such maturity date is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year will be used. The redemption price of Series Bonds to be redeemed pursuant to the make-whole optional redemption provision described above will be determined by an independent accounting firm, investment banking firm or financial advisor retained by the City at the City s expense to calculate such redemption price. The Transfer Agent, the Authority, Trustee and the City may conclusively rely on such determination of redemption price by such independent accounting firm, investment banking firm or financial advisor and will not be liable for such reliance. 9

16 Extraordinary Optional Redemption The Series Bonds are subject to redemption prior to their respective stated maturity dates, at the option of the Authority and at the direction of the City, upon the occurrence of an Extraordinary Event (as hereinafter defined), from any source of available funds, in whole or in part on any date, at a redemption price equal to the Extraordinary Redemption Price. The Extraordinary Redemption Price is equal to the greater of: (1) the issue price of the Series Bonds set forth on the inside cover page hereof (but not less than 100%) of the principal amount of the Series Bonds to be redeemed; or (2) the sum of the present value of the remaining scheduled payments of principal and interest on the Series Bonds to be redeemed to the maturity date of such Series Bonds, not including any portion of those payments of interest accrued and unpaid as of the date on which the Series Bonds are to be redeemed, discounted to the date on which the Series Bonds are to be redeemed on a semi-annual basis, assuming a 360-day year containing twelve 30-day months, at the Treasury Rate (as defined above) plus 100 basis points, date. plus in each case accrued interest on the Series Bonds to be redeemed to the redemption The Authority will only exercise the extraordinary optional redemption of the Series Bonds at the direction of the City and the City will not direct the Authority to exercise the extraordinary optional redemption of the Series Bonds if the Extraordinary Redemption Price is in excess of the maximum redemption price authorized by law (currently 103%). An Extraordinary Event will have occurred if (i) there shall be enacted an amendment to the Internal Revenue Code of 1986, as amended (the Code ) that (A) results in the reduction or elimination of the 45% cash payments payable by the United States Treasury (the Federal Payments ) to issuers of qualified recovery zone economic development bonds under the Code or (B) places substantial new conditions on the receipt by issuers of qualified recovery zone economic development bonds of the applicable Federal Payments and such conditions are unacceptable to the City or (ii) for any reason (other than because of an action taken by the City) the City is held by the Internal Revenue Service to be ineligible to receive the Federal Payments payable by the United States Treasury with respect to the Local Project Municipal Obligation (as defined below). The redemption price of Series Bonds to be redeemed pursuant to the extraordinary optional redemption provision described above will be determined by an independent accounting firm, investment banking firm or financial advisor retained by the City at the City s expense to calculate such redemption price. The Transfer Agent and the City may conclusively rely on such determination of redemption price by such independent accounting firm, investment banking firm or financial advisor and will not be liable for such reliance. 10

17 Redemption Procedures Notice of Redemption Under the Resolution, the Bond Registrar and Paying Agent will mail, by first class mail, as specified in the Resolution, a notice of redemption to the Holders of the Bonds to be redeemed at least 30 and not more than 60 days prior to the redemption date. If any redemption is to be made under the Resolution with funds that the Authority expects to receive between the time of the giving of such notice and the redemption date, the notice will expressly condition such redemption on timely receipt of such funds. The failure of any Bondholder to receive any such notice or any defect in such notice with respect to any Series Bond or portion thereof will not affect the validity of any proceedings for the redemption of any Series Bonds. Selection of Bonds to be Redeemed In the event DTC is the sole registered owner of the Series Bonds, redemption of the Series Bonds will be done in accordance with the procedures of DTC. The Authority will direct the Bond Registrar and Paying Agent to instruct DTC to pay sinking fund allocations and payments in respect of any type of optional redemption of the Series Bonds of a particular maturity to holders through a pro rata pass-through distribution of principal. DTC procedures currently permit either a pro rata pass-through distribution of principal or redemption of bonds selected by lot, in either case, to DTC direct participants. The Bond Registrar and Paying Agent will provide reasonable notice to holders before initial principal repayment if such payments will not be paid on a pro-rata pass-through basis. Assuming sinking fund payments or payments in respect to any type of optional redemption of the Series Bonds will be distributed by a pro-rata pass-through of principal, on each date on which such a payment is distributed to holders, and bond factor for the Series Bonds of each relevant maturity will be reduced accordingly. On any date, the bond factor for the Series Bonds of each relevant maturity will be calculated and is defined as: the amount, expressed as a percentage, equal to the difference of, the aggregate original face amount of Bonds issued, minus the aggregate pro-rata pass-through distributions of principal in relation to such Series Bonds, divided by the aggregate original face amount of Series Bonds issued. The Bond Registrar and Paying Agent will provide DTC with the relevant bond factors relative to each payment in accordance with the terms of DTC s operational agreement. None of the Authority, the Bond Registrar and Paying Agent, the Underwriters or any affiliate thereof can provide any assurance that DTC, DTC s direct and indirect participants or any other intermediary will allocate such payments on the Series Bonds of a particular maturity among the holders on such a proportional or any other basis. If the Bond Registrar and Paying Agent determines that a pro rata pass-through distribution of principal is not feasible, the Bond Registrar and Paying Agent will notify the holders as described above and pay such amounts to the holders using any method as it deems fair and appropriate, including by lot in accordance with DTC s governing procedures. If the owner of any Series Bond that has been redeemed in part fails to represent such Series Bond to the Bond Registrar and Paying Agent for payment and exchange, such Series 11

18 Bond will, nevertheless, become due and payable on the date fixed for redemption to the extent of the principal amount called for redemption. In case a Series Bond of a denomination larger than $5,000 is to be redeemed, the principal amount not being redeemed must be in a denomination of $5,000 or any integral multiple thereof. Upon surrender of any Series Bond for redemption in part only, the Authority will execute the Bond Registrar and Paying Agent will authenticate and deliver to the register owner thereof, at the expense of the Authority, a new Series Bond or Series Bonds of authorized denominations in a aggregate principal amount equal to the unredeemed portion of the Series Bond surrendered. SOURCES OF PAYMENT FOR THE SERIES BONDS The Series Bonds shall not be in any way a debt or liability of the State or any political subdivision thereof and shall not create or constitute any indebtedness, liability or obligations of the State or any political subdivision thereof, or be or constitute a pledge of the full faith and credit or the taxing power of the State or any political subdivision thereof. The Authority has no taxing power. The Series Bonds are limited obligations of the Authority, payable by the Authority solely from the revenues pledged therefor, including payments on the Local Project Municipal Obligation issued by the City, as described herein, and the funds and accounts for the Series Bonds of this Type held by the applicable Depository and Trustee under the Resolution. Pledge of Municipal Obligations Pursuant to the Resolution, the Authority will pledge and assign to the Trustee, for the benefit of all Holders of the Bonds of each Type, (i) all of the Authority s rights and interest in the Municipal Obligations and the Collateral Documents pertaining to such Type under the Resolution, subject to reservation by the Authority of rights to indemnification and to make all determinations and approvals and receive all notices accorded to it under the Municipal Obligations and Collateral Documents, (ii) all moneys in the Revenue Fund established for the Bonds of such Type under the Resolution and (iii) all of the proceeds of the foregoing, including without limitation investments thereof and interest and earnings thereon. The pledge made to the Trustee under the Resolution with respect to the Bonds of each Type is for the equal and ratable benefit of all of the Holders of the Bonds of such Type, and no Holder of any Bond will have priority over any other Holder of Bonds of the same Type or any exclusive right to receive any amounts allocable to Loan Repayments on a particular Municipal Obligation by virtue of the fact that proceeds of such Bond have been used to purchase such Municipal Obligation. Loan Repayments for all Municipal Obligations pertaining to each Type of Bond are scheduled at such times and in such amounts as will provide sufficient amounts, when combined with capitalized interest and other funds available for use by the Authority, to make timely payments of interest on and principal of the Bonds of such Type. 12

19 Information on the City of Detroit, Michigan Appendix II of this Official Statement contains limited information concerning the City. No information is presented in this Official Statement with respect to the City s ability to pay the principal of and interest on its Local Project Municipal Obligation from sources other than the sources of payment described under SOURCES OF PAYMENT FOR THE LOCAL PROJECT MUNICIPAL OBLIGATION herein, and no assurance can be made with respect to the City s ability to pay the principal of and interest on its Local Project Municipal Obligation from sources of payment described under SOURCES OF PAYMENT FOR THE LOCAL PROJECT MUNICIPAL OBLIGATION herein. Reserve Accounts for Bonds of Certain Types No Reserve Account has been established for the Series Bonds. ADDITIONAL BONDS The Series Bonds will be the only Bonds of that Type authorized to be outstanding under the Resolution and the Authority will not issue additional bonds under the Resolution or Supplemental Resolution that are equally and ratably secured as the Series Bonds. Local Project Municipal Obligation THE LOCAL PROJECT MUNICIPAL OBLIGATION The proceeds of the Series Bonds will be used to purchase the City s $100,000,000 Distributable State Aid Second Lien Bonds (Unlimited Tax General Obligation), Series 2010(A) (Taxable-Recovery Zone Economic Development Bonds-Direct Payment) (the Local Project Municipal Obligation ). Proceeds received by the City from the sale of the Local Project Municipal Obligation to the Authority will be used to (1) pay interest on the Local Project Municipal Obligation through July 1, 2011; (2) finance all or certain portions of the public safety facilities and equipment; facilities and equipment for public lighting system betterments, improvements and extensions; facilities and equipment for recreation, zoo, cultural facilities, museum, and library improvements; and transportation facilities; and (3) to pay all or a portion of the costs of issuance with respect to the Series Bonds and the Local Project Municipal Obligation. The Local Project Municipal Obligation will be issued under a bond authorizing resolution adopted by the City Council on July 20, 2010 (the Authorizing Resolution ) a sale order issued by the City Finance Director (the Sale Order and together with the Authorizing Resolution, the City Resolution ) and in accordance with the Charter of the City, Act 34, Public Acts of Michigan, 2001, as amended, and Act 279, Public Acts of Michigan, 1981, as amended. The Local Project Municipal Obligation is payable from a portion of the City s Distributable State Aid, which portion is pledged by the City under the Authorizing Resolution and secured under a Master Debt Retirement Trust Indenture (the Indenture ) dated as of March 1, 2010 by and between the City and U.S. Bank National Association, Detroit, Michigan (the Master 13

20 Trustee ), as supplemented by the First Supplemental Debt Retirement Trust Indenture dated as of March 1, 2010 (the First Supplemental Indenture ) and by the Second Supplemental Debt Retirement Trust Indenture dated as of December 1, 2010 by and between the City and the Master Trustee (the Second Supplemental Indenture and together with the Indenture and the First Supplemental Indenture, the Master Indenture ). The Local Project Municipal Obligation is secured by both (a) an unlimited tax full faith and credit pledge by the City and (b) a portion of the City s Distributable State Aid. See SOURCES OF PAYMENT FOR THE LOCAL PROJECT MUNICIPAL OBLIGATION Security for the Local Project Municipal Obligation, below. SOURCES OF PAYMENT FOR THE LOCAL PROJECT MUNICIPAL OBLIGATION Security for the Local Project Municipal Obligation The Local Project Municipal Obligation is secured by the unlimited tax full faith, credit and resources of the City which will be payable from ad valorem taxes annually levied on all property within the City without limitation as to rate or amount. See Appendix II INFORMATION CONCERNING THE CITY OF DETROIT, MICHIGAN - Assessed Valuation and Property Taxes. Additionally, pursuant to Act 227, Public Acts of Michigan, 1985, as amended ( Act 227 ), the Local Project Municipal Obligation is secured by and payable from certain shared revenue payments that the City expects to receive from the State under the provisions of the Glenn Steil State Revenue Sharing Act, Act 140, Public Acts of Michigan, 1971, as amended ( Act 140 ) in each City fiscal year ending June 30. Such State shared revenue payments, derived from a statewide sales tax, are currently the only source of distributable state aid distributed to local governments (hereinafter referred to as Distributable State Aid ) and will be pledged by the City and secured under the Master Indenture to be used for the sole purpose of paying principal of and interest on the Local Project Municipal Obligation and any additional bonds or other future obligations issued by the City and secured by Distributable State Aid. The pledge of Distributable State Aid for the Local Project Municipal Obligation is subordinate to the pledge of Distributable State Aid for the City s $249,790,000 Distributable State Aid General Obligation Limited Tax Bonds, Series 2010 (the 2010 Senior Bonds ). In addition, the City, the State Treasurer of the State of Michigan (the State Treasurer ) and the Master Trustee shall execute an agreement (the Agreement to Deposit Distributable State Aid ), dated as of December 1, 2010, to provide for the deposit of Distributable State Aid payments by the State Treasurer directly into the funds and accounts held by the Master Trustee pursuant to the Master Indenture so long as the Local Project Municipal Obligation is outstanding. See Appendix III Agreement to Deposit Distributable State Aid. See Revenue Sharing and Distributable State Aid below, Distributable State Aid Obligations Flow of Funds below and Appendix IV Summaries of Certain Provisions of the Master Indenture and the Deposit Agreement for the Local Project Municipal Obligation below. Distributable State Aid payments made to the Master Trustee for the purpose of paying debt service on the Local Project Municipal Obligation are held in trust and are subject to a statutory lien, as provided in Act 227. Section 15(2) of Act 227 provides that a payment 14

21 thereunder that is assigned or pledged to the Authority and held by the State treasurer or a trustee shall be held in trust and be subject to a lien in favor of the Authority. Act 227 provides that: (a) the payment that is assigned or pledged to the Authority shall be held by the State treasurer or a trustee in trust for the payment of principal and interest on the obligation incurred with the authority in a separate account for each municipality; (b) the lien shall be a statutory lien, paramount and superior to all other liens for the sole purpose of paying the principal of, and interest on, the obligation incurred with the Authority; (c) the payment under the act that is assigned or pledged to the Authority under the act shall be exempt from being levied upon, taken, sequestered, or applied toward paying the debts or liabilities of the governmental unit other than for payment of the obligation incurred with the Authority; (d) the lien granted under the act to the Authority shall be valid and binding as against all parties having claims of any kind in tort, contract, or otherwise, against the governmental unit irrespective of whether the parties have notice; and (e) neither the assignment, the pledge, nor any other instrument by which an assignment, lien, or pledge is created is required to be filed or recorded. Revenue Sharing and Distributable State Aid General. As defined in Act 80, Public Acts of Michigan, 1981, as amended, pursuant to which the Indenture was created, Distributable State Aid includes, in addition to State shared revenues provided under Act 140, any State shared revenues provided for in any other law providing for distribution of State shared revenues which are derived from the same taxes distributed under Act 140, and any law providing reimbursement to a municipality under the State Constitution as reimbursement for revenue which would otherwise be collected from taxes imposed by the municipality. The State revenue sharing program authorized by Act 140 distributes tax revenues collected by the State to local governments as unrestricted revenues. The City is entitled to a share of State shared revenue payments under the provisions of Act 140 and the State Constitution. These State shared revenue payments are currently the only source of Distributable State Aid and originate from State sales tax revenues derived from a 6% State levy on retail sales (other than sales of certain exempt items such as food and drugs) (the Sales Tax Revenues ). The City s Distributable State Aid receipts under the State revenue sharing program are composed of two components: Constitutional and Statutory. Distributable State Aid The Constitutional Component. The Constitutional Distribution (as hereinafter defined) is mandated by the State Constitution and distributed on a per capita basis to townships, cities and villages. It is not subject to legislative appropriation. The State Constitution limits the rate of sales tax to 6% and mandates that 15% of the total Sales Tax Revenues collected from the sales taxes levied at the rate of 4% be distributed on a per capita basis to townships, cities and villages (the Constitutional Distribution ). The amount of the Distributable State Aid constitutionally allocated to the City may be adjusted due to changes in the City s population as determined by the federal decennial statewide census, federal mid- 15

22 decade statewide census or special statewide census provided by law. Adjustments in Distributable State Aid payments based upon any certified population changes would be effective October 1 of the year for which the respective census is conducted. Once the official population data from the federal decennial statewide census, federal mid-decade statewide census, or special statewide census provided by law is certified and published, subsequent payments of the Constitutional Distribution will be adjusted to correct for any overpayments or underpayments made to the City. The Constitutional Distribution could also be reduced or otherwise adjusted pursuant to a constitutional amendment. The amount of Distributable State Aid constitutionally allocated to the City may not be reduced or delayed by an Executive Order of the Governor or legislative action other than by legislative action affecting how population is defined or legislative action modifying when payments are made. See RISK FACTORS REGARDING THE LOCAL PROJECT MUNICIPAL OBLIGATION Risk Factors Affecting Distributable State Aid Receipts herein. Distributable State Aid The Statutory Component. The second component of Distributable State Aid is authorized by legislative action and distribution is subject to annual State appropriation by the State Legislature. Act 140 describes the formulas used to determine the Statutory Distribution (as hereinafter defined) for townships, cities and villages and that formula has been adjusted multiple times. Pursuant to amendments made to Act 140 in 1996, an additional 21.3% of sales tax collections at the rate of 4% were to be distributed to the counties, townships, cities and villages in the State (the Statutory Distribution ). Under the 1996 amendments to Act 140, counties were to receive 24.5% of the authorized Statutory Distribution and cities, villages and townships were to receive 75.5%. Act 140 was further amended in 1998, 2002 and 2003, each time reducing the total percentage of the authorized Statutory Distribution available to townships, cities and villages. The 1998 amendments to Act 140 froze the total amount of the combined Constitutional Distribution and Statutory Distribution to be received by the City at $333.9 million and that amount was reduced by 3.5% by an amendment enacted in 2002 and reduced again by an additional 3.0% by an amendment enacted in 2003 which also provided for further reductions should the State sales tax receipts fall below forecasts. Beginning September 30, 2007, Act 140 provides that the Statutory Distribution to counties, cities, villages and townships shall be distributed as provided by law. The State Constitution provides that no appropriation shall be a mandate to spend. The State Constitution further provides that the Governor, with the approval of the Legislature s appropriating committees, must reduce expenditures authorized by appropriations whenever it appears that actual revenues for a fiscal period will fall below the revenue estimates on which appropriations for that period were based. Consequently, the Statutory Distribution may be reduced or delayed by Executive Order of the Governor. State law also provides for the delay or withholding of the Statutory Distribution by the State Treasurer under certain conditions. However, the Agreement to Deposit Distributable State Aid provides that so long as the Local Project Municipal Obligation is outstanding, if future installments of Distributable State Aid due the City are delayed or withheld, the State Treasurer shall not delay or withhold deposit with the Master Trustee of any portions of the City s Distributable State Aid necessary to meet the City s set-aside obligations on debt service for the Local Project Municipal Obligation to the extent such Distributable State Aid is due and owing to the City and unless required to do so by applicable law. See Distribution of Distributable State Aid below. 16

23 The following table lists the amounts of sales tax revenue collected by the State in State fiscal years 2001 through 2009, the amount of Constitutional and Statutory components of State revenue sharing distributions comprising Distributable State Aid, and the percentage of the Constitutional and Statutory components of State revenue sharing distributions comprising Distributable State Aid allocated to the City. The State s fiscal year begins October 1 of each year and ends September 30 of the following calendar year. 17

24 State Fiscal Year Total State Sales Tax Revenues (1) HISTORICAL SALES TAX REVENUE (in $ millions) Constitutional State Revenue Sharing (2) % Allocated to Detroit Statutory State Revenue Sharing (2) % Allocated to Detroit 2001 $6,352 $ % $ % , % % , % % , % % , % % , % % , % % , % % , % % Sources: (1) actual data: Michigan Department of Treasury - Office of Revenue and Tax Analysis, Michigan s Sales and Use Taxes (June 2010); (2) Michigan Department of Treasury.- Administration Estimates Michigan Economic and Revenue Outlook FY and FY (January 11, 2010); actual data: Michigan State Revenue Sharing Payments Total Actual and Estimated Payments (July 9, 2009); ; Michigan Department of Treasury Office of Revenue and Tax Analysis, Michigan Department of Treasury, Comparison FY2009 to FY2010, May Consensus (May 21, 2010); As shown in the table below, the actual Distributable State Aid payments allocated to the City during State fiscal years 2005 through 2009 have declined year to year or remained the same. Distributable State Aid payments to be paid by the State to the City during State fiscal year 2010 are estimated to decline significantly from the prior year. The amount of the Statutory Distribution allocated by the State to the City during the State s fiscal year ended September 30, 2009 was $206.8 million and the amount of the Constitutional Distribution allocated to the City during the same period was $62.2 million for a combined allocation of $269.0 million. Total Distributable State Aid allocated to the City is expected to decline by $34.3 million in the State s fiscal year ending September 30, 2010 to $234.7 million with the Constitutional Distribution expected to decline by $4.1 million and the Statutory Distribution to decline by $30.2 million. 18

25 DISTRIBUTABLE STATE AID State Fiscal Year Ended or Ending September 30, (in $ millions) * Revenue sharing Sales tax-constitutional Distribution $ 64.1 $ 65.2 $ 63.8 $ 65.9 $ 62.2 $ 58.1 Sales tax-statutory Distribution Total State revenue sharing $284.2 $281.1 $272.7 $272.7 $269.0 $234.7 Sources: actual data: Michigan Department of Treasury Finance Department, Bimonthly Estimated Payments for Local Governments; estimated data: Executive Budget Recommendation - January Consensus Office of Revenue and Tax Analysis, Michigan Department of Treasury (February 11, 2010); *Estimated Distribution of Distributable State Aid. Pursuant to Act 140, Distributable State Aid payments shall be made to cities, villages and townships during each October, December, February, April, June and August based on collections from the sales tax at the rate of 4% in the 2-month period ending the prior August 31, October 31, December 31, February 28, April 30 and June 30. State law provides for the withholding of the Statutory Distribution component of Distributable State Aid payments under certain conditions, one being a late or past due Comprehensive Annual Financial Report ( CAFR ), subject to the provisions of the Subordinate Lien State Aid Deposit Agreement as described below. During the fiscal years of the City ended June 30, 2008 ( FY2008 ) and June 30, 2009 ( FY2009 ), the City had not filed its CAFR on a timely basis. In response, the State withheld payment of a portion of the City s Statutory Distribution component of Distributable State Aid payments (the Withheld Amount ). The City filed its CAFR for its FY2008 on November 20, 2009 and its CAFR for FY2009 on May 28, Upon such filings, the State released the Withheld Amounts and the City is current on receiving the expected Distributable State Aid payments. See the Distributable State Aid Cash Flow table, below. Pursuant to the Agreement to Deposit Distributable State Aid, the State Treasurer agrees that so long as the Local Project Municipal Obligation is outstanding, if future installments of Distributable State Aid due the City are delayed or withheld, the State Treasurer shall not delay or withhold deposit with the Master Trustee of any portions of the City s Distributable State Aid necessary to meet the City s setaside obligations on debt service for the Local Project Municipal Obligation to the extent such Distributable State Aid is due and owing to the City and unless required to do so by applicable law. The following table lists budgeted bi-monthly Distributable State Aid based upon consensus revenue estimates during State fiscal years 2008 through 2010 and historical actual payments to the City during State fiscal years 2008 and 2009 and fiscal year 2010 through 19

26 July Budgeted Distributable State Aid for each October, December, February, April, June and August are shown in the table in the next succeeding month to correspond with State remittances generally paid in the beginning of the next succeeding month. Prior to State fiscal year 2008, Distributable State Aid payments were generally not withheld by the State Treasurer and were paid on a timely basis. DISTRIBUTABLE STATE AID CASH FLOW State Fiscal Year Ended or Ending September 30, (in $ millions) Budgeted Actual Cumulative Annual (Deficit) / Surplus Budgeted Actual Cumulative Annual (Deficit) / Surplus Budgeted Actual Cumulative Annual (Deficit) / Surplus October $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 35.4 $ 35.4 $ 0.0 $ 10.3 $ 10.3 November (10.5) December January (25.7) (19.0) February (15.8) (7.3) March (34.7) (11.0) April May (34.7) (7.1) (4.6) June July (24.6) August September (23.0) (1.6) $272.7 $249.7 $269.0 $267.3 $234.7 $104.5 Note: Totals may not add due to rounding. Sources: Trustee Michigan Department of Treasury Finance Department, Bimonthly Estimated Payments for Local Governments; 20

27 The following table shows the pro forma debt service coverage based upon actual Distributable State Aid receipts in the State s fiscal years 2005 through 2009 and projected amounts to be received in State fiscal year PRO FORMA DEBT SERVICE COVERAGE State Fiscal Year Ended or Ending September 30, (in $ millions) * Total Distributable State Aid $ $ $ $ $ $ Constitutional Distribution of State Aid $ 64.1 $ 65.2 $ 63.8 $ 65.9 $ 62.2 $ 58.1 Maximum Annual Senior Lien Debt Service $ 18.9 $ 18.9 $ 18.9 $ 18.9 $ 18.9 $ 18.9 Senior Lien Debt Service Coverage from All Distributable State Aid x 14.9 x 14.4 x 14.4 x 14.2 x 12.4 x Senior Lien Debt Service Coverage from 1 Constitutional Distribution of State Aid 3.4 x 3.4 x 3.4 x 3.5 x 3.3 x 3.1 x Maximum Annual Second Lien Debt Service 1,2 $ 9.8 $ 9.8 $ 9.8 $ 9.8 $ 9.8 $ 9.8 Second Lien Debt Service Coverage from All Distributable State Aid 1 9.9x 9.8x 9.5x 9.5x 9.4x 8.2x Second Lien Debt Service Coverage from Constitutional Distribution of State Aid 1 2.2x 2.3x 2.2x 2.3x 2.2x 2.0x *Estimated 1: coverage levels are for illustrative purposes only since no Senior or Second Lien bonds were issued until : Debt service amounts are before federal subsidy payments Sources: actual data: Michigan Department of Treasury Finance Department, Bimonthly Estimated Payments for Local Governments; estimated data: Executive Budget Recommendation - January Consensus Office of Revenue and Tax Analysis, Michigan Department of Treasury (February 11, 2010); Distributable State Aid Obligations - Flow of Funds. The Indenture creates and establishes a single and common trust fund designated the Distributable State Aid Common Debt Retirement Fund (the Debt Retirement Fund ) with the Master Trustee. Under the Indenture, the Master Trustee acts as depository and trustee for the City s Distributable State Aid. Pursuant to an agreement between the City, the State Treasurer and the Master Trustee, dated as of March 1, 2010, providing for the deposit of Distributable State Aid payments by the State Treasurer directly with the Master Trustee for payment of the 2010 Senior Bonds (the Senior Lien Deposit Agreement ), the State Treasurer has agreed to send 100% of the Distributable State Aid due the City to the Master Trustee for deposit under the Trust Indenture for as long as the 2010 Senior Bonds are outstanding, and pursuant to the Agreement to Deposit Distributable State Aid, will continue to send 100% of the Distributable State Aid due the City to the Master Trustee for deposit under the Trust Indenture for so long as the Local Project Municipal Obligation is outstanding. Nothing in either the Senior Lien Deposit Agreement or 21

28 the Agreement to Deposit Distributable State Aid (collectively the Deposit Agreements ) abridges or reduces the ability of the State Treasurer to withhold Distributable State Aid from the City as provided by law under Act 140 or other applicable law. However, pursuant to the terms of the Agreements, the State Treasurer has agreed that so long as the 2010 Senior Bonds and the Local Project Municipal Obligation are outstanding, if future installments of Distributable State Aid due the City are delayed or withheld, the State Treasurer shall not delay or withhold deposit with the Master Trustee of any portions of the City s Distributable State Aid necessary to meet the City s set-aside obligations on debt service for the 2010 Senior Bonds to the extent such Distributable State Aid is due and owing to the City and unless required to do so by applicable law. The Master Trustee is required to deposit all of the City s Distributable State Aid in the Debt Retirement Fund and allocate and set aside Distributable State Aid into the various Distributable Aid Escrow Funds (the DSA Escrow Funds ) created pursuant to one or more supplemental indentures for the purpose of accumulating Distributable State Aid in sufficient amounts to pay debt service on the bonds and obligations of the City secured by a pledge of Distributable State Aid, including the 2010 Senior Bonds and the Local Project Municipal Obligation. On each such date that the State Treasurer deposits a payment of the City s Distributable State Aid (each a DSA Deposit ) with the Master Trustee (each a DSA Deposit Date ), the Master Trustee shall set-aside such amounts as shall be sufficient to fund the minimum balances required to be on deposit in each DSA Escrow Fund to pay the then current annual principal and interest requirements on the Local Project Municipal Obligation as provided in the Trust Indenture (each, a Deposit Date Balance Requirement and collectively the Deposit Date Balance Requirements ). Any amounts remaining in the Debt Retirement Fund after the setting aside of the amounts necessary to satisfy the Deposit Date Balance Requirements of all DSA Escrow Funds, shall be released to the City for deposit to the General Fund of the City. Set-Aside Requirements for the 2010 Senior Bonds With respect to the 2010 Senior Bonds, the Indenture, as supplemented by the First Supplemental Debt Retirement Trust Indenture dated as of March 1, 2010 (collectively, the Senior Trust Indenture ) established and created with the Master Trustee a DSA Escrow Fund (as defined in the Indenture) designated the Series 2010 Escrow Fund. Moneys on deposit in the Series 2010 Escrow Fund shall be held and withdrawn by the Master Trustee solely for the purpose of paying the principal of and interest on the 2010 Senior Bonds when due and payable. Within the Series 2010 Escrow Fund there shall be created two separate and segregated subaccounts designated the Distributable Aid Account and the General Account. That portion of Distributable State Aid necessary to pay the principal of and interest on the 2010 Senior Bonds when due, shall be set aside and maintained in the Distributable Aid Account of the Series 2010 Escrow Fund. All such other moneys deposited to the Series 2010 Escrow Fund from time to time by the City shall be set aside and maintained in the General Account of the Series 2010 Escrow Fund. For purposes of satisfying the annual set-aside requirements for the Series 2010 Escrow Fund for the 2010 Senior Bonds, within one (1) business day of receipt from each of the October, December and February DSA Deposits (as defined in the Trust Indenture), the Master Trustee shall set aside from the Debt Retirement Fund: (i) to the Series 2010 Escrow Fund, one third (1/3) of the interest due on the next succeeding May 1, and one-sixth (1/6) of the principal due 22

29 on the 2010 Senior Bonds on the next succeeding November 1 and within one (1) business day of receipt from each of the April, June and August DSA Deposits, the Master Trustee shall set aside: (i) in the Series 2010 Escrow Fund, one third (1/3) of the interest due on the next succeeding November 1 and one-sixth (1/6) of the principal due on the 2010 Senior Bonds on the following November 1. In accordance with the Trust Indenture, if a DSA Deposit Date is accelerated or delayed, receipt of the DSA Deposit to the Debt Retirement Fund will mean the actual date of receipt of the DSA Deposit by the Master Trustee. In the event DSA Deposit Dates are changed as a result of a change in applicable law, DSA Deposits shall be set aside in accordance with the requirements of the Senior Trust Indenture. In the event the Deposit Date Balance Requirement for the Series 2010 Escrow Fund is not satisfied following the deposit of the amount required, the Trustee shall set aside from the remaining DSA Deposit received on the DSA Deposit Date, an additional amount equal to the deficiency for the Deposit Date Balance Requirement. If a deficiency of the Deposit Date Balance Requirement exists within forty-five (45) days of the next principal and/or interest date for the 2010 Senior Bonds, the Master Trustee shall notify the City in writing that the Deposit Date Balance Requirement is not on deposit in the Series 2010 Escrow Fund, and the City shall promptly after receiving such notice, cause to be deposited with the Trustee other available funds of the City for deposit to the General Account of the Series 2010 Escrow Fund, in an amount necessary to make up the Deposit Date Balance Requirement deficiency. Set-Aside Requirements for the Local Project Municipal Obligation With respect to the Local Project Municipal Obligation, the Master Indenture established and created a DSA Escrow Fund designated the Series 2010(A) Escrow Fund. Moneys on deposit in the Series 2010(A) Escrow Fund shall be held and withdrawn by the Master Trustee solely for the purpose of paying the principal of and interest on the Local Project Municipal Obligation when due and payable. Within the Series 2010(A) Escrow Fund there shall be created three separate and segregated sub-accounts designated the Distributable Aid Account, the Series 2010(A) Tax Levy Account, and the General Account. That portion of the proceeds of the Local Project Municipal Obligation representing capitalized interest shall be deposited in the Series 2010(A) Tax Levy Account and used to pay interest on the Local Project Municipal Obligation through July 1, That portion of Distributable State Aid necessary to pay the principal of and interest on the Local Project Municipal Obligation when due, shall be set aside and maintained in the Distributable Aid Account of the Series 2010(A) Escrow Fund. Commencing with the July 2011 tax levy, proceeds from the voter authorized tax levy (the Tax Levy ) when received by the City from time to time for the purpose of paying principal of and interest on the Local Project Municipal Obligation shall be set aside and maintained in the Series 2010(A) Tax Levy Account and used as described below. All such other moneys deposited to the Series 2010(A) Escrow Fund from time to time by the City shall be set aside and maintained in the General Account of the Series 2010(A) Escrow Fund and used as described below. Under the Second Supplemental Indenture, the Master Trustee is designated and appointed as the City s depository for the receipt of proceeds from the Tax Levy received by the City and Distributable Aid payments from the State Treasurer for payment of principal of and interest on the Local Project Municipal Obligation. 23

30 Commencing with the July 2011 Tax Levy, proceeds from the Tax Levy received by the City from time to time shall be deposited with the Master Trustee and set aside in the Series 2010(A) Tax Levy Account in an aggregate amount which, together with such other funds on deposit with the Master Trustee in the Series 2010(A) Escrow Fund, shall be sufficient to pay principal of and interest on the Local Project Municipal Obligation when due for the next succeeding bond year. In addition, monies returned by the County Treasurer of the County of Wayne ( County ) as payment for delinquent Tax Levy taxes turned over to the County for collection, and any Federal Payments received by or on behalf of the City for the Local Project Municipal Obligation shall be deposited with the Master Trustee and set aside in the Series 2010(A) Tax Levy Account. Unexpended moneys remaining on deposit in the Series 2010(A) Tax Levy Account after payment of the principal of and interest on the Local Project Municipal Obligation for the corresponding bond year shall be retained in the Series 2010(A) Tax Levy Account for the payment of debt service on the Local Project Municipal Obligation for each subsequent bond year and treated as a credit against future tax levies to reduce the amount of the next succeeding Tax Levy to be levied by the City for the payment of debt service on the Local Project Municipal Obligation. Within one business day of receipt of each DSA Deposit to the Debt Retirement Fund of the City established pursuant to the Indenture, the Master Trustee shall determine if the Deposit Date Balance Requirement for the Series 2010(A) Escrow Fund has been satisfied by the deposits required above. In the event that the Deposit Date Balance Requirement for the Series 2010(A) Escrow Fund is not satisfied by the deposits required, the Master Trustee shall (i) determine the amount of the deficiency, (ii) give written notice to the City and the State Treasurer within sixty (60) days of the next principal and/or interest payment date for the Local Project Municipal Obligation of the amount of the deficiency, and (iii) set aside from the remaining DSA Deposit received on the DSA Deposit Date, an amount equal to the deficiency for the Deposit Date Balance Requirement. In the event the Deposit Date Balance Requirement for the Series 2010(A) Escrow Fund is not satisfied following the deposit of the amount required, the Master Trustee shall set aside from the remaining DSA Deposit received on the DSA Deposit Date, an additional amount equal to the deficiency for the Deposit Date Balance Requirement. If a deficiency of the Deposit Date Balance Requirement exists within forty-five (45) days of the next principal and/or interest date for the Local Project Municipal Obligation, the Master Trustee shall notify the City in writing that the Deposit Date Balance Requirement is not on deposit in the Series 2010(A) Escrow Fund, and the City shall promptly after receiving such notice, cause to be deposited with the Master Trustee other available funds of the City for deposit to the General Account of the Series 2010(A) Escrow Fund, in an amount necessary to make up the Deposit Date Balance Requirement deficiency. Upon satisfaction of the Deposit Date Balance Requirement on each corresponding Deposit Date for the Local Project Municipal Obligation, within five (5) Business Days thereafter the Master Trustee shall remit to the City any remaining funds on deposit in the Series 2010(A) Escrow Fund, excluding monies on deposit in the Series 2010(A) Tax Levy Account, as provided in the Trust Indenture. Amounts withdrawn from the Series 2010(A) Escrow Fund for the purpose of paying debt service on the Local Project Municipal Obligation shall be debited first from the Series 2010(A) Tax Levy Account of the Series 2010(A) Escrow Fund in an amount necessary to pay 24

31 the principal of and interest on the Local Project Municipal Obligation on the corresponding payment date, and thereafter, if the amount on deposit in the Series 2010(A) Tax Levy Account is not sufficient to make the payments required, the amount necessary to satisfy the deficiency shall be debited, first, from the Distributable Aid Account, and second, from the General Account. Additional pledges of Distributable State Aid and Additional Parity Obligations. Pursuant to the Master Indenture, the City has covenanted that as long as the 2010 Senior Bonds are outstanding, the City will not make additional pledges or assignments of Distributable State Aid superior to or on a parity basis with the pledge of Distributable State Aid made for the 2010 Senior Bonds as security for future bonds or obligations of the City. The City may from time to time, to the extent provided by law and in accordance with the Master Indenture, issue in addition to the Local Project Municipal Obligation, bonds or obligations for which principal and interest repayments are secured and payable from Distributable Aid on a parity basis with the Municipal Obligation ( Additional Second Lien Obligations, and collectively with the Local Project Municipal Obligation, Second Lien Obligations ), but only to the extent that (i) the amount of Constitutional Distribution due to the Master Trustee in the twelve (12) calendar months immediately preceding the date on which such Additional Second Lien Obligations are issued, or projected by the State to be due the City for the then current fiscal year of the State, whichever is less, equals or exceeds 150% of the maximum amount of principal of and interest on all Distributable Aid Obligations coming due in any year as of the time immediately following the issuance of such Additional Second Lien Obligations; and (ii) the amount of the total Distributable State Aid due and/or appropriated to the City in the twelve (12) calendar months immediately preceding the date on which such Additional Second Lien Obligations are to be issued, or projected by the State to be due the City for the then current fiscal year of the State, whichever is less, equals or exceeds 200% of the maximum amount of principal of and interest on all Distributable Aid Obligations in any year as of the time immediately following the issuance of such Additional Second Lien Obligations. Limitation on Remedies of Holder of the Local Project Municipal Obligation The rights and remedies of owners or holders of the Local Project Municipal Obligation and the enforceability of the Local Project Municipal Obligation, the City Resolution, Act 279 may be subject to and limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or similar laws affecting the enforcement of creditors rights generally heretofore or hereafter enacted to the extent constitutionally applicable, and by the application of general principles of equity including those relating to equitable subordination and the enforcement of such rights and remedies may also be subject to and limited by the exercise of judicial discretion in appropriate cases. SPECIAL INVESTOR CONSIDERATIONS CONCERNING BANKRUPTCY OF THE CITY The City has been experiencing financial challenges in recent years due, in part, to population declines and rising unemployment and has been limited in its access to capital, primarily because of downgrades in the City s credit ratings. It is the City s intent to arrange its 25

32 affairs and manage its budget to eliminate its current carry-over deficit and provide for future balanced financial operations. If, however, the City s financial status were to deteriorate further, the City s options to improve its fiscal health may be limited. The City is prohibited from voluntarily becoming a debtor under Chapter 9 of the United States Bankruptcy Code (the Bankruptcy Code ) without first complying with certain State law requirements as described below under the caption The Local Government Fiscal Responsibility Act. The Bankruptcy Code does not authorize municipalities to be subject to involuntary bankruptcy petitions. The Local Government Fiscal Responsibility Act The Local Government Fiscal Responsibility Act, Act 72 Public Acts of Michigan, 1990 ( Act 72 ) was enacted to assist any Michigan unit of local government in a fiscal emergency situation to remedy the emergency situation by requiring prudent fiscal management. Specifically, Act 72 provides that the following steps must occur before any consideration of a bankruptcy filing by a local unit of government: The State shall conduct a preliminary review to determine the existence of a financial emergency. The State shall conduct the preliminary review upon the happening of one or more of the following 14 triggering events: The City requests the review; The State Treasurer receives a request from a creditor with an undisputed claim that is more than 1% of the City s General Fund budget and remains unpaid more than 6 months from its due date; The State Treasurer receives a petition from a minimum number of local registered voters containing specific allegations of the City s financial distress; The City has not made timely minimum payments to its pension funds as required by law; City employees have not been paid for at least 7 days beyond the scheduled date of payment; There has been a payment default or covenant default on existing bond debt; Either the State Senate or State House of Representatives requests the review; The City has violated the provisions of any state law governing the issuance of debt; There has been a violation of the conditions of a loan issued pursuant to the Emergency Municipal Loan Act which provides for emergency loans from the State to local government units; There has been noncompliance with the State s Uniform Budgeting and Accounting Act; The City has failed to file a Deficit Elimination Plan as required by law; The City has failed to file its annual financial report or audit; The City is delinquent in the distribution of tax revenues that it has collected on behalf of another taxing jurisdiction and that taxing jurisdiction requests the review; and A Court has ordered an additional tax levy without prior approval of the City. 26

33 After a triggering event, the State Treasurer is required to meet with City officials to discuss and consider the seriousness of the City s financial condition and to make a determination to the Governor within 30 days as to whether a serious financial problem exists. The Governor shall appoint a review team to undertake a local financial management review. The review team is required to report its findings within 60 days and include one of the following conclusions: A serious financial problem does not exist; A serious financial problem exists in the local government, but a consent agreement containing a plan to resolve the problem has been adopted and will be monitored; A local government financial emergency exists because no satisfactory plan exists to resolve a serious financial problem. If the Governor determines, after receiving the report of the review team, that a financial emergency exists, the City may request a hearing within 10 days of notification of the Governor s determination. If the determination is confirmed following the hearing or if no hearing is requested, or if at any time the Governor is advised that the City is not abiding by the provisions of a consent agreement, the Governor shall assign the responsibility for managing the financial emergency to the local emergency financial assistance loan board (comprised of the State Treasurer, the Director of the Department of Consumer and Industry Services and the Director of the Department of Management and Budget) which shall appoint an emergency financial manager which shall have full authority to accomplish the purposes of Act 72. The City may appeal the Governor s determinations to the county circuit court, however, the court may only overturn the Governor s determinations if it finds that the determinations are not supported by competent, material, and substantial evidence or the determinations are arbitrary, capricious, or clearly an abuse or unwarranted exercise of discretion. The emergency financial manager is required to develop a written financial plan which shall include payment in full of the scheduled debt service requirements on all bonds and notes of the City and all other uncontested legal obligations. Act 72 does not set forth a time by which such plan must be developed. Only if the emergency financial manager determines that either (1) no feasible financial plan can be adopted that can satisfactorily resolve the financial emergency in a timely manner, or (2) the adopted plan in effect for at least 180 days cannot be implemented in a manner that can satisfactorily resolve the financial emergency in a timely manner, can the emergency financial manager request permission from the local emergency financial assistance loan board to file for municipal bankruptcy. The local emergency financial assistance loan board has 60 days to disapprove the request. As of the date hereof, the State has not informed the City of any trigger event which would cause the State Treasurer to begin taking the steps authorized under Act 72 as described above. Further, the City has not requested a State review of the City s financial condition pursuant to Act 72 and has no present intention to do so. 27

34 Treatment of Lien on Tax Revenues after a Bankruptcy Filing There has never been a municipal bankruptcy filing in Michigan under the Bankruptcy Code. The lack of precedent in Michigan makes the risks associated with such a filing difficult to assess. As a general matter, however, bankruptcy courts have limited authority to direct the disposition of municipal assets in a federal bankruptcy filing. The Bankruptcy Code expressly provides that, without the debtor s consent, the court may not interfere with any of the property or the revenues of the debtor. Treatment of Distributable State Aid after a Bankruptcy A bankruptcy filing by the City should not affect the State s obligation to pay the City s portion of Distributable State Aid. Despite this treatment, however, there can be no assurance that the State will not change the method or formula for payment of the Statutory Distribution or amend the State Constitution to reduce the amount of the Constitutional Distribution, or that Sales Tax Revenues will continue to be collected in sufficient amounts to pay debt service requirements in full on the Local Project Municipal Obligation. If the City were to go into bankruptcy, the City has been further advised by its bond counsel that, although the question is not free from doubt, in a case that is properly argued, the court having jurisdiction over the case should hold that the proceeds of the taxes that have been pledged to repay the Local Project Municipal Obligation and that are levied by the City for the specific purpose of paying the principal of and interest on the Local Project Municipal Obligation constitute special revenues within the meaning of Section 902(2)(E) of the Bankruptcy Code. Consequences of the proceeds of the tax levy constituting special revenues are that (i) the automatic stay under the Bankruptcy Code will not operate as a stay of application of pledged special revenues to payment of indebtedness secured by the tax revenues, and (ii) special revenues acquired by the City after the commencement of the City s bankruptcy case will remain subject to any lien resulting from a security agreement entered into by the City before the commencement of the City s bankruptcy case. The Bankruptcy Code both allows the paying agent that comes into possession of the pledged special revenues both before and after the commencement of the bankruptcy case to distribute the revenues to bondholders and allows the debtor in bankruptcy voluntarily to transfer the pledged special revenues to the paying agent both before and after the commencement of the bankruptcy case. The Bankruptcy Code also preserves the lien on special revenues created by a pre-bankruptcy security agreement with the debtor in a municipal case after the commencement and during the continuation of the bankruptcy case. If the City were to go into bankruptcy, the City has been advised by its bond counsel that, although the question is not free from doubt, in a case that is properly argued, the court having jurisdiction over the case should hold that special revenues cannot be used to pay necessary operating expenses of the City prior to paying debt service. Treatment of the tax revenues levied to pay the Local Project Municipal Obligation as special revenues in a City bankruptcy does not, however, guarantee that the City will levy the taxes and collect and transfer to the paying agent the necessary tax revenues to pay the Local Project Municipal Obligation. The automatic stay will not prohibit the State, City and local collection authorities from performing their statutory duties with respect to the payment of the Local Project Municipal Obligation. However, there can be no assurance that a court would not 28

35 use its equitable powers to enjoin or otherwise limit the State, City or local collection authorities in the exercise of such duties. The automatic stay that becomes effective the moment the federal bankruptcy petition is filed serves to enjoin litigation against the debtor and prevents other forms of creditor enforcement remedies without express permission from the federal bankruptcy court. The automatic stay will not prohibit the State, the City or the Master Trustee from performing their statutory and contractual duties with respect to the use of Distributable State Aid for payment of the Local Project Municipal Obligation. However, there can be no assurances that a court would not use its equitable powers to enjoin or otherwise limit the State, the City or the Master Trustee in the exercise of such duties. Were the court to exercise such equitable powers, payment of Distributable State Aid to the Authority as holder of the Local Project Municipal Obligation could be delayed. The automatic stay would prohibit the Authority as holder of the Local Project Municipal Obligation from commencing or continuing any action to collect its pre-bankruptcy claims against the City or to enforce its liens against the proceeds of the levied taxes, unless the permission of the bankruptcy court is obtained. The Bankruptcy Code augments the automatic stay further by prohibiting the commencement or continuation of a judicial, administrative, or other action or proceeding against an officer or inhabitant of the debtor to enforce a claim against the debtor. Further, treatment of the tax revenues levied to pay the Local Project Municipal Obligation as special revenues in a City bankruptcy case would not guarantee that the City could not both grant liens on the tax revenues levied to pay the Local Project Municipal Obligation to a creditor offering financing to the City during the bankruptcy case or modify the payment terms of the Local Project Municipal Obligation pursuant to a plan proposed in the bankruptcy case. The bankruptcy court could authorize the debtor to obtain credit secured by a senior, priming lien on property of the bankruptcy estate already encumbered by existing liens, but only if the bankruptcy court determines that there is adequate protection of the interests of the holders of those existing liens on the property of the estate on which the senior or equal lien is proposed to be granted. Similarly, although the City may be able to conform a plan that modifies the terms of the Local Project Municipal Obligation, if the Authority as holder of the obligation, votes to reject a plan and object to confirmation of a plan, the plan cannot be confirmed unless the plan: (1) allows the holder of the obligations to retain its lien on the tax revenues that secure its claim and makes payments to the holder of the obligation equal to the total value of the tax revenues that secure its claim, as of the effective date of the plan; or (2) proposes to sell the tax revenues that secure the holder of the obligation, subject to the obligation holder s rights, if any, to bid in its claim at the sale, and provided that the obligation holder s lien will attach to the proceeds of the sale; or (3) provides for the holder of the obligations to receive what the bankruptcy court determined to be the indubitable equivalent of its claim. If it were determined that the taxes do not constitute special revenues, then the lien of the security agreement may not attach to any tax revenues collected after the bankruptcy case is commenced and the City may not be required to use such tax collections to pay debt service. In such circumstances, there could be substantial delays or reductions in payments on the Local Project Municipal Obligation. In addition, the holder of the Local Project Municipal Obligation 29

36 may need to obtain the permission of the bankruptcy court before any payments can be made on the Local Project Municipal Obligation (even from moneys in the Master Trustee s possession) and before any rights or remedies can be exercised by the Master Trustee or the holder of the Local Project Municipal Obligation. In addition, pursuant to Act 140, the State Treasurer is required to transmit Distributable Aid payments that the City is eligible to receive under Act 140 to the Master Trustee in accordance with the Agreement to Deposit Distributable State Aid. Under Act 227, the Master Trustee is required to hold such Distributable Aid payments in trust for the payment of principal of and interest on the Local Project Municipal Obligation. Under Act 227, the Distributable Aid payments pledged to the Authority and held by the Master Trustee are subject to a lien in favor of the Authority. If the City were to file for protection under the Bankruptcy Code after taking the steps required by Act 72, the City has been advised by its bond counsel that, although the question is not free from doubt, in a case that is properly argued, the court having jurisdiction over the case should hold that the portion of the Distributable State Aid pledged for payment of the Local Project Municipal Obligation and received or to be received by the Master Trustee from the State Treasurer pursuant to the Agreement to Deposit Distributable State Aid, both before and after the City s filing for protection under the Bankruptcy Code, remains subject to the statutory lien and trust imposed on the portion of Distributable State Aid pledged for the Local Project Municipal Obligation pursuant to Act 227 for the sole purpose of paying the principal of and interest on the Local Project Municipal Obligation incurred with the Authority. Further, a bankruptcy court should hold that the portion of Distributable State Aid pledged for payment of the obligation incurred with the Authority does not constitute property of the bankruptcy estate and should not authorize the State, the City, or the Trustee to use such Distributable State Aid for purposes other than to pay the principal of and interest on the Local Project Municipal Obligation. RISK FACTORS REGARDING THE LOCAL PROJECT MUNICIPAL OBLIGATION This Official Statement contains summaries of pertinent portions of the City Resolution, Local Project Municipal Obligation, the Deposit Agreements and the Master Indenture. Such summaries and references are qualified in their entirety by reference to the full text of the documents that comprise the Deposit Agreements and Master Indenture. The following discussion of some of the risk factors associated with the Local Project Municipal Obligation which provide security for repayment of the Series Bonds is not, and is not intended to be, exhaustive, and such risks are not necessarily presented in the order of their magnitude. This Official Statement does not describe all of the risks of an investment in the Series Bonds or the risk factors associated with the Local Project Municipal Obligation which provide security for repayment of the Series Bonds and the Underwriters disclaim any responsibility to advise prospective investors of such risks as they exist at the date of this Official Statement or as they change from time to time. Prospective investors should consult their own legal and tax advisors as to the risks associated with an investment in the Series Bonds in light of their particular circumstances. Prospective investors should be able to bear the risks relating to an investment in the Series Bonds and should carefully consider, among other factors, the matters described below. 30

37 Risk Factors Affecting Distributable State Aid Receipts The following categories of information represent some of the risk factors that may affect the actual amount of Distributable State Aid received by the City and available for payment of principal of and interest on the Local Project Municipal Obligation. Any event that would cause a delay, reduction or elimination of the Distributable State Aid could have a material adverse effect on the ability of the City to make payments due under the City Resolution and the Master Indenture. The risk factors described below are not, and are not intended to be the only factors that may adversely affect future payment of Distributable State Aid from the State to the City. Changes in Law. Act 140 is subject to modification by the State Legislature, subject only to certain constitutional parameters. The State Legislature has amended the laws affecting Distributable State Aid payments to townships, cities and villages, including the City, since it was first enacted in The amount, timing and methodology for calculation of the Statutory Distribution component of Distributable State Aid has changed significantly in recent years, and is subject to future legislative changes. Future amendments to Act 140 may adversely affect the City s ability to pay debt service on the Local Project Municipal Obligation, for example, by reducing the maximum amount payable by the State to the City or by eliminating the Statutory Distribution of Distributable State Aid altogether. Similarly, a Constitutional amendment that modifies the amount, timing and methodology for calculation of or eliminates altogether, the provisions of the Constitutional Distribution component of Distributable State Aid may adversely affect the City s ability to pay debt service on the Local Project Municipal Obligation. See SECURITY FOR THE LOCAL PROJECT MUNICIPAL OBLIGATION Revenue Sharing and Distributable State Aid herein. Sales Tax Collections in the State. The sole source of Distributable State Aid currently is sales tax revenue collected by the State. Sales tax revenues historically have been sensitive to changes in economic conditions. For example, sales tax revenues have historically declined during economic recessions, when high unemployment adversely affects consumption. Michigan has been impacted by economic conditions more seriously than many other states, and the effects of the economic crisis are likely to continue. As of October 2010, Michigan had the nation s second highest jobless rate. State sales tax revenues have declined recently, but are projected by the State to increase 18.8% and 2.3% in 2010 and Any reduction in State sales tax revenues or constitutional changes or legislative changes to laws affecting the amount of State tax revenues available for distribution to local governments could have a material adverse effect on the City s ability to pay debt service on the Local Project Municipal Obligation. Current Economic Conditions in the State. The State s ability to make Distributable State Aid payments to the City in the amounts and at the times anticipated could be affected by the State s overall financial condition and its ability to finance any temporary cash flow deficiencies. The State Constitution prohibits the Governor from reducing funds constitutionally dedicated for a specific purpose, but requires that the Governor, with the approval of the State Legislature s appropriating committees, reduce expenditures authorized by appropriations 1 Source: 31

