Contract analysis

I. Executive Summary and Purpose The purpose of this memorandum is to identify and analyze the federal tax requirements that must be satisfied on a continuing basis to maintain the tax-exempt status of interest on the Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt) (the "Series 2023A Bonds" or the "Bonds"), in the aggregate principal amount of $220,000,000, under Secti

1. Governmental bond qualification and the private activity bond tests under Section 141 of the Code;

2. Arbitrage yield restriction and rebate requirements under Sections 148 and 149 of the Code;

3. Hedge identification rules under Treasury Regulation Section 1.148-4(h);

4. Temporary period and spending exceptions under Section 148(c) and the applicable Treasury Regulations;

5. Treatment of the debt-service reserve fund surety policy under Section 148(d);

6. The federal guarantee prohibition under Section 149(b);

7. Information reporting requirements under Section 149(e);

8. Change-in-use and remedial action requirements under Treasury Regulation Section 1.141-12;

9. Record retention obligations; and

10. Ongoing compliance monitoring recommendations. Each of these areas is discussed in detail in the sections that follow.

II. Qualification as Tax-Exempt Obligations Under Section 103 A. General Rule — Section 103(a)

Section 103(a) of the Code provides the foundational rule that gross income does not include interest on any "State or local bond." For purposes of Section 103, a "State or local bond" is defined in Section 103(c) as an obligation of a State or political subdivision thereof. Interest on such a bond is excludable from gross income, however, only if the bond satisfies each of the following conditions: (i) The bond is n

III. Private Activity Bond Tests — Section 141 A. Overview of the Two-Prong Test

Section 141(a) of the Code provides that a bond is a "private activity bond" if it satisfies both prongs of a two-part test: (1) Private Business Use Test (§ 141(b)(1)): More than 10% of the proceeds of the issue are to be used (directly or indirectly) in a trade or business of any person other than a governmental unit; and (2) Private Security or Payment Test (§ 141(b)(2)): More than 10% of the payment of principal

1. The 10% Threshold Under Section 141(b)(1), a bond issue meets the private business use test if more than 10% of the proceeds of the issue are to be used (directly or indirectly) in the trade or business of any person other than a governmental unit. For this purpose, "use" includes ownership, actual or beneficial use pursuant to a lease, a management or service contract, an output contract, a research agreement, or

2. Analysis of the PSRAWTF The following analysis addresses each potential category of private business use with respect to the PSRAWTF: Ownership. The PSRAWTF will be owned by CSIA, a governmental entity. No portion of the facility will be owned by any private person or nongovernmental entity. Governmental ownership is the most fundamental indicator that the facility is being used for a governmental purpose, and CSI

3. Conclusion. Based on the foregoing analysis, private business use of the PSRAWTF is expected to be 0% of the proceeds of the Series 2023A Bonds. This is well below the 10% threshold of Section 141(b)(1), and the private business use test is not met. C. Private Security or Payment Test — Section 141(b)(2) Under Section 141(b)(2), a bond issue meets the private security or payment test if the payment of principal of

IV. Arbitrage Yield Restriction — Section 148(a) and (b) A. General Arbitrage Bond Prohibition

Section 148(a) of the Code provides that a bond shall be treated as an "arbitrage bond" if any portion of the proceeds of the issue is reasonably expected (at the time of issuance) to be used directly or indirectly to acquire higher-yielding investments, or if the proceeds are intentionally used to acquire such investments. If a bond is an arbitrage bond, the interest on the bond is not excludable from gross income u

V. Temporary Periods and Spending Exceptions — Section 148(c) and Treasury Regulation Section 1.148-2(e) A. Three-Year Temporary Period for Construction Proceeds Under Section 148(c)(2) of the Code and Treasury Regulation Section 1.148-2(e)(2), proceeds of a "construction issue" may be invested without yield restriction for a temporary period of three years from the issue date. For the Series 2023A Bonds, this tempor

VI. Reasonably Required Reserve Fund and Surety Policy — Section 148(d) A. Maximum DSRF Size — The "10% Test"

Section 148(d)(1) of the Code and Treasury Regulation Section 1.148-2(f) limit the size of a "reasonably required reserve or replacement fund" for a tax-exempt bond issue. The DSRF may not exceed the least of the following three amounts: (i) 10% of the stated principal amount (par amount) of the issue; (ii) The maximum annual debt service ("MADS") on the issue; or (iii) 125% of average annual debt service on the issu

VII. Arbitrage Rebate — Section 148(f) A. General Rebate Requirement

Section 148(f) of the Code imposes the "rebate" requirement as an additional safeguard against arbitrage profits. Under Section 148(f), the issuer of tax-exempt bonds must pay to the United States (through the Internal Revenue Service) an amount equal to 100% of the excess (if any) of the actual earnings on nonpurpose investments over the amount that would have been earned if such investments had been invested at the

1. Six-Month Spending Exception — Treasury Regulation Section 1.148-7(c) Under this exception, no rebate is required if all gross proceeds of the issue are spent within six months of the issue date. Given the size of the Project Fund ($215,490,000) and the anticipated three-year construction timeline for the PSRAWTF, it is not possible to spend all gross proceeds within six months. This exception is therefore not ava

2. Eighteen-Month Spending Exception — Treasury Regulation Section 1.148-7(d) The 18-month spending exception provides that no rebate is required if gross proceeds are spent in accordance with the following schedule: (i) At least 15% of gross proceeds spent within 6 months of the issue date; (ii) At least 60% of gross proceeds spent within 12 months of the issue date; and (iii) 100% of gross proceeds spent within 18

3. Two-Year Spending Exception — Treasury Regulation Section 1.148-7(e) The two-year spending exception is available specifically for construction issues. Under this exception, no rebate is required on available construction proceeds if such proceeds are spent in accordance with the following schedule: This spending schedule is more aggressive than the three-year temporary period spending schedule (which allows 36 mo

VIII. Hedge Identification and Integration — Treasury Regulation Section 1.148-4(h) A. General Rule Treasury Regulation Section 1.148-4(h) provides special rules for the treatment of "qualified hedges" entered into by an issuer in connection with a tax-exempt bond issue. A "qualified hedge" is a contract — typically an interest rate swap, cap, collar, or similar derivative instrument — that is entered into primarily

IX. Yield Restriction on Specific Funds This section summarizes the yield restriction requirements applicable to each fund established under the Indenture, taking into account the temporary periods and exceptions discussed in Sections V and VI above. A. Project Fund / Construction Fund Net bond proceeds of $215,490,000 will be deposited in the Project Fund at closing and will be drawn down over the construction perio