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Legislation #: 090129 Introduction Date: 2/12/2009
Type: Ordinance Effective Date: none
Sponsor: COUNCILMEMBER HERMANN
Title: Amending Chapter 2 of the Code of Ordinances of Kansas City, Article XIV “Budgetary and Financial Policies” by enacting new divisions and enacting sections which codify the Investment Policy, Contingent Appropriation Policy, Debt Policy, and Costs of Public Financing Policy for the City and renumbering Section 2-1950, Non-recurring Revenue Policy, as Section 2-1970.

Legislation History
DateMinutesDescription
2/12/2009 Filed by the Clerk's office
2/12/2009 Referred to Finance and Audit Committee
2/18/2009 Hold On Agenda (2/25/2009)
2/25/2009 Do Pass as a Committee Substitute
2/26/2009 Assigned Third Read Calendar as Substituted
3/5/2009 Passed as Substituted

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090129, cs.pdf Authenticated 3187K correct passed copy
exhibit 11.pdf Advertise Notice 291K exhibit 11
exhibit 10.pdf Advertise Notice 230K exhibit 10
exhibit 9.pdf Advertise Notice 125K exhibit 9
http://kansascity.granicus.com/ViewSearchResults.php?view_id=2&keywords=090129 Video Link 0K http://kansascity.granicus.com/ViewSearchResults.php?view_id=2&keywords=090129

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COMMITTEE SUBSTITUTE FOR ORDINANCE NO. 090129

 

Amending Chapter 2 of the Code of Ordinances of Kansas City, Article XIV Budgetary and Financial Policies by enacting new divisions and enacting sections which codify the Investment Policy, Contingent Appropriation Policy, Debt Policy, and Costs of Public Financing Policy for the City and renumbering Section 2-1950, Non-recurring Revenue Policy, as Section 2-1970.

 

WHEREAS, the City is desirous of adopting sound fiscal policies that provide a stable framework for the efficient and effective provision of public services; NOW, THEREFORE,

 

BE IT ORDAINED BY THE COUNCIL OF KANSAS CITY:

 

Section 1. That Chapter 2 of the Code of Ordinances of Kansas City, Missouri, Article XIV, Budgetary and Financial Policies, is hereby amended by enacting a new division, Financial Planning Policies, and enacting within that division a section codifying the Citys investment policy (previously adopted by Committee Substitute for Ordinance No. 070744), to read as follows:

 

Division 1. Financial Planning Policies.

 

Sec. 2-1950. Investment Policy.

 

(a) Policy.

 

(1) It is the policy of the City of Kansas City, Missouri (the City) to invest public funds in a manner which will provide maximum security with the highest investment return while meeting the daily operating cash flow requirements of the City and conforming to all Missouri statutes, City Charter, City Administrative Code, and City General Code of Ordinances governing the investment of public funds.

 

(2) The Citys investment policy shall be adopted by resolution of the City of Kansas City, Missouri Investment Committee. The policy shall be reviewed on an annual basis by the CFO/Director of Finance and any modifications made thereto must be approved by the Investment Committee.

 

(b) Authority.

 

(1) Authority to manage the Citys investment program is derived from Article IV, Section 407 of the City Charter, and Chapter 2, Article XI, Section 2-1611 of the City Code of Ordinances.

 

(2) Management responsibility for the investment program is hereby delegated to the CFO/Director of Finance, who shall establish procedures for the operation of the investment program, consistent with this investment policy. Procedures include (but are not limited to): Depository Trust Agreements, Safekeeping Agreements, Wire Transfer Agreements, and Banking Service Contracts. Agreements shall include explicit delegation of authority to persons responsible for acting on behalf of the City. No person may engage in an investment transaction except as provided under terms of this policy and the procedures established by the CFO/Director of Finance. The CFO/Director of Finance authorizes the City Treasurer and Treasury Division staff holding the titles of Manager of Investments, Cash Manager, and Financial Analyst to initiate investment transactions on behalf of the City. The CFO/Director of Finance shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials.

 

(3) As provided by Chapter 2, Article XI, Section 2-1611 of the City Code of Ordinances, the Investment Committee is composed of the CFO/Director of Finance, the City Treasurer, the City Manager or designee, the Budget Officer or designee, and the City Attorney or designee. The Investment Committee shall set and monitor policies, provide general guidance of city investments and implement necessary monitoring mechanisms. The Committee will meet regularly to review performance, policy, procedures, market conditions, and legislation.

 

(c) Prudence.

 

(1) Investments shall be made with judgment and care -- under circumstances then prevailing -- which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived.

 

(2) The standard of prudence to be used by investment officials shall be the prudent person standard and shall be applied in the context of managing an overall portfolio. Investment officers acting in accordance with the investment policy and written procedures and exercising due diligence shall be relieved of personal responsibility and liability for an individual securitys credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments.

 

(3) The prudent person concept discourages speculative transactions; it attaches primary significance to the preservation of capital and secondary importance to the generation of income and capital gains. The prudent person is expected to be a reasonably well informed person, not a professional investor or market maker, who is obligated to act responsibly.

 

(d) Ethics and Conflict of Interest. Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the CFO/Director of Finance any material financial interests in financial institutions that conduct business within this jurisdiction, and they shall further disclose any large personal financial/investment positions that could be related to the performance of the City of Kansas City, Missouris portfolio. Employees and officers shall subordinate their personal investment transactions to those of the City of Kansas City, Missouri, particularly with regard to the timing of purchases and sales.

 

(e) Scope.

 

(1) This policy applies to all City of Kansas City, Missouri, monies identified as idle, surplus, and reserve as defined in Article IV, Section 407 of the City Charter, Chapter 2, Article XI, Section 2-1611 of the City Code of Ordinances, and in written legal opinions by the City Attorney or designee.

 

(2) Funds included in the investment policy are accounted for in the City of Kansas City, Missouri Comprehensive Annual Financial Report and include (but are not limited to):

 

a. General Fund

 

b. Special Revenue Funds

 

c. Debt Service Funds

 

d. Capital Projects Funds

 

e. Internal Service Funds

 

f. Trust and Agency Funds

 

g. Enterprise Funds

 

(3) Funds of other agencies who act as conduit issuers for bonds secured by the Citys annual appropriation pledge subject to this policy include (but are not limited to): Kansas City Municipal Assistance Corporation (KCMAC), Land Clearance for Redevelopment Authority (LCRA), Port Authority of Kansas City, Missouri (Port Authority) and Tax Increment Financing Commission (TIF). Permitted investments are identified within the bond documents for specific issues and approved by each agencys governing body.

 

(4) Pension and retirement funds are directed by investment policies implemented by the Employee Retirement Pension System Board of Trustees and the Firefighters Pension System Board of Trustees and are therefore not included in the scope of this policy.

 

(f) Objectives. The primary objectives, in priority order, of the City of Kansas City, Missouris investment activities shall be:

 

(1) Legality. The CFO/Director of Finance and those authorized by him or her will invest the Citys excess funds only within the legal guidelines set forth by the Constitution and Statutes of the State of Missouri, City Charter and the City Code of Ordinances. Any investment alternative outside these guidelines is not permissible. Furthermore, the City of Kansas City, Missouri seeks to promote and support the objectives of US foreign policy regarding terrorism. Accordingly, investments in companies or their subsidiaries or affiliated entities that are known to sponsor terrorism or aid the government in countries that are known to sponsor terrorism are prohibited.

 

(2) Safety. Safety of principal is the foremost objective of the investment program. Investments of the City of Kansas City, Missouri shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk.

 

a. Credit Risk. The City of Kansas City, Missouri, will minimize credit risk, the risk of loss due to the failure of the security issuer or backer, by:

 

1. Establishing a pre-approved list of financial institutions and companies that the City will be restricted to when purchasing commercial paper.

 

2. Conducting regular credit monitoring and due diligence of these issuers

 

3. Pre-qualifying the financial institutions and broker/dealers with which the City will do business with for broker services and repurchase agreements.

 

4. Diversifying the portfolio with respect to maturity, issuer, and security type so that potential losses on individual securities will be minimized.

 

b. Interest Rate Risk. The City of Kansas City, Missouri, will minimize the risk that the market value of securities in the portfolio will materially fall due to changes in general interest rates, by:

 

1. Targeting an effective duration of less than 1.5 and an effective weighted average maturity of less than 2.5 years.

 

2. Holding at least 30% of the portfolios total market value in securities with a maturity of 12 months or less.

 

(3) Liquidity. The City of Kansas City, Missouris investment portfolio will remain sufficiently liquid to enable the City of Kansas City, Missouri to meet all operating requirements which might be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with anticipated cash needs. Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets.

 

(4) Return on investment. The City of Kansas City, Missouris investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the Citys investment risk constraints and liquidity needs. The City of Kansas City, Missouris investment strategy is active. The benchmark basis used by the Treasurer to determine whether market yields are being achieved shall be The Merrill 1-3 year index.

 

(g) Authorized and Suitable Investments.

 

(1) The City of Kansas City, Missouri is empowered by City Charter to invest in the following types of securities:

 

a. United States Treasury Securities (Bills, Notes, Bonds and Strips). United States Agency/GSE Securities. The City may invest in obligations issued or guaranteed by any agency of the United States Government and in obligations issued by any government sponsored enterprise (GSE) which have a liquid market and a readily determinable market value that are described as follows:

 

1. U.S. Govt. Agency Coupon and Zero Coupon Securities.

 

2. U.S. Govt. Agency Discount Notes.

 

3. U.S. Govt. Agency Callable Securities. Restricted to securities callable at par only.

 

4. U.S. Govt. Agency Step-Up Securities. The coupon rate is fixed for an initial term. At coupon date, the coupon rate rises to a new, higher fixed interest rate.

 

5. U.S. Govt. Agency Floating Rate Securities. Restricted to coupons with no interim caps that reset at least quarterly and that float off of only one index.

 

6. U.S. Govt. Agency Mortgage Backed Securities (MBS, CMO, Pass-Thru Securities). Restricted to securities with final maturities of five (5) years or less or have the final projected payment no greater than four (4) years when analyzed in a +300 basis point interest rate environment. Restricted to obligations of FNMA, FHLMC and GNMA only.

 

b. Repurchase Agreements. The City may invest in contractual agreements between the City and commercial banks or primary government securities dealers. The Bond Market Associations guidelines for the Master Repurchase Agreement will be used and will govern all repurchase agreement transactions. All repurchase agreement transactions will be either physical delivery or tri-party.

 

c. Bankers Acceptances. The City may invest in bankers acceptances issued by domestic commercial banks possessing the highest credit rating issued by Moodys Investor Services, Inc. or Standard and Poors Corporation.

