Recovery Zone Bonds 101 for South Dakota Counties and Cities. August 5, 2009

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1 Recovery Zone Bonds 101 for South Dakota Counties and Cities August 5, 2009

2 Acknowledgments Thank you to our sponsors: And co-hosts: 2

3 Presenters Lynn Endorf, Dorsey & Whitney LLP Todd Meierhenry, Meierhenry Sargent LLP Thomas Grimmond, Dougherty & Company LLC 3

4 Recovery Zone (RZ) Bonds Overview RZ Bonds are a special category of bonds authorized by the Recovery Act; state law requirements must also be met Two kinds of RZ Bonds: - RZ Economic Development Bonds - RZ Facility Bonds 4

5 RZ Bonds Overview RZ Economic Development Bonds: - the primary focus of this webinar - a type of Build America Bonds taxable bonds with a federal direct payment to the issuer equal to 45% of interest payable - issuable in 2009 and

6 RZ Bonds Overview RZ Facility Bonds: - a new kind of (tax-exempt) private activity exempt facility bonds (PAEF Bonds) used to assist private businesses - generally subject to same rules as PAEF Bonds, except have a separate annual statewide volume cap and expanded permissible uses of proceeds - Issuable in 2009 and

7 Eligible Issuers (Both Kinds of RZ Bonds) Eligible Issuers: - 40 SD counties that received volume cap allocation from federal government - smaller units of government within 40 counties if counties sub-allocate their volume cap - City of Sioux Falls 7

8 Eligible Issuers (Both Kinds of RZ Bonds) Eligible issuers, continued - State of South Dakota if federally allocated volume cap waived by recipients process to be determined - Other counties and cities if federally allocated volume cap waived by recipients and the state sub-allocates waived amounts process to be determined 8

9 Eligible Issuers (Both Kinds of RZ Bonds) Chart showing volume cap allocated to each of 40 counties and City of Sioux Falls available at SD cities and counties received total allocation of $90 million for RZ Economic Development Bonds; $135 million for RZ Facility Bonds 9

10 Use of Proceeds: RZ Economic Development Bonds RZ Economic Development Bonds must be used to promote development or other economic activity in a recovery zone Subject to SD law, qualified purposes include: - capital expenditures in connection with property located in the recovery zone - public infrastructure and public facilities - job training and educational programs - working capital expenditures 10

11 Use of Proceeds: RZ Economic Development Bonds RZ Economic Development Bonds may be used: - to finance costs of issuance (up to 2%) plus a reasonably required reserve fund - to reimburse for qualified expenditures under certain treasury regulations - to reimburse otherwise eligible expenditures paid or incurred after Feb. 17, 2009 and originally financed with temporary short-term financing issued after that date. RZ Economic Development Bonds generally may not be used for refundings 11

12 Use of Proceeds: RZ Facility Bonds RZ Facility Bonds must be used to stimulate private business by financing Recovery Zone Property (defined on next slide) RZ Facility Bonds may also be used for costs of issuance (up to 2%) and a reasonably required reserve fund 12

13 Use of Proceeds: RZ Facility Bonds Recovery Zone Property is depreciable property meeting following additional criteria: - property constructed, acquired, etc. by the borrower after the applicable recovery zone designated - borrower is first person to use the property in the zone - substantially all of the use of property is in the zone, in connection with borrower s active conduct of a qualified business 13

14 Use of Proceeds: RZ Facility Bonds qualified business is any trade or business except: - rental to others of residential rental property (as defined in the Internal Revenue Code) - certain other business including golf courses, country clubs, gambling facilities, off-sale liquor stores, among others 14

15 Recovery Zones: Criteria and Designation Process A recovery zone is either of the following: - A federally designated empowerment zone or renewal community (only such area in SD is within Oglala Sioux reservation) - Any area designated by the issuer of RZ Bonds as (1) having significant poverty, unemployment, rate of home foreclosures, or general distress or (2) distressed because of a military base closure or realignment pursuant to federal law 15

16 Recovery Zones: Criteria and Designation Process Pursuant to interim guidance from the IRS, the issuer of RZ Bonds may make the designation of a recovery zone in any reasonable manner as it shall determine in good faith in its discretion. 16

17 RZ Econ. Dev. Bonds: Other Considerations Federal Davis-Bacon prevailing wage requirements apply to projects financed with RZ Economic Development Bonds Credit payments are obtained from the U.S. Dept. of Treasury using same form (8038-CP) and process that apply to Build America Bonds (BABs). More information on BABs is available under the just published tab at 17

18 State Law Considerations: Debt Limits Certain types of RZ Economic Development Bonds may constitute debt for constitutional purposes: - Counties and cities subject to 5% limit for any purpose; additional 10% for water & sewer with 50% voter approval 18

19 State Law Considerations: Counties Authority Relevant Authority (SDCL) for Counties Issuing RZ Economic Development Bonds: - General Obligation Bonds - ch & 6-8B majority voter approval - Building Fund Bonds - ch Lease-Purchase (COPs) - sections & (using Building Fund Levy ) 19

