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Tab_186TAX EXEMPTION AND NONARBITRAGE CERTIFICATE CONCERNING $4,905,000 GENERAL OBLIGATION SCHOOL REFUNDING BOND, 2016 OF KODIAK ISLAND BOROUGH, ALASKA I, Dora Cross, on behalf of the Kodiak Island Borough, Alaska (the "Borough"), certify as follows: General. 1.1 Responsible Officer. I am the Finance Director of the Borough and, as such, am an officer of the Borough responsible for issuing the Borough's $4,905,000 General Obligation School Refunding Bond, 2016 (the "Bond"), dated, delivered and paid for on the same date as the date of this certificate (the "issue date"). 1.2 Purpose of Certificate. This certificate is executed to establish the facts, estimates and circumstances in existence on the issue date and the bona fide reasonable expectations of the Borough on the issue date as to future events in connection with the Bond for the purposes of the applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and applicable Treasury Regulations under Sections 103, 141 and 148-150 of the Code. 1.3 Reasonable Basis for Expectations. To the best of my knowledge, information and belief, this certificate accurately summarizes the facts, estimates and circumstances in existence on the issue date, and the expectations of the Borough on the issue date about future events in connection with the Bond are reasonable. 1.4 Defined Terms. Capitalized words used but not otherwise defined in this certificate have the meanings set forth in Resolution No. FY2017-10 of the Borough (the "Bond Resolution"). 2. Purpose of Issuing the Bond. 2.1 Governmental Purpose. The Borough is a local government unit of the State of Alaska. The Bond is being issued by the Borough to the Alaska Municipal Bond Bank (the "Bond Bank") to evidence the obligation of the Borough to repay a loan made by the Bond Bank to the Borough from the portion of the proceeds of the Bond Bank's General Obligation and Refunding Bonds, 2016 Series Three, allocable to the Borough (the "Bond Bank Bonds"). The Bond Bank is loaning the proceeds of the Bond Bank Bonds to the Borough pursuant to an amendatory loan agreement (the "Amendatory Loan Agreement") for the purpose of providing the funds necessary to refund the Borough's outstanding General Obligation School Bond, 2008 Series A (the "Refunded Bond") and to pay costs of issuance, as provided by the Bond Resolution (the "Refunding"). The Refunded Bond was issued to provide the funds necessary to plan, design, and construct the school capital improvements described in Proposition 1 as the New School Pool, 6-Lane, 1 Diving Board (the "Refinanced Improvements"). Pursuant to -1- 51562571.1 Treasury Regulations Section 1.150-1 (d)(2)(ii)(B), the Borough is treated as the obligor on the Bond Bank Bonds. 2.2 No Impermissible Private Business Use. No more than 10% ($571,120.52) of the proceeds of the Bond (or of a corresponding portion of the Refinanced Improvements being financed with proceeds of the Bond) will be used for any private business use. No more than 5% ($285,560.26) of the proceeds of the Bond (or of a corresponding portion of the Refinanced Improvements being financed with proceeds of the Bond) will be used either for any private business use that is unrelated to the governmental purpose of the Bond or for any private business use that is related to a governmental purpose of the Bond but exceeds the amount of proceeds of the Bond that are expected to be used for that governmental purpose. No more than 5% of the proceeds of the Bond will be used directly or indirectly to make or finance loans to any person other than a governmental unit, except a loan, if any, which enables the borrower to finance a governmental tax or assessment of general application for a specific essential governmental function, or that constitutes a nonpurpose investment within the meaning of Section 148 of the Code. 3. Source and Disbursement of Proceeds. 3.1 Purchaser and Purchase Price of the Bond. The Borough has entered into the Amendatory Loan Agreement with the Bond Bank to secure payment of the sum of $4,905,000 (the "Loan Amount"). Pursuant to the Amendatory Loan Agreement the Bond Bank will issue the Bond Bank Bonds at a price equal to the Loan Amount plus original issue premium on the Bond Bank Bonds of $806,205.15, less an underwriter's discount on the Bond Bank Bonds of $15,121.11. 