 

d. Commercial Paper. The City may invest in commercial paper issued by domestic corporations, which has received the highest short-term credit rating issued by Moodys Investor Services, Inc. or Standard and Poors Corporation. Eligible paper is further limited to issuing corporations that have total assets in excess of five hundred million dollars ($500,000,000) and are not listed on Credit Watch with negative implications by any nationally recognized credit rating agency at the time of purchase. In addition, the Citys portfolio may not contain commercial paper of any one corporation, the total value of which exceeds 2% of the Citys aggregate investment portfolio.

 

e. Any full faith and credit obligations of the State of Missouri rated at least A or A2 by Standard and Poors or Moodys.

 

f. Any full faith and credit obligations of any county in which the City is located rated at least AA or Aa2 by Standard and Poors or Moodys.

 

g. Any full faith and credit obligations of any school district in Kansas City, Missouri rated at least AA or Aa2 by Standard and Poors or Moodys.

 

h. Any full faith and credit obligations or revenue bonds of the City of Kansas City, Missouri rated at least AA or Aa2 by Standard and Poors or Moodys.

 

i. Any municipal obligation as defined in (6), (7), (8) or (9) that is not rated but either pre-refunded or escrowed to maturity with U.S. Treasury Securities as to both principal and interest.

 

(2) To provide for the safety and liquidity of the City of Kansas City, Missouris funds, the investment portfolio will be subject to the following restrictions:

a. Borrowing for investment purposes (leverage) is prohibited.

 

b. Instruments known as Structured Notes (e.g. inverse floaters, leverage floaters, equity-linked securities) are not permitted. Investment in any instrument which is commonly considered a derivative instrument (e.g. options, futures, swaps, caps, floors, and collars) is prohibited.

 

c. Contracting to sell securities not yet acquired in order to purchase other securities for purposes of speculating on developments or trends in the market is prohibited.

 

(3) It is the policy of the City of Kansas City, Missouri to actively manage the investment portfolio within the constraints outlined in this investment policy versus an exclusive buy and hold philosophy. The prohibition of speculative investments precludes pursuit of gain or profit through unusual risk. However, trading in response to changes in market value or market direction is warranted under active portfolio management.

 

(h) Basis of Award.

 

(1) Generally, investment transactions will be conducted through a competitive offer/bid process consisting of at least three offers/bids from those broker/dealers on the Citys approved broker/dealer list. Exceptions to this requirement include (but are not limited to):

 

a. Market conditions or limited inventory situations may result in an immediate purchase from one broker/dealer without utilizing the competitive bid process so the security can be obtained in a timely manner. Securities purchased in this fashion must have, at a minimum, documentation attached reflecting the current interest rate environment and a brief explanation regarding all pertinent information relevant to the transaction.

 

b. Security transactions initiated to either increase income or restructure various segments of the portfolio, i.e. swaps, will be evaluated on their own merit and potential profitability.

 

c. From time to time the U.S. Government and certain Government Sponsored Enterprises initiate buyback or tender programs. It is the intent of this policy to allow the City to participate in such buyback or tender programs to the extent the participation in the program benefits the Citys investment program.

 

(2) Comparison to market price will be performed by the Treasury Division Investment staff through the Wall Street Journal or a comparable nationally recognized financial publication or service (i.e., Bloomberg or DTN) providing daily market pricing.

 

(i) Securities Lending.

 

(1) The City may temporarily exchange securities held in the portfolio for cash or other authorized securities of at least equal value with no maturity more than one year beyond the maturity of any of the traded obligations.

 

(2) Securities lending may be transacted through the Citys custodial bank, through a third party lender, or directly with approved broker/dealers. Direct broker/dealers must have a signed Bond Market Association Securities Lending Agreement on file with the City.

 

(3) All securities being transferred must be delivered versus payment.

 

(4) Securities lending transactions may be entered into for periods of 90 days or less.

 

(5) The Manager of Investments shall develop cash collateral investment guidelines for the reinvestment of any collateral made by the Citys securities lending agent and is responsible for periodic monitoring of these investments for compliance.

 

(j) Special Investment Programs.

 

(1) The City of Kansas City, Missouri may initiate special investment programs, from time to time, to encourage equal community investment.

 

(2) The Linked Deposit Program is designed to encourage financial institution community re-investment through residential and commercial loans in designated census tracts.

 

(3) The City Wide Time Deposit program provides an equal opportunity for small and large financial institution participation in City deposits.

 

(k) Diversification.

 

(1) The City of Kansas City, Missouri will diversify its investments by security type and institution. The Citys investment portfolio shall be diversified by:

 

(2) Continuously investing a portion of the portfolio in readily available funds to ensure that appropriate liquidity is maintained in order to meet ongoing obligations.

 

(3) Limiting investments in securities that have a higher credit risk.

 

(4) Investing in securities of varying maturities.

 

(5) The following guidelines represent maximum limits established for diversification by instrument:

 

a. U.S. Treasuries and securities having principal and/or interest

guaranteed by the U.S. government . . . . . . . . . . . . . . . . . . 100%

 

b. Collateralized time and demand deposits . . . . . . . . . . . . . . 100%

 

c. U.S. Government agencies and government-sponsored

enterprises (including mortgage-backed securities) . . . . . . 80%

 

d. Collateralized repurchase agreements . . . . . . . . . . . . . . . . . 50%

 

e. U.S. Government agency callable securities . . . . . . . . . . . . 30%

 

f. Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30%

 

g. Bankers Acceptances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30%

 

h. Certificates of Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25%

 

i. State of Missouri Obligations (unless pre-refunded or escrowed to maturity with U.S. Treasury securities as to both principal and interest)maximum of 10% for any one or more:

 

1. Any county in Kansas City, Missouri Obligations

 

2. Any School District in Kansas City, Missouri Obligations

 

3. City of Kansas City, Missouri Obligations or Revenue Bonds

 

(l) Maturities. To the extent possible, the City of Kansas City, Missouri will attempt to match its investments with anticipated cash flow requirements. In accordance with Article XI, Section 2-1611 of the City Code of Ordinances and except for certain mortgage-backed securities as defined in Section VII.A.2.f (above), the City of Kansas City, Missouri will not directly invest in securities with a stated final maturity date more than five (5) years from the date of purchase.

 

(m) Authorized Dealers and Financial Institutions.

 

(1) The City Treasurer will maintain a list of financial institutions authorized, in accordance with Banking Institution Selection Criteria to provide investment services.

 

(2) The City Treasurer will maintain a list of security dealers authorized, in accordance with the Security Dealers Selection Criteria to provide investment services. If the Dealer satisfies all of the requirements, they will be added to the list of firms eligible to provide investment services to the City.

 

(3) Periodic reviews of the financial condition and registration of qualified bidders will be conducted by the City Treasurer.

 

(n) Investment Program Management.

 

(1) Collateralization.

 

a. Collateralization, pursuant to Missouri Revised Statutes, 2000, Chapter 110.010 through 110.020, (Exhibit 9), City Code of Ordinances, Chapter 2, Article XI, Sections 2-1614 through 2-1616 (Exhibit 10), or contractual agreement, will be required on demand deposit accounts, money market banking accounts, certificates of deposit and time deposits.

 

b. Collateral which is accepted at the discretion of the CFO/Director of Finance is specified in the Missouri Revised Statutes, Chapter 30, Section 30.270 (Exhibit 11).

 

c. Collateral shall have a market value equal to one hundred two (102) percent of the amount of the City investment less any amount insured by the Federal Deposit Insurance Corporation, or other governmental agency performing similar functions.

 

d. Securities pledged as collateral will always be held by the Federal Reserve Bank with whom the City of Kansas City, Missouri has a current Custodial Agreement (Exhibit 13). A clearly marked evidence of ownership, Safekeeping Receipt (Exhibit 16) must be supplied to the City of Kansas City, Missouri and retained.

 

e. The right of collateral substitution is granted.

 

(2) Safekeeping and Custody.

 

a. All security transactions entered into by the City of Kansas City, Missouri shall be conducted on a delivery-versus-payment (DVP-delivery of securities with an exchange of money for the securities) basis.

 

b. Any security transaction performed on a free delivery (or delivery versus receipt- delivery of securities with an exchange of a signed receipt for the securities) basis must be pre-approved by the City Treasurer or CFO/Director of Finance.

 

c. Securities will be held in the Citys name by a third party trust custodian designated by the CFO/Director of Finance and evidenced by safekeeping receipts, City Code of Ordinances Chapter 2, Article XI, Section 2-1612.

 

(3) Internal Control.

 

a. The CFO/Director of Finance has established and implemented internal controls within the Treasury Division to prevent loss of public funds arising from fraud, employee error, misrepresentation by third parties, or imprudent actions by employees of the Treasury Division. Internal controls most important to protect the Citys assets are:

 

b. The CFO/Director of Finance shall designate in writing those individuals in addition to the CFO/Director of Finance and City Treasurer, within the Treasury Division, who are authorized to invest City monies. Such authorization letters shall be delivered to each authorized financial institution or security dealer.

 

c. Those individuals making an investment of City monies with an authorized financial institution or security dealer shall provide instruction for delivery of the security being purchased. In addition, the safekeeping financial institution shall be provided details for the security purchase and to deliver payment upon delivery of the security.

 

d. Those individuals making the investment of City monies shall provide details of said investment to personnel within the Treasury Division for entry into the investment portfolio records.

 

e. Investment personnel shall be responsible for accounting for all investment transactions in the Citys financial system. The Cash Management Section will verify and reconcile all investment transactions to the Citys general ledger and to the Citys bank accounts.

 

f. With regard to bank-to-bank (draw down) wires and outgoing wire transfers:

 

1. Investment section personnel (without investment authority) may initiate all bank-to-bank wires and all wire transfers. Repetitive (template) wire transfers require no further approval. Non-repetitive wire transfers must be approved by the Cash Management Section prior to final processing by the bank.

 

2. Individuals with investment authority may initiate bank-to-bank transfers. Individuals with investment authority may only initiate wire transfers and all such wires must be further approved by the Cash Management Section prior to final processing by the bank.

 

g. The Citys investment portfolio shall be subject to an annual audit by an independent audit firm of the City. In addition, the investment portfolio records shall be available to the City Auditor for audit at any time.

 

(4) Reporting.

 

a. The Treasury Division is charged with the responsibility of preparing the following monthly investment reports.

 

1. Monthly Investment Portfolio; listing of all investment transactions by type, security description, average maturity date, cost, acquisition date, and yield.

 

2. Investment and Bank Account Recap Report for monthly financial reports submitted to City Council; totals by category, security definition, and operation purpose.

 

3. The market value of the portfolio shall be calculated monthly and a Statement of Market Value shall be issued at least monthly to the Investment Committee of the City. This will ensure that a review of the investment portfolio, in terms of value and price volatility, has been performed.

