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					The Challenges and Opportunities of
 the “New” Municipal Marketplace

       Prepared and Presented By:
Learning Objectives

 The Participant will be able to identify key events that created the “New” Municipal Marketplace.

 The Participant will be able to compare alternative financing vehicles, including:

        Privately Placed Bank Loans.
        Negotiated Sale of Public Securities.
        Competitive Sale of Public Securities.

 The Participant will be able to recognize the importance of Credit Ratings in the “New” Municipal

 The Participant will be able to explain the Characteristics of Highly Rated Credits.

 The Participant will be able to consider approaches to strengthen their own Unit‟s credit rating.

DAVENPORT & COMPANY                                                                                   2
 Events that Shaped the “New” Municipal Marketplace
    August 2007:                 September 2008:                 October 2008:         February 2009:          April 2010:
  Bear Stearns Hedge          FNMA/FHLMC Takeover /             DOW Jones drops      American Recovery       Moody‟s & Fitch
    Fund Collapse            Lehman Files for Bankruptcy        22% in one week.    and Reinvestment Act    Recalibrate Ratings
                                                                                      Signed Into Law              Scale

2007                             2008                                 2009                                 2010

     January 2008:                            October 2008:                       July 2009:                  August 2009:
  AMBAC Downgraded,                           Municipal Rates                   First NC BABs              First NC GO BABs
   beginning a string in                          Spike                      Issued (Negotiated)              (Competitive)
  Municipal Bond Insurer
       Downgrades          Municipal Variable Rate                Municipal Fixed Rate Market
                           Market struggles due to a
                               lack of liquidity                   “Frozen” to many issuers
 DAVENPORT & COMPANY                                                                                                              3
                      Bank Marketplace

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The Bank Marketplace

 Bank financing can be an attractive alternative to the public markets depending on the specific needs
  of the locality.

 Generally, bank financing is most effective when the debt can carry the Bank-Qualified designation.

    Bank financings can accommodate most any funding need and can provide many of the same
    “options” as are typically found in a public offering:

        Wide range of credit pledges including General Obligation, Installment Purchase, Revenue,
         and Asset Backed /Subject to Appropriation.

        Fixed or variable rate structures.

        Short-term or long-term financing.

        Various amortization options including capitalized interest, interest only and most any
         principal structure.

DAVENPORT & COMPANY                                                                                       5
The Bank Marketplace

 Bank financings can provide an issuer with a number of benefits and advantages as compared to the
  public markets:

        Streamlined issuance period – typically about 60 days from start to finish – can be done more
         quickly if needed.

        Less cumbersome issuance process – no ratings required and less extensive offering
         documents – minimal staff time and resources are required.

        Financing terms and related documentation requirements are generally more favorable –
         shortened pre-payment lock-out term, if any at all, upfront and on-going fees are minimized by
         comparison and minimal on-going disclosure requirements.

DAVENPORT & COMPANY                                                                                       6
The Bank Marketplace

 Bank financing has not been spared the effects of recent financial turmoil. That said, many banks
  are still on solid footing and actively participate in municipal finance.

 Perhaps the greatest change we‟ve seen in the bank funding environment over the last year 1-2 years
  is the heightened level of loan-related credit analysis and due diligence.

        Essentiality of asset pledge is key.

        Increased documentation.

        Demonstrated ability to manage budget.

        Ability to repay planned debt from current or future sources.

 In today‟s market, Banks are also not as willing to extend credit to longer term financings. While
  20-year final maturities are available from some Banks, many have limited terms to 5 or 10 years.

DAVENPORT & COMPANY                                                                                     7
The Bank Marketplace

 Based upon our experience with the bank funding process, Davenport recommends the following
  strategies to help insure a successful effort:

        Develop a competitive process through a formalized RFP solicitation including all pertinent
         deal-related details:

              Project overview.
              Loan security and source of repayment.
              Desired bond structure, term and repayment schedule.

        Include as many banks in the RFP process as you can – local, regional and national entities –
         different banks have different lending capacities and needs at any given time.

        Provide audited financials to all RFP recipients and be prepared for a series of due diligence

DAVENPORT & COMPANY                                                                                       8
Indicative Bank Rates

 Items of Note                Indicative Bank Rates

  Receive less of a yield
   curve benefit.

  Instead fixed rate
   loans are often priced
   at one rate associated
   with the average life or
   final maturity.

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                      Public Markets

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Competitive vs. Negotiated Sales

 Competitive Sale – Bids accepted for purchase of bonds by underwriters at a time and date certain.
     Traditional issuance method of General Obligation Bonds in North Carolina.
     Competitive process can help to achieve low rates.
     Size, timing, and structure determined at least 1 week prior to sale of bonds.

