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HomeMy WebLinkAbout027526 RES - 12/11/2007A RESOLUTION APPROVING A DEBT MANAGEMENT POLICY FOR THE CITY OF CORPUS CHRISTI. BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF CORPUS CHRISTI, TEXAS: SECTION 1. That a Debt Management Policy for the City of Corpus Christi is hereby approved. A true copy of the Debt Management ement Policy is attached as Exhibit A and incorporated herein. ATTEST: Armando Chapa City Secretary APPROVED: December 11, 2007 4‘74;441 VIIt Benjamin V. Lugg Assistant City Attorney for the city Attorney THE CITY OF CORPUS CHRISTI enry Gar eft Mayor 027526 Corpus Christi, Texas J(thof bLCJJYVL(O41 2007 The above resolution was passed by the following vote: Henry Garrett Melody Cooper Larry Elizondo, Sr. Mike Hummel! Bill Kelly Priscilla Leal John E. Marez Nelda Martinez Michael McCutchon 027526 IW NONNI WNW" SWIM City of Corpus Christi CITY OF CORPUS CHRISTI, TEXAS FINANCIAL SERVICES CorpusChristi NI�Au�faelpr 11111F DEBT MANAGEMENT POLICY December 11, 2007 DEBT MANAGEMENT POLICY Table of Contents Section Title Pam L Purpose and Objectives 1 2. Scope 2 3. Roles and Responsibilities 2 4. Selection of Service Providers 5. Use of Det Instruments 6. Structure and Type of Debt .et Limits 10 8. Fund Balance Requirements 11 9. Methods of Sale 12 10. Refunding of Debt 15 11. Variable Rate Exposure 16 12. Interest Rate Swap Agreements 16 13. Continuing Disclosure 17 14. Investment of Debt Proceeds 17 15. Arbitrage 18 16. Capital Improvement Project 19 17. Public Input on Capital Improvement Needs 20 18. Definitions 21 1 ill =,......= City of Corpus Christi Debt Management Policy Section 1 PURPOSE AND OBJECTIVES 1.1 Purpose CoipusChristi NtAnerIcaCipr The Director of Financial Service for the City of Corpus Christi (the "City") is charged with the responsibility for prudently and properly managing any and all debt incurred by the City. The following policy provides the methods, procedures, policies and practices which, when exercised, ensure the sound fiscal management ofthe City's debt program. All City offices and departments must comply with the guidelines and procedures set forth in this policy. The purpose of this policy is to provide guidance regarding the issuance, management, continuing evaluation and reporting on all debt obligations issued by the City. The Corpus Christi City Council recognizes there are no absolute rules or easy formulas that can substitute for a thorough review of all information affecting the City's debt position. Debt decisions should be the result of deliberative consideration of all factors involved. This policy is intended to augment the deliberation process by addressing the methods, procedures, and practices to be utilized to ensure effective and judicious fiscal management of City funds. The terms of this Debt Management policy (the "Policy") are intended to comply with all federal and state laws governing debt, including, but not limited to, Texas law, Internal Revenue Service rules and regulations, United States Securities and Exchange Commission (SEC) regulations, Municipal Securities Rulemaking Board (MSRB) regulations, court rulings, and existing City debt covenants and City of Corpus Christi Charter provisions. 1.2 Objectives Debt Management shall be conducted with the primary objectives of: Maintaining or enhancing the City's existing credit rating for all categories of short and long-term debt, consistent with the financial policies and bond covenant approved by the City Council; 1 * Maintaining access to capital; * Minimizing borrowing costs; and • Maximizing financial flexibility. Section SCOPE .1 This Policy shall govern debt obligations issued by the City that finance the construction or acquisition of infrastructure and other assets or to refinance existing debt. The City may also desire to issue debt obligations on behalf of external agencies, non-profit corporations, or other authorities for the purpose of construction or acquisition of infrastructure or other assets that further the goals and objectives of City goverment. In that case, the City shall take reasonable steps to confirm the financial feasibility of the project and the financing solvency of any necessary borrower; and shall take all reasonable precautions to ensure the public purpose and financial viability of such transactions. 2.2 This policy applies to all long-term debt securities issued by the City. This may include general obligation bonds, certificates of obligation, revenue bonds, commercial paper, long-term capital leases, certificates ofparticipation, equipment notes, private placements, and letters of credit. Section 3 ROLES AND RESPONSIBILITIES 3.1 All debt programs will be made in accordance with applicable federal and state regulations. The City Council will approve the issuance of all City bond indebtedness. 3.2 The Director of Financial Services has the primary responsibility for making debt - financing recommendations to the City Council and has responsibility for the appropriate management of the City's debt program. 3.3 The Director of Financial Services, or the designee thereof, will coordinate all activities necessary to issue debt, including, but not limited to: ■ Selection of financial advisor and bond counsel; • Verifying compliance with City Charter; • Review of ordinances and resolutions prepared by bond counsel; ■ Review of all documents necessary to issue debt prepared by bond counsel; • Review of offering memoranda provided by financial advisors; and ■ Review of all related financial analyses. 2 3.4 The Director of Financial Services, or the designee thereof, will provide no less often than annually to the City Council: a. An annual debt issuance schedule for capital projects (included in the operating budget); b. An updated ten-year capital improvement plan (included in the capital budget); c. Certification that the City is current on all debt service payments; d. Disclosure of any payment defaults since the prior report was made to the City Council; and e. Disclosure of any other bond covenant violations or defaults since the prior report was made to the City Council of which the Director of Financial Services has actual knowledge. 