The American Recovery and Reinvestment Tax Act of 2009

1. Michigan Association of School Administrators The American Recovery and Reinvestment Tax Act of 2009 Build America Bonds and Other Related Financing Alternatives September 2009

2. Table of Contents Section I: Overview of ARRA Financing Alternatives Section II: Build America Bonds Section III: Qualified School Construction Bonds Section IV: Investors & Market Reception Appendix A: State by State Allocations of Tax Credit Bond Authority Appendix B: Build America Bond Transaction Summary 1

3. Section I: Overview of ARRA Financing Alternatives

4. Introduction • In February 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (the “Act” or “ARRA”) into law. • The Act provides issuers of tax-exempt debt new tax provisions for the issuance of tax-exempt obligations, tax credit obligations and hybrid tax credit obligations. • Two of these newly approved financing alternatives, Build America Bonds (BABs) and Qualified School Construction Bonds (QSCBs) have already been utilized successfully by issuers across the country to greatly reduce funding costs. • The majority of these new tax credit bond structures lack a well-developed market and have been assigned only a two-year time horizon. • These possible constraints may restrict the overall effectiveness of the new tax credit bond programs as compared to traditional tax-exempt financings. 3

5. ARRA Bond Related Financing Alternatives • Appendix A provides the detailed allocations of the tax credit bonding authority for each state. 4

6. Tax Credit Bonds • Tax Credit Bonds allow the bond holder to claim a tax credit equal to a specified credit rate set by the Secretary of the Treasury. • The Applicable Programs under ARRA include: 1) Build America Tax Credit Bonds, 2) Qualified School Construction Bonds, 3) Qualified Energy Conservation Bonds, 4) Qualified Zone Academy Bonds and 5) Clean Renewable Energy Bonds. • The credit rate is set such that the bonds can be sold with no interest costs to the issuer. • The federal government effectively makes “payments” to the bondholder. • The tax credits are included in taxable income as if it were interest income. Receives Credit for Tax Liability Commensurate with Interest Rate on Bonds Purchase Bond Municipal Issuer Investors IRS Investor Claims Tax Credit on Tax Form When Filing Tax Return Upon Maturity, Principal is Redeemed 5

7. Direct Subsidy Bonds • ARRA created two programs that allow issuers to receive an interest subsidy directly from the federal government. • Build America Bonds – The issuer can elect to receive a 35% interest subsidy on bonds issued before 2010 for any tax-exempt governmental purpose. • Recovery Zone Economic Development Bonds – The issuer can elect to receive a 45% interest subsidy on bonds issued before 2010 that promote economic development or activity in a Recovery Zone. • Recovery zones are areas designated by the issuer as (1) having significant poverty, unemployment, rate of home foreclosures, or general distress; (2) economically distressed by reason of the closure or realignment of a military installation pursuant to the Defense Base Closure and Realignment Act of 1990; or (3) an empowerment zone or renewal community. • $10 billion of issuance has been allocated among the states based on relative job losses (with a minimum of $90 million to any state) and then within states to the county and city level issuers with a population in excess of 100,000. 6

8. Additional ARRA Provisions • Bank Qualification - The small issuer limit has been raised from $10 million to $30 million for 2009 and 2010. Additionally, bonds issued through a conduit 501(c)(3) organization or through a pooled conduit can be considered separately for the exception. • 2% Safe Harbor – Banks may deduct 80% of the funding cost for new money tax-exempt bonds issued in 2009 and 2010 as long as the tax exempt bonds are 2% or less of total bank assets, exclusive of small issuer bonds. 7

9. Summary of Programs 8

10. Section II: Build America Bonds

11. Structure Overview • Issuers of certain bonds that could be issued as tax-exempt may irrevocably elect at issuance to have the bond designated a Build America Bond. • The Recovery Act authorizes state and local governments to issue BABs for any project authorized by state law so long as they meet the following requirements: • Issued on or after February 17, 2009 or in 2010 • Meets tax-exempt requirements under existing law • Not available for 501(c)(3) nonprofit or private activity projects • Issued with no more than a de minimis amount of original issue premium • There are two BAB structures which can be utilized by issuers: • Credit BABs - Investors receive an annual tax credit equal to 35% of the annual interest on the bond; or • Subsidy (Direct Pay) BABs - Issuer elects to receive a direct federal cash subsidy of the taxable interest in the amount of 35%. All proceeds must be used for new money capital projects, costs of issuance not exceeding 2% of the issue price, and a reasonably required debt service reserve fund. • Most of the BABs issued to date have utilized the direct pay structure. 10

12. Decision Factors Governmental Bond that Qualifies for Tax Exemption Traditional Tax-Exempt Bond Taxable Build America Bond New Capital Projects Refundings and Working Capital or Direct Issuer Subsidy Investor Tax Credit 11

13. Expected Benefit of BABs – Current Market Conditions • Based on current market relationships, an issue of 20 to 30-year Subsidy BABs would compare favorably, from an interest cost standpoint, to a similar tax-exempt bond. • This is notably the case for Michigan Issuers, as tax-exempt rates for Michigan bonds have risen sharply due to the additional risk premium demanded from investors due to the economic conditions in the State.. This risk premium has not been as noticeable for taxable bond issues of Michigan issuers. • The BAB advantage increases as the spread between tax-exempt and taxable yields decreases, making the alternative, under current market conditions, more favorable for longer-term maturities. 12