20 State Law Considerations: Counties Authority Relevant Authority (SDCL) for Counties Issuing RZ Facility Bonds: - Revenue Bonds for Economic Development - sec , ch

21 State Law Considerations: Cities Authority Relevant Authority (SDCL) for Cities Issuing RZ Economic Development Bonds: - General Obligation Bonds - ch & 6-B voter approval 60% - Utility Revenue Bonds - ch (project revenue and system debtvoter approval) - Sales Tax Bonds - ch (1%, 2% or 3% pledge) - Special Assessment Bonds - ch

22 State Law Considerations: Cities Authority Relevant Authority (SDCL) for Cities Issuing RZ Facility Bonds: - Revenue Bonds for Economic Development Purposes - ch

23 State Law Considerations: Prevailing Wage Remember SDCL ch and Davis-Bacon prevailing wage requirements for projects financed with RZ Economic Development Bonds Sample bid language: This project is subject to the requirements of the Davis-Bacon Act, as amended. The contractor is required to comply with the wage and labor provisions and to pay minimum wages in accordance with the wage rates established by the United States Department of Labor. The bidder shall comply with the requirements of the federal prevailing rate of wage under the Davis-Bacon Act, 40 U.S.C. 3141, et seq., as applicable. This project is funded in part with monies from Recovery Zone Economic Development Bonds as authorized under the American Recovery and Reinvestment Act. All work performed on this project will be subject to the federal prevailing rate of wage under the Davis-Bacon Act, 40 U.S.C. 3141, et seq., as applicable. 23

24 An Underwriter s Perspective on RZ Bonds Rationale for new taxable (i.e., RZ Economic Development) bonds - ease financial burden for borrowing with federal subsidy - stimulate spending - broaden the market for issuers - total U.S. retirement market assets valued at $7.86 trillion (includes defined contribution [401k] and defined benefit plans) 24

25 An Underwriter s Perspective on RZ Bonds Taxable bonds carry higher interest rates - Federal government provides a 45% rebate to the issuer Tax-exempt Taxable % Rebate (0.19) (0.25) (0.46) (0.63) (0.69) (0.93) (1.00) (1.10) (1.21) (1.18) (1.19) (1.18) (1.20) (1.56)

26 An Underwriter s Perspective on RZ Bonds 7.00 $3.5 Million RZ Bond Issue % Average Savings After Rebate: $571,774 Savings over traditional tax-exempt bonds Tax-exempt Taxable 45% Rebate 26

27 Live Q & A To ask a question, type it into the chat box on the bottom left of the screen. Your question will only be visible to the presenters. 27

28 For More Information For more information on any of today s topics after the seminar, please contact: Lynn Endorf, Dorsey & Whitney LLP or endorf.lynn@dorsey.com Todd Meierhenry, Meierhenry Sargent LLP or todd@meierhenrylaw.com Thomas Grimmond, Dougherty & Company LLC or tgrimmond@doughertymarkets.com 28

29 Presenter Biographies LYNN ENDORF is an attorney in the public finance group at Dorsey & Whitney LLP. In addition to advising a variety of public bodies, banks, and other financial institutions for more than 35 years on public finance and economic development matters, Lynn serves as bond counsel and underwriter s counsel in connection with general obligation and utility revenue bonds, industrial revenue bonds, housing bonds, health care revenue bonds, and other obligations. Lynn represents clients in Minnesota, North and South Dakota, Wisconsin, Montana and Missouri and has drafted legislation in both Minnesota and South Dakota. 29

30 Presenter Biographies TODD MEIERHENRY is an attorney with Meierhenry Sargent LLP. In addition to advising South Dakota public bodies, banks, and other financial institutions for more than 20 years on public finance and economic development matters, Todd serves as bond counsel and underwriter s counsel in connection with every type of bonds issued in South Dakota. Todd is also general counsel for the South Dakota Building Authority and South Dakota Educational Enhancement Funding Corporation and is the drafter of the legislation which created the County Improvement Districts (Dakota Dunes) and Ellsworth Devolvement Authority South Dakota s newest governmental subdivision. 30

31 Presenter Biographies THOMAS GRIMMOND is a senior vice president at Dougherty & Company based in Sioux Falls. As an investment banker, Tom handles the financial modeling of issuers' capital requirements. Since joining Dougherty in 1992, Tom has structured financings for colleges, school districts, municipalities, and counties using certificates of participation, general obligation bonds, revenue bonds, and other obligations and revenue sources. His notable projects include financings for the Sioux Falls Convention Center and Sioux Falls Lewis & Clark Project. Tom is a past council member for the City of Tea and served on the Revenue and Taxation Policy Committee of the South Dakota Municipal league. He is also a member of the South Dakota Army National Guard and served an 11-month activation in support of Operation Enduring Freedom in

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