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Legislation #: 160883 Introduction Date: 11/10/2016
Type: Ordinance Effective Date: none
Sponsor: None
Title: Amending Chapter 2, Code of Ordinances, by repealing Section 2-1990, Debt policy, and enacting in lieu thereof a new section of like number and subject matter.

Legislation History
11/10/2016 Filed by the Clerk's office
11/10/2016 Referred to Finance and Governance Committee
11/30/2016 Do Pass as a Committee Substitute
12/1/2016 Assigned Third Read Calendar as Substituted
12/8/2016 Passed as Substituted

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160883.pdf Authenticated 1403K Authenticated
160883 Color Compared.pdf Compared Version 129K 160883 Color Compared
Debt Policy Presentation Finance Committee 11-30-16.pdf Other 824K Staff Presentation
160883 Fact Sheet.pdf Fact Sheet 47K 160883 Fact Sheet

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Amending Chapter 2, Code of Ordinances, by repealing Section 2-1990, Debt policy, and enacting in lieu thereof a new section of like number and subject matter.




Section 1. That Chapter 2, Code of Ordinances of the City of Kansas City, Missouri, is hereby amended by repealing Section 2-1990, Debt policy, and enacting in lieu thereof a new section of like number and subject matter, to read as follows:


Sec. 2-1990. Debt policy.


(a)    Policy.


(1)               It is the policy of the City of Kansas City, Missouri (the “City”) to appropriately and advantageously issue public debt and undertake debt derivatives in the form of swap transactions (each a “Swap Transaction”, as further defined herein) in response to the ongoing capital needs of the City and its agencies. All debt and swap transactions should be issued/undertaken in accordance with the requirements governing the issuance of public debt as detailed in applicable federal law, state law, City Charter, and the City’s Code of Ordinances.


(2)               The City’s debt policy (this “Debt Policy” or the “Debt Policy”) shall provide guidelines for City staff to use in issuing debt and undertaking Swap Transactions. The policy shall be reviewed on an annual basis by the Director of Finance. Any modifications made to the policy must be approved by the City Council.


(b)   Authority.


(1)               On behalf of the City and by the authority granted in the State Constitution and in the City Charter, the City Council is authorized to incur debt for funding capital improvement projects and capital equipment. It is the City Council’s intent to responsibly use this authority in order to fulfill the objectives of the City and its agencies.


(2)               Management responsibility for the City’s debt program is hereby delegated to the Director of Finance, who, through the City Treasurer, shall establish written procedures for the operation of the debt program which are consistent with this Debt Policy and with Sections 807 and 831 of the City Charter and with the City’s Code of Ordinances. Pursuant to this policy and subsequent legislative approval of the City Council, it shall be the sole responsibility of the Director of Finance to issue debt on behalf of the City.


(3)               As permitted by state law, the Director of Finance may enter into Swap Transactions on behalf of the City. All Swap Transactions shall be structured in accordance with this Debt Policy and authorized by the City Council. This Debt Policy does not govern the use of Swap Transactions in the City’s investment of funds.


(c)    Prudence.


(1)               Debt shall be issued with the same judgment and care--under circumstances then prevailing--which persons of prudence, discretion and intelligence may be presumed to exercise in the management of their own affairs. The standard of prudence to be used by debt issuance officials shall be the “prudent person” standard and it shall be applied in the context of managing the City’s overall debt portfolio.


(2)               Debt managers acting in accordance with the Debt Policy and exercising due diligence shall be relieved of personal liability for an individual security’s credit risk or market price change, provided that deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments. The “prudent person” is expected to be a reasonably well informed person who is not an investment banker or marketmaker and who is obligated to act responsibly.


(d)   Ethics and Conflict of Interest.

(1)               Officers and employees involved in the debt issuance process shall refrain from personal business activity that could conflict with proper execution of the debt program, or which could impair their ability to make impartial debt issuance decisions.


(2)               Employees and debt issuance officials shall disclose to the Director of Finance any material financial interests in financial institutions that conduct business within this jurisdiction, and shall further disclose any material personal financial positions that could be related to the City’s debt portfolio.


(e)    Scope.

(1)               This Debt Policy applies to debt issued directly by the City and debt issued on behalf of the City by its agencies. Among the City’s agencies are the following: Kansas City Municipal Assistance Corporation (KCMAC), Land Clearance for Redevelopment Authority (LCRA), Planned Industrial Expansion Authority (PIEA), Industrial Development Authority (IDA), and Tax Increment Financing Commission (TIFC). This Debt Policy also provides guidelines regarding the execution of capital leases between conduit issuers such as the Missouri Development Finance Board (MDFB) and the City to finance capital improvement projects. The use of the capitalized term “City” in this policy shall include the City and its agencies solely when debt is secured by the general credit of the City.


(2)               This Debt Policy shall be all-inclusive of debt issued by the City to include, but not be limited to: general obligation debt, special obligation debt, governmental purpose revenue debt for public enterprises – water, sewer, storm water and airports, special assessment debt, sales tax and hospitality tax debt, economic development related debt, lease obligations, certificates of participation, debt derivatives and all forms of debt having the pledge of the annual appropriation of City revenues.


(3)               Any resolution to authorize entry into a Swap Transaction (each a “Swap Resolution”) shall set forth, where applicable, among other things, the notional amount, security, payment and other financial terms of the Swap Transaction between the City and qualified swap counterparties (“Counterparties”). The Swap Resolution shall also approve, as to form, the operative agreements, contracts and other documents to be used in the Swap Transaction. Counterparties shall be selected in accordance with established procedures.


