HomeMy WebLinkAboutStaff Report 7892
City of Palo Alto (ID # 7892)
City Council Staff Report
Report Type: Consent Calendar Meeting Date: 4/11/2017
City of Palo Alto Page 1
Summary Title: Proposed Debt Policy
Title: Approve Updated City of Palo Alto Debt Policy
From: City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends the City Council approve the attached Proposed Debt Policy.
Background
In August 2015, the City’s Finance Committee (CMR 5860) and in June 2016, as part of the
annual budget adoption, the City Council adopted a comprehensive City of Palo Alto Debt
Policy. Debt guidelines had previously been adopted by Council in a report (CMR 210:97) that
addressed infrastructure needs. Although staff had been following these guidelines, a more
comprehensive and detailed document that is similar to the City’s Investment Policy was
considered to be more beneficial for the City. The new Debt Policy followed best practices by
utilizing a template from the Government Finance Officers Association (GFOA). Staff consulted
other jurisdictions’ debt policies as well in the effort to update previous guidelines and
practices.
The Debt Policy discussed several important areas that were not addressed in the guidelines.
These include, for example: expanding the current policy to all City Funds; providing guidelines
for refinancing existing debt; detailing the responsibilities of City staff engaged in issuing debt;
delineating debt instruments or vehicles (e.g. General Obligation Bonds or Certificates of
Participation) the City can utilize; and describing situations in which tax exempt and taxable
debt can be used. The depth and breadth of the policy is intended to guide staff.
Historically, the City has been conservative in issuing debt, both in quantity and type. Whenever
possible, a pay-as-you-go approach had been applied to capital projects. For capital intensive
projects requiring financing, the City traditionally used fixed rate debt. This has provided
certainty as to annual obligations and smooth debt levels over time. Examples include the 2010
and 2013 General Obligation bonds issued to construct and/or renovate the libraries and
community center and the 2009 Utility Revenue (Build America) bonds for emergency water
capital projects.
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As with all guidelines and policies, exceptions are expected to arise in the future. For example,
even though the guideline for enterprise/utility funds specifies that annual debt service cannot
exceed 15 percent of the operating budget for the individual fund (10 percent for the General
Fund), it was expected to be inevitable that given the scale of the future replacement and
renovation of the Water Quality Control Plant that annual debt service will exceed the 15
percent threshold in that fund. In this case, the purpose of the threshold is not to forestall a
necessary project, but to ensure public review and staff explanation for the reasons for a
departure from policy, and how rates will be adjusted to meet annual debt service.
Discussion
Recently, the state legislature adopted Senate Bill 1029 (Hertzberg), amending Government
Code section 8855 to place additional reporting obligations on issuers of public debt, effective
January 1, 2017. The amendments require an issuer to certify that they have adopted a debt
policy concerning the use of debt and that the proposed debt issuance is consistent with that
policy. The statute requires an issuer’s Debt Policy to include:
1. The purposes for which the debt proceeds may be used.
2. The types of debt that may be issued.
3. The relationship of the debt to, and integration with, the issuer’s capital improvement
program or budget, if applicable.
4. Policy goals related to the issuer’s planning goals and objectives.
5. The internal control procedures that the issuer has implemented, or will implement, to
ensure that the proceeds of the proposed debt issuance will be directed to the intended
use.
Though the City’s existing Debt Policy and practice substantially complies with the new
requirements, minor updates are needed, including:
1. Further defining “debt” to mean “all forms of debt incurred by the City and lease
obligations incurred by the City for financing purposes” (page 1 of proposed Debt Policy
(PDP))
2. Stating City’s intent to comply with Government Code Section 8855(i) (page 1 of PDP)
3. Explicitly stating the City’s current practice of engaging in “long-term financial planning,
maintaining appropriate reserves levels and employing prudent practices in governance,
management and budget administration. The City intends to issue debt for the purposes
stated in this Debt Policy and to implement policy decisions incorporated in the City's
annual operations budget.” (page 4 of PDP)
4. Addition of (Section XIII, # D) “Training” for City staff involved in debt issuance (page 13
of PDP)
5. Addition of (Section XIII, # E) “Public Statements Regarding Financial Information” which
codifying the current practice that statements made or information released about the
City’s finances are complete, true, and accurate in all material respects. (page 13 of PDP)
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6. Addition of (Section XIII, # H), “Internal Control Procedures re. Use of Debt Proceeds”,
codifying the current practice that adequate safeguards are in place to insure debt
proceeds are used for their intended purpose and records are kept to document this.
(page 14 of PDP)
In additional, there are new requirements for the California Debt and Investment Advisory
Commission (CDIAC) that impact municipal bond issuers. The existing law requires CDIAC to
collect, maintain, and provide comprehensive information on all state and all local debt
authorization and issuance and to serve as a statistical clearinghouse for all state and local debt
issuance. The new additional requirements which staff will fully comply with, for CDIAC, are:
1. To track and report on all state and local outstanding debt until fully repaid or
redeemed so the City will need to report any debt early payoff and/or refinancing.