38 whenever it appears that actual revenues for a fiscal period will fall below the revenue estimates on which appropriations for that period were based. While the Governor has, therefore, been prohibited from adjusting the Constitutional Distribution component of Distributable State Aid, in recent years, the Statutory Distribution component of Distributable State Aid has been reduced as part of the process of balancing the State s budget. Any action by the Governor and State Legislature reducing or delaying Distributable State Aid in response to economic conditions affecting the State could have a material adverse affect on the City s ability to pay debt service on the Local Project Municipal Obligation. Declines in City Population as a Proportion of State Population. Future amounts of the State s Constitutional Distribution to the City may be affected by changes in the City s population as determined by the federal decennial statewide census, federal mid-decade statewide census or special statewide census provided by law. The Constitutional Distribution component of Distributable State Aid for recipients throughout the State is determined on a per capita basis. To the extent that the City s population declines at a rate greater than that of other recipients, the City s share of the Constitutional Distribution would decline. There can be no assurance that any negative adjustment to the Constitutional Distribution resulting from certified census results would be immaterial. Adjustments in Distributable State Aid payments based upon any certified population changes would be effective October 1 of the year for which the respective census is conducted. See SECURITY FOR THE LOCAL PROJECT MUNICIPAL OBLIGATION Revenue Sharing and Distributable State Aid herein. State Appropriation of Statutory Distribution Component of Distributable State Aid. The Statutory Distribution component of Distributable State Aid available in any fiscal year is subject to appropriation by the State Legislature. The Legislature may not appropriate funds, or may not appropriate funds in a sufficient amount, when combined with the Constitutional Distribution (which is not subject to appropriation), to enable the City to pay debt service on the Local Project Municipal Obligation and to meet its general operating expenses. The State Constitution provides that no appropriation shall be a mandate to spend. Therefore, the State appropriation to all recipients, including the City, could be reduced or delayed such that the aggregate Distributable State Aid payments to the City could be inadequate to allow the City to pay debt service on the Local Project Municipal Obligation. See Current Economic Conditions in the State above and Economic and Other Factors Affecting the Financial Condition of the City below. Economic and Other Factors Affecting the Financial Condition of the City Although it is expected that the Constitutional Distribution and Statutory Distribution components of Distributable State Aid, in the aggregate, will be available in sufficient amounts to pay debt service on the Local Project Municipal Obligation, there can be no assurance that Distributable State Aid will be sufficient to pay debt service on the Local Project Municipal Obligation. To the extent Distributable State Aid is insufficient to pay debt service on the Local Project Municipal Obligation or eliminated entirely, the Local Project Municipal Obligation will be payable from other funds of the City legally available for such purpose including the proceeds of annual ad volorem property taxes which must, to the extent necessary, be levied on all taxable property within the boundaries of the City. 32

39 Economic and other factors have and may continue to adversely affect the City s revenues and expenses and, consequently, the City s ability to meet its operating expenses. Among the factors that could have such adverse effects are: decreases in property and income tax collections; increases in unemployment in the City and State; the City s ability to gain concessions from its unionized workers and the consequent impact on wage scales and operating costs of the City; the City s ability to access capital markets; adverse changes to State budgets and appropriations affecting critical revenue streams from the State to the City (including Distributable State Aid); and changes in demographic trends. The City cannot assess or predict the ultimate effect of these factors on its operations or financial results of its operations or on its ability to make debts service payments on the Local Project Municipal Obligation. Special Investor Considerations Special Considerations Relating to Debtor Relief and Bankruptcy - Remedies May be Unenforceable. Certain remedies provided for in the Indenture may be unenforceable as a result of the application of principles of equity or of state and federal laws relating to bankruptcy, other forms of debtor relief, and creditors rights generally. See SOURCES OF PAYMENT FOR THE LOCAL PROJECT MUNICIPAL OBLIGATION Limitations on Remedies of Bondowners herein. If the City were to commence a case under the United States Bankruptcy Code, there could be adverse effects on the holder of the Local Project Municipal Obligation, including (a) delay in payments due on the Local Project Municipal Obligation and in the enforcement of their remedies, (b) subordination of their claims to claims of those supplying goods and services to the City after initiation of the bankruptcy case and to the administrative expenses of the bankruptcy case, and (c) imposition without their consent of a plan of adjustment reducing or delaying payment of Local Project Municipal Obligation. The United States Bankruptcy Code contains provisions intended to ensure that, in any plan of adjustment not accepted by at least a majority of any class of secured creditors such as the holders of the Local Project Municipal Obligation, such class of creditors is treated fairly. The plan may, however, alter a secured creditor s rights. To the extent that the value of collateral securing a claim is less than the amount of such claim, the secured creditor is entitled to an unsecured claim for the deficiency. Like all aspects of the bankruptcy process, however, the ultimate result in any particular case may be affected significantly by judicial interpretation of the specific facts and circumstances of the case. See SPECIAL INVESTOR CONSIDERATIONS CONCERNING BANKRUPTCY OF THE CITY herein. General TAX MATTERS In the opinion of the Attorney General of the State of Michigan and in the opinion of Co- Bond Counsel, Dickinson Wright PLLC and Miller, Canfield, Paddock and Stone, P.L.C., based on their examination of the documents described in their opinions, under existing law, the interest on the Series Bonds is not excluded from gross income for federal income tax purposes. 33

40 The Attorney General and Co-Bond Counsel will express no opinion regarding other federal tax consequences arising with respect to the Series Bonds and the interest thereon. In the opinion of the Attorney General of the State of Michigan and in the opinion of Co- Bond Counsel, Dickinson Wright PLLC and Miller, Canfield, Paddock and Stone, P.L.C., based on their examination of the documents described in their opinions, under existing law, the Series Bonds and the interest thereon are exempt from all taxation provided by the laws of the State of Michigan, except for estate taxes and taxes on gains realized from the sale, payment or other disposition of the Series Bonds. NO ASSURANCE CAN BE GIVEN THAT ANY FUTURE LEGISLATION OR CLARIFICATIONS OR AMENDMENTS TO STATE OF MICHIGAN LAW, IF ENACTED INTO LAW, WILL NOT CONTAIN PROPOSALS THAT COULD CAUSE THE INTEREST ON THE SERIES BONDS TO BE SUBJECT DIRECTLY OR INDIRECTLY TO STATE OF MICHIGAN INCOME TAXATION, ADVERSELY AFFECT THE MARKET PRICE OR MARKETABILITY OF THE SERIES BONDS, OR OTHERWISE PREVENT THE REGISTERED OWNERS FROM REALIZING THE FULL CURRENT BENEFIT OF THE STATUS OF THE INTEREST THEREON. INVESTORS SHOULD CONSULT WITH THEIR TAX ADVISORS AS TO THE TAX CONSEQUENCES OF THEIR ACQUISITION, HOLDING OR DISPOSITION OF THE SERIES BONDS AND THE TAX CONSEQUENCES OF THE ORIGINAL ISSUE DISCOUNT OR PREMIUM THEREON, IF ANY. Circular 230 Investors are urged to obtain independent tax advice based upon their particular circumstances. The tax discussion above was not intended or written to be used, and cannot be used, for the purposes of avoiding taxpayer penalties. The advice was written to support the promotion or marketing of the Series Bonds. LITIGATION The Authority has not been served with any litigation, and to the best of the Authority s knowledge, there is no threatened litigation against the Authority seeking to restrain or enjoin the sale of the Series Bonds, affecting the security pledged therefor or questioning or affecting the validity of the proceedings or authority under which the Series Bonds were issued. Neither the creation, organization or existence of the Authority, nor the title of any of the present members or other officers of the Authority to their respective offices, is being contested. The Authority has not been served with any litigation and, to the best of the Authority s knowledge, there is no litigation threatened which in any manner questions the right of the Authority to adopt the Resolution or the Supplemental Resolution or to secure the Series Bonds in the manner provided in the Resolution, the Supplemental Resolution and the Act. 34

41 LEGALITY OF SERIES BONDS FOR INVESTMENT AND DEPOSIT Under the Act, the State, a public officer, a Governmental Unit and agencies of the State or Governmental Units, a bank, trust company, savings bank or institution, savings and loan association, investment company or other person carrying on a banking business, an insurance company, insurance association, or other person carrying on an insurance business and an executor, administrator, guardian, trustee or other fiduciary may legally invest a sinking fund, money, or other funds belonging to them or within their control in bonds or notes of the Authority issued under the Act. The Act also provides that the Authority s bonds and notes shall be authorized security for public deposits. STATE NOT LIABLE ON SERIES BONDS The Series Bonds are limited obligations of the Authority payable solely from the sources described herein and neither the faith and credit nor the taxing power of the State, any political subdivision thereof or the Authority is pledged to the payment of the principal or redemption price of, interest on, or the purchase price of the Series Bonds. The sources of payment for the Series Bonds are limited to those provided by the Act, and the issuance of the Series Bonds is not directly or indirectly or contingently an obligation, moral or other, of the State, any political subdivision thereof or the Authority to levy or to pledge any form of taxation whatever therefor or to make any appropriation for their payment. The Authority has no taxing power. CONTINUING DISCLOSURE UNDERTAKING The City, which is the only Material Obligated Person (as such term is defined in the Continuing Disclosure Undertaking which the City expects to execute on or before the date of delivery of the Series Bonds (the City Continuing Disclosure Undertaking ) with respect to the Series Bonds, will covenant for the benefit of the Holders and the Beneficial Owners of the Series Bonds (as such terms are defined in the City Continuing Disclosure Undertaking) to disclose certain financial information and operating data relating to the City, by not later than 365 days following the end of the applicable fiscal year, commencing with the report for fiscal years ending on or after June 30, 2010 (the Annual Financial Information ) and to provide notices of the occurrence of certain enumerated events. The City Continuing Disclosure Undertaking requires that the Annual Financial Information be filed with the Municipal Securities Rulemaking Board ( MSRB ) by electronic transmission through the Electronic Municipal Market Access ( EMMA ) Dataport of the MSRB. The City Continuing Disclosure Undertaking also requires that required notices of events be filed by the City with the MSRB by electronic transmission through the EMMA Dataport. The specific nature of the information to be contained in the Annual Financial Information or the notices of material events is set forth in Appendix V Form of City Continuing Disclosure Undertaking. These covenants have been made in order to assist the Underwriters named on the cover page of this Official Statement to comply with paragraph (b)(5) of Rule 15c2-12 (the Rule ) promulgated by the Securities and Exchange Commission. 35

42 Except as described in the Continuing Disclosure Undertaking the provisions of the City Continuing Disclosure Undertaking will create no rights in any other person or entity. The obligation of the City to comply with the provisions of the City Continuing Disclosure Undertaking is enforceable by any Beneficial Owner of outstanding bonds issued under the Resolution (all as defined in the City Continuing Disclosure Undertaking). The right to enforce the provisions of the City Continuing Disclosure Undertaking is limited to a right, by action in mandamus or for specific performance, to compel performance of the City s obligations under the City Continuing Disclosure Undertaking. Any failure by the City to perform in accordance with the City Continuing Disclosure Undertaking will not constitute a default or an Event of Default under the Resolution, and the rights and remedies provided by the Resolution upon the occurrence of a default or an Event of Default will not apply to any such failure. The following statement has been provided by the City: During the past five years, the City has been unable to meet its obligation under the continuing disclosure agreements related to prior bond issues to provide annual financial information within the periods specified in the applicable agreements. The continuing disclosure agreements entered into by the City in connection with its prior bond issuances required filing of annual financial information within a specified time period ranging from 180 to 270 days of the City s Fiscal Year end. Annual financial information for water supply system bonds and sewage disposal system bonds for Fiscal Year 2004 was filed on February 15, Annual financial information for bonds other than water supply system bonds and sewage disposal system bonds for Fiscal Year 2004 was filed on May 5, Annual financial information for Fiscal Years 2005 through 2009 was filed on June 1, 2006, February 29, 2008, February 26, 2009, November 20, 2009, and May 28, 2010, respectively. In an effort to prevent future filing delays, in the fall of 2008 the City engaged the services of an outside accounting firm to assist the City in the preparation of its financial statements for auditing. Since the time this outside accounting firm has been onsite and assisting the City in the day-to-day preparation of its financial statements for auditing, the City has filed audited financial statements for two prior Fiscal Years in the span of nine months. The City expects that the actions it has taken to enhance its financial reporting process will continue to reduce the production time of its audits such that it will be able to produce audited financials on a timely basis going forward, beginning with the financial statements for FY2010. The City realizes the importance of continued attention to improving its internal procedures related to its financial reporting process and will continue to monitor the financial reporting process and the steps taken to prevent future filing delays. The Authority will covenant for the benefit of the Holders and the Beneficial Owners of the Series Bonds (as such terms are defined in the Authority Continuing Disclosure Undertaking) which the Authority expects to execute on or before the date of delivery of the Series Bonds (the Authority Continuing Disclosure Undertaking ), to provide notices of the occurrence of certain enumerated events. The Authority Continuing Disclosure Undertaking requires that required notices of events be filed by the Authority with the MSRB by electronic transmission through the EMMA Dataport. The specific nature of the information to be contained in the notices of certain 36

43 enumerated events is set forth in Appendix V Form of Authority Continuing Disclosure Undertaking. These covenants have been made in order to assist the Underwriters named on the cover page of this Official Statement to comply with paragraph (b)(5) of Rule 15c2-12 (the Rule ) promulgated by the Securities and Exchange Commission. Except as described in the Authority Continuing Disclosure Undertaking the provisions of the Authority Continuing Disclosure Undertaking will create no rights in any other person or entity. The obligation of the Authority to comply with the provisions of the Continuing Disclosure Undertaking is enforceable by any Beneficial Owner of outstanding bonds issued under the Resolution (all as defined in the Authority Continuing Disclosure Undertaking). The right to enforce the provisions of the Authority Continuing Disclosure Undertaking is limited to a right, by action in mandamus or for specific performance, to compel performance of the Authority s obligations under the Authority Continuing Disclosure Undertaking. Any failure by the Authority to perform in accordance with the Authority Continuing Disclosure Undertaking will not constitute a default or an Event of Default under the Resolution, and the rights and remedies provided by the Resolution upon the occurrence of a default or an Event of Default will not apply to any such failure. The Authority is in compliance in all material respects with all previous undertakings with regard to the Rule to provide annual financial information or notices of material events pursuant to the Rule. A failure by the Authority or the City to comply with the undertaking must be reported by the Authority or the City, respectively, in accordance with the Rule and must be considered by any broker, dealer or municipal securities dealer before recommending the purchase or sale of the Series Bonds in the secondary market. Consequently, such failure may adversely affect the marketability and liquidity of the Series Bonds and the market price thereof. LEGAL MATTERS The legality of the authorization, sale and delivery of the Series Bonds is subject to the approval of the Attorney General of the State and of Co-Bond Counsel, whose approving opinions, substantially in the form attached as Appendix VI to this Official Statement, will be delivered upon the issuance of the Series Bonds. The fees to be received by the Co-Bond Counsel in connection with the issuance of the Series Bonds will be paid from the proceeds of the Series Bonds and from investment earnings thereon. Certain legal matters will be passed upon for the Underwriters by their counsel, Bodman LLP, Detroit, Michigan. RATINGS Moody s Investor Service, Inc. ( Moody s) and Standard & Poor s Ratings Services, a Division of The McGraw-Hill Companies, Inc. ( S&P ) have assigned the Series Bonds the ratings set forth on cover page of this Official Statement, respectively, upon delivery of the Series Bonds. Such ratings reflect only the views of Moody s and S&P, respectively, and an 37

44 explanation of the significance of such ratings may be obtained from Moody s and S&P, respectively. There is no assurance that the ratings assigned to the Series Bonds will continue for any given period of time or that they will not be revised or withdrawn entirely if in the judgment of a rating agency, circumstances so warrant. A downward revision or withdrawal of a rating may have an adverse effect on the market price of the Series Bonds. UNDERWRITING The Underwriters shown on the cover page of this Official Statement, have agreed, subject to the terms of a bond purchase agreement (the Bond Purchase Agreement ) between the Underwriters and the Authority dated December 9, 2010 to purchase the Series Bonds from the Authority. The Bond Purchase Agreement provides, in part, that the Underwriters, subject to certain conditions, will purchase from the Authority all the Series Bonds for a purchase price of $99,310,696.25, which purchase price is equal to the par amount of the Series Bonds less $689, Underwriters discount. The initial public offering prices of the Series Bonds may be changed from time to time by the Underwriters. J.P. Morgan Securities LLC ( JPMS ), one of the Underwriters of the Series Bonds, has entered into negotiated dealer agreements (each, a Dealer Agreement ) with each of UBS Financial Services Inc. ( UBSFS ) and Charles Schwab & Co., Inc. ( CS&Co. ) for the retail distribution of certain securities offerings, including the Series Bonds, at the original issue prices. Pursuant to each Dealer Agreement, each of UBSFS and CS&Co. will purchase Series Bonds from JPMS at the original issue price less a negotiated portion of the selling concession applicable to any Series Bonds that such firm sells. Morgan Stanley, parent company of Morgan Stanley & Co. Incorporated, one of the Underwriters of the Series Bonds, has entered into a retail brokerage joint venture with Citigroup Inc. As part of the joint venture, Morgan Stanley & Co. Incorporated distributes municipal securities to retail investors through the financial advisor network of a new broker-dealer, Morgan Stanley Smith Barney LLC. This distribution arrangement became effective on June 1, As part of this arrangement, Morgan Stanley & Co. Incorporated will compensate Morgan Stanley Smith Barney LLC for its selling efforts with respect to the Series Bonds. OTHER MATTERS Miller, Canfield, Paddock and Stone, P.L.C. and Dickinson Wright PLLC each have acted and may act as bond counsel to some of the governmental units in connection with their issuance and sale of Municipal Obligations to the Authority. Miller, Canfield, Paddock and Stone, P.L.C. has acted as bond counsel to the City in connection with its issuance and sale of the Local Project Municipal Obligation to the Authority. The summaries and explanations herein of provisions of the Act, the Resolution, the Supplemental Resolution and other materials are brief summaries of certain provisions thereof. Such summaries do not purport to be complete and reference is made to such instruments, documents and other materials for full and complete statements of the provisions thereof. 38

45 The information contained in this Official Statement has been compiled or prepared from sources deemed to be reliable and, while not guaranteed as to completeness or accuracy, is believed to be correct as of this date. Any statements involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. The attached Appendices are an integral part of this Official Statement and must be read in their entirety together with all of the foregoing information. The execution and delivery of this Official Statement have been duly authorized by the Authority. MICHIGAN FINANCE AUTHORITY By: /s/ Thomas Letavis Authorized Officer 39

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47 APPENDIX I SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION

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49 SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION The following is a brief summary of certain provisions of the Resolution, as amended, and does not purport to be complete. Reference is made to the Resolution, copies of which are available from the Authority. Definitions The following are definitions of certain of the terms used in the Resolution and this Official Statement. Capitalized terms appearing in this Official Statement and not specifically defined herein have the meaning given to such terms in the Resolution. "AMBAC Assurance" means AMBAC Assurance Corporation, a Wisconsin domiciled stock insurance company. "AMBAC Insurance Policy" means a Financial Guaranty Insurance Policy issued by AMBAC Assurance insuring the payment when due of the principal of and interest on any Bonds as provided therein. "AMBAC Insurance Program Municipal Obligations" means Municipal Obligations purchased with the proceeds of AMBAC Insured Bonds. "AMBAC Insured Bonds" means Bonds so designated from time to time by an Authorized Officer of the Authority, secured by a pledge of the Authority's interest in AMBAC Insurance Program Municipal Obligations and with respect to which an AMBAC Insurance Policy has been issued. "Act" means the Shared Credit Rating Act, Act No. 227 of the Public Acts of 1985 of the State, as from time to time amended. "Act 140" means the State Revenue Sharing Act of 1971, Act No. 140 of the Public Acts of 1971 of the State, as from time to time amended. "Authority" means the Michigan Finance Authority, as successor to Michigan Municipal Bond Authority created by the Act, or any board, body, commission, department or officer succeeding to the principal functions thereof or to whom the powers conferred upon the Authority by the Act shall be given by law. "Authorized Denomination" means $5,000, and integral multiples thereof or such other denominations which shall be specified in a Supplemental Resolution. "Authorized Officer" means any member of the Authority, the Executive Director of the Authority, or any other officer or employee of the Authority authorized by resolution of the Authority to perform the act or sign the document in question. I-1

50 "Available Amount" means for Mandatory Purchase Bonds the amount on deposit in the Revenue Sharing Bond Account of the Revenue Fund not required to pay interest on or to pay the principal at maturity or the Redemption Price of Bonds, and which an Authorized Officer of the Authority directs to be used for the payment of the principal portion of the purchase price of Mandatory Purchase Bonds on any Mandatory Purchase Date, notice of which shall have been given to the Remarketing Agent by the Authority. "Bond Counsel" means bond counsel as designated by the Authority in a Supplemental Resolution. "Bondholder" or "Owner" or "Holder" or "Holder of Bonds" or "Owner of Bonds" means the registered owner of any Bond. "Bonds" means the Authority's Local Government Loan Program Revenue Bonds issued pursuant to the Resolution and Supplemental Resolutions. "Bond Registrar and Paying Agent" means with respect to any Bond the Bond Registrar and Paying Agent appointed as such by a Supplemental Resolution and any successor thereto, and the Co-Paying Agent to the extent that the Bond Registrar and Paying Agent has delegated responsibilities under this Bond Resolution to the Co-Paying Agent. "Business Day" means each weekday on which commercial banking institutions in the State and in the State of New York are not required or authorized by law or executive order to remain closed, and on which the New York Stock Exchange, Inc. is not closed. "Capital Appreciation Bonds" means the Bonds so designated by an Authorized Officer of the Authority which bear interest from their date of issuance and delivery, which interest is compounded semi-annually on each May 1 and November 1 or such other dates as may be specified by an Authorized Officer of the Authority on or prior to the issuance of such Capital Appreciation Bonds, until paid at the maturity thereof. "Capital Guaranty" means Capital Guaranty Insurance Company, a stock insurance company incorporated in the State of Maryland, or any successor thereto. "Capital Guaranty Insurance Program Municipal Obligations" means Municipal Obligations purchased with the proceeds of Capital Guaranty Insured Bonds. "Capital Guaranty Insured Bonds" means Bonds so designated from time to time by an Authorized Officer of the Authority, secured by a pledge of the Authority's interest in Capital Guaranty Insurance Program Municipal Obligations and with respect to which a Financial Guaranty Bond has been issued. "Code" means the Internal Revenue Code of 1986, as amended from time to time and any successor provision, act or statute, and the regulations from time to time promulgated or proposed thereunder. I-2

51 "Collateral Documents" means such documents as may be required, and so designated by the Authority in a Supplemental Resolution, from a Governmental Unit, its incorporating or establishing municipality or other entity designated in a Supplemental Resolution, including without limitation if such Governmental Unit is a building authority incorporated under Act 31, Michigan Public Acts of 1948 (First Extra Session), as amended, or a tax increment finance authority created pursuant to Act 450, Michigan Public Acts of 1980, as amended, or a local development finance authority created pursuant to Act 281, Michigan Public Acts of 1986, as amended, the incorporating or establishing municipality in connection with the purchase by the Authority of Municipal Obligations, including with respect to Revenue Sharing Municipal Obligations and MBIA Insured Revenue Sharing Municipal Obligations, without limitation, the Revenue Sharing Pledge Agreement. "Commencement Date" means the date when the term of the Municipal Obligation begins and the obligation of the Governmental Unit to make Loan Repayments accrues. "Compound Accreted Value" means with respect to each Capital Appreciation Bond, as of the date of computation an amount equal to the principal amount of each Capital Appreciation Bond plus interest accrued and compounded on such Capital Appreciation Bond from its dated date to the May 1 or November 1 (or such other date or dates as may be specified by Supplemental Resolution or by an Authorized Officer of the Authority on or prior to the issuance of such Capital Appreciation Bond) immediately preceding the date of computation or to the date of computation if a May 1 or November 1 (or such other date or dates as may be specified by Supplemental Resolution or by an Authorized Officer of the Authority on or prior to the issuance of such Capital Appreciation Bond), as set forth in schedules of the Compound Accreted Value per $1,000 (or $5,000) maturity amount of each Capital Appreciation Bond on each May 1 or November 1 (or such other date or dates as may be specified by Supplemental Resolution or by an Authorized Officer of the Authority on or prior to the issuance of such Capital Appreciation Bond) prepared by an Authorized Officer of the Authority. "Co-Paying Agent" means with respect to any Bond the Co-Paying Agent, if any, appointed as such by a Supplemental Resolution and any successor thereto. "Costs of Issuance" means any administrative costs of the Authority or items of expense payable or reimbursable directly or indirectly by the Authority and related to the authorization, sale, and issuance of the Bonds, which items of expense shall include, but not be limited to, underwriters' fees, printing costs, cost of reproducing documents, filing and recording fees, initial fees and charges of a Trustee, the initial fees of any liquidity facility issuer, if any, and fees or premiums of any credit facility issuer, if any, costs and expenses of verification agents, the Bond Registrar and Paying Agent, the Co-Paying Agent, the Depository, and the Authority, legal fees and charges, professional consultants' fees, financial advisors' fees, costs of credit ratings, fees and charges for execution, transportation and safekeeping of Bonds, the cost of any Reserve Account Security Instrument and other costs, charges and fees in connection with the foregoing, or designated as such in a Supplemental Resolution, and any other items of expense authorized by the Act. I-3

52 "Cost of Issuance Agreement" means the agreements, if any, between the Authority and the Governmental Units regarding the payment or reimbursement of the Authority's Costs of Issuance. "Costs of Issuance Fund" means the Costs of Issuance Fund established and so designated by the Resolution. "Counsel" means an attorney duly admitted to practice law before the highest court of any state. "Current Interest Bonds" means the Bonds so designated by an Authorized Officer of the Authority which bear interest from their date of issuance and delivery payable semi-annually on such dates as may be specified by an Authorized Officer of the Authority prior to the issuance of such Current Interest Bonds. "Depository" means with respect to any Bond the Trustee or such other Depository (including without limitation the State Treasurer) appointed as such by a Supplemental Resolution. "Distributable Aid" means the payments that a Governmental Unit, or if such Governmental Unit is a building authority incorporated under Act 31, Michigan Public Acts of 1948 (First Extra Session), as amended, the incorporating municipality, or if such Governmental Unit is a tax increment finance authority created pursuant to Act 450, Michigan Public Acts of 1980, as amended, or a local development finance authority created pursuant to Act 281, Michigan Public Acts of 1986, as amended, the establishing municipality is eligible to receive from the State under Act 140 and which may otherwise be lawfully pledged as security for Municipal Obligations. "Distributable Aid Ratio" means, with respect to any Governmental Unit and annual distribution period under Act 140, the ratio of the amount of all payments of Distributable Aid that the Governmental Unit, or if such Governmental Unit is a building authority incorporated under Act 31, Michigan Public Acts of 1948 (First Extra Session), as amended, the incorporating municipality, or if such Governmental Unit is a tax increment finance authority created pursuant to Act 450, Michigan Public Acts of 1980, as amended, or a local development finance authority created pursuant to Act 281, Michigan Public Acts of 1986, as amended, the establishing municipality is eligible to receive in such annual period, to the estimated maximum annual principal and interest requirements for the Municipal Obligation, expressed as a decimal equivalent. "Distributable Sales Tax Ratio" means, with respect to any Governmental Unit and annual distribution period under Act 140, the ratio of the amount of all payments of state sales tax revenues that the Governmental Unit or, if such Governmental Unit is a building authority incorporated under Act 31, Michigan Public Acts of 1948 (First Extra Session), as amended, the incorporating municipality, or if such Governmental Unit is a tax increment finance authority created pursuant to Act 450, Michigan Public Acts of 1980, as amended, or a local development finance authority created pursuant to Act 281, Michigan Public Acts of 1986, as amended, the I-4

53 establishing municipality is eligible to receive under Act 140 in such annual period to the estimated maximum annual principal and interest requirements for the Municipal Obligation expressed as a decimal equivalent. "Eligible Investment" means, except as otherwise provided in a Supplemental Resolution, such of the following as shall mature, or shall be subject to redemption by the holder thereof at the option of such holder, not later than the respective dates when the moneys will be required for the purposes intended: (i) Governmental Obligations, (ii) certificates of deposit issued by any bank or trust company whose deposits are insured by the Federal Deposit Insurance Corporation, provided that such certificates of deposit shall be secured by Governmental Obligations with a market value equal to the principal amount thereof over the amount guaranteed by the Federal Deposit Insurance Corporation, (iii) debentures or notes issued by any of the following Federal agencies: Banks for Cooperatives, Federal Intermediate Credit Banks, Federal Loan Banks, Export-Import Bank of the United States, Government National Mortgage Association, Federal National Mortgage Association, Federal Home Loan Mortgage Corporation or, Federal Home Loan Banks, Federal Land Banks (including participation certificates issued by such agencies) and all other obligations issued or in the opinion of the Attorney General of the United States unconditionally guaranteed as to principal and interest by any agency or person controlled or supervised by and acting as an instrumentality of the United States of America pursuant to authority granted by the Congress, (iv) an Investment Agreement, (v) obligations the interest on which is excluded from gross income for purposes of federal income tax under the Code and, which have received from all Rating Agencies rating the Bonds, a rating in a Rating Category at least as high as the rating on any Bonds secured by such investment, (vi) commercial paper that has received from all Rating Agencies rating the Bonds, a rating at least as high as the rating on any Bonds secured by such investment, (vii) any other investment permitted by Act and approved by resolution of the Authority which has received from all Rating Agencies rating the Bonds a rating in a Rating Category at least as high as the rating on any Bonds secured by such investment, and (viii) with respect to the AMBAC Insured Bond Account within the Revenue Fund, any investment which is legal for the Authority and which has been approved in writing by AMBAC Assurance. "Event of Default" means an Event of Default specified under the Resolution. "Excess Funds" means with respect to the Revenue Account for each Type of Bonds the amount by which the funds on deposit therein exceeds the amount required for the purposes of the Resolution (including future payments of principal and interest on the Bonds of such Type), as certified by an Authorized Officer of the Authority. "Fees and Charges" means all fees and charges collected by the Authority in connection with Municipal Obligations purchased pursuant to the Resolution. "Financial Guaranty Bond" means a financial guaranty bond issued by Capital Guaranty. Act. "Fully Marketable Form" shall have the same meaning under the Resolution as in the I-5

54 "Government Obligations" means, except as otherwise provided in a Supplemental Resolution, direct general obligations of, or obligations the timely payment of the principal of and interest on which are fully and unconditionally guaranteed by, the United States of America. "Governmental Unit" means a "governmental unit" as defined in the Act which qualifies as "a governmental unit within the meaning of Section 103(b)(3)(a) of the Internal Revenue Code of 1954, as amended, and Sections 141(b)(6)(A) and 141(c)(1) of the Code and, if the context so requires, which has been received a Loan from the Authority from the proceeds of the Bonds. "Group" shall have the meaning, if any, given in a Supplemental Resolution. "Interest Payment Date" means, except to the extent otherwise provided in any Supplemental Resolution, (in which case such provision shall govern): (i) with respect to the Transportation Fund Bonds the first February 1 or August 1 which occurs at least 3 months after the original issue date of such Bond, and each February 1 and August 1 thereafter, and (ii) with respect to all other Bonds the first May 1 or November 1 which occurs at least 3 months after the original issue date of such Bond and each May 1 and November 1 thereafter. "Interest Period" means except as otherwise provided in any Supplemental Resolution, with respect to any Mandatory Purchase Bond, each period during which the interest rate on such Bond is not subject to change in accordance with the provisions of the Resolution, which shall be determined as provided in the Resolution. "Investment Agreement" means any agreement for the investment of funds held under the terms of the Resolution which will not result in a reduction or withdrawal of any existing rating on any of the Bonds. "Liquidation Proceeds" means amounts received by the Authority in connection with enforcement of any of the remedies under a Municipal Obligation or Collateral Document after the occurrence of a default which has not been waived or cured. "Loan" means a loan made by the Authority to a Governmental Unit pursuant to the provisions of the Resolution or a Supplemental Resolution. "Loan Account" means with respect to each Type of Bonds the Loan Account, for such Type of Bonds within the Loan Fund established and so designated by the Resolution or a Supplemental Resolution. "Loan Fund" means the Loan Fund established and so designated by the Resolution. "Loan Repayments" means the payments of principal of and interest on a Municipal Obligation and any other amounts payable by a Governmental Unit pursuant to its Municipal Obligation. I-6

55 "Local Project Bonds" means Bonds so designated from time to time by an Authorized Officer of the Authority of one or more Types (each Local Project Bond to be of a Type so designated by such Authorized Officer), the Bonds of each such Type being secured by a pledge of the Authority's interest in one or more Local Project Municipal Obligations. "Local Project Municipal Obligations" means Municipal Obligations so designated from time to time by an Authorized Officer of the Authority. "Local Project Bond Reserve Account" means with respect to each Type of Local Project Bonds the account or accounts within the Reserve Fund established and so designated by the Resolution, by a Supplemental Resolution or by an Authorized Officer for each Type of Local Project Bond, if any. "MBIA" means the Municipal Bond Investors Assurance Corporation and its successors. "MBIA Insurance Program Revenue Sharing Municipal Obligations" means Municipal Obligations purchased with the proceeds of MBIA Insured Revenue Sharing Bonds. "MBIA Insured Revenue Sharing Bonds" means Bonds so designated from time to time by an Authorized Officer of the Authority, secured by a pledge of the Authority's interest in MBIA Insurance Program Revenue Sharing Municipal Obligations, and with respect to which a Municipal Bond Guaranty Insurance Policy has been issued. "MBIA Insured Revenue Sharing Bond Reserve Account" means the account within the Reserve Fund established and so designated by the Resolution, if any. "Mandatory Purchase Bonds" means Revenue Sharing Bonds so designated by an Authorized Officer of the Authority. "Mandatory Purchase Date" means, except to the extent otherwise provided in any Supplemental Resolution, (in which case such provision shall govern), and exclusive of the maturity date, the last day of any Interest Period. "Mandatory Purchase Notice" means the notice of any Mandatory Purchase Date required to be given by the Bond Registrar and Paying Agent pursuant hereto. "Mandatory Redemption" shall mean any mandatory redemption made pursuant to the Resolution. "Michigan School Bus Program Bonds" means Bonds so designated from time to time by an Authorized Officer of the Authority and secured by a pledge of the Authority's interest in the Michigan School Bus Program Municipal Obligations. "Michigan School Bus Program Municipal Obligations" means Municipal Obligations so designated by an Authorized Officer of the Authority, secured in part by a pledge of the Governmental Unit's School Aid pursuant to a School Aid Pledge Agreement. I-7

56 "Moody's" means Moody's Investors Service, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and assigns, and, if such corporation is dissolved or liquidated or no longer performs the functions of a securities rating agency, "Moody's" will be deemed to refer to any other nationally recognized securities rating agency designated by the Authority by notice to the Trustee. "Municipal Obligation" means an obligation of a Governmental Unit purchased by the Authority with proceeds of the Bonds. "Municipal Obligation Closing Date" means, with respect to any Municipal Obligation, the date on which such Municipal Obligation is purchased by the Authority, which date shall be specified in writing by an Authorized Officer of the Authority. "Non-Arbitrage And Tax Compliance Certificate" means a Non-Arbitrage And Tax Compliance Certificate executed by an Authorized Officer of the Authority relating to the use of the proceeds of the Bonds and compliance with the applicable provisions of the Code and regulations promulgated thereunder. It is anticipated that a separate Non-Arbitrage And Tax Compliance Certificate may be executed with respect to each Group or Series of Bonds. All Non-Arbitrage And Tax Compliance Certificates executed by an Authorized Officer of the Authority with respect to any Bond, as such certificates may be amended or supplemented from time to time are collectively referred to as the "Non-Arbitrage And Tax Compliance Certificate". "Notice of Election to Retain" means a notice of election to retain Mandatory Purchase Bonds given by the Owner thereof prior to a Mandatory Purchase Date pursuant to the Resolution. "Notice Parties" means the Authority, the Trustee, the Bond Registrar and Paying Agent, the Co-Paying Agent, the Depository, MBIA with respect to MBIA Insured Revenue Sharing Bonds and Capital Guaranty with respect to the Capital Guaranty Insured Bonds and any other party so designated by a Supplemental Resolution. "Original Issue Date" means with respect to each Bond the date on which the Bond is delivered to the original purchasers thereof or other date specified in a Supplemental Resolution. "Outstanding Bonds" or "Bonds Outstanding" means all Bonds which have been authenticated and delivered by the Bond Registrar and Paying Agent under the Resolution or a Supplemental Resolution, except: (a) (b) (c) Bonds canceled after purchase in the open market because of payment; Bonds deemed paid under the Resolution; and Bonds in lieu of which other Bonds have been authenticated under the Resolution. "Pledge Agreement" or "School Aid Pledge Agreement" means a pledge agreement between a Governmental Unit and the Authority regarding the pledge and payment of a I-8

57 Governmental Unit's school aid pursuant to section 17a of Act 94 of the Public Acts of Michigan of 1979, as amended. "Pledged Funds" means and includes with respect to each Type of Bond, the appropriate accounts within the Loan Fund, the Reserve Fund, the Revenue Fund, and all moneys, instruments and investments from time to time therein. Pledged Funds does not include the Rebate Fund or the Cost of Issuance Fund. "Preliminary Rate Determination Date" means the Business Day selected by the Remarketing Agent which is at least three Business Days prior to any Mandatory Purchase Date. "Purchase Amount" means with respect to any Mandatory Purchase Date the aggregate principal amount of Mandatory Purchase Bonds subject to mandatory purchase on such date and for which no Notice of Election to Retain has been given. "Qualified School Bonds" means Bonds so designated from time to time by an Authorized Officer of the Authority and secured by a pledge of the Authority's interest in the Qualified School Municipal Obligations. "Qualified School Municipal Obligations" means Municipal Obligations fully qualified for participation in the State School Bond Loan Fund pursuant to the provisions of Article IX, Section 16 of the State Constitution and Act No. 108 of the Public Acts of 1961 of the State, as from time to time amended. "Rate Determination Date" means, with respect to any Interest Period for any Bond the Business Day selected by the Remarketing Agent and acceptable to the Authority, that is not fewer than one nor more than 20 Business Days prior to the first day of such Interest Period and at least one Business Day after the last day on which a Notice of Election to Retain may be given by any Owner of a Bond to which such Interest Period applies. "Rate Indication" shall have the meaning given to such term in the Resolution. "Rating Agency" means Moody's or S&P or such other Rating Agency so designated in a Supplemental Resolution. "Rating Category" means one of the generic rating categories of Moody's or S&P or other Rating Agency without regard to any refinement or graduation of such rating category by a numerical modifier or otherwise. "Rebate Fund" means the special fund so designated and established by the Resolution. "Rebate Payments" means the payments required to be deposited to the credit of the Rebate Fund pursuant to the Non-Arbitrage and Tax Compliance Certificate. "Record Date" means the 15 th day of the calendar month immediately preceding any Interest Payment Date, or as otherwise specified in a Supplemental Resolution. I-9

58 "Redemption Price" means, with respect to any Bond or any portion thereof, the principal amount of such Bond or such portion thereof and any premium thereon payable upon redemption thereof pursuant to the Resolution or a Supplemental Resolution. "Remarketing Agent" means the remarketing agent or agents for any Bonds appointed by the Supplemental Resolution authorizing such Bonds and any replacement, successor or additional remarketing agent or agents appointed from time to time by the Authority. "Remarketing Agreement" means any Remarketing Agreement for the bonds entered into by the Authority and a Remarketing Agent as amended, modified or supplemented from time to time. "Remarketing Amount" means with respect to any Mandatory Purchase Date, the Purchase Amount minus the Available Amount. "Reserve Account" means, with respect to each Type of Bonds, the Reserve Account, if any, for such Type of Bonds, within the Reserve Fund, established and so designated by the Resolution or a Supplemental Resolution. No Reserve Account has been established for Transportation Fund Bonds, Qualified School Bonds, Capital Guaranty Insured Bonds or AMBAC Insured Bonds. "Reserve Account Requirement" means (unless a different Reserve Account Requirement is established with respect to such Type of Bonds by a Supplemental Resolution) with respect to each Type of Bonds for which a reserve account is established, the maximum annual principal and interest requirement (for the then current or any subsequent year) on all Bonds of such Type from time to time Outstanding; provided, that such Requirement shall not exceed the lower of 125% of the average annual principal and interest requirements on such Bonds or 10% of the net proceeds of such Bonds; and provided further, that for Bonds other than Bonds bearing interest at rates fixed until their maturity or mandatory redemption dates, annual interest requirements shall be estimated by using the weighted average of the interest rates for Bonds of such Type for which the interest rates are so fixed, if any, or by such other method as shall be provided in a Supplemental Resolution. The Reserve Account Requirement for any Reserve Account may be satisfied by delivery to the Trustee of a Reserve Account Security Instrument. Notwithstanding the foregoing, the Authority in a Supplemental Resolution may reduce or eliminate the Reserve Account Requirement with respect to any Type or Types of Bond at any time if such reduction or elimination would not result in the reduction or withdrawal of any rating applicable to such Bonds, and in such event such Reserve Account Requirement shall be deemed to be so reduced or eliminated. "Reserve Account Security Instrument" means a letter of credit, line of credit, policy of insurance, surety bond or similar instrument which will provide for the payment of all or part of the amounts required to be disbursed from a Reserve Account; provided that the Reserve Account Security Instrument shall not result in a reduction of any rating on the Bonds. I-10

59 "Reserve Fund" means the Reserve Fund (including therein the Revenue Sharing Bond Reserve Account, the Local Project Bond Reserve Accounts, and the MBIA Insured Revenue Sharing Bond Reserve Account and any other Reserve Accounts established by a Supplemental Resolution) and so designated by the Resolution. "Resolution" means the Bond Resolution of the Authority adopted and so designated by the Authority, as the same may be supplemented or amended pursuant to the terms thereof. "Revenue Fund" means the fund established and so designated by the Resolution. "Revenue Sharing Bonds" means Bonds so designated from time to time by an Authorized Officer of the Authority and secured by the pledge of the Authority's interest in the Revenue Sharing Municipal Obligations. Revenue Sharing Bonds does not include MBIA Insured Revenue Sharing Bonds. "Revenue Sharing Bonds Reserve Account" means the account established and so designated by the Resolution. "Revenue Sharing Municipal Obligations" means Municipal Obligations so designated by an Authorized Officer of the Authority, secured in part by a pledge of the Governmental Unit's Distributable Aid, or if such Governmental Unit is a building authority incorporated under Act 31, Michigan Public Acts of 1948 (First Extra Session), as amended, a pledge of the incorporating municipality's Distributable Aid, or if such Governmental Unit is a tax increment finance authority created pursuant to Act 450, Michigan Public Acts of 1980, as amended, or a local development finance authority created pursuant to Act 281, Michigan Public Acts of 1986, as amended, a pledge of the establishing municipality's Distributable Aid. Revenue Sharing Municipal Obligations does not include MBIA Insurance Program Revenue Sharing Municipal Obligations. "Revenue Sharing Pledge Agreement" means the Revenue Sharing Pledge Agreement between a Governmental Unit, or if such Governmental Unit is a building authority Incorporated under Act 31, Michigan Public Acts of 1948 (First Extra Session), as amended, the incorporating municipality, or if such Governmental Unit is a tax increment finance authority created pursuant to Act 450, Michigan Public Acts of 1980, as amended, or a local development finance authority created pursuant to Act 281, Michigan Public Acts of 1986, as amended, the establishing municipality, and the Authority regarding the pledge and payment of a Governmental Unit's, or Incorporating municipality's or establishing municipality's, Distributable Aid. "Revenues" means all income derived for the period for which the calculation is being made by or for the account of the Authority from the Municipal Obligations or under the Resolution, including (i) Loan Repayments, (ii) Liquidation Proceeds, and (iii) income from the investment of all funds and accounts created by or pursuant to the Resolution. "S&P" means Standard & Poor's Corporation, a corporation organized and existing under the laws of the State of New York, its successors and assigns, and, if such corporation is dissolved or liquidated or no longer performs the functions of a securities rating agency, "S&P" I-11

60 will be deemed to refer to any other nationally recognized securities rating agency designated by the Authority, by notice to the Trustee. "School Program Bonds" means Bonds so designated from time to time by an Authorized Officer of the Authority and secured by a pledge of the Authority's interest in School Program Municipal Obligations. "School Program Municipal Obligations" means Municipal Obligations so designated by an Authorized Officer of the Authority, secured in part by a pledge of the Governmental Unit's school aid pursuant to a School Aid Pledge Agreement. "Security" means the Pledged Funds, and other funds, properties and rights of the Authority described in the Resolution as security for the payment of the Bonds. "Serial Bonds" means Bonds so designated in or pursuant to a Supplemental Resolution authorizing their issuance. "Series of Bonds" or "Bonds of a Series" means a Series of Bonds, if any, authorized and so designated by or pursuant to a Supplemental Resolution. "State" means the State of Michigan. "State Qualified School Bonds" means Bonds so designated by an Authorized Officer of the Authority secured by a pledge of the Authority's interest in the State Qualified School Municipal Obligations. "State Qualified School Municipal Obligations" means Municipal Obligations fully qualified for participation in the State School Bond Loan Fund pursuant to the provisions of Article IX, Section 16 of the State Constitution and Act No. 108 of the Public Acts of 1961 of the State ("Act 108"), as from time to time amended, and which are purchased with proceeds of State Qualified School Bonds. "State Treasurer" means the Treasurer of the State. "Supplemental Indenture" means an indenture supplemental to or amendatory to the Resolution authorized by resolution of the Authority and entered into by the Authority and a Trustee in accordance with the Resolution. Except as otherwise expressly provided in the Resolution, all provisions of the Resolution applicable to Supplemental Resolutions also apply to Supplemental Indentures. "Supplemental Resolution" means a resolution supplemental to or amendatory to the Resolution, adopted by the Authority in accordance with the Resolution. The term Supplemental Resolution shall also mean and include a Supplemental Indenture. "Term Bonds" means Bonds so designated in or pursuant to a Supplemental Resolution authorizing their issuance. I-12

61 "Transportation Fund Bonds" means Bonds so designated from time to time by an Authorized Officer of the Authority and secured by a pledge of the Authority's interest in the Transportation Fund Municipal Obligations. "Transportation Fund Municipal Obligations" means Municipal Obligations secured in part by a pledge of a Governmental Unit's State Transportation Fund or Motor Vehicle Highway Fund revenues and issued pursuant to Act 143 of the Public Acts of Michigan of 1943, Act 51 of the Public Acts of Michigan of 1951, or Act 175 of the Public acts of Michigan of 1952, all as from time to time amended. "Trustee" shall mean, with respect to each Type of Bond, the Trustee appointed in a Supplemental Resolution, and its respective successor. "Type" means, with respect to any Bond, the category of Bonds including such Bond that is equally and ratably secured with each other under the Resolution. The Types of Bonds authorized to be issued under the Resolution are Qualified School Bonds, Revenue Sharing Bonds, Transportation Fund Bonds, AMBAC Insured Bonds, Capital Guaranty Insured Bonds, MBIA Insured Revenue Sharing Bonds, Michigan School Bus Program Bonds, Revenue Sharing Bonds, School Program Bonds, Transportation Fund Bonds, and separately designated Types of Local Project Bonds, each such separately designated Type of Local Project Bonds to constitute a Type. Serial or Group designations for Bonds may be made in the Supplemental Resolution authorizing the issuance of the Bonds. Additional Types of Bonds may be authorized to be issued by a Supplemental Resolution. "Type" means with respect to any Municipal Obligation the Type designated of the corresponding Bonds. Pledge and Establishment of Funds and Accounts Pledge The Pledged Funds with respect to each Type of Bonds under the Resolution, including the moneys deposited therein, investments thereof and the proceeds of such investments, if any, are pledged to the Trustee for such Type of Bonds for the payment of the principal of, and interest on, each Type of Bonds in accordance with the terms and provisions of the Resolution. This pledge shall be valid and binding from and after the date of adoption of the Resolution and the Pledged Funds shall immediately be subject to the lien of such pledge without any physical delivery thereof, recordation of the Resolution, or further act, and the lien of such pledge shall be valid and binding as against all parties having claims of any kind in tort, contract or otherwise against the Authority, irrespective of whether such parties have notice thereof. Any amounts deposited into the Costs of Issuance Fund and the Rebate Fund, are not Pledged Funds and the Holders of Bonds shall not have any lien thereon. Establishment of Funds The following special funds and accounts shall be established maintained and held by the Trustee, the Authority or the Depository pursuant; to the provisions of the Resolution. I-13

62 (1) Revenue Fund Michigan Municipal Bond Authority, Local Government Loan Program; and within the Revenue Fund separate accounts designated as the Qualified School Bond Account, one or more Local Project Bond Accounts (each to be separately designated by the Executive Director of the Authority from time to time for each separately designated Type of Local Project Bonds), the Transportation Fund Bond Account, the School Program Bond Account, the Michigan School Bus Program Account, the MBIA Insured Revenue Sharing Bond Account, the Capital Guaranty Insured Bond Account, the Revenue Sharing Bond Account, the AMBAC Insured Bond Account, the State Qualified School Bond Account and such additional accounts as shall be created by Supplemental Resolution. The Revenue Fund and all accounts therein shall be held in trust by the Trustee, or at the written direction of an Authorized Officer of the Authority, by the Depository. (2) Loan Fund Michigan Municipal Bond Authority, Local Government Loan Program; and within the Loan Fund separate accounts designated as the Qualified School Bond Loan Account, one or more Local Project Bond Accounts (each to be separately designated by an Authorized Officer of the Authority from time to time for each separately designated Type of Local Project Bonds), the Transportation Fund Bond Loan Account, the Michigan School Bus Program Bond Loan Account, the School Program Bond Loan Account, the MBIA Insured Revenue Sharing Bond Loan Account, the Capital Guaranty Insured Bond Loan Account, the Revenue Sharing Bond Loan Account, the AMBAC Insured Loan Account, the State Qualified School Bond Loan Account and such additional accounts as shall be created by Supplemental Resolution. The Loan Fund and all accounts therein shall be held in trust by the Trustee, or at the written direction of the Authority, by the Depository. (3) Costs of Issuance Fund Michigan Municipal Bond Authority, Local Government Loan Program. The Costs of Issuance Fund shall be held by the Authority, or at the written direction of the Authority, by the Depository, or the Trustee. (4) Reserve Fund Michigan Municipal Bond Authority Local Government Loan Program; and within the Reserve Fund separate accounts designated as the Revenue Sharing Bond Reserve Account, the MBIA Insured Revenue Sharing Bond Reserve Account, and one or more Local Project Bond Reserve Accounts (to be separately designated by an Authorized Officer of the Authority from time to time for each Type of Local Project Bonds). The Reserve Fund and all accounts therein shall be held in trust by the Trustee, or at the written direction of the Authority, by the Depository. (5) Rebate Fund Michigan Municipal Bond Authority, Local Government Loan Program; and within the Rebate Fund separate accounts designated by a Supplemental Resolution or by a Non-Arbitrage and Tax Compliance Certificate. The Rebate Fund and all accounts therein shall be held by the Authority or at the written direction of the Authority, by the Depository, or the Trustee. An Authorized Officer of the Authority is authorized by the Resolution to establish and maintain such other accounts and subaccounts in the aforesaid funds and accounts as may be I-14

63 necessary, convenient or required to provide for the Authority's compliance with the covenants of the Authority described below under "Covenants of the Authority." The Executive Director is authorized to direct the Trustee or the Depository in writing to close any fund, account or subaccount established by or pursuant to the Resolution to the extent such fund, account or subaccount is determined by the Executive Director to be unnecessary and thereafter to reopen and reclose such fund, account or subaccount as the Executive Director shall determine. Application of Bond Proceeds The net proceeds of each Series of Bonds shall be deposited by the Authority as follows: (a) In the Revenue Fund, to the credit of the appropriate account, amounts received as accrued interest, if any, on the corresponding Type of Bonds and amounts specified by an Authorized Officer of the Authority to provide for payment of capitalized interest on Bonds; and (b) In the Costs of Issuance Fund, the sum specified by an Authorized Officer of the Authority; and (c) In the Loan Fund, to the credit of the appropriate account, the balance of the proceeds received from the sale of such Series of Bonds; and (d) In the Reserve Fund, to the credit of the appropriate account, amounts equal to the Reserve Account Requirement or sufficient to purchase a Reserve Account Security Instrument. Loan Fund (a) Moneys in each Loan Account of the Loan Fund shall be transferred to the corresponding Reserve Account, if any, to the extent required by the Resolution and shall be disbursed to Governmental Units upon the purchase by the Authority of Municipal Obligations from Governmental Units. Such transfers and disbursements shall be made by the Authority, or by the Trustee or the Depository only upon the written direction of an Authorized Officer of the Authority; and (b) All earnings on moneys in any Loan Account of the Loan Fund shall be transferred, as received, to the Revenue Fund, the Costs of Issuance Fund or remain in the Loan Fund as directed in writing by the Authority as received. Costs of Issuance Fund Bond proceeds including moneys in the Costs of Issuance Fund, shall be used to pay the Costs of Issuance or to the extent not needed for such purpose transferred to the Revenue Fund pursuant to the written direction of an Authorized Officer of the Authority. I-15