3.5 The Capital Budget Officer, or the designee thereof, will facilitate implementation and oversee the Capital Improvement Plan for City offices and departments pursuant to Section 16 this policy. 3.6 The Director of Financial Services, or the designee thereof, will recommend to the City Council a financing team consisting of bond counsel, financial advisor, and underwriters, to the extent required for each bond issue. 3.7 The Office of Management and Budget is responsible for reporting quarterly in its financial report a schedule that includes outstanding debt requirements as well as commercial paper activity and capital lease activity. These reports will include principal and interest requirements, dates for each, and related interest rates. 3.8 The City Treasurer is responsible for assuring that all debt service payments are made in a timely manner to the appropriate paying agents for the obligations issued by the City. 3.9 The Office ofthe Director ofFinancial Services is responsible for preparing and submitting the annual continuing disclosure pursuant to SEC Rule 15c-12. 3.10 The City departments administering projects financed with debt funding are responsible for complying with Section 16 of this Policy. Section SELECTION OF SERVICE PROVIDERS .1 Financial Advisors The Director of Financial Services provides recommendations for the selection of a financial advisor for the City of Corpus Christi's debt program. The financial advisor will have comprehensive municipal debt knowledge and experience and may perform the following duties including but not limited to: comprehensive analyses of debt refinancing, 3 recommendations for alternative financial structures; development of timing and sale of new issues; recommending whether the sale of the new issues be through a competitive bid sale, negotiated sale, or private placement; coordinating the market pricing of debt securities; issuing and disseminating the bond offering document and other disclosure requirements; coordinating with the underwriters of the bond issuance if the bonds are sold through a negotiated sale; seeking and obtaining ratings from the three major bond rating agencies; and providing guidance and advice about debt -related topics, as needed. Due to the complex nature of the City's debt portfolio, it is important for the City to maintain continuity with a financial advisor who is familiar with the City' s history in issuing bonds. The City reserves the right, however, to conduct a formal request for proposal or request for qualifications process. 4.2 Bond Counsel The Director of Financial Services coordinates with the City Attorney, the Assistant City Manager for Administrative Services, and the City Manager on the selection of bond counsel for all debt issues. Bond counsel will have comprehensive municipal debt knowledge and experience. When the bond counsel has been selected, they are responsible for providing an opinion to investors in two specific areas. The bond counsel must opine to investors that the securities are valid and legally binding obligations of the issuer. Then, the bond counsel will opine on whether the interest on the bonds is exempt from federal taxation. The bond counsel also prepares all bond documents necessary to execute the bond issuance. The bond counsel is responsible for coordinating with the City Attorney's office, City Secretary's office, and Financial Services, as well as the City's financial advisor, to ensure that all tasks associated with the bond issuance are completed within prescribed timeframes. To the extent required by State law, bond counsel is responsible for coordinating with the Office of the Attorney General and the Office ofthe Comptroller of Public Accounts of the State of Texas matters relating to the approval of City obligations. The City values continuity in maintaining a relationship with bond counsel due to the complexity of issues and laws related in issuing municipal bonds. However, the City reserves the right to conduct a formal request for proposal or request for qualifications process. 4.3 Paying ng .gent/Registrar The City's financial advisor may conduct a request for proposal process to select the paying agent registrar for each new issue and recommends the successful candidate for approval by City Staff. The successful candidate may not necessarily be the proposer with the lowest cost. A "best value" approach is utilized in the selection. 4 4.4 Underwriters In a negotiated sale (see Section 9 - Methods of Sale), the Director of Financial Services, after review with the Assistant City Manager for Administrative Services, the City Manager, and the Financial Advisor makes recommendations about which underwriting ■ firms to include in the underwriting syndicate. The City issues Requests for Qualification (RFQ) approximately every three years to obtain an approved list of underwriters which is broken -out by sections: national scope, banking institutions, regional scope, and "historically underutilized business" ("HUB")status. A diverse group of securities firms will be chosen based on past performance, demonstrated ability to resell, prior municipal issuance experience, and other factors including, without limitation, participation in bidding on competitive bond sales conducted by the City. While past demonstrated performance is the primary criteria for selection within those criteria, the participation of firms with a HUB status will be strongly encouraged. 43 Bond Insurer Credit quality and marketability of securities may be enhanced through the purchase of municipal bond insurance. The City pays a single premium and in tum, the bond insurer unconditionally guarantees the payment of principal and interest to the bondholders in case of a payment default. Prior to purchasing municipal bond insurance for an issue, the financial advisor will perform an analysis to determine the cost benefits to the City derived from obtaining municipal bond insurance. 