 Negotiated Sale – Underwriters are selected prior to the sale at an agreed upon fee. Underwriters
  then market bonds to the public at an opportune time and offer to purchase bonds from the Unit at
  negotiated rates and terms.
      Traditional issuance method of Revenue Bonds and Certificates of Participation in North
      Provides flexibility as to size, timing, and structure of bond issuance up to and through day of

 In 2009, the North Carolina General Statutes were amended so as to permit negotiated sales of
  General Obligation bonds in circumstances beyond refunding transactions – primarily for issues in
  which a federal subsidy was available.

        This year the General Assembly further amended this provision so as to eliminate the
         expiration date.

DAVENPORT & COMPANY                                                                                       11
NC G.O. Issuance: Competitive vs. Negotiated

 Items of Note              North Carolina G.O. Bond Issuance June 2009-June 2010

Competitive Transactions
 41 issues totaling $1.4
 20 New money issues
    3 taxable (2
    21 Refunding

Negotiated Transactions
 33 issues totaling $1.3
 14 New money issues
 8 taxable (7 stimulus)
 19 Refunding issues        83%, of Negotiated Transactions were Refunding or Taxable Issues.

                             58% of Competitive Transactions were Refunding or Taxable Issues

DAVENPORT & COMPANY                                                                              12
Municipal Market Issuance Volume

 Items of Note             Municipal Issuance ($ Billions)
 Since April 2009, the
  issuance of BABs has
  lowered the supply of
  tax-exempt debt in the

 The reduction in
  supply of tax-exempt
  bond has helped
  compress tax-exempt
  yields during this

 Since April 2009,
  BABS have comprised
  25% of the municipal
  market supply.

DAVENPORT & COMPANY                                          13
Long-Term Borrowing Rates: ARRA Options

 Items of Note             30-Year Borrowing Rates
 ARRA programs
  expire at the end of
  CY 2010. Discussion
  continues that some
  programs will continue
  beyond 2010.
 Qualified School
  Construction Bonds
    At or near zero
     interest loan.
 Recovery Zone
  Development Bonds
    45% interest rate
     subsidy of taxable
 Build America Bonds
    35% interest rate
      subsidy of taxable
DAVENPORT & COMPANY                                  14
Competitive Issuance: BAB/TE Hybrid

 Items of Note              Parity Summary of Bids

  The competitive bid
   offering platform,
   PARITY, has made
   adjustments to allow
   for a combined
   issuance of tax exempt
   and BABs.

  It is important to
   verify every bid
   received to confirm
   accuracy of Parity

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Competitive Issuance: BAB/TE Hybrid

 Items of Note               Parity Bid Detail

  As shown in the bid to
   the right, bidders have
   the option to choose
   which maturities they
   choose to issue as

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                      Update on Municipal Rates

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Long-Term Borrowing Rates

 Items of Note              Historic Bond Buyer 20-Bond Index
 20-Bond Index
  Matures in 20 years
  and is rated
  „Aa2‟/„AA‟ by
  Moody's and S&P.

 Historical Statistics:
    Average: 5.38%
    Max:           7.56%
    Min:           3.94%
    Current:       4.37%

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Long-Term Borrowing Rates

 Items of Note               „AAA‟ MMD
 The Municipal Market
  Data Daily Rate
  Publication (MMD) is
  the benchmark for
  municipal yields.

 Municipal borrowers
  who issue public
  securities receive the
  benefit of the yield

 Current municipal
  rates are lower across
  the board (i.e. years 1-
  30) than the same
  period over the
  previous five years.

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Credit Spreads

 Items of Note             30-Year MMD

 The spread between
  „BBB‟ and „A‟ rated
  bonds has increased:
   June „03 – Sept. „08
    Average: 0.28%
    Minimum: 0.07%
    Maximum 0.51%

     Sept. „08 – Present
      Average: 1.78%
      Minimum: 0.79%
      Maximum 2.58%

 On a $25,000,000
  borrowing, a
  difference of 1.0% in
  rates could equate to
                           Due to the Absence of „AAA‟ Bond Insurers and a Flight to Quality by
  an increase of $3.4
  million in total debt     Municipal Investors, Strong Credit Ratings are more important now
  service.                                           than ever before.

DAVENPORT & COMPANY                                                                           20
                      Rating Agency Considerations

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Ten Characteristics of Highly Rated Credits

           1. Resilient Economy                6. Strong Reserves

           2. Diverse Tax Base                 7. Financial Flexibility

           3. Affluent Population              8. Affordable Debt Burden

           4. Established Financial Policies   9. Balanced Capital Plan

           5. Effective Management Practices   10. Long-range Planning

DAVENPORT & COMPANY                                                        22
1. Resilient Economy
 Highly rated credits have a diverse, resilient economy that exhibits steady growth or renewal

 Resilient Economy                Employment by Industry
 Multiple industry clusters.