64 Revenue Fund All Loan Repayments, moneys transferred from the Loan Fund to provide for payment of capitalized interest on Bonds, Fees and Charges and Liquidation Proceeds held or collected by or on behalf of the Authority shall be deposited upon receipt in the appropriate account of the Revenue Fund as directed in writing by an Authorized Officer of the Authority. There shall also be deposited in the appropriate account of the Revenue Fund any other moneys made available by the Authority for the purposes of such account from any other source. Moneys (including the proceeds of sale of Investments) from time to time in the Revenue Fund shall be paid out and applied in the following order of priority; provided, however that in each case only amounts on deposit in the account established for a particular Type of Bond shall be used to make payments with respect to such Type of Bonds or transfers to the Reserve Account established for such Type of Bond, and only moneys on deposit in the account corresponding to Bonds of each Type shall be used to make payments with respect to such Bonds or transfers to the Reserve Account of the Reserve Fund corresponding to such Type of Bonds: (1) At such times as are necessary, to pay the principal of and interest and redemption premium, if any, on any Bonds when due, whether at maturity or upon redemption, redeemed pursuant to the Resolution; (2) At such times as are necessary to: (i) pay the fees and expenses of the Trustee, the Authority (including costs of issuing Bonds if insufficient amounts are on hand in the Costs of Issuance Fund), the Bond Registrar and Paying Agent, the Co-Paying Agent, the issuer of any Reserve Account Security Instrument, the financial advisors to the Authority and any transfer agent, co-paying agent or independent accountants employed to provide or verify cash flow projections and (ii) any rebate required under the Resolution; provided that an Authorized Officer may authorize the payment of any such fees or expenses prior to the payment of principal or interest on the Bonds; (3) At such times as are necessary, to reimburse the Reserve Accounts in amounts sufficient to maintain the Reserve Account Requirements or reimburse the issuers of Reserve Account Security Instruments; (4) Not more often than semiannually, to the extent certified by an Authorized Officer of the Authority as Excess Funds, to the Authority free and clear of the lien of the Resolution, provided however that notwithstanding the foregoing or any other provision of this Bond Resolution Excess Funds may be paid out and applied as otherwise provided in a Supplemental Resolution and provided further, however, that notwithstanding the foregoing or any other provision of the Resolution, Excess Funds in accounts for Bonds with respect to which MBIA has issued a Reserve Account Security Instrument or a Municipal Bond Guaranty Insurance Policy shall first be paid to MBIA to the extent of any reimbursement obligation owing to MBIA thereunder, and Excess Funds in accounts for Bonds with respect to which AMBAC Assurance has issued an AMBAC Insurance Policy shall first be paid to AMBAC Assurance to the extent of any reimbursement obligation owing to AMBAC Assurance thereunder. I-16

65 Notwithstanding the foregoing, moneys and investments in the Revenue Fund which have been allocated to the redemption of Bonds as to which notice of redemption has been given in accordance with the requirement of the Resolution shall be applied only to such redemption in accordance with the requirements of the Resolution. In the event a payment on a Municipal Obligation is received and deposited into the Revenue Fund and due to the untimeliness of its tendering, moneys have previously been transferred from a Reserve Account to account for such untimely payment, such payment on a Municipal Obligation up to the amount so transferred shall be deposited in the appropriate Reserve Account to the extent necessary to increase the amount on deposit in such Reserve Account to the Reserve Account Requirement for such Reserve Account, and provided further that notwithstanding any provision of the Resolution in the event a payment on a Municipal Obligation is received and deposited into the Revenue Fund and due to the untimeliness of its tendering, moneys have previously been paid from a Reserve Account Security Instrument to account for such untimely payment, such payment on a Municipal Obligation shall immediately be deposited directly in any account for which a Reserve Account Security Instrument has been issued, as applicable, to the extent necessary to fully reimburse the Issuer. Reserve Fund There shall be deposited in and credited to the Reserve Accounts all moneys transferred from the Revenue Fund as described above under "The Revenue Fund". Amounts in the Reserve Fund shall be paid out and applied by the Authority, the Trustee or the Depository solely to pay the items enumerated in paragraphs (1), (2), (but only to the extent of any rebate required by the Resolution), and (4) above under "The Revenue Fund" in that order of priority, to the extent insufficient amounts are available to pay such items in the Revenue Fund, provided that the Trustee shall pay, and is authorized to pay, to the extent of any reimbursement obligation owing to the issuer of any Reserve Account Security Instrument securing any Bonds, all moneys in the Reserve Account for such Bonds directly to the issuer of the applicable Reserve Account Security Instrument. Any earnings on moneys deposited in the Reserve Fund shall, to the extent such earnings cause the amount credited to the Reserve Fund to exceed the applicable Reserve Account Requirement, be transferred as received to the Revenue Fund; provided, however, that amounts on deposit in each Reserve Account shall be transferred and applied only with respect to the corresponding Type of Bonds, and amounts on deposit in the MBIA Insured Revenue Sharing Bond Reserve Account shall be transferred and applied for the purposes enumerated in paragraph 2 above under "The Revenue Fund" only with the consent of MBIA. Notwithstanding any other provision of the Resolution, the delivery of a Reserve Account Security Instrument as replacement for an existing cash deposit in any Reserve Account is authorized. The Trustee is hereby authorized and directed (i) to deliver a demand for payment under any Reserve Account Security Instrument issued by MBIA in accordance with the terms of such Reserve Account Security Instrument at least one day prior to the date on which funds are required to be paid under such Reserve Account Security Instrument, and (ii) to maintain adequate records (such records to be verified to the Trustee by MBIA) as to the amount available to be drawn at any given time under each Reserve Account Security Instrument issued by MBIA and held by the Trustee, and as to the amounts of any reimbursement obligation thereunder, or I-17

66 under the financial guaranty insurance agreement between MBIA and the Authority, paid and owing to MBIA. Revenue Sharing Pledge Agreements or Pledge Agreements The Authority shall cause the State Treasurer to agree, pursuant to the applicable Revenue Sharing Pledge Agreement or Pledge Agreement, to immediately transfer to the appropriate Bond Account of the Revenue Fund, available Distributable Aid (including in the case of a Governmental Unit which is a building authority incorporated under Act 31, Michigan Public Acts of 1948 (First Extra Session), as amended, available Distributable Aid of the incorporating municipality, and in the case of a Governmental Unit which is a tax increment finance authority established under Act 450, Michigan Public Acts of 1980, as amended, or a local development finance authority established under Act 281, Michigan Public Acts of 1986, as amended, available Distributable Aid of the establishing municipality) or state school aid, respectively, with respect to a Governmental Unit which has failed to pay any Loan Repayment when due under the applicable Municipal Obligation, and thereafter to continue to make such transfers to the extent provided by such Revenue Sharing Pledge Agreement or Pledge Agreement. The Authority, the Depository, or the Trustee, as the case may be, shall notify the State Treasurer in each case if a Governmental Unit (a) fails to pay at least five Business Days prior to the date when due any payments required to be made pursuant to any MBIA Insurance Program Revenue Sharing Municipal Obligation; (b) fails to pay at least two days prior to the date when due, any payments required to be made pursuant to any Revenue Sharing Municipal Obligation or (c) fails to pay at least five Business Days prior to the date when due any payments required to be made pursuant to any School Program Municipal Obligation. Such notice shall contain a request that the State Treasurer immediately transfer payments pursuant to the applicable Revenue Sharing Pledge Agreement or Pledge Agreement. Rebate Fund All Rebate Payments shall be deposited into the Rebate Fund. The Amounts in the Rebate Fund shall be held in trust and applied as provided in the Resolution and in the Non-Arbitrage and Tax Compliance Certificate. Amounts Remaining in Funds and Accounts Any amounts remaining in any Fund or account after full payment of the Bonds secured by such Fund or account or provision for payment thereof and all fees, charges and expenses have been paid shall be distributed by the Depository or the Trustee to the Authority, or as otherwise provided in a Supplemental Resolution; provided, however, that any amounts owing to MBIA and payable from such Fund or account shall first be paid to MBIA and any amounts owing to AMBAC Assurance and payable from such Fund or account shall be first paid to AMBAC Assurance. I-18

67 Investment of Funds Investment of Funds and Accounts Held Unless otherwise provided in a Supplemental Resolution, moneys in the Loan Fund, the Costs of Issuance Fund, the Reserve Fund, the Rebate Fund and the Revenue Fund shall be invested by the Authority, or at the direction of the Authority by the Trustee or the Depository in Eligible Investments, the maturity, redemption date or purchase date at the option of the holder of which shall coincide as nearly as practicable with the times at which moneys are received by the Authority for the purposes of such fund. Notwithstanding the foregoing, moneys in the MBIA Insured Revenue Sharing Bond Account of the Revenue Fund, the MBIA Insured Revenue Sharing Bond Loan Account of the Loan Fund or the MBIA Insured Revenue Sharing Bond Reserve Account of the Reserve Fund shall be invested only in those Eligible Investments which are designated to the Trustee in writing by an Authorized Officer of the Authority and approved in writing by MBIA; provided that such designation may be changed from time to time by an Authorized Officer of the Authority with the written approval of MBIA. Obligations purchased as an investment of moneys in any fund or account held by the Authority, the Depository or the Trustee under the provisions of the Resolution shall be deemed at all times to be a part of such fund or account; provided that the income or interest earned by, or increment to, any fund or account shall be transferred as provided in the Resolution. In computing the amount in any fund or account held by the Authority, the Depository or the Trustee under the provisions of the Resolution, obligations purchased as an investment of moneys therein shall be valued at the lower of market or cost as adjusted by amortization of the discount or premium paid upon purchase of such obligations ratably to their respective maturities. The Authority, the Depository or the Trustee shall sell at the best price obtainable, or present for redemption, any obligation purchased by it as an investment whenever it shall be necessary in order to provide moneys to meet any payment or transfer from the fund or account for which such investment was made. The Depository and the Trustee shall advise the Authority in writing, on or before the 15 th day of each calendar month, of the details of all investments held for the credit of each fund and account in its custody under the provisions of the Resolution as of the end of the preceding month or such other interval as directed in writing by an Authorized Officer of the Authority. Liability of Trustee, Depository and Authority for Investments Neither the Depository, the Trustee nor the Authority shall be liable or responsible for the making of any investment authorized by the provisions of the Resolution, in the manner therein provided, or for any loss resulting from any such investment so made. I-19

68 The Trustee and the Depository The Trustee and the Depository with respect to the Series Bonds shall file with the Authority its acceptance of the trusts and obligations imposed upon it by the Resolution and agrees to perform such trusts and obligations, but only upon and subject to, among others, the following express terms and conditions: (1) The Trustee, prior to the occurrence of an Event of Default and after the curing of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in the Resolution. In case an Event of Default has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by the Resolution (and, with respect to the MBIA Insured Revenue Sharing Bonds only, use the same degree of care and skill in their exercise as a prudent corporate trustee would exercise or use in the circumstances in the conduct of that corporate trustee's own affairs). (2) The Trustee may execute any of the trusts or powers of the Resolution and perform any of its duties by or through attorneys, agents, receivers or employees, and shall be entitled to act upon the opinion or advice of its counsel concerning all matters thereof, and may in all cases be reimbursed under the Resolution for reasonable compensation paid to all such attorneys, agents, receivers and employees as may reasonably be employed in connection with the trust thereof. The Trustee may act upon an opinion of counsel and shall not be responsible for any loss or damage resulting from any action or nonaction by it taken or omitted to be taken in good faith in reliance upon such opinion of Counsel. (3) The permissive right of the Trustee to do things enumerated in the Resolution shall not be construed as a duty and the Trustee shall not be answerable for other than its gross negligence or willful default. The immunities and exceptions from liability of the Trustee shall extend to its officers, directors, employees and agents. (4) Before taking any action under the Resolution, whether permissive or mandatory, the Trustee may require that reasonable security and/or a reasonably satisfactory indemnification be furnished for the reimbursement of all reasonable expenses to which it may be put and to protect it against all liability, except liability which is adjudicated to have resulted from its gross negligence or willful misconduct. Covenants of the Authority Under the Resolution, the Authority covenants and agrees with the Bondholders as follows: (1) The Authority shall duly and punctually pay or cause to be paid the principal or Redemption Price of every Bond and the interest, if any, thereon, at the dates and places and in the manner provided in the Bond, according to the true intent and meaning thereof. (2) The Authority is duly authorized pursuant to law to issue the Bonds and to adopt the Resolution and to pledge the Pledged Funds, and other moneys, securities, funds and property I-20

69 pledged by the Resolution in the manner and to the extent provided by the Resolution or a Supplemental Resolution. The Pledged Funds, Security, and other moneys, securities, funds and property so pledged are and will be free and clear of any pledge, lien, charge or encumbrance thereon or with respect thereto prior to, or of equal rank with, the pledge created by the Resolution except as otherwise provided in the Resolution or a Supplemental Resolution, and all action on the part of the Authority to that end will be duly and validly taken. The Bonds and the provisions of the Resolution are and will be the valid and legally enforceable obligations of the Authority in accordance with their terms and the terms of the Resolution and the Supplemental Resolutions providing for the issuance of Bonds. The Authority shall at all times, to the extent permitted by law, defend, preserve and protect the pledge of the Pledged Funds, Security, and other moneys, securities, funds and property pledged under the Resolution and all the rights of the Bondholders and the Trustee under the Resolution against all claims and demands of all persons whomsoever. (3) The Authority shall keep proper books of record and account in which complete and correct entries shall be made of its transactions relating to all Municipal Obligations, payments thereof and all funds and accounts established by the Resolution, which shall, except as otherwise provided by law, at all reasonable times be subject to the inspection by the Trustee, MBIA and the owners of an aggregate of not less than fifty-one percent (51%) in principal amount of the Bonds Outstanding or their representatives duly authorized in writing. (4) The Authority shall not at any time insist upon or plead in any manner whatsoever, or claim or take the benefit of any stay or extension law now or at any time hereafter in force which may affect the covenants and agreements contained in the Resolution, or in the Bonds, and all benefit or advantage of any such law or laws is expressly waived by the Authority. (5) The Authority shall not hereafter create or permit the creation of or issue any obligations or create any additional indebtedness, other than the Bonds, secured by a charge and lien on the Pledged Funds, and other moneys, securities, funds and property pledged by the Resolution except as provided in the Resolution or Supplemental Resolution. (6) The Authority shall diligently take all reasonable steps, actions and proceedings necessary for the enforcement of all terms covenants and conditions of purchases made by the Authority which shall affect the prompt collection of payments under the Municipal Obligations including the enforcement of the Municipal Obligations. Whenever it shall be necessary in order to protect and enforce the rights of the Authority under a Municipal Obligation and to protect and enforce the rights and interests of Bondholders under the Resolution the Authority shall commence proceedings against the Governmental Unit in default under the provisions of Municipal Obligations in protection and enforcement of its rights under such Municipal Obligations and bring appropriate action to collect any unpaid balance due on the Municipal Obligations. (7) Notwithstanding any other provision of the Resolution, the Authority shall not permit at any time or times any of the proceeds of the Bonds or any other funds of the Authority to be used directly or indirectly to acquire any investment property, the acquisition of which would cause any of the Bonds to be an "arbitrage bond" as defined in Section 148(a) of the Code. I-21

70 The Authority covenants and agrees that to the extent permitted by law, it shall take all actions within its control necessary to maintain and shall not take any actions the taking of which would adversely affect the exclusion of the interest on the Bonds from gross income for federal income tax purposes including but not limited to, actions relating to the rebate of arbitrage earnings and the expenditure and investment of Bond proceeds and money deemed to be Bond proceeds, all as more fully set forth in the Non-Arbitrage and Tax Compliance Certificate. Amounts required to be deposited in the Rebate Fund shall be determined by or at the direction of the Authority at such times as are required by the Non-Arbitrage And Tax Compliance Certificate. To the extent the Authority determines that there are excess moneys in the Rebate Fund, such excess moneys shall be paid to the Authority. Without limitation to the foregoing, the Authority covenants and agrees to pay to the United States (but only to the extent of moneys available therefor under the Resolution) any amount required to be paid by the Authority to the United States pursuant to Section 148(f) of the Code, at the times, in the amounts and at the places required thereby in order to maintain the exclusion of the interest on the Bonds from gross income for purposes of federal income taxation. (8) The Authority shall not permit at any time or times any of the proceeds of the Bonds or any other funds of the Authority to be used directly or indirectly in a manner which would result in the exclusion of the Bonds from the treatment afforded by Section 103(a) of the Code for any reason including without limitation by reason of the classification of such Bonds as "private activity bonds" within the meaning of Section 141(a) of the Code, or as federally guaranteed bonds as provided in Section 149(b) of the Code. Supplemental Resolutions Supplemental Resolutions Not Requiring Consent of Bondholders The Authority may, without the consent of or notice to any of the Bondholders and for any one or more of the following purposes, adopt at any time any Supplemental Indenture or Indentures, which shall be effective upon execution and delivery by the Trustee and the Authority, or any Resolution or Supplemental Resolution, which shall become effective in accordance with its terms upon the filing with the Trustee of a copy thereof, certified by an Authorized Officer of the Authority: (a) to cure any ambiguity or formal defect or omission in the Resolution; (b) to grant to or confer upon the Trustee for the benefit of the Bondholders any additional benefits, rights, remedies, powers or authorities that may lawfully be granted to or conferred upon the Bondholders or the Trustee; (c) to subject to the Resolution additional revenues, properties or collateral; (d) to modify, amend or supplement the Resolution or any resolution supplemental thereto in such manner as to permit the qualification thereof under the Trust Indenture Act of 1939 or any similar federal statute hereafter in effect or to permit the I-22

71 qualification of the Bonds for sale under the securities laws of the United States of America or of any of the states of the United States of America, and, if they so determine, to add to the Resolution or any resolution supplemental thereto such other terms, conditions and provisions as may be permitted by said Trust Indenture Act of 1939 or similar federal statute; (e) to evidence the appointment of a separate or the succession of a new Trustee, Bond Registrar and Paying Agent, Co-Paying Agent or Depository under the Resolution; (f) to satisfy the requirements of Moody's or S&P or other national rating agencies rating the Bonds in order to obtain, maintain or improve the rating on any of the Bonds; (g) Obligations; to provide for the orderly sale of Bonds or purchase of Municipal (h) to maintain the exclusion of interest on the Bonds from gross income for federal income tax purposes, to prevent interest on the Bonds from being subject to any alternative minimum tax (other than an alternative minimum tax which applies to all tax-exempt bonds generally) and to maintain the exemption of the Bonds and the interest thereon from State taxation; (i) (j) to provide for additional or different Types of Bonds; to issue refunding bonds pursuant to the Resolution; (k) to reduce or eliminate the Reserve Account Requirement with respect to any Type of Bonds if such reduction or elimination is otherwise permitted under the Resolution; (l) to provide for the issuance of any Series or Group of Bonds and to prescribe the terms and conditions pursuant to which such Bonds may be issued, paid or redeemed; (m) to provide for the issuance of Bonds of any Type bearing interest at variable interest rates, or with variable interest periods or subject to mandatory purchase at the option of the Owner thereof; (n) to provide for the purchase of bond insurance or other credit or liquidity support for any Bond; (o) to provide for the purchase or acquisition of one or more Reserve Account Security Instruments; I-23

72 (p) to effect any other changes in the Resolution which, in the judgment of the Trustee, are not to the prejudice of the Trustee or the Bondholders; and (q) to accomplish, implement, or give effect to any other action which is authorized or required by the Resolution. Supplemental Resolutions Requiring Consent of Bondholders The owners of not less than two-thirds in aggregate principal amount of the Bonds Outstanding which are affected shall have the right, from time to time, anything contained in the Resolution to the contrary notwithstanding, to consent to and approve the adoption by the Authority and the acceptance by the Trustee of such other supplemental resolution or resolutions and Supplemental Indentures as shall be deemed necessary and desirable by the Trustee for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions affecting or relating to such Type of Bonds contained in the Resolution or in any Supplemental Resolution; provided, however, that there shall not be permitted, other than in accordance with the Resolution and the terms of the Bonds with respect to each Type of Bonds (1) without the consent of the owners of all then Outstanding Bonds of such type, (a) an extension of the maturity date of the principal of or the interest Payment Date for interest on any Bond of such type, or (b) a reduction in the principal amount of any Bond of such type or the rate of interest thereon, or (c) a privilege or priority of any Bond or Bonds of a Type over any other Bond or Bonds of the same Type, or (d) a reduction in the aggregate principal amount of the Bonds required for consent to such Supplemental Resolution, or (e) the creation of any lien other than a lien ratably securing all of the Bonds of the same Type at any time Outstanding under the Resolution, or (2) any modification of the trusts, powers, rights, obligations, duties, remedies, immunities and privileges of the Trustee or Depository without the written consent of the Trustee or the Depository, respectively. If at any time the Authority shall request the Trustee to accept any such Supplemental Resolution, the Trustee shall, upon being satisfactorily indemnified with respect to expenses, cause notice of the proposed Supplemental Resolution to be mailed by registered or certified mail to MBIA and each owner of a Bond at the address shown on the registration books. Such notice shall briefly set forth the nature of the proposed Supplemental Resolution and shall state that copies thereof are on file at the principal corporate trust office of the Trustee for inspection by all Bondholders. If, within 60 days, or such longer period as shall be prescribed by the Authority, following the mailing of such notice, the owners of not less than two-thirds in aggregate principal amount of the Bonds of each Type affected by such Supplemental Resolution Outstanding at the time of the execution of any such Supplemental Resolution shall have consented to and approved the adoption thereof as provided in the Resolution, no owner of any Bond shall have any right to object to any of the terms and provisions contained in such proposed Supplemental Resolution, or the operation thereof, or in any manner to question the propriety of the execution thereof, or to enjoin or restrain the Trustee or the Authority from executing the same or from taking any action pursuant to the provisions thereof. Upon the adoption of any such Supplemental Resolution, the Resolution shall be and be deemed to be modified, supplemented and amended in accordance therewith. I-24

73 Notice of Amendments Promptly after the adoption by the Authority of any Supplemental Resolution, the Trustee shall mail a notice, setting forth in general terms the substance thereof, to any Bondholder requesting the same in writing and each Rating Agency then rating the affected Bonds. Any failure to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such Supplemental Resolution. Supplemental Non-Arbitrage and Tax Compliance Certificates The Authority may, from time to time and at any time, amend, supplement or modify the Non-Arbitrage and Tax Compliance Certificate, to the extent permitted by law, to maintain the exclusion of the interest on the Bonds from gross income for purposes of federal income taxation under the Code; provided however the Authority shall receive the opinion of Bond Counsel stating that such amendment, supplement or modification is necessary or desirable to maintain such exclusion of the interest on the Bonds (or the exclusion of the interest on the Municipal Obligations) prior to amending, supplementing or modifying the Non-Arbitrage and Tax Compliance Certificate. Consent of MBIA Notwithstanding any other provision of the Resolution, for so long as any Reserve Account is funded in whole or in part by a Reserve Account Security Instrument issued by MBIA or a Municipal Bond Guaranty Insurance Policy is in effect and MBIA is not in default of payment obligations thereunder, the Authority shall not amend or approve the amendment of (i) any provision of the Resolution relating to the Bonds secured thereby, (ii) any corresponding Municipal Obligation, (iii) any Collateral Document relating to a corresponding Municipal Obligation, or (iv) any Revenue Sharing Pledge Agreement or Pledge Agreement relating to a corresponding Municipal Obligation, without the prior written consent of MBIA. Defaults and Remedies Events of Default Each of the following events is an "Event of Default" under the Resolution: (a) Default in the payment of the principal of or interest on any Bond after the same shall become due, whether at maturity, stated date of payment or upon call for redemption, provided that an Event of Default shall be deemed to exist only with respect to those Bonds of the same Type as the Bond with respect to which such failure occurred and provided further that for purposes of determining whether an Event of Default has occurred or is continuing under this paragraph (a), payments by AMBAC Assurance under any AMBAC Insurance Policy shall not be taken into account; or (b) With respect to each Type of Bonds, the Authority shall default in the performance or observance of any other of the covenants, agreements or conditions on its part in I-25

74 the Resolution, or in the Bonds of such Type contained and continuance of such default for a period of ninety (90) days after written notice thereof by the Trustee or the owners of not less than fifty-one percent (51%) in principal amount of the Outstanding Bonds of such Type, or in the case of MBIA Insured Revenue Sharing Bonds, MBIA, or in the case of Capital Guaranty Insured Bonds, Capital Guaranty, or in the case of AMBAC Insured Bonds, AMBAC Assurance, provided, however, that an Event of Default shall not be deemed to exist under the provisions of this clause (b) so long as the Authority shall be provided with or have moneys sufficient in amount to pay the principal of and interest on all Bonds of such Type and expenses authorized to be paid under the Resolution as the same shall become due. Remedies With respect to each Type of Bonds: (a) Upon the happening and continuance of any Event of Default, then, and in each such case the Trustee may (and in the case of MBIA Insured Revenue Sharing Bonds, with the written consent of MBIA) (and in the case of Capital Guaranty Insured Bonds, with the written consent of Capital Guaranty) (and in the case of AMBAC Insured Bonds, with the prior written consent of AMBAC Assurance) proceed, and upon the written request of the Holders of not less than fifty-one percent (51%) in principal amount of the Outstanding Bonds, or, in the case of MBIA Insured Revenue Sharing Bonds, MBIA (provided that if both MBIA and the Holders of not less than fifty-one percent (51%) in principal amount of the Outstanding Bonds make such written request, the request of not less than fifty-one percent (51%) in principal amount of the Outstanding Bonds shall control), or in the case of Capital Guaranty Insured Bonds, Capital Guaranty (provided that if both Capital Guaranty and the Holders of not less than fifty-one percent (51%) in principal amount of the Outstanding Bonds make such written request, the request of the Holders of not less than fifty-one percent (51%) in principal amount of Outstanding Bonds shall control), or, in the case of AMBAC Insured Bonds, AMBAC Assurance (provided that if both AMBAC Assurance and the Holders of not less than fifty-one percent (51%) in principal amount of the Outstanding Bonds make such written request, the request of not less than fifty-one percent (51%) in principal amount of the Outstanding Bonds shall control), shall proceed, in its own name, to protect and enforce its rights and the rights of the Bondholders by such of the following remedies as the Trustee shall deem most effectual to protect and enforce such rights at the direction and with the consent of MBIA (in the case of MBIA Insured Revenue Bonds) and at the direction and with the consent of Capital Guaranty (in the case of Capital Guaranty Insured Bonds) and at the direction and with the consent of AMBAC Assurance (in the case of AMBAC Insured Bonds): (1) by mandamus or other suit, action or proceedings at law or in equity, to enforce the rights of the Bondholders; and to require the Authority to carry out any other agreement with Bondholders and to perform its duties under the Act; (2) by bringing suit upon the Bonds; (3) by action or suit, requiring the Authority to account as if it were the trustee of an express trust for the Holders of Bonds; I-26

75 (4) by action or suit in equity, enjoin any acts or things which may be unlawful or in violation of the rights of the Holders of Bonds; (5) by requiring the Authority to enforce the rights of the Authority under Municipal Obligations or, if not prohibited by Supplemental Resolution, to sell the Municipal Obligations; (6) by bringing an action or suit to obtain any other remedy available at law or equity; (7) if not prohibited by Supplemental Resolutions, by declaring all Bonds, of the Type or Types with respect to which an Event of Default is deemed to exist, due and payable; and if all defaults shall have been cured, then, with the written consent of the Holders of not less than fifty-one percent (51%) in principal amount of the Outstanding Bonds of such Type to annul such declaration and its consequences; and provided that in the case of MBIA Insured Revenue Sharing Bonds, no acceleration shall be declared pursuant to this clause without the prior written consent of MBIA, and provided further that in the case of Capital Guaranty Insured Bonds, no acceleration shall be declared pursuant to this clause without the prior written consent of Capital Guaranty; and provided further that in the case of AMBAC Insured Bonds, no acceleration shall be declared pursuant to this clause without the prior written consent of AMBAC Assurance. (b) The Trustee shall give notice of any Event of Default to the Authority and MBIA with respect to MBIA Insured Revenue Sharing Bonds and Capital Guaranty with respect to the Capital Guaranty Insured Bonds, and AMBAC Assurance with respect to AMBAC Insured Bonds, in the event of default as promptly as practicable after the occurrence of an Event of Default becomes known to the Trustee, and shall give notice in writing to the Governor of the State, the State Treasurer, the Attorney General of the State and the Authority not less than thirty days prior to declaring the principal of the Bonds due and payable after an Event of Default. (c) In the enforcement of any remedy under the Resolution, the Trustee shall be entitled to sue for, enforce payment on and receive any and all amounts then or during any default becoming, and any time remaining, due from the Authority for principal, interest or otherwise, under any provision of the Resolution or of the Bonds, and unpaid, together with any and all costs and expenses of collection and of all proceedings hereunder and under the Bonds, without prejudice to any other right or remedy of the Trustee or of the Bondholders, and to recover and enforce judgment or decree against the Authority for any portion of such amounts remaining unpaid, with interest, costs and expenses, and to collect from Pledged Funds, in any manner provided by law, the moneys adjudged or decreed to be payable. I-27

76 Application of Moneys (a) With respect to Bonds of each Type all moneys received by the Trustee pursuant to any right given or action taken upon an Event of Default, including by virtue of action taken under provisions of any Bond or Municipal Obligation, shall, after payment of the reasonable costs and expenses of the proceedings resulting in the collection of such moneys and of the reasonable expenses, liabilities and advances incurred or made by the Trustee, be applied, along with any other moneys available for such purposes, unless the principal of all the Bonds of such Type shall have become due and payable: FIRST To the payment to the persons entitled thereto of installments of interest in the order of maturity of the installments of such interest and, if the amount available shall not be sufficient to pay in full any particular installment of interest, then to the payment ratably, according to the amounts due on such installment to the persons entitled thereto, without any discrimination or privilege; SECOND To the payment to the persons entitled thereto of the unpaid principal of any of the Bonds which shall have become due at stated maturity or pursuant to a call for redemption (other than Bonds called for redemption for the payment of which moneys are held pursuant to the other provisions of the Resolution), in the order of their due dates and, if the amount available shall not be sufficient to pay in full Bonds due on any particular date, then to the payment ratably, according to the amount of principal due on such date, to the persons entitled thereto without any discrimination or privilege; THIRD To be held as provided under the heading "Pledge and Establishment of Funds and Accounts" above for the payment to the persons entitled thereto as the same shall become due of the amounts payable pursuant to the Resolution; provided, that payments made under a Municipal Bond Guaranty Insurance Policy shall only be used for payments of principal of and interest on the MBIA Insured Revenue Sharing Bonds in accordance with the terms of the Municipal Bond Guaranty Insurance Policy; and provided further that payment made under a Financial Guaranty Bond with respect to Capital Guaranty Insured Bonds shall only be used for payments of principal of and interest on the Capital Guaranty Insured Bonds in accordance with the terms of the Financial Guaranty Bond; and provided further that payments made under an AMBAC Insurance Policy issued with respect to the AMBAC Insured Bonds shall only be used for payments of principal and interest on the AMBAC Insured Bonds in accordance with the terms of the AMBAC Insurance Policy. (b) If the principal of all the Bonds of any Type shall have become due, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon such Bonds and amounts payable as described in paragraphs (2) through (4) under "The Revenue Fund" under this caption, with principal and interest to be paid first without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto without any I-28

77 discrimination or privilege, and then amounts payable as described in paragraphs (2) through (4) under "The Revenue Fund" under this caption to be paid second. Whenever moneys are to be applied by the Trustee pursuant to the provisions described above, such moneys shall be applied by the Trustee at such times, and from time to time, as the Trustee in its sole discretion shall determine (provided, however, that in the case of AMBAC Insured Bonds such determination shall only be made with the prior written consent of AMBAC Assurance), having due regard to the amount of such moneys available for application and the likelihood of additional money becoming available for such application in the future; the deposit or otherwise setting aside such moneys in trust for the proper purpose, shall constitute proper application by the Trustee; and the Trustee shall incur no liability whatsoever to the Authority, to any Bondholder or to any other person for any delay in applying any such moneys, so long as the Trustee acts with reasonable diligence, having due regard for the circumstances, and ultimately applies the same in accordance with such provisions of the Resolution as may be applicable at the time of application by the Trustee. Whenever the Trustee shall exercise such discretion in applying such moneys, it shall fix the date upon which such application is to be made and upon such date interest on the amounts of principal to be paid on such date shall cease to accrue. The Trustee shall give such notice as it may deem appropriate for the fixing of any such date. The Trustee shall not be required to make payment of principal to any Bondholders unless such Bond shall be presented to the Trustee. Termination of Proceedings In case any proceeding taken by the Trustee on account of any Event of Default shall have been discontinued or abandoned for any reason or determined adversely to the Trustee, then in every such case the Authority, the Trustee, MBIA, Capital Guaranty, AMBAC Assurance, and the Bondholders shall be restored to their former positions and rights hereunder, respectively, and all rights, remedies, powers and duties of the Trustee, the Authority, MBIA, Capital Guaranty, AMBAC Assurance, and the Bondholders shall continue as though no such proceeding had been taken. Bondholders' Direction of Proceedings Anything in the Resolution to the contrary notwithstanding, the Holders of fifty-one percent (51%) in principal amount of the Bonds Outstanding of any Type, and, in the case of MBIA Insured Revenue Sharing Bonds (but only if no inconsistent direction is given by the Owners of not less than fifty-one percent (51%) in principal amount of MBIA Insured Revenue Sharing Bonds), MBIA, and, in the case of Capital Guaranty Insured Bonds (but only if no inconsistent direction is given by Owners of not less than fifty-one percent (51%) in principal amount of Capital Guaranty Insured Bonds), Capital Guaranty, and, in the case of AMBAC Insured Bonds (but only if no inconsistent direction is given by owners of not less than fifty-one percent (51%) in principal amount of AMBAC Insured Bonds), AMBAC Assurance, shall have the right, by an instrument or concurrent instruments in writing executed and delivered to the Trustee, to direct the time, method and place of conducting all remedial proceedings with respect to Bonds of such Type to be taken by the Trustee hereunder, provided that such direction shall not be otherwise than in accordance with law and the provisions of the Resolution and any I-29

78 applicable Supplemental Resolution, and that the Trustee shall have the right to decline to follow any such direction which in the opinion of the Trustee would be unjustly prejudicial to Bondholders not parties to such direction. Limitation on Rights of Bondholders With respect to Bonds of any Type, no Holder of any Bond shall have any right to institute any suit, action or other proceeding under the Resolution, or for the protection or enforcement of any right thereunder or any right under law unless such Bondholder shall have given to the Trustee written notice of the Event of Default or breach of duty on account of which such suit, action or proceeding is to be taken, and unless the Holders of not less than fifty-one percent (51%) in principal amount of the Bonds Outstanding of such Type, with the consent of MBIA with respect to the MBIA Insured Revenue Sharing Bonds, with the consent of Capital Guaranty with respect to the Capital Guaranty Insured Bonds, and with the consent of AMBAC Assurance with respect to AMBAC Insured Bonds, shall have made written request of the Trustee after the right to exercise such powers or right of action, as the case may be, shall have accrued, and shall have afforded the Trustee a reasonable opportunity either to proceed to exercise the powers granted in the Resolution or granted under the law or to institute such action, suit or proceeding in its name and unless, also, there shall have been offered to the Trustee reasonable security and indemnity against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee shall have refused or neglected to comply with such request within a reasonable time; and such notification, request and offer of indemnity are thereby declared in every such case, at the option of the Trustee, to be conditions precedent to the execution of the powers under the Resolution or for any other remedy thereunder or under law. It is understood and intended that no one or more Bondholders thereby secured shall have any right in any manner whatever by his or their action to affect, disturb or prejudice the security of the Resolution, or to enforce any right thereunder or under law with respect to the Bonds or the Resolution, except in the manner therein provided, and all proceedings shall be instituted, had and maintained in the manner therein provided and for the benefit of all Holders of the Outstanding Bonds of each Type. Notwithstanding the foregoing provisions, the obligation of the Authority shall be absolute and unconditional to pay the principal of and interest on the Bonds to the respective Holders thereof at the respective due dates thereof and nothing in the Resolution shall affect or impair the right of action, which is absolute and unconditional, of such Holders to enforce such payment. Each Holder of any Bond by his acceptance thereof shall be deemed to have agreed that any court in its discretion may require, in any suit for the enforcement of any right or remedy under the Resolution or any Supplemental Resolution, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the reasonable costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in any such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this paragraph shall not apply to any suit instituted by the Trustee, to any suit instituted by any Bondholder, or group of Bondholders, holding at least fifty-one percent (51%) in principal amount of the Bonds Outstanding of the Type to which such suit relates, or to any suit instituted by any Bondholder for the enforcement of the payment of the I-30

79 principal or interest on any Bond on or after the respective due date thereof expressed in such Bond. Possession of Bonds by Trustee Not Required All rights of action under the Resolution or under any of the Bonds, enforceable by the Trustee, may be enforced by it without the possession of any of the Bonds or the production thereof on the trial or other proceeding relative thereto, and any such suit, action or proceeding instituted by the Trustee shall be brought in its name for the benefit of all the Holders of such Bonds, subject to the provisions of the Resolution. Remedies Not Exclusive No remedy conferred upon or reserved to the Trustee or to the Holders of the Bonds or MBIA with respect to MBIA Insured Revenue Sharing Bonds, or Capital Guaranty with respect to the Capital Guaranty Insured Bonds, or AMBAC Assurance with respect to AMBAC Insured Bonds, is intended to be exclusive of any other remedy or remedies, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity or by statute. No Waiver of Default No delay or omission of the Trustee or of any Holder of the Bonds or MBIA with respect to MBIA Insured Revenue Sharing Bonds, or Capital Guaranty with respect to the Capital Guaranty Insured Bonds, or AMBAC Assurance with respect to AMBAC Insured Bonds, to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver of any such default or an acquiescence therein; and every power and remedy given by the Resolution to the Trustee, and the Holders of the Bonds, MBIA, Capital Guaranty or AMBAC, respectively, may be exercised from time to time and as often as may be deemed expedient. Notice of Event of Default With respect to the Bonds of each Type, the Trustee shall give to the Owners of such Bonds notice of each Event of Default respecting such Bonds known to the Trustee as soon as reasonably practicable after knowledge of the occurrence thereof, unless such Event of Default shall have been remedied or cured before the giving of such notice. Each such notice of Event of Default shall be given by the Trustee by mailing written notice thereof by first class mail to all registered owners of such Bonds, as the names and addresses of such owners appear upon the books for registration and transfer of Bonds as kept by the Bond Registrar and Paying Agent. Defeasance Any Bond will be deemed to be paid within the meaning of the Resolution when (a) payment of the principal of such Bond, plus interest thereon to the due date thereof (whether such due date is by reason of maturity or upon redemption), either (i) has been made or caused to be I-31

80 made in accordance with the terms thereof, or (ii) has been provided for by irrevocably depositing with the Depository or the Trustee in trust and irrevocably setting aside exclusively for such payment sufficient moneys to make such payment and/or Government Obligations maturing as to principal and interest in such amounts and at such times as will insure the availability of sufficient moneys to make such payments, and (b) all necessary and proper fees, premiums, compensation and expenses of the Trustee, the Depository, Bond Registrar and Paying Agent, Co-Paying Agent, the Authority, and any co-registrar or transfer agent pertaining to the Bonds with respect to which such deposit is made have been paid or the payment thereof provided for to the satisfaction of the Trustee. At such times as a Bond is deemed to be paid under the Resolution, as aforesaid, such Bond will no longer be secured by or entitled to the benefits of the Resolution, except with respect to provisions relating to the payment of the principal of and interest on such Bond from such moneys or Government Obligations and the related duties of the Depository, Bond Registrar and Paying Agent or the Trustee. Notwithstanding the foregoing paragraph, no deposit described under clause (a) (ii) of such paragraph will be deemed a payment of such Bonds (1) until the Authority has given the Trustee, in form satisfactory to the Trustee, irrevocable instructions: (i) stating the date when the principal or each such Bonds is to be paid, whether at maturity or on a redemption date, (ii) to call for redemption pursuant to the Resolution any Bonds to be redeemed prior to maturity and (iii) if all the Bonds to be redeemed are not to be redeemed within 30 days, to mail, as soon as practicable, in the manner prescribed by the Resolution for notices of redemption, a notice to the owners of such Bonds that the deposit required by (a)(ii) has been made with the Depository or the Trustee and that said Bonds are deemed to have been paid and stating the maturity or redemption date upon which moneys are to be available for the payment of the principal or Redemption Price, if applicable, on said Bonds; and (2) if any Bonds are to be redeemed within the next 30 days, until proper notice of redemption of those Bonds shall have been given. Notwithstanding any other provision described under this subheading, in the event that the principal and/or interest due on any MBIA Insured Revenue Sharing Bonds shall be paid by MBIA pursuant to a Municipal Bond Guaranty Insurance Policy, such Bonds shall continue to exist and MBIA shall be subrogated to the rights of such registered owners. Notwithstanding any other provision described under this subheading, in the event that the principal and redemption price, if applicable, and interest due on the Capital Guaranty Insured Bonds and coupon, if any, shall be paid by Capital Guaranty pursuant to a Financial Guaranty Bond, the assignment and pledge of the Pledged Funds, and all covenants, agreements and other obligations of the Authority to the Owners of the Capital Guaranty Insured Bonds shall continue to exist and Capital Guaranty shall be subrogated to the rights of such Bondholders. In the event that the Capital Guaranty Insured Bonds are to be defeased, Capital Guaranty shall be notified and provided with draft copies of the proposed escrow agreement, CPA certification, preliminary official statement of the refunding issue (if applicable) and bond counsel opinion. These materials shall be delivered to Capital Guaranty no less than five (5) business days prior to the scheduled defeasance. I-32

81 Defeasance shall be accomplished only with an irrevocable deposit in escrow of certain investments referred to below. Further substitutions of securities in the escrow are not permitted. The deposit in the escrow must be sufficient, without reinvestment, to pay all principal and interest as scheduled on the Capital Guaranty Insured Bonds to and including the date of redemption. A copy of the escrow agreement and certified public accountant's certificate stating that the escrow is sufficient to meet these standards, together with the final official statement for the refunding issue (if applicable), bond counsel opinion, Trustee's receipt, and Trustee's certification as to the application of funds shall be furnished to Capital Guaranty no later than ten (10) business days subsequent to the defeasance. The investments for a defeasance must consist solely of one or more of the following: (a) (b) ("SLGS"); (c) market; and, (d) cash; State and Local Government Series issued by the United States Treasury United States Treasury bills, notes and bonds, as traded on the open zero coupon United States Treasury Bonds. Notwithstanding any other provision under this subheading, in the event that the principal and/or interest due on any AMBAC Insured Bonds shall be paid by AMBAC Assurance pursuant to an AMBAC Insurance Policy, such AMBAC Insured Bonds, shall remain Outstanding, not by reason of such payment be considered defeased or paid by the Authority and the assignment and pledge of the Security and all covenants, agreements and other obligations of the Authority to the registered owners of such AMBAC Insured Bonds shall continue to exist and AMBAC Assurance shall be subrogated to the rights of such registered owners. Notwithstanding the foregoing paragraph, (a), no deposit under (ii) of paragraph (a) above will be deemed a payment of AMBAC Insured Bonds unless (A) the sufficiency of the escrowed cash and non-callable Government Obligations to provide for the payment of debt service on such AMBAC Insured Bonds has been verified in full (the "Verification") by an independent nationally recognized certified public accountant and (B) AMBAC Assurance has been provided a copy of the Verification, an executed copy of the escrow agreement and an opinion of Bond Counsel to the effect that such Bonds are no longer "Outstanding" under this Bond Resolution, each of which shall be in form and substance acceptable to AMBAC Assurance. Provisions Relating to Capital Guaranty Insured Bonds Wherever the term "Bondholder", "Owner", "Holder", "Holder of Bonds", or "Owner of Bonds" or a term of like meaning appears in the Resolution with respect to Capital Guaranty I-33

82 Insured Bonds, Capital Guaranty shall be deemed to be a "Bondholder", "Owner", "Holder", "Holder of Bonds or "Owner of Bonds" of a sufficient percentage of the outstanding Capital Guaranty Insured Bonds (a) to initiate any action or effect any demand which Capital Guaranty Insured Bond holders may initiate or effect, and (b) to approve or disapprove an action, forbearance or amendment which is subject to Bondholder approval or Initiation. At the time that the Trustee for the Capital Guaranty Insured Bonds is required to give any notice relating to the Capital Guaranty Insured Bonds to any party, like notice shall be given to Capital Guaranty. In addition, the Trustee for the Capital Guaranty Insured Bonds shall immediately notify Capital Guaranty (i) not less than ten (10) Business Days (or such lesser number of days as are actually available to the Trustee) in advance of the execution or acceptance of any supplement, amendment or change to the Resolution relating to the Capital Guaranty Insured Bonds, (ii) upon any deficiency in any fund or account held by the Trustee for the Capital Guaranty Insured Bonds under the Resolution with respect to the Capital Guaranty Insured Bonds, (iii) upon a direction from the Authority to redeem all or a portion of the Capital Guaranty Insured Bonds, (iv) upon the resignation or petition for removal of the Trustee for the Capital Guaranty Insured Bonds or the appointment of a successor Trustee for the Capital Guaranty Insured Bonds and (v) upon any event of default with respect to the Capital Guaranty Insured Bonds or upon any event that with notice and/or with the lapse of time could become an event of default with respect to the Capital Guaranty Insured Bonds under the Resolution. Moneys in the Capital Guaranty Insured Bonds Accounts of the Revenue Fund and Loan Fund shall be invested only in those Eligible Investments which are designated to the Trustee in writing by an Authorized Officer of the Authority and approved in writing by Capital Guaranty; provided that such designation may be changed from time to time by an Authorized Officer of the Authority with the written approval of Capital Guaranty. Notwithstanding any other provision of the Resolution, the Trustee for the Capital Guaranty Insured Bonds and the Bond Registrar and Paying Agent for the Capital Guaranty Insured Bonds, may be removed at any time, at the request of Capital Guaranty, for any breach of the trust set forth in the Resolution. Notwithstanding any other provision of the Resolution the Trustee for the Capital Guaranty Insured Bonds and the Bond Registrar and Paying Agent for the Capital Guaranty Insured Bonds and every successor thereto shall: (a) be a trust company or bank in good standing located in or incorporated under the laws of the State, (b) be duly authorized to exercise trust powers, (c) be subject to examination by a federal or state authority and (d) maintain a reported capital and surplus of not less than seventy-five million dollars ($75,000,000). As long as a Financial Guaranty Bond shall be in full force and effect with respect to Capital Guaranty Insured Bonds, the Authority and the Trustee agree to comply and shall comply with the following provisions: 1. The gross amount to be deposited to the Capital Guaranty Insured Bonds Account of the Revenue Fund required to pay in full (a) the interest on the Capital Guaranty Insured Bonds on each stated interest date and (b) the principal of the Capital I-34

83 Guaranty Insured Bonds on each stated maturity date thereof and on each date on which such principal shall have been duly called for mandatory sinking fund redemption (in either event the "Payment Date") shall be deposited by or on behalf of the authority at least five (5) Business Days prior to each such stated Payment Date. 2. If, at the close of business on the fifth Business Day prior to a Payment Date, the Trustee for the Capital Guaranty Insured Bonds determines that there will be insufficient moneys in the funds and accounts available to pay in full the principal of and/or Interest on the Capital Guaranty Insured Bonds on such Payment Date, the Trustee for the Capital Guaranty Insured Bonds shall so notify Capital Guaranty Insurance Company ("Capital Guaranty") via telephonic notice to Capital Guaranty's Claims Officer at (415) , confirmed by telecopy at (415) , of a completed "Notice of Nonpayment" in the form attached as Exhibit A to the Financial Guaranty Bond. 3. Simultaneously with the giving of notice to Capital Guaranty as proved in the preceding paragraph, the Trustee for the Capital Guaranty Insured Bonds shall make available to Capital Guaranty, its agents or assigns the bond registration books of the Authority maintained by the Trustee for the Capital Guaranty Insured Bonds, and all records relating to the funds and accounts for the Capital Guaranty Insured Bonds established under the Bond Resolution. 4. By the close of business on the third Business Day prior to a Payment Date for which there will be a deficiency as aforesaid, the Trustee for the Capital Guaranty Insured Bonds shall provide Capital Guaranty Insured Bonds entitled to receive principal or interest payments from Capital Guaranty under the terms of a Financial Guaranty Bond and the full or partial amounts of interest and principal due each such registered owner. 5. By the close of business on the second Business Day prior to a Payment Date for which there will be a deficiency as aforesaid, Capital Guaranty shall make arrangements with its Disbursing Agent (as such term is defined in the Financial Guaranty Bond) to disburse to the Trustee for the Capital Guaranty Insured Bonds on such Payment Date funds to be held by the Trustee for the Capital Guaranty Insured Bonds in a segregated trust account (the "Segregated Account") in an amount sufficient to enable the Trustee for the Capital Guaranty Insured Bonds (1) to mail checks or drafts on such Payment Date to the registered owners of Capital Guaranty Insured Bonds entitled to receive full or partial interest payments pursuant to the terms of a Financial Guaranty Bond, and (2) to pay principal upon Capital Guaranty Insured Bonds surrendered to the Trustee for the Capital Guaranty Insured Bond by the registered owners of Capital Guaranty Insured Bonds entitled, pursuant to the terms of a Financial Guaranty Bond, to receive full or partial principal payments from Capital Guaranty. The Trustee for the Capital Guaranty Insured Bonds shall administer the Segregated Account (including, but not limited to, the investment thereof and the return of excess amounts, if any) in accordance with the written instructions of an authorized officer of Capital Guaranty. 6. The Trustee for the Capital Guaranty Insured Bonds at the time it provides Notice of Nonpayment to Capital Guaranty, shall notify registered owners of Capital I-35

84 Guaranty Insured Bonds entitled to receive principal and/or Interest payments from Capital Guaranty (i) as to the fact of such entitlement, (ii) that Capital Guaranty's Disbursing Agent may or will remit to Trustee for the Capital Guaranty Insured Bonds all or a portion of the interest payments coming due on the next scheduled Payment Date, (iii) that if entitled to receive full or partial payment of principal pursuant to the terms of a Financial Guaranty Bond, such registered owners must tender their Capital Guaranty Insured Bonds for payment thereof to the Trustee for the Capital Guaranty Insured Bonds along with a valid and duly executed transfer of title in a form reasonably satisfactory to Capital Guaranty. Upon the tendering of such Capital Guaranty Insured Bonds to the Trustee for the Capital Guaranty Insured Bonds shall pay the registered owners thereof the unpaid portion of principal then due pursuant to a Financial Guaranty Bond. 7. Capital Guaranty, if it causes its Disbursing Agent to make payment of all or a portion of principal of or interest on Capital Guaranty Insured Bonds pursuant to a Financial Guaranty Bond, shall become subrogated to the rights of the recipients of such payments in accordance with the terms of the Financial Guaranty Bond, and to evidence such subrogation (i) in the case of subrogation as to payments under a Financial Guaranty Bond representing interest, the Trustee for the Capital Guaranty Insured Bonds shall note Capital Guaranty's rights as subrogee and the amount of such interest so paid by Capital Guaranty on the registration books of the Authority maintained by the Trustee, and (ii) in the case of subrogation as to payments under a Financial Guaranty Bond representing principal, the Trustee shall note Capital Guaranty's rights as subrogee and the amount of such principal so paid by Capital Guaranty on the registration books of the Authority maintained by the Trustee upon surrender of the Capital Guaranty Insured Bonds by the registered owners thereof. The Capital Guaranty Insured Bonds shall contain a statement of Insurance in the form provided by Capital Guaranty. Provisions Relating to AMBAC Insured Bonds Any provision of the Bond Resolution expressly recognizing or granting rights in or to AMBAC Assurance may not be amended in any manner which affects the rights of AMBAC Assurance hereunder without the prior written consent of AMBAC Assurance. Unless otherwise provided in this Section, AMBAC Assurance's consent shall be required in addition to Bondholder consent, when required, for the following purposes: (i) execution and delivery of any supplemental resolution or any amendment, supplement or change to or modification of the Bond Resolution affecting the AMBAC Insured Bonds; (ii) removal of the Trustee or paying Agent for the AMBAC Insured Bonds and selection and appointment of any successor trustee or paying agent for the AMBAC Insured Bonds; and (iii) initiation or approval of any action not described in (i) or (ii) above which requires Bondholder consent. To the extent permitted by law, anything in the Bond Resolution to the contrary notwithstanding, upon the occurrence and continuance of an event of default as defined herein with respect to the AMBAC Insured Bonds, AMBAC Assurance shall be entitled to control and direct the enforcement of all rights and remedies granted to the Bondholders or the Trustee for the benefit of the Bondholders under the Bond Resolution, including, without limitation: (i) the I-36

85 right to accelerate the principal of the AMBAC Insured Bonds as described in the Bond Resolution and (ii) the right to annul any declaration of acceleration with respect to the AMBAC Insured Bonds, and AMBAC Assurance shall also be entitled to approve all waivers of events of default with respect to the AMBAC Insured Bonds. Upon the occurrence of an event of default, the Trustee may, with the consent of AMBAC Assurance, and shall, at the direction of AMBAC Assurance or 51% of the Bondholders with the consent of AMBAC Assurance, by written notice to the Authority and AMBAC Assurance, declare the principal of the AMBAC Insured Bonds to be immediately due and payable, whereupon that portion of the principal of the AMBAC Insured Bonds thereby coming due and the interest thereon accrued to the date of payment shall, without further action, become and be immediately due and payable, anything in the Bond Resolution or in the AMBAC Insured Bonds to the contrary notwithstanding. While the AMBAC Insurance Policy is in effect, the Authority or the Trustee [as appropriate] shall furnish to AMBAC Assurance: (a) as soon as practicable after the filing thereof, a copy of any financial statement of the Authority and a copy of any audit and annual report of the Authority; (b) a copy of any notice to be given to the registered owners of the AMBAC Insured Bonds, including, without limitation, notice of any redemption or defeasance of AMBAC Insured Bonds, and any certificate rendered pursuant to this Bond Resolution relating to the security for the AMBAC Insured Bonds; and (c) such additional information it may reasonably request. The Trustee or Authority [as appropriate] shall notify AMBAC Assurance of any failure of the Authority to provide relevant notices, certificates, etc. The Authority will permit AMBAC Assurance to discuss the affairs, finances and accounts of the Authority or any information AMBAC Assurance may reasonably request regarding the security for the AMBAC Insured Bonds with appropriate officers of the Authority. The Trustee or Authority [as appropriate] will permit AMBAC Assurance to have access to and to make copies of all books and records relating to the AMBAC Insured Bonds at any reasonable time except as otherwise provided by law. AMBAC Assurance shall have the right to direct an accounting at the Authority's expense, and the Authority's failure to comply with such direction within thirty (30) days after receipt of written notice of the direction from AMBAC Assurance shall be deemed a default hereunder; provided, however, that if compliance cannot occur within such period, then such period will be extended so long a compliance is begun within such period and diligently pursued, but only if such extension would not materially adversely affect the interests of any registered owner of the AMBAC Insured Bonds. I-37

