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HomeMy WebLinkAbout17-116 - Resolutions - ADOPTING A DEBT MANAGEMENT POLICY RESOLUTION NO. 17-116 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF RANCHO CUCAMONGA, CALIFORNIA, ADOPTING A DEBT MANAGEMENT POLICY WHEREAS, California Senate Bill 1029 (SB 1029), which was signed into law in September 2016, requires California public agencies that issue debt to adopt debt management policies; and WHEREAS, SB 1029 requires that a debt management policy be adopted at least 30 days prior to issuing any new debt on or after January 21, 2017; and WHEREAS,the City Council desires to comply with state law as it relates to debt issuance requirements and acknowledges the potential benefits of a formal debt policy. NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF RANCHO CUCAMONGA, HEREBY RESOLVES, to adopt the City of Rancho Cucamonga Debt Management Policy. Resolution No. 17-116— Page 1 of 2 PASSED APPROVED AND ADOPTED this 20th day of December 2017. r C L. is Michae ayor ATTE n . T yan, City Clerk Services Director STATE OF CALIFORNIA ) COUNTY OF SAN BERNARDINO ) ss CITY OF RANCHO CUCAMONGA ) I, LINDA A. TROYAN, City Clerk Services Director of the City of Rancho Cucamonga, do hereby certify that the foregoing Resolution was duly passed, approved, and adopted by the City Council of the City of Rancho Cucamonga, at a Regular Meeting of said Council held on the 20th day of December 2017. AYES: Alexander, Kennedy, Michael, Spagnolo, Williams NOES: None ABSENT: None ABSTAINED: None Executed this 21St day of December 2017 at Rancho Cucamonga, California. L/ '___�hda . Troyan, City Clerk Services Director Resolution No. 17-116— Page 2 of 2 P256 ar yCITY OF RANCHO • 1 DEBT MANAGEMENT POLICY POLICY NO.: EFFECTIVE: REVISED: APPROVED: 1. PURPOSE The purpose of this policy is to establish guidelines for the following objectives: A. Minimize debt service and issuance costs B. Provide a scheduling component(planning) C. Maintain access to cost-effective borrowing D. Achieve the highest practical credit rating E. Full and timely repayment of debt F. Balance use of pay-as-you-go and debt financing G. Maintain full and complete financial disclosure and reporting H. Ensure compliance with applicable State and Federal laws It. SCOPE This policy applies to debt issued by the City of Rancho Cucamonga and its related entities, as well as debt issued by the City of Rancho Cucamonga on behalf of other parties. III. GENERAL POLICIES A. Designated Managers of City Debt 1. The Finance Department under the direction of the Finance Director issues and oversees the ongoing administration of all the General Fund and special fund debt programs. These include General Obligation Bonds, lease purchase obligations, tax allocation bonds, revenue obligations, Mello-Roos and special assessment obligations. Other programs are added from time to time as new debt instruments are developed. B. Method of Sale. The City may utilize any methods of sale identified below. 1. There are two methods of issuing debt obligations, a competitive sale and a negotiated sale. In a competitive sale, underwriters submit sealed bids and the underwriter or underwriting syndicate with the lowest True Interest Cost(TIC) is awarded the sale. In a negotiated sale, the underwriter or underwriting syndicate is selected through a Request for Proposal (RFP) process. The interest rate and underwriter's fee are negotiated prior to the sale, based on market conditions. ATTACHMENT #2 P257 DEBT MANAGEMENT POLICY PAGE 2 OF 11 Z When determining whether to use a competitive or negotiated sale, the following criteria should be used by the Finance Director to evaluate issuer and financial characteristics: a. Market familiarity: The City can generally sell most issues through a competitive sale since investors and underwriters are familiar with its credit quality. The Finance Director should consider whether a successful sale will require extensive pre-marketing to investors. A negotiated sale may be appropriate if extensive pre-marketing to investors is advantageous. b. Credit strength: The higher the credit quality of the City, the less likely the need for a negotiated sale due to the demand for high quality municipal bonds. A competitive bidding may be appropriate with the credit rating above"A". C. Policy goals: If the City chooses a negotiated sale for a policy reason, the City should then clearly specify the rationale and criteria for the selection of the underwriters to avoid the appearance of favoritism. Generally, the City should make a policy decision to proceed with a negotiated sale when the composition and distribution of bonds for a particular financing would be advantageous. d. Type of Debt Instrument: Familiar debt instruments would be better suited to competitive sales. New types of instruments may require an education process that is more conducive to a negotiated sale. Thus, as the market becomes more familiar with the City's debt instruments, the need to educate the market diminishes. e. Issue Size: If the bond amount is too small or too large, then the City should consider a negotiated sale. A small bond sale may not attract market attention without significant sales effort while a large sale may be difficult for the market to absorb without the pre-sale activity offered by the negotiated sale process. f. Market Conditions: When the market has interest rate stability, flexibility in the timing of the sale is not critical. However, the timing of the sale is critical when there is a volatile market. If this is the case, then a negotiated sale could be more appropriate. g. Story Bonds: When bonds are unique or have a"story" associated with them, then the pre-marketing process is essential and suitable for a negotiated sale due to the additional explanation. 