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S � �� � � � � � .� �i � � � � � � �. .� ,� -�,1 � ��ty �� 1��e, J�rrar�e�� F'AYGO is generally viewed as a tool carrying less risk for the City. 2. General Obligation Bonds General obligation bonds pledge the full faith and credit of the City's tax base and require the City to levy, as necessary, to guarantee the payment of the bonds. The City's Aa1/AA bond rating makes Roseville's general obligation bonds very marketable, as the buyer of the bonds is given high assurance of repayment. GO Improvement Bonds, GO Equipment Certificates, GO Street Reconstruction Bonds, G 0 Abatement Bonds and GO TI F Bonds may be issued without referendum. I n the 2003 Legislative session, bonding authority was expanded to allow bonds for certain essential city facilities without referendum, subject to caps and adoption of a capital plan by resolution. GO bonds are generally viewed as a tool carrying more risk for the City than PAYGO or a non-GO backed debt instrument. 3. Revenue Bonds Revenue bonds are non-general obligation bonds. They have a pledge of specific revenue streams and do not require a levy should that revenue stream fall short of the required debt service. While bonding is considered a higher risk than PAYGO, there are features that help to minimize the risk of default through credit enhancements including insurance, debt service reserves, collateral, and debt service coverage ratios. Credit enhancements primarily protect the bondholder, but by minimizing the risk aF default, it allows the City time to address the shortfall and minimize any impact on its credit rating. # Insurance provides coverage for the bondholders, with repayment for any payments covered by the insurer and subsequently recovered from the issuer. * A debt service reserve equal to one year's debt service is generally required, but could range up to two years depending on other factors. This reserve provides time for restructuring revenue streams to offset shortfalls. Pledging collateral such as the property acquired from bond proceeds provides an asset necessary to satisfy the bondholders. Debt service coverage is the number of times debt service is covered from operating income. Investors usually require annual operating income of approximately 125% of annual debt service, and sometimes as much as 200%, depending upon other factors. The higher the ratio, the more contingency is available to cover shortfalls. General obligation pledges may be considered a greater risk to the community because taxpayers may be required to finance any shortfall. In reality, even for bonds without a general obligation pledge, most communities will do everything in their power to avoid defaulting, including levying a tax if necessary to protect their bond rating and reputation. SPRINGSTED Page 16