4.6 Bond Rating Agency Application Prior to issuing new debt or to issuing refunding debt, the City will submit a rating application to at least two of the largest rating agencies, which, as of the date this Policy became effective, are: Fitch Ratings, Moody's Investor Services, and Standard & Poor's Rating Services. 4.7 Bond Rating/ and Insurers' Presentation As often as deemed necessary, City staff and/or elected officials will either make a bond rating pres ntation directly to the analysts of the three largest rating agencies and/or the bond insurance companies, will hold conference call interviews with each of these entities, or will invite each of the rating agencies anchor bond insurers to make a site visit to the City. For the presentation, staff compiles information relevant to the City's current economy, financial condition, and current initiatives to provide reference material for the rating agencies and bond insurers. When issues occur frequently, the rating agency application and offering ring document will be supplemented by a minimum of a written presentation of updated information about the City since the last rating application. 5 The City distributes the Comprehensive Annual Financial Report (CAFR) and the current operating and capital budgets to each of the three bond rating agencies, as well as to bond insurance companies. Financial information about the City is available on the City's website: http://www.cctexasacom Section USE of DEBT INSTRUMENTS TS 5.1 Debt financing will not be considered appropriate for any recurring purpose such as current operating and maintenance expenditures. The City will use debt financing only for one-time capital improvement projects and equipment purchases under the following circumstances: a. The project is included in the City's capital improvement plan budget; b. The project is a result of growth -related activities within the community that require unanticipated and unplanned infrastructure or capital improvements by the City; c, The project's useful life will be equal to or exceed the term of the financing; d. The equipment has an expected useful life of at least the term of financing; or e, There are revenues sufficient to service the debt, whether from future property taxes, user fees, or other specified and reserved resources. Section STRUCTURE AND TYPE OF DEBT 6.1 Debt service will be structured to match projected cash flows, minimize the impact of future property tax levies, and maintain a relatively rapid payment of principal. 6.2 The term of the debt issuance should equal the lesser of the useful life of the asset being financed or the maximum maturity permitted by State law for the obligations issued to finance the acquisition and construction of the asset, 6.3 The types of debt instruments to be issued by the City include: a. General Obligation Bonds - The City issues general obligation bonds for general purpose capital improvements when benefits accrue to the entire community. General obligation bonds are also used when the expectation of the project is that it will not generate significant revenues. 6 The City pledges its "full faith and credit" and levies an ad valorem tax to repay the debt, consistent with State law and the City's Charter. In order to issue general obligation bonds, the eligible voters ofthe City must authorize the amount to be issued through a popular referendum held for such purpose. The general obligation bonds are sold for a term no greater than the useful life of the project that is being funded through the issuance of the general obligation bonds. b. Certificatesof Obligation — Under State law, the City has the opportunity to issue certificates of obligation. Although voter approval is not required, additional notification and public hearing requirements may apply, to the extent so provided by applicable State law. Certificates of obligation may be secured by a combination of ad valorem taxes and revenues from a source that the City is authorized by State law to encumber for a public purpose, e.g., solid waste. Certificates of obligation are often issued to finance projects in cases where user fees charged for the use of the projects financed are pledged to repay the certificates of obligation. Examples include: Solid Waste, Marina, Hotel Occupancy Tax, etc. Certificates of obligation are available for governments when the improvements being sought are necessary for the health, safety and welfare of the government's citizens, in circumstances where cost overruns on a general obligation bond - financed capital improvement may have occurred, or where financial opportunities unexpectedly arise to leverage funds from other entities and reduce the City's capital cost for a community improvement. Also, certificates of obligation may be issued where the timing of the construction of a capital improvement ent and the expense of calling a bond election for a single proposition would, in the opinion of City staff and with the approval of the City Council, warrant the issuance of certificates ofobligation to finance the capital improvement. c. Revenue Bonds — Revenubonds are secured by a specific source of revenue. There is no tax pledge. Revenue bonds are issued to pay for improvements that benefit the users that repay the debt through user fees. The City issues revenue bonds primarily for the City's Airport and Utility Systems. Typically, the City is required to fund a reserve fund that has on deposit an amount no less than the average annual debt service requirements on outstanding revenue bonds, as a contingency in the event revenues that are collected for services provided are not sufficient to satisfy debt service requirements. Another method to provide for such reserves is the use of a credit facility (such as a surety bond) in lieu of cash or eligible investments in the amount of the average annual debt service requirements on the outstanding revenue bonds. The costs ofboth 7 methods are evaluated prior to a revenue bond issue. The City fully complies with debt service and reserve funding requirements set forth in any and all bond covenants. When revenue bonds are issued or are outstanding, coverage