2. Requires report of proposed (new) debt which includes a certification by the issuer that
it has adopted a local Debt Policy which include specific provisions concerning the use of
debt and that the contemplated debt issuance is consistent with that policy.
3. Requires municipal issuers to submit an annual report for any issue of debt for which it
has submitted a report of final sale on or after January 21, 2017. The report needs to
include such things as information on debt issued and outstanding and the use of
proceeds from debt during the reporting period.
In conclusion, staff recommends that the Council approve the attached updated City of Palo
Alto Debt Policy (Attachment A).
Resource Impact
There is no resource impact associated with this report.
Policy Implications
This recommendation is in line with debt guidelines outlined in the Annual General Fund
Operating Budget and comports with the more detailed policy document or best practices
provided by the Government Finance Officers Association and California law.
Environmental Review
The actions requested in this report do not constitute a project for the purposes of the
California Environmental Quality Act (CEQA).
Attachments:
Attachment A: Proposed Debt Policy - Redlined
Not Yet Adopted
CITY OF PALO ALTO DEBT POLICY
I. Background/General Statement
One of the keys to sound financial management is the development of a debt policy. Development of a
debt policy is a recommended practice by the Government Finance Officers Association. Bond rating
agencies recognize the importance of debt guidelines as a sign of prudent financial management. A
debt policy establishes the parameters for issuing debt and managing the debt portfolio. It provides
guidance from the Council to City staff regarding purposes for which debt may be issued, types and
amounts of permissible debt, and the method of sale that may be used.
The City of Palo Alto (City) maintains conservative financial policies to assure strong financial health both
in the short‐ and long‐term. The City is an infrequent issuer of debt with debt primarily used as a tool to
finance large capital investments such as property acquisitions, new building construction, and
rehabilitating or replacing major assets. Maintaining the City’s strong bond rating is an important
objective of the City’s financial policies. To this end, the City is constantly working to improve its
financial policies, budgets, forecasts, and financial health. For purposes of this debt policy, “debt” means
all forms of debt incurred by the City and lease obligations incurred by the City for financing purposes.
II. Scope of Policy
This policy sets forth the criteria for the City’s issuance, repayment, and management of debt. The
primary objective of the debt policy is to establish criteria that will protect the City’s financial integrity
while providing a funding mechanism to meet the City’s capital needs. The underlying approach of the
City is to borrow only for capital improvements that cannot be funded on a pay‐as‐you‐go basis. The City
will not rely on any form of debt to finance current operations unless there is a cash flow shortage
requiring short‐term instruments such as Tax and Revenue Anticipation Notes (TRANS). All debt issued
will be in compliance with this policy along with all other City, State, and Federal laws, rules, and
regulations.
This debt policy shall apply to all City of Palo Alto funds although exceptions may be requested from
Council in the future. This Debt Policy is intended to comply with Government Code Section 8855(i),
effective on January 1, 2017.
III. Purpose of Debt Financing Long‐Term Capital Improvements; Integration with Capital
Improvement Plan
The City borrows money primarily to fund long‐term capital improvement projects and to refinance
existing debt. Another potential use is for financing the purchase of major and multiple pieces of
equipment.
With the exception of potential use of short‐term TRANS, debt issued to fund operating deficits is not
permitted. TRANS are used to address short‐term cash flow issues and are intended to be repaid within
the fiscal year of issuance. Debt will be used to finance eligible projects only if it is the most cost‐
effective and practical means available to the City. In addition, consideration on using debt will be
analyzed when interest rates are low. While the “pay‐as‐you‐go” method of using current revenues to
pay for capital projects is often considered the preferred means of financing (to avoid interest and
issuance costs), it may not be entirely practical or equitable.
Not Yet Adopted
The “pay‐as‐you‐go” funding option requires revenues to accumulate to pay for capital projects. The City
would be able to undertake capital projects under this method only if sufficient cash accumulates.
Prudent use of debt financing rather than “pay‐as‐you‐go” funding of capital projects can facilitate:
better allocation of resources over time, increased financial flexibility, and payment equity across
generations for the use of long‐term assets. The three primary borrowing purposes are summarized
below:
A. Long‐Term Capital Improvements
The City maintains a 5‐year Capital Improvement Plan (CIP) and an annual CIP Budget for
consideration and adoption by the City Council as part of the City’s budget process. The
Administrative Services Department’s Treasury Division is responsible for coordinating and
analyzing potential debt financing for CIP projects. Factors included in the analysis are: amount
and type of debt, duration of bonds, interest rates, annual debt service cost, current outstanding
debt levels, debt limitation calculations and compliance, impact on future debt burdens, credit
requirements, and existing or needed revenue sources to meet annual debt service obligations.
Prior to issuance of debt, the City will prepare revenue projections, such as the biennial budget or
financial forecasts (e.g. financial plans for utilities or the General Fund Long Range Financial
Forecast) to ensure that there is adequate capacity to make principal and interest payments. A
new or enhanced revenue source may need consideration and approval to support additional debt
levels.
