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'2_5 4 To avoid this,, the City should consider structuring the bonds and set the timing of when those bonds are 35 issued to be consistent with projected cash-flow needs. 36 37 A second IRS concern is with respect to the bond's tax exempt status. Generally speaking, tax exempt 38 bond proceeds must be spent within 3 years to retain tax exempt status. If the proceeds are not spent within 39 3 years, the bonds become taxable for income purposes. Any investor holding the bonds would now have 40 to pay income taxes on the earnings which would immediately lower the value of the investment itself. 4 'i This could have a detrimental impact on investor relations on future bond issues, potentially shrinking the 42 number of interested bidders. 43 44 Projected Construction Cash Flow Needs 45 As noted above,, the cash flow needs of the fire station and park improvements construction should be a 46 consideration in when and how much bonds are issued. 47 48 With regard to the new Fire Station, the City Council has already authorized the hiring of a construction 49 manager, architect, and demolition contractor. The City can expect to incur several hundred thousand dollars in costs over the next few months. Beginning in the spring of 2012, it is expected that the City will 'i have entered into all construction contracts and will incur approximately $,435,000 per month in 52 construction costs. The $,8 million is expected to be fully spent by October, 2013. 54 In contrast,, the implementation schedule for the park improvements is scheduled to take place over 5 years. 55 The improvements have not been prioritized, nor has the City taken any steps to hire a construction 56 manager or architect/consultant to begin designing the improvements and assessing the optimal phasing �` "7 strategy. It is further anticipated that neighborhood meetings will take place on the proposed improvements 58 once preliminary designs are complete. Based on these timeline - relate factors, $,2 million should be more than sufficient to offset any park 6 'i acquisition or design that may occur through June, 2012 or later. Depending on the level of citizen 62 involvement in the proposed improvements, it is conceivable that actual park improvements will not begin 63 until the fall of 2012. if this timeline proves accurate, the vast majority of the $,19 million in proposed park 64 improvements would not occur until 2013 or beyond. 66 In short,, the construction timeline for the park improvements would easily be met by the planned issuance 67 of $,2 million in 2011, $,10 million in 2012, and $,7 million in 2013. 68 69 p' final Comments "7 ('_) The Staff Recommendation noted above was designed to avoid any IRS penalties while meeting our cash 7 1 flow needs. Certainly the City Council has discretion to select a different timeline and bond allocation "72 plan. While it's difficult to estimate what the financial penalties and added regulatory costs will be if we "73 fail to comply with IRS regulations, it could easily exceed $,200,000 if the City fails to comply with the "74 entire $,27 million package. "7 76 A more significant penalty would arise if the City loses tax-exempt status on its bonds because it issued 77 bonds too early and subsequently failed to spend the proceeds within the allotted timeframe. "7 79 POLICY OBJECTIVE See discussion on applicable IRS Regulations described above. Page 2 of 3