January 31, The Annual Financial Information, as required in the Continuing Disclosure Undertakings for:

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1 ANNUAL FINANCIAL INFORMATION DUE JANUARY 31, 2013 FOR THE TENNESSEE LOCAL DEVELOPMENT AUTHORITY Office of the Comptroller of the Treasury Office of State and Local Finance Suite 1600 James K. Polk Bldg. Nashville, Tennessee (615) Fax: (615) January 31, 2013 Attached is a copy of the State of Tennessee s Comprehensive Annual Financial Report for the fiscal year ended June 30, 2012 ( CAFR ). The CAFR as well as other supplemental data required is being submitted as Annual Financial Information in compliance with certain described Continuing Disclosure Undertakings of the Tennessee Local Development Authority ( the Authority ). The Annual Financial Information, as required in the Continuing Disclosure Undertakings for: Tennessee Local Development Authority: $8,295,000 State Loan Programs Revenue Bonds, 2003 Refunding Series A, dated January 30, 2003, maturing serially March 1, 2004, through 2015, CUSIPs are attached, Undertaking dated January 22, Tennessee Local Development Authority: $20,070,000 State Loan Programs Revenue Bonds, 2006 Refunding Series A, dated January 26, 2006, maturing serially March 1, 2007, through 2021, CUSIPs are attached, Undertaking dated January 19, Tennessee Local Development Authority: $37,415,000 State Loan Programs Revenue Bonds, 2006 Series B, dated February 28, 2006, maturing serially March 1, 2007, through 2034, CUSIPs are attached, Undertaking dated January 19, 2006.* The following information related to the Tennessee Local Development Authority has been included in this report: STATE OF TENNESSEE COMPREHENSIVE ANNUAL FINANCIAL REPORT Auditor s Report, Management s Discussion and Analysis, Basic Financial Statements, Notes and Required Supplementary Information TN CAFR pages 94, 184, & 185 (attached) State Shared Taxes Disbursed to Local Government Units (by tax type and by borrower) Funds Available to Meet Debt Service Estimated Debt Service See attached See attached See attached *All maturities after 2029 were fully defeased on December 16, 2010

2 ANNUAL FINANCIAL INFORMATION DUE JANUARY 31, 2013 FOR THE TENNESSEE LOCAL DEVELOPMENT AUTHORITY Relevant Bond CUSIP Numbers As of Fiscal Year End June 30, 2012 CUSIP NUMBER AMOUNT MATURITY DATE 2003 Refunding Series A: HK7 345,000 March 1, HL5 350,000 March 1, HM3 150,000 March 1, Refunding Series A: $845, MF2 535,000 March 1, MG0 555,000 March 1, MH8 590,000 March 1, MJ4 615,000 March 1, MK1 595,000 March 1, JM1 395,000 March 1, JN9 300,000 March 1, JP4 235,000 March 1, JQ2 75,000 March 1, 2021 $3,895, Series B: NH7 155,000 March 1, NJ3 160,000 March 1, NK0 170,000 March 1, NL8 170,000 March 1, NM6 180,000 March 1, NN4 190,000 March 1, NP9 195,000 March 1, NQ7 200,000 March 1, NR5 210,000 March 1, NS3 220,000 March 1, NT1 230,000 March 1, NU8 240,000 March 1, NV6 245,000 March 1, NW4 260,000 March 1, NX2 15,000 March 1, NY0 20,000 March 1, NZ7 20,000 March 1, 2029 $2,880,000

3 STATE SHARED TAXES Description of State Shared Taxes State Shared Taxes are defined in the Act as taxes collected by the State pursuant to law and allocated by law to Local Government Units, in some cases for general use by the Local Government Unit and in other cases for a particular purpose. The Act authorizes the Authority to identify, from time to time, by resolution, the taxes constituting State Shared Taxes, and upon approval of the form and substance of such resolution by the State Attorney General, such identification is conclusive as to the identified taxes. The Authority has adopted a resolution, approved by the State Attorney General, declaring certain taxes to be State Shared Taxes within the meaning of the Act, the statutes establishing the State Loan Programs, and the Loan Program Agreements. The term State Shared Taxes, as defined in the Act, in resolutions of the Authority, and in the Resolution, includes the following taxes, which were disbursed to Local Government Units in the following respective aggregate amounts during the fiscal year of the State ended June 30, State Shared Tax* Disbursements to Local Government Units (Fiscal Year 2012) State Code Reference Gasoline Tax and Motor Vehicle Fuel Use Taxes $277,933,000 Title 67, Chapter 3 Sales and Use Tax (municipalities only) $239,502,000 Title 67, Chapter 6 Federal Payments in Lieu of Taxes $149,692,000 Title 67, Chapter 9 Tax on Income from Stocks and Bonds (Hall Income Tax) $65,144,000 Title 67, Chapter 2 Mixed Drink Tax $32,051,000 Title 57, Chapter 4 Alcoholic Beverage Tax (counties only) $8,512,000 Title 57, Chapter 3 Beer Tax $3,500,000 Title 57, Chapter 5 *Source: Finance & Administration, Division of Accounts The amounts in the foregoing table are aggregate amounts of State Shared Taxes disbursed in fiscal year 2012 to all local government units in the State, including but not limited to Local Government Units participating in the State Loan Programs. State Shared Taxes allocated to a particular Local Government Unit are not authorized to be withheld to make payments under the Loan Program Agreement of any other Local Government Unit. Schedule 1 sets forth the unobligated State Shared Taxes in fiscal year 2012 for the Local Government Units that have entered into Loan Program Agreements for projects funded from the bond issues listed above and the estimated debt service requirements of these Local Government Units. Schedule 2 hereto sets forth the amount of State Shared Taxes allocated in each fiscal year from 2008 through 2012 to the Local Government Units that have entered into Loan Program Agreements projects funded from the bond issues listed above. In addition to the Act, other provisions of State law permit the withholding of State Shared Taxes to secure loans made to Local Government Units for various purposes, including but not limited to loans made by the State for the acquisition and construction of waterworks, sewage treatment and wastewater facilities. However, the Act

