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HomeMy WebLinkAboutCC RES 17-42RESOLUTION NO. 17-42 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF TUSTIN ADOPTING A DEBT MANAGEMENT POLICY WHEREAS, the City Council recognizes that cost-effective access to the capital markets depends on prudent management of the City's debt program; and WHEREAS, the City wishes to set parameters for issuing debt, managing the debt portfolio and providing guidance to decision makers; and WHEREAS, the Government Finance Officers Association recommends as a best practice for government agencies to adopt a debt management policy; and WHEREAS, SB 1029 (2016) amended Government Code 8855 to require the City to certify that it has adopted a debt management policy prior to issuing new debt. NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of TUSTIN that the DEBT MANAGEMENT POLICY attached hereto be approved and adopted. PASSED, APPROVED, AND ADOPTED BY THE CITY COUNCIL OF THE CITY OF TUSTIN THIS 18th DAY OF JULY, 2017. 6 k— DR. ALLAN BERNSTEIN, Mayor ATTEST: Aik-a- ERICA N. RABE, City Clerk Resolution 17-42 Page 1 of 2 STATE OF CALIFORNIA ) COUNTY OF ORANGE ) SS CITY OF TUSTIN ) I, Erica N. Rabe, City Clerk and ex -officio Clerk of the City Council of the City of Tustin, California, do hereby certify that the whole number of the members of the City Council of the City of Tustin is five; that the above and foregoing Resolution No. 17-42 was duly passed and adopted at a regular meeting of the Tustin City Council, held on the 18th day of July, 2017 by the following vote: COUNCILMEMBER AYES: COUNCILMEMBER NOES: COUNCILMEMBER ABSTAINED: COUNCILMEMBER ABSENT: ERICA N. RABE, City Clerk Bernstein,Murray,Gomez,Puckett,Clark(5) Resolution 17-42 Page 2 of 2 111 DEBT MANAGEMENT POLICY This Debt Management Policy (the "Debt Policy") of the City of Tustin (the "City") and the entities listed in the following paragraph was approved by the City Council on J S '2017. The Debt Policy may be amended or waived pursuant to Secti n 2.F. by City Council as it deems appropriate from time to time in the prudent management of the debt of the City. This Debt Policy will also apply to any debt issued by the Successor Agency to the City of Tustin Redevelopment Agency, Tustin Public Housing Authority, or the Tustin Public Financing Authority, or any other public agency or non-profit public benefit corporation affiliated with the City (collectively, "Related Entities"). 1. Debt Management Objectives This Debt Policy sets objectives in the issuance and management of debt by the City of Tustin or its Related Entities. This Debt Policy shall govern all debt undertaken by the City and its Related Entities. The City has a long history of balanced budgets and prudent financial management. The City has healthy cash reserves and a systematic approach to plan for future rehabilitation of capital facilities, such as roadways, storm drains and water enterprise infrastructure. It is a best practice to develop a debt management policy to be used as a framework in the event that the City considers the issuance of debt in the future. The City recognizes that a fiscally prudent debt policy is required in order to: • Maintain the City's sound financial position; • Ensure the City has the flexibility to 'respond to changes in future service priorities, revenue levels, and operating expenses; • Protect the City's credit -worthiness; and • Ensure that the City's debt is consistent with the City's planning goals and objectives and capital improvement program or budget, as applicable. The main objectives of this Debt Policy are to establish conditions for the use of debt: • To ensure that debt capacity and affordability are adequately considered; • To minimize the City's interest and issuance costs; • To maintain the highest possible credit rating; • To provide complete financial disclosure and reporting; and • To maintain financial flexibility for the City. Debt, properly issued and managed, is a critical element in any financial management program. It assists in the City's effort to allocate limited resources to provide the highest quality of service to the public. A properly managed debt program promotes economic growth and enhances the vitality of the City of Tustin for its residents and businesses. 2. Policies A. Purposes For Which Debt May Be Issued The City will consider the use of debt financing primarily for capital improvement projects (CIP) when the project's useful life will equal or exceed the term of the financing or otherwise comply with federal tax law requirements and when resources are identified sufficient to fund the debt service requirements. An exception to this CIP driven focus is the issuance of short-term instruments such as tax and revenue anticipation notes, which are to be used for prudent cash management purposes and conduit financing, as described below. Bonded debt should not be issued to finance normal operating expenses. If a department has any project which is expected to use debt financing, the department director is responsible for expeditiously providing the City Manager and the Director of Finance with reasonable cost estimates, including specific revenue sources that will provide payment for the debt service. This will allow an analysis of the project's potential impact on the City's debt capacity and limitations. The department director shall also provide an estimate of any incremental operating and/or additional. maintenance costs associated with the project and identify