requirements consistent with the bond covenant will be maintained, typically at a level no less than 1.25 times the average annual debt service requirements on the outstanding revenue bonds. The City maintains that it will collect rates and charges at all times that are necessary to produce gross revenues and other pledged revenue in each fiscal year equal to the greater of either: • Amounts sufficient to pay all current operating expenses plus amounts sufficient to produce net revenue for each fiscal year at least equal to 1.25 times the average annual principal and interest requirements on all revenue bonds outstanding; or • Amounts sufficient to pay the sum of all current operating expenses, the average annual principal and interest requirements on the outstanding priority bonds; required deposits to the reserve fund for revenue bonds, and amounts required to pay any other obligations reasonably anticipated to be paid from gross revenues during the fiscal year. One operating ratio that is utilized is for the days' operating coverage to generally be 90 days — meaning that maintaining revenue sufficient to cover 90 days of operating expenses is targeted. Although this ratio is not mandated by the City's bond covenants, it is one that is utilized by the City's management. The City may also issue bonds and other obligations that are secured by revenues generated within a designated geographic area of the City, such as a tax increment reinvestment zone or a public improvement district. Covenants pertaining to the coverage requirements, reserve funds and other financial considerations will be developed, working with the City's financial advisor and bond counsel, to ensure that any obligations issued will be creditworthy and marketable. d. State Revolving Loan Fundy - The State of Texas administers various revolving loan funds, which are available to be loaned to Texas political subdivisions in accordance with the statutory authority granted to state agencies to fund loans, and the regulations ofthe state agency with respect to the specific loan program. Two examples of such loan programs are the Texas Water Development Board water and wastewater loan programs, and the Texas Military Preparedness Commission loan program to assist defense communities in financing infrastructure improvements. The Director of Financial Services, working with the City's financial advisor, will explore financing opportunities under State loan programs to determine if financial or other benefits may help the City in pursuing loans from such state agencies. 8 e. Refunding Bond — The Director of Financial Services, working with the City's financial advisor, will consider refi 6.5 Fixed Interest versus Variable Interest The City primarily issues fixed rate bonds to protect the City against interest rate risk. The City has the option to issue variable rate bonds and may, if market conditions warrant, consider such a structure. Commercial paper notes, due to their short term maturities (270 days or less), are treated as variable rate obligations. 6.6 Conduit Securities The City has created, and may create, nonprofit corporations as authorized by State statutes that act as a conduit for tax-exempt financing. Those corporations include but are not restricted to: (1) Corpus Christi Housing Finance Corporation, (2) Corpus Christi Industrial Development Corporation, and the Coastal Bend Health Facilities Development Corporation. These entities issue bonds to unrelated commercial entities, and the City assumes no liability for the timely payment of debt issued by these entities. These bonds are not liabilities of the City or the respective corporations and are solely payable from revenues of the various commercial entities. In addition, the City has created nonprofit corporations to assist the City in financing various public infrastructure improvements, such as the North Padre Island Development Corporation and the Corpus Christi Business and Job Development Corporation. Public funds, such as voter -approved sales taxes and tax increment revenues, may be made available to these corporations by contract with the City, in fulfillment ofthe public purposes for which these corporations were created. 6.7 Structure Bonds are generally issued with an average life of 20 years or less for general obligation bonds and revenue bonds but may be greater for some projects such as landfills and major utility facilities whose lives are greater than 20 years. Typically, interest is paid in the first fiscal year after a bond sale, and principal is paid no later than the second fiscal year after the debt is issued. Call provisions for bond issues shall be made as short as possible consistent with the lowest interest cost to the City. The targeted maximum length to call is 10 years. However, the City may opt for a call date longer than 10 years in order to achieve the necessary goals of the particular issue. Section DEBT LIMITS 7.1 The City will maintain its outstanding debt within the limits prescribed by State statute. As permitted by the Constitution of the State of Texas, home rule cities of over 5,000 population shall have a total tax allowable of $2.50 and shall have a bond allowable of 10 $1.50 per $100 valuation (unless City Charter provides less). For purposes of issuing bonds, the State allowables are computed based on 90% collections. On April 3, 1993, the citizens of Corpus Christi voted to amend the City Charter which contained a tax limitation of $0.68 per $100 of assessed valuation for all purposes including debt service to allow for the tax rate to increase up to the State limit for voter approved debt after April 4, 1993. The City evaluates new debt issuance as it relates to the current debt level. The amount of debt retired each year is compared to the amount of debt to be issued any given year, and an analysis is performed to determine the City's ability to assume and support additional debt service payments. When appropriate, the issuance of self-supporting revenue bonds and self-supporting certificates of obligation bonds are also considered. 