(4)               This Debt Policy was formulated pursuant to guidelines published by the Association of Public Treasurers and the Government Finance Officers Association (GFOA) published ‘Best Practices’. These best practices are amended over time, and this Debt Policy incorporates these ongoing changes. This Debt Policy concludes with a glossary of terms used in this Debt Policy.


(f)    Objectives.


(1)               To preserve the public trust and ensure current decisions positively impact future citizens. The City shall achieve this objective by:


a.                   Providing ongoing information to elected officials, senior management and to the public on the status of the City’s debt program;


b.                  Evaluating each debt issue in accordance with this Debt Policy, assessing both individual and cumulative impact;


c.                   Adhering to federal laws, state statutes, regulatory enactments, the City Charter and the City’s Code of Ordinances.


(2)               To minimize borrowing costs. The City shall minimize borrowing costs by:


a.                   Working with spending authorities to ensure that the tax-exempt status of City bonds is maintained;


b.                  Striving to obtain the highest credit ratings possible within the overall objectives of the City;


c.                   Ensuring that the type of debt and debt structure selected employ criteria that encourage the advantageous marketing of each issue.


(3)               To preserve access to capital markets. The City shall preserve access to the capital markets by:


a.                   Providing information to the general municipal market and its agents including regular continuing disclosure to its investors;


b.                  Maintaining future debt capacity.


(4)               To ensure future financial flexibility. The City shall ensure financial flexibility by:


a.                   Maintaining debt levels within manageable ranges and in compliance with applicable legal and financial margins;


b.                  Negotiating all bond-related contracts such that they provide for flexibility in meeting future capital requirements;


c.                   Using cost/benefit analysis to set optional prepayment provisions that ensure proactive management of outstanding obligations.


(5)               To use Swap Transactions as an integral part of the City’s asset/liability and debt management strategies. The City may utilize Swap Transactions to meet any of the following objectives:


a.                   Actively manage its liability interest rate risk.


b.                  Balance financial risk and achieve debt management goals.


c.                   Expeditiously take advantage of market opportunities to reduce costs.


d.                  Accomplish financial objectives not otherwise attainable using traditional financing methods.


e.                   Ensure that interest rate swaps are not used for speculative purposes. For the purposes of this Policy, “speculation” is considered the creation of positions that are inconsistent with the City’s risk management objectives and/or are positions that create or distort the City’s exposure to risks beyond the range normally encountered or that are created for the purpose of generating income for the City.


(g)   Guidelines for Use.


(1)               Debt will not be used to fund ongoing operating expenses of the City.


(2)               Debt is a financing tool which should be judiciously used when the City has legal, financial and market debt capacities, and it may be considered when some or all of the following conditions exist:


a.                   Estimated future revenue is sufficient to ensure the repayment of the debt obligation.


b.                  Other financing options have been explored and are not viable for the economic acquisition or completion of a capital project.


c.                   A capital project is mandated by federal or state authorities with no other viable funding option available, and the capital project or asset lends itself to debt financing rather than “pay-as-you-go” funding based on the expected useful life of the project and the City’s ability to pay debt service.


d.                  Any City debt issued in support of a development project shall first be reviewed and approved under the auspices of the City’s economic development policies and procedures.


e.                   The City shall include the following guidelines in the evaluation and recommendation of Swap Transactions:


1.                  Legality. The City, utilizing advice of counsel, must first determine that the proposed swap contract fits within the legal constraints imposed by applicable law, the City’s Trust Agreement as amended and supplemented, City swap resolutions and other contracts.


2.                  Goals. In conjunction with City Council consideration of the Swap Resolution, the Director of Finance and/or his or her designee must clearly explain the goals to be achieved through the proposed Swap Transaction.


3.                  Rating Agencies. The proposed Swap Transaction shall not have an adverse impact on any existing City credit rating. The Swap Transaction also shall conform to outstanding covenants made to credit enhancers, liquidity providers, surety providers, bondholders and other creditors. All Swap Transactions should be, but are not required to be, discussed with credit rating agencies then maintaining ratings on City debt prior to execution.


4.                  Tenor. The City shall determine the appropriate termination date for a Swap Transaction on a case-by-case basis. However, in no circumstance may the termination date of a Swap Transaction between the City and a Counterparty extend beyond the final maturity date of the underlying debt.


5.                  Impact on Variable Rate Debt Capacity. The impact of the Swap Transaction on the City’s variable rate debt capacity must be quantified prior to execution so as not to hinder the City’s future ability to issue variable rate debt or commercial paper.


6.                  Risks and Benefits. City staff, in consultation with its financial advisor, should evaluate the costs, benefits, risks and other considerations regarding each particular Swap Transaction and should explain them to the City Council, as part of the approval process for each Swap Transaction.


7.                  Accounting Implications. The City shall employ appropriate staff with responsibility and knowledge suitable for monitoring Swap Transactions. Before entering into a Swap Transaction, City staff shall analyze and prepare for the accounting impact of the swap on the City’s comprehensive annual financial report (CAFR). The Finance Department will prepare all necessary CAFR reporting.


8.                  Exit Strategy. The mechanics for determining termination values at various times and upon various occurrences must be explicit in the Swap Transaction, and the City should obtain estimates from its Financial Advisor and/or the Counterparty regarding the potential termination costs which might occur under various scenarios, and plan for how such costs would be funded.


9.                  Basis of Award. The Director of Finance is hereby authorized to enter into Swap Transactions on behalf of the City. The City’s primary method for swap procurement will be either fully negotiated or “quasi-competitive” due to the limited number of qualified Counterparties. The Director of Finance shall determine and recommend the procurement method for each Swap Transaction pursuant to established procedures.


