RPVCCA_CC_SR_2015_06_02_F_Proposed_Debt_Mgmt_PolicyCITY OF
MEMORANDUM
LiRANCHO PALOS VERDES
TO: HONORABLE MAYOR & CITY COUNCIL MEMBERS
FROM: KATHRYN DOWNS, DEPUTY DIRECTOR OF FINANCE
DATE: JUNE 2, 2015
SUBJECT: PROPOSED DEBT MANAGEMENT POLICY
REVIEWED: DOUG WILLMORE, CITY MANAGER AAAJ
RECOMMENDATION
1. Adopt City Council Policy No. _ — Debt Management Policy; or
2. Provide direction to Staff for modifications to the document.
EXECUTIVE SUMMARY
The City has no debt, and no current plans to issue debt. In 2013 and 2014, the City was
faced with making a funding decision for the San Ramon Canyon Stabilization project.
Issuing debt was one of the options considered by both the Finance Advisory Committee
(FAC) and the City Council. Ultimately, the project was funded with a combination of
General Fund money and a state grant; and no debt was issued.
The City's former Financial Advisor, Tim Schaefer of Magis and Associates,
recommended the City establish a debt policy to assist with making informed debt -
financing decisions in the future. The proposed policy (see Attachment B) is a
comprehensive how-to document designed to provide a full understanding of debt options
and debt management to the City Council, Staff and the public.
The proposed policy was drafted by Mr. Schaefer, edited by Staff, and reviewed by the
FAC over the course of 5 meetings (November 2014 through April 2015). The FAC made
many suggestions that were integrated into the proposed document. Most significantly,
the FAC recommended that a Frequently Asked Questions (FAQ) document be prepared
(see Attachment A). The FAC worked with Staff to develop the FAQ.
The City Council may choose to adopt the proposed policy document and the
accompanying FAQ, modify the documents, or provide other direction to Staff.
PROPOSED DEBT MANAGEMENT POLICY
June 2, 2015
Page 2 of 3
BACKGROUND
In February and March 2014, the FAC reviewed and considered debt financing options
for the San Ramon Canyon Stabilization project. The FAC received a presentation from
Mr. Schaefer; which included a recommendation that the City establish a Debt Policy to
outline the parameters of when and how the City would consider the use of debt. In its
Memorandum to the City Council dated March 5, 2014 regarding San Ramon Canyon
Stabilization project financing, the FAC made the following comment:
"We agree with the City's outside financial advisor that `making a decision
to borrow money is almost always better informed by reference to a policy
and a plan than to the needs of a particular transaction. "'
On August 19, 2014, the City Council approved the Finance Advisory Committee (FAC)
work plan; which included the following.
"Review a draft Debt Policy for the City, and make recommendations to the
City Council"
On April 29, 2015, the FAC unanimously approved the proposed policy and the
accompanying FAQ.
DISCUSSION
The proposed policy document is based upon best practices and compliance with federal
and state law. The document is comprehensive, as the City has no previous experience
issuing public debt. The document provides guidance for how to issue debt, not when to
issue debt. Examples of guidance include the best type of debt for a particular situation,
roles of outside advisors, and voter approval requirements.
Any future proposal to issue debt will be accompanied by a unique set of circumstances
to be considered by the City Council and its advisors; such as the priority of the
expenditure to be funded, availability of funding, market conditions, and public sentiment.
As documented in the policy, a thorough review by the City Manager, City Attorney,
Finance Director, and FAC should be performed before making any debt -financing
proposal to the City Council.
The FAC and Staff considered best practice information from the Government Finance
Officers Association (see Attachments C and D); as well as the advice of Mr. Schaefer,
who has 40 years of experience, including 189 long-term public debt issues. He met with
the FAC twice to provide guidance and answer questions related to the proposed policy.
Establishing a debt management policy is not essential; however it is a best practice. The
proposed policy is expected to assist the City Council with decision making in the future,
should the need arise.
PROPOSED DEBT MANAGEMENT POLICY
June 2, 2015
Page 3 of 3
Attachments:
A — Debt Management Policy Frequently Asked Questions (page 4)
B — Proposed City Council Policy — Debt Management Policy (page 6)
C — Government Finance Officers Association — Best Practice, Debt Management Policy
(page 55)
D — Employing a Debt Management Policy, Practices at California Local Agencies,
Government Finance Review, August 2014 (page 59)
3
Attachment A
GTVOF LiRANcrio NDS VERDES
DEBT MANAGEMENT POLICY — FREQUENTLY ASKED QUESTIONS
Does the City have any debt outstanding?
No. The City has no outstanding debt. The City has a long history of balanced budgets
and prudent financial management. The City has healthy cash reserves; and a
systematic approach to plan for future rehabilitation of capital facilities, such as roadways
and storm drains.
Is the City planning to issue debt soon?
No. At this time there are no proposals to issue debt.
Why does the City need a debt policy?