7.2 The City may choose to issue short-term debt (maturities one-year or less) that pay a fixed rate of interest or that pay a rate of interest that varies, both consistent with Federal and State laws and applicable bond covenants of pre-existing bonds. 7.2.1 The City will issue short-term securities for the purposes of providing: 7.2.1.1 interim financing for long-term capital projects; 7.2.1.2 financing of short-term assets at or near their useful life; 7.2.1.3 interim cash flow/working capital needs as they arise; or 7.2.1.4 to reduce the overall interest cost of debt financings of the City. 7.3 The City shall use economic ratios as a tool to assist in providing an objective analytical approach to determine debt capacity for new projects. These ratios may include: a. Debt per capita; b. Debt as a percent of statutory debt limit; c. Debt as a percent of appraised valuation; cl. Debt service payments as a percent of governmental expenditures; or e. Level of overlapping net debt of all local taxing jurisdictions. An objective, analytical approach is used to make the determination of whether debt is issued. The process compares generally accepted standards of affordability to the current values for the City. The City strives to meet and achieve the median industry measures for cities of comparable size in Texas. Section 8 FUND BALANCE REQUIREMENT 8.1 The City will strive to maintain a debt service fund balance for general obligation bonds and certificates of obligation of at least 2 percent of the annual debt service requirement for the fiscal year; provided, however, that this requirement shall comply with the 11 provisions of the Internal Revenue Code of 1986, as amended, which limits the amount of reserve funds that may secure the payment of debt service on bonds. Section 9 METHODS OF SALE 9.1 The City may use competitive sales, negotiated sales, or private placements. When considering the method of sale, the City will take into consideration: a. Financial conditions; b. Market conditions; c. Transaction -specific conditions; d. City -related conditions; and e. Risks associated with each method. 9.2 Competitive sales are the preferred method under the following circumstances: a. A general obligation pledge or annual appropriation of general revenue; b. Simple structure and financial analysis; c. Stable financial market; and d. Moderate par am o unt . 9.2.1 A competitive sale is when bonds are awarded in a sealed bid sale to an underwriter or syndicate of underwriters that provides the lowest True Interest Cost (TIC) bid. TIC is defined as the rate, which will discount the aggregate amount of debt service payable over the life of the bond issue to its present value on the date of delivery. In today's market, bids primarily are submitted electronically through a secure website. 9.2.2 Competitive Sale Bidding Parameters: 9.2.2.1 Bid Verifications - The City awards successful bidders on the basis of the lowest TIC. 9.2.2.2 Good Faith Deposits - Bidders collectively choose a bank to be the good faith bank in providing a good faith deposit. The bidders keep funds on deposit to cover the good faith check if necessary. The Financial Advisor collects a cashier's check in advance for 2% of the issue if the issue is competitive or for 1% of the issue if the issue is negotiated. Bidders not covered by the good faith bank must provide a good faith check at the time they submit their bid. When the issue closes, the good faith check is returned, usually through overnight mail. 12 9.2.2.3 Allowable Discounts/Premiums - In most cases, the City requires bidders to purchase bonds at a price of no less than par. When there are no prevailing limitations, a discount/premium may be permitted when market conditions indicate a discount/premium will be rewarded by a more competitive bid and when there is flexibility to increase/decrease the par amount of the issue. If there is considerable market activity on the date of the proposed sale or other market -related factor to necessitate improving the marketability of the issue, discounts/premiums may be permitted. Bidders are notified in advance of the allowance for discounts/premiums. 9.2.2.4 Term Bonds - Bidders may form term bonds based on the length of the maturity schedule. In a 20 -year maturity, they may form anywhere between three to five term bonds. The resulting term bond structure must completely mirror the serial bond structure. 9.3 Negotiated sales are the preferred method under the following circumstances: a. Complex transactions that require extensive financial modeling, credit analysis, pre - marketing efforts, or that are interest rate sensitive; and b. Volatile financial markets. 9.3.1 A negotiated sale is when the City chooses an underwriter or underwriting syndicate that is interested in reoffering a particular series of bonds to investors. The tens of the sale including the size of the underwriter' s discount, date of sale, and other factors are negotiated between the two parties. Although the method of sale is termed negotiated, individual components of the sale may be competitively bid. The components are subject to a market analysis and reviewed prior to recommendation by staff. Negotiated sales are more advantageous when there needs to be some flexibility in the sale date or when less conventional bond structures are being sold. Negotiated sales are also often used when the issue is particularly large or if the sale of the debt issuance would be perceived to be more successful with pre -marketing efforts. 9.3.2 Negotiated Sale — Allocation and Designation Policies: 9.3.2.1 The City uses designation rules that reward performance. The most common order type used by the City is the Member Designated Order. This type of order permits the institution placing the order to designate which syndicate members receive credit for its order. Typically the City requires that each institution must designate at least three syndicate members, and no one firm may receive more than 50% credit. 