(h)   Types of Permitted Debt. The City has numerous choices regarding types of debt available to meet its financing objectives. The following is a listing of the types of permitted debt and general guidelines as to use.


(1)               General Obligation.


a.                   General Obligation (G.O.) bonds provide the investor with its most secure City transaction because of the City’s pledge of its unlimited authority to levy property taxes for debt service. G.O. bonds are authorized to be issued in the following variations: full faith and credit, double-barrel, and neighborhood improvement district (NID).


b.                  The sum of all G.O. debt outstanding (regardless of type) is governed by the City’s statutory legal debt margin and this Debt Policy. The City must obtain voter authority to issue G.O. bonds (excluding NIDs) by a four-sevenths majority at the general municipal, primary or general election, and a two-thirds majority at all other elections.


1.                  General Obligation Bonds - Full faith and credit. Issued for projects that benefit the City as a whole and for purposes consistent with the voted authority. Principal and interest is paid from City’s debt levy assessed on all taxable, tangible real and personal property.


2.                  Double-barrel (including public benefit districts). Issued for purposes consistent with the voted authority. Principal and interest is paid from a designated revenue source (e.g. sales tax, tax increment financing, etc.) or a special assessment on real property (e.g. sewer special assessment). Revenue shortfalls to be made up from the City’s debt levy assessed on all real and personal property or other legally available revenues of the City.


3.                  NID. Issued for purposes consistent with the NID statute (RSMo 67.453-67.475). Principal and interest is paid from special assessments levied on properties within the NID. Revenue shortfalls are made up from the City’s general municipal resources only if the City has made an annual appropriation pledge under a related agreement. The City must obtain voter approval to issue NID bonds by a four-sevenths majority at the general municipal, primary or general election, and a two-thirds majority at all other elections of qualified voters residing in the district. Alternatively, the NID can obtain approval by a petition of two-thirds of the owners of at least two-thirds by area of the real property within the district.


c.                   G.O. bonds may be issued with a maximum term of 20 years per the state constitution.


(2)               Annual Appropriation.


a.                   Bonds backed by the City’s annual appropriation pledge most often have a dual security structure. Generally, they are first secured by the revenues of the particular project. If these revenues are insufficient, the City pledges to consider an annual appropriation from general municipal revenues for any shortfall. This secondary potential access to general municipal revenues in most cases significantly raises the credit quality of the issue. The rating agencies consider the annual appropriation pledge as a very serious commitment of the City, and as such any failure to appropriate on any given bond issue would likely lead to a downgrading of the City’s general obligation credit rating and the City's annual appropriation credit rating. As the City considers debt service a first-funded priority, it shall be the policy of the City to appropriate principal and interest payments for all annual appropriation debt prior to any other appropriations of the City.  Further, all appropriation obligations will be budgeted in their entirety unless the City Council passes an ordinance stating that it is specifically waiving this portion of the debt policy.


b.                  The City will use annual appropriation debt when necessary to meet the strategic objectives of the City. Any use of annual appropriation debt will require certain security and risk mitigation measures in the structuring of the bonds.


c.                   While each potential use may have its own unique conditions, the City will target a debt service coverage requirement of at least 125% of net available revenues for debt service plus appropriate debt service reserve amounts when necessary to mitigate the City’s risk.


d.                  In addition to special obligation bonds and other direct debt issued by the City, listed below are four types of debt the City may secure with its annual appropriation pledge:


1.                  Lease-backed debt. The City may issue tax-exempt and taxable leasehold revenue bonds and special limited obligation bonds (including redevelopment bonds) through not-for-profit municipal corporations such as KCMAC or by using a trust structure. Projects are primarily to be limited to public purpose capital improvements. Principal and interest is paid from project revenues or specific taxes.


2.                  Conduit debt. The City may issue bonds through conduit agencies (e.g. LCRA, TIFC, etc.) provided that the projects financed have a general public purpose (e.g. infrastructure, economic development, housing, health facilities, etc.) consistent with the City’s overall operating and capital plans and consistent with the purposes of the conduit agency. Principal and interest is paid from project revenues or specific taxes.


3.                  Lease Purchase. The City may enter short-term lease-purchase agreements to finance capital improvements, including equipment with an expected useful life (as defined by the Governmental Accounting Standards Board) of less than ten (10) years. Principal and interest is paid from the operating budget or other dedicated resources of the department purchasing the equipment or constructing the capital improvement.


4.                  Certificates of Participation (COPs). A form of lease obligation in which the City enters into an agreement to pay a fixed amount annually to a third party, usually a nonprofit agency or a private leasing company or trust structure, subject to annual appropriation.


e.                   Conduit and directly issued annual appropriation-backed debt may be issued with a maximum term of 40 years but in any case the average life of the bonds must not be longer than the estimated useful life of the asset being financed.


(3)               Revenue.


a.                   Revenue bonds may be issued to fund capital improvements related to municipal enterprise functions (e.g. water, sewer, airport, etc.) or for special projects supported by discrete revenue sources. They are designed to be self-supporting through user fees or other special earmarked receipts or taxes and do not rely on the general taxing powers of the City. Principal and interest is paid from net revenues from enterprise operations or directly from the earmarked revenue source.


b.                  Governing bond ordinances and/or coverage ratios determine maximum allowable indebtedness. Financial feasibility studies are performed for each project to provide assurances as to the adequacy of dedicated revenue sources.


c.                   The City may obtain voter authority to issue revenue bonds by a simple majority at any election. Revenue bonds secured by certain dedicated revenue streams, such as sales and hospitality taxes, are also authorized by referendum.


d.                  Water, sewer and combined sewer/stormwater revenue bonds may be issued with a maximum term of 35 years per state statute. Airport bonds have no term limitation.