3.2 Funds Into Which Proceeds From the Issuance and Sale of the Bond and the Bond Bank Bonds Will Be Deposited. The proceeds received by the Borough from the issuance and sale of the Bond will be used and applied as follows: (a) $15,000 will be used to pay the Borough's costs of issuance of the Bond, (b) $14,220.23 will be used to pay an allocable portion of the Bond Bank's costs of issuance of the Bond Bank Bonds, (c) $3,349.34 will be used to pay the premium for a debt service reserve surety bond for the Bond Bank Bonds, (d) $1,622.67 representing the contingency amount (an amount less than 1% of the sale proceeds of the Bond) will be deposited in an account used primarily to achieve a proper matching of revenues of the Borough with principal and interest payments on the Bond (the "Bond Fund") and used to pay interest on the Bond on the first interest payment date, and (e) $5,661,891.80 will be deposited in the refunding escrow. 4. The Refunding. 4.1 Use of Proceeds and Other Funds. Of the sale proceeds of the Bond deposited in the refunding escrow, $5,661,890, together with $272,409 on deposit that represents unspent proceeds of the Refunded Bond ("Unspent Proceeds"), will be used on the issue date to acquire United States Treasury Certificates of Indebtedness, Notes, and Bonds--State and Local Government Series (the "Acquired Obligations"), which, together with a beginning cash balance of $1.80, will be held in the refunding escrow established to accomplish the Refunding. -2- 51562571.1 Proceeds of the Bond and other amounts deposited in the refunding escrow are allocated to expenditures to pay the principal, interest, and redemption price of the Refunded Bond so that the expenditures of proceeds do not occur faster than ratably with expenditures of the other amounts. In addition, during the period that there are Unspent Proceeds of the Refunded Bond, proceeds and other amounts are allocated to expenditures to pay the principal, interest and redemption price of the Refunded Bond ratably (with reasonable adjustments for rounding) both between sources of funds (i.e., between proceeds and other amounts) and between uses (i.e., to pay the principal, interest, and redemption price of the Refunded Bond). Other amounts deposited in the refunding escrow that, before the issue date, were held in the Bond Fund for the purpose of paying principal of or interest on the Refunded Bond or were held in a fund that was expected to be used to carry out the governmental purposes of the Refunded Bond are allocated to the earliest-maturing Acquired Obligations in the refunding escrow. 4.2 Purpose and Effect of the Refunding. (a) Interest Cost Savings. The purpose of the Refunding is to accomplish an interest cost savings to the Borough of $799,929.44 with a net present value of $481,937.64, as represented by the difference between debt service on the Bond and debt service on the Refunded Bond discounted to the issue date using the yield on the Bond as the discount rate. (b) Permitted Advance Refunding. The issuance of the Bond represents only the first advance refunding of the Refunded Bond. (c) Required Redemption of Prior Issue. The date on which the Refunded Bond will be called for redemption pursuant to the Refunding is the first date on which that issue may be called for redemption. (d) Unspent Proceeds of the Refunded Bonds. The Borough will not invest the Unspent Proceeds at a yield that exceeds the yield on the Bond, because the Unspent Proceeds will be used on the issue date to acquire the Acquired Obligations. 5. Payment of Bond. 5.1 Debt Service Structure. The Bond is a general obligation bond of the Borough. The Bond matures on December 1, 2027. Principal of the Bond is payable annually in installments on December 1 of each year from 2018 to 2027, inclusive. Interest on the Bond is payable semiannually on each June 1 and December 1, commencing on December 1, 2016. The principal installments of the Bond are not subject to prepayment. 5.2 Source of Payment. The Bond is payable from the proceeds of taxes levied against all of the taxable property located within the Borough and other funds available therefor. Those funds that are expected to be used to pay principal of or interest on the Bond will be deposited in the Bond Fund and used within 13 months of their deposit in that fund for payment of principal of or interest on the Bond. The Bond Fund will be used primarily to achieve a proper matching of tax revenues of the Borough and debt service on the Bond within each bond year. It is expected that the Bond Fund will be depleted at least once a year (on each -3- 51562571.1 December 1), except for a reasonable carryover amount not expected to exceed the greater of one year's earnings on that fund or 1/12 of the annual debt service on the Bond. 5.3 Absence of Other Sinking Funds. Except for the Bond Fund, the Borough has not created or established and does not expect to create or establish any reserve fund, sinking fund or other similar fund that is reasonably expected to be used directly or indirectly to pay debt service on the Bond or any pledged fund with respect to which there is reasonable assurance that money will be available in that fund to pay debt service on the Bond even if the Borough were to encounter financial difficulties. 