 

b. The Treasury Division will also maintain all security transaction activity reports.

 

(o) Glossary. (Definitions provided by Municipal Treasurers Association of the United States and Canada, the Investment Guidelines for Missouri Political Subdivisions, the GFOAs Investing Public Funds, and by Bloomberg.)

 

(1) Accretion. The periodic upward adjustment of the principal value of a fixed income security purchased at a discount from its par value or maturity value.

 

(2) Accrued interest. The accumulated interest due on a bond as of the last interest payment made by the issuer.

 

(3) Agency. A debt security issued by a federal or federally sponsored agency.

 

(4) Amortization. The opposite of accretion. The periodic downward adjustment of the principal value of a fixed-income security purchased at a premium from its par value or maturity value.

 

(5) Asked. The indicated price at which a seller is willing to sell a security or commodity.

 

(6) Average Life. The average length of time that an issue of serial bonds and/or term bonds with a mandatory sinking fund feature is expected to be outstanding

 

(7) Bankers Acceptance (BA). A draft or bill of exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer.

 

(8) Basis point. A unit of measurement used in the valuation of fixed-income securities equal to 1/100 of 1 percent of yield.

 

(9) Benchmark. A comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close correlation to the level of risk and the average duration of the portfolios investments.

 

(10) Bid. The indicated price at which a buyer is willing to purchase a security or commodity.

 

(11) Book value. The value at which a security is carried on the inventory lists or other financial records of an investor.

 

(12) Broker. A broker brings buyers and sellers together for a commission paid by the initiator of the transaction or by both sides; he does not position. In the money market, brokers are active in markets in which banks buy and sell money and in inter-dealer markets.

 

(13) Buyback. In the fixed income sense, a program in which an issuer offers to repurchase its debt obligations at market prices.

 

(14) Callable bond. A bond that the issuer has the right to redeem prior to maturity. Some callable bonds may be redeemed on one call date while others have multiple call dates. Some callable bonds may be redeemed at par while others can only be redeemed at a premium.

 

(15) Call risk. The risk to a bondholder that a bond may be redeemed prior to maturity.

 

(16) Certificate of Deposition (CD). A deposit of funds, in a bank or savings and loan association, for a specified term that earns interest at a specified rate or rate formula, evidenced by a certificate. They may be for terms as short as 1 week or as long as or longer than 10 years.

 

(17) Collateral. Securities, evidence of deposit or other property which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies.

 

(18) Commercial paper. Unsecured, short-term promissory notes issued by corporations for specific amounts and with specific maturity dates. Firms with lower ratings or firms without well-known names usually back their commercial paper with guarantees or bank letters of credit. Commercial paper may be sold on a discount basis or may bear interest. Terms can be as short as 1 day and usually do not exceed 270 days.

 

(19) Comprehensive Annual Financial Report (CAFR). The official annual report for the City of Kansas City, Missouri. It includes five combined statements for each individual fund and account group prepared in conformity with Generally Accepted Accounting Principles (GAAP). It also includes supporting schedules necessary to demonstrate compliance with finance-related legal and contractual provision, extensive introductory material, and a detailed Statistical Section.

 

(20) Convexity. A measure of a bonds price sensitivity to changing interest rates. A high convexity indicates greater sensitivity of a bonds price to interest rate changes.

 

(21)           Coupon.

 

a.       the annual rate of interest that a bonds issuer promises to pay the bondholder on the bonds face value.

 

b.      A certificate attached to a bond evidencing interest due on a payment date.

 

(22) Credit risk. The risk to an investor than an issuer will default in the payment of interest and/or principal on a security.

 

(23) Current yield. A yield calculation determined by dividing the annual interest received on a security by the current market price of that security.

 

(24) Dealer. A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account.

 

(25) Dealer bank. A bank that continuously deals in government and agency securities.

 

(26) Debenture. A bond secured only by the general credit of the issuer.

 

(27) Delivery versus Payment. There are two methods of delivery of securities: delivery versus payment and delivery versus receipt (also called free). Delivery versus payment is delivery of securities with an exchange of money for the securities. Delivery versus receipt is delivery of securities with an exchange of a signed receipt for the securities.

 

(28) Derivative security. A financial instrument created from, or whose value depends upon, one or more underlying assets or indexes of asset values.

 

(29) Discount. The difference between the cost price of a security and its value at maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount.

 

(30) Discount rate. The rate of interest at which the Federal Reserve Bank lends overnight money to commercial banks who are members of the Federal Reserve System.

 

(31) Discount securities. Non-interest bearing money market instruments that are issued at a discount and redeemed at maturity for full face value, e.g. U.S. Treasury Bills.

 

(32) Diversification. Dividing investment funds among a variety of securities offering independent returns.

 

(33) Duration. See Modified Duration.

(34) Effective duration. See Modified Duration.

 

(35) Federal credit agencies. Agencies of the Federal government set up to supply credit to various classes of institutions and individuals, e.g., S&Ls, small business firms, students, farmers, farm cooperatives and exporters.

 

(36) Federal Deposit Insurance Corporation (FDIC). A federal agency that insures bank deposits for public funds, currently up to $100,000 per time deposit and $100,000 per demand deposit.

 

(37) Federal funds rate. The rate of interest at which banks lend excess funds to other banks. This rate is currently pegged by the Federal Reserve through open market operations.

 

(38) Federal Home Loan Bank (FHLB). Government sponsored wholesale banks (currently 12 regional banks) which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions and insurance companies. The mission of the FHLBs is to liquefy the housing related assets of its members who must purchase stock in their district Bank.

 

(39) Federal National Mortgage Association (FNMA). FNMA, like GNMA, was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development (HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder-owned corporation. The corporations purchases included a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages. FNMAs securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest.

 

(40) Federal Open Market Committee (FOMC). Consists of seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member while the other Presidents serve on a rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of Government Securities in the open market as a means of influencing the volume of bank credit and money.

 

(41) Federal reserve system. The central bank of the United States created by Congress and consisting of a seven member Board of Governors in Washington, D.C. 12 Regional Banks and about 5,700 commercial banks that are members of the system.

 

(42) Government agency. An agency of the federal government whose debt obligations are unconditionally backed by the full faith and credit of the United States of America. Examples include: GNMA.

 

(43) Governmental National Mortgage Association (GNMA or Ginnie Mae). Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. Security holder is protected by full faith and credit of the U.S. Government. Ginnie Mae securities are backed by FHA, VA or FmHA mortgages. The term pass-throughs is often used to describe Ginnie Mae securities.

 

(44) Government Sponsored Enterprises (GSEs). An agency of the federal government whose debt obligations are not unconditionally backed by the full faith and credit of the United States of America, but a market perception that there is an implicit government guarantee. Examples include: FHLB, FFCB, FNMA, FHLMC, SLMA, FMAC and TVA.

 

(45) Interest rate. See Coupon (a).

 

(46) Interest rate risk. The risk associated with declines or rises in interest rates which causes an investment in a fixed-income security to increase or decrease in value.

(47) Investment policy. A concise and clear statement of the objectives and parameters formulated by an investor or investment manager for a portfolio of investment securities.

 

(48) Investment grade obligations. An investment instrument suitable for purchase by institutional investors under the prudent person rule. Investment-grade is restricted to those obligations rated BBB or higher by a nationally recognized rating agency.

 

(49) Liquidity. A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, securities are said to be liquid if the spread between bid and asked prices is narrow and reasonable size can be done at those quotes.

 

(50) Local Government Investment Pool (LGIP). The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment.

 

(51) Mark to market. The process whereby the book value or collateral value of a security is adjusted to reflect its current market value.

 

(52) Market risk. The risk that the value of a security will rise or decline as a result of changes in market conditions.

 

(53) Market value. The price at which a security is trading and could presumably be purchased or sold.

 

(54) Master Repurchase Agreement. A written contract covering all future transactions between the parties to purchase/repurchase securities. The master agreement governs each specific repo transaction and establishes each partys rights in the transactions. A master agreement will often specify, among other things, the right of the buyer-lender to liquidate the underlying securities in the event of default by the seller-borrower.

 

(55) Maturity. The date upon which the principal or stated value of an investment becomes due and payable.

 

(56) Modified (effective) duration. The percentage price change of a security or a basket of securities for a given change in yield. The higher the modified duration of a security, the higher its risk.

 

(57) Money market. The market in which short-term debt instruments (bills, commercial paper, bankers acceptances, etc.) are issued and traded.

 

(58) Mortgage-backed securities. Securities created whereby the issuer pools numerous home mortgages that it owns and then issues one security, or tranches of securities, secured by the underlying mortgages.

 

(59) National Association of Securities Dealers (NASD). A self-regulatory organization of brokers and dealers in the over-the-counter securities business.

 

(60) Nominal yield. The stated rate of interest that a bond pays its current owner, also known as the coupon rate or interest rate.

 

(61) Offer. See Asked.

 

(62) Open market operations. Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserves most important and most flexible monetary policy tool.

 

(63) Operating funds. Includes all investable funds of the political entity with the exception of bond proceeds, retirement funds and self-insurance funds. Investable funds shall include all fund balances and surplus funds.

 

(64) Par. The face value or principal value of a bond, typically $1,000 per bond.

 

(65) Portfolio. Collection of securities held by an investor.

 

(66) Premium. The amount by which the price paid for a security exceeds its par value.

 

(67) Primary dealer. A group of government securities dealers and banks that can buy and sell government securities while working directly with the Federal Reserve Bank of New York. Primary dealers include Securities and Exchange Commission (SEC) registered securities broker-dealers, banks and a few unregulated firms.

 

(68) Prime rate. A preferred interest rate charged by commercial banks to their most creditworthy customers. Many interest rates are keyed to this rate.

 

(69) Prudent person rule. An investment standard in which a trustee may invest in a security if it is one which would be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital.

 

(70) Qualified public depositories. A financial institution which does not claim exemption from the payment of any sales or compensating use or ad valorem taxes under the laws of this state, which has segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability and which has been approved by the Public Deposit Protection commission to hold public deposits.

 

(71) Rate of return. The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond or the current income return.

 

(72) Regional dealer. A securities broker/dealer that operates primarily in a specific geographic area of the country.

 

(73) Reinvestment risk. The risk that a fixed income investor will be unable to reinvest income proceeds from a security holding at the same rate of return currently being generated by that holding.

 

(74) Repurchase Agreement (RP OR REPO). A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. The security buyer in effect lends the seller money for the period of the agreement, and the terms of the agreement are structured to compensate him for this. Dealers use RPs extensively to finance their positions. Exception: When the Fed is said to be doing RPs, it is lending money, that is, increasing bank reserves.