13 9.3.2.2 Retention - At least two days prior to pricing, the senior managing underwriter will award a block of bonds to each co -manager in the syndicate. Each co -manager is responsible for buying these bonds even if they do not obtain orders for them. If another member of the syndicate has more orders than they can fill, the member may fill orders for syndicate members that have not obtained sufficient orders. 9.3.2.3 Management Fee - The management fee to compensate the underwriters for providing assistance in structuring of the transaction, review of documents, coordination of the working group, efforts to obtain credit enhancement, and other tasks. The management fee is typically allocated in the same allocation as the retention allocation. 9.4 Private placement is the preferred method under the following circumstances: a. Small issue size; b. Questionable security for the issue; and c. Overall cost savings to the City. A private placement is a sale of debt securities to a limited number of sophisticated investors. The City may engage a placement agent to identify likely investors. A. private placement is beneficial when the issue size is small or when the security of the bonds is weak since the private placement permits issuers to sell more risky securities at a higher yield to investors that are familiar with the credit risk. 9.5 The City considers the following criteria when determining the appropriate method of sale for any debt issuance: a. Complexity of the Issue — Municipal securities with complex security features require greater marketing and buyer education efforts on the part of the underwriter, to improve the investors' willingness to purchase. b. Volatility of Bond Yields — If municipal markets are subject to abrupt changes in interest rates, there may be a need to have some flexibility in the timing of the sale to take advantage of positive market changes or to delay a sale in the face of negative market changes. c. Familiarity of Underwriters with the City' s Credit Quality — If underwriters are familiar with the City's credit quality, a lower TIC may be achieved. Awareness of the credit quality of the City has a direct impact on the TIC an underwriter will bid on an issue. Therefore, where additional information in the form of presale marketing benefits the interest rate, a negotiated sale may be recommended. The City strives to maintain an excellent bond rating. As a result, the Municipal Bond Market is generally familiar with the City's credit quality. 14 d. Size of the Issue - The City may choose to offer sizable issues as negotiated so that pre -marketing etin and buyer education efforts may be done to more effectively promote the bond sale, Section 10 REFUNDING OF DEBT 10.1 The City may elect to refund existing debt for reasons including, but not limited to, the following, a. To achieve Net Present Value (NPV) savings; b. To update bond covenants on outstanding debt that impair efficient operations or prohibit necessary or desirable activities; c, To restructure the debt service schedules associated with outstanding bond issues; or d. To alter bond characteristics such as call provisions or payment dates. 10.2 If a refunding is undertaken, the City will evaluate: a. Issuance costs that will be incurred; b. Interest rate at which the refunding bonds can be issued; c. Maturity dates of the refunded bonds; d. Call date (if any) on the refunded bonds; and e. Call premium (if any) on the refunded bonds 10.3 Types of Refunding Current refundings occur when outstanding debt is called for redemption within 90 days. Most City's debt has a ten-year call date built into its structure. When debt reaches the call date, refunding bonds may be issued to pay off the old debt. Advance refundings are refundings where the debt is not called for redemption within 90 days. In an advance refunding, the proceeds to defease the debt at its call date are placed in escrow until the call date. The City's practice i present value savings. Other factors may also affect the City's decision to advance refund an issue. Section 11 VARIABLE RATE EXPOSURE 11.1 The City may use variable rate debt (including commercial paper) to lower the cost of borrowing and provide a hedge against interest rate risk. 11.2 The City's target is not to exceed 30 percent of its total outstanding debt in a variable rate mode. 11.3 Variable rate debt should be converted to fixed rate debt as necessary to maintain the 30 percent target, to meet the particular needs of a financing program, or to lock in low long term fixed interest rates. 11.4 When issuing variable rate debt, the City will have appropriate contingency plans in place, hedging such as reserves or hed in instruments, to mitigate the risk associated with rising interest rate environments. Section 12 INTEREST RATE SWAP AGREEMENTS 12.1 The may Cityconsider the use of interest rate swap agreements on a case -by -base basis and consistent with Texas law and financial prudence. 12.2 Interest rate swap agreements may be used for the following purposes: a. To achieve significant savings as compared to other, non -derivative type products available in the bond market; b To prudentlyhedge risk in the context of a particular financing cing or the overall asset liability management of the City; c. To incur variable rate exposure within prudent financial guidelines; d. To achieve more flexibility in meeting overall financial objectives than available in conventional markets; or e. To accomplish a financial objective ective not otherwise obtainable using traditional financing methods. 12.3City The will not enter into an interest rate swap agreement without advice of an independent advisor and bond counsel. 12.4 The City may enter into an interest rate swap agreement if the counterpart has at least two logratings -tern unsecured credit ratin of at least equal to the City's long term general 16 r obligation rating from Fitch Ratings, Moody's Investors Service or Standard & Poor's Ratings Services, and the party has demonstrated experience in successfully executing interest rate swap agreements. 12.5 The City will select counterparties utilizing one of the Methods of Sale as outlined in Section 9 of this policy. 