3. A variation of a negotiated sale, a private placement or direct placement,allows the City to sell bonds directly to a limited number of investors. Private placements are not subject to the same laws and regulations that apply to registered offerings. ATTACHMENT #2 P258 DEBT MANAGEMENT POLICY PAGE 3 OF 11 IV. DEBT CAPACITY A. Debt Affordability 1. The determination of how much indebtedness the City should incur will be based on the long-term financial plan. This plan should evaluate the long-term borrowing needs of the City and the impact of planned debt issuances on the long-term affordability of all outstanding debt. 2. The long-term financial plan should integrate with the City's Capital Improvement Program and include all presently known City financings to be repaid from the General Fund and relevant special funds. 3. The affordability of the incurrence of debt will be determined by calculating various debt ratios(itemized below)that would result after issuance of the debt and analyzing the trends over time. B. Ceilings for Debt Affordability 1. Debt Ratios. Direct debt includes all debt that is repaid from the General Fund or from any tax revenues deposited into special funds not supporting revenue bonds, such as General Obligation bonds and city-wide parcel tax bonds. "General Revenues" consist primarily of the General Fund, as well as the revenues to the special funds supporting direct debt. Ratio Ceiling Total Direct Debt Service as % of General Fund Revenues 10% a. The debt ceiling may be exceeded if there is a guaranteed new revenue source for the debt payments. Generally, this is common for Public Enterprise Revenue Bonds. 2. Rapidity of Debt Repayment. To prevent backloading debt service payments and provide additional debt capacity through relatively rapid retirement of outstanding debt, debt issuances will be structured to reach a target of 50% of debt being repaid within 15 years. a. Back loading of debt service will be considered acceptable when one or more events occur that make debt service payments in early years impracticable or prohibitive. The Finance Director may make findings for any of the following: 1. Natural disasters, extraordinary, or unanticipated external factors. 2. The benefits derived from the debt issuance can clearly be demonstrated to be greater in the future than in the present period. 3. Such structuring is beneficial to the City's aggregate overall debt payment schedule. 4. Such structuring will allow debt service to more closely match project revenues during the early years of the project's operation. ATTACHMENT#2 P259 DEBT MANAGEMENT POLICY PAGE 4 OF 11 C. Monitor Impact on City Taxpayer of All Fees and Taxes 1. In addition to the analysis of the City's debt affordability, the Finance Director will review the impact of debt issuance on City taxpayers. This analysis will incorporate the City's tax levy, other jurisdictions' tax levies, additional taxes for voter-approved debt, and assessments and fees used by the City or related agencies to service revenue bonds. V. REFINANCING OUTSTANDING DEBT A. Types of Refundings (as applicable by Federal and state law): 1. Current Refunding: A refunding of bonds within 90 days of the bond's first optional redemption or call date. 2. Advance Refunding: A refunding that occurs more than 90 days in advance of the first optional redemption or call date of the refunded bonds. B. Monitor Potential Savings 1. Potential savings available by refinancing outstanding debt of the City should be evaluated on a present value basis by using either a percent of maximum call option value or percentage of the refunded par amount. All costs and benefits of the refinancing should be considered. C. Target Savings Amounts 1. A present value analysis must be prepared by the Finance Department or the City's general financial advisors to identify the economic effect of any proposed refunding. To proceed with a refinancing, either of two methodologies may be used to analyze the targeted savings: a. The net present value savings as a percentage of the refunded par amount with a minimum average savings of 3% for any one refunding transaction. 1. For an advance refunding, the threshold goal will be 5% net present value savings. D. Other Considerations: 1. A refunding may be executed for other than economic purposes, such as to restructure debt,to change the type of debt instrument, or to retire a bond issue and indenture for more desirable covenants. The Finance Director may recommend this type of refunding. VI. DEBT USES AND LIMITATIONS A. Legal Restrictions 1. The City must adhere to Section 18 of article XVI of the California Constitution. ATTACHMENT #2 P260 DEBT MANAGEMENT POLICY PAGE 5 OF 11 2. Exceptions to the terms of Section 18 of article XVI of the California Constitution include: a. Obligations of Special District Funds which are not legally enforceable against the City's General Fund or its tax revenues. The City has developed separate guidelines that serve as minimum requirements for the issuance of Mello-Roos Obligations. b. Obligations imposed by law, such as tort damages or state and federal mandates that may exceed current revenues. C. Certain property or equipment leases and service contracts. B. Long-Term Fixed-Rate Debt 1. Debt should be used to finance essential capital assets such as facilities, real property, and certain equipment where it is appropriate to spread the cost of the asset over more than one budget year. Projects that are not appropriate for spreading costs over future years will not be debt financed. 