4 provides that notwithstanding the provisions of any other law, moneys withheld from State Shared Taxes apportioned to Local Government Units as permitted under the terms of the State Loan Programs shall be paid into the Loan Programs Fund and applied by the Authority solely to pay debt service on Bonds and Notes, refund moneys due to Local Government Units where appropriate, and pay other costs incidental to the administration of the State Loan Programs and the issuance of Bonds and Notes. See THE LOAN PROGRAM AGREEMENTS Pledges and Source of Payments by Local Government Units. Although State Shared Taxes are currently imposed and collected by the State and allocated to Local Government Units by statutory formulae as described below, there is no assurance that the State will continue to impose or collect State Shared Taxes, impose or collect such taxes at current rates or with respect to current tax bases, or allocate such taxes to Local Government Units in accordance with current practices or statutory formulae. The State s General Assembly has revised from time to time the allocation of State Shared Taxes, and in the future may consider further revisions of the State s tax structure, and any such revisions may affect the State Shared Taxes currently imposed and collected by the State and allocated to Local Government Units. The State s General Assembly currently is in session. The Authority cannot predict the form that future revisions, if any, to the State tax structure or to the allocation of State Shared Taxes will take, the level of funding that the Local Government Units will receive from State revenues or the effects any reduction in such revenues may have on the activities of the Local Government Units. In addition, there can be no assurance that State Shared Taxes will be available if they are withheld to satisfy withholdings permitted by other State law. Gasoline Tax and Motor Vehicle Fuel Use Taxes The tax imposed on distributors and dealers of gasoline was first enacted in The motor vehicle fuel use taxes (excise taxes on fuels other than gasoline, as defined by statute) were first imposed in The gasoline tax rate is currently 20 cents per gallon. Of the total gasoline tax rate, 11 cents is distributed under a formula which allocates approximately 14.3% of revenues to municipalities and 28.6% to counties. Three cents of the gasoline tax is allocated entirely to local governments, with approximately one-third being distributed to municipalities and approximately two-thirds to counties. The remaining gasoline tax is retained by the State. Effective January 1, 1989, gasohol is taxed and the tax revenue is distributed in the same manner as gasoline. The taxes on motor vehicle fuels are composed of the diesel tax, which is currently 17 cents per gallon, and the tax on compressed natural gas used as motor vehicle fuel, which is currently 13 cents per gallon. Twelve cents of the motor vehicle fuel tax plus taxes derived from the issuance of "diesel tax prepaid user authorizations" and nine cents of the compressed natural gas tax is distributed under a formula which allocates approximately 12.38% to municipalities and 24.75% to counties. The remainder of the motor vehicle fuel taxes is retained by the State. In fiscal year 2012, counties received a total combined allocation of $196,069,289 pursuant to the Gasoline Tax and Motor Vehicle Fuel Use Taxes and municipalities received a total of $81,864,118. Sales and Use Tax The retail sales and use tax (the "Sales Tax"), first enacted in 1947 at the rate of 2%, immediately became the State's largest revenue producer. From April 1, 1984, until April 1, 1992, the rate was 5.5%. Pursuant to 1992 Tennessee Public Acts Chapter 529, which became law March 4, 1992, the General Assembly increased the Sales Tax rate to 6.0%, effective April 1, 1992, through June 30, This increase is earmarked for the State s general fund, to be used for educational purposes. In 1994, the General Assembly enacted legislation making this increase permanent. In 2002, the General Assembly increased the Sales Tax rate to 7%, effective July 15, In general, under current law, approximately 4.59% of the Sales and Use Taxes collected are distributed among the incorporated municipalities based on population. Municipalities received $239,502,411 in fiscal year 2012.

5 Federal Payments in Lieu of Taxes The federal legislation creating the Tennessee Valley Authority (TVA) requires TVA to pay to the State a percentage of its gross revenues each year in lieu of taxes. In 1978, the State set the current base amounts for determining annual distributions to counties and municipalities of such TVA payments. Approximately 51.5% of the subsequent increase in proceeds from such TVA payments is allocated to counties and municipalities each year. Impacted areas experiencing TVA construction activities receive 3% of such increase. The remaining 48.5% of the increase is allocated 30% to municipalities, based on population, and 70% to counties, based on population, area, and, in part, on the percentage of TVA-owned land in the county. In fiscal year 2012, counties received a total of $107,832,704 and municipalities a total of $41,859,311 state-shared TVA payments. Tax on Income from Stocks and Bonds The income tax levied upon State taxpayers on their income derived by way of dividends on stocks and interest on bonds (commonly called the Hall Income Tax) was enacted in The rate is 6% per annum on such income. Of the taxes collected, three-eighths of the net tax is distributed among cities and counties based on the residence of the taxpayer. In fiscal year 2012, $41,515,797 was distributed to municipalities and $23,628,693 was distributed to counties. Legislation enacted in 1985 for tax years ending on or after January 1, 1986, raised the amount of such income exempt from the tax, increased the total annual income limits below which senior citizens are not required to pay the tax and eliminated a lower tax rate on stock dividends from certain corporations. Mixed Drink Tax The mixed drink tax was first enacted in The tax is levied at the rate of 15% of the sales price of all alcoholic beverages sold for consumption on the premises where sold. Fifty percent of the tax is allocated to counties and municipalities in which the alcoholic beverage is consumed that gives rise to the tax. One-half of the allocation is distributed to either the county or municipality in which the taxed liquor is consumed, depending on the form of organization of the local public school system. The remaining one-half is allocated to the municipality if collected therein and to the county if collected outside the corporate limits of a municipality. Municipalities received a total allocation of $16,320,752 and counties received a total of $15,729,796 in fiscal year 2012 pursuant to this tax. Alcoholic Beverage Tax The alcoholic beverage tax was first enacted in The tax is levied at the rate of $1.21 on each gallon of wine (other than wine produced in the State) and $4.40 on each gallon of spirits. Approximately 17.5% of the proceeds of the tax is allocated to counties, based predominantly on county population and in part on area. Counties received a total allocation of $8,512,400 pursuant to the Alcoholic Beverage Tax in fiscal year Beer Tax The beer tax was first enacted in The tax is levied at the rate of $4.29 per thirty-one liquid gallon barrel. Of the proceeds of the tax, 10.05% is allocated equally to counties and 10.05% is allocated based on population to municipalities. In fiscal year 2012, counties received $1,749,967 and municipalities an equal amount, pursuant to allocations of the Beer Tax.