 

(75) Safekeeping. A service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the banks vault for protection.

 

(76) Sec Rule 15C3-1. See Uniform Net Capital Rule.

(77) Secondary market. A market made for the purchase and sale of outstanding debt issues following the initial distribution.

 

(78) Securities & Exchange Commission (SEC). Agency created by Congress to protect investors in securities transactions by administering securities legislation.

 

(79) Structured notes. Notes issued by Government Sponsored Enterprises (FHLB, FNMA, FHLMC, SLMA, etc.) and Corporations which have imbedded options (e.g., call features, step-up coupons, floating rate coupons, derivative-based returns) into their debt structure. Their market performance is impacted by the fluctuation of interest rates, the volatility of the imbedded options, and shifts in the shape of the yield curve.

 

(80) Swap. The exchange of securities for a realized profit greater than if the security was held to maturity or to restructure the maturity characteristics of the portfolio.

 

(81) Tender. To formally bid on a security or to surrender ones shares in response to such a bid.

 

(82) Total return. The sum of all investment income plus changes in the capital value of the portfolio.

 

(83) Treasury bills. A non-interest bearing discount security issued by the U.S. Treasury to finance the national debt. Most bills are issued to mature in three months, six months or one year.

 

(84) Treasury bonds. Long term U.S. Treasury securities having initial maturities of more than ten years.

 

(85) Treasury notes. Intermediate term coupon bearing U.S. Treasury securities having initial maturities from two to ten years.

 

(86) Uniform Net Capital Rule. A Securities and Exchange Commission regulation that outlines the net capital ratio, which is all monies due to the firm, including margin loans, divided by liquid assets. Member firms must maintain a ratio of at least 15 to 1.

 

(87) Volatility. A degree of fluctuation in the price and valuation of securities.

 

(88) Weighted Average Maturity (WAM). The average maturity, on a dollar weighted basis, of all the securities that comprise a portfolio. As applied to mortgage-backed securities, it is the average maturity of the principal repayments of that particular security.

 

(89) Yield. The rate of annual income return on investment, expressed as a percentage.

 

1. Income yield is obtained by dividing the current dollar income by the current market price for the security.

 

2. Net yield or yield to maturity is the current income yield minus any premium above par or plus any discount from par in purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond.

 

(90) Yield to call. The rate of return the investor receives from a bond assuming the bond is redeemed prior to its stated maturity date.

 

(91) Yield to maturity. The rate of return yielded by a debt security held to maturity when both interest payments and the investors potential capital gain or loss are included in the calculation of return.

 

(92) Zero coupon securities. An investment security that is issued at a discount and makes no periodic interest payments. The rate of return consists of gradual accretion of the principal of the security and is payable at par upon maturity. U.S. Treasury Bills, Federal Agency Discount Notes, and Commercial Paper are all issued in zero coupon form.

 

Section 3. That Chapter 2 of the Code of Ordinances of Kansas City, Missouri, Article XIV, Budgetary and Financial Policies, Division 1, is hereby amended by enacting a new section establishing the Citys policy on the contingent appropriation, to read as follows:

 

Sec. 2-1951. Contingent Appropriation Policy.

(a) The annual budget ordinance shall contain an appropriation of not less than one percent or more than three percent of the estimated general fund revenues as a contingent appropriation.

 

(b) In case of an emergency or unbudgeted expense:

(1) The head of any department may make a written request for a transfer from the contingent appropriation, stating the facts constituting the emergency and needs in detail or describing the unbudgeted expense and the justification for funding. The request shall be presented to the city manager for approval. The city manager may also amend the request.

 

(2) The city manager may also initiate requests for transfers from the contingent appropriation

 

(3) The city manager shall forward his or her own requests or approved requests from any department head to the council for approval.

(4) The council may transfer amounts from the contingent appropriation, not in excess of the amounts recommended by the city manager, to departments for such emergency needs or unbudgeted expenses.

 

Secs. 2-1952 through 2-1969. Reserved

 

Section 2. That Chapter 2 the Code of Ordinances of Kansas City, Missouri, Article XIV, Budgetary and Financial Policies, is hereby amended by enacting a new division, Revenue Policies, and renumbering Section 2-1950, Non-recurring Revenue Policy, as Section 2-1970, to read as follows:

 

Division 2. Revenue Policies.

 

Sec. 2-1970.  Non-recurring Revenue Policy.

 

It is the policy of the city that one-time or limited term resources such as proceeds from asset sales, debt refinancing, one-time grants, legal settlements, revenue spikes, budget savings and similar nonrecurring resources shall not be used for current or new and ongoing operating expenses. Appropriate uses of one-time resources include building and maintaining the unallocated reserves in the general fund or other city funds, the early retirement of debt, capital improvement or capital maintenance expenditures and other nonrecurring expenditures.

 

Secs. 2-1971 through 2-1989. Reserved.

 

Section 3. That Chapter 2 the Code of Ordinances of Kansas City, Missouri, Article XIV, Budgetary and Financial Policies, is hereby amended by enacting a new division, Expenditure Policies, and enacting with that division a section codifying the Citys debt policy (previously adopted by Committee Substitute for Ordinance No. 071981), to read as follows:

 

Division 3. Expenditure Policies.

 

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 in response to the ongoing capital needs of the City and its agencies. All debt will be issued in accordance with all applicable federal, state, City Charter, City Administrative Code, and City General Code of Ordinances requirements governing the issuance of public debt.

 

(2) The Citys debt policy is the guideline for City staff to use in issuing debt. The policy shall be reviewed on an annual basis by the CFO/Director of Finance. Any substantive modifications made to the policy must be approved by the City Council.

 

(b) Authority.

 

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

 

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

 

(c) Prudence.

 

(1) Debt shall be issued with judgment and care--under circumstances then prevailing--which persons of prudence, discretion and intelligence 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 shall be applied in the context of managing an overall debt portfolio.

 

(2) Debt managers acting in accordance with the debt policy and written procedures and exercising due diligence shall be relieved of personal liability for an individual securitys credit risk or market price changes, provided 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, not an investment banker or marketmaker, 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 CFO/Director of Finance any material financial interests in financial institutions that conduct business within this jurisdiction, and they shall further disclose any large personal financial positions that could be related to the Citys 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 Citys 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 (TIF). This 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, 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 an annual appropriation of City revenues. Additionally, this policy governs the use of any swap transactions used in conjunction with the Citys debt program.

 

(3) This debt policy contains certain elements on procedures and practices to achieve the objectives of the policy and to ensure that professional standards are defined and met in the policys implementation. In numerous specified cases within this policy, these procedures and policies are adopted by reference from the Government Finance Officers Association (GFOA) published Recommended Practices for Debt Management. These best practices are amended over time, and this policy incorporates these ongoing changes. This policy concludes with a glossary of terms frequently used in the municipal debt industry and in this 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 the public on the status of the Citys debt program;

 

b. Evaluating each debt issue in accordance with this policy, as to its individual and cumulative impact;

 

c. Adhering to federal laws, state statutes and regulatory enactments, City Charter and 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 bonds issued on that basis are 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 ensure 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 to ensure both legal and financial margins exist;

 

b. Negotiating all bond-related contracts, which provide for flexibility in meeting future capital requirements;

 

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

 

(g) Guidelines for Use.

 

(1) Debt is a financing tool which should be judiciously used when the City has legal, financial and market debt capacities and will 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 timely or 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

 

d. 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 Citys ability to pay debt service.

 

e. Debt will not be used to fund ongoing operating expenses of the City.

 

f. Any City debt issued in support of a development project shall first be reviewed and approved under the auspices of the Citys economic development policies and 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 their use.

 

(1) General Obligation (Maximum Term 20 years*).

 

a. General obligation (G.O.) bonds provide the investor with its most secure City transaction, because of the Citys 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 Citys statutory legal debt margin but must also conform to limitations on the general credit of the City. The City may obtain voter authority to issue G.O. bonds (excluding NIDs) by a four-sevenths vote at the general municipal, primary or general election day and two-thirds at all other elections.

 

1. General Obligation Bonds - Full faith and credit. To be issued for projects, which benefit the City as a whole. Principal and interest to be paid from Citys debt levy assessed on all real and personal property.

 

2. Double-barrel (including public benefit districts). To be issued for purposes consistent with the voted authority. Principal and interest to be 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 Citys debt levy assessed on all real and personal property.

 

3. NID. To be issued for purposes consistent with the NID statute (Sections 67.453-64.475, RSMo). Principal and interest to be paid from special assessments levied on properties within the NID. Revenue shortfalls to be made up from the Citys general municipal resources. The NID may obtain voter authority to issue NID bonds by a four-sevenths vote at the general municipal, primary or general election day and two-thirds at all other elections of qualified voters residing in the district; or by a petition of two-thirds of the owners of at least two-thirds by area of the real property within the district.

 

*Maximum term allowed per state constitution.

 

(2) Annual Appropriation (Maximum Term 40 years*).

 

a. Bonds backed by the Citys 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 Citys 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 in all probability lead to a downgrading of the Citys general obligation credit rating. Therefore, the City will enter into any annual appropriation transaction with the full expectation of making whatever annual appropriations are necessary to fund debt service on a timely basis; however, the City Council has the legal authority to choose not to appropriate on an annual basis.

 

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. While each potential use may have its own unique conditions, the City will target its 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 Citys risk.

 

c. 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 to be paid from project revenues or specific taxes. Capital leases are not considered an indebtedness of the City according to state statute because the lease payments are subject to annual appropriation; however, from a variety of perspectives (e.g. credit, accounting, etc.) all or most of this type of debt may be considered an obligation of the City.

 

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 Citys overall operating and capital plans. Principal and interest to be 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 to be paid from the operating budget or other dedicated resources of the department purchasing equipment or constructing 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.

 

*Maximum term allowed for conduit and directly issued annual appropriation-backed debt.

 

(3) Revenue (Maximum Term 35 years*).

 

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. Revenue bonds secured by a broad based tax such as sales are considered by the rating agencies as on a par with General Obligation bonds in determining the Citys debt burden.

 

*Note: Maximum term allowed by state statute for sewer and combined sewer/water revenue bonds. Airport and water revenue bonds have no term limitation.

 

(4) Industrial Revenue (Maximum Term 10 years*). The City may issue industrial revenue bonds (per Chapter 100, RSMo) for purposes consistent with state law, 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. Chapter 100 bonds are not included in the Citys debt burden because they are secured solely by revenues of the private or non-profit party. Principal and interest on Chapter 100 bonds is paid solely from the net revenues of the project. Issuance of these bonds does not constitute a general obligation of the City.

 

*Note: Maximum term allowed by City ordinance.