86 Notwithstanding any other provision of the Bond Resolution, the Trustee or Authority [as appropriate] shall immediately notify AMBAC Assurance if at any time there are insufficient moneys to make any payments of principal and/or interest at required and immediately upon the occurrence of any event of default hereunder. As long as the AMBAC Insurance Policy shall be in full force and effect, the Authority, the Trustee and any Paying Agent agree to comply with the following provisions: (a) At least one (1) day prior to all Interest Payment Dates the Trustee or Paying Agent, if any, will determine whether there will be sufficient funds in the Funds and Accounts to pay the principal of or interest on the AMBAC Insured Bonds on such Interest Payment Date. If the Trustee or Paying Agent, if any, determines that there will be insufficient funds in such Funds or Accounts, the Trustee or Paying Agent, if any, shall so notify AMBAC Assurance. Such notice shall specify the amount of the anticipated deficiency, the AMBAC Insured Bonds to which such deficiency is applicable and whether such AMBAC Insured Bonds will be deficient as to principal or interest, or both. If the Trustee or Paying Agent, if any, has not so notified AMBAC Assurance at least one (1) day prior to an Interest Payment Date, AMBAC Assurance will make payments of principal or interest due on the AMBAC Insured Bonds on or before the first (1 st ) day next following the date on which AMBAC Assurance shall have received notice of nonpayment from the Trustee or Paying Agent, if any. (b) The Trustee or Paying Agent, if any, shall, after giving notice to AMBAC Assurance as provided in (a) above, make available to AMBAC Assurance and, at AMBAC Assurance's direction, to the Untied States Trust Company of New York, as insurance trustee for AMBAC Assurance or any successor insurance trustee (the "Insurance Trustee"), the registration books of the Authority maintained by the Trustee or Paying Agent, if any, and all records relating to the Funds and Accounts for the AMBAC Insured Bonds maintained under the Bond Resolution. (c) The Trustee or Paying Agent, if any, shall provide AMBAC Assurance and the Insurance Trustee with a list of registered owners of AMBAC Insured Bonds entitled to receive principal or interest payments from AMBAC Assurance under the terms of the AMBAC Insurance Policy, and shall make arrangements with the Insurance Trustee (i) to mail checks or drafts to the registered owners of AMBAC Insured Bonds entitled to receive full or partial interest payments from AMBAC Assurance and (ii) to pay principal upon AMBAC Insured Bonds surrendered to the Insurance Trustee by the registered owners of AMBAC Insured Bonds entitled to receive full or partial principal payments from AMBAC Assurance. (d) The Trustee or Paying Agent, if any, shall, at the time it provides notice to AMBAC Assurance pursuant to (a) above, notify registered owners of AMBAC Insured Bonds entitled to receive the payment of principal or interest I-38

87 thereon from AMBAC Assurance (i) as to the fact of such entitlement, (ii) that AMBAC Assurance will remit to them all or a part of the interest payments next coming due upon proof of Bondholder entitlement in form satisfactory to the Insurance Trustee, of an appropriate assignment of the registered owner's right to payment, (iii) that should they be entitled to receive full payment of principal from AMBAC Assurance, they must surrender their AMBAC Insured Bonds (along with an appropriate instrument of assignment in form satisfactory to the Insurance Trustee to permit ownership of such AMBAC Insured Bonds to be registered in the name of AMBAC Assurance) for payment to the Insurance Trustee, and not the Trustee or Paying Agent, if any, and (iv) that should they be entitled to receive partial payment of principal from AMBAC Assurance, they must surrender their AMBAC Insured Bonds for payment thereon first to the Trustee or Paying Agent, if any, who shall note on such AMBAC Insured Bonds the portion of the principal paid by the Trustee or Paying Agent, if any, and then, along with an appropriate instrument of assignment in form satisfactory to the Insurance Trustee, to the Insurance Trustee, which will then pay the unpaid portion of principal. (e) In the event that the Trustee or Paying Agent, if any, has noticed that any payment of principal of or interest on an AMBAC Insured Bond which has become Due for Payment and which is made to a Bondholder by or on behalf of the Authority has been deemed a preferential transfer and theretofore recovered from its registered owner pursuant to the United States Bankruptcy Code by a trustee in bankruptcy in accordance with the final, nonappealable order of a court having competent jurisdiction, the Trustee or Paying Agent, if any, shall, at the time AMBAC Assurance is notified pursuant to (a) above, notify all registered owners that in the event that any registered owner's payment is so recovered, such registered owner will be entitled to payment from AMBAC Assurance to the extent of such recovery if sufficient funds are not otherwise available, and the Trustee or Paying Agent, if any, shall furnish to AMBAC Assurance its records evidencing the payments of principal of and interest on the AMBAC Insured Bonds which have been made by the Trustee or Paying Agent, if any, and subsequently recovered from registered owners and the dates on which such payments were made. (f) In addition to those rights granted AMBAC Assurance under the Bond Resolution, AMBAC Assurance shall, to the extent it makes payment of principal of or interest on AMBAC Insured Bonds, become subrogated to the rights of the recipients of such payments in accordance with the terms of the AMBAC Insurance Policy, and to evidence such subrogation (i) in the case of subrogation as to claims for past due interest, the Trustee or Paying Agent, if any, shall note AMBAC Assurance's rights as subrogee on the registration books of the Authority maintained by the Trustee or Paying Agent, if any, upon receipt from AMBAC Assurance of proof of the payment of interest thereon to the registered owners of the AMBAC Insured Bonds, and (ii) in the case of subrogation as to claims for past due principal, the Trustee or Paying Agent, if any, shall note I-39

88 AMBAC Assurance's rights as subrogee on the registration books of the Authority maintained by the Trustee or Paying Agent, if any, upon surrender of the AMBAC Insured Bonds by the registered owners thereof together with proof of the payment of principal thereof. 1. The Trustee (or Paying Agent) may be removed at any time at the request of AMBAC Assurance, for any breach of the trust set forth herein. 2. AMBAC Assurance shall receive prior written notice of any Trustee (or Paying Agent) resignation. 3. Every successor Trustee appointed pursuant to this Section shall be a trust company or bank in good standing located in or incorporated under the laws of the State, duly authorized to exercise trust powers and subject to examination by federal or state authority, having a reported capital or surplus of not less than $75,000,000 and acceptable to AMBAC Assurance. Any successor Paying Agent, if applicable, shall not be appointed unless AMBAC Assurance approves such successor in writing. 4. Notwithstanding any other provision of the Bond Resolution in determining whether the rights of the Bondholders will be adversely affected by any action taken pursuant to the terms and provisions of the Bond Resolution, the Trustee (or Paying Agent) shall consider the effect on the Bondholders as if there were no AMBAC Insurance Policy. 5. Notwithstanding any other provision of the Bond Resolution, no removal, resignation or termination of the Trustee (or Paying Agent) shall take effect until a successor, acceptable to AMBAC Assurance, shall be appointed. Nothing in the Bond Resolution expressed or implied is intended or shall be construed to confer upon, or to give to, any person or entity, other than the Authority, the Trustee, AMBAC Assurance, the Paying Agent, if any, and the registered owners of the AMBAC Insured Bonds any right, remedy or claim with respect to the AMBAC Insured Bonds under or by reason of this Bond Resolution or any covenant, condition or stipulation hereof, and all covenants, stipulations, promises and agreements in this Bond Resolution contained with respect to the AMBAC Insured Bonds by and on behalf of the Authority shall be for the sole and exclusive benefit of the Authority, the Trustee, AMBAC Assurance, the Paying Agent, if any, and the registered owners of the AMBAC Insured Bonds. Provisions Relating to Mandatory Purchase Bonds Except as otherwise provided, each Mandatory Purchase Bond is subject to mandatory purchase, and the Authority shall purchase or cause to be purchased each Mandatory Purchase Bond, on each Mandatory Purchase Date applicable to such Mandatory Purchase Bond at a price equal to the principal amount thereof plus accrued interest, if any, thereon. The Bond Registrar and Paying Agent shall mail to each holder of a Mandatory Purchase Bond notice of each Mandatory Purchase Date applicable to Mandatory Purchase Bonds at least I-40

89 30 days or if 30 days is not practicable on the earliest practicable date before any Mandatory Purchase Date applicable to such Bonds, such notice to include the Mandatory Purchase Price and any Bonds which have been designated for Mandatory Purchase. The registered owner of any Mandatory Purchase Bond may irrevocably elect to retain such Bond or any portion thereof on any Mandatory Purchase Date if such Bond or portion thereof is in a denomination authorized to be outstanding after such Mandatory Purchase Date by providing written notice to the Bond Registrar and Paying Agent or the Co-Paying Agent of such election. Such Notice of Election to Retain shall be irrevocable and, shall affirmatively acknowledge such matters as shall be specified in the applicable Mandatory Purchase Notice and shall contain the irrevocable agreement by the registered owner of the Bond with respect to which, or a portion of which, such Notice of Election to Retain is given not to tender such Bond, or such portion thereof for purchase pursuant to the provisions of this Resolution on or before the applicable Mandatory Purchase Date except as provided in the following paragraph. Each Mandatory Purchase Bond (other than a Bond with respect to which a Notice of Election to Retain has been properly given) shall be tendered for purchase on each Mandatory Purchase Date applicable to such Bond at the time referred to in the applicable Mandatory Purchase Notice on the Mandatory Purchase Date, to the Bond Registrar and Paying Agent with an instrument of transfer satisfactory to the Bond Registrar and Paying Agent executed in blank by the registered owner or his attorney or legal representative with the signature guaranteed by a bank, trust company or member firm of the New York Stock Exchange. Determination of Interest Rates and Interest Periods for Mandatory Purchase Bonds. (a) Except as otherwise provided, each Mandatory Purchase Bond shall bear interest during each Interest Period applicable to such Mandatory Purchase Bond at the rate determined by the Remarketing Agent on the Rate Determination Date for such Interest Period to be the minimum rate that, in the judgment of the Remarketing Agent, would enable such Remarketing Agent to sell each of the Mandatory Purchase Bonds to which such Rate Determination Date applies, on the first day of such Interest Period, at a price equal to the principal amount thereof plus accrued interest, if any, thereon. Different interest rates may be determined for Mandatory Purchase Bonds having identical or different Interest Periods, and the interest rates may be determined separately for each Series of Bonds. Notwithstanding the foregoing provisions of this paragraph or anything to the contrary in the Resolution: (A) the interest rate borne by Mandatory Purchase Bonds may not exceed the maximum rate permitted by law; (B) if any payment of the principal or Redemption Price of or interest on, or the purchase price of, any Mandatory Purchase Bond shall not be made when due, such Mandatory Purchase Bond and all other Mandatory Purchase Bonds with the same Mandatory Purchase Date shall bear interest at the last interest rate borne by such Mandatory Purchase Bonds until such payment is made as provided in the Resolution, and in such Mandatory Purchase Bonds and the interest rate will not be adjusted as provided in this Section; and I-41

90 (C) if on any Rate Determination Date for the Mandatory Purchase Bonds the Remarketing Agent does not determine the interest rate for any Interest Period applicable to a Mandatory Purchase Bond as provided in this Section, the interest rate for such Rate Determination Date shall be equal to the interest rate determined on the immediately preceding Rate Determination Date applicable to such Mandatory Purchase Bond for the Interest Period determined on such Rate Determination Date; and (D) on each Preliminary Rate Determination Date the Remarketing Agent shall determine the rate or rates or range of rates (the "Rate Indication") which in its judgment would be the rate determined by the Remarketing Agent under this subsection, if such date were the next Rate Determination Date. The Remarketing Agent shall give notice of each Rate Indication for any Bond to the Authority and the Bond Registrar and Paying Agent, on each Preliminary Rate Determination Date. The Bond Registrar and Paying Agent shall give each registered owner of a Mandatory Purchase Bond written notice of each Rate Indication affecting such registered owner no later than three Business Days prior to each Rate Determination Date. (a) The Remarketing Agent shall give notice of each interest rate determined for any Mandatory Purchase Bond in accordance with subsection (a) of this Section to the Authority, the Bond Registrar and Paying Agent and the Co-Paying Agent. The Bond Registrar and Paying Agent shall give written notice of each such interest rate to the Trustee and the holders of the Mandatory Purchase Bonds (other than Mandatory Purchase Bonds which, due to the failure to deliver a Notice of Election to Retain, are required to be tendered to the Bond Registrar and Paying Agent or the Co-Paying Agent on the first day of the Interest Period to which such interest rate applies) to which such interest rate will be applicable. (b) The determination of the interest rates on the Mandatory Purchase Bonds by the Remarketing Agent as provided in this Section shall be conclusive and binding on the Holders of such Bonds, the Authority, the Trustee, the Co-Paying Agent and the Bond Registrar and Paying Agent. (c) Interest on the Mandatory Purchase Bonds shall be calculated on the basis of a year consisting of 360 days divided into twelve 30-day months. (d) The Interest Periods for Mandatory Purchase Bonds shall begin on the original issuance date of the Bonds or on the day after the last day of the preceding Interest Period, and each Interest Period shall end on the last calendar day of a month. Remarketing of Mandatory Purchase Bonds. The Bond Registrar and Paying Agent shall notify the Remarketing Agent of the Remarketing Amount on the Business Day after the last day on which a Notice of Election to Retain may be given with respect to any Mandatory Purchase Date. Unless the Authority otherwise directs, the Remarketing Agent shall offer for sale, and use its best efforts to sell for delivery, on each Mandatory Purchase Date at a price equal to the principal amount thereof plus accrued interest, if any, thereon to such Mandatory Purchase Date, Mandatory Purchase Bonds in an aggregate principal amount equal to the Remarketing Amount. I-42

91 The Remarketing Agent shall notify the Bond Registrar and Paying Agent of the aggregate principal amount of Bonds expected to be sold by the Remarketing Agent on such Mandatory Purchase Date. The Bond Registrar and Paying Agent shall calculate the amount of Bonds not remarketed and notify the Authority and the Trustee, of the aggregate principal amount of Bonds expected to be purchased on such Mandatory Purchase Date by the Bond Registrar and Paying Agent which shall be equal to the Purchase Amount less the sum of (i) any Available Amount and (ii) the aggregate principal amount of Bonds that will be remarketed by the Remarketing Agent on such Mandatory Purchase Date. On each Mandatory Purchase Date the Remarketing Agent shall (i) pay to the Bond Registrar and Paying Agent proceeds from the remarketing of Bonds and all other amounts required to be so transferred by any supplemental remarketing agreement, and (ii) give notice to the Bond Registrar and Paying Agent of the purchasers of the Bonds to be purchased on such date and the denominations of Bonds to be delivered to each such purchaser. In the event that the Remarketing Agent does not provide such information or pay for the Remarketed Bonds at such time, the Bond Registrar and Paying Agent shall notify the Trustee of the portion of the Remarketing Amount not remarketed and request such funds. Procedure for Purchase of Mandatory Purchase Bonds. The Mandatory Purchase Bonds to be purchased on each Mandatory Purchase Date shall be purchased by the Bond Registrar and Paying Agent at a purchase price equal to the principal amount thereof, plus accrued interest, if any, to such Mandatory Purchase Date, from the following sources and in the following order of priority: (i) Bonds resold by the Remarketing Agent shall be purchased from remarketing proceeds made available to the Bond Registrar and Paying Agent; and (ii) any Available Amount in the Revenue Sharing Bond Account of the Revenue Fund; and (iii) to the extent moneys are not made available to purchase Mandatory Purchase Bonds on a Mandatory Purchase Date from the sources immediately preceding, from amounts on deposit in the Revenue Sharing Bond Account of the Revenue Fund. Notwithstanding anything to the contrary contained herein, if there shall be on deposit in the appropriate accounts of the Revenue Fund, or if there shall be made available to the Bond Registrar and Paying Agent by the Remarketing Agent funds in an amount sufficient to pay the purchase price of Mandatory Purchase Bonds on any Mandatory Purchase Date applicable to such Bonds, such Bonds shall be deemed purchased with such moneys on such Mandatory Purchase Date, shall cease to bear interest as of such Mandatory Purchase Date whether or not such Bonds are tendered to the Bond Registrar and Paying Agent on such date, and the registered owners of such Mandatory Purchase Bonds shall have no rights with respect thereto or under this Bond Resolution except to receive the purchase price of such Bonds and when received by the Bond Registrar and Paying Agent such Bonds shall be canceled. I-43

92 If the funds available for purchase of Mandatory Purchase Bonds are inadequate for the purchase of all Mandatory Purchase Bonds tendered on any Mandatory Purchase Date, all Bonds subject to such purchase shall continue to bear interest until paid at the interest rate last determined for such Bonds. In such event, the Bond Registrar and Paying Agent shall immediately: (i) return all tendered Bonds to the holders thereof, (ii) return all moneys received for the purchase of such Bonds to the persons providing such moneys, and (iii) notify all Bondholders in writing (A) as to whether an event has occurred which is or may become an Event of Default, and (B) of the rate of interest on such Bonds. Disposition of Purchased Bonds. Mandatory Purchase Bonds tendered to the Bond Registrar and Paying Agent on any Mandatory Purchase Date in accordance with the provisions of this Section shall be delivered by the Bond Registrar and Paying Agent as follows: (i) Bonds resold by the Remarketing Agent shall be exchanged for other Bonds, as necessary to correspond to the denominations, and Types in which such Bonds have been sold by the Remarketing Agent, shall be registered in the names of the purchasers thereof and shall be delivered to such purchasers in accordance with the directions of the Remarketing Agent; and (ii) Bonds the principal amount of which shall have been paid by the Bond Registrar and Paying Agent from amounts on deposit in any Fund or Account in accordance with clauses (ii) or (iii) under Procedure for Purchase of Mandatory Purchase Bonds above (other than amounts needed to compensate for original issue discount) shall be canceled by the Bond Registrar and Paying Agent. If any Mandatory Purchase Bond (other than a Bond with respect to which a Notice of Election to Retain has been properly given) is not delivered to the Bond Registrar and Paying Agent on any Mandatory Purchase Date applicable to such Bond and such Bond was resold by the Remarketing Agent on such date, the Bond Registrar and Paying Agent shall register the transfer of such Bond to the purchaser thereof and the Authority shall execute and the Bond Registrar and Paying Agent shall authenticate and deliver a new Bond or Bonds and deliver the same in accordance with the provisions of the first paragraph of this Section, notwithstanding such non-delivery. Resolution Constitutes Contract of Authority; No Recourse Against Members, Officers or Employees In consideration of the purchase and acceptance by any and all of the Bonds issued under the Resolution, the Resolution shall be deemed to be and shall constitute a contract between the Authority and the Bondholders and the pledges made in the Resolution and the covenants and agreements therein set forth to be performed by the Authority shall be for the benefit, protection and security of (i) the Owners of any and all of each Type of the Bonds all of which, without regard to the time or times of their issue or maturity, shall be of equal rank without preference, priority or distinction of any of the Bonds of any Type over any other Bonds of the same Type, except as expressly provided in or permitted by the Resolution, (ii) on a subordinate basis in I-44

93 connection with the MBIA Insured Revenue Sharing Bonds, of MBIA, (iii) on a subordinate basis in connection with the Capital Guaranty Insured Bonds, of Capital Guaranty, and (iv) on a subordinate basis in connection with the AMBAC Insured Bonds, of AMBAC Assurance. All covenants, stipulations, promises, agreements and obligations of the Authority contained in the Resolution shall be deemed to be the covenants, stipulations, promises, agreements and obligations of the Authority and not of any member, officer or employee of the Authority in his individual capacity, and no recourse shall be had for the payment of the principal or interest on the Bonds or for any claim based thereon or on the Resolution against any member, officer or employee of the Authority or any person executing the Bonds. I-45

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95 APPENDIX II INFORMATION CONCERNING THE CITY OF DETROIT

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97 APPENDIX II INFORMATION CONCERNING THE CITY OF DETROIT, MICHIGAN TABLE OF CONTENTS GOVERNMENTAL STRUCTURE... 1 Executive Branch... 1 Legislative Branch... 2 District Court... 3 Principal Governmental Services and Work Force... 3 Related City Entities... 6 Other Governmental Entities... 7 FINANCIAL PROCEDURES... 8 Accounting System... 8 Independent Auditors... 8 Accounting Methods... 8 Cash Management... 9 Budget Process... 9 Budget Stabilization Fund FINANCIAL OPERATIONS Overview Revenues and Expenditures of the General Fund Fund Balance of the General Fund Components of Fund Balance General Fund Revenue Categories CURRENT FISCAL SITUATION Credit Ratings Recent Cash Flow Borrowings Deficit Elimination Plan Swap Agreement Termination Events Recent State Audit of Tax Increment Financing Recent Reporting Change Compliance with Certain Finance Related Legal and Contractual Provisions Component Units of the City Risk Management ASSESSED VALUATION AND PROPERTY TAXES Property Valuation and Tax Rate Industrial Facilities Tax Payment and Lien Personal Property Tax Assessments and Appeals Valuations Valuation by Type of Property Tax Rates and Levies Tax Levies and Collections Largest Taxpayers Tax-Exempt Property INDEBTEDNESS OF THE CITY AND RELATED ENTITIES Legal Debt Margin... 32

98 Capital Financing Policies Overlapping Debt Summary of Debt Statement Short-Term Indebtedness Prospective Indebtedness EMPLOYEE BARGAINING UNITS RETIREMENT SYSTEMS In General Payment Obligations under Retirement System Service Contracts LITIGATION CERTAIN ECONOMIC AND DEMOGRAPHIC INFORMATION General Population Employment and Economic Base Construction Housing Characteristics Largest Employers Port of Detroit Transportation Network Major Projects and Developments ii

99 GOVERNMENTAL STRUCTURE Pursuant to the provisions of the Constitution of the State of Michigan (the State ), the City is a home rule city with significant independent powers. In accordance with the City Charter (the Charter ), the governance of the City is organized in two branches: the Executive Branch, which is headed by the Mayor, and the Legislative Branch, which is composed of the City Council and its agencies. The Mayor and the members of the City Council are elected every four years unless a special election is required as provided for in the Charter. In January 2010, the Mayor and the newly constituted City Council commenced their new terms. There are no limits as to the number of terms that may be served by City elected officials. The Charter provides that the voters of the City reserve the power to enact City ordinances by initiative and to nullify ordinances enacted by the City by referendum. However, these powers do not extend to the budget or any ordinance for the appropriation of money, and the referendum power does not extend to an emergency ordinance. In addition, the City is the District Control Unit responsible for certain duties relating to the 36th District Court. See GOVERNMENTAL STRUCTURE - District Court. Following is a description of the duties and responsibilities of the branches of the City government. Executive Branch The Mayor is the chief executive of the City and has control of and is accountable for the Executive Branch of City government. The Charter grants the Mayor broad managerial powers, including the authority to appoint all department directors and deputy directors. The Charter also delegates the responsibility for the implementation of most programs, services and activities solely to the Executive Branch. Financial operations of the City are carried out through the appointed positions of Finance Director and Budget Director. The Finance Director oversees most financial functions of the City, including coordinating debt issuance activities, collecting and disbursing funds, investing City funds (excluding pensions), directing accounting procedures and financial reporting, purchasing goods and services, and assessing property in the City. The Budget Director is responsible for controlling and supervising the expenditure of funds and assisting the Mayor in the preparation of the City s annual budget and long-term capital agenda. Dave Bing, Mayor, became Detroit s 62nd Mayor on May 11, Prior to becoming Mayor, Bing served as President and Chairman of The Bing Group, an automotive supply corporation he founded in A former professional basketball player, Mayor Bing played nine of his twelve years in the National Basketball Association with the Detroit Pistons. Voted one of the top 50 basketball players of all time, Bing was inducted into the Michigan Hall of Fame in 1984, and into the Naismith Hall of Fame in Proving that the basics of good performance, integrity and business can be applied to any area or industry, Mayor Bing has brought a renewed sense of trust and hope to the City of Detroit. Poised to make the tough decisions, he has already begun to lay the groundwork for solid city government by instituting the toughest ethics ordinance in the City s history. He and his team of professionals are also carefully analyzing ways to restructure operations to improve efficiency, and to tackle the City s systemic issues. Mayor Bing is a graduate of Syracuse University where he earned his Bachelor of Arts in Economics. Saul A. Green, Deputy Mayor, was appointed in September Prior to his appointment as Deputy Mayor, he was senior counsel and member of Miller Canfield s Criminal Defense Group and Litigation and Dispute Resolution Practice Group, with a specialty in alternative dispute resolution, white-collar crime and high profile litigation. Mr. Green was appointed United States Attorney for the Eastern District of Michigan by Former President William J. Clinton, and served in that capacity from May 1994 to May During his many years of public service, he has held the positions of Wayne County Corporation Counsel; Chief Counsel, United States Department of Housing and Urban Development, Detroit Field Office; and Assistant United States Attorney. In February 2009, he completed service as the Independent Monitor overseeing implementation of police reforms in Cincinnati, Ohio. Mr. Green received his law degree in 1972 from the University of Michigan Law School and a Bachelor of Arts degree in Pre-Legal Studies in 1969, also from the University of Michigan. II-1

100 Norman L. White, Chief Financial Officer, was re-appointed in May Mr. White also served as the City s Finance Director from January 2008 through September Prior to his original appointment as Chief Financial Officer, he served as Transportation Director (DDOT) for four years. His current responsibilities include providing the Mayor and the City Council with long-term and short-term financial planning data, assisting in the preparation of the City s operating and capital budgets, monitoring City financial operations and supervising and controlling the expenditure of funds. Mr. White holds a Bachelor of Science degree in Accounting from Georgia College & State University. He is a member of the Government Finance Officers Association. Mr. White also serves on the boards of the Detroit Building Authority, Detroit Transportation Corporation, the Downtown Development Authority, Detroit Brownfield Development Authority and the Greater Detroit Resource Recovery Authority. Thomas J. Lijana, Group Executive Finance Director, was appointed in January Prior to his current position, Mr. Lijana served as the Chief Financial Officer for The Bing Group, an automotive supply corporation. Prior to the Chief Financial Officer position with The Bing Group, Mr. Lijana served as Chief Financial Officer for Aiden Companies. His 30 years of experience include system implementations, process improvement, and financial turnarounds. He holds a Bachelor of Accounting Degree from Walsh College and a Master of Science in Business Administration from Central Michigan University. Pamela C. Scales, Budget Director, was appointed in February Prior to her current appointment, Ms. Scales served as Deputy Budget Director. She has more than 21 years of service with the City. During her service as Deputy Budget Director and Budget Director, the City has received eleven Distinguished Budget Awards from the Government Finance Officers Association. Ms. Scales is a faculty member of the University of Phoenix, teaching graduate and undergraduate Finance courses. She holds a Bachelor of Arts degree in Economics from the University of Michigan and a Master of Business Administration degree from the University of Detroit-Mercy. She is a member of the Government Finance Officers Association, the Michigan Municipal Finance Officers Association and the Association of Government Accountants. George W. Jackson, Jr., Chief Development Officer, was appointed in March He also has served as President & CEO of the Detroit Economic Growth Corporation (DEGC) since February Previously he had been Director of Customer Marketing for DTE Energy, where he worked for 27 years. His additional prior experience includes personnel and human resources responsibilities in the U.S. Navy and teaching on the adjunct faculty at Lawrence Technological University School of Management. Mr. Jackson has a Bachelor of Science degree in Human Resource Development from Oakland University and a Master of Arts degree in Management - Business Management from Central Michigan University. Krystal A. Crittendon, Corporation Counsel, was appointed in January Prior to this appointment, she was an Assistant Corporation Counsel, Senior Assistant Corporation Counsel and Supervising Assistant Corporation Counsel assigned to the Litigation Section of the City of Detroit Law Department. She was appointed Deputy Corporation Counsel in November 2008 and has been employed by the City of Detroit since While attending law school, Ms. Crittendon was a Caseworker for the Michigan Department of Social Services. She has a Bachelor of Arts degree in English Literature from Wayne State University and a Juris Doctor degree from the Detroit College of Law. Legislative Branch The City Council, composed of nine members elected at large for four-year terms, is the City s legislative body. The City Council has the power to override the Mayor s veto of City Council changes to the annual budget with a two-thirds majority of its members. The three agencies that aid the City Council in the performance of its duties are described below. The Auditor General is appointed for a term of ten years by a majority of City Council members and may be removed for cause by a two-thirds majority. Any person who has held the position of Auditor General is not eligible for reappointment. By Charter, the principal duty of the Auditor General is to audit the financial transactions of all City agencies. However, since 1980 the City has retained independent accounting firms to II-2

101 perform that function. As required by State law, audits are performed annually; they are only required every two years by the Charter. The Auditor General may investigate the administration and operation of any City agency and prepares various reports, including an annual analysis for the City Council of the Mayor s proposed budget. The Ombudsman is appointed for a term of ten years by a two-thirds majority of City Council members for the purpose of investigating any official act of any agency (except elected officers) which aggrieves any person. The City Planning Commission, consisting of nine members appointed by the City Council for three-year terms, advises the City Council on such matters as the annual capital agenda, certain development or renewal projects and proposals for the demolition, disposition or relinquishment of, or encroachment upon, public real property or public interests in real property. District Court The 36th District Court is responsible for adjudicating certain legal matters that arise within the City, including State felony arraignments and preliminary examinations, State misdemeanor and City ordinance violations, civil litigation for claims of $25,000 or less, and landlord/tenant disputes. The City is responsible for all funding of the 36th District Court in excess of fines collected by the Court, except for judicial salaries, which are funded by the State. Principal Governmental Services and Work Force The following table sets forth the major services provided to City residents and businesses, the governmental unit responsible for providing that service, and the revenue source of City-provided services as indicated in the proposed Executive Budget for the fiscal year ending June 30, The City s budget contains both operating revenues and expenditures, and capital sources and expenditures. (Balance of this page intentionally left blank) II-3

102 Table 1 Services Provided: Governmental Unit and Revenue Sources Services Provided and Funded by the City in Whole or in Part Responsibility General Fund (1) Self- Supported (2) Percent Supported by: State Grants (3) Federal Grants (3) Other Sources (4) Police and fire... City 77.2% 16.5% 1.7% 1.5% 3.1% Sanitation and streets... City Parks and recreation... City Water and Sewer (5)(6)... City Court... City/State Transportation: Port (7)... City/County/State Bus (6)... City City Airport (6)... City Planning and Development (8)... City Health... City Public Lighting (9)... City Parking (6)... City Education... Airport... Housing (10)... Hospital... Welfare... Services Provided and Totally Funded Other than by the City School District of the City of Detroit Wayne County Airport Authority Independent Private State SOURCE: Budget Department. Totals may not add up to 100% due to rounding.. (1) Represents the net tax cost to the City. (2) Includes revenues derived from sale of services to other City departments, self-supporting agencies and outside users. (3) Includes mass transportation, health and other grant revenues. (4) Includes both bond proceeds and federal project note borrowings. (5) Provides water supply and sewage disposal services for the southeastern Michigan region. Accounted for separately in two enterprise funds. (6) Accounted for in an enterprise fund. (7) Although the Port facilities are privately owned, the Detroit/Wayne County Port Authority s budget is funded by City, Wayne County and State contributions. (8) Department revenues exceed appropriations resulting in net contributions to the General Fund. (9) Provides power through a City-owned public utility for City-owned buildings, streets, certain other governmental units and some private customers. Revenues are derived from the sale of power to these governmental units and private customers. (10) Starting in fiscal year 2004, the Detroit Housing Commission ( DHC ) became an autonomous enterprise separate from the City. Therefore, the Fiscal Year 2010 Budget does not include funding for the DHC. II-4

103 The following table sets forth the City s budgeted employee positions for fiscal years 2007 through 2011, according to those positions that are tax-supported and those positions that are supported by other revenues. Table 2 City of Detroit Budgeted Employee Positions Fiscal Year Ended or Ending, June 30, Number % Number % Number % Number % Number % Tax Supported: General City... 5, , , , , Police and fire... 4, , , , , Library Total tax supported... 10, , , , , Revenue supported: Buildings & Safety Transportation... 1, , , , , Water... 1, , , , , Sewage... 1, , , , ,050 8 Total revenue supported... 4, , , , , Total... 15, % 15, % 15, % 14, % 13, % SOURCE: City s Amended Budgets for fiscal years 2007 through 2010 and City s Adopted Fiscal Year 2011 Budget. Totals may not add up to 100% due to rounding. (Balance of this page intentionally left blank) II-5

104 The following table sets forth the departmental budgeted appropriations as a percentage of total General Fund appropriations for fiscal years 2007 through Table 3 Departmental Appropriations Fiscal Year Ended or Ending June 30, Police... 23% 23% 23% 22% 25% Fire Public works (sanitation and streets) Public lighting Health Recreation Planning and development Other departments Non-departmental: Enterprise fund contributions Other (1) General agency budget (millions)... $1,832.5 $1,989.7 $1,956.7 $1,989.8 $1,683.5 SOURCE: City s Amended Budgets for fiscal years 2007 through 2010 and Adopted Fiscal Year 2011 Budget. Totals may not add up to 100 % due to rounding. (1) Includes contributions to the Transportation Fund. Related City Entities Other entities have been established by the City, in certain cases with the County of Wayne (the County ) and with the City of Highland Park, or by the State, principally for the purpose of providing capital financing (normally through the sale of bonds or through special tax levies) for various improvements, services or major construction projects. See INDEBTEDNESS OF THE CITY AND RELATED ENTITIES - Statement of Direct Tax - Supported and Revenue Indebtedness and -Overlapping Debt. Below is a description of certain entities and their functions. Detroit Brownfield Redevelopment Authority ( DBRA ). The DBRA was created by a City Council resolution and approved by the Mayor in April 1998, under the provisions of Act 381, Public Acts of Michigan, The DBRA was established to create Brownfield redevelopment zones and promote the revitalization, redevelopment, and reuse of certain property, including, but not limited to, tax-reverted, blighted or functionally obsolete property. Detroit Public Library ( DPL ). The DPL is a statutory body created by the State. The DPL was created to provide reference materials, research information, and publications to residents of the City and the County. Funding is provided by an ad valorem tax of mills in real and personal property taxes in the City. In addition, DPL receives grants and endowments from private organizations. The City Council is responsible for approving DPL s annual budget. Downtown Development Authority ( DDA ). The DDA was created to promote and develop economic growth in the City s downtown business district. Funding is provided by an ad valorem tax of 1.0 mill on real and personal property in the downtown development district, a levy on the increased assessed value of the tax increment district, and issuance of revenue and tax increment bonds. II-6

105 Economic Development Corporation ( EDC ). The EDC was established to create and implement project plans for designated project areas within the City, and thus encourage the location and expansion of industrial and commercial enterprises within the City. The EDC is primarily funded by means of grants from the City. Detroit Housing Commission ( DHC ). The DHC was established in 1933 under the authority of the Housing Facilities Act, Act 18, Public Acts of Michigan, 1933 (Ex. Sess.). Section 2 of the act provided that any city or incorporated village with a population of over 500,000 was authorized to purchase, acquire, construct, maintain, operate, improve, extend, and/or repair housing facilities and to eliminate housing conditions which are detrimental to the public peace, health, safety, morals, and/or welfare. While formerly a department of the City, the DHC is now an autonomous enterprise, separate from the City. Local Development Finance Authority ( LDFA ). The LDFA was created to finance certain improvements for local public roads in the vicinity of the Chrysler Jefferson Avenue Assembly Plant. Incremental portions of the City and the County property taxes funded LDFA. Charles H. Wright Museum of African American History ( MAAH ). The MAAH was created to provide research, compilation, presentation, publication, and dissemination of knowledge relating to the history, growth, development, heritage and culture of people of African descent and the human struggle for freedom. The MAAH is primarily funded by means of private grants and grants from the City. School District of the City of Detroit ( District ). The District is a statutory body created by the State and functions under the provisions of the Revised School Code of Michigan. Funding is provided by an ad valorem tax of mills (homestead properties) and mills (non-homestead) on real and personal property in the City and a foundation allowance provided by the State. The District encompasses an area of approximately 140 square miles, and is located within the City of Detroit, Wayne County, Michigan. Although the corporate boundaries of the District are coterminous with the corporate boundaries of the City of Detroit, the District is a totally separate governmental unit. Tax Increment Finance Authority ( TIFA ). The TIFA was created to acquire property and provide financing for residential and commercial development programs through issuance of long-term debt secured by tax increment financing. The City has satisfied its debt obligation associated with the tax increment financing and no longer levies taxes under this authority beginning with the fiscal year 2010 budget. Detroit Transportation Corporation ( DTC ). The DTC was established in 1985 to oversee construction and operation of the Central Automated Transit System (People Mover) in downtown Detroit. The DTC is primarily funded by means of grants from the City. Greater Detroit Resource Recovery Authority ( GDRRA ). The GDRRA was established by the Cities of Detroit and Highland Park for the acquisition, construction and operation of a waste-to-energy facility. The financing was provided by the issuance of revenue bonds which matured and were fully paid in December Other Governmental Entities Services are provided to residents and businesses of the City by other governmental entities such as the County, the District, Wayne County Community College and the Wayne County Regional Educational Service Agency. All of these entities are funded through their own taxing powers and other sources independent of the City. II-7

106 FINANCIAL PROCEDURES Accounting System The City s fiscal year begins on July 1 and ends on June 30. The City uses a computer software financial management system which provides general ledger, purchasing, accounts payable, accounts receivable, fixed assets and project accounting applications. These core financial applications are integrated with third-party software providers for budget preparation, work order and inventory applications to provide a complete financial reporting system. The City uses a legacy (mainframe application vs. a client-based server system) human resources/payroll application for employee compensation. Replacement of the legacy system with computer software human resources/payroll modules integrated with the core financial applications is expected to be completed in late Independent Auditors The basic financial statements of the City, as of and for the fiscal year ended June 30, 2009, included in Appendix VII to the Official Statement have been audited by KPMG LLP, independent accountants, as stated in their report also included in Appendix VII to the Official Statement. Accounting Methods The City s financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Except for the City s Enterprise Funds and Pension Funds (which are accounted for on the accrual basis), the City s funds and accounts (General, Special Revenues and Debt Service Funds) are maintained and reported on the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized when they are susceptible to accrual, i.e., measurable and available to finance expenditures of the current fiscal year. Accrued municipal income taxes are estimated by the City as collected (i.e., withheld) by employers but not yet remitted to the City. Estimated refunds for income tax returns received and in process, on which payment has not yet been made, are recorded as a reduction of revenues. The City establishes reserves against certain of the revenues so recognized, to reflect its judgment of collectibility. The City records expenditures when goods and services are received and encumbers the amounts required by purchase orders and contracts at the time the purchase orders and contracts are issued. The encumbrances are liquidated when the goods and services are received. While the City is not required to carry unliquidated encumbrances past the end of the fiscal year, it sets aside, within each respective fund balance, an amount equal to the unliquidated encumbrances that it plans to carry forward. In the succeeding fiscal year, the budget is increased by an amount sufficient to cover the unliquidated encumbrances and those encumbrances are reinstated. Unliquidated appropriations represent amounts appropriated for encumbrances and for other commitments not liquidated by year-end and carried forward to the succeeding year s budget. Any remaining balance constitutes an unappropriated surplus (see Budget Stabilization Fund below). Any unappropriated deficit is funded in the succeeding fiscal year. The Capital Projects Funds account for all funds used for the construction, acquisition and renovation of capital facilities. The City maintains twelve sub-funds within the Capital Projects Funds, which account for all capital improvements (other than water supply and sewage disposal facilities) including those financed by the City s general obligation bond issues, gifts, governmental grants, transfers from other funds and special assessments. The City maintains detailed accounting records by individual projects within these funds. Revenues and expenditures are recorded in specific cost centers which list the sources of revenue and type of expenditure. Uncollected estimated II-8

107 revenues and unexpended appropriations are brought forward until completion of a capital project. Revenues must be used on the specific capital projects for which they were designated. Cash Management A cash flow forecast is prepared monthly to assist in formulating cash management strategy and is revised as necessary. The City maintains one bank account for General Fund receipts and disbursements, excluding general obligation bond proceeds, which are kept in a separate account. Capital Projects Funds moneys are also maintained in separate accounts. All funds are invested in accordance with State law. The City may invest in direct obligations of the U.S., obligations of an agency or instrumentality of the U.S., certain grades of commercial paper, bankers acceptances of U.S. banks, certificates of deposit, savings accounts or depository receipts of savings and loan associations or member banks of the Federal Deposit Insurance Corporation, and certain municipal bonds. The City s investment policy is to provide for effective cash management. The goal of the City s investment policy is to maintain and protect invested principal while striving to maximize total return on the portfolio consistent with limitations pursuant to guidelines set forth in Act 20, Public Acts of Michigan, 1943, as amended ( Act 20 ). The City has not experienced material investment-related losses in any City-managed funds. As of November 1, 2010, the composition of the City s investment portfolio was as follows: Table 4 Composition of General Fund Investment Portfolio November 1, 2010 Pooled investment funds (1) % Commercial paper 17.0% Federal Agency Coupon Securities % (1) Consists only of permitted investments % In accordance with Act 20, no investments may have a maturity longer than ten years from the date of investment. As of November 1, 2010, the longest investment of the City s General Fund had a maturity of December 15, Table 5 General Fund Investments (1) Average monthly investment balance, Fiscal Year $ 87,002,455 Investment earnings, Fiscal Year $ 2,875,776 Investment earnings, Fiscal Year $ 12,108,402 (1) Includes an average monthly balance of approximately $80 million which is considered restricted. Budget Process The general content and process of developing the City s annual budget are prescribed by the Charter. The City s annual budget constitutes a financial plan for the next fiscal year which is required to set forth estimated revenues from all sources and all appropriations, including proposed capital appropriations. Any deficit during the preceding year is entered into the budget for the next fiscal year as an appropriation in accordance with the Charter. The total of proposed expenditures cannot exceed the total of estimated revenues so that the budget as submitted is a balanced budget. II-9

108 The adoption of the budget provides for: (1) appropriations of specified amounts from funds indicated, (2) a specified levy of the property tax, and (3) a provision for the issuance of bonds specified in the capital agenda. The budget document, as adopted, becomes the basis for establishing revenues and expenditures for the fiscal year. The appropriation for every function of each City department is fixed, and expenditures may not exceed the original appropriation without City Council approval. If, during the fiscal year, the Mayor advises the City Council that there are available for appropriation revenues in excess of those estimated in the budget, the City Council may make supplemental appropriations up to the amount of the excess. In the case of revenue shortfalls, the Mayor may request that the City Council decrease certain appropriations. The Mayor is under no obligation to spend an entire appropriation. Also, at any time, upon written request by the Mayor, the City Council may transfer all or part of any unencumbered appropriation balance among programs, services or activities within an agency or from one agency to another. Prior to the December submission of budget requests to the Budget Director, seven departments are required to attend a public meeting where input is received on programs and objectives for the coming fiscal year. These departments include Police, Fire, Public Works, Public Lighting, Health, Recreation, and Water and Sewerage. The initial budget proposal, which includes all department estimates of revenues and expenditures for the next fiscal year, is submitted to the Mayor by the Budget Department on or before the preceding February 22. The Mayor may revise the budget prior to submitting it to the City Council on or before April 12, the date for budget submission to the City Council established by City ordinance. Prior to approval of the budget, the City Council holds hearings with various department and agency heads and also holds a public hearing. In addition, the Auditor General prepares an analysis of the proposed budget for the City Council. The City Council may amend the budget as presented by the Mayor on or before May 24. The Mayor may veto any City Council amendment, but must do so by the third business day after May 27. Any Mayoral veto of City Council amendments to the budget may be overridden by the City Council by a two-thirds vote of the members serving; provided, however, that the Council must act on or before the third calendar day or the second business day (whichever will provide the greater number of business days) following the maximum return date of the budget by the Mayor. Budget Stabilization Fund In 1978, the State Legislature authorized municipalities to establish budget stabilization funds for the purpose of providing a method to stabilize financial operations. Prior to that time, municipalities were required to allocate any budget surplus to the following fiscal year. Accordingly, in 1979, the City by ordinance established the Budget Stabilization Fund to cover General Fund deficits, to restore a reduction in the number of employees (under certain circumstances) and to cover expenses arising because of a natural disaster. In accordance with a City ordinance, one-half of any unappropriated General Fund surplus, up to the lesser of either 15% of the City s most recent General Fund budget or 15% of the average of the City s five most recent General Fund budgets, is transferred to the Budget Stabilization Fund in each fiscal year that a surplus is experienced, with the balance being available for other appropriations in the following fiscal year. The Budget Stabilization Fund had a balance of $8.5 million as of June 30, 2003, which was used to reduce the City s General Fund deficit in fiscal year 2004, and the Budget Stabilization Fund has had a zero balance since that time. FINANCIAL OPERATIONS Overview This section contains a detailed description of various important financial matters. II-10

109 Revenues and Expenditures of the General Fund The following tables set forth a comparison of revenues, expenditures and other financing sources and uses of the General Fund by major classification. Table 6 Revenues and Expenditures of the General Fund Fiscal Year Ended June 30, (5) REVENUES: (in millions) Taxes, assessments, interest and penalties: Property taxes... $ $ $ $ $ Municipal income tax Utility users tax Wagering taxes Other taxes and assessments Interest and penalties on taxes Total taxes, assessments, interest and penalties Licenses, permits and inspection charges Shared taxes: State revenue sharing Other shared taxes Total shared taxes Grants: Total grants Sales and charges for services (1) Other revenues Total revenues... 1, , , , ,192.1 OTHER FINANCING SOURCES: Debt and capital lease proceeds Transfer from Community Development Block Grants Transfer from Major & Local Street Funds Transfer from Capital Projects Funds Transfer from Trust and Agency Funds Transfer from Component Units Total Other Financing Sources TOTAL REVENUES AND OTHER FINANCING SOURCES... $1,486.0 $1,499.3 $1,392.6 $1,280.8 $1,461.3 (1) The Solid Waste Fund (Special Revenue Fund) was created in fiscal year 2008 to account for the City s solid waste activities that were accounted for in the General Fund in previous years. A total of $65.3 million of sales and charges for services revenues for the solid waste activities were recorded in the new Solid Waste Special Revenue Fund and account for the large difference in sales and charges for services in fiscal year 2008 as compared to fiscal year II-11

110 Fiscal Year Ended June 30, (5) EXPENDITURES: (in millions) Executive agencies: Public Works (4)... $ $ $ 18.1 $ 16.4 $ 13.8 Fire Health Police Public Lighting Recreation All other Total executive agencies... 1, , , Legislative agencies Judicial agencies Non-departmental (1) Total expenditures... 1, , , , ,070.9 OTHER FINANCING USES: Transfer to Community Dev. Block Grant Fund Transfer to Construction Code Fund Transfer to Detroit Building Authority Transfer to Human Services Fund Transfer to Solid Waste Fund Transfer to Targeted Business Development Fund Transfer to Debt Service Funds Transfer to Capital Projects Funds Transfer to POC Service Funds Transfer to Airport Fund (2) Transfer to Water Fund Transfer to Sewer Fund Transfer to Transportation Fund (2) Transfer to Municipal Parking Fund (2) Transfer to Component Units Payment to Refunded Debt Escrow (3) Total Other Financing Uses TOTAL EXPENDITURES AND OTHER FINANCING USES... $1,549.5 $1,484.3 $1,445.6 $1,404.8 $1,280.9 SOURCE: Derived by the Finance Department from 2006 through 2009 audited financial statements. Totals may not add up exactly due to rounding. (1) Non-departmental includes items such as payment of damage claims, self-insurance fund contributions and other expenses that are not allocated on a departmental basis. (2) The City has made transfers to certain enterprise funds for operating purposes. (3) Reflects refunding of certain limited tax obligations. See FINANCIAL OPERATIONS - General Fund Revenue Categories. (4) The Solid Waste Fund (Special Revenue Fund) was created in fiscal year 2008 to account for the City s solid waste activities that were accounted for in the General Fund in previous years. A total of $108.3 million of Public Works expenditures were recorded in the new Solid Waste Special Revenue Fund and account for the large difference in public works expenditures in fiscal year 2008 as compared to fiscal year (5) Unaudited. II-12

111 Fund Balance (Deficit) of the General Fund An analysis of changes in Fund Balance of the General Fund for fiscal years 2006 through 2010 is as follows: Table 7 General Fund Balance Fiscal Year Ended June 30, (1) (in millions) Fund balance (deficit) at beginning of year... $ (33.6) $ (107.2) $ (91.4) $ (141.7) $ (266.7) Revenues and other financing sources... 1, , , , ,461.3 Expenditures and other financing uses... (1,549.5) (1,484.2) (1,445.6) (1,404.8) (1,280.9) Increase (decrease) in reserve for other assets. (10.1) (1.0) (2.60) Fund balance (deficit) at end of year... $ (107.2) $ (91.4) $ (141.7) $ (266.7) $ (88.9) SOURCE: Derived by the Finance Department from 2006 through 2009 audited financial statements. (1) Unaudited (Balance of this page intentionally left blank) II-13

112 Components of Fund Balance An analysis of the components of Fund Balance of the General Fund for fiscal years 2006 through 2010 is as follows: Table 8 Components of General Fund Balance Fiscal Year Ended June 30, (1) Reserved Fund balance: (in millions) Reserved for Encumbrances $40.7 $21.5 $17.0 $7.1 $4.4 Reserved for the Budget Stabilization Fund Reserved for Risk Management Operations Reserved for Motor Vehicle Operations Reserved for Inventory Reserved for Short-Term Loans and Advances to Other Funds Total Reserved Fund balance Unreserved Fund balance: Undesignated: Total Undesignated Fund Balance... (173.7) (155.6) (219.2) (331.9) (153.5) Total Unreserved Fund Balance (Deficit)... (173.7) (155.6) (219.2) (331.9) (153.5) Total Fund Balance $ (107.2) $ (91.4) $ (141.7) $ (266.7) $ (88.9) SOURCE: Derived by the Finance Department from 2006 through 2009 audited financial statements. (1) Unaudited. (Balance of this page intentionally left blank) II-14

113 General Fund Revenue Categories The City s General Fund derives revenues from various sources. The following table shows the percentage that various sources of General Fund revenues have contributed to total General Fund revenues for fiscal years 2006 through Table 9 Major General Fund Revenue and Other Financing Sources Fiscal Year Ended June 30, (2) (Percentage of Total) Property taxes % 12.3% 11.9% 12.9% 12.0% Municipal income tax Utility users tax Wagering taxes State shared revenues State equity grant Sales and charges for services Other revenue, grants and financing sources (1) Total % 100.0% 100.0% 100.0% 100.0% SOURCE: Derived by the Finance Department from 2006 through 2009 audited financial statements. (1) See FINANCIAL OPERATIONS - General Fund Revenue Categories - Other Revenue, Grants and Other Financing Sources for a discussion of the sources of revenue included in this category. (2) Unaudited (Balance of this page intentionally left blank) II-15

114 The following is a description of the major General Fund revenue sources of the City. Property Taxes The City reports revenue from real and personal property taxes when measurable and available. Available is defined as due and receivable within the current period, and collected within the current period or expected to be collected within sixty days thereafter. The City s Taxable Value (defined in ASSESSED VALUATION AND PROPERTY TAXES - Property Valuation and Tax Rate below) has increased an average of 0.66% during each of the last five fiscal years ending June 30, Taxable valuations for fiscal year 2011 decreased 6.3% from the previous fiscal year. The overall growth rate in fiscal year 2010 property taxes was -2.0% when the special taxing districts are included. Beginning March 1, 2004, the County began collection of the City s delinquent real property taxes. Act 246, Public Acts of Michigan, 2003, effective December 29, 2003, allows for the Treasurer of a city with a first class school district to return (transfer) all uncollected delinquent taxes levied on real property after December 31, 2004 to the County Treasurer on the March 1 st immediately following the year in which the taxes are levied. In June 2004, the City began receiving annual payments from the County for the General Fund and the Debt Service Fund which represent 2003 and later real property taxes that had been turned over to the County as delinquent. Taxes which remain uncollected are ultimately charged to the City as an offset against future payments and are reserved in accordance with City management estimates. See ASSESSED VALUATION AND PROPERTY TAXES - Tax Levies and Collections. Since 1994, the State Legislature has enacted various statutes pertaining to assessments and assessment procedures which changes have restricted the rate of growth on Taxable Value of property throughout the State. See ASSESSED VALUATION AND PROPERTY TAXES. On March 1, 2010, the City transferred to the County Treasurer the uncollected 2009 real property taxes. Municipal Income Taxes The City levies an annual income tax, pursuant to State enabling legislation. The maximum rate consists of a tax of 2.5% on income earned and received (investment income included) by residents of the City, 1.0% on corporate income earned in the City and 1.25% on income earned in the City by nonresidents. See ASSESSED VALUATION AND PROPERTY TAXES - Tax Levies and Collections. Effective January 12, 1999, Act 500, Public Acts of Michigan, 1998 ( Act 500 ), required a reduction in both resident and non-resident City income tax rates. The City s resident income tax rate of 3% was required to be reduced by 0.1% on each July 1, beginning July 1, 1999, until reaching 2%. The non-resident income tax rate was required to be reduced to maintain it at one-half of the resident income tax rate. Act 500 permits this statutory rate reduction schedule to be suspended by the State under certain circumstances if at least three of the following four conditions exist: (1) funds have been withdrawn from the City s Budget Stabilization Fund for two or more consecutive fiscal years or the City s Budget Stabilization Fund balance falls to zero; (2) the City s inflation adjusted income tax revenue growth rate over the prior year is 0.95% or less; (3) the City s tax base growth rate is 80% or less of the State-wide tax base growth rate over a two-year period; or (4) the City s unemployment rate is 10% or higher. If three of these four conditions exist, the next scheduled rate reduction will be suspended until the following July 1, and the suspension may be extended if these conditions continue. Act 500 also reduced the population threshold for levying local income taxes at rates in excess of 2% from 1,000,000 to 750,000. In addition, the then current Mayor proposed to City Council a phase-out of the corporate income tax over a similar 10-year period at the end of calendar The reduction of 0.2% became effective on January 1, 2000, with subsequent reductions on each January 1 following the scheduled July 1 reduction in the individual income tax rate, until the City s corporate income tax is eliminated by January 1, 2009, or such later date as may be applicable. Under City ordinance, the income tax rate reduction for corporations is also suspended whenever a suspension is granted by the State for resident and non-resident rates. Because of two successive one-year suspensions of the 0.1% resident income tax rate reduction granted to the City by the State pursuant to Act 500, the City corporate income tax rate for fiscal years 2004 and 2005 remained the same at 1.2%. The scheduled reduction for fiscal year II-16