6. Restrictions on Investing Proceeds of the Bond in Higher Yielding Investments. 6.1 Calculation of Yield on Bond. For purposes of this certificate, the yield on the Bond is deemed to be equal to the yield on the Bond Bank Bonds. The yield on the Bond Bank Bonds has been calculated as the yield that when used in computing the present worth of all payments of principal of and interest on the Bond Bank Bonds produces an amount equal to the issue price of the Bond Bank Bonds. The "issue price" of the Bond Bank Bonds is the initial offering price of the Bond Bank Bonds (including original issue discount or premium, if any) at which a substantial amount (at least 10%) of each maturity of the Bond Bank Bonds has been sold to the public (not including bond houses, brokers or other intermediaries). The yield on the Bond Bank Bonds has been calculated to be 2.598457%. Such determination as to yield has been made by Western Financial Group, LLC, attached hereto as Exhibit A, based on representations made by RBC Capital Markets, LLC, underwriter of the Bond Bank Bonds, attached hereto as Exhibit B. In determining this yield, no adjustments were made for underwriter's discount or other costs of issuance of the Bond. 6.2 Calculation of Yield on Acquired Obligations. The yield on the Acquired Obligations has been calculated (using the same method and frequency intervals used in calculating the yield on the Bond) as the yield that when used in computing the present worth of all payments of principal of and interest on the Acquired Obligations produces an amount equal to the purchase price of the Acquired Obligations. The purchase price of the Acquired Obligations is their subscription price paid on the issue date to the Division of Special Investments of the United States Bureau of Public Debt, which subscription price is deemed to be the fair market value of the Acquired Obligations pursuant to Treasury Regulations Section 1. 148-5(d)(6)(i). As so determined, the yield on the Acquired Obligations is 0.680224%, which is 1.918233% less than the yield on the Bond. 6.3 Restrictions on Investment of Proceeds in Higher Yielding Investments. (e) Proceeds in Refunding Escrow. The applicable temporary period for investing proceeds of the Bond held in the refunding escrow is 30 days after the issue date, but the Borough elects to waive this temporary period, and those proceeds (including investment proceeds) will not be invested at a yield higher than the yield on the Bond. (f) Proceeds Used for Costs of Issuance. Proceeds of the Bond to be used to pay costs of issuance of the Bond and the Bond Bank Bonds are expected to be spent for that purpose on the issue date and not invested. 51562571.1 (g) Bond Fund. Proceeds of the Bond representing the contingency amount deposited in the Bond Fund and other amounts treated as replacement proceeds of the Bond because they are held in the Bond Fund may be invested in higher yielding investments for a temporary period not exceeding 13 months from the date of their deposit in the Bond Fund. (h) Investment Earnings. Investment proceeds of the Bond for which no other temporary period is available may be invested in higher yielding investments for a temporary period of one year from the date of receipt of those investment earnings. (i) Restricted Yield Investments. Proceeds (and amounts treated as replacement proceeds) of the Bond that may not be invested in higher yielding investments will be invested only in (i) obligations purchased at fair market value in bona fide, arm's length transactions in an established market for those obligations and having yields not materially higher than the yield on the Bond when calculated using the same frequency interval of compounding interest as used for the Bond, (ii) obligations the interest on which is excluded from gross income under Section 103 of the Code that are not private activity bonds under Section 141 of the Code (or obligations treated as tax-exempt obligations under Section 103 of the Code, e.g., obligations issued by certain qualified regulated investment companies that invest, to the extent practicable, all of their assets in tax-exempt governmental bonds and meet certain other conditions), and Demand Deposit Securities issued by the United States Treasury pursuant to the State and Local Government Series program, or (iii) other United States Treasury Obligations—State and Local Government Series having yields not materially higher than the yield on the Bond. 7. Compliance With Arbitrage Rebate Requirement. The Bond Bank Bonds are subject to the rebate requirement imposed by Section 148(f) of the Code. Because proceeds of the Bond Bank Bonds used pursuant to the Amendatory Loan Agreement to acquire the Bond from the Borough are not treated as spent until those proceeds are used