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HomeMy WebLinkAboutReso 43-18 Debt Mgmt PolicyRESOLUTION NO.43-18 RESOLUTION OF THE CITY COUNCIL OF THE CITY OF MORRO BAY, CALIFORNIA, ADOPTING A DEBT MANAGEMENT POLICY THE CITY COUNCIL City of Morro Bay, California WHEREAS, Effective January 1, 2017, Senate Bill 1029 (SB 1029) amended Section 8855(i) of the California Government Code to require that local government issuers of public debt adopt a debt management policy, including specific provisions concerning the use of debt; and WHEREAS, in accordance with SB 1029, the City of Morro Bay ("City") desires to adopt a formal policy concerning the administration and management of debt issued by the City; and WHEREAS, staff recommends the City Council adopt the proposed debt management policy, which policy demonstrates the City 's commitment to fiscal responsibility and prudent debt issuance and management, and which meets the criteria identified in the Government Code. NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Morro Bay, California, that the "Debt Management Policy" as documented in Exhibit A, attached hereto and incorporated herein, is hereby approved. PASSED AND ADOPTED by the City Council of the City of Morro Bay at a special meeting thereof held on the 13t" day of June 2018, by the following vote: AYES: Irons, Davis, Headding, Makowetski, McPherson NOES: None ABSENT: None IE L. IKONS, Ma�%r ATTEST: LORI M. KUDZMA, Deputy City Clerk 5` 0 ram-+ MO.�1�ry COUNCIL POLICY DEBT MANAGEMENT POLICY Policy Statement The City of Morro Bay (City) funds its capital projects and meets other financing needs through a combination of current operating revenues, available reserves, outside funding (i.e. grants), and, when necessary, prudently issued debt. Debt includes financing as a way to raise working capital or capital expenditures by selling bonds, bills, certificates, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay principal and interest on the debt. To achieve optimal credit ratings and endorse prudent financial management, the City is committed to long-term capital and financial planning, and continual review of its financing structure to optimize the overall cost of debt. The issuance of debt by the City to finance major capital projects or to refinance existing obligations will only occur after the transaction is evaluated to be fiscally prudent and responsible under the prevailing economic conditions. Prior approval by the City Council is required for the issuance of new debt or for the refinancing of existing debt. Purpose The purpose of this Debt Management Policy (Debt Policy) is to establish and maintain parameters foI issuing debt and promote objectivity in the decision -making process. The City will adhere to the following legal requirements for the issuance of public debt: • State law, which authorized the issuance of debt, • Federal and state law, which govern the eligibility of the debt for tax-exempt status, • Federal and state law, which govern the issuance of taxable debt, • Federal and state law, which govern disclosure, sale, and trading of the debt, both before and subsequent to issuance, • Elector approval when required by law and • Generally Accepted Accounting Principals (GAAP). This Debt Policy is intended to comply with Government Code subdivision 8855(i) and shall govern all debt issued by the City. The City hereby recognizes a fiscally prudent debt policy is required to: • Maintain the City's sound financial position. • Ensure the City has the flexibility to respond to changes in future service priorities, revenues, and operating expenses. • Protect the City's credit -worthiness. • Ensure the City's debt is: o structured to protect current and future taxpayers, ratepayers and constituents of the City. June 2018 Page 1 Debt Management Policy o consistent with the City's planning goals and objectives and Capital Improvement Program (CIP) or the Capital budget, as applicable. Purpose and use of Debt When approved by the City Council, debt financing is an acceptable and appropriate approach to fund the City's long-term capital improvements, which, thus, ensures intergenerational equity of such major improvements among existing and future users of the system. Debt can be issued to fund the capital cost of planning, pre -design, design, land and/or easement acquisition, construction, and related fixtures, equipment, and other costs as permitted by law. Long -Term Debt Long-term debt may be issued to finance the construction, acquisition, and rehabilitation of capital improvements and facilities, equipment and land to be owned or leased and operated by the City. Long-term debt financings are appropriate when: • A project to be financed is necessary to provide City services. • The project to be financed with benefit constituents over 10+ years. • Total long-term debt financing does not constitute an unreasonable burden to the City and its taxpayers or ratepayers. • The debt is used to refinance outstanding debt to reduce the total cost of the debt or to realize other benefits of a debt restructuring, such as increased flexibility in the use of cash and reserves. • The weighted average maturity of the debt (or the portion of the debt allocated to the project) will not exceed the average useful We of the project to be financed by more than 20%, unless specific conditions exist that would mitigate the extension of time to repay the debt and it would not cause the City to violate any covenants to maintain the tax-exempt status of such debt, if applicable. Long-term debt financings will not be considered appropriate for current operating expenses and routine