6 SCHEDULE 1 SCHEDULE OF UNOBLIGATED STATE SHARED TAXES AND DEBT SERVICE FUNDS AVAILABLE TO MEET DEBT SERVICE DEBT SERVICE REQUIREMENTS AUTHORITY LOAN PROGRAM 2012 STATE AGREEMENTS OTHER CONTRACTS LOCAL GOVERNMENT UNIT SHARED TAXES* BOND FUNDED NOTE FUNDED** (STATE BONDS, SRF) TOTAL BENTON 151,263 30,814-30,814 BRUCETON 157,956 36,396-36,396 CARYVILLE-(JACKSBORO) 247,485 77,333-77,333 CLIFTON 290,150 13,011 25,824 38,835 COLLEGEDALE 1,368,178 33,953 72, ,913 COVINGTON 1,000,635 10,658-10,658 CROSSVILLE 1,311, ,849 1,078,533 1,252,382 DECATUR 277,965 19,230 71,196 90,426 DECATURVILLE 96,864 20,995-20,995 GIBSON 42,393 2,237-2,237 HUNTSVILLE 140,482 9,958-9,958 JACKSBORO-(CARYVILLE) 215,330 36,087-36,087 JEFFERSON CITY 884, , , ,848 JELLICO 250,364 21, , ,814 JONESBOROUGH 558,024 38,203-38,203 LAFAYETTE 483, , , ,964 LAKE CITY 189,822 27,295-27,295 MANCHESTER 1,146,257 4, , ,240 MOUNT CARMEL 607, , ,372 RED BANK 1,271, , , ,721 RIPLEY 914, , , ,444 SAVANNAH 777,706 40,871 79, ,107 SPRINGFIELD 1,818,132 31,117 63,000 94,117 TIPTONVILLE 480,897 29,132-29,132 TRENTON 496,250 87,991-87,991 TRIMBLE 69,111 7,760-7,760 TULLAHOMA 2,216, , , ,991 WHITE BLUFF 342,346 40,132 91, ,740 * STATE SHARED TAXES SHOWN FOR EACH MUNICIPALITY LISTED ARE NOT SUBJECT TO ANY OUTSTANDING PRIOR PLEDGES. THEREFORE, THE FULL AMOUNT OF STATE SHARED TAXES SHOWN ARE AVAILABLE TO MEET DEBT SERVICE ON LOAN PROGRAM AGREEMENTS. ** The TLDA Notes were fully refunded on December 16, Trenton's portion of the refunded notes was repaid by TLDA; however Trenton is still obligated to the TLDA for the balance of their loan.

7 SCHEDULE OF STATE SHARED TAXES BY BORROWER FOR THE FISCAL YEARS ENDING JUNE 30, 2008, 2009, 2010, 2011, AND 2012 SCHEDULE 2 FISCAL YEARS ENDING JUNE 30, LOCAL GOVERNMENT UNIT BENTON 157, , , , ,263 BRUCETON 175, , , , ,956 CARYVILLE-(JACKSBORO) 268, , , , ,485 CLIFTON 341, , , , ,150 COLLEGEDALE 851, , , ,406 1,368,178 COVINGTON 1,002, , , ,150 1,000,635 CROSSVILLE 1,377,867 1,355,678 1,255,294 1,269,897 1,311,718 DECATUR 178, , , , ,965 DECATURVILLE 97,111 94,937 92,888 94,772 96,864 GIBSON 46,120 43,401 42,922 43,896 42,393 HUNTSVILLE 127, , , , ,482 JACKSBORO-(CARYVILLE) 221, , , , ,330 JEFFERSON CITY 969, , , , ,676 JELLICO 272, , , , ,364 JONESBOROUGH 537, , , , ,024 LAFAYETTE 465, , , , ,006 LAKE CITY 213, , , , ,822 MANCHESTER 1,155,979 1,094,189 1,064,106 1,080,563 1,146,257 MOUNT CARMEL 532, , , , ,816 RED BANK 1,421,533 1,343,274 1,306,496 1,348,959 1,271,343 RIPLEY 909, , , , ,850 SAVANNAH 847, , , , ,706 SPRINGFIELD 1,842,512 1,728,617 1,701,240 1,729,960 1,818,132 TIPTONVILLE 537, , , , ,897 TRENTON 561, , , , ,250 TRIMBLE 81,248 76,922 75,594 80,389 69,111 TULLAHOMA 2,331,533 2,216,966 2,110,850 2,138,999 2,216,365 WHITE BLUFF 331, , , , ,346