2. Under no circumstances will long-term debt be used to fund City operations or maintenance. 3. The uses of long-term debt include: a. Equipment Financing: Lease obligations are a routine and appropriate means of financing capital equipment. However, lease obligations also have the greatest impact on debt capacity and budget flexibility. Therefore, efforts will be made to fund capital equipment with pay-as-you-go financing where feasible, and only the highest priority equipment purchases will be funded with lease obligations.All equipment with a useful life of less than five(5)years shall be funded on a pay-as-you-go basis. b. Lease Financinq of Real Property Lease financing for facilities and real property is appropriate if the City desires to finance them from existing revenue sources, and not through voter-approved bonds secured by an increase in property taxes. Such financings will be structured in accordance with the above Other Lease Obligations paragraph. C. Identified Repayment Source: The City will, when feasible, issue debt with a defined revenue source to preserve the use of General Fund-supported debt for projects with no stream of user-fee revenues. Examples of revenue sources include voter-approved taxes, user fees, and other appropriate revenues. d. Use of General Obligation Bonds: Voter-approved General Obligation Bonds provide the lowest cost of borrowing to finance the acquisition or improvement of real property, and provide a new and dedicated revenue source in the form of additional ad valorem ATTACHMENT #2 P261 DEBT MANAGEMENT POLICY PAGE 6 OF 11 taxes to pay debt service. In recognition of the difficulty in achieving the required two-thirds voter-approval to issue General Obligation Bonds, such bonds will be generally limited to facilities that provide wide public benefit and that have generated broad public support. e. Use of Revenue Bonds: To preserve General Fund debt capacity and budget flexibility, revenue bonds will be preferred to General Fund-supported debt when a distinct and identifiable revenue stream can be identified to support the issuance of bonds. C. Variable Rate and Short-Term Debt 1. Generally, the City will not issue variable interest rate debt instruments. The Finance Director may decide to issue variable-rate debt when a synthetic fixed rate through a swap agreement is determined to be a viable and cost-effective alternative, subject to the provisions of the Derivatives section below. 2. Uses of short-term debt: a. Tax and Revenue Anticipation Notes: Borrowing for cash flow purposes using tax and revenue anticipation notes is often desirable to manage the timing mismatch between revenues and expenditures over the course of a fiscal year. b. Bond Anticipation Financing: In certain circumstances, it may be appropriate for the City to issue short-term obligations to finance a capital project, with this obligation refunded with a more conventional long-term financing. C. Commercial Paper: Commercial Paper (CP) is a short-term obligation with maturities ranging from 1 to 270 days. It is often used as interim financing until a project is completed to take advantage of lower interest rates. Once a project is completed, the Finance Director may recommend refunding CP with a long-term financing obligation, if appropriate. VII. STRUCTURE OF CITY DEBT INSTRUMENTS A. General Obligation Bonds: 1. The final maturity of General Obligation bonds will be limited to the shorter of the average useful life of the asset financed or 30 years. 2. Principal will be amortized in equal annual amounts or faster to meet the rapidity of debt repayment goals.The bonds should be callable in no later than 10 years. B. Other Lease-Purchase Obligations 1. The final maturity of equipment obligations will be limited to the average useful life of the equipment to be financed. 2. The final maturity of real property obligations will be determined by the size of the financing, 10 to 15 years for small issues, 20 to 25 years for large issues and 30 years for exceptional projects or those with a direct revenue component, such as a special tax. ATTACHMENT #2 P262 DEBT MANAGEMENT POLICY PAGE 7 OF 11 3. Principal will generally be amortized to result in level annual lease payments; however, more rapid principal amortization may occur where permissible to meet debt repayment goals. 4. The obligations should be callable in no later than 10 years. C. Revenue Obligations: 1. The final maturity of bonds or other debt obligations secured by enterprise or other special revenues will be determined by the expected useful life of the financed project and the revenues available to repay the debt. 2. Principal amortization will be appropriate for the project cash flows, based on the useful life of the project and other revenue bonds outstanding. The obligations should be callable in no later than 10 years. D. Special Tax Obligations (excluding Mello-Roos Special Taxes): 1. The final maturity of special tax obligations will be limited to 30 years. 