sources of revenue, if any, to pay for such incremental costs. (i) Long -Term Debt. Long-term debt may be issued to finance or refinance the construction, acquisition, and rehabilitation of capital improvements and facilities, equipment and land to be owned and/or operated by the City. (a) Long-term debt financings are appropriate when all of the following conditions exist: • When the project to be financed is necessary to provide basic services; • When the project to be financed will provide benefit to constituents over multiple years; • When total debt does not constitute an unreasonable burden to the City and its taxpayers and ratepayers (b) Long-term debt financings may be used to refinance outstanding debt in order to produce debt service savings or to realize the benefits of a debt restructuring. (c) Long-term debt financings will not be considered appropriate for current operating expenses and routine maintenance expenses. (d) The City may use long-term debt financings subject to the following conditions: • The project to be financed has been or will be approved by the City Council; • The City estimates that sufficient income or revenues will be available to service the debt through its maturity; • The City determines that the issuance of the debt will comply with the applicable requirements of state and federal law; and • The City considers the improvement/facility to be of vital, time - sensitive need of the community and there are no plausible alternative financing sources. (e) Periodic reviews of outstanding long-term debt will be undertaken to identify refunding opportunities. Refunding will be considered (within federal tax law constraints, if applicable) if and when there is a net economic benefit of the refunding. Refundings which 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 profile. In general, refundings which produce a net present value aggregate savings of at least three (3) percent of the refunded debt will be considered economically viable. Refundings which produce a net present value aggregate savings of less than three (3) percent or negative savings will be considered on a case-by-case basis, and are subject to City Council approval. (ii) Short-term debt. Short-term borrowing may be issued to generate funding for cash flow needs. Short-term borrowing, such as commercial paper, Tax and Revenue Anticipation Notes (TRANS), 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. Short-term debt may also be used to finance short-lived capital projects such as lease -purchase financing for equipment. The City may issue Interfund loans rather than outside debt instruments to fund short-term cash flow needs. Interfund loans will be permitted only if an analysis of the affected fund indicates excess funds are available and the use of these funds will not impact its current operations. Interfund loans must be approved by the City Council and have a defined repayment term. The prevailing interest rate, as established by the City's Finance Department, will be paid to the lending fund. (iii) Financings on Behalf of Other Entities. The City may also find it beneficial to issue debt on behalf of other governmental agencies or private third parties in order to further the public purposes of City. In such cases, the City shall take reasonable steps to confirm the financial feasibility of the project to be financed and the financial solvency of any borrower and that the issuance of such debt is consistent with the policies set forth herein. In no event will the City incur any liability or assume responsibility for payment of debt service on such debt. B. Types of Debt In order to maximize the financial options available to benefit the public, it is the policy of the City to allow for the consideration of issuing all generally accepted types of debt, including, but not exclusive to the following: General Obligation (GO) Bonds: General Obligation Bonds are suitable for use in the construction or acquisition of improvements to real property that benefit the public at large. Examples of projects include libraries, parks, and public safety facilities. All GO bonds shall be authorized by the requisite number of voters in order to pass. • Revenue Bonds/Certificatesof Participation (COPs): Revenue Bonds are limited -liability obligations tied to a specific enterprise or special fund revenue stream where the projects financed clearly benefit or relate to the enterprise or are otherwise permissible uses of the special revenue. Generally, no voter approval is required to issue this type of obligation but in some cases, the City must comply with proposition 218 regarding rate adjustments. • JointPowersAuthority (IPA) Revenue Bonds: As an alternative to COPs, the City may obtain financing through the issuance of debt by a joint exercise of powers agency with such debt payable from amounts paid by the City under a lease, installment sale agreement, or contract of indebtedness. • Loans: The City is authorized to enter into loans, installment payment obligations, or other similar funding structures secured by a prudent source, or sources of repayment. • Lease -Backed Debt/Certificates of Participation (COP/Lease Revenue Bonds): Issuance of Lease -backed debt is a commonly used form of debt that allows a City to finance projects where the debt service is secured via a lease agreement and where the payments are budgeted in the annual budget appropriation by the City. Lease -Backed debt does not constitute indebtedness under the state or the City's