8 STATE OF TENNESSEE NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2012 (Continued) M. Nonmajor component units long term debt Tennessee Local Development Authority (TLDA) Bonds Payable and Notes Payable at June 30, 2012, are shown below (expressed in thousands): Revenue bonds, 3.4% to 5%, due in generally decreasing amounts of principal and interest from $1.373 million in 2013 to $26 thousand in 2029 $ 7,832 Less: unamortized bond refunding costs (426) Net bonds payable $ 7,406 The revenue bonds listed above are not obligations of the state. They are secured by pledge of resources from the facilities to which they relate and by certain other revenues, fees and assets of TLDA. Debt Service requirements to maturity for TLDA s revenue bonds payable at June 30, 2012, are as follows (expressed in thousands): For the Year(s) Revenue Bonds Total Ended June 30 Principal Interest Requirements 2013 $ 1,063 $ 310 $ 1, , , , , , , $ 7,832 $ 1,630 $ 9,462 The above principal for revenue bonds does not reflect a $426 thousand deduction from bonds payable for the deferred amount on refunding. Tennessee State School Bond Authority (TSSBA) Bonds and Commercial Paper Payable at June 30, 2012, are shown below (expressed in thousands): Revenue bonds, various Series, 0% to 5.86%, due in decreasing amounts of principal and interest from $ million in 2013 to $4.414 million in 2040 $ 1,439,457 Less: unamortized bond refunding costs (16,291) Net bonds payable $ 1,423,166 Commercial paper, interest rates ranging from.10% to.33%, varying maturities $ 253,676 The revenue bonds and commercial paper listed above are not obligations of the state. They are secured by pledge of resources from the facilities to which they relate and by certain other revenues, fees and assets of the TSSBA. 94

9 State of Tennessee Combining Statement of Net Assets Component Units June 30, 2012 (Expressed in Thousands) Governmental Fund Types Proprietary Fund Types Tennessee Student Housing Tennessee Board University Assistance Tennessee Development Education of of Corporation CSA Agency Lottery Regents Tennessee Assets Cash and cash equivalents $ 4,826 $ 256 $ 219,397 $ 72,214 $ 1,019,674 $ 935,770 Investments 40, , ,206 Receivables, net 10,055 1,152 42,591 60, , ,964 Due from primary government 447 1,175 28,308 Inventories, at cost 3,263 6,541 Prepayments 7,767 5, Loans receivable 2,099,615 Deferred charges and other 11,741 4,104 9,669 Fair value of derivatives Restricted assets: Cash and cash equivalents 34, Investments 186,562 2,889 Receivables, net 1,683 Capital assets: Land, at cost 124,805 75,400 Infrastructure 330,538 98,226 Structures and improvements, at cost 402 2,367,405 2,061,522 Machinery and equipment, at cost , , ,795 Less accumulated depreciation (13) (443) (4,356) (1,315,159) (1,200,629) Construction in progress 212, ,610 Total assets 14,881 1,900 2,636, ,030 3,873,684 4,074,229 Liabilities Accounts payable and accruals 4, ,585 50, , ,303 Due to primary government ,438 5,041 4,480 Deferred revenue 137 1, ,327 83,738 Deferred inflow- derivatives Other 34,049 46,607 Noncurrent liabilities: Due within one year , ,182 73,041 Due in more than one year ,871,002 3, , ,940 Total liabilities 5, ,078, ,017 1,032,152 1,195,109 Net assets Invested in capital assets, net of related debt ,101 1,527,605 1,371,908 Restricted for: Debt service 3, Capital projects 27,722 63,202 Single family bond programs 508,687 Other 9,582 9, , ,748 Permanent and endowment: Expendable 11,621 84,910 Nonexpendable 285, ,515 Unrestricted 1,072 39,824 (1,101) 812, ,097 Total net assets $ 9,582 $ 1,117 $ 557,918 $ 13 $ 2,841,532 $ 2,879,

10 Proprietary Fund Types State Local Veterans' Federal Family School Certified Access Total Development Homes Education Loan Bond Cotton Tennessee Component Authority Board Program Authority Growers' Insurance Plan Units $ 15,023 $ 8,060 $ 85,879 $ 23,771 $ 1,520 $ 46,598 $ 2,432,988 1,008 1,338,210 3, , , ,569 1,777 31, , ,149 7,287 1,477,909 3,584, ,562 2,487 61,665 2,128 2,128 1,373 3,110 13,815 96, ,767 82, ,036 1,181 2, ,611 1, ,471 30,209 4,459,538 5,664 1,016,569 (11,597) (2,532,197) 9 607,722 23,781 42, ,373 1,728,284 5,039 47,803 12,694, , , , , ,189 15, ,043 2,128 2, ,768 1, , ,709 6,371 5,431 1,626,808 5,100,519 7,569 7, ,720, ,392 6,194,326 21,088 2,921, ,611 90, ,687 4,243 14, ,678 96, ,275 16,212 9,439 86,372 7,872 4,985 45,411 1,499,662 $ 16,212 $ 35,099 $ 101,368 $ 7,872 $ 4,985 $ 45,411 $ 6,500,