 Economic resilience in
  recessionary environment.

 Industrial/commercial
  growth and reinvestment
  in community.

 Transportation links
  within region.

 Unemployment
  consistently below state,
  regional, and national

 High proportion of
  knowledge based

 Few sectors in decline.
DAVENPORT & COMPANY                                                                              23
Resilient Economy (continued)
 Highly rated credits have a diverse, resilient economy that exhibits steady growth or renewal

 Unemployment Rate                                      Poverty Rate

DAVENPORT & COMPANY                                                                              24
2. Diverse Tax Base
 Highly rated credits‟ Ad Valorem tax base exhibit commercial and industrial diversity, not just
 residential growth

 Diverse Tax Base                 Assessed Value Per Capita
  Market value of taxable
   property per capita is
   above average.

  No concentration among
   top ten taxpayers (less
   than 10% of total
   assessed value).

  Tends to be successful in
   redevelopment projects.

        Underscores
         demand and
         desirability of

DAVENPORT & COMPANY                                                                                25
Diverse Tax Base (continued)
 Highly rated credits‟ Ad Valorem tax base exhibit commercial and industrial diversity, not just
 residential growth

 Diverse Tax Base                 Top 10 Tax Payers
  No concentration among
   top ten taxpayers (less
   than 10% of total
   assessed value).

DAVENPORT & COMPANY                                                                                26
3. Affluent Population
 Highly rated credits tend to be affluent areas in or adjacent to core cities

 Affluent Population                Per Capita Income
  Have a solid,
   independent job base.

  Number of jobs tends to
   be a high percentage of
   the Labor Force.

  Wealth and income
   indicators above State
   and U.S. Averages
   (student population or
   governmental presence
   may temper income
   levels, but are stable).

DAVENPORT & COMPANY                                                             27
Affluent Population (continued)
 Highly rated credits tend to be affluent suburbs adjacent to core cities

 Affluent Population               Regional „AAA‟ Communities
  Steadily growing or                          City of Baltimore*
                                                                                                            Washington, DC*
   stable population.                            Howard, MD
                                                                                                             Arlington, VA
                                                 Baltimore, MD
                                                                                                             Fairfax, VA
                                                 Annapolis, MD
                                                                                                             Loudoun, VA
                                                 Carroll, MD
                                                                                                             Montgomery, MD
  Educated labor force                          Harford, MD
                                                                                                             Prince George‟s, MD
   with high portion of                                                                                      Calvert, MD
                                   City of Richmond*
                                                                                                             Charles County, MD
                                    Chesterfield, VA
   employees in executive           Hanover, VA
                                                                                                             Bowie, MD
                                                                                                             Frederick, MD
   and professional                 Henrico, VA
                                                                                                             Talbot, MD
                                    Albemarle, VA
   occupations.                                                                                              Falls Church, VA
                                    Charlottesville, VA
                                                                                                             Herndon, VA

                                                                                                            Virginia Beach, VA
                                                                                                             James City, VA

                                    City of Charlotte                                                     City of Raleigh/Durham
                                     Mecklenburg, NC                                                      Durham, NC
                                     Cornelius, NC                                                        Wake, NC
                                                                                                           Cary, NC
                                                                                                           Chapel Hill, NC
                                                                                                           Apex, NC
                                            City of Winston-Salem
                                                                                                           Wake Forest, NC
                                             Forsyth, NC            City of Greensboro
                                                                      Guilford, NC
                                                                                          City of Wilmington*
                                                                      High Point, NC
                                                                                           New Hanover, NC
                                  *Not rated ‘AAA’
DAVENPORT & COMPANY                                                                                                              28
4. Established Financial Policies
 Highly rated credits have formally adopted a broad spectrum of state of the art fiscal and
 debt management policies that are adhered to

  Reviewed / discussed with Elected Officials and adopted, if possible.

  Fund Balance.
      Reserve policies establish minimum reserve level and conditions for use and replenishment.

  Non Recurring Funds.
      Policy regarding use, and may prohibit use in some operations.

  Investment Management Policy.

  Debt Capacity.
      Debt to assessed value target and/or maximum limit.
      Debt Service to expenditures target and/or maximum limit.
      10-year Payout Ratio target and/or minimum limit.
      Amount of cash funding of CIP.

  Policies need to allow for responsible future growth, not limit it.

DAVENPORT & COMPANY                                                                                 29
5. Effective Management Practices
 Highly rated credits exhibit best industry practices in managing their affairs

 Effective Management Practices                                         GFOA Awards
  Demonstrate willingness to maintain structural balance in
   difficult economic environments:
       Revenue adjustments.
       Expenditure/program reductions.
       Operating surpluses are the norm.

