MEMORANDUM

February 19, 2008

To: Diane Stoddard

From: Randy Irey

Re: City Guaranty of a Private Note.

This memorandum summarizes our recent telephone conversation during which we discussed whether the City of Lawrence (the “City”) could guarantee a note from a local not-for-profit entity the “NFP”) to a bank. The NFP would use the proceeds of the loan to implement a wireless internet project in the City. By guaranteeing the note, the City would be putting its credit behind the note so that if the NFP failed to make a payment, the City would be obligated to make the payment. If the note could be accelerated upon default by the NFP (a normal feature), the City would be liable for the full unpaid amount of the note.

The transaction would be approved by an ordinance adopted by the City Commission under its home rule authority. The governing body would need to make a finding in the ordinance that guaranteeing the note was a for a public purpose. The city’s obligation under the guaranty would be subject to the Kansas Cash-Basis Law (K.S.A. 10-1101 et seq.) and would not be permitted unless a statutory exception could be found. An exception to cash basis exists if the City’s obligation under the guaranty is approved by the voters at an election (see K.S.A. 10-1116). In a similar situation several years ago, a smaller community guaranteed a developer’s note in order to open the only grocery store in the community after the voters approved the obligation.

An alternative to the voter-approved guaranty would be available if the transaction was done as an annual appropriation lease-purchase transaction under the exception to the Cash-Basis Law set forth in K.S.A. 10-1116b and part (b) of K.S.A. 10-1116c. The City Commission would need to make a finding that the lease-purchase transaction was for a public purpose. The transaction would be structured as a lease-purchase agreement between the bank and the City as lessee. The City would, in turn, sublease the equipment to the NFP in return for the NFP agreeing to make rental payments to the City equal to the city’s obligation to the bank. The City’s obligation as lessee to pay rent to the bank under the lease-purchase agreement would be subject to annual appropriation and thus be a permitted exception to the Cash-Basis law. If the City’s annual rent obligation in any year exceeded 3% of the City’s general fund budget in the current year, the transaction would be subject to notice and 30-day protest period.