Since the aggregate cost of desired capital projects generally exceeds available funds, the capital
planning process prioritizes projects and identifies the funding needs. The City will initially rely on
internally‐generated funds and/or grants and contributions from other governmental agencies to
finance its capital needs. Debt will be issued for a capital project only when the magnitude of costs
justifies a debt financing; the project meets a critical need; if a secure revenue source is identified
to repay the debt; and when it is an appropriate means to achieve a fair allocation of costs
between current and future beneficiaries. All debt issuances must be approved by the City
Council.
The Treasury Division of the Administrative Services Department, working with the Office of
Management and Budget, City departments, and within the context of the Capital Improvement
Plan and the City’s financial forecasts, oversees and coordinates the analysis, timing, processing,
and marketing of the City’s bonds. Close coordination of capital and debt planning among
appropriate departments will ensure that the maximum benefit from existing funding is achieved.
Debt financing will be considered after a debt capacity or affordability analysis is conducted.
B. Essential Vehicle and Equipment Needs
In addition to capital projects, the City can finance essential equipment and vehicles. These assets
range from public safety vehicles to utility equipment. The underlying asset must have a minimum
useful life of three years. Short‐term financings, including loans and capital lease purchase
agreements, are executed to meet such needs. It has been the City’s practice to fund these
purchases with existing resources; however, debt financing flexibility for future needs remains an
option.
C. Re‐financings/Refunding of Existing Debt
The Chief Financial Officer or Director of Administrative Services, supported by Treasury Division,
will periodically evaluate its existing debt and execute re‐financings when economically beneficial.
Not Yet Adopted
A refinancing may include the issuance of bonds to refund existing bonds or the issuance of bonds
in order to refund other obligations. A net present value analysis, both in dollar and percentage
terms, will be conducted to determine whether a re‐financing is optimal. See “ XV. Refunding
Debt” below for City policies on refunding parameters. As a “rule of thumb,” a minimum 3
percent net present value savings will be used as a basis to begin re‐financing efforts. As with new
debt, all re‐financings must be approved by Council.
IV. Responsibilities of City Personnel
Authority to issue and manage debt is derived from Palo Alto Municipal Code 2.08.150, section 13.
This section gives the Director of Administrative Services (Chief Financial Officer or CFO) authority to
perform the duties of debt management. This section also authorizes the CFO to appoint a subordinate
employee from the Department to assist in the performance of the duties of City Treasurer. The CFO has
appointed an Assistant Director and a Manager of Treasury, Debt & InvestmentSenior Management
Analyst to oversee debt issuance and subsequent responsibilities such as: making interest and principal
payments via a Trustee; managing debt service reserves and project funds; and following bond
indenture requirements and all other Federal and State regulations. The CFO is responsible for assuring
that the activities related to the issuance and payment of bonds or other obligations do not materially
impact the City’s bond rating which currently stands at a Triple A level (the highest possible rating).
V. Guidelines for Use of Debt and Other Financing
A. Debt may be judiciously used when some or all of the following conditions exist:
1. Estimated future revenue is sufficient to ensure the payment of annual debt service.
2. Other financing options have been explored and are not viable for the timely or economic
acquisition or completion of a capital project.
3. A capital project is mandated by federal or state authorities with no other viable funding
option available.
4. The capital project or asset lends itself to debt financing rather than pay‐as‐you‐go funding
based on the expected useful life of the project.
5. Debt will not be used to fund ongoing operating expenses of the City except for situations in
which cash flow problems arise and the City may need to issue short‐term Tax or Revenue
Anticipation Notes.
6. Annual debt service shall not exceed 10 percent of annual operating expenses for the General
Fund unless an exception is approved by Council. For all other City funds annual debt service
shall not exceed 15 percent of annual operating expenses unless an exception is approved by
Council.
B. Minimize borrowing costs by:
1. Maximizing the use of existing resources for capital projects and equipment needs.
2. Issuing tax‐exempt debt except in instances where IRS regulations require taxable bonds.
3. Striving to obtain the highest credit ratings possible.
4. Maintaining a competitive bid process on bond sales except for situations in which negotiated
or private placement sales meet City objectives. In negotiated or private placement sales, City
staff will work with its Municipal Financial Advisor (aka Financial Advisor) to review proposed
interest rates and proposed fees.
5. Ensuring that the type of debt and debt structure developed ensure advantageous marketing
of each issue.
C. Linking debt to appropriate revenue sources and project users:
Not Yet Adopted
1. When possible, tie project financing directly to users of a specific facility or use. Examples
include renovation of the Golf Course where user fees can offset debt service or replacing gas
mains where gas rates can be increased to cover debt expense.
2. Using debt in the Enterprise Funds so as to avoid significant spikes in user rates by smoothing
out costs over time.