to carry out the Refunding, those proceeds continue to be treated as proceeds of the Bond Bank Bonds until spent for that purpose, and the Borough on behalf of the Bond Bank, in the manner and to the extent required by that Section, will calculate and rebate to the United States any investment earnings on gross proceeds of the Bond Bank Bonds and the Bond, plus any income attributable to such excess earnings. Investment earnings on amounts held in the Bond Fund will not be taken into account for this purpose at any time, even if the amount earned is $100,000 or more in a bond year, because the Bond bears interest at fixed rates (i.e., rates that do not vary during the term of the Bond) and has an average maturity of at least five years. If the Borough for any reason fails to comply with the rebate requirement to the extent applicable to the Bond Bank Bonds and the Bond, the Borough, to the extent permitted and required by Section 148(f)(7) of the Code, will pay any penalty that may be necessary to preserve the tax exemption for interest on the Bond. 8. Bond Meets Other Arbitrage Requirements. 8.1 No Other Governmental Obligations Part of This Issue. There are no other obligations of the Borough that are being sold at substantially the same time (less than 15 days -5- 5562571.1 apart) as the Bond pursuant to the same plan of financing and that are reasonably expected to be paid from substantially the same source of funds. 8.2 No Replacement of Funds Invested in Higher Yielding Investments. No portion of the proceeds of the Bond will be used directly or indirectly to replace funds of the Borough invested in higher yielding investments. 8.3 No Abusive Arbitrage Device. The primary, bona fide governmental purposes of issuing the Bond are to finance the costs of the Refunding. No action is being taken or will be taken in connection with the issuance of the Bond that has the effect of (1) enabling the Borough to exploit the difference between tax-exempt and taxable interest rates to obtain a material financial advantage by investing any portion of the gross proceeds of the Bond over any period of time, and (ii) overburdening the tax-exempt bond market as a result of issuing the Bond in a higher amount, issuing the Bond earlier, or allowing the Bond to remain outstanding longer than is otherwise reasonably necessary to finance the costs of the Refunding. 8.4 No Intent To Earn Impermissible Arbitrage Profit. The Borough will not take any intentional action to earn any impermissible arbitrage profit from the investment of gross proceeds of the Bond. 9. Bond Meets Other Requirements for Tax Exemption. 9.1 Bond In Registered Form. The Bond is issued only in registered form. 9.2 No Federal Guaranty. Except as otherwise permitted by the Code, payment of the principal of or interest on the Bond is not guaranteed in whole or in part by the United States or any agency or instrumentality thereof. 9.3 Information Return To Be Filed. The Borough will cause a Form 8038-G Information Return respecting the Bond to be timely filed with the Internal Revenue Service. 9.4 Bond Not a Hedge Bond. On the date of issue of the Refunded Bond, the Borough reasonably expected that (i) at least 85% of the spendable proceeds of the Refunded Bond would be used to carry out the governmental purposes of the Refunded Bond within the 3- year period beginning on their date of issue, and (ii) not more than 50% of the proceeds of the Refunded Bond would be invested in nonpurpose investments having a substantially guaranteed yield for 4 years or more. 9.5 Post-Issuance Compliance Procedures. The Finance Director on behalf of the Borough has adopted and will implement in respect of the Bond the "Post-Issuance Compliance Procedures for Tax-Exempt Bonds" in substantially the form as that attached hereto as Exhibit C to facilitate compliance by the Borough with the applicable requirements of the Code that must be satisfied after the issue date to maintain the tax exemption for interest on the Bond after the issue date. [Signature page follows] -6- 5l562571i 10. Bond Tax Exempt and Not an Arbitrage Bond. The Borough expects that bond counsel to the Borough will rely upon the foregoing facts, estimates and circumstances in existence on the issue date and the reasonable expectations of the Borough as to future events respecting the Bond to enable them to conclude that it is not expected that proceeds of the Bond will be used in any manner that would cause the Bond to be an arbitrage bond and to provide their opinion that the Bond is a governmental obligation the interest on which is excluded from gross income for federal income tax purposes under Section 103 of the Code. DATED November 3, 2016. By Dora Cross, Finance Director Exhibit A: Certificate of Western Financial Group, LLC Exhibit B: Certificate of RBC Capital