 

(5) Temporary Loans/Interfund Borrowing (Maximum Term 270 days*).

 

a. In accordance with Section 806 of the City Charter, the CFO/ 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, 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; or

 

b. To borrow monies from non-city sources, using bonding 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.

 

*Note: Maximum term allowed by City Charter, except as provided for in E 1. (3) above.

 

(6) Debt Derivatives (Maximum Term Not to Exceed Term of Underlying Debt). In conjunction with the Citys debt program, and as permitted by state law, the Director of Finance/CFO shall be permitted to enter into interest rate swaps, forward swaps, swap options, basis swaps, caps, floors, collars, cancellation options or any similar hedge, derivative or synthetic instrument on behalf of the City (swap transactions). All swap transactions shall be administered and executed pursuant to the Citys Debt Derivative Policy, codified in Section 2-1990(n), which does not allow the use of such products in the Citys investment of funds.

 

(i) Debt Structuring and Marketing.

 

(1) Fixed or Variable Rate Debt.

 

a. The Citys 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 Citys long-term financial condition. The City will generally issue its debt on a fixed interest rate basis, wherein at the time of the bond sale all interest rates are known and do not change while those bonds are outstanding. Particular conditions may arise where the City would 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 would cause a consideration of variable rate debt are:

 

        Adverse fixed-rate municipal market;

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

        The potential for a rapid repayment of debt; or

        The need or desire to maximize the Citys asset/liability balance

 

b. Variable interest rate debt exposes the City to interest rate risk over the term of the financing. While the credit rating agencies are supportive of an issuer of the magnitude of the City having a certain amount of unhedged variable rate debt, they suggest the aggregate amount be capped at a level not exceeding 20-25% of all comparable debt outstanding. Their guideline is generally applied to variable rate debt which has no other significant risk mitigation factors.

 

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 to create a net financial margin (i.e., cash management investment portfolio) or the use of derivatives, specifically interest rate hedges. From a debt portfolio management perspective, the City will also seek the optimal mix of hedged and unhedged variable rate debt, which best fits the Citys long-term credit and financial profile.

 

(2) Taxable vs. Tax-exempt Debt. 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 reserves the right to participate in taxable financings. For tax-exempt debt issuances, the CFO/Director of Finance is hereby delegated 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. Such intent will be documented in a memo to the file with copies to bond counsel, the City Manager and the Chair of the Finance Committee.

 

(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 within the Citys overall financial objectives.

 

(4) Prepayment Provisions.

 

a. Redemption provisions and call features shall be evaluated in the context of each bond sale to enhance marketability of the bonds; to ensure flexibility related to potential early redemption; to foster future refunding transactions; or in consideration of special conditions of the transaction. The potential of additional costs (i.e., call premium) and higher interest rates as a result of including a call provision shall also be evaluated.

 

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

 

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

 

2. Mandatory redemption. Provisions associated in redeeming bonds under certain predetermined conditions.

 

3. Extraordinary redemption. The ability to redeem bonds to address fortuitous events.

 

(5) Credit Enhancement. When the City is considering the purchase of bond insurance, it will determine its cost-effectiveness in the marketing of particular bond issues. 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 purchasers option approach to the acquisition of bond insurance will be used.

 

(6) Method of Sale. The CFO/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. Three general methods exist for the sale of municipal bonds:

 

a. Competitive sale. Bonds are marketed to a wide audience of investment banking (underwriting) firms. Their bids are submitted at a specified time. The underwriter is selected based on its best bid for its securities. Pursuant to this policy, and within the parameters approved by the City Council, the CFO/Director of Finance is hereby authorized to sign the bid form on behalf of the City fixing the interest rates on bonds sold on a competitive basis.

 

b. Negotiated sale. The City selects the underwriter or group of underwriters of its securities 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 policy, and within the parameters approved by the City Council, the CFO/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.

 

c. 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.

 

(7) Award of Sale. The City and its agencies will award the sale of their competitively sold bonds on a true interest cost (TIC) basis. A TIC basis considers the time value of money in its calculation.

 

(j) Retention of Consultants and Other Related Parties. The City recognizes the nature of the municipal bond industry is such that specialized consultants may need to be retained. The City will strive to retain those consultants who will best advise them on individual issues and the overall City debt program in a manner, which will most advantageously position the City on both a short and long-term basis. In general, a competitive selection process will be used in the retention of any consultants; however, the CFO/Director of Finance may also directly engage consultants on a case-by-case basis. At the discretion of the Committee Chair, a member of the Finance and Audit Committee may be asked to serve on a selection committee for retention of consultants and other related parties.

 

(1) Bond/Swap Counsel. The City Attorney will maintain responsibility for selection and procurement of bond and swap counsel. Bond and swap counsel will be retained who are recognized by the bond market (Red Book) and who have extensive expertise in the public finance areas commensurate with the needs of the City.

 

(2) Financial Advisors.

 

a. The City will select financial advisors who may either be independent financial advisors or firms who engage in municipal bond underwriting or brokerage services. While serving as the Citys financial advisor, a firm may not also engage in the underwriting of the 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.

 

b. Financial advisors shall be selected through a competitive process after a review of proposals by a committee, which may include a member of the Finance and Audit Committee and City staff.

 

c. 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 specific direction of the Citys CFO/ Director of Finance.

 

(3) 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 bonds. The City will determine the appropriate method to evaluate the underwriter submittals and then select or qualify firms on that basis. The City will not be bound by the terms and conditions of any underwriting agreement, oral or written, to which it was not a party.

 

(4) Other Parties. Depending on the specific bond issue, other parties customary in the bond issuance process may need to be engaged (e.g. trustee banks, printers, dissemination agents, bond insurers, etc.). The City will retain those parties which are first acceptable to the municipal market for that particular issue, and then having those characteristics of professional standing and cost-effectiveness.

 

(k) Guidelines for Debt Management.

 

(1) Proactive debt management is a key component to the immediate and long-term success of the Citys financial objectives. A successful debt management program begins with comprehensive information on the current debt program status and definition of the future direction of the Citys capital financing objectives. Within this context, the City structures and markets individual bond issues to complement these objectives.

 

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

a. Disclosure.

 

1. Disclosure is both a regulatory requirement and a highly advisable means to enhance the marketing of the Citys bonds. The Securities and Exchange Commission (SEC) regulates both primary disclosure, the initial marketing of a bond issue, and continuing disclosure, the ongoing information to the market about the status of the issue and issuer. The regulations place responsibility for primary disclosure on underwriters, and on issuers for continuing disclosure.

 

2. Failure by the City to properly manage primary disclosure and to timely provide its continuing disclosure may have adverse impacts on its credit ratings and access to the tax-exempt capital market. It may also subject the City to regulatory actions from both the SEC and IRS.

 

3. Adequate disclosure on both a primary and continuing basis can enhance the marketability of the Citys bonds by providing potential investors with current and professional information regarding the City. Timely and accurate completion of these tasks both influences investors decisions on purchasing the Citys bonds and contributes to the competitive audience for the Citys bonds. The City will fully comply with disclosure regulations.

 

A. Primary. In the preparation of official statements the City will follow professional and market standards in the presentation of its issues and issuers. It will facilitate the distribution of the official statements in a timely manner to allow investors adequate time to make their investment decisions in an informed manner. The City will execute continuing disclosure undertakings in a manner to fully comply with regulatory provisions and ensure a full disclosure of appropriate information to the market.

 

B. Secondary. The City will meet all substantive and time requirements in its annual continuing disclosure filings, which include making the Citys CAFR available to the public 180-270 days after the fiscal year end. The City will keep current with any changes in both the administrative aspects of its filing requirements and the national repositories responsible for ensuring issuer compliance with the continuing disclosure regulations. In the event a material event occurs requiring immediate disclosure, the City will ensure information flows to the appropriate disclosure notification parties.

 

(3) Debt Target. Maintaining an appropriate level of indebtedness is important to preserve flexibility for future infrastructure investments and to position for high credit quality. Each type of debt has its own appropriate level. 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 sectors credit rating objectives. Since these factors can change over time, any debt guideline must be periodically reviewed to reflect evolving City conditions. Certain types of debt may have different applications but are treated as one type by the credit rating agencies. Therefore, the City may develop guidelines which reflect both the use of the debt type and its contribution to the credit rating debt burden.

 

a. General Obligation and Annual Appropriation. General obligation and annual appropriation-backed bonds present both individual and collective financial impacts. Individually, they place actual or potential demands on general municipal revenue sources. Collectively, they are reviewed by the credit rating agencies as to their cumulative impact on these revenue sources. Guidelines for their individual and overall levels assist in the ongoing evaluation of these impacts. As part of the debt management program, City staff will report the following three debt ratios to the City Council, which are routinely reviewed by the credit rating agencies:

 

                    Tax-Supported Debt Outstanding as a Percent of Market Value

 

                    Tax-Supported Debt Outstanding Per Capita

 

                    Tax-Supported Debt Service as a Percent of General Municipal Revenues (GMR)

 

Additionally, the City Council will utilize the following two guidelines to ensure general obligation indebtedness is maintained within constitutional debt limitations and non self-supporting (net) tax-supported debt outstanding is maintained within a targeted range:

 

                    General Obligation Debt Outstanding as a

Percent of Assessed Valuation . . . . . . . . . . . . . 0<20%

 


                    Net Tax-Supported Debt Service as a Percent of Net

GMR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-15%

 

b. Revenue. 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 their specific bond covenant requirements.

 

(4) Credit Rating Strategy. High credit quality is essential to the cost-effective financing of the Citys capital needs. The City maintains a variety of credit ratings based on the diversity of its issuers and activities. In all cases, the City will strive to obtain the highest credit ratings possible within the parameters of each credit. The CFO/Director of Finance will develop appropriate credit rating strategies for each of the Citys discrete credits and will update the City Council regarding all credit rating events.

 

a. Rating Agency Choice.

 

1. Three national agencies are currently prominent in the municipal market; Standard & Poors, Moodys Investors Service and Fitch Investors Service. Since the Citys bonds attract a national underwriter and investor audience, the City will obtain ratings from those agencies that are most attractive to the specific audience.

 

2. The retention of a rating agency relationship will be based on a determination of the potential for more favorable interest costs as compared to the direct and indirect cost of maintaining that relationship.

 

b. Information Program. The City will maintain a multi-faceted information program, which will include:

 

                    Providing new informational materials to the agencies, on a periodic basis.

 

                    Delivering rating presentations in the appropriate form prior to any bond sale.

 

                    Seeking opportunities to have the agencies tour the City at times not necessarily associated with a bond sale to update them on the changes to the community.

 

                    Working with other governmental entities impacting the Citys rating to coordinate both the substance and presentation of the Citys credit ratings case.