D. Debt Policy Goals Related to Planning Goals and Objectives.
1. The City is committed to long‐term financial planning, maintaining appropriate reserves levels
and employing prudent practices in governance, management and budget administration. The
City intends to issue debt for the purposes stated in this Debt Policy and to implement policy
decisions incorporated in the City's annual operations budget.
VI. Types of Financing Instruments
As outlined by the California Debt and Investment Advisory Commission (CDIAC), there are numerous
options or debt instruments to fund projects. These range from General Obligation Bonds to Mello‐Roos
Districts, to State Revolving Funds to Certificates of Participation. The list below represents the most
typically used debt vehicles and the general guidelines for their use.
A. General Obligation Bonds (G.O.)
G.O. bonds provide investors with the most secure credit and the City with the lowest cost of
funds. Through a super majority vote, residents agree to place a lien/tax on all properties to pay
annual debt service. A lien on property, especially with land values in the City of Palo Alto, along
with a City pledge to use its unlimited authority to levy property taxes for debt service provides
significant assurance to investors and bondholders. Proceeds from G.O. bonds are strictly limited
for acquisition of land, capital projects and the purchase of fixed equipment. These bonds cannot
be used for operating expenses or moveable equipment. The sum of all G.O. debt outstanding is
governed by a statutory legal debt limit that is disclosed in the City’s annual Comprehensive
Annual Financial Report and the City’s budget documents.
B. Certificates of Participation (COPs) and Other Lease Financings
COPs are a form of lease obligation in which the City enters into an agreement to pay a fixed
amount annually to a third party, usually a private leasing company or trust structure. These
leases are issued for land acquisition and capital improvements. In addition, the purchase of
moveable equipment is permitted. It is typical for the asset being acquired or improved to act as
the leased asset for the financingas the credit for the financing, but the City’s General Fund is
ultimately liable for all annual debt service limits. COPs can be tied, for example, to revenue
streams such as Golf Course fees or rents from a newly constructed facility. The City has
established a leasing structure with the Public Improvement Corporation (PIC) that allows the
issuance of COPS. The City may consider other lease financing structures, including lease revenue
bonds and privately placed lease financings.
C. Revenue Bonds
Revenue bonds may be issued to fund capital improvements related to enterprise functions (e.g.
water, sewer, electric) or for special projects supported by discrete revenue sources. They are
designed to be self‐supporting through user fees or other special earmarked receipts or taxes and
do not rely on the general taxing powers of the City. Principal and interest is paid from the net
revenuesnet the revenues of enterprise operations. Unlike General Obligation bonds, revenue
Not Yet Adopted
bonds are not subject to the City’s statutory debt limitation. Electric and gas bonds, for example,
do not require voter approval while other enterprise funds such as the Storm Drain Fund may be
subject to Proposition 218 requirements in raising revenue levels sufficient to pay debt. Net
revenues generated by the applicable Enterprise Funds must be sufficient to maintain required
debt service coverage levels specified in bond indentures.
D. Special District Bonds.
These bonds are typically used for a specific purpose such as garage construction, landscape and
lighting improvements, or utility work. They are subject to voter or property owner approval
where special taxes or assessments are levied on properties to pay debt service for constructed
facilities or services. With the passage of Proposition 218 by voters, specific steps and
requirements must be followed to implement such districts. The City’s downtown parking
assessment district is one such example.
E. State Revolving Fund (SRF) and Federal Loans
The SRF provides a low interest loan program for construction of water and wastewater
infrastructure projects. The City’s Regional Water Quality Control Plant, for example, has an
outstanding SRF loan. Both the State and rating agencies require the City to disclose all incurred
debt as they determine whether the City is able to meet required debt service coverage ratios (the
basic concept of coverage is that after covering all operating expenses, the fund issuing debt has
sufficient revenue (at a specified level) to cover annual debt service.
In addition to the SRF, the City may participate in advantageous Federal loans as they become
available. For example, the City has issued Clean Renewable Energy Bonds for a photovoltaic
project and Build America Bonds to construct water system improvements. Such bonds typically
offer incentives for investors and a low cost of funds for the City.
VII. Debt Limits
A standard guideline, and one that has been inserted annually in the City’s General Fund budget
document, is that debt service payments should not exceed 10 percent of the annual expenditure
budget. Moreover, California Government Code, Section 43605 sets the general obligation bond debt
limit at 15% of the assessed value of all real and personal property of the City. Because this Code section
was enacted when assessed value was 25% of market value, the limit is calculated now at one‐fourth of
that amount or 3.75 percent. For details on current General Fund debt service levels as a percent of
budget and for where the City stands on the State’s legal debt margin, see the Comprehensive Annual
Financial Report’s (CAFR) Statistical section for the Computation of Legal Bonded Debt Margin
calculation. Similar, but abbreviated information also is provided in the Operating Budget’s Debt Service
Funds Overview section.
Enterprise or other fund debt is not subject to legal debt margin described above. For Enterprise and all
other funds, debt service payments should not exceed 15 percent of the annual expenditure budget.
Any exceptions to the above guidelines will be presented to Council for approval.