constitutional debt limit and does not require voter approval. Lease Revenue Bonds may be issued by the Tustin Public Financing Authority on behalf of the City. • Special Assessment/Special Tax Debt: The City will consider requests from developers for the use of debt financing secured by property based assessments or special taxes in order to provide for necessary infrastructure for new development under guidelines adopted by City Council, which may include miriimum value -to -lien ratios and maximum tax burdens. Examples of this type of debt are Assessment Districts (AD) and Community Facilities Districts (CFD) or more commonly known as Mello -Roos Districts. In order to protect bondholders as well as the City's credit rating, the City will also comply with all state guidelines regarding the issuance of special tax or special assessment debt. The City has previously adopted local goals and policies for special tax debt. (See Appendix A). • Tax Allocation Bonds: Tax Allocation Bonds are special obligations that are secured by the allocation of tax increment revenues that are generated by increased property taxes in the designated redevelopment project areas. Tax Allocation Bonds are not debt of the City. Due to changes in the law affecting California Redevelopment agencies with the passage of ABX1 26 (as amended, the "Dissolution Act") as codified in the California Health and Safety Code, the City of Tustin Redevelopment Agency (RDA) was dissolved as of February 1, 2012, and its operations substantially eliminated but for the continuation of certain enforceable RDA obligations to be administered by the Successor Agency to the City of Tustin Redevelopment Agency (Successor Agency). The Successor Agency may issue Tax Allocation Bonds to refinance outstanding obligations of the RDA, subject to limitations included in the Dissolution Act. • Multi -Family Mortgage Revenue Bonds: The City is authorized to issue mortgage revenue bonds to finance the development, acquisition and rehabilitation of multi -family rental projects. The interest on the bonds can be exempt from federal and state taxation. As a result, bonds provide below market financing for qualified rental projects. In addition, the bonds issued can qualify projects for allocations of federal low- income housing tax credits, which can provide a significant portion of the funding necessary to develop affordable housing. • HUD Section 108 Loan Guarantee Program: The U.S. Department of Housing and Urban Development (HUD) Section 108 Loan Guarantee Program allows cities to use their annual Community Development Block Grant (CDBG) entitlement grants to obtain federally guaranteed funds large enough to stimulate or pay for major community development and economic development projects. The program does not require a pledge of the City's General Fund, only of future CDBG entitlements. By pledging future CDBG entitlement grants as security, the City can borrow at favorable interest rates because of HUD's guarantee of repayment to investors. • Refunding Bonds: The City shall refinance debt pursuant to the authorization that is provided under California law, including but not limited to Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code, as market opportunities arise. The Finance Director shall identify refunding opportunities and prepare a present value analysis that describes the economic effects of a refunding. Refundings may be undertaken in order: (i) to take advantage of lower interest rates and achieve debt service costs savings; (ii) to eliminate restrictive or burdensome bond covenants; or (iii) to restructure debt to lengthen the duration of repayment, relieve debt service spikes, reduce volatility in interest rates or free up reserve funds. Generally, the City shall strive to achieve a minimum of three (3) percent net present value savings for a current refunding and a minimum of five (5) percent net present value savings for an advance refunding. Upon the advice of the Finance Director and with the assistance of a financial advisor and bond counsel, the City will consider undertaking refundings for other than economic purposes upon a finding that such a restructuring is in the City's overall best financial interest. The City may from time to time find that other forms of debt would be beneficial to further its public purposes and may approve such debt without an amendment of this Debt Policy. To maintain a predictable debt service burden, the City will give preference in the future to debt that carries a fixed interest rate. An alternative to the use of fixed rate debt is variable rate debt. The City may choose in the future to issue securities that pay a rate of interest that varies according to a pre -determined formula or results from a periodic remarketing of securities. When making the determination to issue bonds in a variable rate mode in the future, consideration will be given in regards to the useful life of the project or facility being financed or the term of the project requiring the funding, market conditions, credit risk and third party risk analysis, cost benefit of employing interest rate CAPS, and the overall debt portfolio structure when issuing variable rate debt for any purpose. The use of derivative products can, among other things, increase City financial flexibility and provide opportunities for interest rate savings or enhance investment yields. Careful monitoring of such products is required to preserve City credit strength and budget flexibility. Swaps will