 

c. Statistical Analyses. The City will maintain an ongoing statistical base of primary credit quality indicators to measure its standing over time.

 

(5) Bond Financial Advisory Committee. In accord with City ordinance, the City may engage a Bond Financial Advisory Committee, appointed by the Mayor, to advise the Mayor and Council on matters relating to the following: timing of bond issuance, debt capacity, prevailing interest rates, municipal budget considerations and compliance with bond authorization ballot language.

 

(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.

 

b. Defeasance can occur when funds are accumulated in a dedicated debt service fund or other available reserve to place in an irrevocable escrow account an amount sufficient such that the initial deposit plus accumulated investment earnings pay all scheduled debt service obligations on the refunded bonds until an optional prepayment date, at which time all remaining refunded bonds are retired.

 

c. In the case of dedicated debt service funds, the City will monitor such fund balances and will periodically review the advisability of defeasing related bonds. In the case of other available reserves, the City will periodically analyze the financial trade-offs of defeasing or other advantageous uses of these funds.

 

d. Prepayment provisions are structured into the original bond issue to provide the City with opportunities to manage the issue. These opportunities take the form of using cash to reduce all or a portion of outstanding principal and future debt service obligations. Prepayment provisions play a major part in the economics of refunding debt.

 

e. The City will monitor the prepayment provisions on its outstanding debt to realize both of these potential opportunities. By monitoring its debt service funds the City can gauge its ability to prepay debt. Debt can be refunded to achieve one or more of the following objectives:

 

                    Reduce future interest costs;

 

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

 

                    Restructure the legal requirements, termed covenants of the original issue to reflect more closely the changing conditions of the City or the type of bond.

 

f. 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.

 

g. Because these two broad refunding categories encompass a number of bond structuring techniques, the City will evaluate each technique on a case-by-case basis given the objectives of the specific issue. Management guidelines for refundings vary by both type and purpose.

 

h. If the objectives of the refunding are to either redefine bond covenants or restructure debt service, then the City shall evaluate the merits of those situations with a diminished concern over reductions in future interest payments.

 

i. If the objective is to reduce future interest costs, then the City will consider whether the issue is a current or advance refunding.

 

j. For a current refunding the City will consider the absolute interest costs savings on both net present and future value bases. For an advance refunding the City will look to more rigorous quantifiable net savings measures.

 

k. Although the City recognizes the latitude it requires given the range of its debt types, the City will generally look to a net present value savings in a range from 3% to 5% of the present value of the refunding bonds.

 

l. A refunding that relies on a swap transaction to achieve present value savings is generally called a synthetic refunding. Given their added complexity, the City will enter into synthetic refundings only after significant internal review in accord with the Citys Swap Policy. As such, the City will apply both its general refunding and swap guidelines when reviewing synthetic refunding proposals. All approved synthetic refundings should achieve results superior to those available in the conventional market.

 

(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. The investment of bond proceeds should be considered at the outset of every debt issuance and integrated throughout the process. As one part of the Citys investment management program, this policy incorporates by reference the GFOAs Recommended Practice, Investment of Bond Proceeds and the Citys Investment Policy.

 

a. Maintenance of Records. The City will maintain appropriate records in accordance with federal, state and City requirements, and in accordance with its bond documents to fully meet their provisions and provide for ease of any reporting requirements.

 

b. Arbitrage/Rebate Liability. The City will structure and time its bond issues such that the investment of bond proceeds will minimize any arbitrage/rebate liability.

 

c. Escrow Investments. The City will take such steps as necessary to ensure that investments placed in escrow fully comply with regulatory provisions. Where appropriate the City will use State and Local Government Securities (SLGS), and in those conditions where federal open market securities are used, the City will seek at minimum three competitive bids for the placement of these securities.

 

(8) Federal Arbitrage and Rebate Compliance.

 

a. The City will fully comply with federal arbitrage and rebate regulations. Concurrent with this policy, 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 Citys tax-exempt issues, including lease purchase agreements, are subject to arbitrage compliance regulations.

 

b. The Finance Department and the requesting departments shall be responsible for the following:

 

1. Using bond proceeds only for the purpose and authority for which the bonds were issued. Tax-exempt bonds will not be issued unless it can be demonstrated that 85% of the proceeds will be expended within the three-year temporary period.

 

2. Performing arbitrage rebate calculations on construction funds, as determined by the IRS.

 

3. Performing arbitrage rebate computations no later than each five-year anniversary date of the issuance and at the final maturity for all bonds.

 

4. Examining whether the City met the arbitrage rebate exception calculation rules.

 

5. Maintaining detailed investment records, including purchase prices, sale prices and comparable market prices for all securities.

 

6. Monitoring the expenditure of bond proceeds and exercising best efforts to spend bond proceeds in such a manner that the City shall meet one of the spend-down exemptions from arbitrage rebate.

 

7. Monitoring the investment of bond proceeds with awareness of rules pertaining to yield restrictions.

 

c. To the extent any arbitrage rebate liability exists, the City will report such liability in its comprehensive annual financial report (CAFR).

 

(9) Monitoring of Covenant Compliance. The Citys 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. This system will specifically report information on coverage, rate and additional bond covenant compliance. The system will track trends in coverage levels over time and capacity availability under additional bonds covenants.

 

(10) Debt Service Cash Flow Monitoring. 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. The City shall maintain a system of debt service revenue forecasting for each of its major debt categories.

 

(11) 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.

 

(l) Reporting. The Finance Department is charged with the responsibility of preparing monthly financial reports. Within the monthly financial report a summary of the Citys debt portfolio shall be included listing of all Citys outstanding debt by type including the outstanding principal amount for each. Additionally, pursuant to Section XI, A. of this debt policy, the monthly financial report shall also 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 Citys comprehensive annual financial report.

 

(m) 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) Basis Point. One basis point is 1/100 of 1 percent (0.01 percent). One hundred basis points equal 1 percent.

 

(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) Bond Year. An element in calculating average life of an issue and in calculating net interest cost and net interest rate on an issue. A bond year is the number of 12-month intervals between the date of the bond and its maturity date, measured in $1,000 increments. For example, the "bond years" allocable to a $5,000 bond dated April 1, Year 1, and maturing June 1, Year 2, is 5.830 [1.166 (14 months divided by 12 months) x 5 (number of $1,000 increments in $5,000 bond)]. Usual computations include "bond years" per maturity or per an interest rate, and total "bond years" for the issue.

 

(5) 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.

 

(6) 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.

 

(7) 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.

 

(8) Closing Date. The date on which a new issuance of bonds is delivered to the purchaser upon payment of the purchase price and the satisfaction of all conditions specified in the bond purchase agreement.

 

(9) 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.

 

(10) Dated Date (or Issue Date). The date of a bond issue from which the bondholder is entitled to receive interest, even though the bonds may actually be delivered at some other date.

 

(11) 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).

 

(12) Debt Service. Principal and interest.

 

(13) Depository. A clearing agency registered with the Securities and Exchange Commission which provides immobilization, safekeeping and book-entry settlement services to its participants. The four registered depositories are The Depository Trust Company (New York), the Midwest Securities Trust Company (Chicago), the Pacific Securities Depository Trust Company (Chicago) and the Philadelphia Depository Trust Company.

 

(14) Discount.

 

a. 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.

 

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

 

(16) 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).

 

(17) Issue Date (or Dated Date). The date of a bond issue from which the bondholder is entitled to receive interest, even though the bonds may actually be delivered at some other date.

 

(18) 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."

 

(19) 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.

 

(20) 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.

 

(21) 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).

 

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

 

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

 

(24) Net Direct Debt. Total direct debt of a municipality less all self-supporting debt, any sinking funds and short-term debt such as tax anticipation notes and revenue anticipation notes.

 

(25) Net General Municipal Revenues. Aggregate general municipal revenues less those dedicated, earmarked, redirected or otherwise legally unavailable to pay net tax-supported debt service.

 

(26) 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").

 

(27) 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.).

 

(28) Notice of Sale. An official document disseminated by an issuer of municipal securities that gives pertinent information regarding an upcoming bond issue and invites bids from prospective underwriters.

 

(29) 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.

(30) 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.

 

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

 

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

 

(33) 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."

 

(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) 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").

 

(37) 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.

 

(38) Underwriting Spread. The difference between the offering price to the public by the underwriter and the purchase price the underwriter pays to the issuer. The underwriter's profit, expenses and selling costs are usually paid from this amount.

 

Glossary Source: Public Securities Association,

Fundamentals of Municipal Bonds, Third Edition.

 

(n) Debt Derivative Policy

 

(1)               Policy.

 

a.                   It is the policy of the City of Kansas City, Missouri (the City) to undertake debt derivatives in the form of swap transactions to meet the debt management goals of the City and its agencies. All swap transactions will be executed in a manner conforming to all applicable federal, state, City Charter, City Administrative Code, and City General Code of Ordinances requirements.

 

b. The Citys debt derivative policy is the standard guideline for City staff to use in entering into swap transactions. The policy shall be reviewed on an annual basis by the CFO/Director of Finance and any modifications made thereto must be approved by the City Council.

 

(2)               Authority.

 

a.                   As permitted by state law, the CFO/Director of Finance may enter into interest rate swaps, forward swaps, swap options, basis swaps, caps, floors, collars, cancellation options or any similar hedge, derivative or synthetic instrument on behalf of the City of Kansas City, Missouri (the City). For the purposes of this policy, all such transactions are referred to hereinafter as swap transactions. All swap transactions shall be structured in accordance with this policy and authorized by the City Council. This policy does not govern the use of such products in the Citys investment of funds.

 

b. Management responsibility for the Citys swap program is hereby delegated to the CFO/Director of Finance, who through the City Treasurer shall establish written procedures for the operation of the swap program consistent with this policy. The CFO/Director of Finance will enter into swap transactions on behalf of the City.

 

(3)               Prudence.

 

a. Swap transactions shall be undertaken with judgment and care--under circumstances then prevailing--which persons of prudence, discretion and intelligence exercise in the management of their own affairs. The standard of prudence to be used by Finance staff shall be the prudent person standard and shall be applied in the context of managing an overall swap portfolio. The prudent person is expected to be a reasonably well informed person, not an investment banker or counterparty, who is obligated to act responsibly.

 

b. Finance staff acting in accordance with the swap policy and written procedures and exercising due diligence shall be relieved of personal liability for an individual swap transactions risks or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments.

 

(4)               Ethics and Conflict of Interest. Officers and employees involved in the swap transaction process shall refrain from personal business activity that could conflict with proper execution of the swap program, or which could impair their ability to make impartial swap transaction decisions. Employees and swap transaction officials shall disclose to the CFO/Director of Finance any material financial interests in financial institutions that conduct business within this jurisdiction, and they shall further disclose any large personal financial positions that could be related to the Citys swap portfolio.