11 FINANCIAL STATEMENTS OF THE AUTHORITY

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14 TENNESSEE LOCAL DEVELOPMENT AUTHORITY MANAGEMENT S DISCUSSION AND ANALYSIS As management of the Tennessee Local Development Authority, we offer readers of the Authority s financial statements this narrative overview and analysis of the financial activities of the Authority for the fiscal years ended June 30, 2012, and June 30, 2011, with comparative data for the year ended June 30, This discussion has been prepared by management along with the financial statements and related note disclosures and should be read in conjunction with the Independent Auditor s Report, the audited financial statements, and the accompanying notes. The financial statements, notes, and this discussion are the responsibility of management. Program Activity Highlights The Authority s purpose is to provide loans to Local Government Units under the State Loan Programs and State Infrastructure Program, and to qualified borrowers under the Community Provider Loan program. The table below summarizes this business activity. Pursuant to Title 4, Chapter 31, Tennessee Code Annotated, the General Assembly of the state created the Tennessee Local Development Authority to issue bonds and notes to fund capital projects for a variety of purposes. Currently, the active programs of the Authority include: 1) the State Loan Programs providing assistance to Local Government Units in the construction of waterworks, sewage treatment, and energy and/or solid waste recovery facilities; 2) the Community Provider Program providing facility construction assistance to licensed, nonprofit, 501(c)(3) corporations under grant contracts with the state to deliver mental health, mental retardation, or alcohol and drug services; and Local Community Government Units Providers Number of borrowers with outstanding loans Total number of outstanding loans Total amount of outstanding loans (in thousands) $6,429 $7,527 $85,422 $830 $1,432 $1,839 Number of loans approved in fiscal year Amount of loans approved in fiscal year (in thousands) $0 $0 $1,194 $0 $0 $0 3) the State Infrastructure Program providing assistance to Local Government Units in the construction of transportation infrastructure projects that provide public benefits by enhancing mobility or safety, promoting economic development, or increasing the quality of life and general welfare of the public. During the year ended June 30, 2011, one loan was approved in the amount of $1,725,000. No loans were approved or made for the years ended June 30, 2012, and June 30, The financial statements and the analysis provided in the remainder of this report reflect the financial results of this activity. For more specific financial information on long-term debt activity, see Note 5, Debt Payable, in the Notes to the Financial Statements.

15 TENNESSEE LOCAL DEVELOPMENT AUTHORITY MANAGEMENT S DISCUSSION AND ANALYSIS (Cont.) Debt Administration A financial analysis of each loan funded through the State Loan Programs is undertaken before it is approved by the Authority. Each Local Government Unit must demonstrate that it has enacted rates and charges sufficient to repay the debt, as well as to fund operations, maintenance, and depreciation. The Authority is authorized to intercept the local community s state-shared taxes, should the government unit fail to repay timely its loan. Similarly, Community Providers must also charge fees sufficient to repay the debt and fund operations, maintenance, and depreciation. The Authority is also authorized by statute to intercept the state appropriation to the Community Provider should the borrower fail to make timely debt service payments to the Authority. Under the financing program for the State Loan Programs, during the construction phase of a project, the project generally is funded through the issuance of Bond Anticipation Notes. When sufficient projects are completed to assure an appropriate economy of scale to sell bonds, the Authority fixes the interest rate for the term of the projects by issuing long-term debt. Interest rates on the State Loan Programs facilities long-term fixed-rate debt range from a low of 3.50% to a high of 5.00%. By pooling the financing of their capital needs, management believes that economic efficiencies of a single large borrowing administered by one agency are achieved. The creditworthiness of both large and small Local Government Units is homogenized into one credit resulting in a lower cost of borrowing to all participants. The Authority s State Loan Programs are rated Aa3, AAA, and AA by Moody s Investors Service, Inc., Standard & Poor s Rating Group, and Fitch Ratings, respectively. Fitch Ratings comments that the rating reflects the ongoing commitment to conservative practices of the program. Fitch also cites the structure of the Authority s board with its composition including the state s highest elected officials as an asset of the program. Standard & Poor s Rating Group notes that the ample debt service reserve fund and the underlying credit quality of the local governments receiving loans are strengths of the credit. Moody s Investors Service comments that the responsibility of the localities to repay loans, the sound legal provisions, and state oversight were factors in the rating process. All rating agencies commented that the fact that there had been no recourse to the state intercept of state-shared taxes nor to the statutory reserve fund are additional strengths of the credit. The Community Provider program was originally authorized in 1990 by the General Assembly to provide construction financing for eligible borrowers at interest rates lower than would otherwise be obtainable in the capital market. The program was initially funded through the issuance of the 1992 and the 1994 Community Provider bonds. In 1999, the State Funding Board loaned $16,000,000 to the Authority to defease the 1992 and 1994 bonds. This loan was fully repaid during fiscal year Overview of the Financial Statements The Authority is a discretely presented component unit of the State of Tennessee and uses proprietary fund accounting. The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America using the accrual basis of accounting and the flow of economic resources measurement focus. This basis recognizes revenues when earned and expenses at the time liabilities are incurred. Using the economic resources measurement focus, a reader is presented information that allows him to determine the transactions and events that have increased or decreased the total economic resources for the period.

16 TENNESSEE LOCAL DEVELOPMENT AUTHORITY MANAGEMENT S DISCUSSION AND ANALYSIS (Cont.) This discussion and analysis is intended to serve as an introduction to the Authority s basic financial statements. The Authority s basic financial statements comprise two components: 1) the basic financial statements and 2) notes to the basic financial statements. The basic financial statements consist of the Statement of Net Assets; the Statement of Revenues, Expenses and Changes in Net Assets; and the Statement of Cash Flows. The Statement of Net Assets depicts the Authority s overall financial position at June 30, the end of each fiscal year presented. The Statement of Revenues, Expenses and Changes in Net Assets reports the results of operations for the year. The Statement of Cash Flows summarizes the inflows and outflows of cash throughout the fiscal year. These statements are supplemented by notes to the basic financial statements, which provide information essential to the reader s understanding of the financial statements. In addition to the basic financial statements and notes, this report also contains supplementary information containing financial statement information at the program level. Financial Analysis of the Authority Standard indicators of financial success are not applicable to the Authority. The financial goal of the Authority is to provide timely access to the capital markets at the lowest possible cost and to make creditworthy loans. The Authority successfully achieved this goal. There were no incidents requiring the Authority to draw from the debt service reserve fund or refuse a loan to an applicant due to the inability to obtain capital funding. Statements of Net Assets Summary (in thousands) Current assets $ 16,316 $ 16,066 $ 24,019 Restricted assets 1,373 1,611 5,580 Other assets 6,092 7,492 87,615 Total assets 23,781 25, ,214 Current liabilities 1,198 1,404 58,201 Noncurrent liabilities 6,371 7,361 44,712 Total liabilities 7,569 8, ,913 Net assets: Unrestricted net assets 16,212 16,404 14,301 Total net assets $ 16,212 $ 16,404 $ 14,301 Note: The Authority owns no capital assets.