12.6 Before entering into an interest rate swap agreement, the City shall evaluate all the risks inherent in the transaction including counterparty risk, termination risk, rollover risk, basis risk, tax event risk, credit risk and amortization risk. Evaluation of risk will also include the following considerations: a. Uncertainty with respect to the City's future debt obligations; b. Effect on the City's credit quality; c. Cumulative exposure to all risk factors identified; d. Difficulty and costs associated with terminations; and e. Limitations on the ability to refund the swap's underlying bonds. 12.7 The City will monitor interest rate swap agreements no less often than on a quarterly basis to ensure compliance with corresponding swap documentation. Section 13 CONTINUING DISCLOSUR 13.1 The City will periodically review the requirements of the Municipal Securities Rulemaking Board (MSRB) and the recommendations of the Goverment Finance Officers Association (GFOA), including the GFOA recommendation that financial statements be prepared and presented according to generally accepted accounting principles. 13.2 The City will remain in compliance with SEC Rule 15c2-12 by filing its annual financial statements and other financial and operating data for the benefit of its bondholders within six months after the end of each fiscal year. Section 14 INVESTMENT OF DEBT PROCEEDS 14.1 Debt proceeds will be invested in accordance with the City's Investment Policy or as otherwise permitted in the ordinance or resolution authorizing the issuance of the debt. 14.2 Interest earned is allocated to each fund monthly based on the average balance of funds available during the month. Interest earned on proceeds from bonds, certificates of 17 obligation, commercial paper or other short-term or long-term debt proceeds is allocated to the respective capital projects funds. 14.3 The City maintains in its Investment Policy document approved by the City Council the strategy and policies for investing all available monies (which included bond proceeds). Interest on bond proceeds is restricted such that it may only be used to fund projects that have the same purpose as the purpose for which the bonds were originally issued. Construction proceeds are typically invested in short-term securities so that they are more liquid. Section 15 ARBITRAGE 15.1 The City will follow a policy of full compliance with all arbitrage rebate requirements ofthe Internal Revenue Code of 1986, as amended and its adopted rules and regulations, and will perform (via contract consultant) arbitrage calculations for each debt issue subject to rebate on an annual basis. All necessary rebate liabilities will be filed and paid when due. 15.2 Arbitrage Calculations and Rebate On fixed -yield issues, the calculation of rebate must be performed no later than each five- year anniversary date of the issuance of the bonds and at final maturity. The City currently outsources those calculations on an annual basis. Where bond interest earnings exceed the arbitrage yield, the City rebates those excess earnings to the Internal Revenue Service. The City keeps detailed records of investments and construction expenditures to provide to the consultant to make the arbitrage calculation. The City plans projects carefully in order to determine the applicability of rebate exceptions. 15.3 Exceptions to Rebate Calculations Six-month Exception — Where 95% of the proceeds will be spent within six months and the other 5% will be spent within twelve months. Eighteen -month Exception -- Available for any type of capital proceeds and includes the following spending schedule: 15% in six months, 60% in twelve months, and 100% in eighteen months (with a de minimus holdback). An issue does not fail to satisfy the spending requirement for the third spending period as a result of a reasonable retainage if the reasonable retainage is allocated to expenditures within 30 months of the issue date. Twenty-four month Exception — Only available to a construction issue having the following expenditure goals: 10% in six months, 45% in twelve months, 75% in eighteen months, and 100% in twenty-four months (with a de minimus hold back). An issue does not fail to satisfy the spending requirement for the fourth spending period as a result of 18 unspent amounts for reasonable retainage if the reasonable retainage is allocated to expenditures within 3 years of the issue date. Section 16 CAPITAL IMPROVEMENT PROGRAM 16.1 In order to ensure sufficient cash flow is available to meet capital improvement project cash requirements, an annual debt issuance schedule is required. The Capital Improvement Planning Guide (the "Guide") will provide the basis for the annual debt issuance schedule. 16.2 The underlying asset that is being financed should have as long a useful life as the maturity schedule of the debt issued for the financing of the asset. Since issuing debt costs more to the entity than purchasing assets outright, the use of financing will be carefully evaluated to ensure that the benefits, tangible and/or intangible derived from financing exceed the related financing costs. 16.3 On-going Capital Needs — "Pay as You Go": 16.3.1 Capital projects are generally defined as costs to construct an asset or system improvement that exceed $5,000 and have a useful life of at least the term of financing but no less than one year. 16.3.2 The City Council's goals and policies focus on infrastructure improvements. The City strives to maintain capital assets and infrastructure at a sufficient level to protect the City's investment to minimize replacement and maintenance costs, and to maintain service levels. 16.3.3 An annual review of the (1) need for capital improvements and equipment, (2) current status of the City's infrastructure, replacement and renovation needs, and potential new projects, is implemented during the capital budget process. All projects, ongoing and proposed, are prioritized by City staff which includes a representative from Financial Services, the Office of Management and Budget, Engineering Services, and each department which has or may have capital improvement project requests. For every capital project, all operating and maintenance costs/estimated incremental revenues would be included in the proposal, as well as a start date, requested total budget, the capital amount expected to be expended each year, and proposed sources of funding. City staff would then match eligible requests with available sources of funding. 