2. Principal will be amortized as quickly as feasible, with a preference for equal annual principal payments. 3. The obligation should have optional redemption provisions that set out terms in the bond documents which give the City the right to call all or a portion of an outstanding issue of bonds, prior to their stated dates of maturity at a specified price. a. The City should include these terms in the event a property owner intends to make a prepayment of special taxes to reduce their overall tax burden. 4. The obligations should be callable in no later than 10 years. E. Mello-Roos and Special Assessment Obligations: 1. These obligations, although repaid through special taxes levied on a specific group of taxpayers, constitute overlapping indebtedness of the City, and have an impact on the overall level of debt affordability. 2. The City has developed separate guidelines for the issuance of Mello-Roos and Special Assessment Obligations. F. Capitalized Interest: 1. Capitalized interest increases the amount of debt to be issued and, therefore, will be avoided unless deemed beneficial from a credit standpoint, as in the case of lease-purchase obligations. 2. Interest on General Obligation Bonds will not be capitalized. 3. Interest on lease-purchase obligations will be capitalized for a maximum of 18 months following a conservatively based estimate of project completion to provide a cushion for project slippage. ATTACHMENT#2 P263 DEBT MANAGEMENT POLICY PAGE 8 OF 11 G. Payment Dates: 1. It is preferable that new debt service payments occur in September and March to align with past debt issuances. VIII. INVESTMENT OF BOND PROCEEDS 1. All investments of bond proceeds shall adhere to the City's Investment Policy, approved periodically by the City Council. IX. CONDUIT DEBT 1. Conduit financing are securities issued by the City to finance a project of a non-governmental third party, such as a non-profit organization or other private entity. 2. The City may sponsor conduit financings for those activities that may have a public purpose and are consistent with the City's overall service and policy objectives. 3. The City will not in any way pledge the City's credit in any form. 4. No City funds shall be pledged to support the conduit debt and no appropriation will be made in the event of a default of conduit debt. X. DERIVATIVES A. Use of Derivatives 1. The City may use derivative instruments to mitigate interest rate risk as specified in Section 5922(a)of the Government Code of the State of California. The Finance Director will recommend the use of these instruments only in a manner consistent with the Government Code and when the following findings can be made: a. The instrument reduces exposure to changes in interest rates in the context of a financing or the overall asset/liability management of the City; or b. The instrument achieves a lower net cost of borrowing with respect to the City's debt. 2. As required by the Government Code,the City Council must determine that the instrument will reduce the amount or duration of payment, result in a lower cost of borrowing, or enhance the relationship between risk and return. 3. Derivative instruments will not be used for speculative purposes. B. Methods of Procurement 1. The Finance Director will solicit and procure derivative instruments by competitive bid whenever feasible. ATTACHMENT #2 P264 DEBT MANAGEMENT POLICY PAGE 9 OF 11 2. A negotiated transaction should only be used if the Finance Director determines that due to the size or complexity that a competitive bid is impractical and a negotiated transaction. Such findings will be based on advice from an independent financial advisor and with the assistance of the City Attorney. a. The independent financial advisor should make findings on the terms and conditions of the derivative instrument and the fair market value of such agreement. C. Aspects of Risk Exposure 1. Before entering into a derivative instrument, the Finance Director should evaluate the risk inherent to the transaction. The risks to be evaluated should include: a. Amortization Risk: The mismatch of the expiration of the underlying obligation and the derivative instrument. b. Basis Risk: The mismatch between the actual variable rate debt service and variable rate index used to determine the derivative instrument. C. Credit Risk: The occurrence of an event modifying the credit rating of the counterparty. d. Counterparty Risk: The failure of the counterparty to make its required payments. e. Rollover Risk: The potential need to find a replacement counterparty as part of the overall plan of finance if the derivative instrument does not extend to the final maturity of the underlying variable rate bonds. f. Tax Events Risk: The risk created by potential changes to Federal and State income tax codes on the interest rates to be paid by the City on its variable rate bonds. g. Termination Risk: The possibility that, upon a default by the counterparty, the City may be required to make a large payment to the counterparty if the derivative instrument is terminated prior to its scheduled maturity