VIII. Term and Structure of Debt
A. Term of Debt
The duration of a debt issue is typically tied to the economic or useful life of an asset. This is
consistent with standard practice and further serves the concept of allocating debt service costs to
Not Yet Adopted
current and future beneficiaries of the asset. It is possible, though uncommon, for the term of
debt to exceed 30 years duration. For long‐term assets such as a building or a parking garage, the
City has issued 30 year bonds. Wherever possible and to save on interest costs, the City should
consider shorter‐term borrowings where appropriate. Additional factors to include in the analysis
of the term of debt are: current market conditions, institutional interest, and the durability and
consistency of revenue sources covering debt service payments.
B. Structure of Debt
1. Fixed and Variable Rate Debt
The City’s practice has been to issue fixed rate debt. Such debt provides absolute certainty, at
the time of a bond sale, as to the level of principal and interest owed annually. Moreover, it
allows the City to have even debt service payments over time. This conservative practice has
served the City well over the past decades.
Specific conditions may arise where the City would consider the use of variable interest rate
bonds. Variable bonds have interest rates that reset on a periodic basis (e.g. daily, weekly,
monthly). Conditions which would cause consideration of variable rate debt are:
a. An adverse fixed‐rate municipal market.
b. Uncertainty over the level of annual revenues to cover debt service.
c. The potential for rapid repayment of debt.
d. The need or desire to optimize the City’s asset/liability balance.
Variable interest rate debt, however, exposes the City to interest rate risk over the term of the
financing. While credit rating agencies are supportive of variable rate debt, the magnitude of
any unhedged variable rate debt could raise concerns. Rating agencies suggest the aggregate
amount of such debt be capped at a level not exceeding 20‐25 percent of debt outstanding.
It is possible to issue a combination of both fixed and variable rate debt. The City could use
this tool, as well as others, such as front or back ending debt to manage its debt portfolio.
These structures should be used in a manner which best supports the City’s long‐term
financial condition. There are other types of debt that are a variation of fixed and variable
debt. These can involve swaps of fixed for variable debt (or vice versa) depending on the
interest rate environment and the City’s general financial position. These instruments can
become most complex and sensitive to shifts in the interest rate and economic environment.
They require careful analysis and monitoring.
2. Tax‐exempt versus Taxable Debt
The City’s standard practice is to issue tax‐exempt debt. This debt reduces the City’s interest
expense and provides considerable savings over time. There are, however, instances in which
the City may want or need to issue taxable debt. For example, if the City builds a garage and
plans retail space within it, it may, depending on square footage used, have to issue both
exempt and taxable debt. The Internal Revenue Service (IRS) has specific guidelines on public
and private usage of facilities and when taxable debt must be issued. Working with the City’s
Bond Counsel to understand and comply with IRS regulations is essential.
3. Prepayment Provisions
Not Yet Adopted
Redemption provisions and call features shall be evaluated in the context of each bond sale
to: enhance marketability of the bonds; ensure flexibility related to potential early
redemption; and to foster future refunding transactions. The potential for additional costs
such as a call premium and potentially higher interest rates will be evaluated in the decision to
redeem bonds. The following are different redemption provisions to be evaluated:
a. Optional redemption allows the City the ability to redeem bonds early.
b. Mandatory redemption includes provisions for redeeming bonds under specific and
pre‐determined conditions.
c. Extraordinary redemption provides ability to redeem bonds given fortuitous events.
IX. Attention to Credit‐Worthiness
A. Credit Ratings
The City seeks to maintain the highest possible credit rating on debt that can be achieved without
compromising its policy objectives or transparency. Achieving the highest possible credit rating
translates into lower interest cost and annual debt service. At a high level, rating agencies will
look for the ability to repay debt, prudent financial management, systematic capital planning,
interdepartmental cooperation and coordination, long‐term labor agreements, and long‐term
financial planning. More specifically, agencies such as Standard and Poor’s focus on:
1. Fiscal soundness of the General and Enterprise Funds
2. Community demographics such as education and income levels
3. Property values and business concentration
4. Management capability
5. State and Federal regulations
6. The credits, revenue sources, and coverage ratios pledged to repay debt
7. Fund reserve levels and policies
8. City’s debt history and current debt structure
9. The capital improvement project being funded
10. Covenants and conditions in the governing legal documents
11. Cost adjustments to balance budgets during an economic downturn
The City recognizes that external legislative, economic, natural, or other events may, from time to
time, affect the creditworthiness of its debt. Such events could lead to a downgrade or upgrade to
City ratings. Naturally, when new debt is proposed, rating agencies will evaluate its potential
impact upon the City’s outstanding debt rating. The major source of risk rating agencies consider is
the stability and reliability of revenue sources to service the debt. Projects with volatile or risky
debt repayment revenue will receive a lower rating and that could potentially impact the ratings
on other City debt.