(4)               Industrial Revenue (“Chapter 100”).


a.                   The City may issue taxable industrial revenue bonds (per Chapter 100 RSMo) for purposes consistent with RSMo 100.010, which include but are not limited to: improvement of warehouses, industrial plants, buildings, machinery, etc. In this case, the City acts as a “conduit” issuer, as defined under federal law and state statute, on behalf of a private or non-profit party. Principal and interest on Chapter 100 bonds is paid solely from the revenues of the private or non-profit party which are pledged to repayment under a lease agreement. Issuance of these bonds does not constitute a general obligation or indebtedness of the City within the meaning of any constitutional, charter or statutory debt limitation or restriction, and are not payable in any manner by taxation.


b.                  Certain types of projects, including, but not limited to manufacturing, multifamily housing, and solid waste disposal, as well as certain types of private companies, such as not-for-profit companies with 501(c)(3) status, may qualify for a federal tax exemption on the interest on Chapter 100 bonds issued, provided that all of the applicable requirements of the Internal Revenue Code of 1986, as amended, for the issuance of private activity bonds are satisfied.


c.                   Industrial revenue bonds may be issued with a maximum term of 10 years per the City’s Chapter 100 Policy as outlined in Committee Substitute for Resolution No. 041033.


(5)               Temporary Loans/Interfund Borrowing.


a.                   In accordance with Section 806 of the City Charter, the Director of Finance may borrow monies from other city funds:


1.                  To meet the operating and capital cash requirements of any other fund in anticipation of the receipts from revenues for the current fiscal year. All such loans shall be repaid on or before the due date out of the receipts from revenues of the fiscal year in which they are incurred, and shall become due within not more than nine months from the date of incurring the loan obligation, and in no event beyond the end of the fiscal year in which made; or


2.                  To finance capital improvements from anticipated receipts of revenues for the current calendar year, plus any unencumbered balances from previous years. All such loans shall become due within not more than nine months from the date of incurring the loan obligation; or


3.                  To meet the operating and capital cash requirements of another fund, the City Council may by ordinance authorize the borrowing of monies from the unreserved and undesignated fund balances of a fund provided that the City Council makes provision for repayment within a designated time and provided that the repayments include interest at a reasonable rate.


b.                  The City Council, by two-thirds vote of its members, may authorize the Director of Finance to borrow monies from non-city sources using authority approved by the voters or the City Council to finance capital improvements in anticipation of issuing bonds to refinance the loan. All such loans shall become due within not more than nine months from the date of incurring the loan obligation. The City may not use revenues authorized for repayment of bonded indebtedness for repayment of such loans unless the loan is made pursuant to voted authority.


(6)               Authorized Swap Transactions. The City may use any of the following Swap Transactions after identifying the specific financial objective to be realized and assessing the attendant risks:


Interest Rate Swaps -- Immediate or forward starting floating-to-fixed rate swaps may be used to capture current market fixed interest rates or eliminate variable rate exposure. Fixed-to-floating rate swaps may be used to create additional variable interest rate exposure.


a.                   Interest Rate Caps, Collars and Floors -- Financial contracts may be used to limit or bound exposure to interest rate volatility.


b.                  Options on Swaps - Sales or purchases of options may be used to commence or cancel interest rate swaps.


c.                   Basis Swaps -- Floating-to-floating rate swaps may be used to manage basis or tax risk and change the basis on which variable cash flows are determined.


d.                  Rate Locks – Rate locks are often based on interest rate swaps and may be used to hedge an upcoming fixed rate bond issue.


e.                   Forward Swaps - Swap Transactions may become effective immediately upon execution or on a forward starting basis.


(7)               Other Debt. Any other form of debt allowable under federal law, state law, and the City Charter that is deemed by the Director of Finance to be appropriate to meet the City’s financing needs.


(i)     Debt Structuring and Marketing.


(1)               Fixed or Variable Rate Debt.


a.                   The City’s debt portfolio may at any given time be comprised of a combination of both fixed and variable rate debt. The City will always seek to manage its debt portfolio, including the absolute amount(s) of outstanding fixed and variable rate debt, in a manner which best supports the City’s long-term financial condition. The City will generally issue its debt on a fixed interest rate basis such that, at the time of the bond sale, all interest rates are known and do not change while the bonds are outstanding. Particular conditions may arise in which the City might consider the use of variable interest rate bonds. Variable interest rate bonds have interest rates that reset on a periodic basis (e.g. daily, weekly, monthly, etc.). Conditions which might cause the City to contemplate the issuance of variable rate debt may include:


1.                  Adverse fixed rate municipal market;


2.                  Uncertainty or variability of the amount of annual revenues for debt service;


3.                  The potential for an accelerated repayment of debt; or


4.                  The need or desire to maximize the City’s asset/liability balance


b.                  Variable interest rate debt exposes the City to interest rate risk over the term of the financing. The aggregate total amount of variable rate debt maintained by the City shall be capped at a level not exceeding 25% - 30% of all comparable debt outstanding and no distinct portion of the City’s debt portfolio shall have variable rate debt exceeding this threshold.


c.                   Once variable rate debt is issued, the City may employ various risk mitigation factors including “natural” hedging of its short-term liabilities (i.e., variable rate debt) with its substantial short-term assets (i.e., cash management investment portfolio) to create a net financial margin, or the use of derivatives, specifically interest rate hedges. For any new variable rate debt issued, the City will also seek the optimal mix of hedged and unhedged variable rate debt, which best fits the City’s long term credit and financial profile.