 

(5)               Scope.

 

a. This swap policy applies to all swap transactions of the City and its agencies. Among the Citys 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 (TIF). The use of the capitalized term City in this policy shall include the City and its agencies when swap transactions are used in conjunction with debt secured by the general credit of the City.

 

b. Each 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 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 satisfy the requirements of Section X of this policy.

 

c. Each swap resolution of the City Council shall authorize the CFO/Director of Finance and/or his or her designee to make modifications to or finalize the terms of the swap transactions contemplated, within parameters established by the swap resolution. In the event of a conflict between a swap resolution or the documentation effectuating a swap transaction and this policy, the terms and conditions of the swap resolution or such documentation shall control.

 

(6)               Objectives. Swap transactions can be an integral part of the Citys asset/liability and debt management strategies. By utilizing interest rate swaps, the City can meet 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 obtainable using traditional financing methods.

 

The City shall not enter into interest rate swaps for speculative purposes. For the purposes of this Policy, speculation is considered the creation of positions that are inconsistent with the Citys risk management objectives and/or are positions that create or distort the Citys exposure to risks beyond the range normally encountered or that are created for the purpose of generating income for the City.

 

(7)               Guidelines for Use. The City shall include the following guidelines in the evaluation and recommendation of swap transactions:

 

a.                   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 Citys Trust Agreement as amended and supplemented, City resolutions and other contracts

 

b.                  Goals. In conjunction with City Council consideration of the swap resolution, the CFO/Director of Finance and/or his or her designee must clearly explain the goals to be achieved through the proposed swap transaction.

 

c.                   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.

 

d.                  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.

 

e.                   Impact on Variable Rate Debt Capacity. The impact of the swap transaction on the Citys variable rate debt capacity must be quantified prior to execution so as not to hinder the Citys ability to issue variable rate debt or commercial paper.

 

f.                    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.

 

g.                   Debt Constraints. The swap transaction shall not contain terms that restrict the ability of the City to comply with additional bonds tests or anti-dilution tests and shall not create cross defaults to City debt below prescribed threshold amounts.

 

 

h.                   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 Citys comprehensive annual financial report (CAFR). The Finance Department will prepare all necessary CAFR reporting.

 

i.                     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.

 

j.                    Basis of Award. The CFO/Director of Finance is hereby authorized to enter into swap transactions on behalf of the City. The Citys primary method for swap procurement will be either fully negotiated or quasi-competitive due to the limited number of qualified Counterparties. The CFO/Director of Finance shall determine and recommend the procurement method for each swap transaction, as follows:

 

1.                  Competitive Bid. Competitive bid transactions will be quasi-competitive (i.e., include no fewer than three firms) among firms qualified under the terms of this policy. Under a quasi-competitive bid, the City may allow a firm or firms, if not submitting the best bid, to amend its bid or their bids to match the best bid, and by doing so, be awarded up to a specific percentage of the transaction. The quasi-competitive bid process allows the City to achieve diversification of its Counterparty exposure. Prior to conducting a quasi-competitive bid, the City will establish clear parameters and mechanics in the bid solicitation.

 

2.                  Negotiated Transaction. In the case of a negotiated transaction, the City Council shall (i) set parameters; (ii) within the parameters established by the City Council delegate to the CFO/Finance Director, in consultation with the Citys financial or swap advisor, authority to negotiate the price; and (iii) arrange with the financial advisor for delivery of a "fair value opinion." The Counterparty shall disclose to the City payments to third parties regarding the execution of any swap or derivative contract.

 

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

 

a.                   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.

 

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

 

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

 

d.                  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.

 

e.                   Rate Locks - These are often based on interest rate swaps and may be used to hedge an upcoming fixed rate bond issue.

 

(9)               Form of Swap Transactions and Other Documentation.

 

a. Each interest rate swap transaction shall contain terms and conditions as set forth in the International Swap and Derivatives Association, Inc. (ISDA) Master Agreement and such other terms and conditions included in any schedules, confirmations and credit support annexes as approved in accordance with the Citys swap resolution pertaining to that swap transaction. All of the Citys swap documentation shall be prepared and reviewed by qualified swap counsel, as procured by the City Attorney.

 

b. For all swap transactions, the Counterparty and the Citys financial advisor shall each provide the City, a disclosure memorandum (which may or may not become part of the official transcript) that shall include an analysis of the risks and benefits, with amounts quantified. This analysis should include, among other things, a matrix of maximum termination values under a range of interest rate scenarios within the parameters and assumptions given by the Counterparty over the life of the swap transaction. Additionally, the Counterparty shall affirm receipt and understanding of the Citys swap policy and that the contemplated transactions fit within the swap policy, as described. For all negotiated swap transactions, the financial advisors fair value opinion shall become a part of the official transcript.

 

c. Each swap resolution should provide specific approval guidelines for the swap transactions to which it pertains. These guidelines may provide for modifications to the approved swap transactions, provided such modifications do not extend the average life of the term of the swap, increase the overall risk to the City resulting from the swap, or increase the notional amount of the swap beyond pre-approved levels.

 

(10)           Counterparty Approval Guidelines.

 

a.                   Eligibility.

 

1. The City shall enter into interest rate swap transactions only with qualified Counterparties. The City shall avoid entering into contracts with derivative product companies (DPCs") that are classified as terminating or Sub-T DPCs by the credit rating agencies. To qualify as a Counterparty under this policy, at the time of entry into a swap transaction, the selected swap provider(s) (i) shall be rated at least AA-/Aa3/AA- by at least two of the three nationally recognized credit rating agencies (Standard & Poors, Moodys, and Fitch Ratings, respectively) and shall have a minimum capitalization of $50 million, or (ii) shall be rated at least [A-/A3/A-] by two of the three nationally recognized credit rating agencies and provide a credit support annex (CSA) to the schedule to the ISDA master agreement that shall require such party to deliver collateral for the benefit of the City (a) that is of a kind and in such amounts as are specified therein and (b) that, in the judgment of the CFO/Director of Finance and his/her designee in consultation with the Citys financial advisor, is reasonable and customary for similar transactions, taking into account all aspects of such transaction including without limitation the economic terms of such transaction and the creditworthiness of the Counterparty or, if applicable, its guarantor; or (iii) shall obtain credit enhancement from a provider with respect to its obligations under the transaction that satisfies the requirements of clause (i) of this paragraph. The City shall not enter into an interest rate swap transaction with a firm that does not qualify as a Counterparty consistent with the foregoing guidelines.

 

2. Subsequent to entering into the agreement, if the ratings of the counterparty or guarantor should fall below the minimum credit thresholds established above, the City should have the ability to (a) require the posting of additional collateral or (b) terminate the agreement at the market.

 

3. The Counterparty must make available audited financial statements and rating reports of the Counterparty (or any guarantor or credit enhancer, as the case may be), and, in accordance with industry accepted accounting practices, must identify the amount and type of derivative exposure, and the net aggregate exposure to all parties (the City and others), along with relevant credit reports at the time of entering into a swap transaction and annually thereafter unless the Counterparty, guarantor or credit enhancer is under credit or regulatory review and in that case immediately upon notice by the appropriate agencies to the entity.

 

b.                  Collateral Requirements.

 

1.                  Collateral posting requirements between the City and each swap Counterparty should not be unilateral in favor of the Counterparty. If the ratings of the Counterparty or its guarantor does not meet or falls below the ratings required herein (see Section V, A. - Eligibility) the Counterparty would be required to post collateral, subject to minimum threshold amounts specified by the City.

 

2.                  Eligible collateral shall be limited to permissible investments of the City, as defined in its Investment Policy. To the extent possible, the City will endeavor to not obligate itself to post collateral. As part of the swap transaction, the City or the Counterparty may require collateral be posted to secure any or all swap payment obligations. Collateral requirements shall be subject to the following guidelines:

 

(i)                  Collateral requirements imposed on the City should not be accepted to the extent they would impair the Citys existing operational flow of funds. The City should seek other remedies to satisfy counterparty requirements.

 

(ii)                Each Counterparty shall be required to provide a form of a Credit Support Annex should the credit rating of the Counterparty fall below the A-/A3/A- category by at least two of the nationally recognized rating agencies.

 

(iii)               A list of acceptable securities that may be posted as collateral and the valuation of such collateral shall be determined and mutually agreed upon during negotiation of the swap transaction with each Counterparty.

 

(iv)              The market value of the collateral shall be determined on either a daily, weekly or monthly basis, as provided in the documentation for the swap transaction.

 

(v)                Failure to meet collateral requirements shall be a default pursuant to the terms of the swap transaction.

 

(vi)              The City and each Counterparty may provide in the supporting documents to the swap transaction for reasonable threshold limits for the initial deposit and for increments of collateral posting thereafter. The swap transaction may provide for the right of assignment by one of the parties in the event of certain credit rating events affecting the other party. The City (or the Counterparty) shall first request that the Counterparty (or the City) post collateral, or provide a credit support facility. If the Counterparty (or the City) does not provide the required credit support, then the City (or the Counterparty) shall have the right to assign the agreement to a third party acceptable to both parties and based on terms mutually acceptable to both parties. The credit rating thresholds to trigger an assignment shall be included in the supporting documents.

 

(11)           Management of Swap Transaction Risks. Certain risks will be created as the City enters into swap transactions with Counterparties. Some swap transaction risks, in general, are described in Appendix A Summary of Swap Transaction Risks. In order to manage the associated risks, guidelines and parameters for certain risk categories are as follows:

 

a.                   Counterparty Risk. The risk of Counterparty default can be reduced by limiting swap transactions between the City and any single Counterparty. The City shall endeavor to minimize counterparty risk by establishing strong minimum counterparty credit standards (see Section X, A. - Eligibility). In addition, the City may mitigate Counterparty risk by requiring the Counterparty to post collateral on a marked-to-market basis, in accordance with the guidelines described in Section X, B. - Collateral Requirements.

 

                                                                     i.                        Exposure Limits. The City should endeavor to diversify its exposure to counterparties. To that end, before entering into a swap transaction, it should determine its exposure to the relevant Counterparty or Counterparties and determine how the proposed transaction would affect the exposure. The exposure should not be measured solely in terms of notional amount, but should also consider how changes in interest rates would affect the Citys exposure based on all outstanding swap transactions by the City. In weighing its exposure to different Counterparties, the City may give more weight to a certain contract based on its periodic marked-to-market value under current interest rate levels.

 

                                                                   ii.                        Transfer. If an agreement eliminates the Citys ability to transfer the swap to an acceptable alternative Counterparty (i.e., eliminates the Citys right to assign the agreement) then the City should have the right, but not the obligation, to terminate the swap without cost to the City.