115 2005 was frozen and did not take effect. The City income tax rate for fiscal year 2005 and 2006 was 2.5% for residents and 1.25% for non-residents. In December 2006, the City received a fourth suspension of its income tax rate reduction, effective for the period July 1, 2007 through June 30, Act 209, Public Acts of Michigan, 2007 ( Act 209 ), effective December 27, 2007, fixed income tax rates at the 2007 levels for calendar years 2008, 2009 and Utility Users Tax The Utility Users Tax is a 5% excise tax on utility bills within the City, and may be levied only by cities with a population in excess of 750,000. The City recognizes Utility Users Tax revenues collected during the fiscal year and accrues cash received within 60 days of the fiscal year end, which is related to utility usage during the fiscal year. Act 197, Public Acts of Michigan, 2005, provides that all Utility Users Tax revenues shall be used to hire and retain police officers. Wagering Taxes There currently are three casino licensees operating casinos in the City. As permitted by Act 69, Public Acts of Michigan, 1997 ( Act 69 ), in November 1997 the City s voters approved the imposition of a local tax of 9.9% on adjusted gross receipts from casino operations ( AGR ) in the City. Also pursuant to Act 69, the City has imposed a municipal service fee of 1.25% of AGR, or $4 million per licensee, whichever is greater, to pay for the provision of municipal services. Act 306, Public Acts of Michigan, 2004, effective September 2, 2004, imposed an additional wagering tax of 6% of AGR, which is allocated one-third to the City and two-thirds to the State. Thus, the City currently collects a total of 11.9% on AGR as the wagering taxes in addition to such municipal service fee. Act 306 also provides for a reduction of the additional 6% wagering tax to 1% (paid to the City) upon the certification of a permanent casino. MGM Grand Detroit casino opened its permanent casino in October 2007 and received its certification in December The current tax rate for MGM is 10.9%. Motor City Casino opened its permanent casino in November 2007 and received its certification in January The current tax rate for Motor City is 10.9%. In February 2009, Greektown Casino opened its permanent casino hotel and received its certification in March Its current tax rate is 10.9%. See CERTAIN ECONOMIC AND DEMOGRAPHIC INFORMATION - Major Projects and Developments. As a result of the wagering taxes and municipal service fees described above, the City collected revenues from gaming facilities of $122.5 million in fiscal year 2002, $125.4 million in fiscal year 2003, $130.1 million in fiscal year 2004, and $152.8 million in fiscal year Effective January 1, 2006, pursuant to an agreement with the three casinos in the City, an additional payment to the City of 1% of each casino s AGR was imposed on the casinos. Also pursuant to the same agreement and effective January 1, 2006, an additional payment to the City of 1% of AGR was imposed on casinos that achieve at least $400 million in annual AGR. The City collected revenues from gaming facilities of $171.6 million in fiscal year 2006, $196.3 million (inclusive of municipal service fees) in fiscal year 2007, $195.5 million (inclusive of municipal service fees) in fiscal year 2008 and $190.0 million (inclusive of municipal service fees) in fiscal year The City is required to transfer daily casino tax revenues to a trustee to ensure payment of the quarterly interest payments due under the Swap Agreements (as defined herein). See PAYMENT OBLIGATIONS UNDER RETIREMENT SYSTEM SERVICE CONTRACTS. Following a settlement with the State reached in 2002, the Sault Ste. Marie Tribe of Chippewa Indians sought U.S. Congressional approval of a casino, resort and convention center in Romulus, Michigan, approximately 20 miles from downtown Detroit. Legislative efforts to secure federal approval of a casino license for the Tribe were pursued, however, due to opposition to off-reservation gaming, 27 applications, including that of the Sault Ste. Marie Tribe, were dismissed in The Hannahville Indian Community has resubmitted its application to the U.S. Department of the Interior, requesting the federal Bureau of Indian Affairs to place a portion of a 27-acre site in Romulus, Michigan into trust allowing tribal members to own the land and use it for a gaming facility (the Romulus Casino ), as an extension of their 5,500-acre reservation near Escanaba, Michigan. The potential effect, if any, II-17

116 of competition from the Romulus Casino on the City s existing gaming facilities, and the resulting effect on the City s revenues from gaming facilities, are unknown. In the November 2004 election, Michigan voters approved a constitutional amendment which requires approval of any form of gaming, other than Indian tribal gaming and gaming in up to three casinos in the City, by a majority of State voters as well as a majority of voters in the city or township where the gaming will take place. Greektown Casino has constructed a $10 million 650-car parking garage, and recently constructed a $200 million complex including a 400 room hotel, 3,500-space attached garage, and 1,500 seat theater, as well as 25,000 square feet of convention space, a spa and 25,000 square feet of gaming space. On May 29, 2008, Greektown Holdings, together with its direct and indirect subsidiaries and certain affiliates, filed voluntary petitions to reorganize their businesses under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Michigan. Pursuant to a plan of reorganization approved by the Bankruptcy Court, Greektown Superholdings was incorporated under the laws of the State of Delaware on March 17, Greektown emerged from Chapter 11 bankruptcy on June 30, 2010, and as of such date, each of Greektown Superholdings and its wholly-owned subsidiary, Greektown Newco Sub, Inc. (the Greektown Sub ), hold 50% of the outstanding membership interests of Greektown Holdings. Greektown Superholdings is a holding company that owns 50% of the issued and outstanding membership interests of Greektown Holdings and 100% of the issued and outstanding stock of Greektown Sub. Through its direct and indirect ownership of Greektown LLC, Greektown Superholdings owns and operates Greektown Casino. On June 28, 2010, the Michigan Gaming Control Board approved the transfer of interest in the gaming license of Greektown Casino to Greektown Superholdings. On November 3, 2009, voters in the State of Ohio approved a constitutional amendment to allow one casino within each of the cities of Cincinnati, Cleveland, Columbus and Toledo (the Four Ohio Casinos ). The potential effect, if any, of competition from any or all of the Four Ohio Casinos on the City s existing gaming facilities, and the resulting effect on the City s revenues from gaming facilities, are unknown. State Revenue Sharing The City receives State revenue sharing payments from the State under the State Constitution and the State Revenue Sharing Act of 1971, as amended (the Revenue Sharing Act ). State revenue sharing payments are Stateshared revenues that can be used by a local unit of government for any purpose it deems appropriate. As permitted by State law, from time to time the City has secured certain debt obligations with a pledge of its revenue sharing payments (sometimes called Distributable State Aid ), such as its 2010 Senior Bonds. The Local Project Municipal Obligation also will be secured by Distributable State Aid. Subsequent to the issuance of the Local Project Municipal Obligations, the City expects to issue additional debt obligations, including short-term debt for cash flow purposes, which will be secured by Distributable State Aid both on a parity or subordinate basis to the 2010 Senior Bonds. See INDEBTEDNESS OF THE CITY AND RELATED ENTITIES. The City s Distributable State Aid receipts under the State revenue sharing program are composed of the Constitutional Distribution and the Statutory Distribution as shown in the table below. The Constitutional Distribution is mandated by the State Constitution and distributed on a per capita basis to townships, cities and villages. The Statutory Distribution is authorized by legislative action and distribution is subject to annual State appropriation by the State Legislature, and may be reduced or delayed by Executive Order during any State fiscal year in which the Governor, with the approval of the Legislature s appropriation committees, determines that actual revenues will be less than the revenue estimates on which appropriations were based. The City received $272.7 million in Distributable State Aid payments for each of State fiscal years 2007 and The City received $269.0 million in Distributable State Aid payments for State fiscal year 2009 due to the receipt of withheld 2008 payments in State fiscal year The City estimates that the total amount of Distributable State Aid received by it in State fiscal year 2010 will be $34.3 million less than it received in State fiscal year The table below shows actual Distributable State Aid payments allocated to the City during State fiscal years 2005 through 2009, and actual Distributable State Aid payments allocated to the City or projected to be received by the City during State fiscal year II-18

117 Table 10 Distributable State Aid State Fiscal Year Ended or Ending September 30, (in $ millions) * Revenue sharing Sales tax-constitutional Distribution $ 64.1 $ 65.2 $ 63.8 $ 65.9 $ 62.2 $ 58.1 Sales tax-statutory Distribution Total State revenue sharing $284.2 $281.1 $272.7 $272.7 $269.0 $234.7 Sources: actual data: Michigan Department of Treasury Finance Department, Bimonthly Estimated Payments for Local Governments; estimated data: Executive Budget Recommendation - January Consensus Office of Revenue and Tax Analysis, Michigan Department of Treasury (February 11, 2010); *Estimated Pursuant to Act 140, Distributable State Aid payments shall be made to cities, villages and townships during each October, December, February, April, June and August based on collections from the sales tax at the rate of 4% in the 2-month period ending the prior August 31, October 31, December 31, February 28, April 30 and June 30. State law provides for the withholding of the Statutory Distribution component of Distributable State Aid payments under certain conditions, one being a late or past due Comprehensive Annual Financial Report ( CAFR ). During the fiscal years of the City ended June 30, 2008 ( FY2008 ) and June 30, 2009 ( FY2009 ), the City had not filed its CAFR on a timely basis. In response, the State withheld payment of a portion of the City s Statutory Distribution component of Distributable State Aid payments (the Withheld Amount ). The City filed its CAFR for its FY2008 on November 20, 2009 and its CAFR for FY2009 on May 28, Upon such filings, the State released the Withheld Amounts and the City is current on receiving the expected Distributable State Aid payments. However, pursuant to the Agreement to Deposit Distributable State Aid, the State Treasurer agrees that so long as the 2010 Senior Bonds are outstanding, if future installments of Distributable State Aid due the City are delayed or withheld, the State Treasurer shall not delay or withhold deposit with the Trustee of any portions of the City s Distributable State Aid necessary to meet the City s set-aside obligations on debt service for the 2010 Senior Bonds to the extent such Distributable State Aid is due and owing to the City and unless required to do so by applicable law. Sales and Charges for Services Receipts for sales and charges for services include such items as maintenance and construction charges, electrical fees, recreation fees, property tax collection fees and personal service fees. Receipts decreased from $243.5 million in fiscal year 2007 to $193.3 million in 2008 and $167.4 million in 2009 mainly due to moving the solid waste activities from the General Fund to the Solid Waste Special Revenue Fund. As a result, $69.6 million of sales and charges for services were recorded in the Special Revenue Funds and not in the General Fund in Other Revenue, Grants and Other Financing Sources Other revenue and other financing sources generally consist of fines, inspection fees, interest on investments, real estate rentals, sales of property and transfers. II-19

118 General Fund expenditures include the federal share of the cost of services for personnel employed in various General Fund agencies. The Community Development Block Grants and a small amount under the Job Training Partnership Act fund the federal share. The grants listed under Other Grants (which are usually for health-related activities or community development projects) are generally received on a drawdown basis. Increases or decreases in expenditures would not have a direct effect on fund balances, since revenues would likewise be increased or decreased. The annual budget contains the full amount of an expected grant even though total expenditures may not be realized. The following table compares budgeted and actual revenues and expenditures for certain major General Fund categories for fiscal years 2007 through Also included are the budgeted amounts for fiscal years 2010 and 2011, and unaudited results for fiscal year Table 11 Comparison of Major Budget Classifications-General Fund Fiscal Year Ended or Ending June 30 (millions) Category Budget Actual Budget Actual Budget Actual (1) Budget (2) Revenues Property tax... $ $ $ $ $ $ $ Municipal income tax State revenue sharing Utility Users Tax Wagering taxes Total... $ $ $ $ $ $ $ Total General Fund Revenues... $1,711.1 $ 1,303.4 $1,755.3 $1,268.4 $ 1,602.3 $ 1,192.1 $ 1,651.9 % of Total General Fund % 70.0% 56.53% 70.9% 57.4% 73.6% 48.1% Expenditures Police... $ $ $ $ $ $ $ Department of Public Works Fire Public Lighting Recreation Total... $ $ $ $ $ $ $ Total General Fund Expenditures.. $ 1,696.5 $1,181.4 $1,798.3 $ 1,155.9 $ 1,834.2 $ 1,070.9 $ 1,664.1 % of Total General Fund % 56.9% 43.6% 52.6% 42.0% 59.4% 39.0% SOURCE: Budget Department and Finance Department. (1) Unaudited. (2) City s Fiscal Year 2011 Adopted Budget. CURRENT FISCAL SITUATION Pursuant to the City Charter, on or before April 12, 2010, the Mayor submitted a Fiscal Year 2011 Executive Budget to City Council for adoption. The City expects to incorporate an estimated carryforward deficit of $117 million. Per unaudited financial statements for FY 2010 the accumulated deficit is expected to be approximately $150 million. The City has retained the services of Mckinsey Incorporated to address both an overall city plan and also identify efficiency opportunities, In addition the City has embarked on a city wide land planning initiative, Detroit Works. The Detroit Works initiative is approximately in its fifth month of an expected 18 month plan. The current deficit elimination plan as outlined in the Mckinsey plan eliminates the accumulated deficit over a 3 year period and has identified cost reductions in excess of $260 million. II-20

119 In recent prior Fiscal Years, significant uncertainties have arisen in the economic environment that had and will continue to affect the City. Recessionary conditions at the City, State, national and global levels have increased the risk to provide our current level of funding in support of daily operations and services historically offered by the City. The City and State, in general, have suffered from increased unemployment rates, depressed personal incomes, a rising level of mortgage delinquencies, continued contraction in the automotive industry and persistent softness in the regional housing market. These conditions were exacerbated by the recent bankruptcy filings of Chrysler Group LLC and General Motors Company (both of which subsequently emerged from bankruptcy) which further reduced collections in several categories of revenues such as property and income taxes, among others. Locally and throughout the State, the economic conditions remain recessionary. As a result of the recessionary economic environment, the City continues to be challenged by unprecedented unemployment levels leading to continued reductions in personal income tax revenues. Higher resident home foreclosures and delinquent property tax levels represent another sign of financial concern. The City s largest revenue streams, Distributable State Aid, municipal income taxes, property taxes and wagering taxes, are each susceptible, in varying degrees, to downturns in the economy and increasing levels of unemployment. Credit Ratings On January 6, 2009, S&P downgraded the City s $530 million of outstanding unlimited tax general obligation ( UTGO ) bond rating from BBB to BB and its $355 million of outstanding limited tax general obligation ( LTGO ) bond rating from BBB- to BB. On that date, S&P also downgraded to BB the rating on the $536 million of outstanding Detroit Retirement Systems Funding Trust 2005 Taxable Certificates of Participation Series 2005 and $948 million of Detroit Retirement Systems Funding Trust 2006 Taxable Certificates of Participation Series 2006 (collectively, the Pension Obligation Certificates or POCs ). On January 13, 2009, Moody s downgraded the ratings on the City s UTGO debt and on the POCs from Baa3 to Ba2 and its LTGO debt rating from Ba1 to Ba3. At the same time, Moody s downgraded from Aa3 to Baa3 the Global Scale Rating assigned to the outstanding POCs. On January 22, 2009, Fitch downgraded the ratings on the City s UTGO debt and POCs from BBB to BB, and the City s LTGO debt from BBB to BB-. On August 20, 2009, Moody s downgraded the ratings of the City s UTGO debt from Ba2 to Ba3, LTGO debt from Ba3 to B1 and its outstanding POCs from Ba2 to Ba3. Concurrently, Moody s downgraded the Global Scale rating assigned to the outstanding POCs from Baa3 to Ba1. The downgrades in the City s credit ratings to a level below investment grade status limits the City s access to capital, including borrowing for cash flow purposes. The City now also faces higher borrowing costs. Recent Cash Flow Borrowings The City s declining revenues over the past several years have led to an accumulated unreserved undesignated fund deficit in the General Fund of $153.5 million as of June 30, 2010 which is based on preliminary unaudited financial statements as of this writing As a result, the City had been dependent on short-term borrowing for cash flow purposes. The amount of combined borrowings increased from $54.4 million in Fiscal Year 2005 to $223.6 million in FY2009. The City recently borrowed an additional $35.5 million on December 21, The issuance of the 2010 Senior Bonds and the full implementation of the Mckinsey efficiency plan over the next three years will eliminate the City s need for short-term cash flow borrowings. The City expects to eliminate future short term borrowings primarily thru efficiency gains identified in the Mckinsey plan. Deficit Elimination Plan The FY2010 Budget was built upon conservative revenue and expenditure assumptions which also includes provisions for an then anticipated carryover of undesignated General Fund deficit from FY2009 estimated at $117 million. II-21

120 State law requires that a local unit of government ending its fiscal year in a deficit condition shall formulate and file a deficit elimination plan with the Michigan Department of Treasury within 90 days after completion of the CAFR to correct the deficit. After certification by the Michigan Department of Treasury, the local unit of government is required to implement the deficit elimination plan. A deficit elimination plan (the Deficit Elimination Plan or DEP ) was developed by the City administration and approved by the City Council. as a part of the 2009 CAFR completed in May of 2010 a deficit elimination plan was filed with the Michigan Department of Treasury and as of December 2010 is waiting their approval. A DEP in connection with the 2008 CAFR was certified by the Michigan Department of Treasury on January 8, 2010 contingent upon issuance of the 2010 Senior Bonds. This DEP included a four year projection of revenues and expenditures and involves the continued collection of increased tax revenues, enhanced procedures for the collection of revenues, the issuance of the 2010 Senior Bonds as well as payment of debt service requirements, including debt service on the 2010 Senior Bonds and the City s tax anticipation notes. The issuance of fiscal stabilization bonds in January 2010 resulted in proceeds of $249.7 million. The City has begun implementation of the DEP and has made significant progress with several of the initiatives for FY2010, including the planned staffing reductions detailed in the DEP, days off without pay for certain employees, realized savings from the Cobo Hall agreement and finalization and approval of the Greektown casino settlement. Further, collections on delinquent receivables have already exceeded projections by over 65% and certain anticipated grant funding has been received. Through the use of the proceeds of the 2010 Senior Bonds, expense reductions and revenue enhancements, the City s general fund accumulated deficit is projected to be reduced in FY2010 from approximately $331.9 million in FY2009 to approximately $153.5 million at the end of FY2010. The deficit is expected to be further reduced in Fiscal Year 2011 to approximately $100 million and by the end of Fiscal Year 2012, the DEP is projected to be less than $50 million and by the end of FY 2013 will be in a positive fund balance. The foregoing projections were current as of the date the DEP was filed with the Michigan Department of Treasury and are subject to adjustment based upon the City s actual financial results and future events. NO GUARANTEE CAN BE MADE THAT THE PROJECTED INFORMATION IN THE DEP WILL CORRESPOND WITH THE RESULTS ACTUALLY ACHIEVED IN THE FUTURE BECAUSE THERE IS NO ASSURANCE THAT ACTUAL EVENTS WILL CORRESPOND WITH THE ASSUMPTIONS MADE BY THE CITY. ACTUAL RESULTS MAY BE AFFECTED BY MANY FACTORS INCLUDING, BUT NOT LIMITED TO, THE INABILITY TO ISSUE THE 2010 SENIOR BONDS IN A SUFFICIENT PRINCIPAL AMOUNT, AN INABILITY OR FAILURE TO IMPLEMENT THE DEP, RECEIPT OF LOWER STATE SHARED REVENUES, EMPLOYEE RELATIONS AND UNION CONTRACT NEGOTIATIONS, REDUCED TAX COLLECTIONS AND CHANGES IN DEMOGRAPHIC TRENDS. Swap Agreement Termination Events There exists a certain degree of risk relating to Swap Agreement Terminations due to the recent credit rating downgrades of the City and the continued credit rating declines of the bond insurers insuring the City s Swap Agreements (as herein defined). The City has eight (8) interest rate exchange agreements (the Swap Agreements ) in effect. These Swap Agreements were entered into in conjunction with the issuance of the POCs and were subject to termination as a result of the rating changes described above. Specifically, the Swap Agreements provided that a termination event would occur if the credit ratings on the POCs were withdrawn, suspended or downgraded below Baa3 (or equivalent) and the bond insurers ratings fell below an A3 (or equivalent rating) (each a Termination Event ). On January 8, 2009, the City received formal notice from the counterparty to four of the eight Swap Agreements stating that an event had occurred, which, if not cured by the City, would constitute an additional Termination Event. On January 14, 2009, the City also received formal notice from the counterparty to the four remaining Swap Agreements stating that the applicable bond insurers had been downgraded below the thresholds set forth in the Swap Agreements. In June 2009, the City avoided Swap Agreement Terminations by amending the Swap Agreements with the counterparties to include a collateral agreement. The collateral agreement requires the City to provide for the direct deposit of daily casino tax revenues from the casinos to a trustee to ensure payment of the quarterly interest payments due under the Swap Agreements. The collateral agreement also provides for an increase of approximately 1.5% or 10 basis points in such payments beginning in Fiscal Year 2011 and further provides that the II-22

121 counterparties may terminate the Swap Agreements if certain increased coverage levels of the wagering taxes over the required quarterly interest payments are not met or if the debt ratings of the POCs are withdrawn, suspended or downgraded below Ba3 (or equivalent). Should such termination events occur in connection with these Swap Agreements, and not be cured, there presently exists significant risk in connection with the City s ability to meet the cash demands under the terms of the amended Swap Agreements. See CAPITAL ASSETS AND DEBT ADMINISTRATION Long-Term Debt in Appendix B and Note IV. Subsequent Events Subsequent Economic Events Swap Agreement Termination Events in Appendix B for more detail regarding the Swap Agreements and termination provisions. Recent State Audit of Tax Increment Financing The TIFA, DDA, and LDFA are financed through captures of property taxes levied by other units of government including the City of Detroit, the Detroit Public Library, the Detroit Public Schools, Wayne County and the State of Michigan (State Education Tax). Following the passage of Proposal A which amended the State of Michigan Constitution in 1994, the capture of school taxes are limited. Tax increment financing entities like TIFA, DDA, and LDFA can only capture taxes if a pre-existing or eligible obligation is present. The State of Michigan completed an audit of the tax captures of these entities from the tax year 2001 through tax year The State claims that TIFA ($22.5 million), DDA ($5.9 million), and LDFA ($5.7 million) have over captured school property taxes during that time period. The City engaged a consulting firm in January 2010 to verify the allowability and accuracy of eligible obligations included in the TIFA (TIFA 2 Central Industrial Park Project) capture reports for the tax years The consultant determined that the City overcaptured $18.0 million of school property taxes for the tax years In addition, the consultant determined that Hamtramck was overpaid $7.1 million for its share of captured taxes for those years. Hamtramck shares in collection of income taxes and property taxes with the City of Detroit from the Central Industrial Park Project (General Motors Facility). As a result of the overcapture of taxes, Hamtramck was overpaid property taxes. A dispute has arisen between Hamtramck and the City of Detroit over the payment of property taxes from the TIFA and both Cities have initiated lawsuits against the other. The City has recorded a liability due to the State of Michigan at June 30, 2010 for the $18.0 million overcaptured property taxes. Also, the City recorded an accounts receivable due from the City of Hamtramck and deferred the revenue at June 30, 2010 for the $7.1 million overpaid. The consultant is also verifying the allowability and accuracy of the tax captures for the DDA and LDFA. However, the work has not been completed as of the date of this document. At June 30, 2010, no provision for loss has been recorded in the City s General Fund related to the DDA and LDFA as the outcome is uncertain. Recent Reporting Change For the year ended June 30, 2010, the City implemented GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments. This Statement addresses the recognition, measurement, and disclosure of information regarding derivative instruments in the Government-wide Financial Statements. Specifically, it requires that derivative instruments be reported at fair value. The changes in fair value of derivative instruments that are used for investment purposes or that are reported as investment derivative instruments because of ineffectiveness are reported within the investment revenue classification. Alternatively, the aggregate changes in fair value of derivative instruments that are classified as hedging derivative instruments are reported in the statement of net assets as deferred inflows and outflows. The City has recorded for the year ended June 30, 2010 liabilities of $227.0 million and $432.9 million for the fair value of derivatives respectively in the Governmental Activities statements and Business Activities statements. In addition, the City recorded for the year ended June 30, 2010, assets for the deferral of effective derivatives of $59.6 million and $88.8 million respectively in the Governmental Activities statements and the Business Activities statements. Also, the Business Activities statements include an asset of $103.0 million for deferred defeasance of certain derivatives that were once effective hedges. The net impact of the implementation of GASB Statement No. 53 is a reduction of the primary government net assets totaling $408.5 million ($167.4 million Governmental Activities and $241.1 million Business Activities). The Statement does not impact the City s Governmental Fund Financial Statements, which includes the General Fund. II-23

122 Compliance with Certain Finance Related Legal and Contractual Provisions The Sewage Disposal and Water Funds revenue bond ordinances require that certain amounts be held on deposit in or deposited to various funds and accounts. As of June 30, 2008 the Sewage Disposal Fund s Senior Lien Bond Account and its Extraordinary Repair and Replacement Reserve Fund were underfunded by approximately $7.4 million and $2.1 million, respectively. The City has fully funded these funds has implemented procedures to monitor legal requirements on a continuous basis going forward. Bond ordinances require amounts be held on deposit in a Bond and Interest Redemption Fund such that the aggregate balance is sufficient to provide for payment, when due, of the current principal and interest. During the fiscal year ended June 30, 2009, the balance in the Water Fund's Bond and Interest Redemption Fund was not in compliance with these ordinances. However, the Fund transferred the required amounts on July 1, 2009 and made the principal and interest payments on a timely basis. During FY2008 and FY2009, the City s auditors raised a question as to whether certain expenditures made by the Sewage Disposal and Water Funds should be classified as operating rather than capital expenditures under generally accepted accounting principles (GAAP). The City is in the process of analyzing each of the questioned expenditures to determine whether the accounting characterization of the expenditure is indicative of an improper expenditure of bond proceeds under federal tax law applicable to tax-exempt bonds or under State law. The City does not believe the outcome of this matter will have a material impact on the accompanying financial statements. The Fiscal Year 2011 Budget includes subsidies for the Department of Transportation of $55.3 million a decrease of $25 million from fiscal year 2010 and an airport subsidy of $790,887, which is unchanged from the Fiscal Year 2010 Budget. In fiscal year 2011, the Detroit Historical Society will receive an operational subsidy of $450,000 and the Detroit Zoological Society will receive $765,000 for insurance and security pursuant to its operating agreement with the City. The Charles H. Wright Museum of African American History will receive a $1.9 million subsidy, and the Detroit Institute of Arts will receive an operational subsidy of $500,000. Table 12 Transportation Fund Subsidies Fiscal Year Subsidy (1) (in millions) 2004 $ $ $ $ $ $ $80.0 SOURCE: Finance Department. (1) 2010 is an unaudited amount. The 2010 subsidy is the Appropriation listed in the Adopted Budget for ; all other fiscal years are derived from audited financial statements. The City s Airport Fund accounts for the operations of Detroit City Airport. The Airport is capable of accommodating commercial jet carrier service although no commercial airline currently provides passenger service. The Airport has not been self-sufficient and has required General Fund subsidies ranging between $1 million and $2.5 million per year. An operating subsidy of $900,000 was paid to the Airport in both fiscal years 2007 and An operating subsidy of $928,865 was paid to the Airport in fiscal year A $790,355 operating subsidy was appropriated for the Airport for fiscal year II-24

123 Component Units of the City In addition, the General Fund provides significant financial support to two discretely presented component units: the GDRRA and the Detroit Transportation Corporation ( DTC ). The GDRRA receives moneys from the General Fund through tipping fees paid for disposal of waste collected by the City. The City s obligation to pay such tipping fees is an obligation of the City s General Fund. The GDRRA is responsible for disposal of essentially all residential solid waste and a small fraction of commercial waste collected in the City. GDRRA, which is responsible for the disposal of essentially all residential solid waste and small fraction of commercial waste collected in the City receives fees (known as Tipping Fees ) from the City out of its General Fund. Since 1984 GDRRA has disposed of solid waste it receives from the City to a solid waste disposal and resource recovery facility (the Facility ) for processing and disposal. In 1985, GDRRA contracted for the construction and operation of the Facility with an outside contractor ( Operator ). In 1991, GDRRA, with City Council s approval, sold the Facility to two private trusts (collectively, the Owners ) in a sale-leaseback transaction pursuant to two separate Participation Agreements (collectively, the Participation Agreement ) in consideration for the deposit to the City s General Fund of $54 million in net sale proceeds, as well as the Owners participation in the financing of certain pollution control equipment that was added to the Facility in the 1990 s. As part of consideration for the sale, the City committed to deliver its solid waste to the Facility until October 1, 2021, unless the Owners decide to walk away or GDRRA reacquires the Facility before then. In connection with the sale-leaseback transaction the Owners agreed to lease the Facility to the Operator for an initial lease term of 18 years. The Facility leases and the operating agreement expired July 1, Under the terms of the Participation Agreement, GDRRA had the option to either repurchase the Facility or direct the Operator to renew the lease for the Facility as of July 1, When GDRRA did not exercise either option, the Owners exercised their contractual right under the Participation Agreement to compel GDRRA to continue to deliver solid waste to the Facility after July 1, 2009 by matching GDRRA s alternative cost to dispose of the City s solid waste. On July 1, 2009, GDRRA entered into a service agreement with the Operator to continue to deliver solid waste delivered to it by the City to the Facility (excluding convenience center bulky waste and recycled waste). The Owners right to compel GDRRA to dispose of the City s solid waste at the Facility continues until October 1, 2021, as long as the Owners match GDRRA s alternative hauling and disposal cost and the Operator is reasonable and acceptable to GDRRA. This condition came about as part of the terms of the sale of the Facility in 1991, for which the City received the $54 million in sale proceeds. The City Council does not have the power to dissolve GDRRA without the Mayor's direction, and by contract and law the Mayor may not do so if dissolution would impair contracts of GDRRA. Dissolution before 2021 would impair the contractual obligations described above. The ownership of the beneficial interests of the trusts that make up the Owners has changed since the effective date of the Participation Agreement, and it is expected that the ownership will change again in the near future. While the impending ownership changes may effect the future role of the Operator in the management of the Facility, the City expects the Participation Agreement and its obligations to deliver waste pursuant to the Participation Agreement to remain effective. While the discussions have continued, the Facility has continued to operate, and is currently processing waste and producing power. To prepare for transition to new management and operating support, in November 2010 the Operator temporarily closed the doors to the Facility while negotiations for the transfer of ownership interests continue, though the Facility continues to process waste already within the gates. Until the new ownership and management of the Facility are finalized GDRRA has made temporary arrangements for alternative disposal, and the City s trash is being collected and disposed of as scheduled. In 1986, the City, through the DTC, took over responsibility for the Downtown People Mover. Construction of the project was funded primarily through a combination of federal and State transportation moneys. DTC is not self-supporting and approximately $6.2 million was budgeted for fiscal year 2010 to support its operations. Other Funds The following table lists the other funds of the City and their revenues and expenditures for fiscal year II-25

124 Table 13 Revenues and Expenditures of Other Funds Fiscal Year Ended June 30, 2010 Revenues/ Funds Expenditures Purpose Major Funding Sources ($ in millions) ($ in millions) Special Revenue Funds Community Development Block Grant $42.1 $42.1 Economic Development $ Federal Government Construction Code Fund Building Permits/Inspections User Fees Detroit Building Authority Special Maintenance Transfers Drug Law Enforcement Drug Law Enforcement Fines and Forfeitures Detroit Workforce Development Detroit Workforce Development Federal Government Targeted Business Development Economic Development Major and Local Streets Infrastructure Gas and Weight Tax Telecommunications Technology Federal Government Human Services Social Welfare Programs Federal Government Solid Waste Waste Disposal Sales and Charges for Services PA Energy Optimization Surcharges Capital Projects (including Urban Renewal) Capital Projects Proceeds/Bond/Note Issuances Debt Service Debt Service Property Taxes Fiduciary Funds Pension Funds Employee Retirement and Benefits City Contributions Plan Member Contributions SOURCE: Derived by Finance Department from unaudited fiscal year 2010 financial statements Risk Management The City is self-insured with respect to property damage, liability risks and workers compensation claims. The City assumes the risk for loss exposures, using generally accepted standards with regard to self-assumption of risk. Provisions are made for assumed losses by a combination of annual budgetary appropriations and liquid reserve funds. Insurance has been obtained for catastrophic loss exposures when insurance has been a feasible alternative. Contract liability losses and tort and negligence liability losses are covered by a combination of a Public Liability Reserve Fund and a Risk Management Fund. The City issued self-insurance bonds in fiscal years 2003 and 2004 to make loss payments. The following schedule indicates the amounts paid from appropriations for the fiscal years ended June 30, 2006 through The schedule reflects both General Fund and Transportation Fund payments. The General Fund has typically made substantial transfers to the Transportation Fund, in part to cover liability claims payable from that fund. Table 14 Liability Claims Paid Fiscal Year Ended June 30, (1) Damage, liability and vehicle claims... $40,603,167 $27,901,968 $45,308,611 $36,010,026 $40,392,863 Worker compensation claims... 11,391,778 13,930,599 12,606,028 11,257,759 10,613,168 Total... $51,994,945 $41,832,567 $57,914,639 47,267,785 51,006,031 SOURCE: Finance Department. (1) Unaudited II-26

125 ASSESSED VALUATION AND PROPERTY TAXES Property Valuation and Tax Rate Article IX, Section 3, of the Michigan Constitution provides that the proportion of true cash value at which property shall be assessed shall not exceed 50% of true cash value. The Michigan Legislature, by statute, has provided that property shall be assessed at 50% of its true cash value. The Michigan Legislature or the electorate may at some future time reduce the percentage below 50% of true cash value. On March 15, 1994, the electors of the State approved an amendment to the Michigan Constitution permitting the Legislature to authorize ad valorem taxes on a non-uniform basis. The legislation implementing this constitutional amendment added a new measure of property value known as Taxable Value. Beginning in 1995, taxable property has two valuations-state Equalized Valuation ( SEV ) and Taxable Value. Property taxes are levied on Taxable Value. Generally, Taxable Value of property is the lesser of (a) the Taxable Value of the property in the immediately preceding year, adjusted for losses, multiplied by the least of the net percentage change in the property s SEV, or the inflation rate, or 5%, plus additions, or (b) the property s current SEV. Therefore, the Taxable Value of property is likely to differ from the same property s SEV. This constitutional amendment and the implementing legislation based the Taxable Value of existing property for the year 1995 on the SEV of that property in Beginning with the taxes levied in 1995, an increase, if any, in Taxable Value of existing property is limited to the lesser of the percentage net change in SEV from the preceding year to the current year, 5% or the inflation rate. When property is sold or transferred, Taxable Value is adjusted to the SEV, which under existing law is 50% of the current true cash value. The Taxable Value of new construction is equal to current SEV. Taxable Value and SEV of existing property are also adjusted annually for additions and losses. Responsibility for assessing taxable property rests with the City Assessor. Any property owner may appeal the assessment to the City Assessor, the Board of Review and ultimately to the Michigan Tax Tribunal. The Michigan Constitution also mandates a system of equalization for assessments. Although the City Assessor is responsible for actually assessing at 50% of true cash value, adjusted for Taxable Value purposes, the final SEV and Taxable Value are arrived at through several steps. The City Assessor establishes assessments initially. City assessments are then equalized to the 50% levels as determined by the County s department of equalization. Thereafter, the State equalizes the various counties in relation to each other. SEV is important, aside from its use in determining Taxable Value of real estate for the purpose of levying ad valorem property taxes, because of its indirect measure of total true cash value contained in the City, its role in the spreading of taxes between overlapping jurisdictions, the distribution of various State aid programs, distribution of State revenue sharing and the calculation of debt limits. Real and personal property that is exempt from property taxes, e.g., churches, government property and public schools, is not included in the SEV and Taxable Value. Property granted tax abatements under Act 198, Public Acts of Michigan, 1974, as amended ( Act 198 ), is recorded on separate tax rolls while subject to tax abatement. The valuation of tax-abated property is based upon SEV but is not included in either the SEV or Taxable Value data in the Official Statement except as noted. The assessments of, and the tax levies on abated properties are not reflected in Table 17, Tax Rates and Levies, below. Industrial Facilities Tax Act 198 provides significant property tax incentives to industry to renovate and expand aging industrial facilities and to build new industrial facilities in Michigan. Land receives no abatement. Under the provisions of Act 198, qualifying cities, villages and townships may establish districts in which industrial firms are offered certain property tax incentives to encourage restoration or replacement of obsolete industrial facilities and to attract new industrial facilities. Property owners situated in such districts pay an Industrial Facilities Tax ( IFT ) in lieu of ad valorem property taxes on plant and equipment for a period of up to twelve years. For rehabilitated plant and equipment, the IFT is determined by calculating the product of the state equalized valuation of the replacement facility in the year before the effective date of the abatement certificate multiplied by the total mills levied by all taxing units in the II-27

126 current year. New plants and equipment that received an abatement certificate prior to January 1, 1994 are taxed at one-half the total mills levied by all taxing units, other than mills levied for local school district operating purposes or under the State Education Tax Act, plus one-half of the number of mills levied for local school district operating purposes in For new facility tax abatements granted after 1993, new plants and equipment are taxed at one-half of the total mills levied as ad valorem property taxes by all taxing units except mills levied under the State Education Tax Act, plus the number of mills levied under the State Education Tax Act. For new facility tax abatements granted after 1993, the State Treasurer may permit abatement of all, none or one-half of the mills levied under the State Education Tax Act. Ad valorem property taxes on land are not reduced in any way since land is specifically excluded under Act 198. Payment and Lien Property taxes are due on July 1 of the fiscal year and are payable in full without penalty either on or before August 31 or, at the taxpayer s option, one-half may be paid on or before August 15, with the other half paid on or before January 15. For taxes levied prior to December 31, 2002, the City collected its own delinquent property taxes. Pursuant to Act 246, Public Acts of Michigan, 2003, the City began returning uncollected delinquent property taxes levied after December 31, 2002 to the County for collection on each March 1. The City receives full funding for such taxes from the County s delinquent tax revolving fund. If such delinquent real property taxes remain uncollected after three years from the date on which such taxes become delinquent, the County may charge the respective amount of such taxes back to the City. Thus, delinquent real property taxes for tax year 2007 will be collected in accordance with Act 123, Public Acts of Michigan, 1999, which may result in foreclosure if such taxes are not paid by March 31, Tangible personal property may also be seized and sold to satisfy a personal property tax lien. As shown in Table 18, Tax Levies and Collections below, the rate of current collections to the adjusted levy has decreased from 95.01% in fiscal year 2005 to 86.83% in fiscal year Such decrease is primarily due to delinquencies and decreased housing values. The City has taken steps designed to improve collections, including a more aggressive foreclosure policy and the implementation of a program that offers negotiated payment plans to delinquent taxpayers. Additionally, the City may attach personal property of real property owners to satisfy real property delinquencies of such owners. Personal Property Tax Assessments and Appeals Since the 1960s, Michigan personal property tax assessments have been based, among other things, on the use of one or more depreciation schedules formulated by the State Tax Commission (STC). The schedule used against the taxpayer-reported cost depends upon the Assessor s view of the appropriate depreciation table to adopt for valuation of the affected personal property. The STC revised its depreciation schedules beginning with the 2000 tax year. The revisions had the effect of reducing personal property tax revenues in some jurisdictions, including the City. The revisions were effective beginning with City s fiscal year ended June 30, (Balance of this page intentionally left blank) II-28

127 Valuations The following table shows SEV and Taxable Valuations for the most recent five fiscal years. Because the State has applied an equalization factor of 1.0x for each of these years, SEV is equal to the valuations as determined by City assessing officials. Table 15 State Equalized Valuations and Taxable Valuations Fiscal Year Real Property State Equalized Valuation Taxable Valuation (1) Personal Property Total % Annual Change Total Valuation (2) % Annual Change ,799,604,984 1,655,569,747 13,455,174, % 9,298,274, % ,466,718,586 1,646,721,974 14,113,440, % 9,896,704, % ,332,514,854 1,612,957,472 13,945,472, % (3) 10,031,267, % ,860,509,350 1,637,133,708 12,497,643, % 9,725,918, % ,604,012,722 1,516,381,857 11,120,394, % 9,111,881, % SOURCE: Finance Department, Assessments Division. (1) Limited by State law. See ASSESSED VALUATION AND PROPERTY TAXES Property Valuation and Tax Rate. (2) Valuations represent the General Ad Valorem roll, which includes the Renaissance Zone. (3) Decline in State Equalized Valuation includes anticipated reductions as a result of tax assessment appeals to the Michigan Tax Tribunal. Valuation by Type of Property Table 16 Components of State Equalized Valuation Fiscal Year Ended or Ending June 30, By Use (Real Property only) Residential % 72.7% 71.5% 68.4% 65.9% Commercial % 20.4% 21.8% 25.0% 26.7% Industrial % 6.9% 6.7% 6.6% 7.4% Total % 100.0% 100.0% 100.0% 100.0% By Class (Total State Equalized Valuation) Real property % 88.3% 88.0% 87.0% 86.4% Personal property % 11.7% 12.0% 13.0% 13.6% Total % 100.0% 100.0% 100.0% 100.0% SOURCE: Finance Department, Assessments Division. Tax Rates and Levies The following table shows the tax rates and levies in the City for City, School and County purposes for the last five fiscal years. II-29

128 TAXING ENTITY: Table 17 Tax Rates and Levies Fiscal 2007 Fiscal 2008 Fiscal 2009 Fiscal 2010 Fiscal 2011 CITY OF DETROIT Millage Levy Millage Levy Millage Levy Millage Levy Millage Levy General Fund $179,491, $191,557, $194,399, $188,329, $176,126,271 Debt Service ,059, ,849, ,012, ,723, ,928,559 Garbage Levy ,997, Library ,658, ,458, ,118, ,709, ,877,502 Total City $309,207, $315,866, $314,530, $304,762, $297,932,332 SCHOOLS Debt Service $120,877, $128,657, $130,406, $126,436, $118,454,455 Judgment ,991 Non- Homestead Tax ,930, ,816, ,380, ,307, ,401,379 Total Schools $282,808, $301,473, $305,786, ,743, $276,751,826 STATE EDUCATION TAX $53,976, $57,605, $58,460, $56,634, $52,964,997 WAYNE COUNTY General Fund $59,716, $63,730, $64,676, $64,560,649 NA NA Regional Educational Service Operational Agency ,165, ,260, ,753, ,693,500 NA NA Community College ,282, ,780, ,133, ,090,128 NA NA Wayne County Parks ,212, ,360, ,395, ,391,603 NA NA Huron-Clinton Metro Authority ,930, ,060, ,090, ,087,182 NA NA Public Safety ,439, ,006, ,140, ,123,884 NA NA Zoo (1) , ,592 NA NA Total Wayne County $125,746, $134,199, ,190, $136,919,539 NA NA Total Levy $771,738,906 $809,144,923 $814,967,764 $793,060,798 NA Total Homestead Rate Total non-homestead Rate SOURCE: Finance Department (1) The Wayne County Zoological Authority was established pursuant to Public Act 49 of 2008 to allow for continuing zoological services. Authorization passed August 5, 2008 by the electors to levy a tax of not more than 0.1 mill (10 cents per $1,000 of taxable value) on real property and personal property for a period of ten (10) years, being years 2008 through Note: Beginning with fiscal year 1996 taxable value cannot exceed the statewide rate of inflation of the prior year on a per parcel basis, except where increases are due to physical changes in the parcel (P.A. 415 of 1994) II-30

129 Tax Levies and Collections The following table shows collections of current taxes and collections of current and delinquent taxes, penalties and interest for City operating, refuse collection and disposal, debt service and library purposes for fiscal years 2005 through Table 18 Tax Levies and Collections-Fiscal Years 2005 to 2009 Collections of Current Levy During Year Total Collections Through Fiscal Year Ended June 30, 2009 Fiscal Year Ended June 30, Adjusted Tax Levy (1) Amount (2) Ratio to Adj. Levy (all dollars in thousands) Amount Ratio to Adj. Levy $250,556 $263,532 $268,630 $271,516 $238,059 $244,189 $255,353 $251, % 92.66% 95.06% 92.64% $238,059 $246,682 $255,353 $252, % 95.06% 95.06% 93.14% 2009 $269,556 $234,049 (3) 86.83% $234, % SOURCE: Finance Department, Treasury Division. (l) The levy is adjusted from the original levy for cancellations and assessment adjustments. (2) Property tax levy and collections exclude captured taxes for DDA and LDFA. (3) Decrease in tax collections was due to chargebacks from Wayne County and continuation of the nationwide foreclosures situation. The collection of delinquent City real property taxes was transferred to the County in fiscal year 2003 for collection of fiscal year 2003 and future taxes. See FINANCIAL OPERATIONS - General Fund Revenue Categories: Property Taxes. (Balance of this page intentionally left blank) II-31

130 Largest Taxpayers Listed below are the ten largest property taxpayers in the City and their Taxable Valuations (thousands omitted). Table 19 Ten Largest Taxpayers Fiscal Year Ended June 30, 2010 Taxable Assessed Value (000 s) % of Total City Taxable Assessed Value Chrysler Group LLC (1) $613, % Detroit Edison 318, % MGM Grand Detroit LLC (1) 237, % Riverfront Holdings Inc. (1) 143, % General Motors LLC 136, % Marathon Oil Company 124, % Michigan Consolidated Gas Co. 86, % Greektown Casino LLC (1) 85, % Detroit Entertainment LLC 77, % American Axle & Manufacturing Inc. 60, % Total $1,883, % Total City Taxable Valuation $9,725,919 SOURCE: City of Detroit - Assessor s Office. (1) Indicates property taxpayer is in a tax-increment financing district whereby taxes are captured and used to pay debt service on other specific tax-increment debt obligations of the City. Tax-Exempt Property A significant amount of real property (such as government facilities, schools, churches and hospitals) located within the City is exempt from taxation. In addition to tax-exempt real property, much personal property is also exempt, including household property, licensed motor vehicles, manufacturing tools held for use, mechanic s tools, pollution control facilities, property stored while in transit and business inventory, as well as the property of publicly owned and tax-exempt private institutions. The only major items of personal property subject to property taxation in the City are commercial and industrial furniture, fixtures and equipment. INDEBTEDNESS OF THE CITY AND RELATED ENTITIES Legal Debt Margin Article VII, Section 21 of the State Constitution establishes the authority, subject to constitutional and statutory prohibitions, for municipalities to incur debt for public purposes. In accordance with the authority granted to the State Legislature, Act 279, Public Acts of Michigan, 1909, as amended ( Act 279 or the Home Rule City Act ) was enacted. Pursuant to the power conferred by Act 279, the electorate of the City adopted the Charter. The Charter provides that the City may borrow money for any purpose within the scope of its power, may issue bonds or other evidence of indebtedness therefor, and may, when permitted by law, pledge the full faith, credit and resources of the City for the payment of those obligations. Act 279 limits the debt a city may have outstanding at any time by providing that the net indebtedness incurred for all public purposes may not exceed the greater of 10% of the assessed value of all the real and personal property in the City or 15% of the assessed value of all the real and personal property in the City if that portion of the total amount of indebtedness incurred which exceeds 10% is or has been used solely for the construction or renovation of hospital facilities. The definition of assessed value for the II-32

131 debt limit computation under Act 279 includes certain assessed value equivalents not otherwise included in assessed valuation. Pursuant to Act 279, significant exclusions to the debt limitations have been permitted for the following purposes: special assessment bonds and motor vehicle highway fund bonds, even though they are a general obligation of the City; revenue bonds payable from revenues only, whether or not secured by a mortgage; bonds, contract obligations or assessments incurred to comply with an order of the Water Resources Commission of the State or a court of competent jurisdiction; obligations incurred for water supply, sewage, drainage, refuse disposal or resource recovery projects necessary to protect the public health by abating pollution; bonds issued to acquire housing for which certain rent subsidies will be received by the City or an agency thereof; bonds issued to refund money advanced or paid for certain special assessments; and self-insurance bonds. The maximum amount of general obligation debt (both unlimited tax and limited tax) the City may have outstanding at any time is limited by State law. The limit is set at 10% of the City s SEV (adjusted for certain assessed value equivalents) or 15% if that portion which exceeds 10% is used solely for construction or renovations of hospital facilities. However, certain general obligation debt (including the Self-Insurance Bonds debt) is excluded from this limit. The limit and the outstanding general obligation debt subject to the limit are shown in the following table: Table 20 Legal Debt Margin Subject to State Limitation As of December 1, 2010 SEV Fiscal Year $11,120,394,579 Add: Allowance under Act 228, Mich. Public Acts, ,498,590 Allowance under Act 198, Mich. Public Acts, ,043,696 Allowance under Act 147, Mich. Public Acts, ,403,632 Allowance under Act 146, Mich. Public Acts, ,593,833 $12,187,934,330 General Purpose Limit (10% x $12,187,934,330)... $1,218,793,433 Less Outstanding Debt: General Obligation Bonds (Unlimited Tax)... $ 497,790,000 General Obligation Bonds (Limited Tax) ,205,000 Detroit Building Authority Bonds (District Court Madison Center). 2,655, ,650,000 General Debt Margin ,143,433 Additional Hospital Limit (5% x $12,187,934,330) ,396,717 Total Legal Debt Margin (General and Hospital)... $ 908,540,150 SOURCE: Finance Department. Unlimited Tax Bonds Capital Financing Policies In accordance with the State Constitution, unlimited tax general obligation bonds must be voter approved before issuance. General Fund departments have traditionally relied on unlimited tax general obligation bonds of the City for capital programs. In accordance with State law, the City is obligated to levy and collect taxes without regard to any constitutional, statutory or Charter tax rate limitations for payment of such obligations. The City has followed a policy of scheduling bond referenda to coincide with regularly scheduled elections. The City has issued and expects to continue to issue unlimited tax general obligation bonds annually as described in INDEBTEDNESS OF THE CITY AND RELATED ENTITIES-Prospective Indebtedness below. The following table shows the City s authorized but unissued unlimited tax general obligation debt for capital programs as of December 1, II-33

132 Table 21 Authorized but Unissued Debt General Obligation (Unlimited Tax) Bonds Date of Voter Approval Remaining Authorization Sewer Construction (1) 8/02/1960 $24,000,000 Public Safety 11/2/2004 2/24/ ,125,000 72,000,000 Municipal Facilities 11/7/ ,000 Neighborhood / Economic Development 11/2/2004 2/24/ ,295,000 25,000,000 Public Lighting 11/2/2004 2/24/ ,235,000 22,000,000 Recreation, Zoo, and Cultural 11/7/ /2/2004 2,775,000 4,840,000 Museums, Libraries, Recreation and Other Cultural 2/24/ ,000,000 Detroit Historical Museum 11/06/ ,200,000 C. Wright MAAH 4/29/ ,000 Transportation 11/2/2004 2/24/ ,810,000 12,000,000 SOURCE: Finance Department. (1) Not expected to be issued. Limited Tax Bonds $416,900,000 The City may issue limited tax general obligation bonds or other obligations without the vote of the electors. However, taxes may not be levied in excess of constitutional, statutory or Charter limitations for the payment thereof. Such bonds are payable from general non-restricted moneys of the City. Certain of such limited tax obligations are secured with a first lien on specific revenues such as Distributable State Aid. The City has utilized limited tax obligations to finance vehicle purchases, general capital improvements, deficit elimination and the City s Risk Management Fund. See INDEBTEDNESS OF THE CITY AND RELATED ENTITIES - Statement of Direct Tax - Supported and Revenue Indebtedness below. Revenue Bonds There are generally no voter approval requirements for the issuance of revenue bonds. The City issues revenue bonds to finance and refinance various capital projects for water supply, sewage disposal and convention facilities and, through the City of Detroit Building Authority, parking facilities. Additional revenue bonds may be issued for these systems provided certain specific additional bonds tests are met under applicable bond documents. Other Capital Financing Sources The City also receives State and federal funds which finance certain construction and capital projects. These include State Gas and Motor Vehicle Registration for street improvements, federal Community Development Block Grant revenues largely for continuing urban renewal projects and funds through the State and federal government for transportation purposes. In addition, the City periodically receives capital grants as a result of certain tax supported and revenue debt. II-34

133 The following table sets forth the outstanding direct tax-supported and revenue indebtedness of the City. Table 22 Statement of Direct Tax-Supported and Revenue Indebtedness As of December 1, 2010 Tax Supported Debt: Unlimited Tax General Obligation Bonds (general purpose) (1)... $ 497,790,000 Limited Tax Self-Insurance Bonds 96,925,000 General Obligation Bonds and Notes (limited tax) ,205,000 Detroit Building Authority Bonds (Madison Center)... 2,655, ,785,000 Total tax supported debt... $ 1,016,575,000 Revenue and Other Debt: Water Supply System Bonds... $ 2,222,140,000 Sewage Disposal System Bonds... 2,951,696,297 Detroit Building Authority Bonds (Parking & Arena System)... 37,445,000 Federal Section 108 Loans... 81,925,000 Convention Facility Revenue Bonds (Cobo Hall Expansion) 52,414,185 DDA Tax Increment Bonds... 88,043,198 LDFA Tax Increment Bonds (Chrysler Project) 69,510,000 Total revenue and other projects... 5,503,173,680 Gross Direct Debt... 6,519,748,680 Deductions of Revenue and Other Debt... 5,503,173,680 Total Deductions... (5,503,173,680) Net Direct Debt... $ 1,016,575,000 SOURCE: Finance Department. (1) Does not include the Local Project Municipal Obligations. (Balance of this page intentionally left blank) II-35

134 Overlapping Debt Property in the City is taxed for a proportionate share of outstanding general obligation debt of overlapping governmental entities including the School District of the City of Detroit, Wayne County, Regional Educational Service Agency, Wayne County Community College and the Detroit-Wayne Joint Building Authority. The table below shows the City s share of outstanding tax-supported overlapping debt as of December 1, 2010, See GOVERNMENTAL STRUCTURE - Other Governmental Entities. Table 23 City s Share of Overlapping Debt As of December 1, 2010 Detroit s Share Issuer Outstanding Debt Percentage Amount School District of the City of Detroit $1,897,823, % $1,897,823,042 Wayne County (1) 188,857, % 36,374,008 Wayne County Community College. 9,140, % 2,755,710 Net Overlapping Debt $1,936,952,760 SOURCE: Municipal Advisory Council of Michigan. (1) This debt is a general obligation of the County but is payable from assessments against municipalities in the County, other than the City, as well as from the County General Fund. Summary of Debt Statement The following table shows the City s net direct and overlapping debt as of December 1, Table 24 Direct and Overlapping Debt Direct debt (1) : Gross principal amount... $6,519,748,680 Less amount payable from other sources... 5,503,173,680 Net direct debt... $1,016,575,000 Overlapping debt: Net overlapping debt... 1,936,952,760 Net direct and overlapping debt... $2,953,527,760 SOURCE: Finance Department and Municipal Advisory Council of Michigan. (1) Does not include the Local Project Municipal Obligations. II-36