maintenance expenses. The City may use long-term debt financings subject to the following conditions: • The project to be financed must be approved by the City Council; • Professionally prepared estimates show sufficient revenues will be available to service the debt through its maturity; and • The City determines the issuance of the debt will comply with the applicable state and federal law. Periodic reviews of outstanding long-term debt will be undertaken to identify refunding opportunities. Refunding's will be considered (within federal tax law constraints, if applicable) if and when there is a net economic benefit of the refunding. Refunding's that are non -economic may be undertaken to achieve City objectives relating to changes in covenants, call provisions, operational flexibility tax status of the issuer, or the debt service profiles. Refunding's that produce a net present value savings of at least 4% of the refunded debt will be considered economically viable. Refunding's that produce a net present value savings of less than 4% or negative savings will be considered on a case -by -case basis. June 2018 Page 2 Debt Management Policy Short -Term Debt Short-term borrowing such as a commercial paper and lines of credit will be considered as an interim source of funding in anticipation of long-term borrowing. Short-term debt may be issued for any purpose for which long-term debt may be issued, including capitalized interest and other financing -related costs. Prior to issuance of the short-term debt, a reliable revenue source shall be identified to secure repayment of the debt. The final maturity of the debt issued to finance the project shall be consistent with the economic or useful life of the project and, unless the City determines that extraordinary circumstances exist, must not exceed seven years. Short-term debt may also be issued to provide financing for the City's operational cash flows in order to maintain a steady and even cash flow balance, due within one year, and may be rolled over or extended if necessary. Short-term debt may also be used to finance short-lived capital projects, such as undertaking lease -purchase financing for equipment. Types of Debt That May Be Issued The City may find that debt financings would be beneficial to further its public purposes and the City Council may approve such debt without an amendment of this Debt Policy. The following types of debt are allowable under this Debt Policy: • Bond or grant anticipation notes • State Revolving Fund Loans • Water Infrastructure Finance and Innovation Act (WIFIA) • Lease Revenue Bonds, Certificates of Participation and lease -purchase transactions • Other revenue bonds and certificates of participation • Tax and revenue anticipation notes The City may, from time to time, find other forms of debt would be beneficial to further its public purposes and may approve such debt without an amendment of this Debt Policy. Debt shall be issued as fixed-rate debt, unless the City Council makes a specific determination as to why a variable rate issue would be beneficial to the City in a specific circumstance. Relationship of Debt to Capital Improvement Program and Budget The City is committed to a long-term capital planning and may issue debt for the purposes stated in this Debt Policy for implementation of the City's capital budget and CIP. The City's Debt Management Policy, Reserve Policy and Investment Policy will be considered in the decision -making framework utilized in the preparation of the City's CIP and long-term capital and financial planning, and its fiscal year budgeting process. The City will fund the upkeep and maintenance of its infrastructure and facilities improvements due to normal wear and tear through the expenditure of available operating revenues rather than incurring debt. The City shall integrate its debt issuances with the goals of its CIP by timing the issuance of debt to ensure projects are available when needed in furtherance of the City's public purposes or may be less expensive due to construction costs or low interest rates. Debt Issuance June 2018 Page 3 Debt Management Policy The City is committed to long-term financial planning, maintaining appropriate reserves and employing prudent practices in governance, management and budget administration, and systematic capital planning. The City will issue debt for the purposes stated in this Debt Policy and as approved by the City Council to implement policy decisions incorporated in the City's annual operations and capital budgets. Adoption of this Debt Policy will help ensure debt is issued and managed in a manner that protects the public interest. Credit Rating The City will do everything reasonably necessary to instruments. City staff, working with the City's Municipal be responsible for determining which of the major rating rating. Method of Sale maintain optimum credit ratings for debt Finance Advisor and/or Rate expert, shall agencies will be asked to provide such a Debt is typically issued under either a competitive or negotiated sale, or private placement. Determination of the appropriate method of sale to be recommended to the City Council for approval will rest with the City Manager, after consultation with the City Finance Director. There are a number of market factors that will affect the success of a debt offering and each should be carefully considered before selecting a method of sale. Those factors include, but are not limited to: 1) market perception of the City's credit quality, 2) interest rate volatility, 3) size of the proposed sale, term and average life, 4) complexity of the proposed issue, and 5) competition