 

b.                  Termination Risk.

 

                                                                     i.                        Optional Termination. The City shall have the right to optionally terminate a swap transaction at any time over the term of the swap transaction (elective termination right) at the then-prevailing market value of the swap. Termination value shall be readily determinable by one or more independent swap counterparties, who may assume the swap obligations of the City in the event of an assignment. A Counterparty shall not have the elective right to terminate a swap transaction unless a termination option has been priced into the terms of the swap transaction. The Finance Department may, but is not required to, explore the economic viability of a unilateral termination provision without being exposed to a termination payment.

 

                                                                   ii.                        Credit Related Termination. Upon the occurrence of a Counterparty default, the City may be required to make a termination payment to the Counterparty. It is the intent of the City not to make a termination payment to a Counterparty failing to meet its contractual obligations unless the City is contractually obligated to do so. When a swap dealer is the Affected Party (the defaulting party), as defined in the ISDA Master Agreement, the swap transaction may set forth a suitable time period during which the City may evaluate whether it is financially advantageous for the City to obtain a replacement Counterparty to avoid making a termination payment. The market value of each swap transaction shall be calculated by the Counterparty and provided to the City at least quarterly. The CFO/Director of Finance will monitor and report the market value to the City Council periodically and implement an appropriate exit strategy in a timely manner, if required.

 

c.                   Amortization and Rollover Risk (Term). Each swap transaction shall reflect as closely as possible the amortization of the underlying debt.

 

d.                  Liquidity Risk. The City should consider if the swap market is sufficiently liquid (i.e., if enough potential Counterparties participate actively in the market to assure fair pricing) for the type of swap transaction being considered and the potential ramifications of an illiquid market for such types of swap transactions. There may not be another appropriate party available to act as an offsetting Counterparty. The City may enter into liquidity or credit agreements with liquidity providers and/or credit enhancers to protect against this risk.

 

e.                   Basis (Index) Risk (including Tax Reform Risk).

 

(i)                  Any index chosen as part of an interest rate swap transaction shall be a recognized market index, including but not limited to The Bond Market Association Municipal Swap Index (BMA) or London Interbank Offering Rate (LIBOR).

 

(ii)                The City shall not enter into leveraged swap transactions without thoroughly analyzing the risks associated with the enhancement. The tax reform risk and impact to the City of each swap transaction shall be detailed through the Counterparty disclosure requirements outlined in Section IX Form of Swap Transactions and Other Documentation.

 

(f)                 Bankruptcy Risk. The Citys swap counsel shall disclose to the City the bankruptcy risks and issues associated with the type of Counterparty and swap transaction chosen. Additionally, the Citys swap counsel shall disclose to the City the bankruptcy issues associated with the method proposed for the posting of collateral.

 

(12)           Reporting Requirements. On at least an annual basis through the Citys CAFR as required by GASB the status of all swap or debt derivative transactions shall be reported. Any such report shall include, but not be limited to, the following information:

 

a.                   All changes to swap transactions or new swap transactions entered into by the City since the last report to the City Council.

 

b.                  A status report regarding the termination value of each of the Citys interest rate swap transactions.

 

c.                   A summary for each Counterparty of the total notional amount of each swap transaction, the remaining average life of each swap transaction, the term of each swap transaction, the authority to enter into each swap transaction, and the remaining term of each swap transaction.

 

d.                  A summary of the credit ratings of each Counterparty, and those of any credit enhancer insuring or guaranteeing swap payments.

 

e.                   A list of any collateral posted by a Counterparty, if any, and by the City, if any, detailed by swap transaction and in total by Counterparty.

 

(13) Glossary.

 

a. Basis Risk. The risk that a selected index in a swap (e.g., BMA Index) is not perfectly correlated with the underlying asset or liability (e.g., the actual floating rate on the bonds) i.e. Equity: MSFT does not track perfectly with the S&P 500

 

b. Bond Market Association (BMA) Municipal Swap Index. BMA Index is a 7-day high-grade swap index comprised of tax-exempt variable rate demand notes produced by Municipal Market Datas (MMD) extensive database. It serves as a benchmark for tax-exempt swaps, representing the relative benefit of tax-exemption when compared to taxable securities. Criteria for the Index selected from over 10,000 active issues require weekly reset on Wednesday. To be considered for the Index, the issue must not be subject to Alternative Minimum Tax, must have an outstanding balance of $10 million or more, have the highest short term rating by Moodys or Standard & Poors and pay interest on a monthly basis, calculated on an actual/actual basis.

 

c. Counterparty Risk. The risk that the two principals involved in a swap transaction will not perform under the terms of the swap, taking into consideration its creditworthiness. Risk is reduced by entering into Swap Agreements with Aa rated providers only.

 

d. 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).

 

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

 

f. LIBOR (London Interbank Offered Rate). LIBOR is the rate of interest at which banks borrow funds from other banks on short term money in the London Interbank market. Determined by the British Bankers Association, LIBOR serves as the floating rate benchmark in many swap agreements. The rate is normally calculated on an Actual/360-day count basis and is not referenced in tax-exempt debt offerings. Although there are many available global indexes, LIBOR is the most common index for taxable securities.

 

g. 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

 

h. Margin. The spread (+/-) to the floating rate index which determines the floating leg of the swap.

 

i. 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.

 

j. Off-Market Swap. A swap where the fixed rate is above or below the par market rate for a given structure. A payment from either the fixed rate or floating rate payer is necessary to affect a transaction. The par swap rate is determined by the fixed rate for a given structure, in which the value of the swap is zero. No payment by either party is necessary to enter into the transaction.

 

k. 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.

 

l. 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.

 

m. 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.

 

n. 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.

 

o. Trade Date. The date which the counterparties agree to enter into a swap transaction, which may or may not be the effective date from which the coupon accrual begins.

 

  Section 4. That Chapter 2 of the Code of Ordinances of Kansas City, Missouri, Article XIV, Budgetary and Financial Policies, Division 3,is hereby amended by enacting a new section codifying the Citys Costs of Public Financing Policy (previously enacted in Second Committee Substitute for Ordinance No. 020238), to read as follows:

 

Sec. 2-1991. Costs of Public Financing Policy.

 

The City from time-to-time may issue municipal bonds on behalf of development-related projects or further secure debt issued by other conduit issuers. As part of these issuances the City or other issuers may pay certain costs of issuance from bond proceeds. Per this ordinance, the cost reimbursement target ceiling for payment of such costs shall be as follows:

 

(1) For bond issuances having a principal amount of less than ten million dollars, the cost reimbursement target ceiling shall be three percent (3%) of the aggregate par amount of the bonds issued;

 

(2) For bond issuances having a principal amount of between ten and twenty million dollars, the cost reimbursement target ceiling shall be two and one-half percent (2.5%) of the aggregate par amount of the bonds issued; and

 

(3) For bond issuances having a principal amount of greater than twenty million dollars, the cost reimbursement target ceiling shall be two percent (2%) of the aggregate par amount of the bonds issued.

 

  Section 5. Pursuant to Section 1, the City or other conduit issuers utilizing the Citys annual appropriation guarantee, may pay reasonable and customary structuring and financing costs from bond proceeds. Such costs may include but are not limited to the following services:

 

(1) Advertising

 

(2) Bond Counsel

 

(3) City Administrative Expenses

 

(4) Credit Rating Agencies

 

(5) CUSIP

 

(6) Disclosure Counsel

 

(7) Electronic Bid Platform

 

(8) Financial Advisor

 

(9) Financial Printing

 

(10) Investment Banker

 

(11) Special Counsel

 

(12) Transcript Binding

 

(13) Trustee/Paying Agent

 

Costs related to obtaining municipal bond insurance shall be treated as prepaid interest costs relating to bond debt service and therefore will not count toward the target ceilings described in Section 1.

 

Section 6. The City may also pay a conduit issuance fee of no more than one-half of one percent of the par amount of the bonds issued (Statutory Agency Fee). Such Statutory Agency Fee shall be subject to the target ceilings describe in Section 1. Such Statutory Agency Fee may be paid to the City-related issuers or State of Missouri statutory agencies permitted by State law, including but not limited to the following listed agencies:

 

(1) Port Authority (Port)

 

(2) Land Clearance for Redevelopment Authority (LCRA)

 

(3) Tax Increment Financing Commission (TIFC)

 

(4) Planned Industrial Expansion Authority (PIEA)

 

(5) Industrial Development Authority (IDA)

 

(6) Missouri Development Financing Board (MDFB)

 

For all aforementioned agencies except MDFB, the Statutory Agency Fee shall be deemed payment in full of all costs of issuance owed by the City to the applicable agency related to the project and the resulting bond issuance (e.g., issuing authority counsel, out-of-pocket expenses, etc.).  

 

Section 7. Successful completion of development projects advantageous to the City may require the use of professional services by the private developer separate and apart from, or complementary to, the Citys own costs of issuance of bonds, and agency fees, described in Sections 2 and 3, above. Such private development costs may require the Developer to incur costs for professional services related to the financing of the project (Developer Professional Services). Therefore, at the time such bond issue is presented to the Finance Committee of the City Council for initial consideration, designated City staff shall recommend a budget for City costs of issuance and Developer Professional Services, if any.

 

In advance of the first reading of any bond resolution for which the Citys credit is to be used to enhance a development-related bond issue, written notice shall be sent by any Developer seeking reimbursement of Developer Professional Services costs from City bond proceeds to the City Manager with copies to the City Attorney and Director of Finance. Such notice should include, but not be limited to, the following:

 

(1) Description of each Developer Professional Service specifying the rate/base for each service

 

(2) Total dollar amount expected to be reimbursed

 

(3) Detailed explanation of benefit of service to the City/transaction

 

(4) Any calculations or formulas used to apportion or pro-rate benefit of service

 

The City Manager, in consultation with the Director of Finance, City Attorney and Director of City Development will negotiate on behalf of the City to determine the methodology, formula and/or amount of Developer Professional Services costs to be included in any City sponsored bond sale and will present the rationale for same to the City Council in conjunction with the resolution to proceed to approve a development-based bond issue.

 

Based upon the facts and circumstances of the bond issue being presented for consideration, the total costs to be reimbursed (the sum of the City costs of issuance and Developer Professional Services) shall not normally exceed the cost reimbursement ceiling for payment of such costs as outlined in Section 1, above. The City will not be bound to the terms and conditions of any agreement, oral or written, for Developer Professional Services to which it is not a party.

 


Secs. 2-1992 through 2-2009. Reserved.

 

_____________________________________________

 

Approved as to form and legality:

_______________________________

Heather A. Brown

Assistant City Attorney