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CDIAC provides information, education and technical assistance on public debt and investments to local public agencies and other public finance professionals. 1

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Not Concerned About Arbitrage? Not so Fast… Tuesday, November 8 th 10am – 11:15am Continuing Disclosure Issues – Material Events| 5 | 5 | 5

Discussion Topics  Arbitrage Math Concepts  IRS Audit Hot Buttons  Documentation and SEC Disclosure Continuing Disclosure Issues – Material Events| 6 | 6 | 6

Primary Math Concepts • Arbi rbitrage R Reba bate • Yield R Reduct uctio ion P n Payment • Spend nding ing E Exceptio ions ns • Transfe ferre rred P Proc oceeds Continuing Disclosure Issues – Material Events| 7 | 7 | 7

Arbitrage Rebate Continuing Disclosure Issues – Material Events| 8 | 8 | 8

Yield Reduction Payment Arbitrage Earned Period Example 1 Example 2 Example 3 Year 1 -3 Unrestricted 10,000 (9,000) 8,000 Year 4 - 5 Restricted 5,000 7,000 (2,000) Rebate Payment 10,000 0 6,000 Yield Reduction Payment 5,000 7,000 0 Continuing Disclosure Issues – Material Events| 9 | 9 | 9

Spending Exceptions 6 mos 15% 6 mos 10% 100% 1 6 mos. 12 mos 60% 12 mos. 45% 100% 18 mos 18 mos. 75% 100% 24 mos. Continuing Disclosure Issues – Material Events| 10 | 10 | 10

Spending Analysis Amount Cumulative Cumulative Cumulative Exceeding / Percentage Amount Amount (Below) Period Period End Date Required Required Actually Spent Requirement Six Month 23-Aug-06 10% $ 10,702,878.95 $ 31,144,712.06 $ 20,441,833.11 Twelve Month 23-Feb-07 45% 48,162,955.27 53,018,920.06 4,855,964.79 Eighteen Month 23-Aug-07 75% 80,271,592.12 69,184,284.06 (11,087,308.06) Twenty-Four Month 23-Feb-08 100% 107,028,789.49 106,253,656.73 (775,132.76) Final 23-Feb-09 100% 107,028,789.49 106,253,656.73 (775,132.76) Continuing Disclosure Issues – Material Events| 11 | 11 | 11

Transferred Proceeds Call/ Principal Cumulative Cumulative Transfer Called Outstanding Transfer Transferred Non-Transferred Dates Principal Prior to Call Percentage Proceeds Ratio Proceeds Ratio 2.0970% 2.0970% 97.9030% 02/01/2008 $ 545,000.00 $ 25,990,000.00 02/01/2009 565,000.00 25,445,000.00 2.1739% 4.2709% 95.7291% 02/01/2010 590,000.00 24,880,000.00 2.2701% 6.5410% 93.4590% 02/01/2011 24,290,000.00 24,290,000.00 93.4590% 100.0000% 0.0000% Totals $ 25,990,000.00 $ - 100.0000% Continuing Disclosure Issues – Material Events| 12 | 12 | 12

Bond Yield Comparison 6.00% 5.00% 4.00% Variable Rate Yield 3.00% Fixed Rate Yield Variable w/SWAP 2.00% 1.00% 0.00% 2006 2007 2008 2009 2010 Continuing Disclosure Issues – Material Events| 13 | 13 | 13

Use of Proceeds Scenarios A. A. Sp Spent q quickly b but m misse ssed Sp Spending Except ption on B. Pro B. Project s stal talled afte after thre r three y year ears C. C. Di Didn’t s spe pend pr proceeds Continuing Disclosure Issues – Material Events| 14 | 14 | 14

Spent Quickly Missed Spending Exception 6.00% 5.00% 4.00% Fixed Rate Bond 3.00% Variable Rate Yield Investment Yield 2.00% 1.00% 0.00% 2007 2008 2009 2010 2011 Continuing Disclosure Issues – Material Events| 15 | 15 | 15

Project Stalled after 3 years 6.00% 5.00% 4.00% Fixed Rate Bond 3.00% Variable Rate Bond 2.00% Investment Yield 1.00% 0.00% 2007 2008 2009 2010 2011 -1.00% Continuing Disclosure Issues – Material Events| 16 | 16 | 16

Minimal Proceeds Spent 6.00% 5.00% 4.00% Fixed Rate Bond 3.00% Variable Rate Bond Investment Yield 2.00% 1.00% 0.00% 2007 2008 2009 2010 2011 Continuing Disclosure Issues – Material Events| 17 | 17 | 17

IRS Audit Hot Topics Actual Dr Drawdown wn Sc Schedule le of Bond ond Procee ceeds (Ha (Have A. You Spent nt Bon ond Pr Proceed ceeds Within in Three ee Yea ears rs?) ?) B. Hav ave you Ma Made your Re Rebate Payment nts in in a Tim imely Ma Manner nner? C. Are Bon ond Pr Proceed ceeds Yield Res Restrict cted ed after er Three ee Ye Years? D. Do Do th the Reb Rebate Repor ort Schedules match tch th the Issuer’s ’s Bon ond Alloc Allocation on for or Other er Pur Purposes es? E. Hav ave You Co Comp mpli lied with th the IRS RS Sa Safe-harbo bors for Gua uarant nteed Inv nvestment Cont ontracts or for or bid iddin ing open market et secur ecurities es for or a Refund nding ng Es Escr crow? Continuing Disclosure Issues – Material Events| 18 | 18 | 18

Documentation and SEC Disclosure Once t there is is a a Tax ax I Issu ssue mu must y you Disc isclose I It? A. A. B. B. Wha hat D Disclosure Tre Trends a are re The There for Ta for Tax Ma Matters Sectio ions? s? C. C. Post st I Issu suan ance C Compl mplia iance - Wha hat Typ Type of of Wri ritten Pro rocedures Do I n o I need? Continuing Disclosure Issues – Material Events| 19 | 19 | 19

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