135 Table 25 General Obligation Long-Term Cumulative Principal Amortization Fiscal Year Ending June 30, Unlimited Tax GO (1) Limited Tax GO Total GO Debt Percent Percent Percent Principal Retired Principal Retired Principal Retired 2011 $44,705, % $32,365, % $77,070, % ,255, ,850, ,105, ,715, ,810, ,525, ,205, ,420, ,625, ,910, ,230, ,140, ,805, ,875, ,680, ,465, ,315, ,780, ,085, ,960, ,045, ,420, ,670, ,090, ,460, ,405, ,865, ,515, ,565, ,080, ,405, ,685, ,090, ,775, ,365, ,140, ,090, ,175, ,265, ,635, ,045, ,680, ,870, ,015, ,885, ,110, ,580, ,690, ,365, % 12,170, ,535, ,795, ,795, ,450, ,450, ,140, ,140, ,885, ,885, ,690, ,690, ,535, ,535, ,425, ,425, ,365, % 18,365, % Total $497,790,000 $518,785,000 $1,016,575,000 SOURCE: Finance Department. (1) Does not include the Local Project Municipal Obligations. (Balance of this page intentionally left blank) II-37

136 Table 26 Total Outstanding Long-Term Debt Service Requirement Schedule General Obligation Fiscal Year Ending Unlimited Tax (1) Limited Tax Revenue and Other Bonds (2)(3) June 30, Principal Interest Total Principal Interest Total Principal Interest Swap Offset Total Total General Obligation Revenue and Other Bonds 2011 $44,705,000 $25,102,446 $69,807,446 $32,365,000 $27,784,242 $60,149,242 $143,447,444 $264,447,153 $7,873,637 $415,768,234 $545,724, $42,255,000 $22,971,409 $65,226,409 $33,850,000 $24,841,830 $58,691,830 $145,127,224 $263,554,898 $8,510,304 $417,192,426 $541,110, $41,715,000 $20,863,925 $62,578,925 $41,810,000 $23,272,704 $65,082,704 $147,560,242 $256,287,484 $8,477,487 $412,325,212 $539,986, $38,205,000 $18,744,551 $56,949,551 $43,420,000 $21,262,560 $64,682,560 $148,625,954 $255,106,306 $8,443,110 $412,175,369 $533,807, $35,910,000 $16,809,666 $52,719,666 $33,230,000 $18,235,285 $51,465,285 $153,919,826 $249,818,467 $8,407,174 $412,145,467 $516,330, $32,805,000 $14,981,019 $47,786,019 $34,875,000 $16,591,550 $51,466,550 $152,939,562 $239,511,370 $8,369,592 $400,820,523 $500,073, $34,465,000 $13,286,648 $47,751,648 $13,315,000 $14,863,032 $28,178,032 $158,894,293 $233,106,578 $8,330,406 $400,331,276 $476,260, $35,085,000 $11,545,670 $46,630,670 $13,960,000 $14,197,933 $28,157,933 $165,369,899 $226,598,700 $8,289,616 $400,258,215 $475,046, $34,420,000 $9,758,679 $44,178,679 $14,670,000 $13,500,464 $28,170,464 $171,206,533 $219,903,179 $8,247,109 $399,356,822 $471,705, $35,460,000 $8,010,866 $43,470,866 $15,405,000 $12,767,439 $28,172,439 $176,868,035 $212,239,596 $8,097,742 $397,205,373 $468,848, $36,515,000 $6,211,391 $42,726,391 $16,565,000 $11,997,608 $28,562,608 $182,935,788 $205,840,444 $7,873,637 $396,649,869 $467,938, $23,405,000 $4,371,941 $27,776,941 $15,685,000 $11,180,298 $26,865,298 $190,784,137 $190,263,719 $7,637,572 $388,685,427 $443,327, $20,775,000 $3,173,073 $23,948,073 $16,365,000 $10,430,918 $26,795,918 $199,705,864 $181,564,691 $7,390,045 $388,660,600 $439,404, $17,090,000 $2,117,585 $19,207,585 $17,175,000 $9,641,693 $26,816,693 $207,379,111 $172,519,295 $7,130,592 $387,028,998 $433,053, $9,635,000 $1,249,000 $10,884,000 $18,045,000 $8,773,101 $26,818,101 $217,039,770 $162,518,020 $6,858,696 $386,416,486 $424,118, $4,870,000 $767,250 $5,637,250 $11,015,000 $7,834,375 $18,849,375 $225,870,000 $149,559,661 $6,572,579 $382,002,241 $406,488, $5,110,000 $523,750 $5,633,750 $11,580,000 $7,269,500 $18,849,500 $236,585,000 $137,973,721 $6,272,853 $380,831,574 $405,314, $5,365,000 $268,250 $5,633,250 $12,170,000 $6,675,750 $18,845,750 $245,765,000 $125,822,545 $6,061,854 $377,649,399 $402,128, $12,795,000 $6,051,625 $18,846,625 $251,735,000 $113,724,616 $5,340,662 $370,800,278 $389,646, $13,450,000 $5,395,500 $18,845,500 $259,330,000 $101,650,589 $4,589,984 $365,570,573 $384,416, $14,140,000 $4,705,750 $18,845,750 $257,610,000 $89,238,287 $4,542,752 $351,391,039 $370,236, $14,885,000 $3,961,519 $18,846,519 $249,070,000 $76,516,166 $4,493,404 $330,079,570 $348,926, $15,690,000 $3,158,925 $18,848,925 $283,425,000 $63,819,613 $4,441,940 $351,686,552 $370,535, $16,535,000 $2,313,019 $18,848,019 $296,060,000 $46,521,313 $4,388,360 $346,969,673 $365,817, $17,425,000 $1,421,569 $18,846,569 $290,400,000 $31,989,950 $4,263,160 $326,653,110 $345,499, $18,365,000 $482,081 $18,847,081 $294,455,000 $17,152,750 $2,976,241 $314,583,991 $333,431,072 Total $497,790,000 $180,757,120 $678,547,120 $518,785,000 $288,610,264 $807,395,264 $5,452,108,680 $4,287,249,110 $173,880,509 $9,913,238,298 $11,399,180,681 Source: Finance Department. (1) Does not include the Local Project Municipal Obligations. (2) Includes debt service for the Water and Sewage Systems and for the Detroit Building Authority (Parking System), DDA, LDFA, and Cobo Hall revenue debt. Includes SRF debt calculated at the amount approved and not at the actual amount borrowed. (3) The Water and Sewerage system revenue bond debt service is presented in a manner consistent with the respective bond ordinances. II-38

137 Table 27 Per Capita Debt and Debt Ratios Net Direct Debt Net Direct and Overlapping Debt Per Ratio to Ratio to As of Population Net Amount Capita Net True Cash Per True Cash June 30, Estimate (1) (000) Amount Value (2) Total (000) Capita Value (2) ,352 $1,104,034 1, $2,625,218 2, ,675 1,209,104 1, ,253,998 1, ,849 1,197,915 1, ,655,212 1, ,936 1,001,500 1, ,605,745 1, , ,583 1, ,540,494 2, , , ,332,441 2, ,920 1,016,575 1, ,749,248 3, SOURCES: Finance Department (1) Population estimates are from the U.S. Department of Commerce, Bureau of Census, Population Estimates Program. The 2009 population estimate is the latest available from the U.S. Census Bureau. (2) By law, SEV represents 50% of True Cash Value. True Cash Value used is based on the SEV set on December 31 of the fiscal year which determines property taxes levied in the following year and is referred to as the following year s SEV. See ASSESSED VALUATION AND PROPERTY TAXES. Short-Term Indebtedness Under the provisions of State law, a municipality, by resolution of its governing body and without a vote of its electors, but subject to the prior approval of the Michigan Department of Treasury or an exception therefrom, may borrow money and issue its notes in anticipation of the collection of the taxes and certain other revenues for its current fiscal year or its next succeeding fiscal year. In addition, a municipality, by resolution of its governing body and without a vote of its electors, may borrow money and issue its notes in anticipation of the receipt of payments under the provisions of the State Revenue Sharing Act for its current fiscal year or its next succeeding fiscal year. Tax anticipation notes and revenue sharing anticipation notes issued under this Act are limited tax general obligations of a municipality. The City did not issue short-term debt in fiscal years 2000 through The following table sets forth the tax anticipation notes and revenue sharing anticipation notes issued by the City in fiscal years 2005 through 2010 for cash flow purposes: Table 28 Short-Term Indebtedness Fiscal Year Ended June 30, Tax Anticipation Notes $ 00.0 $ 79.6 $ 83.5 $ 89.7 $ 96.2 $ 35.5 Revenue Sharing Anticipation Notes Total $54.4 $125.2 $129.4 $129.6 $223.6 $ 35.5 II-39

138 Prospective Indebtedness Unlimited and Limited Tax Obligations. The City expects to issue unlimited tax general obligation bonds in future years to finance its continuing capital improvement program. The City currently plans an annual unlimited tax bonding program averaging approximately $50 million, not including approximately $50 million in bonds to fund Department of Transportation projects. See INDEBTEDNESS OF THE CITY AND RELATED ENTITIES Capital Financing Policies and Legal Debt Margin. Revenue Obligations. The City intends to issue revenue bonds periodically to finance improvements to self-supporting systems, including its Water Supply System and its Sewage Disposal System. EMPLOYEE BARGAINING UNITS The City budgeted 13,136 employees (including part-time and seasonal employees) for fiscal year Approximately 10% of these employees are non-union, and the remaining 90% are represented by one of the City s 48 bargaining units. The largest bargaining units are: the American Federation of State, County and Municipal Employees ( AFSCME ); the Detroit Police Officers Association ( DPOA ); the Detroit Fire Fighters Association ( DFFA ); the Teamsters; and the Amalgamated Transit Union ( ATU ). The collective bargaining agreements for AFSCME and the other non-uniformed unions expired on June 30, 2008, and the City has been engaged in negotiations toward successor contracts. Thus far, the City has achieved concessions, including concessions in the area of wages, health care and other economic fringes, with 29 bargaining units, as well as with all of its nonunionized employees. The City s most recent agreement with the DPOA and the Detroit Police Lieutenants and Sergeants Association ( DPLSA ) expired on June 30, The City is currently involved in negotiations with police uniformed personnel and is seeking economic concessions similar to those being bargained with non-uniformed personnel. Until such time that a new agreement has been reached, they will continue to operate in accordance with the provisions of the expired agreement. Historically, the DFFA agreements provide for automatic parity of DFFA with police uniformed personnel with respect to wages and benefits. Accordingly, DFFA members, based on rank, receive the same wages, health care, pension benefits and economic concessions as provided in the DPOA, DPLSA and DPCOA labor agreements. The City and DFFA are currently in bargaining for a successor agreement. The City has no reason to believe it will face any interruption of service from the unionized work force. RETIREMENT SYSTEMS In General The City has two retirement systems. The General Retirement System ( GRS ) covers all employees other than policemen and firemen, who are covered by the Police and Fire Retirement System ( PFRS ). Each system is governed by its own Retirement Board ( GRS Board and PFRS Board, respectively), which invests and administers the system s assets as trust funds solely for the benefit of its participants, retirees and their beneficiaries. The assets of each Retirement System are separate and distinct from assets of the City, are outside the City s control and are not available to pay any obligation or expense of the City. Each Retirement System receives an annual actuarial report from its consulting actuary as of each June 30, providing actuarial valuations of its vested benefits, prior service costs and unfunded actuarial accrued liability ( UAAL ). Each Retirement Board uses those actuarial valuations, together with certain actuarial assumptions, to II-40

139 determine the annual contribution amounts requested from the City to fulfill its constitutional and statutory pension funding obligations. As part of their regular, periodic review of the actuarial assumptions used to administer their respective Retirement Systems, the GRS Board and the PFRS Board may receive recommendations from time to time to increase or decrease the interest rate and to change other actuarial assumptions. The most recent annual actuarial reports available for the Retirement Systems are as of June 30, As of June 30, 2009, the two Systems had combined total net assets held for benefits of approximately $7.36 billion and covered 12,636 active employees and 19,831 retirees and their beneficiaries. According to the actuarial study of Gabriel, Roeder, Smith and Company ( Actuary ) the GRS and PFRS also had estimated combined UAAL of $(552.8) million as of June 30, The Actuary does actuarial studies annually, and the Charter provides that the assumptions used to value the liabilities of both Systems are to be studied in depth every five years. Actuarial assumptions were revised following the in-depth experience study. Both Systems use the entry age normal actuarial cost methodology to determine age and service liabilities, vested liabilities, casualty liabilities and normal cost. As of the June 30, 2009 actuarial reports, the following significant assumptions are utilized in calculating the present value of vested benefits and the actuarially determined prior service cost: (1) the future investment return rate is assumed to be 7.9% per annum for the GRS and 7.8% per annum for the PFRS; (2) the GRS assumes that total active member payroll expense will increase 4% annually, while the PFRS assumes that payroll expense will increase 5.0% annually; and (3) the GRS UAAL and the PFRS UAAL both are amortized over a period of 30 years. Both Systems amortize their respective UAAL to produce contribution amounts (principal and interest) which are a level percentage of payroll contributions. The GRS Board has historically established or changed the amortization period for the funding of GRS UAAL by resolution from time to time. On February 8, 2006, the GRS Board adopted a resolution establishing a 30-year amortization period for funding GRS UAAL. The City Council adopted an ordinance, which became effective on February 8, 2006, establishing a 30-year amortization period for funding PFRS UAAL. In an appeal over whether the City or the PFRS Board has authority to determine the appropriate amortization period for funding PFRS UAAL, the Michigan Court of Appeals ruled in the PFRS Board s favor on February 28, 2006, granting a declaratory judgment that the PFRS Board has the authority under applicable law to set the amortization period for the PFRS. On March 30, 2006, the PFRS Board adopted a resolution establishing a 30-year amortization period for funding PFRS UAAL. On April 11, 2006, the City applied for leave to appeal the Michigan Court of Appeals decision to the Michigan Supreme Court, which was subsequently denied. The mortality table for both Systems is 90% of the 1983 Group Annuity Mortality Table (adopted June 30, 1998 for the PFRS, and June 30, 2003 for the GRS), and the probabilities of retirement and separation from service (including death in service and disability) were revised (based on the in-depth experience study) for the June 30, 2003 valuations for both Systems. Valuation assets recognize investment returns above or below the actuarial assumed rate over a three-year period. In July 2004, GASB issued Statement No. 43, Financial Reporting for Post employment Benefit Plans Other Than Pension Plans and Statement No. 45, Accounting and Financial Reporting by Employers for Post employment Benefits Other Than Pensions. These Statements establish accounting and financial reporting standards for employers that participate in a defined benefit other post employment benefit (OPEB) plan. Specifically, the City will be required to measure and disclose an amount for annual OPEB cost on the accrual basis for health and insurance benefits that will be provided to retired City employees in future years. The City is also required to record a net OPEB obligation which is defined as the cumulative difference between annual OPEB cost and the employer s contributions to a plan, including the OPEB liability or asset at transition, if any. The City implemented Statement No. 43 beginning with the year ended June 30, 2007, and Statement No. 45 beginning with the year ended June 30, For the City, the implementation of Statement No. 45 resulted in a total of $146.5 million in increased expenses and a related liability for the year ended June 30, 2008, adversely impacting the net assets and cumulative surplus/deficit of the government and business-type activities of the City. The implementation of GASB Statement No. 45 increased 2008 expenses and liabilities by $114.1 million and $32.4 million in the governmental activities and business-type activities categories, respectively, and contributed to the decline in net assets and increase in the cumulative deficit of the City. The recorded liability at June 30, 2009 was II-41

140 330.3 million. The actuarial accrued liability for post employment benefits other than pensions for all City employees was estimated to be $5.0 billion at June 30, 2009 and the value of assets was zero resulting in an unfunded actuarial accrued liability of $5.0 billion. The following table sets forth the contributions of the City to the GRS and the PFRS for fiscal years 2005 through Table 29 Annual City Contributions to the Retirement Systems For the Fiscal Year Ended June 30, (1) (2) 2009 GRS $95,876,076 $781,483,426 $84,071,346 $41,444,808 $43,168,448 $42,311,524 PFRS 69,475, ,431,785 78,157,729 57,423,366 41,113,934 61,151,056 (1) The City s increased contributions to the GRS and PFRS in fiscal year 2005 as compared to fiscal year 2004 resulted from its funding nearly all of the existing UAAL of both the GRS and the PFRS on June 2, (2) For the fiscal years ended June 30, 2008, 2009 and 2010 the PFRS System gave a $25 million credit to the City for current year contributions. (Balance of this page intentionally left blank) II-42

141 The following table sets forth the actuarial valuation results for the GRS and the PFRS for the fiscal years 2005 through 2009 actuarial valuations by the City s consulting actuary. Table 30 Summary of Retirement System Actuarial Valuation Results Actuarial Valuation Date - June 30, General Retirement Number of Active Employees 9,820 9,047 8,971 8,823 8,599 Number of Retirees and Beneficiaries 11,396 11,541 11,478 11,388 11,407 Number of Deferred Vested Beneficiaries 1,109 1,109 1,672 1,665 1,682 Accrued Actuarial Liabilities (Millions) $3, $3, $3, $3, $3, Available for Benefits (Millions) 3, , , , , Assets as % of Accrued Actuarial Liabilities 96.3% (1) 98.2% 98.8% 100.9% 92.5% City Contributions (% of Payroll) - Applicable Fiscal Year (1) Normal Cost 9.26% 9.26% 9.29% 10.09% 15.38% (2) -UAAL Amortization Amount 1.8% 1.0% 0.7% (0.5)% 4.54% - Total % of Payroll City Contribution 11.1% 10.2% 9.9% 9.6% 15.38% Police and Fire Retirement System: Number of Active Employees 4,799 4,312 4,212 4,078 4,037 Number of Retirees and Beneficiaries 8,376 8,550 8,498 8,442 8,424 Number of Deferred Vested Beneficiaries Accrued Actuarial Liabilities (Millions) $3, $3, $3, $4, $4, Available for Benefits (Millions) 3, , , , Assets as % of Accrued Actuarial Liabilities 99.4% (1) 104.7% 110.5% 106.0% 93.5% City Contributions (% of Payroll) - Applicable Fiscal Year (1) Normal Cost 25.0% 25.1% 26.7% 26.3% 26.6% -UAAL Amortization Amount 0.5% N/A N/A N/A 7.4% - Total % of Payroll City Contribution 25.5% N/A N/A N/A 33.9% SOURCE: Derived by Finance Department from annual actuarial reports. (1) City contribution percentages calculated and published in each annual actuarial valuation apply to the second following fiscal year. (2) Includes Cobo Hall. Methodology for determining split between Cobo Hall and City has not been finalized. II-43

142 Payment Obligations under Retirement System Service Contracts The City is a party to two Service Contracts, dated May 25, 2005 and June 7, 2006, with the Detroit General Retirement System Service Corporation, and two other Service Contracts, dated May 25, 2005 and June 7, 2006, with the Detroit Police and Fire Retirement System Service Corporation. Those two Service Contracts dated May 25, 2005 are called the 2005 Service Contracts below, and those two Service Contracts dated June 7, 2006 are called the 2006 Service Contracts below. The GRS and the PFRS are not parties to any of the Service Contracts. Pursuant to Ordinance No of the City (the Funding Ordinance ), the City entered into the 2005 Service Contracts as a means to fulfill its State constitutional and statutory obligations to provide funding for an approximately $1.37 billion portion of outstanding unfunded accrued actuarial liabilities (the 2005 Subject UAAL ) of the City s two retirement systems, the GRS and the PFRS. On June 2, 2005, a funding trust created by the two Service Corporations issued and sold Certificates of Participation Series 2005-A and 2005-B ( Series A COPs and Series 2005-B COPs, respectively, and collectively 2005 COPs ), evidencing undivided proportionate interests in the rights to receive certain payments ( 2005 Scheduled Payments and 2005 Service Charges, and collectively 2005 COP Service Payments ) to be made by the City under the 2005 Service Contracts. A portion of the proceeds of the 2005 COPs was irrevocably paid to the GRS and the PFRS, fully funding the 2005 Subject UAAL on June 2, The periods for payment of the City s scheduled 2005 COP Service Payments under the 2005 Service Contracts were limited to 13 and 20 years in regard to the PFRS and GRS, respectively, the amortization periods then in effect for PFRS UAAL and GRS UAAL. Pursuant to the Funding Ordinance and an authorizing resolution of the City Council adopted on April 26, 2006, the City entered into the 2006 Service Contracts, as anticipated and authorized in the Funding Ordinance, as a means of enabling the City to utilize a now permitted longer payment period for the obligations it incurred to fulfill its constitutional and statutory obligations to provide such funding for the 2005 Subject UAAL. A new funding trust created by the two Service Corporations issued and sold Certificates of Participation Series 2006-A and 2006-B ( Series 2006-A Certificates and Series 2006-B Certificates, respectively, and collectively 2006 Certificates and collectively with the 2005 COPs, the COPs ), evidencing undivided proportionate interests in the rights to receive certain payments ( 2006 Scheduled Payments and 2006 Service Charges, and collectively 2006 Certificate Service Payments ) to be made by the City under the 2006 Service Contracts. A portion of the proceeds of the 2006 Certificates was used to optionally redeem certain outstanding Series 2005-A COPs and to purchase and cancel certain outstanding Series 2005-B COPs, thereby extinguishing the City s obligations to pay the 2005 COP Service Payments related to the 2005 COPs thus redeemed or purchased and canceled. The Series 2006 Certificates were issued to provide moneys to fund the optional redemption of $104,055,000 aggregate principal amount of Series 2005-A COPs and the purchase and cancellation of $800,000,000 aggregate principal amount of Series 2005-B COPs. The 2005 COPs and the 2006 Certificates are wholly independent of each other. The City s contractual payment obligations underlying the 2006 Certificates are totally separate and distinct from its contractual payment obligations underlying the 2005 COPs. Holders of 2006 Certificates will have no rights or interests in the City s payment obligations under the 2005 Service Contracts, and holders of 2005 COPs will have no rights or interests in the City s payment obligations under the 2006 Service Contracts. The following table sets forth the combined annual amounts of 2005 Scheduled Payments and 2005 Service Charges (i.e., 2005 COP Service Payments) that the City will be obligated to pay under the 2005 Service Contracts, and the combined annual amounts of 2006 Scheduled Payments and 2006 Service Charges (i.e., 2006 Certificate Service Payments) that the City is obligated to pay under the 2006 Service Contracts, and the optional redemption of the Series 2005-A COPs to be redeemed from proceeds of the 2006 Certificates and the purchase and cancellation of the tendered Series 2005-B COPs to be purchased from proceeds of the 2006 Certificates. II-44

143 Payments made by the City under the service contracts are not debt of the City but are contractual obligations and are payable in addition to the debt discussed under INDEBTEDNESS OF THE CITY AND RELATED ENTITIES. Table COP Service Payments and 2006 Certificate Service Payments Twelve months ending June 15, 2005 COP Service Payments 2006 COP Service Payments (1) Total 2011 $36,512,526 $59,597,480 $ 96,110, ,950,067 59,633, ,583, ,428,624 59,633, ,061, ,928,206 59,633, ,561, ,205,504 59,633, ,838, ,345,528 59,633, ,978, ,582,125 59,633, ,215, ,915,480 59,633, ,548, ,501,634 74,262, ,763, ,237,920 72,512, ,749, ,053,745 70,682, ,735, ,931,865 68,790, ,722, ,894,682 66,816, ,711, ,938,837 64,762, ,701, ,065,475 62,625, ,691, ,684, ,684, ,620, ,620, ,552, ,552, ,480, ,480, ,407, ,407, ,331, ,331, ,251, ,251, ,164, ,164, ,079, ,079, ,009, ,009,749 Totals: $770,492,218 $2,151,063,049 $2,921,555,267 (1) Series 2006B COP s interest calculated at fixed swap rates. At the end of fiscal year 2010, the City had eight (8) interest rate exchange agreements (the Swap Agreements ) in effect. These Swap Agreements were issued in conjunction with the issuance of the COPs and were subject to termination as a result of recent credit rating downgrades of the City. Specifically, the Swap Agreements provided that a termination event would occur if the credit ratings on the COPs were withdrawn, suspended or downgraded below Baa3 (or equivalent) and if the bond insurers ratings fell below an A3 (or equivalent rating). On January 8, 2009, the City received formal notice from the counterparty to four of the eight Swap Agreements stating that an event had occurred, which, if not cured by the City, would constitute an additional termination event. On January , the City also received formal notice from the counterparty to the four II-45

144 remaining Swap Agreements stating that the applicable bond insurers had been downgraded below the thresholds set forth in the Swap Agreements. In June 2009, the City avoided termination payments by amending the Swap Agreements with the counterparties to include a collateral agreement. The collateral agreement requires the City to provide for the direct deposit of daily casino tax revenues from the casinos to a trustee to ensure payment of the quarterly interest payments due under the Swap Agreements. The collateral agreement also provides for an increase of approximately 1.5% or 10 basis points in such payments beginning in fiscal year 2011 and further provides that the counterparties may terminate the Swap Agreements if certain increased coverage levels of the wagering taxes over the required quarterly interest payments are not met or if the debt ratings of the COPs are withdrawn, suspended or downgraded below Ba3 (or equivalent). Should such termination events occur in connection with these Swap Agreements, and not be cured, there presently exists a significant risk in connection with the City s ability to meet the cash demands under the terms of the amended Swap Agreements. The following table sets forth a summary of the outstanding swaps relating to the Series 2006 Certificates. Table 32 Summary of Outstanding Swaps Related to Certificates of Participation (Table follows on next page) II-46

145 Related Bond Series Taxable Certificates of Participation Series B (Floating Rate) (General Retirement System-FGIC) Taxable Certificates of Participation Series 2006-B (Floating Rate) (Police and Fire Retirement System- FGIC) City of Detroit Summary of Outstanding Swaps Related to Certificates of Participation Taxable Certificates of Participation Series 2006-B (Floating Rate) (Police and Fire Retirement System- Syncora, Formerly XLCA) Taxable Certificates of Participation Series 2006-B (Floating Rate) (General Retirement System- Syncora, Formerly XLCA) Taxable Certificates of Participation Series B (Floating Rate) (General Retirement System-FGIC) Taxable Certificates of Participation Series B (Floating Rate) (Police and Fire Retirement System-FGIC) Taxable Certificates of Participation Series 2006-B (Floating Rate) (Police and Fire Retirement System- Syncora, Formerly XLCA) Taxable Certificates of Participation Series 2006-B (Floating Rate) (General Retirement System- Syncora, Formerly XLCA) Original Notional Amount $96,621,000 $153,801,500 $104,325,500 $45,252,000 $96,621,000 $153,801,500 $104,325,500 $45,252,000 Current Notional Amount $96,621,000 $153,801,500 $104,325,500 $45,252,000 $96,621,000 $153,801,500 $104,325,500 $45,252,000 Termination Date (s) June 15, 2034 June 15, 2034 June 15, 2029 June 15, 2029 June 15, 2034 June 15, 2034 June 15, 2029 June 15, 2029 Termination Provisions The City can terminate with five day written notice. The City can terminate with five day written notice. The City can terminate with five day written notice. The City can terminate with five day written notice. The City can terminate with five day written notice. The City can terminate with five day written notice. The City can terminate with five day written notice. The City can terminate with five day written notice. Termination Values (1) ($36,525,393) ($58,198,382) ($33,434,491) ($15,389,868) See Comparable SBS Swap See Comparable SBS Swap See Comparable SBS Swap See Comparable SBS Swap Type of Swap Floating to Fixed Floating to Fixed Floating to Fixed Floating to Fixed Floating to Fixed Floating to Fixed Floating to Fixed Floating to Fixed Rate Paid By 3 Month LIBOR + 34 bps 3 Month LIBOR + 34 bps 3 Month LIBOR + 30 bps 3 Month LIBOR + 30 bps 3 Month LIBOR + 34 bps 3 Month LIBOR + 34 bps 3 Month LIBOR + 30 bps 3 Month LIBOR + 30 bps Counterparty (Cost of Funds) (Cost of Funds) (Cost of Funds) (Cost of Funds) (Cost of Funds) (Cost of Funds) (Cost of Funds) (Cost of Funds) Rate Paid By City %, %, %, % %, %, %, % %, %, %, % %, %, %, % %, %, %, % %, %, %, % %, %, %, % %, %, %, % SBS Financial Products Company, LLC (Merrill Lynch as CSP) SBS Financial Products Company, LLC (Merrill Lynch as CSP) SBS Financial Products Company, LLC (Merrill Lynch as CSP) SBS Financial Products Company, LLC (Merrill Lynch as CSP) UBS AG UBS AG UBS AG UBS AG Counterparty Counterparty Rating A2/A/A+ (CSP Rating) A2/A/A+ (CSP Rating) A2/A/A+ (CSP Rating) A2/A/A+ (CSP Rating) Aa3/A+/A+ Aa3/A+/A+ Aa3/A+/A+ Aa3/A+/A+ Swap Insurer FGIC FGIC Syncora (Formerly XLCA) Syncora (Formerly XLCA) FGIC FGIC Syncora (Formerly XLCA) Syncora (Formerly XLCA) Counterparty Bond Rating Downgrade Event Bond Rating Downgrade Event Bond Rating Downgrade Remedies Counterparty senior unsecured rating is withdrawn, suspended or falls below Baa3/BBB- (1 of 2). Insurer < (A-/A3) (1 of 2) and City's rating is suspended or below (Baa3/BBB-) (1 of 2) or Insurer < (Aaa/AAA) (1 of 2) and fails to pay a claim greater than $100,000,000. City must provide substitute credit support provider acceptable to Counterparty within 30 days. Counterparty senior unsecured rating is withdrawn, suspended or falls below Baa3/BBB- (1 of 2). Insurer < (A-/A3) (1 of 2) and City's rating is suspended or below (Baa3/BBB-) (1 of 2) or Insurer < (Aaa/AAA) (1 of 2) and fails to pay a claim greater than $100,000,000. City must provide substitute credit support provider acceptable to Counterparty within 30 days. Counterparty senior unsecured rating is withdrawn, suspended or falls below Baa3/BBB- (1 of 2). Insurer < (A-/A3) (1 of 2) and City's rating is suspended or below (Baa3/BBB-) (1 of 2) or Insurer < (Aaa/AAA) (1 of 2) and fails to pay a claim greater than $100,000,000. City must provide substitute credit support provider acceptable to Counterparty within 30 days. Counterparty senior unsecured rating is withdrawn, suspended or falls below Baa3/BBB- (1 of 2). Insurer < (A-/A3) (1 of 2) and City's rating is suspended or below (Baa3/BBB-) (1 of 2) or Insurer < (Aaa/AAA) (1 of 2) and fails to pay a claim greater than $100,000,000. City must provide substitute credit support provider acceptable to Counterparty within 30 days. Counterparty senior unsecured rating is withdrawn, suspended or falls below Baa3/BBB- (1 of 2). Insurer < (A-/A3) (1 of 2) and City's rating is suspended or below (Baa3/BBB-) (1 of 2) or Insurer < (Aaa/AAA) (1 of 2) and fails to pay a claim greater than $100,000,000. City must provide substitute credit support provider acceptable to Counterparty within 30 days. Counterparty senior unsecured rating is withdrawn, suspended or falls below Baa3/BBB- (1 of 2). Insurer < (A-/A3) (1 of 2) and City's rating is suspended or below (Baa3/BBB-) (1 of 2) or Insurer < (Aaa/AAA) (1 of 2) and fails to pay a claim greater than $100,000,000. City must provide substitute credit support provider acceptable to Counterparty within 30 days. Counterparty senior unsecured rating is withdrawn, suspended or falls below Baa3/BBB- (1 of 2). Insurer < (A-/A3) (1 of 2) and City's rating is suspended or below (Baa3/BBB-) (1 of 2) or Insurer < (Aaa/AAA) (1 of 2) and fails to pay a claim greater than $100,000,000. City must provide substitute credit support provider acceptable to Counterparty within 30 days. Counterparty senior unsecured rating is withdrawn, suspended or falls below Baa3/BBB- (1 of 2). Insurer < (A-/A3) (1 of 2) and City's rating is suspended or below (Baa3/BBB-) (1 of 2) or Insurer < (Aaa/AAA) (1 of 2) and fails to pay a claim greater than $100,000,000. City must provide substitute credit support provider acceptable to Counterparty within 30 days. Source of Payment General Fund Revenues General Fund Revenues General Fund Revenues General Fund Revenues General Fund Revenues General Fund Revenues General Fund Revenues General Fund Revenues (1) Estimated values are from City's perspective. A negative value would have required a payment by the City if swap had been terminated at mid on June 30, Swap values were provided by each respective counterparty. UBS AG no longer provides these values, however, each UBS swap is identical to one of the SBS Financial swaps. II-47

146 LITIGATION Dallus Tyus v City of Detroit. A jury returned a verdict in the amount of $13,848, on December 18, 2008 in a personal injury lawsuit arising out of an automobile accident in which an elevenyear-old child was injured when he was struck by a vehicle driven by an evidence technician on Six Mile Road. The plaintiff is asking for an additional $400, in interest and attorney fees. The case is currently on appeal and pending appeal settlement negotiations continued. As a result of these negotiations, on October 28, 2010, the Detroit City Council approved a settlement in the amount of $6 million, conditioned on payment prior to the end of Laurence Wolf v City of Detroit, Michigan Court of Appeals, Case No This is a putative class action lawsuit filed as an original action in the Court of Appeals. The case arises from the City s implementation on July 1, 2007 of an annual fee for inspection of those parcels of real property which do not use City solid waste disposal service. The inspection serves to ensure that such properties have an annual contract for trash collection with a licensed waste hauler and are complying with other provisions of the City s Solid Waste Code. Plaintiff seeks to certify a class comprised of the approximately 16,000 property owners who paid the fee. Plaintiff contends that the fee is a tax and that it, therefore, violates the Headlee Amendment, 1963 Mich Const. Art. 9, Sec 31. Plaintiff seeks an order that all amounts collected be refunded. The fee charged for the 2008 fiscal year was approximately $4.3 million and a similar amount was charged for the 2009 fiscal year. For the 2010 fiscal year the fee was reduced to a flat fee of $100 for anticipated fee revenue of approximately $1.8 million. The City presented to the Court of Appeals documents, testimony, and expert opinion to support its contention that the charge at issue is a lawful user fee under the inquiry established by case law. If plaintiff prevails in the case the City will be required to refund all fees collected and ordered to pay plaintiff's attorney's fees and costs. By a published opinion dated January 21, 2010, the Court of Appeals concluded that the fee was a valid regulatory fee and not a disguised tax. Based upon that ruling, the plaintiff's motion for class certification was denied as moot. Plaintiff filed an application for leave to appeal to the Michigan Supreme Court and on September 29, 2010 this application was granted. The City cannot predict the outcome of the Supreme Court s consideration of this case. In June of 2008, while the Wolf case was pending, plaintiff s counsel filed a duplicate class action complaint, Riviera Grand Properties LLC v City of Detroit, COA Case No , which seeks the same relief as Wolf for the same class of persons and for the same reasons. On October 23, 2008, the Court stayed all proceedings in this second action pending its decision in the Wolf case. The Riviera case does not expose the City to liability beyond that which may be ordered in Wolf. Other Litigation The City is involved in numerous other lawsuits related to its ongoing operations. These lawsuits arise primarily out of personal injuries or property damage, or assert breach of contract claims. While it is impossible to predict the outcome of these suits and claims, the Law Department believes, based on its review, that the pending claims, other than those summarized above, are such as may be fairly characterized as being in the ordinary course of business for a large municipality and further believes that the resolution of these matters will result in costs to the City similar to those incurred during the last five years. II-48

147 CERTAIN ECONOMIC AND DEMOGRAPHIC INFORMATION General Detroit is located in Southeastern Michigan and is the nation s 11th largest city. It is the central city of a metropolitan area that has a population of over four million people. Detroit is the largest city in Michigan and comprises almost one-half of Wayne County s population. Established in 1701 and incorporated in 1815, Detroit encompasses an area of 138 square miles. Like many other older, major cities in the Northeast, Detroit has experienced a significant decline in population since 1950, and an erosion of its economic base. Since the mid- 1970s, the City and private interests have made substantial investments which have led to additional economic diversification and development during the last several years. The City is a major manufacturing center for the United States, and a regional center of finance, commerce and tourism. The City is located in a regional economy that, although diversifying, remains susceptible to swings in the national economy due to its concentration of employment in the durable goods industries, particularly the automobile industry. Economically, Detroit relates primarily to the Tri-County area of Wayne, Oakland and Macomb counties. Officially, however, it is a part of a Primary Metropolitan Statistical Area (the Detroit PMSA ) that includes the Tri-County area, plus Monroe, Livingston, Lapeer and St. Clair counties. Population The City s population count (established by U.S. Census) determines its legislative apportionment in Congress and in the State Legislature, and has a direct impact on federal and State programs allocated in whole or in part on a per capita basis. While population growth in the Detroit PMSA significantly outpaced the national rate in the 1950s, the region s total population expanded more slowly in the 1960s and contracted (reflecting a significant net out-migration) in the 1970s and 1980s. Net population losses in the region were primarily concentrated in the City. The remainder of the Detroit PMSA continued to experience population growth throughout the 1970s and 1980s. Originally consisting of the Tri-County Area, the region considered the metropolitan area was expanded geographically for U.S. statistical purposes, as population and industry dispersed, to add Lapeer, Livingston and St. Clair counties in 1973 and Monroe County. in Between 1950 and 2008, the City experienced substantial changes in the characteristics of its population, with differing migration patterns resulting in a net decline of 51% of its total population during the 58-year period. Detroit s share of total State and metropolitan area population also fell significantly. Table 33 Population Trends, City of Detroit Wayne County Detroit PMSA (1) U.S. Year Population % Change Population % Change Population % Change % Change ,849,568-2,435,235-3,169, ,670, % 2,666, % 4,050, % 18.50% ,511, ,666, ,549, ,203, ,337, ,488, ,027, ,111, ,382, , ,061, ,441, * 910, ,925, ,373, SOURCE: U.S. Department of Commerce, Bureau of the Census. NOTE: N.A. = Not Available. *Estimated. (1) Consists of Lapeer, Livingston, Macomb, Monroe, Oakland, St. Clair and Wayne Counties in Michigan. II-49

148 Table 34 Distribution of Population by Age, 2000 Age in Years Population % of Total Under 5 76, % 5 to 9 93, to 14 83, to 19 68, to 24 65, to , to , to , to 59 38, to 64 29, to 74 52, to 84 35, years and over 10, Total 951, % SOURCE: U.S. Department of Commerce, Bureau of the Census. Table 35 Households by Type, Type of Household No. of % of No. of % of No. of % of No. of Households Total Households Total Households Total Households (number of households in thousands) % of Total Family Married-couple Single male head Single female head Non-family Living alone Total households N.A % N.A % % % % % % % SOURCE: U.S. Department of Commerce, Bureau of the Census. NOTE: N.A. = Not Available. Family households consist of two or more related persons. Data may not add up to totals due to rounding. II-50

149 Employment and Economic Base The economy of the City is influenced by trends in the durable goods industry and in particular the domestic automobile industry. Over the past two decades, all three major automotive companies have, at times, experienced financial problems adversely affecting the economy of the Detroit area. General Motors Company and Chrysler Group LLC represent approximately 6.9% of the City s Taxable Valuation and are major employers in the City. Among the complex factors affecting the automotive industry are: national consumer spending patterns (related, among other things, to consumer confidence and perception, disposable income, credit availability and interest rates); the value of the U.S. dollar relative to foreign currencies; foreign trade restrictions; federal and state regulatory policies with respect to auto imports, safety, fuel efficiency and pollution emissions; the availability and price of gasoline; and organizational demand for fleet or specialized vehicles. The following table sets forth certain information on total employment by industry group for the Detroit- Warren-Livonia MSA and the U.S. The region has in the past consistently maintained a greater percentage of persons employed in the manufacturing sector of the economy than the nation as a whole, which reflected the area s dependence on the automotive industry. (Balance of this page intentionally left blank) II-51

150 Table 36 Annual Average Wage and Salary Employment by Place of Work (Non-Agricultural) Industry Group Detroit - Warren - Livonia MSA (000s) % (000s) % (000s) % (000s) % (000s) % Natural Resources, Mining & Const Manufacturing Trade, Transportation & Utilities Information Professional and Business Services Leisure & Hospitality Educational and Health Services Financial Activities Other Services Government Totals 1, , , , Industry Group U.S (000s) % (000s) % (000s) % (000s) % (000s) % Natural Resources & Mining , Construction 7, , , , , Manufacturing 14, , , , , Trade, Transportation & Utilities 25, , , , , Information 3, , , , , Financial Activities 8, , , , , Professional and Business Services 16, , , , , Educational & Health Services 17, , , , , Leisure & Hospitality 12, , , , , Other Services 5, , , , , Government 21, , , , , Totals 133, , , , , SOURCE: Michigan Department of Energy, Labor & Economic Growth, Office of Labor Market Information for Detroit-Warren-Livonia MSA; U.S. Department of Labor, Bureau of Labor Statistics for U.S. Notes: Total may not add due to rounding. II-52

151 The following table shows the annual average unemployment rates for the City, the Detroit-Warren- Livonia CBSA and the U.S. from 2005 to July Table 37 Civilian Unemployment Rates, Spanning 2005 to July 2010 City of Detroit Detroit-Warren-Livonia CBSA U.S % 7.2% 4.9% % 7.2% 4.6% % 7.7% 4.6% % 8.7% 5.8% % 15.1% 9.3% July 2010 (1) 25.5% 15.2% 9.7% SOURCE: Michigan Department of Energy, Labor & Economic Growth; U.S. Department of Labor, Bureau of Labor Statistics. (1) Not seasonally adjusted. The following table shows a breakdown of manufacturing wage and salary employment by type for the Detroit-Warren-Livonia MSA for calendar years 2005 through Table 38 Manufacturing Wage and Salary Employment Industry Group: (In Thousands) Durable goods industries Nondurable goods industries Total manufacturing employment SOURCE: Michigan Department of Energy, Labor & Economic Growth, Office of Labor Market Information. (Balance of this page intentionally left blank) II-53

152 Construction The following data shows trends in construction permits in the City. Table 39 Trends in Construction Permits, 2005 to 2009 Value (in millions) New Construction Alterations/Additions Non- Non- Residential Residential Residential Residential $81.4 $243.4 $ 92.2 $ $55.8 $156.8 $ 99.3 $ $30.8 $464.4 $104.3 $1, $24.1 $ 48.2 $ 68.8 $ $10.4 $ 24.3 $ 76.2 $ SOURCE: City of Detroit Department of Buildings and Safety Engineering. NOTE: Residential includes single and multiple family dwellings. Housing Characteristics Trends in the housing stock of the City have a direct impact on the City s levy and collection of ad valorem property taxes, because residential real property accounts for more than two-thirds of the valuation of all real property in the City (see ASSESSED VALUATION AND PROPERTY TAXES - Valuation by Type of Property above). The number of housing units in the City fell 29% between 1970 and Net losses have been concentrated in owner-occupied units, 16% of which were lost to the housing market in the 1970s, 21% of which were lost in the 1980s and 7% lost in the 1990s. Owner occupancy rates in the City declined from 60% in 1970 to 49% in Since 1990, the City has experienced a significant increase in the construction of new housing units. See CERTAIN ECONOMIC AND DEMOGRAPHIC INFORMATION - Major Projects and Developments. Table 40 Housing Inventory, 1970 to 2000 Occupancy Status (in thousands) Owner-occupied Renter-occupied Vacant Total housing units SOURCE: U.S. Department of Commerce, Bureau of the Census. NOTE: Data may not add up due to independent recording. Excludes seasonal housing. II-54

153 Table 41 Housing Characteristics, 2000 City of Detroit Wayne County Detroit PMSA United States Percent owner-occupied % 66.6% 72.4% 66.2% Rental vacancy % 7.2% 6.4% 6.8% Median value of owner-occupied units... $ 63,600 $ 96,200 $ 127,800 $119,600 Median contract rent... $ 486 $ 428 $ 502 $ 602 Persons per household SOURCE: U.S. Department of Commerce, Bureau of Census. NOTE: Value of Owner-Occupied Units is a self-reported estimate of the then-current market value and therefore is not directly comparable to the SEV. Largest Employers Below is a listing of the largest principal employers by company and by number of employees actually or estimated to be employed full-time within the cities of Detroit, Hamtramck and Highland Park as of January 2010, unless otherwise noted. Number of full-time employees may include full-time equivalents. Table 42 Largest Principal Employers January 2010 Employees (1) Detroit Public Schools 13,039 City of Detroit 12,472 Detroit Medical Center 10,502 Henry Ford Health System 8,289 U.S. Government 6,880 (2) Wayne State University 5,152 State of Michigan 4,740 (3) Chrysler Group LLC 4,150 (3) U.S. Postal Service 3,987 St. John Health System 3,884 General Motors Company 3,740 DTE Energy Co. 3,668 Wayne County Government 3,409 MGM Grand Detroit Casino & Hotel 3,000 Blue Cross Blue Shield of Michigan/Blue Care Network 2,457 MotorCity Casino 2,087 Compuware Corp. 1,940 Greektown Casino-Hotel 1,793 Comerica Bank 1,552 Deloitte L.L.P. 903 (1) SOURCE: Crain s Detroit Business, February 1, 2010 (2) As of September 2009 (3) Crain s Detroit Business estimate II-55

154 Port of Detroit The Detroit/Wayne County Port Authority ( DWCPA ) is a public agency responsible for promoting trade and freight transportation through the Port of Detroit (the Port ), which provides direct water service to world markets via the Great Lakes/St. Lawrence Seaway. The Port has five privately owned and operated full-service terminals, a liquid bulk terminal and bulk facility, and a single dock facility with capacity for 14 ocean-going vessels. In addition, more than 30 industries located on the Detroit and Rouge Rivers have their own port facilities. A variety of ship repair services are available. The Detroit area, which is the largest foreign trade zone in the United States, provides financial advantages related to federal taxes and customs duties at subzones throughout the City and region. The Port is a principal port of entry for trade with Canada via bridge, vehicular tunnel, rail tunnel and barge service. Steel and scrap steel are the principal export products of the Port, handled for the three local steel mills. General cargo constitutes a minor portion of total tonnage due to the lack of regularly scheduled shipping service. See CERTAIN ECONOMIC AND DEMOGRAPHIC INFORMATION - Major Projects and Developments. Transportation Network Five major rail lines provide direct service to the Detroit area by such railroad companies as Conrail, Norfolk Southern, Grand Trunk Western, Canadian Pacific and CSX Transportation. Major cargoes handled by the rail lines in the Detroit area include automobiles, auto parts, steel, chemicals and food products. Air transportation service is provided to the City at the Detroit City Airport, with general aviation, cargo and scheduled passenger services, and at the Detroit Metropolitan Wayne County Airport, the nation s 12th largest international airport, the [second] largest hub for Delta Air Lines, Inc. and the second largest hub for ultra-low-cost carrier Spirit Airlines. Delta Air Lines is the world s largest carrier. Together with fifteen additional passenger airlines - including six foreign flag carriers - Detroit s airlines and their regional partners offer service to more than [160] non-stop destinations around the globe. This area s extensive toll-free highway system, which includes the I-94, 1-75, 1-96 and interstate highways and Canadian 401, provides one-day access, based on a 500-mile day, to 48% (by population) of the U.S. market and to the Province of Ontario, Canada. Major Projects and Developments A number of major developments have been completed during the past three years, and others are in various stages of construction in the City. Most of the projects represent joint efforts between the public and private sectors. Below are brief descriptions of the major developments, including announced financing sources. Woodward Place at Brush Park Phase I resulted in the construction of 100 homes. Phase II construction will continue over the next three years, ultimately adding up to 700 new housing units. The project also involves the renovation of several historic homes for residential use. The total cost of the project is $75 million. Woodbridge Estates The $98 million project includes 247 rental units, 101 new homes, town homes and duplex condominiums and 297 enhanced service units on a former public site. In addition, the project will include retail space and a community center. The project is being funded with both public and private funds. II-56

155 St. John Hospital and Medical Center The health care provider built a $141 million hospital tower and a $15 million emergency department at its eastside location in the City. Detroit-Wayne County Port Authority Construction continues on Phase I of a 1.3 acre public dock and 21,000 sq ft terminal near the Detroit- Windsor tunnel. A $7.1 million grant from federal stimulus funding will be used for construction an offshore wharf to serve cruise ships, ferries and other deep-draft vessels in the Detroit River. Federal and State grants will provide $15 million for the project. The Port of Detroit is considered a Tier II port by the U.S. Department of Homeland Security, guaranteeing annual funding by the federal government. Book-Cadillac Hotel A $180 million restoration of the Book-Cadillac Hotel into a mix of hotel rooms, condominiums and retail space is complete. The development includes a four-star Westin Hotel featuring 455 rooms, 67 upper floor condominiums, 3 ballrooms, 3 restaurants and a connected parking garage. Fort Shelby Hotel The historic Fort Shelby Hotel was renovated and reopened as the DoubleTree Guest Suites Fort Shelby/Detroit Downtown December The $82 million rehabilitation project has 203 guest suites and upper floors consisting of 56 apartments. The hotel features a restaurant and a 21,000 square foot conference center with two ballrooms and 17 breakout rooms. Gardenview Estates Construction continues on a new $230 million redevelopment on the site of a 139-acre former public housing complex. Approximately half of the rentals and homes will be reserved for low-income families and the remainder will be offered at market-rates. The development plan also includes small retail stores, and could take up to 5 years to complete. Additional phases include plans for 2,000-2,500 additional public housing units. A $6 million, 35,000 square foot NFL Education Town and Boys and Girls Club was opened on the site to provide recreational and educational opportunities. Oakman-Woodrow Wilson Development This project includes the phased development of the industrial and commercial strip along Oakman Boulevard into a mix of affordable housing, retail and park space. The first phase, called Oakman Manor, is a 6.2 million, 55-unit senior apartment building and was developed in partnership with a faith-based organization. East English Village This $18 million project has been completed and contains 77 condominiums located on the east side of Detroit, north of Belle Isle, an island park. Park Shelton The historic Park Shelton tower has been converted into residential condominiums. The $15 million renovation of the 12-story, 220-unit building included the construction of an adjacent four-level parking garage replacing a three-story facility. II-57

156 Transit Center A $18.3 million 24-hour transit center, consisting of a 25,700- square-foot building housing cashier, retail, DDOT police and passenger seating. The structure, an island covered by a tensile structure on 2.4 acres was financed through federal and state grants. Wayne State University Capital Expansion Projects include: a $27.3 million Marvin Danto Engineering Development Center; a three-story structure that adjoins the existing College of Engineering Building, including an expanded clean room that local companies will use for R&D testing; a $30 million 34,000 square foot, two-story Medical Education Commons; and a $7 million law school classroom building. South University Village A private developer has constructed a $20 million residential and retail establishment. The new 155,000 square foot, five-story mixed-use building consists of first floor commercial and four levels of marketrate residential apartment rental units. Adjacent to the building, Wayne State University has built a four-level $11.0 million parking garage to serve the needs of the general public, the residential/retail complex and the university. Biodiesel Industries A 13,000 square foot biodiesel fuel production facility has been built in partnership with NextEnergy. This is the company s sixth U.S. plant and will be capable of producing 10 million gallons of biodiesel fuel per year. The building is also used for research, public outreach and education. Greektown Casino Greektown Casino has constructed a $10 million 650-car parking garage, and recently constructed a $200 million complex including a 400 room hotel, 3,500-space attached garage, and 1,500 seat theater, as well as 25,000 square feet of convention space, a spa and 25,000 square feet of gaming space. On May 29, 2008, Greektown Holdings, together with its direct and indirect subsidiaries and certain affiliates, filed voluntary petitions to reorganize their businesses under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Michigan. Pursuant to a plan of reorganization approved by the Bankruptcy Court, Greektown Superholdings was incorporated under the laws of the State of Delaware on March 17, Greektown emerged from Chapter 11 bankruptcy on June 30, 2010, and as of such date, each of Greektown Superholdings and its wholly-owned subsidiary, Greektown Newco Sub, Inc. (the Greektown Sub ), hold 50% of the outstanding membership interests of Greektown Holdings. Greektown Superholdings is a holding company that owns 50% of the issued and outstanding membership interests of Greektown Holdings and 100% of the issued and outstanding stock of Greektown Sub. Through its direct and indirect ownership of Greektown LLC, Greektown Superholdings owns and operates Greektown Casino. On June 28, 2010, the Michigan Gaming Control Board approved the transfer of interest in the gaming license of Greektown Casino to Greektown Superholdings. MGM Grand Detroit Casino MGM Grand Detroit Casino has constructed a $765 million complex on a 25-acre site near downtown Detroit. The complex includes a 16-story, 400 room hotel, convention space, 100,000 square foot casino complex, an entertainment venue and 5,000 indoor parking spaces. The first three floors of the 17 floor complex include restaurants, retail space and meeting rooms. II-58

157 Motor City Casino A permanent casino hotel with 400 rooms and expanded gaming areas has been constructed on property that annexes the former temporary casino at Grand River Avenue and the Lodge Freeway. In addition to the hotel, the casino has been expanded to include up to 100,000 square feet of gaming and convention space, an additional 4,800-space parking structure, 1,800-seat theater, coffee shop and ballroom. College for Creative Studies A $145 million expansion launched the redevelopment of the 760,000 square foot, 11-story Argonaut Building, designed by Albert Kahn in 1927, as a second campus and the new home for its design programs, community outreach activities and research and professional activities in the design fields. In addition to a full design curriculum, graduate students will take business courses through a partnership with the University of Michigan s Ross School of Business. Also included is a 300-bed student housing, as well as charter middle and high schools. The complex opened in the fall of 2009 and is slated to host one of two creative business accelerators. Hubbard Communities The $8.2 million 2nd phase development, consists of new 44 single-family townhouses and homes in Southwest Detroit, all of which are completed and fully leased. The initial phase encompassed the rehabilitation of 13 apartment buildings by a non-profit organization for a total investment of over $40 million. Piquette Square The four-story brick building is a $23 million project that is supported by federal, state and local government agencies. The 106,000-square-foot mixed-use building consists of common areas, commercial space and 150-unit housing targeted to veterans. Detroit Medical Center $500 million in total improvements are planned over a 4-year period, due to Vanguard Health Systems recent purchase of the Detroit Medical Center. The first phase consists of $24.6 million construction of a new pediatric specialty center at Children's Hospital. II-59

