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
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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.
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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
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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.
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(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
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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]
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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.
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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.
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