17 TENNESSEE LOCAL DEVELOPMENT AUTHORITY MANAGEMENT S DISCUSSION AND ANALYSIS (Cont.) No Revenue Bond Anticipation Notes were issued during the year ended June 30, There are no unexpended note proceeds as of June 30, 2012, and June 30, All notes have been defeased. The cash balance of $4,395,496 in current assets at June 30, 2010 included unexpended note proceeds available to fund loans to State Loan Programs eligible borrowers. For the years ended June 30, 2012 and June 30, 2011, the largest component of the total asset balance is the cash balance. For the year ended June 30, 2010, the loans receivable balance, which represents the principal due from borrowers to the Authority, was the largest component of the total asset balance. Loans receivable (both current and noncurrent) totaled $7,286,648 at June 30, 2012, $8,958,662 at June 30, 2011, and $87,260,196 at June 30, The large decrease between 2010 and 2011 is due to the partial refunding that took place in December The partial refunding is also the reason for the significant decreases in cash, restricted assets, current liabilities and noncurrent liabilities. Restricted assets represent the debt service reserve fund. Noncurrent assets will continue to decrease unless new loans are made. The Authority s unrestricted net assets are available to fund operations and other expenses necessary to meet the goals of the Authority. Statements of Revenues, Expenses, and Changes in Net Assets Summary (in thousands) Operating Revenues Revenue from loans $ 350 $ 1,370 $ 2,311 Interest income Administrative fees Total operating revenue 380 1,418 2,404 Operating Expenses Interest expense ,451 Subsidy to borrowers Other expenses Total operating expenses ,688 Operating Income (Loss) (192) 424 (284) Nonoperating Revenue (Expense) - 1,679 2,215 Increase (Decrease) in Net Assets $ (192) $ 2,103 $ 1,931 The Authority s operating expenses are supported by revenue received from the borrowers as a one-time cost of issuance expense not to exceed 2% at the time of permanent financing, interest on loans, and income on investments. Operating expenses include interest expense on

18 TENNESSEE LOCAL DEVELOPMENT AUTHORITY MANAGEMENT S DISCUSSION AND ANALYSIS (Cont.) outstanding debt, administrative expenses, and the amortization of bond costs of issuance. The Authority returns a portion of the investment earnings as a subsidy to its borrowers in the State Loan Programs. Revenue to the Authority decreased from 2011 to 2012 and from 2010 to 2011 due to the Authority not issuing any new loans and the exit of the Authority s largest borrower, Nashville, TN in December While the Authority s operating expenses decreased from 2011 to 2012 and from 2010 to 2011, a decrease in operating revenues resulted in an overall operating loss for the year ended June 30, Falling market interest rates were responsible for a decrease in interest earned on the Authority s investments. Meanwhile, interest income from loans of the Authority experienced a decrease. This decrease is a result of a decline in the frequency of requests for new loans in recent years. All of the Authority s loans are structured such that the borrowers pay level debt service payments for the life of the loan. Therefore as the loans approach maturity, more of the payments received are applied toward principal, resulting in less interest income. Loan principal prepayments of loans in both the State Loan Program and the Community Provider Program were also partially responsible for the decrease in the interest revenue generated from the Authority s loans. In 2012, there was no nonoperating revenue due to the lack of a transfer or early termination of loans as has occurred in previous years as stated below. The nonoperating revenue in 2011 is due to a gain on the early termination of loans. The nonoperating revenue in 2010 was due to a transfer to the Authority in the amount of $2,190,000 from the Tennessee Department of Transportation (TDOT). The funds were transferred to the Authority after the creation of the Tennessee Transportation State Infrastructure Fund Act pursuant to Tennessee Code Annotated The State Infrastructure Program provides assistance to Local Government Units in the construction of transportation infrastructure projects that provide public benefits by enhancing mobility or safety, promoting economic development, or increasing the quality of life and general welfare of the public. The Authority has no plans to issue debt in the immediate future. Communities who had previously utilized the program have identified other funding opportunities, such as the State Revolving Loan Program, that better suit their needs. Contacting the Authority s Financial Management Team This discussion and analysis is designed to provide our citizens, local government units, community providers, investors, and creditors with a general overview of the Authority s finances and to demonstrate its accountability for the monies it receives. If you have questions about this report or need additional financial information, contact the Office of State and Local Finance, State of Tennessee, Suite 1600, James K. Polk Building, Nashville, Tennessee or visit our website at

19 Tennessee Local Development Authority Notes to the Financial Statements June 30, 2012, and June 30, 2011 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reporting Entity The Tennessee Local Development Authority was created to provide financial assistance to local governments through the issuance of revenue bonds or notes. The Authority has also issued bonds to assist nonprofit corporations in the construction of mental health, mental retardation, or alcohol and drug facilities. The Authority is a component unit of the State of Tennessee (the State) and a separate legal entity. In accordance with the Governmental Accounting Standards Board s (GASB) Statement No. 14, The Financial Reporting Entity, the Authority is discretely presented in the Tennessee Comprehensive Annual Financial Report because the Authority s board consists of state officials which include the Governor, the Secretary of State, the Comptroller of the Treasury, the State Treasurer, the Commissioner of Finance and Administration, a State Senate appointee and a State House appointee. The Governor serves as chairman and the Secretary of State serves as vice chairman. The Comptroller of the Treasury serves as secretary. The Director of the Office of State and Local Finance serves as the assistant secretary; the Office of State and Local Finance provides administrative and financial services to the Authority. Therefore, the State has the ability to affect the day to day operations of the Authority. Basis of Presentation The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board (GASB). The Tennessee Local Development Authority follows all applicable GASB pronouncements as well as applicable private sector pronouncements issued on or before November 30, The Authority has chosen not to follow subsequent private-sector guidance. Measurement Focus and Basis of Accounting The accompanying financial statements have been prepared using the accrual basis of accounting and the flow of economic resources measurement focus. Under this basis, revenues are recorded when earned, and expenses are recorded at the time liabilities are incurred. The Tennessee Local Development Authority distinguishes operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with principal ongoing operations. The Authority s principal operation is to provide loans to local governments through the issuance of revenue bonds or notes. Therefore, the principal operating revenues of the Authority are from interest on loans made to borrowers. The Authority also recognizes income on investments as operating revenue. The Authority s operating expenses include interest paid on borrowings, subsidies to borrowers, bond issuance costs, arbitrage, and administrative expenses. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses.