B. Rating Agency Relationships
The Chief Financial Officer (CFO) is responsible for maintaining relationships with the rating
agencies (e.g. Standard and Poor’s and Moody’s) that assign ratings to debt issuances. The CFO
performs this function in conjunction with the Assistant Director, Manager of Treasury, Debt, &
InvestmentSenior Financial Analyst, and outside consultants such as the City’s MunicipalFinancial
Advisor and Bond Counsel. This effort shall include providing periodic updates on a Fund’s
financial conditions when requested and providing documents such as the Comprehensive Annual
Not Yet Adopted
Financial Report and Adopted Budget. Rating agencies may require payments from the City to
update their bond ratings.
C. Bond Ratings
The CFO and his staff are responsible for providing factual, well‐organized, and germane
presentations to the agencies rating proposed bonds. These presentations will involve
coordination among the City Manager’s and City Attorney’s Offices, Administrative Services, and
the department responsible for the debt issuance such as the Public Works, Utilities or Community
Services departments. In addition, the City’s MunicipalFinancial Advisor and Bond Counsel will
attend these presentations.
D. Credit Enhancement
Credit enhancement may be used to establish or improve a credit rating on a City debt obligation.
Types of credit enhancement include bond insurance, surety policies, or a Letter of Credit. The
CFO and staff will consider the use of credit enhancement if it reduces the overall cost of the
proposed financing, or if in the opinion of the CFO, the use of such credit enhancement furthers
the City’s overall financial objectives.
Bond insurance is an unconditional pledge by an insurance company to make principal and
interest payments on the City’s debt in the event insufficient funds are available to meet a debt
service obligation. Bond insurance, when available, may be purchased from an insurance
company and is a potential means of enhancing the debt’s rating. The cost of the insurance is to
be weighed against the potential interest costs savings generated by the assurance. A Letter of
Credit may be obtained from a major bank, for a fee, to enhance the credit rating. This letter is an
unconditional pledge of the bank’s credit to make principal and interest payments on the City’s
debt in the event insufficient funds are available to meet a debt service obligation. Again, the cost
of the credit Letter is to be weighed against savings from the Letter.
E. Debt Service Reserve Fund
For debt other than GO bond indebtednessWith the exception of G.O. bond indebtedness, the City
may size the debt issuance such that a debt service reserve fund is established at the time of
issuance. The debt service reserve funds will be held by and are available to the Trustee to make
principal and interest payments to bondholders in the event that pledged revenues are
insufficient to do so. The maximum size of the reserve fund is generally governed by tax law,
which permits the lesser of: 1) 10 percent of par; 2) 125 percent of average annual debt service;
and 3) 100 percent of maximum annual debt service. Debt reserve funds for the City are typically
equal to one year’s maximum debt service. On a case‐by‐case basis and assuming there is no
economic or credit disadvantage, the City may issue bonds with a debt service reserve fund that is
sized at a lower level. The City may purchase a debt service reserve fund insurance policy for the
reserve fund in appropriate circumstances.
X. Method of Sale
The CFO/Director of Administrative Services will select the method of sale that best fits the type of
bonds being sold, the prevailing market conditions, and the desire to structure bond maturities to
enhance the overall performance of the entire debt portfolio. Three general methods exist for the sale
of municipal bonds:
A. Competitive Sale
Not Yet Adopted
Bonds are marketed to a wide audience of investment banking (underwriting) firms. Their bids
are submitted at a specified time (generally the day of the bond sale). The underwriter then is
selected based on the best bid (lowest interest rate) for the securities. Pursuant to this policy
and within the parameters approved by the City Council, the CFO or his/her designee (e.g.
Assistant Directors of Administrative Services Department(ASD)) is hereby authorized to sign the
bid form on behalf of the City fixing the interest rates on bonds sold on a competitive basis
B. Negotiated Sale
The City selects the underwriter or group of underwriters of its securities in advance of the bond
sale. This method of sale is warranted for complex or unique bonds that require education and
marketing in the investment community. Underwriters will perform this service on the City’s
behalf given ties to large institutional investors and large brokerage houses. Moreover, it is only
through negotiatedcompetitive sales that City staff can arrange the sale of its bonds to
residents. When feasible and effective, staff will give local residents and investors domiciled in
the City first priority to purchase bonds.
The City’s financing team ASD staff and the MunicipalFinancial Advisor) works with a selected
underwriter to bring a bond issue to market. In advance of the sale, the City will determine a
selected underwriter’s compensation, their liability, and the designation rules and priority of
orders under which the sale will be conducted. The MunicipalFinancial Advisor is responsible for
advising staff on whether the fees and interest rates terms offered by the underwriter are
consistent with prevailing market conditions. The City adheres to a strict policy of separating its
MunicipalFinancial Advisor function from the underwriter function. Pursuant to this policy and
conditions described herein, the City Council authorizes the CFO or his/her designee (e.g.
Assistant Directors of ASD) to negotiate the terms of sale and to sign bond purchase agreements
(that fix interest rates on bonds sold) in a negotiated sale.