(2)               Taxable vs. Tax-exempt Debt.


a.                   The City shall first seek to issue and/or guarantee only tax-exempt debt and avoid taxable debt in order to reduce interest expense. However, the City recognizes that not all financings will be able to be completed on a tax-exempt basis and therefore the City reserves the right to undertake taxable financings. Furthermore, the City reserves the right to undertake taxable financings to benefit from any current or future Federal programs requiring use of taxable financing.


b.                  For tax-exempt debt issuances, the City Council has the authority to declare the official intent of the City to reimburse itself for certain expenditures made within 60 days prior to or on and after the date of such declaration in accord with Treasury Regulation 1.150-2, as may be amended or replaced from time to time.


c.                   The City may decide to issue taxable debt to refund outstanding tax-exempt debt either to remove undesirable covenants of the old debt or to provide flexibility to the City for the future use of the bond financed facility. In certain circumstances, outstanding debt may not be eligible for refunding on a tax-exempt basis because of federal tax laws.


(3)               Repayment Term. The City will structure its debt to comply with all federal and state and local requirements as to repayment terms. The City will seek to repay its debt in an expeditious manner consistent with the City’s overall financial objectives and in no case will the estimated useful life of the asset being financed be greater than the average life of the bonds.


(4)               Prepayment Provisions.


a.                   The potential costs (including call premium and higher on-going interest cost) of redemption provisions and call features shall be evaluated in the context of each bond sale and with respect to the ability to:


1.                  enhance marketability of the bonds;


2.                  ensure flexibility related to potential early redemption;


3.                  foster future refunding transactions; or


4.                  impact other special conditions of the transaction.


b.                  The following are the different redemption provisions that may be evaluated:


1.                  Optional redemption. The ability of the City to redeem bonds early.


2.                  Mandatory redemption. The requirement to redeem bonds under certain predetermined conditions.


3.                  Extraordinary redemption. The ability to redeem bonds to address specific, predetermined extraordinary events.


(5)               Credit Enhancement.


a.                   When the City is considering the purchase of bond insurance, it will determine the cost-effectiveness and the impact on the marketing of a bond issue. The cost-effectiveness will be based on the premium cost of the insurance as compared to the estimated difference in the true interest cost (TIC) of an insured versus uninsured bond issue. In most competitive sales, a “purchaser’s option” approach to the acquisition of bond insurance will be used.


b.                  In addition to the cost of insurance, the ability to fund any required debt service reserve fund on a revenue issue or appropriation issue with a surety bond may be factored in when considering bond insurance.


c.                   To address remarketing risk inherent in a variable rate debt issuance, the City may evaluate alternative forms of liquidity such as direct pay letters of credit, standby letters of credit and lines of credit.  The City may enter into such agreements when an agreement is deemed prudent and advantageous.  Such evaluation will weigh the value of mitigating remarketing risk versus the economic costs associated with each alternative.  Evaluations will also review diversification among liquidity providers, thereby limiting exposure to any individual liquidity provider.  Additionally, all cost components to the liquidity facility, including commitment fees, standby fees, draw fees, and interest rates charged against liquidity draws should be considered.


d.                  Special consideration should be given to any additional covenants or restrictions credit enhancement providers may require.


(6)               Method of Sale.


a.                   The Director of Finance will select the method of sale, which best fits the type of bonds being sold, market conditions, and the desire to structure bond maturities to enhance the overall performance of the entire debt portfolio. This Debt Policy provides for four general methods for the sale of municipal bonds:


1.                  Competitive sale. Bonds are marketed to a wide audience of investment banking (underwriting) firms. Bids are submitted at a specified time. The underwriter is selected based on the best bid for the securities being offered and subject to conformance with the bid parameters. Pursuant to this policy, and within the parameters set by the City Council in the approving ordinance, the Director of Finance is authorized to accept the bid on behalf of the City on the day of pricing. The City will award the sale of its competitively sold bonds on a true interest cost (TIC) basis. A TIC basis considers the time value of money in its calculation.


2.                  Negotiated sale. The City selects the underwriter or group of underwriters in advance of the bond sale. The City financing team works with the underwriter to bring the issue to market and negotiates all rates and terms of the sale. In advance of the sale, the City will determine compensation for and liability of each underwriter employed and the designation rules and priority of orders under which the sale itself will be conducted (e.g., retail, group net, net designated, etc.). Pursuant to this Debt Policy, and within the parameters approved by the City Council, the Director of Finance is hereby authorized to sign the bond purchase agreement on behalf of the City fixing the interest rates on bonds sold on a negotiated basis.


3.                  Private placement. The City sells its bonds to a limited number of sophisticated investors, and not the general public. Private placement bonds are often characterized as having higher risk or a specific type of investor base.


4.                  State or federal programs. The City may borrow through certain state or federal loan programs via competitive sale or private placement.


(j)     Retention of Consultants and Other Related Parties.


(1)               The City recognizes that the specialized nature of the municipal bond industry may require the retention of certain consultants. The City will retain consultants for advice on individual issues and the overall debt program in a manner that will most advantageously position the City on both a short and long-term basis.


(2)               In general, a competitive selection process will be used in the retention of any consultants; however, the Director of Finance may also directly engage consultants on a case-by-case basis and based on a fair and reasonable cost.


a.                   Bond/Swap Counsel. The City Attorney, with input from the Director of Finance or his/her designee, will maintain responsibility for selection and procurement of bond and swap counsel. Bond and swap counsel will be recognized by the bond market (Red Book) and will have extensive expertise in public finance commensurate with the needs of the City.


b.                  Financial Advisors.