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159 APPENDIX III AGREEMENT TO DEPOSIT DISTRIBUTABLE STATE AID

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161 AGREEMENT TO DEPOSIT DISTRIBUTABLE STATE AID WITH THE MASTER TRUSTEE FOR PAYMENT OF $100,000,000 CITY OF DETROIT DISTRIBUTABLE STATE AID SECOND LIEN BONDS (UNLIMITED TAX GENERAL OBLIGATION), SERIES 2010(A) (TAXABLE RECOVERY ZONE ECONOMIC DEVELOPMENT BONDS DIRECT PAYMENT) This Agreement, dated as of December 1, 2010 (the Agreement ) among the City of Detroit, County of Wayne, Michigan (the City ), the Michigan Finance Authority, as successor to the Michigan Municipal Bond Authority (the Authority ), the State Treasurer of the State of Michigan (the State Treasurer ) and U.S. Bank National Association, Detroit, Michigan, and its successors in trust and assignees, as Master Trustee (the Trustee ). WHEREAS, on March 18, 2010, pursuant to Act 80, Public Acts of Michigan, 1981, as amended ( Act 80 ), the City issued its $249,790,000 Distributable State Aid General Obligation Limited Tax Bonds, Series 2010 (the DSA Bonds ) secured by and payable from money received or to be received by the City derived from the imposition of taxes by the State of Michigan (the State ) and returned or to be returned to the City as provided by law under the State Revenue Sharing Act, as hereinafter defined ( Distributable Aid ); and WHEREAS, in connection with the issuance of the DSA Bonds, the City entered into a Master Debt Retirement Trust Indenture and a First Supplemental Debt Retirement Trust Indenture, both dated as of March 1, 2010, between the City and the Trustee (together, and collectively with the Second Supplemental Indenture, as hereinafter defined, the Indenture ), that provide for the escrow of Distributable Aid payments received by the Trustee on behalf of the City to pay the debt service on obligations of the City secured by and payable from Distributable Aid ( Distributable Aid Obligations ), so long as Distributable Aid Obligations of the City are outstanding; and WHEREAS, in accordance with Act 80 and the Indenture, the City entered into an agreement with the State Treasurer dated as of March 1, 2010 (the DSA Bonds Deposit Agreement ) to provide for the direct payment to the Trustee of the Distributable Aid to be held in trust and used solely for the payment of principal of and interest on Distributable Aid Obligations, including the DSA Bonds; and WHEREAS, on even date herewith, the City issued $100,000,000 in aggregate original principal amount of Distributable State Aid Second Lien Bonds (Unlimited Tax General Obligation), Series 2010(A) (Taxable Recovery Zone Economic Development Bonds Direct Payment) (the Bonds ) pursuant to a resolution duly adopted by the City Council of the City on July 20, 2010 and a Sale Order of the Finance Director of the City dated December 9, 2010 (together, the Resolution ), and pursuant to the authorization of the City Charter, Act 279, Public Acts of Michigan, 1909, as amended, Act 34, Public Acts of Michigan, 2001, as amended, and pursuant to the authorizations provided by the qualified electors of the City at certain Prior Elections (defined in the Resolution); and WHEREAS, the Bonds have been sold to the Authority pursuant to Act 227, Public Acts of Michigan, 1985, as amended ( Act 227 ), under which the City may pledge Distributable Aid that the City expects to receive from the State under the provisions of the Glenn Steil State Revenue Sharing Act, Act 140, Public Acts of Michigan, 1971, as amended (the State Revenue III-1

162 Sharing Act ) for the payment of bonds and obligations purchased by the Authority, and may enter into an agreement with the Authority to provide for the direct payment of Distributable Aid to a trustee to be used for the payment of principal of and interest on bonds and obligations purchased and held by the Authority; and WHEREAS, in the Resolution and pursuant to Act 227, the City has pledged Distributable Aid to pay debt service on the Bonds, and in addition has pledged its unlimited tax full faith and credit; and WHEREAS, Distributable Aid is currently comprised of revenue sharing payments ( State Shared Revenues ) from the State under the State Revenue Sharing Act; and WHEREAS, the City has covenanted in the Indenture and the DSA Bonds Deposit Agreement to provide notice to the State Treasurer of the issuance of any additional Distributable Aid Obligations; and WHEREAS, pursuant to the Indenture and the DSA Bonds Deposit Agreement, the City may enter into additional agreements with the State Treasurer and the Trustee to provide for the direct payment of Distributable Aid to the Trustee to be held and used for the payment of principal of and interest on additional Distributable Aid Obligations issued by the City; and WHEREAS, in accordance with the Indenture and the DSA Bonds Deposit Agreement, the City has provided notice to the State Treasurer of the City s intent to issue its Bonds which will be secured by and payable from Distributable Aid, and has entered into a Second Supplemental Debt Retirement Trust Indenture dated as of December 1, 2010 (the Second Supplemental Indenture ), with the Authority and the Trustee to establish deposit requirements for Distributable Aid necessary to pay debt service on the Bonds; and WHEREAS, pursuant to Act 227 and the State Revenue Sharing Act, under an agreement entered into by the City pledging all or a portion of Distributable Aid that it is eligible to receive for payment of an obligation incurred with the Authority, the State Treasurer shall transmit to the Trustee the amount of the payment pledged under the agreement. NOW, THEREFORE, THIS AGREEMENT WITNESSETH that in order to continue to provide for the direct payment of Distributable Aid by the State Treasurer to the Trustee to pay debt service on the Bonds, the City, the Authority, the State Treasurer and the Trustee agree as follows. 1. Pursuant to the Indenture, and in accordance with Act 227 and the State Revenue Sharing Act, the City hereby directs the State Treasurer to continue, and the State Treasurer hereby reaffirms its agreement, to pay directly to the Trustee 100% of all Distributable Aid due and to be distributed to the City in accordance with the requirements of the Indenture for as long as the DSA Bonds or the Bonds are outstanding; provided, however, that nothing in this Agreement shall abridge or reduce the ability of the State Treasurer to withhold Distributable Aid from the City as provided by law under the State Revenue Sharing Act or other applicable law. III-2

163 2. Distributable Aid payments due the City shall be sent directly to the Trustee, at: U.S. Bank National Association 535 Griswold, Suite 550 Detroit, MI ABA No Account No City of Detroit DSA Debt Fund Trust # The Trustee hereby agrees to promptly provide notice to the State Treasurer and the Authority of any change of the address and/or account set forth above, which shall include the new address and/or account to which Distributable Aid payments shall be sent. 3. In accordance with the State Revenue Sharing Act, the Authority hereby acknowledges the direct payment by the State Treasurer to the Trustee of Distributable Aid due the City and pledged to the Authority for the payment of debt service on the Bonds. The Trustee hereby agrees to hold the portion of Distributable Aid payments pledged to the Authority for the payment of debt service on the Bonds in trust on behalf of the Authority, as provided in the Indenture, for the payment of principal of and interest on the Bonds. The remaining Distributable Aid shall be remitted to the City in accordance with the Indenture and the instructions of the City. The debt service schedule for the Bonds is set forth in Exhibit A attached to this Agreement. 4. The City and the Authority each acknowledge that in accordance with the State Revenue Sharing Act, the State Treasurer is authorized to withhold State Shared Revenues due the City as provided by the State Revenue Sharing Act or otherwise provided by law. 5. Notwithstanding the foregoing, the State Treasurer hereby agrees that so long as the Bonds are outstanding, if the State Treasurer has received from the Trustee a notice of deficiency of the Deposit Date Balance Requirement as defined in the Second Supplemental Indenture, and future installments of any Distributable Aid due the City are delayed or withheld, the State Treasurer shall not delay or withhold any portions of the City s Distributable Aid necessary for the City to cure such deficiency of the Deposit Date Balance Requirement for the Bonds unless required to do so by applicable law. 6. The City agrees that unless and until funds are on deposit with the Trustee to meet the payment obligations for the DSA Bonds and the Bonds under the Indenture, when due, Distributable Aid shall not be paid by either the Trustee or the State Treasurer to the City. 7. As provided in the DSA Bonds Deposit Agreement, in the event the City issues subsequent series of Distributable Aid Obligations pursuant to Article IV of the Indenture, for each series of Distributable Aid Obligation issued by the City, the City, the State Treasurer and the Trustee may enter into a separate agreement ( Additional Distributable Aid Deposit Agreement ) to provide for the deposit of Distributable Aid in trust with the Trustee, in the order of priority and pursuant to the requirements of Article II of the Indenture and applicable law for the payment of debt service on the related Distributable Aid Obligation. In accordance with the provisions of Sections 402(e) and 402(f) of the Indenture, the City hereby directs the Trustee, and the Trustee hereby agrees, to provide to the State Treasurer: III-3

164 (a) Notice of the issuance of each Distributable Aid Obligation, if any, which notice shall include an annual debt service payment schedule and final maturity date for the related Distributable Aid Obligation (the form of which is provided in Exhibit B to this Agreement); (b) Not later than the first week of January of each calendar year, a written report or schedule of the minimum amount of the Distributable Aid to be distributed to the City necessary and required to be deposited with the Trustee and set aside under the Indenture to satisfy the debt service payment requirements of the Bonds in such calendar year ( Annual Report ) (the form of which is provided in Exhibit C to this Agreement); and (c) Within 30 days after the Bonds have been defeased or redeemed in accordance with the Resolution of the City, notice that the Bonds have been defeased or redeemed, which notice shall include a revised Annual Report for the remainder of such calendar year, direction for a final minimum deposit or for the discontinuance or reduction of minimum deposits for the payment of debt service on the Bonds, as the case may be (the form of which is provided in Exhibit D to this Agreement). 8. This Agreement may be amended or revised in writing if such amendment or revision would not cause the then-current rating on the Bonds or any Distributable Aid Obligations issued by the City under the Indenture to be downgraded by any national rating service then maintaining a rating on such Bonds, and with the consent of any credit provider that has issued and has in effect a credit facility with respect to the outstanding Bonds. Notwithstanding the foregoing, the City and the State Treasurer hereby agree not to amend this Agreement in any manner which would in the opinion of nationally recognized bond counsel ( Bond Counsel ) have a material adverse effect on the direct payment of Distributable Aid to the Trustee to be held and used for the payment of principal of and interest on the Bonds or Distributable Aid Obligations, if any, unless such amendments shall, in the opinion of Bond Counsel, be necessary to cure or prevent the occurrence of an Event of Default by the City under the Indenture, and such amendment shall not become effective until approved in writing by the holders of a majority of the principal amount of all Distributable Aid Obligations then outstanding, including the Bonds. 9. Except as otherwise provided, all notices, certificates, requests, complaints, demands or other communications under this Agreement shall be deemed sufficiently given when sent by first class mail or overnight mail postage prepaid, addressed as follows: III-4

165 (a) If to the City, to: (b) If to the Authority, to: (c) If to the State Treasurer, to: (d) If to the Trustee, to: City of Detroit Finance Department 1200 Coleman A. Young Municipal Center Detroit, Michigan Attention: Finance Director Michigan Finance Authority Richard H. Austin Building 430 West Allegan Street Lansing, Michigan Attention: Executive Director State of Michigan, Department of Treasury 430 West Allegan Street Lansing, Michigan U.S. Bank National Association 535 Griswold Street, Suite 550 Detroit, Michigan Attention: Corporate Trust Administration The City, the Authority, the State Treasurer and the Trustee may be given notice hereunder, in writing, designate any further or different addresses to which subsequent notices, certificates, requests, complaints, demands or other communications hereunder shall be sent. 10. This Agreement shall not require the State to make an appropriation to any municipality and shall not be construed as creating an indebtedness of the State. 11. The Trustee, by its execution of this Agreement, acknowledges and consents to exercise all of its obligations and duties hereunder, subject to the same standard of care contained in the Indenture. 12. This Agreement shall be read in concert with the DSA Bonds Deposit Agreement, and shall not repeal or abrogate any provision of the DSA Bonds Deposit Agreement. 13. This Agreement may be executed simultaneously in counterparts, each of which shall be deemed an original, and such counterparts together shall and will constitute one and the same instrument. III-5

166 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by the authorized signatories to evidence the acceptance of the agreement, and have caused this Agreement to be executed in their behalf by an authorized officer, all as of the date first above written. CITY OF DETROIT By Norman L. White Its: Finance Director MICHIGAN FINANCE AUTHORITY By Its: STATE TREASURER, STATE OF MICHIGAN By Its: U.S. BANK NATIONAL ASSOCIATION By: Its: Vice President Dated:, 2010 III-6

167 EXHIBIT A DEBT SERVICE SCHEDULE FOR THE BONDS [ATTACH SCHEDULE] III-7

168 EXHIBIT B FORM OF NOTICE OF ISSUANCE OF DISTRIBUTABLE AID OBLIGATION [Letterhead of U.S. Bank National Association], 20 Via Certified Mail Return Receipt Requested NOTICE Michigan Department of Treasury Austin Building 430 W. Allegan Street Lansing MI Attention: State Treasurer Re: Agreement to Deposit Distributable Aid with the Master Trustee for Payment of $100,000,000 City of Detroit Distributable State Aid Second Lien Bonds (Unlimited Tax General Obligation), Series 2010(A) (Taxable Recovery Zone Economic Development Bonds Direct Payment) (the Agreement ) Dear : In accordance with Section 7(a) of the Agreement among the City of Detroit, County of Wayne, Michigan (the City ), Michigan Finance Authority (the Authority ), the State Treasurer of the State of Michigan and U.S. Bank National Association, Detroit, Michigan, as Master Trustee (the Trustee ) dated as of, 2010 (the Agreement ), notice is hereby given that the City intends to issue its $ (the Obligations ) which will be secured by Distributable Aid as defined in the Agreement. The City hereby requests that the State Treasurer enter into an additional agreement with the City and the Trustee to provide for the direct deposit of Distributable Aid owing to the City with the Trustee to secure payment of the debt service on the Obligations. Enclosed is a copy of the proposed debt service requirements showing the amounts and due dates for the Obligations and other prior obligations of the City payable from Distributable Aid and a draft of the proposed Agreement related to the Obligations for your review. III-8

169 Please contact the undersigned at your earliest opportunity with any comments or questions on the proposed additional agreement. Very truly yours, U.S. BANK NATIONAL ASSOCIATION By: Its: ACKNOWLEDGEMENT: CITY OF DETROIT By: Its: Finance Director III-9

170 EXHIBIT C FORM OF ANNUAL REPORT III-10

171 [Letterhead of U.S. Bank National Association], 20 Via Certified Mail Return Receipt Requested ANNUAL REPORT Michigan Department of Treasury Austin Building 430 W. Allegan Street Lansing MI Attention: State Treasurer Re: Agreement to Deposit Distributable Aid with the Master Trustee for Payment of $100,000,000 City of Detroit Distributable State Aid Second Lien Bonds (Unlimited Tax General Obligation), Series 2010(A) (Taxable Recovery Zone Economic Development Bonds Direct Payment) (the Agreement ) Dear : In accordance with Section 7(b) of the Agreement among the City of Detroit, County of Wayne, Michigan (the City ), the Michigan Finance Authority (the Authority ), the State Treasurer of the State of Michigan and U.S. Bank National Association, Detroit, Michigan, as Master Trustee (the Trustee ) dated as of, 2010 (the Agreement ), notice is hereby given of the minimum amount of Distributable Aid (as defined in the Agreement) to be distributed to the City which is necessary and required to be deposited with the Trustee and set aside under the Indenture (as defined in the Agreement) to satisfy the debt service payment requirements for the above-captioned bonds (the Bonds ) during the calendar year beginning January 1, 20. Schedule of Debt Service Set Asides 20 February $ April June October December TOTAL Amount Debt Service on the Bonds in 20 May 1 (interest) November 1 (principal plus interest) TOTAL Amount III-11

172 In the event that all or any portion of the Bonds are defeased or redeemed during 20, the Trustee shall send a subsequent notice and a revised Annual Report to you in accordance with Section 6(b) of the Agreement. Please contact the undersigned at your earliest opportunity with any questions. Very truly yours, U.S. BANK NATIONAL ASSOCIATION By: Its: cc. Its: Finance Director City of Detroit III-12

173 EXHIBIT D FORM OF NOTICE OF DEFEASANCE OR REDEMPTION OF THE BONDS III-13

174 [Letterhead of U.S. Bank National Association], 20 Via Certified Mail Return Receipt Requested NOTICE III-14

175 Michigan Department of Treasury Austin Building 430 W. Allegan Street Lansing MI Attention: State Treasurer Re: Agreement to Deposit Distributable Aid with the Master Trustee for Payment of $100,000,000 City of Detroit Distributable State Aid Second Lien Bonds (Unlimited Tax General Obligation), Series 2010(A) (Taxable Recovery Zone Economic Development Bonds Direct Payment) (the Agreement ) Dear : In accordance with Section 7(c) of the Agreement among the City of Detroit, County of Wayne, Michigan (the City ), the Michigan Finance Authority (the Authority ), the State Treasurer of the State of Michigan and U.S. Bank National Association, Detroit, Michigan, as Master Trustee (the Trustee ) dated as of, 2010, notice is hereby given that on, 20 the City (redeemed/defeased) $ in aggregate principal amount of the above-captioned bonds (the Bonds ) and that such (redeemed/defeased) Bonds are no longer entitled to Distributable Aid (as defined in the Agreement) set asides. As a result of such (redemption/defeasance), the undersigned Trustee has attached a revised total remaining debt service schedule for the Bonds and provides the following revised Annual Report under Section 67(c) of the Agreement: Schedule of Remaining Debt Service Set Asides of Distributable Aid 20 February $ April June October December TOTAL Amount May 1 (interest) November 1 (principal) Debt Service on the Bonds in 20 TOTAL Amount III-15

176 Please contact the undersigned at your earliest opportunity with any questions. Very truly yours, U.S. BANK NATIONAL ASSOCIATION By: Its: cc., Finance Director City of Detroit III-16

177 APPENDIX IV SUMMARIES OF CERTAIN PROVISIONS OF THE MASTER INDENTURE AND THE DEPOSIT AGREEMENT FOR THE LOCAL PROJECT MUNICIPAL OBLIGATION

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179 SUMMARIES OF CERTAIN PROVISIONS OF THE MASTER INDENTURE AND THE DEPOSIT AGREEMENT FOR THE LOCAL PROJECT MUNICIPAL OBLIGATION The following is a summary of certain provisions of the Master Indenture and the Deposit Agreement that provide for the securing and deposit of the Distributable Aid pledged by the City to secure the Local Project Municipal Obligation and other Distributable Aid Obligations of the City, including summaries of definitions of certain terms used therein and in this Official Statement. The Master Indenture consists of the Master Debt Retirement Trust Indenture (the Indenture ) as supplemented by the First Supplemental Debt Retirement Trust Indenture (the First Supplemental Indenture ) and the Second Supplemental Debt Retirement Trust Indenture (the Second Supplemental Indenture ). The Deposit Agreements consist of the Agreement to Deposit Distributable State Aid for the City of Detroit Distributable State Aid General Obligation (Limited Tax) Bonds, Series 2010 and the Agreement to Deposit Distributable State Aid for the City of Detroit Distributable State Aid Second Lien Bonds (Unlimited Tax General Obligation), Series 2010(A) (Taxable Recovery Zone Economic Development Bonds Direct Payment). Reference is made to the indentures and agreements for a complete statement of the provisions thereof. Capitalized terms used herein below and not defined shall have the meanings ascribed to them in the Official Statement. Definitions of Certain Terms SUMMARY OF THE INDENTURE Additional Obligations means collectively the Additional Parity Obligations and Subordinate Lien Obligations, if any. Additional Parity Obligations means additional bonds, notes or obligations issued in accordance with the terms of Section 402(b) of the Master Indenture and for which principal and interest repayments are secured by and payable from the Distributable Aid on a parity basis with the Bonds. Bonds means the $250,000,000 aggregate original principal amount of City of Detroit Distributable State Aid General Obligation (Limited Tax) Bonds, Series Bond Resolution means the resolution adopted by the Council on February 23, 2010, authorizing the issuance of the Bonds for the purposes set forth therein and as described in the preambles above. Combined Distributable Aid means together, the Constitutionally Mandated Distributable Aid and RSA Distributable Aid. Constitutionally Mandated Distributable Aid means that portion of the total Sales Tax Revenues mandated by the State Constitution to be distributed on a per capita basis to townships, villages and cities, including a portion distributed to the City. Debt Retirement Fund means the single and common trust fund established on the books of the City pursuant to the Master Indenture and the Bond Resolution, as described in Section 201 of the Master Indenture. Deposit Date Balance Requirement means each minimum balance the City shall be required under a Supplemental Indenture to maintain in a DSA Escrow Fund for the benefit of the holders of the related Distributable Aid Obligation. Distributable Aid means certain moneys received or to be received by the City, derived from the imposition of taxes by the State and returned to or to be returned to the City as provided by law under the State Constitution and Act 140. IV-1

180 Distributable Aid Obligations means collectively, the Bonds and any Additional Obligations of the City, and includes all Senior Lien Obligations and Subordinate Lien Obligations. DSA Deposit or DSA Deposits means whenever used herein singularly, each revenue sharing payment, and collectively, all revenue sharing payments constituting Distributable Aid due the City and deposited by the State Treasurer with the Master Trustee on the respective DSA Deposit Date or DSA Deposit Dates. DSA Deposit Date or DSA Deposit Dates means whenever used herein singularly, each date, and collectively all dates, as determined by applicable law, during each month when the State Treasurer shall make DSA Deposits with the Master Trustee in accordance with Article II of the Master Indenture, which initially shall mean February, April, June, August, October and December of each calendar year, and which if accelerated or delayed shall mean the actual date of receipt of the DSA Deposit by the Master Trustee. DSA Escrow Fund or DSA Escrow Funds mean whenever used herein singularly, each escrow fund, and collectively all escrow funds established and created under each Supplemental Indenture for the payment of debt service on the related Bonds or Additional Obligations, if any, secured by the Master Indenture, as described in Section 202 of the Master Indenture. Initial Resolution means the Resolution Authorizing Application to State Administrative Board for Approval to Issue Not to Exceed $250,000,000 in Fiscal Stabilization Bonds, adopted on November 20, 2009 by the Council. Master Indenture means the Master Debt Retirement Trust Indenture, dated as of March 1, 2010, as supplemented and amended. Master Trustee means initially, U.S. Bank National Association, Detroit, Michigan, or any successor in trust or assignees. Non-Arbitrage and Tax Compliance Certificate means the Non-Arbitrage and Tax Compliance Certificate of the City, dated the Closing Date for the Bonds (as defined in the Bond Resolution), regarding rebate requirements and other tax responsibilities of the City relating to the Bonds under the Internal Revenue Code of 1986, as amended and the regulations promulgated thereunder. RSA Distributable Aid means that portion of the total Sales Tax Revenues distributed by the State to municipalities in the State, including a portion distributed to the City, other than the Constitutionally Mandated Distributable Aid, and subject to annual appropriation by the State, all in accordance with the Revenue Sharing Act, which amount shall initially mean 21.3% of sales tax collections at the rate of 4%, as may be amended from time-to-time by the State. Sales Tax Revenues means sales tax revenues derived from a 6% State levy, on retail sales, excluding sales of certain exempt items such as food and drugs. Senior Lien Escrow Fund or Senior Lien Escrow Funds mean whenever used herein singularly, each escrow fund, and collectively all escrow funds established and created under each Supplemental Indenture for the payment of debt service on related Senior Lien Obligations. Senior Lien Obligations means collectively the Bonds and all Additional Parity Obligations, if any. Series 2010 Deposit Agreement means the agreement by and among the City, the State Treasurer and the Master Trustee, directing the State Treasurer to send 100% of the City s Distributable Aid due the City to the Master Trustee for as long as the Bonds are outstanding. Subordinate Lien Escrow Fund or Subordinate Lien Escrow Funds mean whenever used herein singularly, each escrow fund, and collectively all escrow funds established and created under each Supplemental Indenture for the payment of debt service on related Subordinate Lien Obligations. IV-2

181 Subordinate Lien Obligations means additional bonds, notes or obligations issued in accordance with the terms of Section 402(c) of the Master Indenture, which are subordinated to the Bonds and Additional Parity Obligations as to principal and interest repayments from the Distributable Aid. Supplemental Indenture or Supplemental Indentures mean whenever used herein singularly, each supplemental indenture, and collectively all supplemental indentures, entered into by the City and the Master Trustee for the Bonds and each series of Additional Obligations, if any, issued by the City pursuant to the Master Indenture, as provided in the Master Indenture. Establishment of Funds Establishment of Debt Retirement Fund. Under the Trust Indenture there is created and established with the Master Trustee, a single and common trust fund designated the Distributable State Aid Common Debt Retirement Fund (hereinafter referred to as the Debt Retirement Fund ). Moneys received by the Master Trustee in the Debt Retirement Fund, together with investment earnings thereon, if any, shall be transferred to the DSA Escrow Funds in accordance with Section 204 of the Master Indenture. Establishment of Supplemental Indentures, DSA Escrow Funds and Sub-Accounts. (a) The City and the Master Trustee shall enter into a Supplemental Indenture to the Master Indenture for the Bonds and each series of Additional Obligations hereafter issued by the City. Each Supplemental Indenture shall establish deposit requirements for funds necessary to pay the debt service on the related Bonds or Additional Obligations secured by the Master Indenture. (b) Trust funds, each to be designated a Distributable Aid Escrow Fund (referred to herein as a DSA Escrow Fund, and collectively, the DSA Escrow Funds), with such other series and obligation specific designations, shall be established and created under each Supplemental Indenture for the payment of debt service on the related Bonds or Additional Obligations. (c) In each Supplemental Indenture related to the Distributable Aid Obligations, the City may (i) establish and create within the related DSA Escrow Fund, separate segregated sub-accounts, with such designations as provided in the Supplemental Indenture, for the maintenance of Distributable Aid deposited for the payment of debt service on the related Distributable Aid Obligation, and (ii) establish and create separate funds or accounts for the deposit of other funds of the City pledged to pay debt service on the related Distributable Aid Obligation. Deposits to Debt Retirement Fund. Under the Master Indenture, the City appointed the Master Trustee as depository and trustee for the City s Distributable Aid. Concurrently with the execution of the Master Indenture and in accordance with Act 80, the City, the State Treasurer and the Master Trustee have entered into the Series 2010 Deposit Agreement directing the State Treasurer to send 100% of the City s Distributable Aid due the City to the Master Trustee for as long as the Bonds are outstanding. Commencing with the effective date of the Master Indenture, Distributable Aid payments to be received by the City from time to time shall be distributed by the State Treasurer to the Master Trustee and deposited in the Debt Retirement Fund. The Master Trustee shall deposit Distributable Aid in the Debt Retirement Fund and allocate and set aside Distributable Aid into the DSA Escrow Funds, in accordance with the provisions of Section 204 of the Master Indenture, as supplemented by the Supplemental Indentures. Any amounts remaining in the Debt Retirement Fund after the setting aside of the amounts necessary to satisfy the Deposit Date Balance Requirements of all DSA Escrow Funds, shall be released to the City for deposit to the General Fund of the City. IV-3

182 Deposits to DSA Escrow Funds. (a) For as long as any Distributable Aid Obligations subject to the Master Indenture are outstanding, within one (1) Business Day of receipt of each DSA Deposit to the Debt Retirement Fund, the Master Trustee shall set aside in each of the DSA Escrow Funds established for the payment of debt service on each series of Distributable Aid Obligations, an amount sufficient to pay not less than: (A) that fractional amount of interest due on the corresponding Distributable Aid Obligation prior to the next succeeding interest payment date (such fractional amount equal to one (1) as the numerator and the number of DSA Deposit Dates from the last interest payment date to the next succeeding interest payment date for the corresponding Distributable Aid Obligation as the denominator, multiplied by the amount due and payable on the Distributable Aid Obligation on the next succeeding interest payment date), and (B) that fractional amount of principal due on the corresponding Distributable Aid Obligation prior to the next succeeding principal payment date (such fractional amount equal to one (1) as the numerator and the number of DSA Deposit Dates prior to the next succeeding principal payment date for the Distributable Aid Obligation as the denominator, multiplied by the amount of principal due and payable on the next succeeding principal payment date), in the following priority: (i) (ii) FIRST, in each Senior Lien Escrow Fund on a pro-rata basis. In the event the City is required under a Supplemental Indenture to maintain a Deposit Date Balance Requirement in a Senior Lien Escrow Fund for the benefit of the holders of any Senior Lien Obligations following each DSA Deposit Date, and such Deposit Date Balance Requirement has not been satisfied following the deposit of the amounts required by section (a) above, the Master Trustee shall set aside on a pro-rata basis from the remaining DSA Deposit received on the DSA Deposit Date, an amount equal to the deficiency in each Senior Lien Escrow Fund that has a deficiency; and SECOND, from the portion of DSA Deposit remaining after the deposit of amounts required by section (a)(i) above, in each Subordinate Lien Escrow Fund on a pro-rata basis. In the event the City is required under a Supplemental Indenture to maintain a Deposit Date Balance Requirement in a Subordinate Lien Escrow Fund for the benefit of the holders of any Subordinate Lien Obligations, and such Deposit Date Balance Requirement has not been satisfied in such Subordinate Lien Escrow Fund following the deposit of the amounts required by sections (a)(i) and (ii) hereof, the remaining portion of the DSA Deposit shall be allocated by the Master Trustee on a pro-rata basis to each Subordinate Lien Escrow Fund for which there is a deficiency, in an amount necessary to eliminate the deficiency in the Subordinate Lien Escrow Fund, to the extent funds are available. (b) If a deficiency exists in one or more DSA Escrow Funds following the allocation of DSA Deposits made in accordance with section (a) above and within forty-five (45) days of the next principal and/or interest payment date for the Bonds, the Master Trustee shall promptly notify the City in writing of the amount of the deficiency for each DSA Escrow Fund, and the City shall, promptly after receiving such notice, cause to be deposited with the Master Trustee other available funds of the City pledged, if any, for the payment of debt service on the Distributable Aid Obligations for which the funds were pledged, in an amount necessary to make up the deficiency in all applicable DSA Escrow Funds. Deposits made by the City with the Master Trustee shall be deposited to each of the applicable DSA Escrow Funds and sub-accounts therein, if any, as required by the related Supplemental Indenture until the deficiency in all applicable DSA Escrow Funds has been eliminated. The Master Trustee shall confirm in writing to the City the receipt of each payment of additional funds for deposit into each of the applicable DSA Escrow Funds. IV-4

183 (c) Upon satisfaction of all DSA Escrow Fund deposit requirements specified hereinabove, the Master Trustee shall transfer to the City any remaining Distributable Aid due and owed the City. (d) Notwithstanding the foregoing, to the extent any Additional Obligations are subject to additional set aside requirements provided by state law, including but not limited to Part IV of Act 34, set aside installments shall at a minimum, satisfy the state law requirements. (e) The total set-aside amount in any bond year may be satisfied in whole or in part by treating the earnings on the related DSA Escrow Fund as a credit toward that payment, subject to the restrictions and requirements contained in the Non-Arbitrage and Tax Compliance Certificate of the City, if any, and as set forth in the related Supplemental Indenture. Withdrawals from the DSA Escrow Funds. The Master Trustee, in its capacity as transfer agent and paying agent for the Bonds and any Additional Obligations shall withdraw from the related DSA Escrow Fund amounts necessary to pay when due any payments of the principal of and interest on the Bonds or Additional Obligations in accordance with the resolution, order or Supplemental Indenture authorizing the Bonds or Additional Obligations. Investment of Funds Investment of Funds. All money held by the Master Trustee pursuant to the Master Indenture shall be invested by the Master Trustee in accordance with written instructions from the City in Permitted Investments for the funds of the City. Eligibility of Financial Institutions. Except as provided in Section 1(5) of Act 20, Public Acts of Michigan, 1943, as amended, the City shall not instruct the Master Trustee to deposit or invest the funds in a financial institution that is not eligible to be a depository of funds belonging to the State under a law or rule of the State or the United States. For purposes of this section, "financial institution" means a state or nationally chartered bank or a state or federally chartered savings and loan association, savings bank, or credit union whose deposits are insured by an agency of the United States government and that maintains a principal office or branch office located in the State under the laws of the State or the United States. Additional Bonds and Parity Obligations Secured by Distributable Aid Representations of the City Regarding Distributable Aid. The City represents and affirms that, as of the date the Bonds are issued, it receives Distributable Aid payments from the State under the State Constitution (which portion represents Constitutionally Mandated Distributable Aid), and pursuant to the Revenue Sharing Act (which portion represents RSA Distributable Aid). As of the date of the Master Indenture, the sole source of Distributable Aid payments is Sales Tax Revenues of the State. Additional Obligations. (a) The City covenants under the Master Indenture that as long as the Bonds are outstanding, the City will not make additional pledges or assignments of Distributable Aid superior to the pledge of Distributable Aid made in the Bond Resolution as security for future bonds or obligations of the City. (b) The City may from time to time, to the extent provided by law, and so long as no Event of Default has occurred and is continuing under the Master Indenture, issue in addition to the Bonds, Additional Parity Obligations (sometimes referred to herein as Senior Lien Obligations), but only to the extent that (i) the amount of Constitutionally Mandated Distributable Aid due to the Master Trustee in the twelve (12) calendar months immediately preceding the date on which such Additional Parity Obligations IV-5

184 are to be issued, or projected by the State to be due the City for the then current fiscal year of the State, whichever is less, equals or exceeds 150% of the maximum amount of principal of and interest on all Senior Lien Obligations coming due in any year as of the time immediately following the issuance of such Additional Parity Obligations; and (ii) the amount of Combined Distributable Aid due and/or appropriated to the City in the twelve (12) calendar months immediately preceding the date on which such Additional Parity Obligations are to be issued, or projected by the State to be due the City for the then current fiscal year of the State, whichever is less, equals or exceeds 300% of the maximum amount of principal of and interest on all Senior Lien Obligations in any year as of the time immediately following the issuance of such Additional Parity Obligations. To the extent permitted by law, the principal of and interest on all Senior Lien Obligations shall be due on the same dates. (c) The City reserves the right to issue Subordinate Lien Obligations so long as the amount of Combined Distributable Aid due and/or appropriated to the City in the twelve (12) calendar months immediately preceding the date on which such Subordinate Lien Obligations are to be issued, or projected by the State to be due the City for the then current fiscal year of the State, whichever is less, equals or exceeds 100% of the maximum amount of principal of and interest on all Distributable Aid Obligations in any year as of the time immediately following the issuance of such Subordinate Lien Obligations. (d) Each series of Additional Obligations shall be payable from Distributable Aid and have such other terms and conditions not inconsistent with the provisions of the Master Indenture, and shall provide for the creation and establishment of DSA Escrow Funds and subaccounts in accordance with Section 202 of the Master Indenture. (e) The City covenants under the Master Indenture to provide notice to the State Treasurer and the Master Trustee of the issuance of each series of Additional Obligations secured and payable from Distributable Aid. The City may enter into additional agreements with the State Treasurer and the Master Trustee to provide for the direct payment of Distributable Aid to the Master Trustee to be held and used for the payment of principal of and interest on any Additional Obligations pursuant to the Master Agreement. (f) The City covenants under the Master Indenture to provide notice to the State Treasurer and the Master Trustee of the defeasance or redemption of all or any portion of the Bonds in accordance with the terms of the Series 2010 Deposit Agreement. In the event that the City enters into an agreement with the State Treasurer and the Master Trustee as described in the Master Indenture, with respect to any Additional Obligation issued by the City, the City covenants to provide notice to the State Treasurer and the Master Trustee of the defeasance or redemption of all or any portion of the Additional Obligation in accordance with the terms of the corresponding agreement between the City, the State Treasurer and the Master Trustee. Events of Default and Remedies on Default Events of Default. Any one or more of the following events shall be deemed an Event of Default under the Master Indenture: (a) The City shall default in the due and punctual payment of any interest on any or all of the Distributable Aid Obligations on any date when such interest is due and payable; (b) The City shall default in the due and punctual payment of any principal or premium, if any, of any or all Distributable Aid Obligations, whether at the stated maturity or redemption thereof; (c) The City shall default in the performance or observance of any of the other covenants, agreements or conditions on its part contained in the Master Indenture (other than covenants otherwise specifically covered by this section); provided, however, that: (i) no such default shall constitute an Event of Default unless it shall not have been cured within thirty (30) days following receipt of written notice thereof by the City from the Master Trustee or the holders of twenty-five percent (25%) in principal amount of any IV-6

185 outstanding Distributable Aid Obligations of the same level of lien priority; (ii) if the default is such that it cannot be corrected within such period, but can be corrected without material adverse affect on the holders of the Distributable Aid Obligations, it shall not constitute an Event of Default if corrective action is instituted by the City during such period and diligently pursued until such default is corrected; and (iii) if by reason of force majeure, the City is unable in whole or in part to carry out any agreement on its part contained in the Master Indenture, other than payment of principal, premium, if any, or interest on the Distributable Aid Obligations, the City shall not be deemed in default during the continuance of such disability. The term force majeure includes the following: Acts of God, strikes, walk-outs or other employee disturbances, acts of public enemies, orders of any kind of the government of the United States of America, the state or states in which the City is doing business, or any of their departments, agencies, political subdivisions or officials or any civil or military authority, insurrection, riots, epidemics, landslides, lightning, earthquakes, fires, hurricanes, storms, floods, wash-outs, droughts, civil disturbances, explosions, breakage or accidents to machinery, transmission pipes or canals, partial or entire failure of utilities, or similar acts or events other than financial not within the control of the City; or (d) The City shall fail to make any deposits to a DSA Escrow Fund or sub-account of a DSA Escrow Fund as required by the Master Indenture or any Supplemental Indenture. Remedies. Upon the occurrence and continuation of an Event of Default, the Master Trustee shall (i) for an Event of Default related to Senior Lien Obligations, at the direction of the holders of twenty-five percent (25%) in aggregate principal amount of the Senior Lien Obligations, and (ii) for an Event of Default related to any Subordinate Lien Obligations, at the direction of twenty-five percent (25%) in aggregate principal amount of the Subordinate Lien Obligations, proceed to protect or enforce the rights of the Master Trustee and the holders of the related Senior Lien Obligations or Subordinate Lien Obligations, either by mandamus to compel the City to perform each and every covenant contained in the Master Indenture, or by injunction to prevent the City from taking any action in violation of said covenants. Waiver of Default. If all defaults are cured, the Master Trustee shall (i) for an Event of Default related to the Senior Lien Obligations, at the direction of the holders of twenty-five percent (25%) in aggregate principal amount of the Senior Lien Obligations, and (ii) for an Event of Default related to any Subordinate Lien Obligations, at the direction of the holders of twenty-five percent (25%) in aggregate principal amount of the Subordinate Lien Obligations, waive an Event of Default and annul its consequences. No such waiver shall extend to or affect any subsequent Event of Default or shall impair any right consequent thereon. Holders Rights to Proceed. No holder of any Distributable Aid Obligation secured under the Master Indenture shall have any right to institute any suit, action or proceedings for any remedy of an Event of Default under the Master Indenture or relating thereto unless: (a) such holder previously shall have given to the Master Trustee written notice of such Event of Default and of the continuance thereof, (b)(i) for an Event of Default related to the Senior Lien Obligations, the holders of a majority in aggregate principal amount of the outstanding Senior Lien Obligations, and (ii) for an Event of Default related to any Subordinate Lien Obligations, the holders of a majority in aggregate principal amount of the outstanding Subordinate Lien Obligations, shall have made written request upon the Master Trustee and shall have afforded the Master Trustee a reasonable opportunity either to exercise the powers granted in the Master Indenture or to institute such action, suit or proceedings in its own name and (c) such holders shall have offered to the Master Trustee adequate security and indemnity against the costs, expenses and liabilities to be incurred therein or thereby. Such notifications, requests and offers of indemnity are declared in every such case, at the option of the Master Trustee, to be conditions precedent to the exercise by one or more holders of the Distributable Aid Obligations of the powers and trusts of the Master Indenture for the benefit of such holders and to any action or cause of action, or for any other remedy under the Master Indenture or relating thereto. It is further understood and intended that no one or more IV-7

186 holders of Distributable Aid Obligations shall have any right in any manner whatever, by taking any action to affect, disturb or prejudice the lien under the Master Indenture or to enforce any rights under the Master Indenture except in the manner therein provided, and that all proceedings shall be instituted and maintained in the manner therein provided and (i) for an Event of Default related to the Senior Lien Obligations, for the equal benefit of all holders of the Senior Lien Obligations, and (ii) for an Event of Default related to any Subordinate Lien Obligations, for the equal benefit of all holders of the Subordinate Lien Obligations. Nothing contained in this paragraph shall be construed as granting to the holder of any Bond or Additional Obligation secured hereby the right to bring any action or proceeding which the Master Trustee is not expressly authorized to bring; provided, however, if (i) for an Event of Default related to the Senior Lien Obligations, the holders of a majority in the aggregate principal amount of the Senior Lien Obligations, and (ii) for an Event of Default related to any Subordinate Lien Obligations, the holders of a majority in the aggregate principal amount of the Subordinate Lien Obligations, shall have complied with all conditions prerequisite to the requiring of action on the part of the Master Trustee and the Master Trustee shall refuse to act, then one or more holders of the related Senior Lien Obligations or the related Subordinate Lien Obligations may bring any action or actions as the Master Trustee might have instituted for and on behalf of the owners of all outstanding related Senior Lien Obligations or related Subordinate Lien Obligations. Nothing contained in the Master Indenture shall impair the right of any holder of Distributable Aid Obligations to payment of, or to enforce payment of, any amount payable by the City thereunder or under any Distributable Aid Obligation after the respective due dates of such payment or amount. Possession of Distributable Aid Obligations by Master Trustee Not Required. All rights of action under the Master Indenture or the Distributable Aid Obligations enforceable by the Master Trustee may be enforced by it without the possession of any of the related Distributable Aid Obligations or the production thereof at any proceedings relative thereto. Any action instituted by the Master Trustee shall be brought in its name for the benefit of all the holders of the related Distributable Aid Obligations, subject to the provisions of the Master Indenture. Remedies Cumulative. The rights and remedies of the Master Trustee and the holders of Distributable Aid Obligations shall be cumulative, and any failure on its or their part to act shall not constitute a waiver of any right or remedy to which it or they may be entitled to hereunder or under applicable law or in equity. Knowledge by Master Trustee of an Event of Default. The Master Trustee shall not be deemed to have knowledge of any Event of Default under the Master Indenture unless and until it shall have actual knowledge thereof, or shall have received written notice thereof from the holders of at least twenty-five percent (25%) in aggregate principal amount of any outstanding Distributable Aid Obligations of all levels of lien priority, at its office in Detroit Michigan. Except as otherwise expressed in the Master Indenture, the Master Trustee shall not be bound to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements therein or of any of the documents executed in connection with the Distributable Aid Obligations, or as to the existence of an Event of Default hereunder. Application of Moneys. All moneys received by the Master Trustee and deposited in the Debt Retirement Fund pursuant to any right given or action taken under the provisions of this Article shall be applied first to the payment of the costs and expenses of the proceedings resulting in the collection of such moneys and expenses, liabilities, advances and charges incurred or made by the Master Trustee. The balance of such moneys, after providing for the foregoing shall be deposited by the Master Trustee in the DSA Escrow Funds and shall be applied in accordance with the Master Indenture. IV-8

187 Supplemental Indentures and Amendments to the Master Indenture Modifications and Amendments Not Requiring Consent. Any provision of the Master Indenture may be amended at any time by the parties thereto, without the consent of the holders of the Distributable Aid Obligations, for any one or more of the following purposes: (a) (b) (c) To cure any ambiguity or formal defect or omission in the Master Indenture or in any supplemental agreement; To grant to or confer upon the Master Trustee for the benefit of the holders of Distributable Aid Obligations any additional rights, remedies, powers, authority or security that may lawfully be granted to or conferred upon such holders or the Master Trustee; To accomplish, implement or give effect to any other action which is authorized or required by the Master Indenture; (d) To comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to the Bonds or any Additional Obligations; (e) (f) (g) To appoint separate or successor trustees, paying agents or bond registrars; To make any other change which, in the judgment of the Master Trustee, is not to the material prejudice of holders of the Distributable Aid Obligations, upon the opinion of bond counsel or other professionals; To create obligation specific DSA Escrow Funds and sub-accounts in accordance with the Master Indenture for further securing and establishing deposit and set-aside requirements of all Distributable Aid Obligations issued pursuant to the Master Indenture. Within thirty (30) days after the execution of any supplement pursuant to this section, the Master Trustee shall cause notice thereof to be mailed, postage prepaid to all owners of Distributable Aid Obligations at their addresses as they appear on the registration books. The notice shall briefly set forth the nature of the supplement and shall state that copies thereof are on file at the corporate trust office of the Master Trustee for inspection by all such holders. Any such supplement so executed shall be valid and binding notwithstanding any failure of the Master Trustee to mail the notice required and notwithstanding any objections which may be received pursuant to any mailed notice. Upon the execution of any supplement pursuant to the provisions of this section, the Master Indenture shall be deemed to be modified and amended in accordance therewith and the respective rights, duties and obligations under the Master Indenture of the City, the Master Trustee and all holders of outstanding Distributable Aid Obligations shall thereafter be determined, exercised and enforced hereunder, subject in all respects to such modifications and amendments. Amendments Requiring Consent. Any provision of the Master Indenture may be amended at any time by written agreement of the parties hereto, but, except as provided in this section, no such amendment made after the issuance of any Distributable Aid Obligations shall become effective until IV-9

188 approved in writing by the holders of a majority of the principal amount of all outstanding Distributable Aid Obligations, other than those in the possession of the City or under its control; provided, however, no such amendment may (i) extend the maturity of the principal of or the interest on any Distributable Aid Obligation or (ii) reduce the principal amount of any Distributable Aid Obligation or the rate of interest thereon, or (iii) grant a privilege or priority of any Distributable Aid Obligations over any other Distributable Aid Obligations of the same series, or (iv) reduce the aggregate principal amount of the Distributable Aid Obligations required for consent to such supplemental or amendatory indenture unless approved (A) for a supplemental or amendatory indenture related to Senior Lien Obligations, by the holders of all outstanding Senior Lien Obligations, and (B) for a supplemental or amendatory indenture related to any Subordinate Lien Obligations, by the holders of all outstanding Subordinate Lien Obligations. Nothing contained in the Master Indenture, however, shall be construed as making necessary the approval of the holders of Distributable Aid Obligations of the execution of any supplement as authorized in the Master Indenture. Upon the execution of any supplement pursuant to the provisions of the Master Indenture, the Master Indenture shall be and be deemed to be modified and amended in accordance therewith, and the respective rights, duties and obligations under the Master Indenture of the City, the Master Trustee and all holders of Distributable Aid Obligations outstanding shall thereafter be determined, exercised and enforced hereunder, subject in all respects to such modifications and amendments. [Remainder of page intentionally left blank] IV-10

189 Definitions of Certain Terms SUMMARY OF FIRST SUPPLEMENTAL INDENTURE For purposes of this summary of the First Supplemental Indenture, the following capitalized terms shall be defined as follows: Trustee means the Master Trustee appointed under the Master Indenture, or any successor in trust or assignees, in its capacity as escrow trustee, transfer agent and paying agent for the Bonds. First Supplemental Indenture means the First Supplemental Debt Retirement Trust Indenture, dated as of March 1, 2010, by and between the City and the Trustee. Establishment of Funds Establishment of Series 2010 Escrow Fund and Sub-Accounts. (a) Under the First Supplemental Indenture, there is established and created with the Trustee, pursuant to the Bond Resolution and the Master Indenture, a trust fund designated the Series 2010 Escrow Fund. Moneys on deposit in the Series 2010 Escrow Fund shall be held and withdrawn by the Trustee solely for the purpose of paying the principal of and interest on the Bonds when due and payable. (b) Under the First Supplemental Indenture, there is created within the Series 2010 Escrow Fund, two separate and segregated sub-accounts, designated the Distributable Aid Account and the General Account. That portion of Distributable Aid necessary to pay the principal of and interest on the Bonds when due, in the amounts set forth in Exhibit A to the First Supplemental Indenture, shall be set aside and maintained in the Distributable Aid Account of the Series 2010 Escrow Fund. (c) All such other monies deposited by the City to the Series 2010 Escrow Fund in accordance with the Bond Resolution and this First Supplemental Indenture shall be set aside and maintained in the General Account of the Series 2010 Escrow Fund in accordance with Section 202(b) of the First Supplemental Indenture. Deposits to Series 2010 Escrow Fund. (a) Within one (1) Business Day of receipt of the April 2010, June 2010 and August 2010 DSA Deposits to the Debt Retirement Fund in accordance with the Master Indenture, the Master Trustee shall set aside in the Distributable Aid Account of the Series 2010 Escrow Fund, one-third (1/3) of the interest due on the Bonds on November 1, Within one (1) Business Day of receipt of the October 2010, December 2010 and February 2011 DSA Deposits the Master Trustee shall set aside in the Series 2010 Escrow Fund one-third (1/3) of the interest due on the Bonds on May 1, 2011 and one-sixth (1/6) of the principal due on the Bonds on November 1, Thereafter, from each of the October, December and February DSA Deposits, the Master Trustee shall set aside from the Debt Retirement Fund in accordance with the Master Indenture: (i) to the Series 2010 Escrow Fund, one third (1/3) of the interest due on the next succeeding May 1, and one-sixth (1/6) of the principal due on the Bonds on the next succeeding November 1. From each of the April, June and August DSA Deposits the Master Trustee shall set aside: (i) in the Series 2010 Escrow Fund, one third (1/3) of the interest due on the next succeeding November 1 and one-sixth (1/6) of the principal due on the Bonds on the following November 1. In accordance with the Master Indenture, if a DSA Deposit Date is accelerated or delayed, receipt of the DSA Deposit to the Debt Retirement Fund will mean the actual date of receipt of the DSA Deposit by the Master Trustee. In the event DSA Deposit Dates are changed as a result of a change in applicable law, DSA Deposits shall be set aside in accordance with the requirements of the Master Indenture. IV-11

190 (b) For purposes of satisfying the annual set-aside requirements for the Series 2010 Escrow Fund for the Bonds, the City shall set aside the Deposit Date Balance Requirement amounts set forth in Exhibit A to the First Supplemental Indenture on the corresponding DSA Deposit Dates, which amounts shall be sufficient to fund the minimum balance required to be on deposit in the Series 2010 Escrow Fund. In the event the Deposit Date Balance Requirement for the Series 2010 Escrow Fund is not satisfied following the deposit of the amount required in section (a) above, the Master Trustee shall set aside from the remaining DSA Deposit received on the DSA Deposit Date, an additional amount equal to the deficiency for the Deposit Date Balance Requirement. If a deficiency of the Deposit Date Balance Requirement exists within forty-five (45) days of the next principal and/or interest payment date for the Bonds, the Master Trustee shall promptly notify the City in writing that the Deposit Date Balance Requirement is not on deposit in the Series 2010 Escrow Fund, and the City shall, promptly after receiving such notice, cause to be deposited with the Master Trustee other available funds of the City for deposit to the General Account of the Series 2010 Escrow Fund, in an amount necessary to make up the Deposit Date Balance Requirement deficiency. The Master Trustee shall confirm in writing to the City the receipt of each payment of additional funds for deposit into the General Account. (c) Upon satisfaction of the Deposit Date Balance Requirement specified hereinabove for the Bonds, the Master Trustee shall allocate to the City any remaining Distributable Aid due and owed to the City as provided in the Master Indenture. (d) The total set-aside amount in any year may be satisfied in whole or in part by treating the earnings on the Series 2010 Escrow Fund as a credit toward that payment, subject to the restrictions and requirements contained in the Tax Certificate of the City. Withdrawals from the Series 2010 Escrow Fund. (a) The Trustee, in its capacity as transfer agent and paying agent for the Bonds, shall withdraw from the Series 2010 Escrow Fund amounts necessary to pay when due any payments of the principal of and interest on the Bonds. Any amounts remaining in the Series 2010 Escrow Fund after payment in full of the debt service on the Bonds on the corresponding payment date, shall be maintained in the Distributable Aid Account of the Series 2010 Escrow Fund and applied as a credit against the next succeeding Deposit Date Balance Requirement to reduce the amount required to be set aside in the Series 2010 Escrow Fund on the next succeeding Deposit Date. (b) After the defeasance of the Bonds in accordance with the requirements of the Bond Resolution, and if the City has paid all amounts owed to [the Bond Insurer and] the Master Trustee, any balance on deposit in the Series 2010 Escrow Fund, including investment earnings, if any, shall be allocated to the DSA Escrow Funds for any outstanding Additional Obligations or remitted to the City, all in accordance with the Master Indenture. Amendments to First Supplemental Indenture Modifications and Amendments Not Requiring Consent. Any provision of the First Supplemental Indenture may be amended at any time by the parties thereto, without the consent of the holders of the Bonds or any other obligations issued by the City and subject to the Master Indenture, for any one or more of the following purposes: (a) (b) To cure any ambiguity or formal defect or omission in the First Supplemental Indenture or in any supplemental agreement; To grant to or confer upon the Trustee for the benefit of the holders of Bonds any additional rights, remedies, powers, authority or security that may lawfully be granted to or conferred upon such holders or the Trustee; IV-12