not be used to speculate on perceived movements in interest rates. Before the City enters into any derivative product associated with debt, the City Council or appropriate governing body shall consider and approve the plan and product separately. C. Relationship of Debt to Capital Improvement Program and Budget The City intends to issue debt for the purposes stated in this Debt Policy and to implement policy decisions incorporated in the City's capital budget and the capital improvement plan. The City shall seek to avoid the use of debt to fund infrastructure and facilities improvements that are the result of normal wear and tear, unless a specific revenue source has been identified for this purpose. The City shall integrate its debt issuances with the goals of its capital improvement program by timing the issuance of debt to ensure that projects are available when needed in furtherance of the City's public purposes. The decision to incur new indebtedness should be integrated with the City Council adopted bi-annual Operating Budget and Capital Improvement Program Budget. The annual debt service payments shall be included in the Operating Budget. D. Policy Goals Related to Planning Goals and Objectives The City is committed to financial planning, maintaining appropriate reserves levels and employing prudent practices in governance, management and budget administration. The City intends to issue debt for the purposes stated in this Debt Policy and to implement policy decisions incorporated in the City's annual operating budget. It is a policy goal of the City to protect taxpayers, ratepayers and constituents by utilizing conservative financing methods and techniques so as to obtain the highest practical credit ratings (if applicable) and the lowest practical borrowing costs. It is a policy goal of the City to reduce the unfunded liabilities for employee pension and other post -employment benefits (OPEB). The City will consider options to accelerate funding, including creating a tax-exempt Section 115 Trust for pension costs. The City will comply with 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. Except as described in Section 2.A., when refinancing debt, it shall be the policy goal of the City to realize, whenever possible, and subject to any overriding non-financial policy considerations minimum aggregate net present value debt service savings equal to or greater than three (3) percent of the refunded principal amount. E. Internal Control Procedures When issuing debt, in addition to complying with the terms of this Debt Policy, the City shall comply with any other applicable policies regarding initial bond disclosure, continuing disclosure, post -issuance compliance, and investment of bond proceeds. A copy ,of the City's adopted policies are attached as Appendix B. The Director of Finance has the responsibility to determine and oversee internal control procedures. The City will periodically review the requirements of and will remain in compliance with the following: • Federal securities law, including any continuing disclosure undertakings under SEC Rule 15c2-12; •Any federal tax compliance requirements, including without limitation arbitrage and rebate compliance, related to any prior bond issues; *The City's investment policies as they relate to the investment of bond proceeds; and • Government Code section 8855(k) and the annual reporting requirements therein. The City shall be vigilant in using bond proceeds in accordance with the stated purpose at the time that such debt was issued. Whenever reasonably possible, proceeds of debt will be held by a third -party trustee and the City will submit written requisitions for such proceeds. The City will submit a requisition only after obtaining the signature of the City Manager or the Director of Finance or the Deputy Finance Director. F. Amendment and Waivers of Debt Policy • The Policy will be reviewed and amended from time to time as appropriate, subject to City Council approval. • There will be circumstances from time to time when strict adherence to a provision of this Debt Policy is not possible or not in the best interest of the City. • If the City staff has determined that a waiver of one or more provisions of this Debt Policy should be considered by the City Council, it will prepare an analysis for the City Council describing the rationale for the waiver and the impact of the waiver on the proposed debt issuance and on taxpayers, if applicable. • upon a majority vote of the City Council, one or more provisions of this Debt Policy may be waived for a debt financing, • The failure of a debt financing to comply with one or more provisions of this Debt Policy shall in no way affect the validity of any debt issued by the City in accordance with applicable laws. G. Professional Assistance The City shall utilize the services of independent financial advisors and bond counsel on all debt financings. The Director of Finance shall have the authority to periodically select service providers as necessary to meet legal requirements and minimize net City debt costs. Such services, depending on the type of financing, may include financial advisory, underwriting, trustee, bond counsel, disclosure counsel, verification agent, escrow agent, arbitrage consulting, continuing disclosure consultants, and special tax consulting. The goal in selecting service providers, whether through a competitive process or when appropriate, a sole -source selection, is to achieve an appropriate balance of service and cost.