20 Cash Tennessee Local Development Authority Notes to the Financial Statements (Cont.) June 30, 2012, and June 30, 2011 This classification includes cash on hand and deposits in the pooled investment fund administered by the State Treasurer. Bond Discounts and Issuance Costs Bond discounts and issuance costs are deferred and amortized over the life of the bonds using the straight-line method. Bonds payable are reported net of the applicable unamortized bond discount. Unamortized issuance costs are reported as deferred charges. NOTE 2. DEPOSITS AND INVESTMENTS Under the general bond resolution of the Tennessee Local Development Authority, the funds of the Authority are to be held and invested by the State Treasurer. Deposits The Authority does not utilize its own bank accounts but has cash on deposit for its operating cash purposes in the State Pooled Investment Fund administered by the State Treasurer. The Authority had $16,396,042 in the pooled investment fund at June 30, 2012, and $16,090,287 at June 30, The pooled investment fund is authorized by statute to invest funds in accordance with policy guidelines approved by the State Funding Board. The fund is not rated by a nationally recognized statistical rating organization. Its investment policy and required risk disclosures are presented in the State of Tennessee s Treasurer s Report. The report is posted on the State s website at or may be obtained by calling (615) NOTE 3.. NOTE 4. RESTRICTED ASSETS The general bond resolution of the Authority requires that the principal of each bond issue include an amount equal to one year's debt service requirement and that such amount be placed in special trust accounts with the trustee. The required debt service reserve is $1,373,003 at June 30, 2012, and $1,611,103 at June 30, The general bond resolution also requires that the debt service requirement in any year of the refunding bonds must not exceed the debt service requirement in any year of the refunded bonds. Two of the largest borrowers in the 2003 refunding issue chose to shorten the term of their loans by one year, causing the new debt service requirement in the year 2011 to exceed the prior debt service requirement by $26, The amount was yield restricted and placed in a special trust account with the trustee and held until March 1, The deposit, in effect, reduced the new debt service requirement not to exceed the prior debt service requirement. PAYABLE TO BORROWERS This account represents interest earnings on restricted assets and loan principal overpayments that will be refunded to borrowers.

21 Tennessee Local Development Authority Notes to the Financial Statements (Cont.) June 30, 2012, and June 30, 2011 NOTE 5. DEBT PAYABLE Revenue bonds. Bonds payable at June 30, 2012, and June 30, 2011, are as follows (expressed in thousands): June 30, 2012 June 30, Refunding Series A at an interest rate of 4.00% maturing to 2015 (original par $8,295) $ 845 $ 1, Refunding Series A at interest rates from 4.0% to 5.00% maturing to 2021 (original par $20,070) 3,895 4, Series B at interest rates from 3.5% to 4.375% maturing to 2029 (original par $37,415) 2,880 3,030 Total par amount of bonds payable 7,620 8,845 Plus unamortized premium Less unamortized discount (15) (16) Bonds payable net of unamortized premium/discount 7,832 9,085 Less deferred amount on refunding (426) (499) Net bonds payable $ 7,406 $ 8,586 Debt service requirements to maturity of the revenue bonds payable at June 30, 2012, are as follows (expressed in thousands): For the Year(s) Ending June 30 Principal Interest Total , , , , , , , , Total $7,832 $1,630 $9,462 The above principal amounts for bonds do not reflect a $425,549 deduction from bonds payable for the deferred amount on refunding.

22 Revenue bonds payable Tennessee Local Development Authority Notes to the Financial Statements (Cont.) June 30, 2012, and June 30, 2011 Changes in long-term debt payable for the year ended June 30, 2012, are as follows (expressed in thousands): Amounts Beginning Ending Due Additions Reductions Balance Balance Within One Year $ 8,845 $ $ 1,225 $ 7,620 $ 1,035 - Unamortized amounts: Premium Discount (16) - (1) (15) - Deferred amount on refundings Total bonds payable (499) - (73) (426) $ 8,586 $ - $ 1,180 $ 7,406 $ 1,035 - Revenue bonds payable Changes in long-term debt payable for the year ended June 30, 2011, are as follows (expressed in thousands): Amounts Beginning Ending Due Additions Reductions Balance Balance Within One Year $ 48,940 $ $ 40,095 $ 8,845 $ 1,225 - Unamortized amounts: Premium Discount (172) - (156) (16) - Deferred amount on refundings Total bonds payable (1,240) - (741) (499) - $ 48,242 $ - $ 39,656 $ 8,586 $ 1,225 NOTE 6. STATUTORY RESERVE RESTATEMENT In fiscal year 2011, the decision was made to restate amounts held in the Statutory Reserve Fund from restricted to unrestricted. The intention of the Fund was to ensure payment of the required annual debt service (principal and interest) for certain municipalities. As of June 30, 2012, Mount Carmel was the only borrower meeting the requirements for inclusion in the Fund. Maximum annual debt service for Mount Carmel is $130,372. After review of the General Bond Resolution, it was determined that this amount should be classified as unrestricted.