It is a best practice to develop a debt management policy to be used as a framework in
the event that the City considers the issuance of debt in the future. By adopting the policy,
the City Council is not preparing to issue debt.
Under what conditions would the City issue debt?
As outlined in the City's debt policy, the City normally will rely first on internally generated
funds and/or grants and contributions from other governments to finance its capital needs.
Further, debt will not be considered appropriate for any recurring purpose such as
operating and maintenance costs. In general, debt will only be undertaken in the following
circumstances:
1. All other forms of financing or internal funding have been exhausted;
2. The City is responding to an immediate emergency affecting the health and welfare
of its citizens or for the protection of public property or interests; or
3. When project revenues or specific resources will be available and sufficient to
service the debt over its entire life.
Does the policy provide guidelines for determining when to issue debt?
No. The policy provides guidelines for how to issue debt, not when to issue debt. The
guidelines were developed to minimize the City's debt service and issuance costs, retain
the highest practical credit rating, and maintain full and complete disclosure and reporting.
Any future proposal to issue debt will be accompanied by a unique set of circumstances
to be considered individually by the Debt Management Committee (City Manager,
Finance Director, and City Attorney), the Finance Advisory Committee (seven -member
citizens committee appointed by the City Council), and then the City Council. The City
Council's deliberations when considering the issuance of debt will be conducted during
public hearings when any citizen will have the opportunity to express their opinion.
El
Attachment A
Could the City incur debt for a commercial or industrial project like a stadium?
There is a separate section of the City's debt policy regarding "Special District Financing"
of major public facilities. The City may desire to encourage the development of
commercial or industrial property that results in significant public benefit to the City; such
as the creation of new jobs, property and/or sales tax revenues and major public
improvements. Such projects may be considered through the use of Community Facilities
Districts (CFDs) as well as other financing methods, but only if such development will
result in a significant public benefit. Special district taxes require a two-thirds majority
approval of the voters.
Is a vote of the City's residents required to incur debt?
A two-thirds majority vote of the local electorate is required to issue general obligation
debt. Special assessment bonds can be approved by the City Council during duly noticed
public hearings, but only in the absence of a weighted majority protest vote of property
owners.
Under state law, the City may incur lease revenue debt or financing leases for projects
that will: generate positive net revenues after debt service, reduce ongoing City operating
costs, facilitate an equal or greater amount of non -City matching funds, or the project is
greater than $5 million and there are no other alternative means to finance the project.
However, the decision to issue this type of debt must be made by the City Council at duly
noticed public meetings.
State statute limits the amount of outstanding debt the City can have. To achieve
creditworthiness objectives, the City's debt policy limits the amount of General Fund
money available to repay debt to 5% of annual revenue.
How would property values be impacted if the City were to issue debt?
In general, when voters approve the issuance of debt, they are also approving a new tax
to pay for the debt. In the event of a default on City debt, property owners are generally
not obligated to repay the outstanding balance. An exception is general obligation debt.
The tax approved by the voters and pledged to repayment of general obligation debt is
unlimited as to rate or amount; which could be adjusted in the event of a default.
Issuing municipal debt does not generally impact property values. An exception is a new
tract of houses that is overly burdened with debt related to furnishing infrastructure; which
may affect the value of the properties in that development.
Does the City have a credit rating?
No. There are costs associated with maintaining a credit rating. Since the City has never
issued debt, it does not have a credit rating.
1A
Attachment B
PROPOSED CITY COUNCIL POLICY
NUMBER:
DATE ADOPTED/AMENDED: June 2, 2015
SUBJECT: Debt Management Policy
POLICY:
The City has no outstanding debt. The City has a long history of balanced budgets and
prudent financial management. The City has healthy cash reserves; and a systematic
approach to plan for future rehabilitation of capital facilities, such as roadways and storm
drains. It is a best practice to develop a debt management policy to be used as a
framework in the event that the City considers the issuance of debt in the future.
The Debt Management Policy is a comprehensive document establishing a rigorous
process for the issuance and management of debt. The basic principles of the Debt
Management Policy follow, and are described in greater detail in the attached document.
1. It shall be the City's policy to undertake debt only when the City determines that
the project revenues or specific financial resources will be available and sufficient
to service the debt over its life.
2. Debt will be considered for a capital project only when other forms of financing or
internal funding have been exhausted; and debt will not be issued for periods
exceeding the useful life of the project to be financed.
3. In the case of debt serviced solely from the City's General Fund, the City will
observe a guideline of 5% of annual revenue as the maximum permissible level
for General Fund resources committed to the repayment of debt.
4. Before issuing lease revenue debt or financing leases, the City will determine that
the proposed facility is both necessary and desirable, and that no other financing
method is practical to finance it.
5. All direct or indirect debt proposals will be presented to the City's Finance Advisory
Committee for deliberation and recommendation prior to review of the City Council.