with other issuers for investor interest. Debt Administration The City will comply with: A. Applicable state and federal law as it pertains to the maximum term of debt and the procedures for levying and imposing any related taxes, assessments, rates and charges; and B. Applicable policies regarding initial bond disclosure, continuing disclosure, post -issuance compliance, and investment of bond proceeds. Without limiting the foregoing, the City will periodically review the requirements of and will remain in compliance with the following: a. Any continuing disclosure undertakings entered into by the City in accordance with SEC Rule 15c2-12; bI Any federal tax compliance requirements, including without limitation, arbitrage and rebate compliance; c. The City's investment policies as they relate to the use and investment of bond proceeds; and d. California Government Code Section 8855(i) and the annual reporting requirements therein. Proceeds of debt will be held either by: A. A third -party trustee or fiscal agent, which will disburse such proceeds to or upon the order of the City upon the submission of one or more written requisitions by the City Manager or the City (or their written designee); or B. The City, to be held and accounted for in a separate fund or account to ensure debt proceeAs are expended only for the purposes for which the debt was issued, the June 2018 Page 4 Debt Management Policy expenditure of which will be carefully documented by the City in records compliance with current accounting standards and subject to the City's annual audit. Investment of Debt Proceeds Proceeds of debt will be invested until used for the intended projects) in order to maximize utilization of the public funds. The investment will be made to obtain the highest level of safety. The City Manager will oversee the investment of bond proceeds in a manner to avoid, if possible, and minimize any potential negative arbitrage over the life of the bond issue, while complying with arbitrage and tax provisions. Debt Coverage Target In determining the affordability of comparing projected annual net expenditures, to estimated annual coverage ration is the amount of principle payments on debt. a proposed debt financing, the City will perform revenues, after payment of operating and debt service and the estimate debt coverage rati net cash flow available, divided by the annual an analysis maintenance o. The debt interest and The City's existing debt covenants for its share of the Central Coast Water Authority Certificates of Participation capital debt financing require a legal debt coverage ratio of at least 1.25. Debt Service Reserve Balance City staff will monitor dedicated debt service reserve fund balances, ensuring compliance with related reserve requirements (if applicable), and periodically review the advisability of prepayment or refunding of related debt. The financial advantages of a current refunding must outweigh the cost of issuing the refunding debt by a sufficient margin to justify it. Call Options/Redemption Provisions City staff will evaluate and recommend to the City Council the use of a call option, if any, and a call protection period for each issuance. A call option, or optional redemption provision, gives the City the right to repay or retire debt prior t its stated maturity. The option may permit the City to achieve interest savings in the future through refunding the debt. The cost of call options can vary widely, depending largely on market conditions, an evaluation of factors such as the call premium, time until the debt may be called at a premium or at par, and interest rate volatility. Quarterly Reports City staff will provide quarterly review and reporting to the City Council of the debt's financial performance, including capital expenditures and interest earnings. Debt Service Payments Necessary appropriation for annual debt service requirements will be reflected in the City's annual budget. Staff is responsible for timely annual payments. Continuing Disclosure Requirements The City is responsible for ensuring the City's annual financial statements, continuing disclosure reports, and material event notifications are posted on the City of Morro Bay website. The City may also contract with third -party consultant(s) to comply with its continuing disclosure obligations, and with Securities and Exchange Commission Rule 15c2-12(b)(5). The City shall submit an annual report to the California Debt and Investment Advisory Commission for any issuance of debt for which it has submitted a report of final sale on or after the date of this June 2018 Page 5 Debt Management Policy policy. The annual report shall comply with the requirements of Government Code section 8855 and related regulations. Failure to comply with disclosure requirements may restrict the ability of the City to issue debt. Investor Relations Information that the City intends to make available to the investing public, including bondholders, rating analysts, investment advisors, or any other members of the investment community shall be available on the City's Website, The City will maintain proactive communications with the investment community, including rating agencies and investors, to ensure future capital market access at the lowest possible interest rates. Records Retention A copy of all relevant documents and records will be maintained by the City through the final maturity of the debt financing plus ten years. Relevant documents and records will include sufficient documentation to support the requirements related to maintaining the tax-exempt status of the debt financing. June 2018 Page 6 Debt Management Policy