1.                  The City will select financial advisors through a competitive process, who may either be independent financial advisors or firms who engage in municipal bond underwriting or brokerage services. The City’s financial advisors shall comply with all applicable Municipal Securities Rulemaking Board (MSRB) rules. While serving as the City’s financial advisor, a firm may not also engage in the underwriting of a City bond issue for which that firm acts as financial advisor. A firm may also not switch roles (i.e., from financial advisor to underwriter) after a financial transaction has begun.


2.                  During the contract term of any party acting as financial advisor, neither the firm nor any individual employed by that firm will perform financial advisory, investment banking or similar services for any entity, other than the City, in transactions involving a City financial commitment without the written approval of the City’s Director of Finance.


c.                   Underwriters. For negotiated sales, the City will generally select or pre-qualify underwriters through a competitive process. This process may include a request for proposal or qualifications to all firms considered appropriate for the underwriting of a particular issue or type of bond. The City will determine the appropriate method to evaluate the underwriter submittals and then select or qualify firms on that basis. The underwriters shall comply with all applicable MSRB rules and regulations.


d.                  Other Parties. Depending on the specific bond issue, other parties as are customary in the bond issuance process may need to be engaged (e.g. trustee, paying agent, registrar, verification agent, printer, dissemination agent, bond insurers etc.). The City will select third party providers on a competitive basis.


(k)   Guidelines for Debt Management.


(1)               In accordance with established procedures, the City’s policy is to proactively manage its debt portfolio. Proactive debt management is a key component to the immediate and long-term success of the City’s financial objectives. A successful debt management program begins with comprehensive information on the current debt program and a definition of the future direction of the City’s capital financing objectives. Within this context, the City structures and markets individual bond issues to expedite these objectives.


(2)               Once issued, the professional oversight of individual issues and the ongoing context of the City’s debt program will permit the recognition of future opportunities and the advantageous positioning of the overall program.


(3)               Disclosure. The City will comply with all SEC mandated disclosure requirements pursuant to established procedures.


(4)               Debt Target.


a.                   It is the City’s policy to maintain an appropriate level of indebtedness to preserve flexibility for future infrastructure investments while balancing the potential impact on the City’s credit rating. The appropriate levels are internally determined based on a variety of factors, such as: infrastructure investment needs of the particular service area, capacity to repay debt from the specific revenue source, and the sector’s credit rating objectives. Since these factors can change over time, any debt guideline must be periodically reviewed to reflect evolving City conditions.


b.                  General Obligation and Annual Appropriation. The City should consider debt issuance targets which attempt to:


1.                  Issue debt with a new, dedicated revenue source for repayment.


2.                  Limit debt service as a percent of governmental funds revenues to under 14.5 percent


3.                  Limit total outstanding debt as a percent of total governmental funds revenues to under 125 percent;


4.                  Limit total outstanding debt as a percent of full value of property to under 4.5 percent; and


5.                  Limit annual net growth in debt to growth in population, fund balance, or economically based revenue sources.


c.                   Revenue Bonds. Each type of revenue bond indebtedness has an estimated capacity dictated by financial position, user rate revenue generation capability and existing and anticipated future debt requirements. Revenue bonds may also have legal restrictions on the amount of parity debt that may be issued based on an additional bonds covenant for existing debt. The debt capacity guidelines for each type of revenue bond indebtedness will be governed by specific bond covenant requirements.


(5)               Credit Rating Strategy. The Director of Finance will develop appropriate credit rating strategies for each of the City’s discrete credits and will update the City Council regarding all credit rating events.


(6)               Defeasance, Prepayment and Refunding.


a.                   The accelerated retirement and restructuring of debt can be valuable debt management tools. Accelerated retirement occurs through the use of defeasance and the exercise of prepayment provisions. Debt is often restructured to the benefit of the City through the issuance of refunding bonds. The City will monitor the prepayment provisions on its outstanding debt to realize both of these potential opportunities.


b.                  Debt can be refunded to achieve one or more of the following objectives:


1.                  Reduce future interest costs;


2.                  Restructure future debt service in response to evolving conditions regarding anticipated revenue sources;


3.                  Restructure future debt service to provide needed debt capacity, and


4.                  Restructure the legal requirements and/or covenants of the original issue to respond to changing conditions.


c.                   The IRS promulgates specific rules regarding the tax-exempt refunding of outstanding issues. Refundings have two general categories:


1.                  Current refunding. Refunding bonds are settled within 90 days of an optional prepayment date.


2.                  Advance refunding. Refunding bonds are settled more than 90 days in advance of an optional prepayment date. The federal restrictions are that any issue can only be advance refunded once on a tax-exempt basis.


d.                  For a current refunding the City will consider the absolute interest cost savings on both net present and future value bases. For an advance refunding the City will look to more rigorous quantifiable net savings measures. The City will generally undertake a refunding if the net present value savings is three percent (3%) or more of the refunding bonds. In certain circumstances, however, and subject to City Council approval, the City may also issue refunding debt for purposes other than net present value savings, such as restructuring debt, changing covenants or changing the repayment source of the bonds.


e.                   A refunding that relies on a Swap Transaction to achieve present value savings, or to provide other benefit to the City, is generally called a “synthetic refunding.” The City will enter into synthetic refundings only after significant internal review in accordance with this Debt Policy, and the City will apply both its general refunding and swap guidelines when reviewing synthetic refunding proposals.