  Strong disclosure practices.

  Interim financial reporting is common.

  Stability of key personnel and informed elected officials.

  Regular financial performance monitoring and reporting to
   elected officials.

DAVENPORT & COMPANY                                                                   30
6. Strong Reserves
 Highly rated credits have a strong fund balance that consistently meets or exceeds internal targets

 Strong Reserves                  Unreserved / Undesignated GF balance as % of Budget
  Depending on diversity
   and dependability of
   revenues, unreserved
   general fund balance for
   a Highly Rated Credit
   can range widely from as
   low as 10% of Budget to
   as high as 60%.

  Excellent liquidity across
   all major funds.

  No need for cash flow

  Enterprise, internal
   service funds, and
   pension funds are

DAVENPORT & COMPANY                                                                                    31
7. Financial Flexibility
 Highly rated credits have solid overall fiscal flexibility

 Flexibility                        Tax Rates of Local / Regional Units
  Regular pay-as-you-go
   funding for Capital.

  Competitive tax rates.

  Rapid debt retirement.

  Diversity of revenue
   sources is typical:
      Property tax.
      Lesser taxes/fees
        available have been

  Conservative budgeting.

  Positive fiscal
   relationships with related

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Financial Flexibility (continued)
 Highly rated credits have solid overall fiscal flexibility

 Flexibility                        10-Year Payout Ratio
  The Payout Ratio
   measures how quickly a
   Credit pays down its

  The industry standard is
   to analyze the 10-year
   payout ratio, or the
   percentage of the
   principal paid back over
   the next 10 years.

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8. Affordable Debt Burden
 Highly rated credits regularly measure debt affordability and policies are in place to control amount
 and timing of debt issuance to meet policy targets

 Affordable Debt Burden           Debt Service vs. Expenditures
  Low to moderate debt
   ratios measured by:

       Debt to assessed

       Debt service to

       10-year payout ratio.

  Strong record of pay-as-
   you-go funding.

DAVENPORT & COMPANY                                                                                  34
9. Balanced Capital Plan
 Highly rated credits typically have a well-defined 5 or 10 year capital improvement plan (CIP)

 Balanced CIP                      CIP Planning
  Balanced sources and

  Minimal use of “To Be
   Determined” funds.

  Highest priority projects
   are identified.

  Incremental operating
   costs associated with CIP
   are clearly identified.

  Reviewed and updated at
   least annually.

DAVENPORT & COMPANY                                                                               35
10. Long Range Planning
 Long term planning is a hallmark of highly rated credits

 Long Range Planning              Planning Process
  Emphasis on internal
                                      Annual CIP
   planning; early issue
   identification.                  Review / Update

  Tend to be “first                                         Debt Capacity Analysis
   implementers” for new                            Debt to AV     DS vs. Expenditures     10-year Payout

  External planning and
   cooperation with other
   entities to tackle regional
                                        Debt Affordability
  Multi-Year financial
   planning discipline is in                                                             Implementation
   place and updated

DAVENPORT & COMPANY                                                                                         36
Long Range Planning
 Existing and Proposed Debt

 Long Range Planning           Existing and Proposed Debt
  Review Existing Debt

  Layer proposed CIP debt
   on top of exiting debt
   profile in order to:

        Measure Debt

        Measure Debt

  Evaluate alternative debt
   structures to alleviate
   any potential problems.

DAVENPORT & COMPANY                                         37
Long Range Planning
 Key Debt Ratios

 Long Range Planning       Debt to Assessed Value
  Review how proposed
   debt impacts key debt

DAVENPORT & COMPANY                                 38
Long Range Planning
 Key Debt Ratios

 Long Range Planning       Debt Service to Expenditures
  Review how proposed
   debt impacts key debt

DAVENPORT & COMPANY                                       39
Long Range Planning
 Key Debt Ratios

 Long Range Planning       10-Year Payout Ratio
  Review how proposed
   debt impacts key debt

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Long Range Planning
 Debt Affordability

 Long Range Planning             Affordability
  Review how proposed
   CIP / Plan of Finance
   impacts cash flows
   available to pay for debt
       Evaluate all potential
        costs associated with
          Debt Service
          Operating
       Evaluate potential
        sources of payment
          Debt Service
          Sales Tax
          Capital Reserves
          Other

DAVENPORT & COMPANY                              41

 If there are any questions about the material presented today, please feel free to contact anyone from
  the Davenport Team.

 Raleigh Office
  Bob High

 Charlotte Office
  Walter Goldsmith                           Patrick Smith
  704-998-5396                               704-375-0550   

 Richmond Office
  Ted Cole                                   Mitch Brigulio
  804-697-2907                               804-697-2903        

DAVENPORT & COMPANY                                                                                        42