191 (c) To accomplish, implement or give effect to any other action which is authorized or required by the First Supplemental Indenture; or (d) To comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to the Bonds. Within thirty (30) days after the execution of any supplement pursuant to this section, the Trustee shall cause notice thereof to be mailed, postage prepaid to all owners of Bonds at their addresses as they appear on the registration books. The notice shall briefly set forth the nature of the supplement and shall state that copies thereof are on file at the corporate trust office of the Trustee for inspection by all such holders. Any such supplement so executed shall be valid and binding notwithstanding any failure of the Trustee to mail the notice herein required and notwithstanding any objections which may be received pursuant to any mailed notice. Upon the execution of any supplement pursuant to the provisions of this section, the First Supplemental Indenture shall be deemed to be modified and amended in accordance therewith and the respective rights, duties and obligations under the First Supplemental Indenture of the City, the Trustee and all holders of outstanding Bonds shall thereafter be determined, exercised and enforced thereunder, subject in all respects to such modifications and amendments. Amendments With Approval. Any provision of the First Supplemental Indenture may be amended at any time by written agreement of the parties thereto, but, except as provided in this section, no such amendment made after the issuance of any Bonds shall become effective until approved in writing by the holders of a majority of the principal amount of the Bonds then outstanding, other than those in the possession of the City or under its control; provided, however, no such amendment may (i) extend the maturity of the principal of or the interest on any Bond or (ii) reduce the principal amount of any Bond or the rate of interest thereon, or (iii) grant a privilege or priority of any Bond or Bonds over any other Bond or Bonds, or (iv) reduce the aggregate principal amount of the Bonds required for consent to such supplemental or amendatory indenture unless approved by the holders of all outstanding Bonds. Nothing contained in the First Supplemental Indenture, however, shall be construed as making necessary the approval of the holders of Bonds of the execution of any supplement as authorized in the First Supplemental Indenture. If at any time the City shall request the Trustee to execute any supplement for any of the purposes of this section, the Trustee shall cause notice of the proposed supplement to be mailed, postage prepaid to all owners of registered Bonds at their addresses as they appear on the registration books. The notice shall briefly set forth the nature of the proposed supplement and shall state that copies thereof are on file at the principal corporate trust office of the Trustee for inspection by any holders of Bonds. The Trustee shall not, however, be subject to any liability to any holder of Bonds by reason of its failure to mail the notice required by this section, and any such failure shall not affect the validity of such supplement when executed as provided in this section. Upon the execution of any supplement pursuant to the provisions of this section, the First Supplemental Indenture shall be and be deemed to be modified and amended in accordance therewith, and the respective rights, duties and obligations under the First Supplemental Indenture of the City, the Trustee and all holders of Bonds outstanding shall thereafter be determined, exercised and enforced thereunder, subject in all respects to such modifications and amendments. Miscellaneous Continuing Exclusion Opinion; Extraordinary Mandatory Redemption. Commencing March 1, 2015, and each March 1 thereafter (each, an Extraordinary Redemption Date ) the Bonds shall be subject to extraordinary mandatory redemption, and the City shall redeem the Bonds in whole, at the IV-13

192 prices specified in the Bonds, unless not less than 60 days prior to each Extraordinary Redemption Date, the City (i) elects in writing to the Trustee to redeem none or less than the entire outstanding principal amount of the Bonds and (ii) delivers to the Trustee an opinion ( Continuing Exclusion Opinion ) of nationally recognized bond counsel ( Bond Counsel ) to the effect that in the sole opinion of such Bond Counsel the failure to redeem the Bonds that shall remain outstanding after the next succeeding Extraordinary Redemption Date, will not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes. Under the First Supplemental Indenture, the Trustee covenants, commencing November 1, 2014 and each November 1 thereafter, so long as the Bonds are outstanding, to send the Finance Director of the City, notice requesting the City to engage Bond Counsel to provide the Continuing Exclusion Opinion. Under the First Supplemental Indenture, the City covenants, that upon receipt of such notice from the Trustee, the City shall cause Bond Counsel to provide the Continuing Exclusion Opinion as required above. The City may conclusively rely on such Continuing Exclusion Opinion in complying with the extraordinary redemption requirements set forth therein and in the Bonds. In the event the City fails to obtain the Continuing Exclusion Opinion, or Bond Counsel determines that the conditions necessary to provide the Continuing Exclusion Opinion for the Bonds that remain outstanding after the next succeeding Extraordinary Redemption Date do not exist, the City shall redeem the Bonds in accordance with the provisions above and as more fully described in the Bonds. Notwithstanding the foregoing, if the City obtains an opinion of Bond Counsel to the effect that no further action is required to maintain the exclusion of interest on the Bonds from gross income for federal income tax purposes, the Bonds shall no longer be subject to extraordinary mandatory redemption prior to maturity. The City may conclusively rely on such opinion of Bond Counsel in complying with the provisions of the First Supplemental Indenture. First Supplemental Indenture Construed with Master Indenture. All of the provisions of the First Supplemental Indenture shall be deemed to be and construed as part of the Master Indenture to the same extent as if fully set forth therein. [Remainder of page intentionally left blank] IV-14

193 Definitions of Certain Terms SUMMARY OF SECOND SUPPLEMENTAL INDENTURE For purposes of this summary of the Second Supplemental Indenture, the following capitalized terms shall be defined as follows: Additional Second Lien Obligations means any additional bonds, notes or obligations issued in accordance with the Indenture and the Second Supplemental Indenture for which principal and interest repayments are secured and payable from Distributable Aid on a subordinate basis to the City s $249,790,000 Distributable State Aid General Obligation Limited Tax Bonds, Series 2010 the DSA Bonds ), and on a parity basis with the Bonds. Bond Resolution means the resolution adopted by the City Council of the City on July 20, 2010, authorizing the issuance of the Bonds. Bonds means the $100,000,000 aggregate original principal amount of City of Detroit Distributable State Aid Second Lien Bonds (Unlimited Tax General Obligation), Series 2010(A) (Taxable Recovery Zone Economic Development Bonds Direct Payment). Closing means the closing date upon which there is an exchange of all or portions of the Bonds for the proceeds representing the purchase price of the Bonds as provided in the Bond Purchase Agreement (as defined in the Bond Resolution). Deposit Date Balance Requirement means each annual minimum balance the City shall be required under this Second Supplemental Indenture to maintain in the Series 2010(A) Escrow Fund to pay the then current annual principal and interest requirements on the Bonds, which shall include, but not be limited to, proceeds from the Voter Authorized Tax Levy and DSA Deposits. Second Lien Obligations means, collectively, the Bonds and any Additional Second Lien Obligations. Second Supplemental Indenture means the Second Supplemental Debt Retirement Trust Indenture, dated as of December 1, 2010, by and between the City and the Trustee. Subordinate Lien Obligations means bonds, notes or obligations issued in accordance with the Master Indenture, which are subordinated to the Bonds and any Additional Second Lien Obligations as to principal and interest repayments from Distributable Aid. Trustee means the Master Trustee appointed under the Master Indenture, or any successor in trust or assignees, in its capacity as escrow trustee, transfer agent and paying agent for the Bonds. Voter Authorized Tax Levy means the ad valorem tax levy on all taxable property in the City authorized by the electors of the City for the purpose of paying principal of and interest on the Bonds. Establishment of Funds Establishment of Series 2010(A) Escrow Fund and Sub-Accounts. (a) Under the Second Supplemental Indenture there is established and created with the Trustee, pursuant to the Bond Resolution and the Master Indenture, a trust fund designated the Series 2010(A) Escrow Fund. Moneys on deposit in the Series 2010(A) Escrow Fund shall be held and withdrawn by the Trustee solely for the purpose of paying the principal of and interest on the Bonds when due and payable. (b) Under the Second Supplemental Indenture there is created within the Series 2010(A) Escrow Fund, three separate and segregated sub-accounts, designated the Distributable Aid Account, IV-15

194 the Series 2010(A) Tax Levy Account and the General Account. The portion of Distributable Aid necessary to pay the principal of and interest on the Bonds when due, in the amounts set forth in Exhibit A hereto, shall be set aside and maintained in the Distributable Aid Account of the Series 2010(A) Escrow Fund. (c) Under the Second Supplemental Indenture, the portion of the proceeds of the Bonds representing capitalized interest on the Bonds when received by the City at Closing shall be set aside and maintained in the Series 2010(A) Tax Levy Account of the Series 2010(A) Escrow Fund in accordance with Section 202(b) hereof. (d) Under the Second Supplemental Indenture, commencing with the July 2011 tax levy, proceeds from the Voter Authorized Tax Levy when received by the City from time to time for the purpose of paying principal of and interest on the Bonds shall be set aside and maintained in the Series 2010(A) Tax Levy Account of the Series 2010(A) Escrow Fund. (e) All other monies deposited by the City to the Series 2010(A) Escrow Fund in accordance with the Bond Resolution and the Second Supplemental Indenture shall be set aside and maintained in the General Account of the Series 2010(A) Escrow Fund. Deposits to Series 2010(A) Escrow Fund. (a) Under the Second Supplemental Indenture, the Master Trustee is designated and appointed as the City s depository for the receipt of proceeds from the Voter Authorized Tax Levy received by the City and Distributable Aid payments from the State Treasurer for payment of principal of and interest on the Bonds. (b) Commencing with the July 2011 tax levy, proceeds from the Voter Authorized Tax Levy received by the City from time to time shall be deposited with the Master Trustee and set aside in the Series 2010(A) Tax Levy Account in an aggregate amount which, together with such other funds on deposit with the Master Trustee in the Series 2010(A) Escrow Fund, shall be sufficient to pay principal of and interest on the Bonds when due for the next succeeding bond year. In addition, monies returned by the County Treasurer of the County of Wayne ( County ) as payment for delinquent Voter Authorized Tax Levy taxes turned over to the County for collection, and any interest subsidy payments received by or on behalf of the City for bonds issued as Recovery Zone Economic Development Bonds pursuant to the Bond Resolution, shall be deposited with the Master Trustee and set aside in the Series 2010(A) Tax Levy Account. Unexpended moneys remaining on deposit in the Series 2010(A) Tax Levy Account after payment of the principal of and interest on the Bonds for the corresponding bond year shall be retained in the Series 2010(A) Tax Levy Account for the payment of debt service on the Bonds for each subsequent bond year and treated as a credit against future tax levies to reduce the amount of the next succeeding Voter Authorized Tax Levy to be levied by the City for the payment of debt service on the Bonds. (c) For as long as the Bonds are outstanding and subject to the Master Indenture, within one (1) Business Day of receipt of each DSA Deposit to the Debt Retirement Fund of the City established pursuant to the Master Indenture, the Master Trustee shall determine if the Deposit Date Balance Requirement for the Series 2010(A) Escrow Fund has been satisfied by the deposits required under (b), above. In the event that the Deposit Date Balance Requirement for the Series 2010(A) Escrow Fund is not satisfied by the deposits required, the Master Trustee shall (i) determine the amount of the deficiency, (ii) give written notice to the City and the State Treasurer within sixty (60) days of the next principal and/or interest payment date for the Bonds of the amount of the deficiency, and (iii) set aside from the remaining DSA Deposit received on the DSA Deposit Dates, an amount equal to the deficiency for the Deposit Date Balance Requirement. IV-16

195 (d) If, following the deposits required in Sections 202(b) and (c), a deficiency of the Deposit Date Balance Requirement exists within forty-five (45) days of the next principal and/or interest payment date for the Bonds, the Master Trustee shall promptly notify the City in writing that the Deposit Date Balance Requirement is not on deposit in the Series 2010(A) Escrow Fund, and the City shall, promptly after receiving such notice, cause to be deposited with the Master Trustee other available funds of the City for deposit to the General Account of the Series 2010(A) Escrow Fund, in an amount necessary to make up the Deposit Date Balance Requirement deficiency. The Master Trustee shall confirm in writing to the City the receipt of each payment of additional funds for deposit into the General Account. (e) If on each corresponding Deposit Date the Deposit Date Balance Requirement specified hereinabove for the Bonds is satisfied, within five (5) Business Days thereafter the Master Trustee shall allocate and transfer to the City any remaining funds on deposit in the Series 2010(A) Escrow Fund, excluding monies on deposit in the Series 2010(A) Tax Levy Account, as provided in the Master Indenture. (f) The total set-aside amount in any year may be satisfied in whole or in part by treating the earnings on the Series 2010(A) Escrow Fund as a credit toward that payment, subject to the restrictions and requirements contained in the Tax Certificate of the City. Withdrawals from the Series 2010(A) Escrow Fund. (a) The Trustee, in its capacity as transfer agent and paying agent for the Bonds, shall withdraw from the Series 2010(A) Escrow Fund amounts necessary to pay when due any payments of the principal of and interest on the Bonds. Amounts withdrawn from the Series 2010(A) Escrow Fund for the purpose of paying debt service on the Bonds shall be debited first from the Series 2010(A) Tax Levy Account of the Series 2010(A) Escrow Fund in an amount necessary to pay the principal of and interest on the Bonds on the corresponding payment date, and thereafter, if the amount on deposit in the 2010(A) Tax Levy Account is not sufficient to make the payments required, the amount necessary to satisfy the deficiency shall be debited, first, from the Distributable Aid Account, and second, from the General Account. (b) Any amounts remaining in the Series 2010(A) Escrow Fund after payment in full of the debt service on the Bonds on the corresponding payment date, shall be maintained in the Distributable Aid Account of the Series 2010(A) Escrow Fund and applied as a credit against the next succeeding Deposit Date Balance Requirement to reduce the amount required to be set aside in the Series 2010(A) Escrow Fund on the next succeeding Deposit Date. (c) After the defeasance of the Bonds in accordance with the requirements of the Bond Resolution, and if the City has paid all amounts owed to the Trustee, any balance on deposit in the Series 2010(A) Escrow Fund, including investment earnings and any subsidy payments received by or on behalf of the City for bonds issued as Recovery Zone Economic Development Bonds pursuant to the Bond Resolution, if any, shall be allocated to the DSA Escrow Funds for any outstanding Additional Obligations or remitted to the City, all as permitted by law and in accordance with the Master Indenture. Amendments to the Master Indenture Amendment to Sections 402(a) and 402(b) of the Master Indenture. Under the Second Supplemental Indenture, Sections 402(a) and 402(b) of the Master Indenture are amended and restated in their entirety as follows, wherein the term Bonds means the DSA Bonds and the term Bond Resolution means the resolution adopted by the City Council of the City on February 23, 2010, authorizing the issuance of the DSA Bonds, in accordance with their meanings in the Master Indenture: (a) The City hereby covenants that as long as the Bonds are outstanding, the City will not make additional pledges or assignments of Distributable Aid superior to or on a parity basis with the pledge of Distributable Aid made in the Bond Resolution as security for the Bonds. IV-17

196 (b) The City reserves the right to issue Subordinate Lien Obligations so long as the amount of Combined Distributable Aid due and/or appropriated to the City in the twelve (12) calendar months immediately preceding the date on which such Subordinate Lien Obligations are to be issued, or projected by the State to be due the City for the then current fiscal year of the State, whichever is less, equals or exceeds 100% of the maximum amount of principal of and interest on all Distributable Aid Obligations in any year as of the time immediately following the issuance of such Subordinate Lien Obligations, and so long as any such Subordinate Lien Obligations are issued in accordance with the terms of any supplemental indentures which have been entered into between the City and the Trustee pursuant to the Master Indenture and which are in effect as of the date such Subordinate Lien Obligations are issued. Amendment to Section 402(c) of the Master Indenture. Under the Second Supplemental Indenture, Section 402(c) of the Master Indenture is hereby deleted in its entirety and in lieu thereof shall be substituted the word Reserved. Additional Bonds and Obligations Secured by Distributable Aid Additional Obligations on a Parity Basis with the Bonds. Under the Second Supplemental Indenture, the City may from time to time, to the extent provided by law and in accordance with the Master Indenture and this Second Supplemental Indenture, and so long as no Event of Default has occurred and is continuing under the Master Indenture, issue in addition to the Bonds, bonds or obligations for which principal and interest repayments are secured and payable from Distributable Aid on a parity basis with the Bonds ( Additional Second Lien Obligations, and collectively with the Bonds, Second Lien Obligations ), but only to the extent that (i) the amount of Constitutionally Mandated Distributable Aid (as defined in the Master Indenture) due to the Trustee in the twelve (12) calendar months immediately preceding the date on which such Additional Second Lien Obligations are issued, or projected by the State to be due the City for the then current fiscal year of the State, whichever is less, equals or exceeds 150% of the maximum amount of principal of and interest on all Distributable Aid Obligations coming due in any year as of the time immediately following the issuance of such Additional Second Lien Obligations; and (ii) the amount of Combined Distributable Aid (as defined in the Master Indenture) due and/or appropriated to the City in the twelve (12) calendar months immediately preceding the date on which such Additional Second Lien Obligations are to be issued, or projected by the State to be due the City for the then current fiscal year of the State, whichever is less, equals or exceeds 200% of the maximum amount of principal of and interest on all Distributable Aid Obligations in any year as of the time immediately following the issuance of such Additional Second Lien Obligations. To the extent permitted by law, the principal of and interest on all Second Lien Obligations shall be due on the same dates. Additional Obligations on a Subordinate Basis to the Bonds The City reserves the right to issue bonds, notes or obligations in accordance with the Master Indenture and this Second Supplemental Indenture, which are subordinated to the Bonds and any Additional Second Lien Obligations as to principal and interest repayments from the Distributable Aid ( Subordinate Lien Obligations ), so long as the amount of Combined Distributable Aid (as defined in the Master Indenture) due and/or appropriated to the City in the twelve (12) calendar months immediately preceding the date on which such Subordinate Lien Obligations are to be issued, or projected by the State to be due the City for the then current fiscal year of the State, whichever is less, equals or exceeds 100% of the maximum amount of principal of and interest on all Distributable Aid Obligations in any year as of the time immediately following the issuance of such Subordinate Lien Obligations. IV-18

197 Amendments to Second Supplemental Indenture Modifications and Amendments Not Requiring Consent. Any provision of the Second Supplemental Indenture may be amended at any time by the parties thereto, without the consent of the holders of the Bonds or any other obligations issued by the City and subject to the Master Indenture, for any one or more of the following purposes: (a) (b) (c) To cure any ambiguity or formal defect or omission in the Second Supplemental Indenture or in any supplemental agreement; To grant to or confer upon the Trustee for the benefit of the holders of Bonds any additional rights, remedies, powers, authority or security that may lawfully be granted to or conferred upon such holders or the Trustee; To accomplish, implement or give effect to any other action which is authorized or required by the Second Supplemental Indenture; or (d) To comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to the Bonds. Within thirty (30) days after the execution of any supplement pursuant to this section, the Trustee shall cause notice thereof to be mailed, postage prepaid to all owners of Bonds at their addresses as they appear on the registration books. The notice shall briefly set forth the nature of the supplement and shall state that copies thereof are on file at the corporate trust office of the Trustee for inspection by all such holders. Any such supplement so executed shall be valid and binding notwithstanding any failure of the Trustee to mail the notice herein required and notwithstanding any objections which may be received pursuant to any mailed notice. Upon the execution of any supplement pursuant to the provisions of this section, the Second Supplemental Indenture shall be deemed to be modified and amended in accordance therewith and the respective rights, duties and obligations under the Second Supplemental Indenture of the City, the Trustee and all holders of outstanding Bonds shall thereafter be determined, exercised and enforced thereunder, subject in all respects to such modifications and amendments. Amendments With Approval. Any provision of the Second Supplemental Indenture may be amended at any time by written agreement of the parties thereto, but, except as provided in this section, no such amendment made after the issuance of any Bonds shall become effective until approved in writing by the holders of a majority of the principal amount of the Bonds then outstanding, other than those in the possession of the City or under its control; provided, however, no such amendment may (i) extend the maturity of the principal of or the interest on any Bond or (ii) reduce the principal amount of any Bond or the rate of interest thereon, or (iii) grant a privilege or priority of any Bond or Bonds over any other Bond or Bonds, or (iv) reduce the aggregate principal amount of the Bonds required for consent to such supplemental or amendatory indenture unless approved by the holders of all outstanding Bonds. Nothing contained in the Second Supplemental Indenture, however, shall be construed as making necessary the approval of the holders of Bonds of the execution of any supplement as authorized in the Second Supplemental Indenture. If at any time the City shall request the Trustee to execute any supplement for any of the purposes of this section, the Trustee shall cause notice of the proposed supplement to be mailed, postage prepaid to all owners of registered Bonds at their addresses as they appear on the registration books. The notice shall briefly set forth the nature of the proposed supplement and shall state that copies thereof are on file at the principal corporate trust office of the Trustee for inspection by any holders of Bonds. The Trustee IV-19

198 shall not, however, be subject to any liability to any holder of Bonds by reason of its failure to mail the notice required by this section, and any such failure shall not affect the validity of such supplement when executed as provided in this section. Upon the execution of any supplement pursuant to the provisions of this section, the Second Supplemental Indenture shall be and be deemed to be modified and amended in accordance therewith, and the respective rights, duties and obligations under the Second Supplemental Indenture of the City, the Trustee and all holders of Bonds outstanding shall thereafter be determined, exercised and enforced thereunder, subject in all respects to such modifications and amendments. Miscellaneous Second Supplemental Indenture Construed with Master Indenture. All of the provisions of the Second Supplemental Indenture shall be deemed to be and construed as part of the Master Indenture to the same extent as if fully set forth therein. [Remainder of page intentionally left blank] IV-20

199 SUMMARY OF AGREEMENT TO DEPOSIT DISTRIBUTABLE STATE AID CITY OF DETROIT DISTRIBUTABLE STATE AID GENERAL OBLIGATION (LIMITED TAX) BONDS, SERIES 2010 Definitions of Certain Terms For purposes of this summary, the following capitalized terms shall be defined as follows: Bonds means the $250,000,000 aggregate original principal amount of City of Detroit Distributable State Aid General Obligation (Limited Tax) Bonds, Series Under the Agreement to Deposit Distributable State Aid (hereafter referred to as the Agreement ), and pursuant to Act 80, the City directs the State Treasurer to, and the State Treasurer thereby agrees, to pay directly to the Trustee 100% of all Distributable Aid due and to be distributed to the City in accordance with the requirements of the Master Indenture, as supplemented by the First Supplemental Indenture (together, hereafter referred to as the Indenture ) for as long as the Bonds are outstanding; provided, however, that nothing in the Agreement shall abridge or reduce the ability of the State Treasurer to withhold Distributable Aid from the City as provided by law under the State Revenue Sharing Act or other applicable law. Under the Agreement, the Trustee agrees to hold the Distributable Aid payments in trust on behalf of bondholders as provided in the Indenture, for the payment of principal of and interest on the Bonds. The City acknowledges that in accordance with the State Revenue Sharing Act, the State Treasurer is authorized to withhold State Shared Revenues due the City as provided by the State Revenue Sharing Act or otherwise provided by law. Notwithstanding the foregoing, the State Treasurer agrees that so long as the Bonds are outstanding, if future installments of any Distributable Aid due the City are delayed or withheld, the State Treasurer shall not delay or withhold any portions of the City s Distributable Aid necessary to meet its set-aside obligations on debt service for the Bonds unless required to do so by applicable law. If the City fails to satisfy all or any portion of its payment obligations for the Bonds under the Indenture, when due, which shall give rise to or constitute an Event of Default under the Indenture, the City by the Agreement authorizes and directs the Trustee to give written notice to the State Treasurer on that payment date of the amount of the payment deficiency. If on any payment date for the Bonds the funds on deposit with the Trustee to make such payments are insufficient to pay the principal of, premium, if any and interest on the Bonds then due, the City can request and the State Treasurer may advance all or a part of any Distributable Aid payment which is dedicated for distribution or for which the appropriation authorizing the payment has been made under the State Revenue Sharing Act to pay the principal of and interest on the Bonds. In the event the City issues subsequent series of Distributable Aid Obligations pursuant to the Indenture, for each series of Distributable Aid Obligation issued by the City, the City, the State Treasurer and the Trustee may enter into a separate agreement to provide for the deposit of Distributable Aid in trust with the Trustee, in the order of priority and pursuant to the requirements of the Indenture and applicable law for the payment of debt service on the related Distributable Aid Obligation. The Agreement may be amended or revised in writing if such amendment or revision would not cause the then-current rating on the Bonds or any Distributable Aid Obligations issued by the City under IV-21

200 the Indenture to be downgraded by any national rating service then maintaining a rating on such Bonds, and with the consent of any credit provider that has issued and has in effect a credit facility, including bond insurance, with respect to the outstanding Bonds. Notwithstanding the foregoing, the City and the State Treasurer agree not to amend the Agreement in any manner which would in the opinion of nationally recognized bond counsel ( Bond Counsel ) have a material adverse effect on the direct payment of Distributable Aid to the Trustee to be held and used for the payment of principal of and interest on the Bonds or Distributable Aid Obligations, if any, unless such amendments shall, in the opinion of Bond Counsel, be necessary to cure or prevent the occurrence of an Event of Default by the City under the Indenture, and such amendment shall not become effective until approved in writing by the holders of a majority of the principal amount of all Distributable Aid Obligations then outstanding, including the Bonds. IV-22

201 SUMMARY OF AGREEMENT TO DEPOSIT DISTRIBUTABLE STATE AID CITY OF DETROIT DISTRIBUTABLE STATE AID SECOND LIEN BONDS (UNLIMITED TAX GENERAL OBLIGATION), SERIES 2010(A) Definitions of Certain Terms For purposes of this Agreement, the following capitalized terms shall be defined as follows: Bonds means the $100,000,000 aggregate original principal amount of City of Detroit Distributable State Aid Second Lien Bonds (Unlimited Tax General Obligation), Series 2010(A) (Taxable Recovery Zone Economic Development Bonds Direct Payment). Under the Agreement to Deposit Distributable State Aid (hereafter referred to as the Agreement ), the City directs the State Treasurer to continue, and the State Treasurer thereby reaffirms its agreement, to pay directly to the Trustee 100% of all Distributable Aid due and to be distributed to the City in accordance with the requirements of the Master Indenture, as supplemented by the Second Supplemental Indenture (together, hereafter referred to as the Indenture ) for as long as the Bonds are outstanding; provided, however, that nothing in the Agreement shall abridge or reduce the ability of the State Treasurer to withhold Distributable Aid from the City as provided by law under the State Revenue Sharing Act or other applicable law. Under the Agreement, and in accordance with the State Revenue Sharing Act, the Authority acknowledges the direct payment by the State Treasurer to the Trustee of Distributable Aid due the City and pledged to the Authority for the payment of debt service on the Bonds. The Trustee agrees to hold the portion of Distributable Aid payments pledged to the Authority for the payment of debt service on the Bonds in trust on behalf of the Authority, as provided in the Indenture, for the payment of principal of and interest on the Bonds. The City and the Authority each acknowledge that in accordance with the State Revenue Sharing Act, the State Treasurer is authorized to withhold State Shared Revenues due the City as provided by the State Revenue Sharing Act or otherwise provided by law. Notwithstanding the foregoing, the State Treasurer agrees that so long as the Bonds are outstanding, if the State Treasurer has received from the Trustee a notice of the deficiency of the Deposit Date Balance Requirement as defined in the Second Supplemental Indenture, and future installments of any Distributable Aid due the City are delayed or withheld, the State Treasurer shall not delay or withhold any portions of the City s Distributable Aid necessary for the City to cure such deficiency of the Deposit Date Balance Requirement for the Bonds unless required to do so by applicable law. The City agrees that unless and until funds are on deposit with the Trustee to meet the payment obligations for the DSA Bonds and the Bonds under the Indenture, when due, Distributable Aid shall not be paid by either the Trustee or the State Treasurer to the City. In the event the City issues subsequent series of Distributable Aid Obligations pursuant to the Indenture, for each series of Distributable Aid Obligation issued by the City, the City, the State Treasurer and the Trustee may enter into a separate agreement to provide for the deposit of Distributable Aid in trust with the Trustee, in the order of priority and pursuant to the requirements of the Indenture and applicable law for the payment of debt service on the related Distributable Aid Obligation. The Agreement may be amended or revised in writing if such amendment or revision would not cause the then-current rating on the Bonds or any Distributable Aid Obligations issued by the City under IV-23

202 the Indenture to be downgraded by any national rating service then maintaining a rating on such Bonds, and with the consent of any credit provider that has issued and has in effect a credit facility, including bond insurance, with respect to the outstanding Bonds. Notwithstanding the foregoing, the City and the State Treasurer agree not to amend the Agreement in any manner which would in the opinion of nationally recognized bond counsel ( Bond Counsel ) have a material adverse effect on the direct payment of Distributable Aid to the Trustee to be held and used for the payment of principal of and interest on the Bonds or Distributable Aid Obligations, if any, unless such amendments shall, in the opinion of Bond Counsel, be necessary to cure or prevent the occurrence of an Event of Default by the City under the Indenture, and such amendment shall not become effective until approved in writing by the holders of a majority of the principal amount of all Distributable Aid Obligations then outstanding, including the Bonds. IV-24

203 APPENDIX V FORMS OF AUTHORITY CONTINUING DISCLOSURE UNDERTAKING AND CITY CONTINUING DISCLOSURE UNDERTAKING

204 [THIS PAGE INTENTIONALLY LEFT BLANK]

205 FORM OF AUTHORITY CONTINUING DISCLOSURE UNDERTAKING CONTINUING DISCLOSURE UNDERTAKING Michigan Finance Authority Local Government Loan Program Revenue Bonds, Series 2010E (City of Detroit Unlimited Tax General Obligation Local Project Bonds) (Federally Taxable) This Continuing Disclosure Undertaking (the "Undertaking") is executed and delivered by the Michigan Finance Authority (the "Issuer") in connection with the issuance of its Local Government Loan Program Revenue Bonds, Series 2010E (City of Detroit Unlimited Tax General Obligation Local Project Bonds) (Federally Taxable) (the "Bonds"). The Bonds are being issued pursuant to a resolution adopted by the Board of Trustees of the Michigan Municipal Bond Authority on September 21, 1989, as amended, and a supplemental resolution of the Issuer adopted on December 7, 2010 (the "Resolution"). The Issuer covenants and agrees as follows: SECTION 1. Purpose of the Undertaking. This Undertaking is being executed and delivered by the Issuer for the benefit of the Bondholders. The Issuer acknowledges that the State of Michigan (the "State") has undertaken no responsibility with respect to any notices or disclosures provided or required under this Undertaking and has no liability to any person, including any Bondholders, with respect to any such notices or disclosures. The Issuer acknowledges that this Undertaking does not address the scope of any application of Rule 10b-5 promulgated by the SEC pursuant to the 1934 Act to the notices of the Listed Events provided or required to be provided by the Issuer pursuant to this Undertaking. SECTION 2. Definitions. In addition to the definitions set forth in the Resolution, which apply to any capitalized term used in this Undertaking unless otherwise defined in this Undertaking, the following capitalized terms shall have the following meanings: "Bondholders" shall mean the registered owner of any Bond and any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any of the Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (b) is treated as the owner of any of the Bonds for federal income tax purposes. "Dissemination Agent" shall mean the Issuer, or any successor Dissemination Agent designated in writing by the Issuer and which has filed with the Issuer a written acceptance of such designation. V-1

206 "EMMA" shall mean the Electronic Municipal Market Access system of the MSRB. As of the date of this Disclosure Certificate, the EMMA Internet Web site address is "Listed Events" shall mean any of the events listed in Section 3(a) of this Undertaking. "Material Obligated Person" shall mean a Governmental Unit meeting the objective criteria established by the Issuer as provided in Section 4 of this Undertaking. "MSRB" shall mean the Municipal Securities Rulemaking Board. As of the date of this Undertaking, the address and telephone and telecopy numbers of the MSRB are as follows: Municipal Securities Rulemaking Board 1900 Duke Street, Suite 600 Alexandria, Virginia Tel: (703) Fax: (703) "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. "Participating Underwriter" shall mean any of the original underwriters of the Bonds required to comply with the Rule in connection with the original offering of the Bonds. "Rule" shall mean Rule 15c2-12 promulgated by the SEC pursuant to the 1934 Act, as the same may be amended. "SEC" shall mean the United States Securities and Exchange Commission. SECTION 3. Reporting of Significant Events. (a) The Issuer agrees to provide, or cause to be provided, in a timely manner notice of the occurrence of any of the following events in a timely manner not in excess of ten (10) business days after the occurrence of the event and in accordance with the Rule: (1) Principal and interest payment delinquencies; (2) Non-payment related defaults, if material; (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, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with V-2

207 respect to the tax status of the security, or other material events affecting the tax status of the security; (7) Modifications to rights of security holders, if material; (8) Bond calls, if material; (9) Defeasances; (10) Release, substitution, or sale of property securing repayment of the securities, if material; (11) Rating changes; (12) Tender offers; (13) Bankruptcy, insolvency, receivership or similar event of the obligated person; (14) The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (15) Appointment of a successor or additional trustee or the change of name of a trustee, if material. (b) Whenever the Issuer obtains knowledge of the occurrence of a Listed Event described in subsection (a)(2), (7), (8), (10), (14) or (15), the Issuer shall as soon as possible determine if such event would be material under applicable federal securities laws. The Issuer covenants that its determination of materiality will be made in conformance with federal securities laws. (c) If the Issuer determines that (i) a Listed Event described in subsection (a)(1), (3), (4), (5), (6), (9), (11), (12) or (13) has occurred or (ii) the occurrence of a Listed Event described in subsection (a)(2), (7), (8), (10), (14) or (15) would be material under applicable federal securities laws, the Issuer shall cause a notice of such occurrence to be filed with the MSRB within ten (10) business days of the occurrence of the Listed Event. In connection with providing a notice of the occurrence of a Listed Event described in subsection (a)(9), the Issuer shall include in the notice explicit disclosure as to whether the Bonds have been escrowed to maturity or escrowed to call, as well as appropriate disclosure of the timing of maturity or call. SECTION 4. Obligated Persons. The Issuer hereby determines that for the Bonds the City of Detroit is a Material Obligated Person. V-3

208 SECTION 5. Termination of Reporting Obligation. The Issuer's obligations under this Undertaking shall terminate upon the legal defeasance of the Bonds or upon the payment in full of all of the Bonds. Notwithstanding the foregoing, (i) if the Rule shall be amended, modified or changed so that all or any part of the information currently required to be provided thereunder shall no longer be required to be provided thereunder and the Issuer has received an opinion of legal counsel experienced in the area of federal securities law to that effect, then such information shall no longer be required to be provided hereunder, and (ii) if and to the extent the Rule or any provision thereof shall be declared by a court of competent and final jurisdiction to be, in whole or in part, invalid, unconstitutional, null and void, or otherwise inapplicable to the Bonds, then the information required to be provided hereunder, insofar as it was required to be provided by a provision of the Rule so declared, shall no longer be required to be provided hereunder. SECTION 6. Mandatory Electronic Filing with EMMA. All filings with the MSRB under this Undertaking shall be made by electronically transmitting such filings through the EMMA Dataport at as provided by the amendments to the Rule adopted by the SEC in Securities Exchange Act Release No on December 5, SECTION 7. Dissemination Agent. The Executive Director on behalf of the Issuer, from time to time, may appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Undertaking and may discharge any such Agent, with or without appointing a successor Dissemination Agent. SECTION 8. Amendment. Notwithstanding any other provision of this Undertaking, this Undertaking may be amended, without the consent of any Bondholder, if the Issuer receives an opinion of legal counsel experienced in the area of federal securities law to the effect that: (i) such amendment is made in connection with a change in circumstances that arises from a change in legal requirements, a change in law or a change in the identity, nature or status of the Issuer, or types of activities in which the Issuer or the State is engaged; (ii) this Undertaking, as so amended, would have complied with the requirements of the Rule at the time of the primary offering of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (iii) such amendment does not materially impair the interests of the Bondholders. SECTION 9. Additional Information. Nothing in this Undertaking shall be deemed to prevent the Issuer from disseminating any other information, using the means of dissemination set forth in this Undertaking or any other means of communication, or including any other information in any notice of occurrence of a Listed Event, in addition to that which is required by this Undertaking. If the Issuer chooses to include any information in any notice of occurrence of a Listed Event in addition to that which is specifically required by this Undertaking, the Issuer shall have no obligation under this Undertaking to update such information or include it in any future notice of occurrence of a Listed Event. V-4

209 SECTION 10. Failure to Comply. In the event of a failure of the Issuer to comply with any provision of this Undertaking, any Bondholder may take such actions as may be necessary and appropriate, including seeking specific performance by court order, to cause the Issuer to comply with its obligations under this Undertaking. A failure to comply with this Undertaking shall not be deemed an Event of Default under the Resolution. The sole remedy under this Undertaking in the event of any failure of the Issuer comply with this Undertaking shall be an action to compel performance, and no person or entity shall be entitled to recover monetary damages hereunder under any circumstances. SECTION 11. Duties of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Undertaking. SECTION 12. Beneficiaries. This Undertaking shall inure solely to the benefit of the Issuer, the Dissemination Agent, the Participating Underwriter, and the Bondholders, and shall create no rights in any other person or entity. SECTION 13. Governing Law. To the extent not governed by federal law, this Undertaking shall be governed by the law of the State. MICHIGAN FINANCE AUTHORITY Dated:, 2010 By: Authorized Officer V-5

210 FORM OF CITY CONTINUING DISCLOSURE UNDERTAKING This Continuing Disclosure Undertaking (the Undertaking ) is executed and delivered by the City of Detroit, County of Wayne, State of Michigan (the City ) in connection with bonds issued by the City, purchased or to be purchased with funds from the Michigan Finance Authority Local Government Loan Program Revenue Bonds, Series 2010E, of the Type designated City of Detroit Unlimited Tax General Obligation Local Project Bonds (the Local Project Municipal Obligations ) by the Michigan Finance Authority (the MFA ). The City covenants and agrees for the benefit of the Bondholders, as hereinafter defined, as follows: (a) Definitions. The following terms used herein shall have the following meanings: Audited Financial Statements means the annual audited financial statement pertaining to the City prepared by an individual or firm of independent certified public accountants as required by Act 2, Public Acts of Michigan, 1968, as amended, which presently requires preparation in accordance with generally accepted accounting principles. Bondholders shall mean the MFA and the registered owner of any MFA Bond or any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any MFA Bond (including any person holding an MFA Bond through a nominee, depository or other intermediary), or (b) is treated as the owner of any MFA Bond for federal income tax purposes. EMMA shall mean the MSRB s Electronic Municipal Market Access System or such other system, Internet Web Site, or repository hereafter prescribed by the MSRB for the submission of electronic filings pursuant to the Rule. MFA Bond means any bond issued by the MFA which is secured in whole or in part by payments to be received on the Local Project Municipal Obligation. MSRB means the Municipal Securities Rulemaking Board. Rule means Rule 15c2-12 promulgated by the SEC pursuant to the Securities Exchange Act of 1934, as amended. SEC means the United States Securities and Exchange Commission. (b) Continuing Disclosure. The City hereby agrees, in accordance with the provisions of the Rule, to provide or cause to be provided to the MSRB through EMMA on or before the last day of the sixth month after the end of its fiscal year the following annual financial information and operating data, commencing with the fiscal year ended June 30, 2010 in an electronic format as prescribed by the MSRB, the Audited Financial Statements and updates of certain financial and operating data of the City appearing under the headings and tables in the Official Statement of the MFA dated December 9, 2010 relating to the MFA Bonds V-6

211 as follows: Tables 1 through 32, inclusive, and 42 in Appendix II to the Official Statement ( Annual Financial Information ). If the fiscal year of the City is changed, the City shall send notice of such change to the MSRB through EMMA prior to the earlier of the ending date of the fiscal year prior to such change or the ending date of the fiscal year as changed. In the event that the Audited Financial Statements are not available by the date specified above, they will be provided when available and Unaudited Financial Statements will be filed by such date and the Audited Financial Statements will be filed as soon as available. Such annual financial information and operating data described above are expected to be provided directly by the City by specific reference to documents available to the public through EMMA or filed with the SEC. (c) Notice of Failure to Disclose. The City agrees to provide or cause to be provided, in a timely manner, to the MSRB through EMMA, in an electronic format as prescribed by the MSRB, notice of a failure by the City to provide the annual financial information with respect to the City described in subsection (b) above on or prior to the dates set forth in subsection (b) above. (d) Occurrence of Events. The City agrees to provide or cause to be provided to the MSRB through EMMA, in an electronic format as prescribed by the MSRB, in a timely manner not in excess of ten business days after the occurrence of the event, notice of the occurrence of any of the following events listed in (b)(5)(i)(c) of the Rule with respect to the Local Project Municipal Obligation: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (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, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Local Project Municipal Obligation, or other material events affecting the tax status of the Local Project Municipal Obligation; (7) modifications to rights of Bondholders, if material; (8) bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Local Project Municipal Obligation, if material; (11) rating changes; V-7

212 (12) bankruptcy, insolvency, receivership or similar event of the City, which is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for the City in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the City, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City; (13) the consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; or (14) appointment of a successor or additional trustee or the change of name of a trustee, if material. (e) Materiality Determined Under Federal Securities Laws. The City agrees that its determination of whether any event listed in subsection (d) is material shall be made in accordance with federal securities laws. (f) Termination of Reporting Obligation. The City reserves the right to terminate their obligation to provide annual financial information and notices of material events, as set forth above, if and when the City is no longer an obligated person with respect to the MFA Bonds within the meaning of the Rule, including upon legal defeasance of all MFA Bonds. (g) Identifying Information. All documents provided to the MSRB through EMMA shall be accompanied by the identifying information prescribed by the MSRB. (h) Benefit of Bondholders. The City agrees that its undertaking pursuant to the Rule set forth in this Section is intended to be for the benefit of the Bondholders and shall be enforceable by any Bondholder; provided that, the right to enforce the provisions of this undertaking shall be limited to a right to obtain specific enforcement of the City s obligations hereunder and any failure by the City to comply with the provisions of this undertaking shall not constitute a default or an event of default with respect to the Bonds. (i) Amendments to the Undertaking. Amendments may be made in the specific types of information provided or the format of the presentation of such information to the extent deemed necessary or appropriate in the judgment of the City, provided that the City agrees that any such amendment will be adopted procedurally and substantively in a manner consistent with the Rule, including any interpretations thereof by the SEC, which, to the extent applicable, are V-8

213 incorporated herein by reference. Such interpretations currently include the requirements that (a) the amendment may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of the City or the type of activities conducted thereby, (b) the undertaking, as amended, would have complied with the requirements of the Rule at the time of the primary offering of the MFA Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances, and (c) the amendment does not materially impair the interests of Bondholders, as determined by parties unaffiliated with the City (such as independent legal counsel), but such interpretations may be changed in the future. If the accounting principles to be followed by the City in the preparing of the Audited Financial Statements are modified, the annual financial information for the year in which the change is made shall present a comparison between the financial statements as prepared on the prior basis and the statements as prepared on the new basis, and otherwise shall comply with the requirements of the Rule, in order to provide information to investors to enable them to evaluate the ability of the City to meet its obligations. A notice of the change in accounting principles shall be sent to the MSRB through EMMA. (j) Municipal Advisory Council of the State of Michigan. The City shall also file by electronic or other means any information or notice required to be filed with the MSRB through EMMA pursuant to this Undertaking in a timely manner with the Municipal Advisory Council of the State of Michigan. CITY OF DETROIT County of Wayne State of Michigan By Its: Finance Director Dated:, 2010 V-9

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215 APPENDIX VI FORMS OF LEGAL OPINIONS

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217 FORM OF APPROVING OPINION OF THE ATTORNEY GENERAL December _, 2010 Michigan Finance Authority Richard H. Austin Building Lansing, Michigan In my capacity as Attorney General of the State of Michigan, I have caused to be examined a closing transcript and, in particular, the following documents relating to the issuance by the Michigan Finance Authority (the "Authority") of bonds designated MICHIGAN FINANCE AUTHORITY LOCAL GOVERNMENT LOAN PROGRAM REVENUE BONDS, SERIES 2010E, (CITY OF DETROIT UNLIMITED TAX GENERAL OBLIGATION LOCAL PROJECT BONDS) (FEDERALLY TAXABLE), in the aggregate principal amount of $100,000,000 (the "Bonds"): (1) Executive Order compiled at of the Michigan Compiled Laws and the Shared Credit Rating Act, 1985 PA 227, as amended (the "Act"), which created the Authority and empowers it to issue bonds; (2) a certified copy of Resolution No adopted by the Authority on September 21, 1989, as amended, and supplemented, by a supplemental resolution adopted by the Authority on, 2010, authorizing the issuance of the Bonds (together, the "Resolutions"); and (3) a Non-Arbitrage and Tax Compliance Certificate of the Authority; and (4) one Bond, as executed, or a specimen thereof; The Bonds are being issued for the purpose of providing funds which will be used to purchase the obligations (the "Municipal Obligations") of various governmental units (the "Governmental Units") within the State of Michigan (the "State"), and to pay costs of issuance of the Bonds. In rendering this opinion, no opinion is expressed as to the validity or enforceability of the Municipal Obligations. Based on the foregoing, I am of the opinion that, under existing law as presently interpreted: 1. The Authority is a public body corporate and politic of the State duly organized and validly existing under the Constitution and the laws of the State, including particularly the Act. VI-1

218 2. The Authority has the power under the laws of the State to adopt the Resolutions. The Resolutions have been duly adopted by the Authority, are in full force and effect in the form adopted, and are valid and binding actions of the Authority. 3. The Bonds have been duly authorized, executed, and delivered by the Authority and, when duly authenticated, will constitute valid and binding limited obligations of the Authority enforceable in accordance with their terms, payable as to the principal of, premium, if any, and interest thereon solely from the security pledged therefor under the Resolutions, which security includes the Municipal Obligations. 4. The Bonds are limited obligations of the Authority. The Bonds, including the interest thereon, are not general obligations of the Authority and do not constitute obligations, debts, or liabilities of the State and do not constitute a charge against the general credit of the Authority or a charge against the credit or taxing power of the State. The Authority has no taxing power. 5. Interest on the Bonds is not excluded from gross income for federal income tax purposes. 6. The Bonds and the interest thereon are exempt from all taxation provided by the laws of the State except estate taxes and taxes on gains realized from the sale, payment, or other disposition thereof. Enforceability of the Bonds and the Resolutions may be subject to bankruptcy, insolvency, reorganization, moratorium, and other laws affecting creditors' rights heretofore or hereafter enacted to the extent constitutionally applicable and their enforcement may be subject to the exercise of judicial discretion including the application of general principles of equity. I express no opinion on the investment quality of the Bonds or whether the facts, figures, or financial information or other statements made respecting the Governmental Units or the State contained any untrue statement of material fact or omitted to state a material fact necessary in order to make those statements, in the light of the circumstances under which they were made, not misleading. Sincerely, MIKE COX Attorney General Assistant Attorney General VI-2

219 [Form of Approving Opinion of Bond Counsel] December, 2010 Michigan Finance Authority Richard H. Austin State Office Building Lansing, Michigan As Bond Counsel to the Michigan Finance Authority (the "Authority") we submit this opinion with respect to the issuance by the Authority of Local Government Loan Program Revenue Bonds, Series 2010E (City of Detroit Unlimited Tax General Obligation Local Project Bonds) (Federally Taxable) (the "Bonds"). The Bonds are authorized to be issued by Act No. 227, Public Acts of Michigan, 1985, as amended, (the "Act"), and by a bond resolution adopted by the Michigan Municipal Bond Authority on September 21, 1989, as amended and supplemented, and a supplemental resolution adopted by the Authority on, 2010 (together the "Resolutions"). The Bonds are being issued pursuant to the Act and the Resolutions to provide funding for the purchase of an obligation (the "Municipal Obligation") to be issued by a governmental unit in the State of Michigan (the "Governmental Unit") as set forth in the Resolutions and to pay costs of issuance of the Bonds. The Bonds are subject to redemption prior to maturity as set forth in the Resolutions and the Bonds. We have examined the Constitution and statutes of the State of Michigan (the "State"), the Resolutions, a specimen of a Bond and such other information, records and documents as we deem necessary, including a non-arbitrage and tax compliance certificate of the Authority, and based on such examination we are of the opinion under existing law that: 1. The Authority is duly created and validly existing as a body corporate with the power to adopt the Resolutions. 2. The Resolutions have been duly adopted by the Authority and constitute legal, valid and binding actions of the Authority in accordance with their terms. 3. The Bonds are valid and legally binding limited obligations of the Authority enforceable in accordance with their terms, payable as to the principal of, premium, if any, and accrued interest thereon solely from the security pledged therefor under the Resolutions. The Bonds are not a general obligation of the Authority. Neither the State nor any political subdivision of the State is obligated to pay the principal of, premium, if any, or interest on the Bonds and neither the faith and credit nor the taxing power of the State or any political subdivision of VI-3

220 the State is pledged to the payment of the principal of, premium, if any, or interest on the Bonds. The Authority has no taxing power. 4. The interest on the Bonds is not excluded from gross income for federal income tax purposes. We express no opinion regarding other federal tax consequences arising with respect to the Bonds and the interest thereon. 5. The Bonds and the interest thereon are exempt from all taxation provided by the laws of the State, except for estate taxes and taxes on gains realized from the sale, payment or other disposition of the Bonds. In rendering the foregoing opinion, no opinion is expressed as to the tax status or tax treatment of or the validity or enforceability of the Municipal Obligation. Enforceability of the Bonds and the Resolutions may be subject to the application of general principles of equity including those related to equitable subordination, and to bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws affecting creditors' rights heretofore or hereafter enacted to the extent constitutionally applicable and their enforcement may be subject to the exercise of judicial discretion in appropriate cases. The Opinions set forth herein are not intended or provided to be used and cannot be used by an owner of the Bonds for the purpose of avoiding penalties that may be imposed on the owner of the Bonds. The opinions set forth herein are provided to support the promotion or marketing of the Bonds. Each owner of the Bonds should seek advice based on its particular circumstances from an independent tax advisor. Respectfully submitted, Miller, Canfield, Paddock and Stone, P.L.C. Dickinson Wright PLLC VI-4

221 APPENDIX VII AUDITED BASIC FINANCIAL STATEMENTS OF THE CITY OF DETROIT, MICHIGAN

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223 City of Detroit Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2009 VII-1 FOUNDED 1701 INCORPORATED 1806 AREA (Square Miles) POPULATION 951,270 Dave Bing, Mayor Norman L. White, Chief Financial Officer

224 VII-2 TABLE OF CONTENTS I. INTRODUCTORY SECTION LETTER OF TRANSMITTAL I-1 AUDITOR GENERAL S LETTER I-5 LIST OF CITY OF DETROIT PRINCIPAL OFFICIALS I-6 CITY OF DETROIT ORGANIZATION CHART I-9 II. FINANCIAL SECTION INDEPENDENT AUDITORS REPORT 2 MANAGEMENT S DISCUSSION AND ANALYSIS (MD&A) (UNAUDITED) 7 BASIC FINANCIAL STATEMENTS: A. GOVERNMENT-WIDE FINANCIAL STATEMENTS: Statement of Net Assets 29 Statement of Activities 30 B. FUND FINANCIAL STATEMENTS: Governmental Funds Financial Statements: Balance Sheet 32 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets 34 Statement of Revenues, Expenditures, and Changes in Fund Balances 35 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities 36 Proprietary Funds Financial Statements: Statement of Net Assets 38 Statement of Revenues, Expenses, and Changes in Fund Net Assets 42 Statement of Cash Flows 44 Fiduciary Funds Financial Statements: Statement of Fiduciary Net Assets 48 Statement of Changes in Fiduciary Net Assets 49 Component Units Financial Statements: Combining Statement of Net Assets 50 Combining Statement of Activities 52 C. NOTES TO BASIC FINANCIAL STATEMENTS: I. Summary of Significant Accounting Policies 56 II. Stewardship, Compliance, and Accountability 66 III. Detailed Notes on all Funds A. Assets 69 B. Liabilities 83 IV. Subsequent Events 117 REQUIRED SUPPLEMENTARY INFORMATION: A. BUDGET TO ACTUAL COMPARISON GENERAL FUND: Notes to Budget to Actual Comparisons 122 Schedule of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual - General Fund 123 B. EMPLOYER CONTRIBUTIONS AND FUNDING PROGRESS: Schedule of Funding Progress 128 Schedule of Employer Contributions 129 Page TABLE OF CONTENTS OTHER SUPPLEMENTARY INFORMATION SECTION: A. COMBINING NON-MAJOR GOVERNMENTAL FUNDS FINANCIAL STATEMENTS: Other Governmental Funds: Combining Balance Sheet 134 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances 135 Special Revenue Funds: Combining Balance Sheet 136 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances 138 Capital Projects Funds: Combining Balance Sheet 140 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances 141 Street Fund: Combining Balance Sheet 142 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances 143 Permanent Funds: Combining Balance Sheet 144 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances 145 B. OTHER GOVERNMENTAL FUNDS BUDGETARY COMPARISON SCHEDULES: Special Revenue Funds 146 Debt Service Funds 158 Capital Projects Funds 159 C. FIDUCIARY FUNDS: Statement of Net Assets 162 Combining Statement of Changes in Net Assets 164 D. AGENCY FUNDS: Combining Statement of Assets and Liabilities 165 Combining Statement of Changes in Assets and Liabilities 166 III. STATISTICAL SECTION (UNAUDITED) Net Assets by Component, Last Eight Fiscal Years 168 Changes in Net Assets, Last Eight Fiscal Years 170 Fund Balances, Governmental Funds, Last Ten Fiscal Years 172 Changes in Fund Balances of Governmental Funds, Last Ten Fiscal Years 176 Assessed and Estimated Actual Value of Taxable Property, Last Ten Fiscal Years 178 Direct and Overlapping Property Tax Rates, Last Ten Fiscal Years 180 Principal Property Tax Payers, Current Year and Nine Years Ago 182 Property Tax Levies and Collections, Last Ten Fiscal Years 184 Ratios of Outstanding Debt by Type, Last Ten Fiscal Years 186 Ratios of General Bonded Debt Outstanding, Last Ten Fiscal Years 188 Direct and Overlapping Governmental Activities Debt as of June 30, Legal Debt Margin Information, Last Ten Fiscal Years 192 Pledged Revenue Coverage, Last Ten Fiscal Years 195 Demographic and Economic Statistics, Last Ten Calendar Years 197 Principal Employers, Current Year and Nine Years Ago 198 Full-time Equivalent City Employees by Function/Program, Last Ten Fiscal Years 201 Miscellaneous Operating Indicators by Function/Program, Last Ten Fiscal Years 202 PHOTO CREDITS All photographs courtesy of City of Detroit Communications and Creative Services Department Page i ii

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227 PRINCIPAL OFFICIALS OF THE CITY OF DETROIT, MICHIGAN Executive (Elected) Mayor DAVE BING VII-5 Legislative (Elected) City Council CHARLES PUGH President GARY BROWN President Pro Tem SAUNTEEL JENKINS KENNETH V. COCKREL JR. BRENDA JONES ANDRE SPIVEY JAMES TATE KWAME KENYETTA JOANN WATSON I-6

228 PRINCIPAL OFFICIALS OF THE CITY OF DETROIT, MICHIGAN Legislative (Elected) City Clerk JANICE WINFREY VII-6 Executive Official (Appointed) NORMAN WHITE Chief Financial Officer I-7