14. Expected Benefit of BABs – Current Market Conditions 13

15. Expected Benefit of BABs – Market Volatility • As indicated in the graph below, the relationship between tax‐exempt and taxable yields is volatile, continuously changing the savings available from a BAB issuance. • Issuers should maintain complete flexibility by preparing a new issue as both tax-exempt bonds and taxable BABs. • Market conditions at time of pricing will dictate the most effective bond structure. Indicative Tax Exempt Indicative Taxable After Subsidy 14

16. Michigan Issuance Of Build America Bonds 15

17. Developing Build America Bond Considerations • Rating agencies continue to monitor the use of BABs by general governmental issuers. • Standard & Poor’s is particularly focused on issuers who intend to use the 35% federal subsidy directly for debt service. • Under their credit review, they will evaluate the issuer’s ability to cover debt service in full should the payment of the subsidy become delayed. • Fitch is carefully reviewing the implications of an issuer’s use of a corporate type debt structure (no call, no sinking fund payments, etc.). • Certain revenue based issuers have been unable to utilize the direct pay BAB structure due to underlying bond covenants, specifically related to existing additional bond tests and/or rate covenants. • Depending on the wording of these covenants, the subsidy may not be available to reduce debt service or provide additional revenue for debt service coverage purposes. 16

18. Section III: Qualified School Construction Bonds

19. Structure Overview • The Qualified School Construction Bond (“QSCB”) program allows municipal issuers to issue tax credit bonds where the holder receives a tax credit in lieu of interest, as long as the following requirements are met: • 100% of the bond proceeds from the tax credit bonds must be used for the construction, rehabilitation, or repair of a public school facility or for the acquisition of land on which the facility is to be constructed, with an allowance of up to 2% for costs of issuance. • The bond must be issued by a State or local government where the school is located. • Issuers must spend 100% of the bond proceeds within three years from the issue date. • Should any proceeds remain outstanding after the three years, the Issuer is required to use the remaining money to redeem bonds. • The Volume cap limitation has been set at $11 billion for the remainder of 2009 and $11 billion in 2010. • The allocation among states has been made in proportion to the amount of grant funds each state is eligible to receive under the federal Elementary and Secondary Education Act of 1965, reduced by the amount received by any large school district in the State. • Tax credit bonds are traditionally structured as “bullet” maturities and maturity limits are based on Treasury guidelines on the day of pricing. 18

20. Qualified School Construction Bonds in the Market • Since the inception of ARRA, there have been twelve successfully placed QSCBs: 19

21. Section IV: Investors & Market Reception

22. Targeted Investors – BABs and Tax Credit Bonds Build America Bonds Tax Credit Bonds • Individuals • Commercial Banks • Property and Casualty Insurance Companies • Life Insurance Companies • Public and Private Pension Funds • Taxable Bonds Funds • Endowment Funds • Foreign Investors • State and Local Governments • Corporations • Property and Casualty Insurance Companies • Life Insurance Companies • Hedge Funds • Profitable Financial Institutions • High-net-worth Individuals • Private Pension Funds • State Pension Funds • Foreign Investors 21

23. Municipal Issuance Trends • Over the past four years, taxable municipal issuance has accounted for approximately 6.7% of total municipal issuance. • As of Sept 1, 2009, taxable municipal issuance represents 16.4% of municipal issuance since the beginning of the year. • Initially, the flood of taxable municipals improved the relative trading value of tax-exempt bonds. *Source : SDC, Thomson Reuters **2009 YTD as of Sept 1, 2009 22

24. BAB Market Reception • To date there have been 303 BAB financings completed for a par amount in excess of $28 billion. • These deals have been done by issuers nationwide and have ranged in size from a minimum of $525,000 to a State of California BAB financing of $5 billion. • Most BAB deals completed thus far have elected the 35% Subsidy BAB structure. • Lower spreads in recent secondary market trading and primary market issuance indicate that investors are becoming more comfortable with the structure. • When initially issued, some BABs were yielding more than investment-grade corporate bonds and government bonds from emerging economies. • With increased issuance, the spreads of BAB yields to U.S. Treasury yields have narrowed and we would expect this trend to continue. 23

25. BAB Market Reception (continued) • The taxable buyer universe has digested the increase in taxable municipal supply efficiently. • The issuance of BABs will continue to expand the buyer universe for municipals beyond the typical purchasers as any investor in taxable fixed income investments is a potential buyer. • Contrary to initial indications, large par amounts and block sizes have not been a requirement. • Only 15% of BABs issued have had an issue size greater than $200 million. • Traditional tax-exempt structuring has been employed successfully with numerous BABs utilizing serialized amortizations across the maturity spectrum. • Traditional municipal call features (10 years at par) have been utilized successfully for issues with a par amount from $525,000 up to $500 million. • BAB investors are not necessarily requiring a make whole call, allowing municipal issuers to maintain flexibility to call their bonds in the future. • 77% of BABs have been issued with a 10 year call option at par. 24

26. Appendix A: State by State Allocations of Tax Credit Bond Authority

27. State By State Allocations 26

28. State By State Allocations 27

29. Appendix B: Build America Bond Transaction Summary

30. Summary Of Build America Bond Transactions Issuance Summary By State – By Par Amount In Millions 29