16.3.4 Decisions are made on prioritization of proposed projects using criteria such as: o Agreed orders (Federal/State), o Voter -approved bonds, 19 o Completion of existing projects already approved by the City Council, o New v projects recommended by the committee noted above, and o Emergency requests. 16.3.5 Capital improvements may be funded using current revenues (property tax, dedicated tax, enterprise user fees, etc.), grant funds, contributions (such as developer contributions) and the issuance of debt. 16.3.6 Upon completion of the Guide, City staff will present it to the City Council for approval by ordinance. Once approved, a total dollar amount of capital improvement projects would then be identified, and any additions to the Guide for that particular year would warrant a change to the ordinance to either identify additional funding for that particular project or to identify the reduction of another project in the Guide. Section 17 PUBLIC INPUT ON CAPITAL IMPROVEMENT NEEDS 17.1 Citizen Input - 17.1.1 Citizen Input Form — In order to obtain input from the citizens on projects to be included in a bond election, a "Citizen Input Form" is made available on the City' s website at http:wwv.ccas.co. The form provides a place for citizens to list in priority projects they the ' ect feel should be considered in the next bond election. It also provides a place for the reasoning in choosing those particular projects. The results of the citizen input forms would then be compiled and presented to the City Council so that a slate of projects could be prepared for the bond election. 17.1.2 Town Hall Meetings — City Council members also hold Town Hall meetings in their respective districts to obtain input from citizens on the projects they would like considered for a bond election. All the suggestions from the Town Hall meetings would then be compiled and presented to the City Council for discussion to be included on the slate of projects for the bond election. 17.2 Citizen Advisory Committee — At the discretion of the City Council, a Citizen Advisory Committee may be formed to initiate the development of a multi-year financing and management tool that identifies public facility and equipment requirements, places these requirements in order of priority, and schedules them for funding and implementation. 20 Section 18 DEFINITIONS 18.1 Definitions: a. Amortization Risk — The cost to the issuer of servicing debt or honoring swap payments due to mismatch between bonds and the notional amount of the swap outstanding. b. Arbitrage — The investment of proceeds from tax-exempt debt in taxable securiti n. Credit Risk — The risk that an issuer of debt securities or a borrower may default on its obligations, or that the payment may not be made on a negotiable instrument i.e., the occurrence of an event modifying the credit rating of the issuer or its counterparty). 0. De minimis amount — Any failure to satisfy the final spending requirement of the 18 - month exception or the 24 -month exception is disregarded if the issuer exercises due diligence to complete the project financed and the amount of the failure does not exceed the lesser of 3 percent of the issue price of the issue or $250,000, P. q• Defeasance — The setting aside by a borrower of cash or bonds suffi y. Negotiated Sales — A sale whereby the issuer selects an underwriter in advance so that the underwriter can assist with determining the appropriate structure of the bonds. z. Notional Principal Amount — In an interest rate swap, the predetermined dollar principal on which the exchanged interest payments are based aa. Private Placement — A sale whereby the issuer sells the bonds directly to an institutional investor. bb. Reasonable Retainage — An amount, not to exceed five percent of available construction proceeds, that is retained for reasonable business purposes relating to the property financed with the proceeds of the issue. For example, a reasonable retainage may include a retention to ensure or promote compliance with a construction contract in circumstances in which the retained amount is not yet payable, or in which the issuer reasonably determines that a dispute exists regarding completion or payment. cc. Refunding Bonds — A bond issued to retire a bond already outstanding that may be sold for cash and outstanding bonds redeemed with cash or exchanged with holders of outstanding bonds. dd. Rollover Risk — The risk that results when a swap contract does not have the same terms with the unrelated bonds (ie. the mismatch of the maturity of a swap and the maturity of the underlying bonds). ee. Syndicate — A group of banks that acts jointly, on a temporary basis, to loan money in a bank credit (syndicated credit) or to underwrite a new issue of bonds. ff. Tax Anticipation Notes — Short-term notes issued in anticipation of collections of taxes. gg. Tax Event Risk — The risk that the spread between taxable and tax-exempt rates will change as a result of the changes in income tax laws or other conditions. hh. Termination Risk — The need to terminate a transaction in a market that dictates a termination payment by the issuer. ii. Variable Rate Debt — Bonds with interest rates that fluctuate based upon an index or pricing procedure. These bonds often offer lower interest rates and have short maturities. hh. Yield Burning — A municipal bond financing method. Underwriters in advance refundings add large markups on U.S. Treasury bonds bought and held in escrow to compensate investors while waiting for repayment of old bonds after issuance of the new bonds. Since bond prices and yields move in opposite directions, when the bonds 23 are marked up, they "burn down" the yield, which may violate federal tax rules and diminishes tax revenues. 24