C. Private placement
This method involves the City selling its bonds to a bank or limited number of sophisticated
investors. Bonds are not sold to the general, investor community. City staff will perform due
diligence in comparing interest costs and fees in a private placement to those using a
competitive or negotiated sale. There are potential benefits in securing a private placement
such as:
a. Lower fees or costs compared to selling bonds on the open market e.g. no fees for a
Disclosure Counsel or rating agencies.
b. The time frame for selling City is shorter and subject to less uncertainty in the event
market rates move upward and against the City by the time a competitive bid
process is held.
c. The lack of a reserve requirement through a private placement could reduce the
amount of principal outstanding and lead to lower annual debt service costs.
XI. Initial Disclosure Requirements
The Administrative Services Department, together with the City Attorney’s Office and an outside
Disclosure Counsel, shall coordinate all the necessary documents for disclosing the City’s financial
condition. The City’s practice is to use separate law firms for the Disclosure and Bond Counsel functions.
Not Yet Adopted
Each publicly offered debt issuance will meet the disclosure requirements of the Securities and
Exchange Commission (SEC) and other government agencies before and after the bond sale takes place.
The disclosure documents, specifically the Preliminary and Final Official Statements, will provide the
potential investor with full and accurate information necessary to make prudent investment decisions.
Information for City backed transactions generally includes: a City government description; a
description or scope of project being financed; annual financial data and statements; disclosure of
liabilities; the tax or rate base; current debt burden; the history of tax collections and bond repayments;
future borrowing plans; the source of funds for the proposed debt repayments; and specific bond data
and bond holder risk factors.
XII. Post Issuance Administration
A. Investment of Bond Proceeds
The proceeds of the bond sales will be invested until used for the intended project in order to
maximize utilization of the public funds. The investments will be made to obtain the highest level
of safety and will be guided by the City’s Investment Policy and/or bond indenture guidelines. City
staff will provide investment guidance to a Trustee or management firm holding bond proceeds
whether for project or debt service reserve funds.
B. Arbitrage Compliance
ASD shall establish and maintain a system of record keeping and reporting to meet the arbitrage
rebate compliance requirements as required by the Federal tax code. This effort shall include
tracking investment earnings on bond proceeds, calculating rebate payments in compliance with
tax law, and remitting any rebate earnings to the federal government in a timely manner. These
activities preserve the tax‐exempt status of the City’s outstanding debt issuances. Additionally,
financial reporting and other tax certification requirements embodied in bond covenants shall be
monitored to ensure the City is in compliance with its bond covenants.
C. Ongoing Disclosure
ASD shall be responsible for providing annual disclosure information to established national
information repositories and for maintaining compliance with disclosure requirements by state and
national regulatory bodies. Securities and Exchange Commission (SEC) disclosure, stipulated by the
SEC Rule 15c2‐12, shall occur by the date designated in the bond ordinance. Disclosures shall include
the Comprehensive Annual Financial Report (CAFR) at a minimum and any other information
required by the bond indenture or regulatory body.
The CFO shall be responsible for providing ongoing disclosure information to the Municipal
Securities Rulemaking Board’s (MSRB’s) Electronic Municipal Market Access (EMMA) system. This is
the central depository designated by the SEC for ongoing disclosures by municipal issuers. The CFO
is responsible for maintaining compliance with disclosure standards promulgated by state and
national regulatory bodies, including the Government Accounting Standards Board (GASB), the
National Federation of Municipal Analysts, the Securities and Exchange Commission (SEC), and
Generally Accepted Accounting Principles (GAAP). The City may also employ the services of firms
that improve the availability of or supplement the City’s EMMA filings. [These updates reflect
changes by the SEC to Rule 15c2‐12, effective July 1, 2009.] The City will provide full and complete
financial disclosure to rating agencies, institutional and individual investors, other levels of
government, and the general public to share clear, comprehensible, and accurate financial
information using the appropriate channels/policies/procedures.
Not Yet Adopted
In order to facilitate the City’s receipt of financing proposals associated with existing or
contemplated debt, the City will have in place ans Independent Registered Municipal Advisor
(IRMA). The IRMA will provide advice to the City on proposals from broker‐dealers or banks and will
be required to be registered as a Municipal Advisor with the SEC and the MSRB. To attract financing
proposals and assuage underwriter concerns about federal requirements, the City has posted on its
website that an IRMA is under contract with the City.
D. Compliance with Other Bond Covenants
In addition to financial disclosure and arbitrage compliance, once bonds are issued, the City is
responsible for verifying compliance with all activities, agreements, and requirements outlined in
the bond documents on an ongoing basis. This typically includes: ensuring an annual appropriation
to meet debt service payments; that relevant taxes, rates, and fees are levied and collected at a
level sufficient to meet indenture requirements and debt service payments; the timely payment of
debt service to a trustee or paying agent is completed; and compliance with insurance and other
requirements.
XIII. Professional Services
ASD shall be responsible for the solicitation and selection of financial professional services that are
necessary to issue and manage debt.