(7)               Investment of Bond Proceeds. The investment of bond proceeds requires significant diligence in meeting the objectives of regulatory compliance, the management of the flow of funds described in bond documents, and the needs of the projects being funded. It is the City’s policy to consider the investment of bond proceeds at the outset of every debt issuance and to integrate the investment of bond proceeds throughout the debt issuance process. This policy incorporates by reference the GFOA’s Recommended Practice, “Investment of Bond Proceeds”, the City’s Investment Policy, and established procedures.


(8)               Federal Arbitrage and Rebate Compliance. It is the City’s policy to fully comply with federal arbitrage and rebate regulations. The City will take all permitted steps to minimize any rebate liability through proactive management in the structuring and oversight of its individual debt issues. All of the City’s tax-exempt issues, including lease purchase agreements, are subject to arbitrage compliance regulations.


(9)               Monitoring of Covenant Compliance. The City’s revenue bonds generally have a number of bond covenants requiring ongoing compliance and conditions for future bond issuance on an equal security (‘parity’) basis. The City will maintain a compliance monitoring system by revenue bond type of all bond covenants in accordance with established procedures.


(10)           Post Issuance Compliance. The IRS has mandated that municipal bond issuers must have written procedures regarding post-issuance compliance. The City has established procedures which cover:


a.                   Appointment of a Bond Compliance Officer.


b.                  Spending and investment of bond/lease proceeds.


c.                   Use of the financed project.


d.                  Monitoring of management and use contracted on financed projects.


e.                   Primary disclosure requirements.


f.                   Proper record retention.


g.                  Continuing disclosure requirements.


(11)           Debt Service Cash Flow Monitoring.


a.                   The City has a large variety of debt repayment sources, with a wide range of variability and predictability. The City understands the essentiality of proper management and forecasting of future revenues for debt service. This essentiality is embodied in its ability to make timely payment of debt obligations, comply with legal restrictions, and forecast the revenue impacts on policy decisions.


b.                  The City shall maintain a system of debt service revenue forecasting for each of its major debt categories.


(12)           Referendum Approved Capacity. The City can only obtain authority to issue general obligation and revenue debt through referendum approval. The City often seeks referendum approval for a program of capital finance covering a number of years. The City will both monitor the absorption of referendum approved capacity over time and meet any commitments made, absent exigent circumstances, at the time of the public vote.


(13)           Derivative Regulatory Compliance. The Director of Finance shall, through the City Treasurer, establish written procedures designed to help the City comply with applicable local, state and federal laws and regulations pertaining to Swap Transactions including, but not limited to:


a.                   Section 731 of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010;


b.                  The Commodity Exchange Act of 1936, as amended.


(l)     Reporting. The monthly financial report of the Finance Department shall include a calculation of debt capacity for the general municipal debt of the City (i.e., excludes enterprise-related revenue bonds). On an annual basis, the Finance Department will prepare all required debt related schedules and footnotes for inclusion in the City’s comprehensive annual financial report.


(m) Debt Glossary.


(1)               Arbitrage. Investment earnings representing the difference between interest paid on bonds and the interest earned on securities in which bond proceeds are invested. The Internal Revenue Code regulates the amount and conditions under which arbitrage on the investment of bond proceeds is permissible and the 1986 Tax Reform Act requires, with limited exceptions, that arbitrage from investments must be rebated to the federal government.


(2)               Asset/Liability Management. Asset/liability management is the process of managing the use of assets and cash flows to meet an entity’s obligations, which reduces the entity’s risk of loss due to not paying a liability on time.


(3)               Bond Insurance. Insurance as to timely payment of interest and principal of a bond issue. The cost of insurance is usually paid by the issuer in the case of a new issue of bonds, and the insurance is not purchased unless the cost is more than offset by the lower interest rate that can be incurred by the use of the insurance.


(4)               Call. Actions taken to pay the principal amount of the bonds prior to the stated maturity date, in accordance with the provisions for "call" stated in the proceedings and the bonds.


(5)               Callable. Subject to payment of the principal amount (and accrued interest) prior to the stated maturity date, with or without payment of a call premium.


(6)               Call Premium. A dollar amount, usually stated as a percentage of the principal amount called, paid as a "penalty" or a "premium" for the exercise of a call provision.


(7)               Coverage. This is a term usually connected with revenue bonds. The margin of safety for payment of debt service, reflecting the number of times (e.g."120 percent coverage") by which annual revenues either on a gross or net basis exceed annual debt service.


(8)               Debt Limit. Statutory or constitutional limit on the principal amount of debt that an issuer may incur (or that it may have outstanding at any one time).


(9)               Debt Service. Required payments of principal and interest.


a.                   Discount. Amount (stated in dollars or a percent) by which the selling or purchase price of a security is less than its face amount.


b.                  Amount by which the amount bid for an issue is less than the aggregate principal amount of that issue.


(10)           General Municipal Expenditures (GME). Expenditures for general municipal purposes including those for general fund-supported, special revenue and assessment programs but excluding enterprise funds.


(11)           General Municipal Revenues (GMR). Revenues available to pay for general municipal expenses and collected from general municipal sources (e.g., taxes, fees, rentals, etc.) including general fund-supported, special revenue and assessment programs but excluding enterprise funds (i.e., water, sewer and airport).


(12)           Index. Short-term benchmark rate used to calculate variable rate payments. Common indexes include the London Interbank Offered Rate (taxable) and the Bond Market Association Index (tax-exempt).


(13)           International Swap Dealers Association (ISDA). An association developed by the swap community to address major documentation issues facing the market.