23 Tennessee Local Development Authority Notes to the Financial Statements (Cont.) June 30, 2012, and June 30, 2011 NOTE 7. STATE INFRASTRUCTURE FUND The Tennessee Transportation State Infrastructure Fund was created pursuant to Tennessee Code Annotated The State Infrastructure Program provides assistance to Local Government Units in the construction of transportation infrastructure projects that provide public benefits by enhancing mobility or safety, promoting economic development, or increasing the quality of life and general welfare of the public. As of June 30, 2012, one loan has been approved in the amount of $1,725,000. NOTE 8. EARLY REPAYMENT OF LOANS AND DEFEASANCE OF RELATED DEBT On December 2, 2010, Metropolitan Government of Nashville and Davidson County advised the Tennessee Local Development Authority (the Authority ) of its desire to prepay its program loans and defease its current TLDA debt outstanding that was issued by the Authority on its behalf. As of December 16, 2010, long-term debt in the amount of $38,575,000 and all of the bond anticipation notes, totaling $53,060,000, were defeased. NOTE 9. TRANSFER FROM COMMUNITY PROVIDERS TO STATE LOAN PROGRAM Pursuant to the authorization of the Public Acts of 2012, Chapter 1029, Section 41, Item 42, $700,000 was transferred from the Community Provider Loans Fund to the State Loan Programs Fund. NOTE 10. COMMUNITY PROVIDERS LITIGATION The Community Provider Program provided financial assistance to construct facilities for licensed, nonprofit, 501(c)(3) corporations to deliver mental health, mental retardation, alcohol and drug rehabilitation services under grant contracts with the State of Tennessee. The Program has no outstanding debt associated with the loans that are currently outstanding. The loans for the Fayette County Developmental Center, Inc. and to the Hardeman County Development Services, Inc. are in default. The Fayette County Development Center loan is outstanding in the amount of $177,406, and the Hardeman County Development Services, Inc. loan is outstanding in the amount of $498,488. The services provided by these corporations have been assumed by the State of Tennessee. This matter was referred to the Office of the Tennessee Attorney General, which is currently exploring options for the most effective way to resolve the legal issues involved. NOTE 11. SUBSEQUENT EVENTS On August 31, 2012, Standard and Poor s Rating Group downgraded the Authority s bond rating from AAA to AA+.

24 TENNESSEE LOCAL DEVELOPMENT AUTHORITY STATEMENTS OF NET ASSETS JUNE 30, 2012, AND JUNE 30, 2011 (Expressed in Thousands) June 30, 2012 June 30, 2011 ASSETS Current assets: Cash (Note 2) $ 15,023 $ 14,478 Receivables: - - Loans receivable (Notes 8 and 10) 1,293 1,588 Total current assets 16,316 16,066 Noncurrent assets: Restricted cash (Notes 2 and 3) 1,373 1,611 Loans receivable (Notes 8 and 10) 5,993 7,371 Deferred charges Total noncurrent assets 7,465 9,103 Total assets 23,781 25,169 LIABILITIES Current liabilities: Accrued interest payable Payable to borrowers (Note 4) Revenue bonds payable (Note 5) 1,035 1,225 Total current liabilities 1,198 1,404 Noncurrent liabilities: Revenue bonds payable, net (Note 5) 6,371 7,361 Total noncurrent liabilities 6,371 7,361 Total liabilities 7,569 8,765 NET ASSETS Unrestricted (Note 6) 16,212 16,404 Total net assets $ 16,212 $ 16,404 The Notes to the Financial Statements are an integral part of this statement. -

25 TENNESSEE LOCAL DEVELOPMENT AUTHORITY STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS FOR THE YEARS ENDED JUNE 30, 2012, AND JUNE 30, 2011 (Expressed in Thousands) Year Ended June 30, 2012 Year Ended June 30, 2011 OPERATING REVENUES Revenue from loans $ 350 $ 1,370 Administrative fees collected 9 - Interest income Total operating revenues 380 1,418 OPERATING EXPENSES Interest expense Subsidy to borrowers - 29 Administrative expense Total operating expenses Operating income (loss) (192) 424 NONOPERATING REVENUES AND EXPENSES Gain on the early termination of loans (Note 8) - 1,654 Transfer from the State of Tennessee - 25 Total nonoperating revenue (expense) - 1,679 Change in net assets (192) 2,103 Net assets, July 1 16,404 14,301 Net assets, June 30 $ 16,212 $ 16,404 The Notes to the Financial Statements are an integral part of this statement.

26 TENNESSEE LOCAL DEVELOPMENT AUTHORITY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2012, AND JUNE 30, 2011 (Expressed in Thousands) Year Ended June 30, 2012 Year Ended June 30, 2011 CASH FLOWS FROM OPERATING ACTIVITIES Payments to service providers $ (140) $ (174) Net cash used by operating activities (140) (174) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Principal payments (1,225) (1,520) Interest paid (381) (1,735) Transfer from the State of Tennessee - 25 Payment for defeasance of debt - (14,648) Net cash used by noncapital financing activities (1,606) (17,878) CASH FLOWS FROM INVESTING ACTIVITIES Loans issued (27) (612) Collections of loan principal 1,699 5,379 Interest received on loans 351 1,371 Administrative revenue 9 - Interest received on pooled investment fund Net cash provided by investing activities 2,053 6,186 Net increase (decrease) in cash 307 (11,866) Cash, July 1 16,089 27,955 Cash, June 30 $ 16,396 $ 16,089 Reconciliation of operating income (loss) to net cash used by operating activities: Operating income (loss) $ (192) $ 424 Adjustments to reconcile operating income (loss) to net cash used by operating activities: Revenue from loans (350) (1,370) Interest income (21) (48) Interest expense Subsidy to borrowers - 29 Administrative revenue from borrowers (9) - Total adjustments 52 (598) Net cash used by operating activities $ (140) $ (174) The Notes to the Financial Statements are an integral part of this statement.