pursuant to its terms. D. Counterparty 1. A counterparty, or the entity who takes the other side of the derivative instrument, exists for every derivative agreement. The risk that the counterparty will default on its obligation must be mitigated. Therefore, a counterparty should meet the following standards: a. At least two of the counterparty's credit ratings are rated at least "AaW or "AA-", or equivalent, by any two of the nationally recognized rating agencies (i.e. Moody's, Standard and Poor's, or Fitch); or b. The payment obligations of the counterparty are unconditionally guaranteed by an entity with such a credit rating. ATTACHMENT #2 P265 DEBT MANAGEMENT POLICY PAGE 10 OF 11 2. A counterparty should be collateralized at levels and with securities acceptable to the Finance Director if the payment obligations are not unconditionally guaranteed. E. Termination 1. Prior to making any termination payment due to the default of a counterparty, the Finance Director will evaluate whether it is financially advantageous for the City to obtain a replacement counterparty to avoid making such termination payment. F. Le alit 1. The City Attorney must receive an opinion reasonably acceptable to the market from a nationally recognized law firm that any derivative instrument that the City enters, is a legal, valid and binding obligation of the City. Xi. CONTINUING DISCLOSURE AND ADMINISTRATION A. Continuing Disclosure 1. The City will comply with Rule 15(c)2-12 of the Securities and Exchange Commission by filing an annual report that provides certain financial information and operating data relevant to investors in City obligations. a. The City will covenant to provide its annual disclosure report no later than 270 days following the end of the fiscal year to the Electronic Municipal Market Access(EMMA)site maintained by the Municipal Securities Rulemaking Board (MSRB). b. The City will issue a material event notice in accordance with the provisions of Rule 15(c)2-12 of the Securities and Exchange Commission. Prior to the issuance of any material event, the Finance Director may convene a meeting of the Mayor, City Manager, City Attorney and policymakers or outside professionals as appropriate, to discuss the materiality of any event and the process for equal, timely and appropriate disclosure to the marketplace. B. Arbitrage Rebate Compliance 1. The City will comply with all of its tax certificates for tax-exempt financings by monitoring the arbitrage earned on bond proceeds and by rebating all positive arbitrage, pursuant to Internal Revenue Code Section 148. The Finance Director may choose to hire an arbitrage consultant to prepare the calculations required by the Internal Revenue Service. Contractor payments shall be made from either the General Fund or from the special fund for which the calculation was made. C. Ratings 1. The City will secure underlying ratings on all newly issued obligations from at ATTACHMENT #2 P266 DEBT MANAGEMENT POLICY PAGE 11 OF 11 least one national rating agency, if deemed beneficial for the financing. a. Some forms of debts, such as equipment leases and private placements, will not require ratings. 2. The Finance Director shall meet with a rating agency, either in person or via conference call as deemed appropriate by the financing team, that rates City debt issues. 3. The Finance Director shall ensure prompt delivery to a rating agencies of the Comprehensive Annual Financial Report (CAFR) and adopted budgets when req uested. 4. Certificates of Substantial Completion on projects financed with long term obligations shall be delivered to the rating agencies and Bond Insurer, as relevant. 5. Any changes in ratings will be promptly noticed to the City Manager and the City Council. XII. FINANCIAL CONSULTANTS A. General 1. The Finance Director will be responsible for recommending the financial consultants and professionals based on prior experience, recommendations, or a Request for Proposals(RFP)or Request for Qualifications(RFQ)process, whichever is most appropriate given the circumstances. B. Independent Financial Advisors 1. The City will utilize an independent financial advisory team to assist in the structuring of its debt offerings, to conduct its competitive bond sales, and to assist with a negotiated bond sale to ensure that interest rates are appropriate. C. Bond Counsel Services 1. The City will select bond counsel teams for its current bond programs. 2. As-needed bond counsel teams will be selected for those issuances that do not fall into any other categories of City debt obligations. D. Underwriters 1. The City will select the underwriting firm to provide the City with market knowledge, assist with credit analysis and preparation, premarketing of bonds, pricing and sale of bonds, and trading of bonds, as applicable. E. Trustee 1. The Finance Director shall have the discretion to select a commercial banking firm as trustee, either through a request for qualifications process or by relying on existing banking relationships. ATTACHMENT #2 P267 >O a C1 `- aay� 0 � m c m N� a) � !GN - E � C-1 F- _ cuj w Mat) mN � o w � a - "E Q = L «. c �. V Z aaf)) o co ° U) O Eco Ea) ci c FQ- N ° `: vao � w > o> roG a = CD a. =3j o o. m 2 ° c CL�� `, aci � U oaooEto > H .� CD (D Hro� nvo � Q d L a) O C U icn U a C 0 a) a O C Q HN U d Q .N. 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