A. MunicipalFinancial Advisor
A MunicipalFinancial Advisor(s) will be used to assist in the issuance of the City’s debt. The
MunicipalFinancial Advisor, or IRMA, will provide the City with objective advice and analysis on
debt issuance. This includes, but is not limited to, monitoring market opportunities, structuring
and pricing debt, and advising on official statements of disclosure.
B. Underwriters
An Underwriter(s) will be used for all debt issued in a negotiated sale. The Underwriter is
responsible for purchasing negotiated debt and reselling it to investors.
C. Fiscal Agent
A Fiscal Agent or Trustee will be used to provide accurate and timely securities processing and
timely payment to bondholders.
D. Training.
The CFO or his/her designee shall ensure that the members of the City staff involved in the initial
or continuing disclosure process and the City Council are properly trained to understand and
perform their responsibilities.
E. Public Statements Regarding Financial Information
Whenever the City makes statements or releases information relating to its finances to the public
that are reasonably expected to reach investors and the trading markets, the City is obligated to
ensure that such statements and information are complete, true, and accurate in all material
respects.
The City Attorney’s Office shall be responsible for the appointment of Bond and Disclosure Counsels
Not Yet Adopted
F. Bond Counsel
All debt issued by the City will include a written opinion by Bond Counsel affirming that the City is
authorized to issue the proposed debt. The opinion shall include confirmation that the City has
met all City and State constitutional and statutory requirements necessary for issuance; a
determination of the proposed debt’s federal income tax status; and any other components
necessary for the proposed debt. Bond Counsel shall provide a comprehensive and complete
collection of resolutionsdocument of resolutions, indentures, disclosure statements and all related
bond documents in binder and in electronic form.
G. Disclosure Counsel
This Counsel is responsible for drafting Preliminary and final Official Disclosure statements. While
City staff provides Counsel with information required for these statements, it is Counsel’s
responsibility to know all regulatory and legal requirements necessary for full disclosure to
investors.
H. Internal Control Procedures re. Use of Debt Proceeds
Whenever it’s required, proceeds of debt will be held by a third‐party trustee and the City will
submit written requisitions for such proceeds. In those cases where it is not required for the
proceeds of debt to be held by a third‐party trustee, the Director, Assistant Director of
Administrative Services or their designee shall retain records of all expenditures of proceeds.
XIV. Refunding Debt
Refunding of debt may be undertaken to:
Take advantage of lower interest rates and achieve debt service cost savings
Restructure debt to either shorten or lengthen its duration or eliminate a debt service reserve
Refund outstanding indebtedness when existing bond covenants or other financial structures
impinge on prudent and sound financial management or are too complex
Generally, the City will consider a refunding only when there is a net economic benefit. This is when
there is an aggregate net present value savings expressed as a percentage and dollar value of the par
amount of the refunded bonds. A net present value savings of at least 3 percent is a standard guideline
for initiating a refunding; however, a higher savings level may be considered. A net present value
savings of 4 percent is a reasonable guideline for an advance refunding. The savings guideline for an
advanced refunding may be waived by the Chief Financial Officer upon determining that such a
restructuring is in the City’s overall best financial interest. Exceptions shall be made only upon the
approval of the Chief Financial Officer.
Not Yet Adopted
Types of Refunding include:
A. Current Refunding
A current refunding is one in which the refunding bonds are issued less than 90 days before the
date upon which the refunded bonds will be redeemed.
B. Advance Refunding
An advance refunding is one in which the refunding bonds are issued 90 days or moremore than
90 days prior to the date upon which the refunded bonds will be redeemed. An advance refunding
is used to refinance outstanding debt before the date the outstanding debt becomes due or
callable. Proceeds of the advance refunding bonds are placed into an escrow account with a
fiduciary and used to pay interest and principal on the refunded bonds and then used to redeem
the refunded bonds at their maturity or call date. Internal Revenue Code §149(d)(3) provides that
governmental bonds issued after 1985 may only be advanced refunded once over the life of a
bond issuance.
XV. Arbitrage Rebate Monitoring and Reporting
The City will, unless otherwise justified, use bond proceeds within the established time frame pursuant
to the bond ordinance, contract or other documents to avoid arbitrage. The general rule is that the City
must on the date of issuance of any tax‐exempt debt have a reasonable expectation of spending at least
85% of the debt proceeds within three years.The general rule is that the City must spend all bond
proceeds for a project within three (3) years of project initiation. Arbitrage is the interest earned on the
investment of the bond proceeds above the yield of the debt.above the interest paid on the debt. If
arbitrage occurs, the City will pay the amount of the arbitrage to the Federal Government as required by
Internal Revenue Service Regulation 1.148‐11. The City will maintain a system of recordkeeping and
reporting to meet the arbitrage rebate compliance requirement of the IRS regulation. For each bond
issue not used within the established time frame, the recordkeeping shall include tracking investment
earnings on bond proceeds, calculating rebate payments, and remitting any rebate earnings to the
federal government in a timely manner in order to preserve the tax‐exempt status of the outstanding
debt.
Adopted by City Council June 2016