Markets, LLC Exhibit C: Post-Issuance Compliance Procedures for Tax-Exempt Bonds EXHIBIT I ISJ Iciu1[II i au irsi a liii 1 FOR Iij Kodiak Island Borough, Alaska (the "Borough") issues governmental tax-exempt bonds subject to ongoing compliance obligations that must be met to preserve the tax-exempt status of the bonds. In addition to loss of tax-exemption, adverse consequences can result from failure to comply with Internal Revenue Service (IRS) restrictions relating to arbitrage, timing and use of bond proceeds, and other aspects of a bond issue. However, issuers that discover noncompliance as a result of the adoption and adherence to a written post-issuance compliance policy are eligible for significantly more favorable treatment when remediating the noncompliance through the IRS's Voluntary Closing Agreement Program. Accordingly, the Borough has adopted these procedures to assist in identifying and correcting noncompliance in a timely manner. Responsibility for Maintaining Compliance The Assembly of Borough has the overall, final responsibility for monitoring whether the Borough is in compliance with post-issuance federal tax requirements for its tax-exempt bonds. However, the Assembly has delegated to the Finance Director the primary operating responsibility for implementing and monitoring compliance with this policy document. The Finance Director should consult with bond counsel when there are questions or concerns about the application of applicable federal law to a tax-exempt bond financing or a post-issuance tax compliance issue. Expenditures of Tax-Exempt Bond Proceeds For each project financed in whole or part with tax-exempt bond proceeds, the Finance Director will monitor the expenditure of both tax-exempt bond proceeds and funds that are not proceeds of tax-exempt bonds and will track allocations of tax-exempt bond proceeds and funds that are not proceeds of tax-exempt bonds to project expenditures. For expenditures of tax-exempt bond proceeds, the Finance Director will record the date, purpose, property financed and vendor associated with each expenditure of bond proceeds and identify which expenditures are for the purpose of reimbursing the Borough for prior expenditures. Use of Property Financed with Tax-Exempt Bond Proceeds For each issue of tax-exempt bonds, the Finance Director will monitor the use of property financed with tax-exempt bond proceeds for the term of the bond issue and for the term of any bonds issued to refund the original issue or issued to refund an issue that refunded the original issue. The Finance Director will monitor such use no less frequently than once a year. Arbitrage Yield Restriction and Rebate For each issue of tax-exempt bonds, the Finance Director will monitor the interest earned on investment of tax-exempt bond proceeds on an annual basis and will cause arbitrage rebate calculations to be made as required by applicable federal law. If necessary, the Finance Director also will cause the appropriate federal arbitrage tax returns to be prepared and timely filed with the IRS together with any rebate amount owed. 1 51496575.1 Identification of Potential Violations If at any time during the term of an issue of tax-exempt bonds, the Borough discovers that a violation of federal tax requirements applicable to that issue may have occurred, the Finance Director will consult with bond counsel to determine whether any such violation actually has occurred and, if so, take prompt action to accomplish an available remedial action under applicable IRS regulations or enter into a closing agreement with the IRS under the Voluntary Closing Agreement Program described under Notice 2008-31 or other future published guidance. Record Retention Records relating to tax-exempt bonds must be maintained as required by the State Auditor's Office. However, notwithstanding the record retention requirements set forth by the State Auditor's Office, records relating to tax-exempt bonds must be maintained for the term of the bond issue plus three years, or, in the case of an issue refunded by one or more subsequent bond issues, for the combined term of the issues plus three years. Training It is the policy of Borough that the Finance Director and his or her staff, as well as the principal operating officials of those departments of the Borough for which property is financed with tax-exempt bonds should be provided with education and training on federal tax requirements applicable to tax-exempt bonds. The Borough therefore will enable and encourage those personnel to attend and participate in educational and training programs offered by, among others, bond counsel, the Washington Municipal Treasurers Association and the Washington Finance Officers Association with regard to the federal tax requirements applicable to tax-exempt bonds. 2 51496575.1