CHICAGO - The Indiana Bond Bank is set to enter the market as early as today with a $365 million note issue that will finance cash-flow deficits for local governments across the state.

The tax anticipation note issue, one of two the bank sells annually, is typically its largest issue of the year.

About $150 million less than the Bond Bank's deal last January, this week's issue is the first that will begin to reflect the impact of Indiana's sweeping property tax reform law. Under the new law, the state agreed to take over funding for school districts' general funds, a move that is expected to substantially lower the borrowing needs of schools in the program, said Dan Huge, executive director of the Bond Bank.

Ahead of the sale, Moody's Investors Service assigned a top MIG-1 rating to the notes, which mature Jan. 5, 2010. Proceeds will be lent to 121 government entities to help ease deficits until local property tax revenue begins to flow in.

JPMorgan is the senior manager on the deal. Fifth Third Securities Inc., Morgan Keegan & Co., and NatCity Investments Inc. are also on the underwriting team. Bond counsel is Barnes & Thornburg LLP, and the bank's financial adviser is Crowe Horwath LLP.

JPMorgan also provides a standby credit facility for the program.

As Indiana's 2008 property tax changes begin to take effect, Huge expects borrowing under the twice-annual program to decrease. The chief factor behind the decrease is the state's move to take over all funding responsibility for school districts' general funds. Schools currently account for about 75% of the program by par amount.

"You'll see some schools borrow this year but next year I would anticipate little to very low borrowing for schools' general funds," Huge said.

But other effects of the property tax law are more uncertain. A so-called circuit-breaker provision that is at the center of the new law is expected to result in revenue declines for most local governments. The provision caps this year's property tax bills at 1.5% of a home's assessed value, 2.5% of a rental property's assessed value, and 3.5% of a commercial building's assessed value.

Moody's analysts point out that the declines will range from mild to severe. For some borrowers, like the financially struggling city of Gary - one of the program's top borrowers - the effect is expected to be severe.

The Bond Bank has prepared for losses by restricting municipalities to borrowing not more than 80% of their property tax levy, including the estimated losses under the new law.

The adjustment "preserves the estimated 1.25% minimum coverage," Moody's said. In addition, for certain borrowers, such as Gary, the bank requires the pledged revenues to be intercepted and directly sent to the trustee.

This year, the Indiana Bond Bank - whose chairman is state Treasurer Richard Mourdock - will not invest the program's funds in a guaranteed investment contract as usual, according to Huge.

"Given a number of changes in the market, it's not an appropriate time to be using a GIC," he said. "We'll be using triple-A securities for our brief investment period."

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