(14)           Joint Managers. Underwriting accounts are headed by a manager. When an account is made up of several groups of underwriting firms that normally function as separate accounts, the larger account is often managed by several underwriters, usually one from each of the several groups, and these managers are referred to as "joint managers."


(15)           Legal Opinion. An opinion of bond counsel concerning the validity of a securities issue with respect to statutory authority, constitutionality, procedural conformity and usually the exemption of interest from federal income taxes.


(16)           Letter of Credit (LOC). A security document usually issued by a bank that back-stops, or enhances, the basic security behind a bond. In the case of a direct pay "LOC," the bondholder can request the bank to make payment directly rather than through the issuer, in which case the City agrees to promptly repay the bank or pay the bank in advance.


(17)           Level Debt Service. The result of a maturity schedule that has increasing principal amounts maturing each year so that the debt service in all years is essentially "level." "Level debt service" is often used with revenue bond issues (and, in a familiar area, in the traditional approach to monthly payments on home mortgages).


(18)           Liquidity. The ease with which a swap participant may assign or terminate its obligations and rights under a swap. Higher costs are associated with more flexibility. Risk reduced by ISDA standards and improved liquidity to counterparties.


(19)           Maturity Date. The stated date on which all or a portion of the principal amount of a security is due and payable.


(20)           Maturity Schedule. The schedule (by dates and amounts) of principal maturities of an issue.


(21)           Net Interest Cost. The traditional method of calculating bids for new issues of municipal securities. The total dollar amount of interest over the life of the bonds is adjusted by the amount of premium or discount bid, and then reduced to an average annual rate. The other method is known as the true interest cost (see "True Interest Cost").


(22)           Net Tax-Supported Debt Service. Annual principal and interest due for aggregate tax-supported debt less any principal and interest due for tax-supported debt determined to be self-supporting (i.e., annual debt service is fully paid from dedicated taxes, fees, incremental revenues, etc.).


(23)           Notional Principal Amount. The agreed upon reference amount or balance from which swap payments will be calculated. This amount is typically for calculation purposes only, since no principal is exchanged when payments are netted.


(24)           Optional Redemption. A right to retire an issue or a portion thereof prior to the stated maturity thereof during a specified period of years. The right can be exercised at the option of the issuer or, in pass-through issues, of the primary obligor. "Optional redemption" may require the payment of a premium for its exercise, with the amount of the premium decreasing the nearer the option exercise date is to the final maturity date of the issue.


(25)           Overlapping Debt. On a municipal issuer's financial statement "overlapping debt" is the debt of other issuers which is payable in whole or in part by taxpayers of the subject issuer.


As an example, a county usually includes several smaller government units and its debt is apportioned to them for payment based on the ratio of the assessed value of each smaller unit to the assessed value of the county. Another example is when a school district includes two or more municipalities within its bounds.


(26)           Par Value. The principal amount of a bond or note due at maturity.


(27)           Paying Agent. Place where principal and interest are payable. Usually a designated bank or the office of the treasurer of the issuer.


(28)           Prudent Person Rule. A financial standard in which a fiduciary entrusted with funds is not required to possess exceptional financial skills, but that the fiduciary exercise discretion and average intelligence in making sound decisions regarding those funds.


(29)           Reset Date and/or Reset Frequency. Reset date determines on which day the floating rate for the subsequent period is set until the next reset date. Frequency determines the number of times reset dates occur in a year.


(30)           Surety Bond. A policy typically issued by a municipal bond insurance company providing for the funding of a debt service reserve fund that would otherwise be funded with cash or bond proceeds.


(31)           Swap Legs. Either the fixed or floating cash flow involved in a swap which determines the party who pays the fixed rate and receives the floating rate and the party who pays the floating rate and receives the fixed rate.


(32)           Syndicate. A group of underwriters formed for the purpose of participating jointly in the initial public offering of a new issue of municipal securities. The terms under which a "syndicate" is formed and operates are typically set forth in the "agreement among underwriters." Those terms will establish the pro rata participation of each syndicate member; the methods by which offering prices and other terms of sale will be established; in what priority orders for securities will be taken and confirmed; and the joint or several nature of the liability assumed by each member for the purchase of unsold securities. The purpose of a "syndicate" formation is to share the risk of the offering among participating underwriters and to establish a distribution network in which to market the offered securities. One or more underwriters will act as manager of the "syndicate" and one of the managers will act as lead manager and "run the books." A "syndicate" is also often referred to as an "account" or "underwriting account."


(33)           Tax Risk. The potential for higher funding costs due to a change in the taxation of interest income. Lower income tax rates would result in a reduction in the tax advantage of tax-exempt securities over taxable securities, resulting in higher tax-exempt rates and higher swap payments. Higher income tax rates would have the opposite effect or lowering the BMA rate and therefore increasing the tax-exempt advantage over taxable securities.


(34)           Tax-Supported Debt Outstanding. Total principal amount of City debt outstanding excluding any debt issued for public enterprises including water, sewer and airport bonds.


(35)           Tax-Supported Debt Service. Annual principal and interest due for aggregate tax-supported debt.


(36)           Term. The length of time payments are exchanged from the first day of coupon accrual and ending on the maturity date; typically 1-30 years.


(37)           True Interest Cost. A method of calculating bids for new issues of municipal securities that takes into consideration the time value of money (see "Net Interest Cost").


(38)           Trustee. A bank designated by the issuer as the custodian of funds and official representative of bondholders. "Trustees" are appointed to insure compliance with the contract and represent bondholders to enforce their contract with the issuers.




Approved as to form and legality:



Sarah Baxter

Assistant City Attorney