Issuance and Sale of General Obligation Refunding Bond

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The city's modestly sized $237 million tax base may continue to e�erience moderate declines as values adjust � following a period of significant growth. The city encompasses 18 square miles in central Minnesota, 150 miles northwest of the Twin Cities. The local econorrry is centered on tourism and seasonal recreation activities. The largest employer in the area is Breery Point Resort with 400 employees. Landis Gyr is the second largest private sector employer with 167 employees and is focused on technology needs of the utility industry. The company underwent significant layoffs following its purchase by Toshiba (Long term rated Baa2 / stable outlook), but has since refilled many of those positions and is e�ected to continue hiring in the coming year. Officials report that many residents commute to Brainerd (General Obligation rated Aa3), the counry seat of Crow Wing County (General Obligation rated Aa3), where there are additional opportunities for employment in the tourism industry as well as lurr�er and health care related positions. The county unemployment rate of 6.1 % was above the state average of 5.2%, but still below the national average of 7.9% as of May 2012. Resident income levels are below national levels with per capita income and median family income at 79% and 71 % of US medians, respectively, from 2006 to 2010, as estimated in the American Communiry Survey. The city's population grew a substantial 128% between 2000 and 2010 primarily due to annexation. The city's full valuation underwent a significant decline of 27% from 2008 to 2012, which officials attribute primarily to a readjustment of valuations following substantial growth in the last decade. Assessed values declined 8.7% in 2012 with appro�amately 55% of the decline is a result of legislative change that reduces the taxable value of certain residential properties, effective 2012. Previously, the Market Value Homestead Credit (MVHC) allowed for residential properties to be taxed based on market valuations, but qualifying home owners received a credit on their tax statements that reduced their tax payments. The state then reimbursed cities to make up for their tax revenues lost due to the credit. The MVHC program was eliminated in fiscal 2011 and, effective fiscal 2012, was replaced by the homestead Market �falue Exclusion (MVE). The MVE implements a direct reduction in taxable value for residential properties with market values below $413,800, and eliminates the state's reimbursement to cities that previously made cities whole. Residential properties with a market value of $76,000 receive a full 9% reduction in ta�ble value, with the percentage gradually reduced to zero as market value reaches $413,800. SATISFICATORY FINANCIAL POSITION WITH LIMfTED DEPENDENCE ON STATE AID � We e�ect the city's financial position will remain satisfactory supported by the presence of healthy reserves. The city posted an operating surplus of $282,000 in fiscal 2011 bringing the General Fund balance to $1.3 million or a healthy 71.3% of revenues. The balance was highly liquid with nearly all of the reserves held in cash and investments. Management comr�ts a portion of fund balance for future capital projects; the unassigned General Fund balance at the fiscal 2011 year end was $836,000 or a solid 46.8% of revenues. Fluctuations in year end results are largely the result of capital outlays and the city's fiscal 2013 budget plans for the use of $150,000 in corrvnitted fund balance for capital projects. The city's fund balance policy is to maintain 50% of the following years e�enses in reserves. The city is primarily funded by property taxes, which comprised 78.3% of fiscal 2011 General Fund revenues. Officials report that the city has kept its levy relatively flat in fiscal 2012, which will have the impact of increasing tax rates for certain property owners as a result of the market value exclusion. Minnesota Statute provided overall levy limitations for cities over 2,500 in population through 2011. The City of Pequot Lakes has a population of 2,162 and was not subject to levy limits, which provides additional financial fle�ability. Intergovemmental revenue comprises a relatively rrinor 7.5% of revenues. Due to unallotments by the state, the city did not receive any of the $75,000 in local government aid (LGA) certified for fiscal 2011. Favorably, the city conservatively does not budget for LGA The city has two enterprise funds to account for water and sewer operations. Both funds ended fiscal 2012 will solid financial results including adequate liquidiry and positive net income. Officials report that they are in year 7 of a 10 year plan to build up the funds reserves through rate increases in order finance future capital needs. Ciry employees participate in the Public Employees RetirementAssociation of Minnesota and the Public Employees Police and Fire Fund, which are multi-employer defined benefit plan administered by the state. MODEST DEBT BURDEN WITH BELOWAUERAGE PRINCIPALAMORTIZATION We e�ect the city's debt burden to remain modest due to a lack of future borrowing planned. The city's direct debt burden is minimal at 0.2% of full value and while the overall debt burden is normal 2.2%. Principal amortization is slow with 50.7°/a retired within ten years. Debt service as a percentage of total operating e�enditures is affordable at 6.6% in fiscal 2011. All of the ciry's debt is fixed rate and long term, and it is not a party to any derivative � agreements.