6. Action taken by the City Council to incur debt will be taken as a regular business
item, and at a regular or special City Council meeting, consistent with state law.
7. All debt issued by the City will include a written opinion by bond counsel affirming
that the City is authorized to issue the debt, and has met all statutory requirements
necessary for issuance; and the federal income tax status of such debt.
X
Attachment B
DEBT MANAGEMENT POLICY
PREAMBLE& EXECUTIVE SUMMARY............................................................................................................................. l
INTRODUCTION...............................................................................................................................................................
4
CHAPTER ONE: PURPOSES AND USES OF DEBT...............................................................................................................5
SECTION I:
Capital Financing — In General..................................................................................................5
SECTION 2:
Capital Planning.........................................................................................................................
6
SECTION3:
Debt Limits.................................................................................................................................6
SECTION4:
Asset Life.....................................................................................................................................7
SECTION 5:
General Obligation Debt............................................................................................................
7
SECTION 6:
Certificates of Participation or Financing Leases......................................................................8
CHAPTER TWO: CREDITWORTHINESS
OBJECTIVE,S.........................................................................................................9
SECTION7:
Credit Ratings.............................................................................................................................9
SECTION 8:
Financial Disclosure, both Initial and Continuing .....................................................................
9
CHAPTER THREE: DEBT STANDARDS AND STRUCTURE................................................................................................10
SECTION9:
Term of Debt.............................................................................................................................10
SECTION10:
Debt Structure..........................................................................................................................10
SECTION11:
Amortization.............................................................................................................................10
SECTION 12:
Subordinate Debt.....................................................................................................................11
SECTION 13:
variable Rate Debt............................. ......................................... .............................................
I I
SECTION 14:
Non-traditional Financial Products.........................................................................................
I I
SECTION 15:
Refunding (refinancing)...........................................................................................................11
SECTION 16:
Short Term Borrowings............................................................................................................12
SECTION 17:
Credit Enhancements...............................................................................................................12
CHAPTER FOUR: DEBT ADMINISTRATION AND PROCESS..............................................................................................13
SECTION 18:
Review by City's Debt Management Committee......................................................................13
SECTION 19:
Investment of Bond Proceeds...................................................................................................13
SECTION 20:
Costs and Fees.........................................................................................................................13
SECTION 21:
Method of Sale.........................................................................................................................14
SECTION 22:
Action to be Regular Business Item, Not on Consent Calendar...............................................14
Attachment B
CHAPTER FIVE: ENGAGEMENT OF SERVICE PROVIDERS..............................................................................................15
SECTION23:
Underwriters............................................................................................................................15
SECTION 24:
Payment of Underwriter's Counsel Fees..................................................................................15
SECTION25:
Bond Counsel...........................................................................................................................15
SECTION 26:
Disclosure Counsel..................................................................................................................16
SECTION 27:
Financial Advisor.....................................................................................................................16
SECTION 28:
Fiscal Agents, Paying Agents and Trustees.............................................................................16
SECTION 29:
Compensation for Services.......................................................................................................17
SECTION 30:
Selection Processes..................................................................................................................17
SECTION 31:
Other Service Providers— ....... ............ — ...... ...........
.............................. ................ .......... 17
CHAPTERVII: OTHER
POLICY...................................................................................................................................18
SECTION 32:
Arbitrage Compliance..............................................................................................................18
SECTION34:
Internal Borrowings.................................................................................................................18
SECTION 35:
Special District Financing..............................................._.......................................................19
APPENDIXA: GI.OSSARY..............................................................................................................................................22
APPENDIX B: SPECIAL
DISTRICT FINANCING PROCEDURES..........................................................................................36
i
Attachment B
PREAMBLE & EXECUTIVE SUMMARY
The following debt policy was developed to establish a rigorous process for the issuance
and management of public and other forms of debt by the City of Rancho Palos Verdes
and its component units. The City debt policy is based on guidance provided by the
Government Finance Officers Association and the California Debt and Investment
Advisory Commission as well as generally accepted principles set forth in the financial
management literature for municipal governments.
The policy applies to all direct and other debt issued or contracted by the City, including
leases, debt guaranteed by the City, and revenue bonds issued by the City's enterprises
or business type activities, as applicable. The Policy also applies to so-called no -
commitment debt of the City.
The City's budget practices generally have been that (1) operating expenses should not
exceed operating revenues; (2) established reserves should meet minimum policy levels;
(3) "one-time" revenues should be used to fund nonrecurring expenditures; and (4) the
prioritization of capital projects should be accomplished through a "needs assessment"
undertaken as part of the formulation and development of the City's Capital Improvement
Plan. The development of the Debt Policy will affect each of the items specified above.
The policy is divided into sections and sub -sections as outlined in the table of contents.
In general terms, it shall be the City's policy to undertake debt only when the City
determines that the project revenues or specific financial resources will be available and
sufficient to service the debt over its life.
City debt will not be issued for periods exceeding the useful life or average useful lives of
the project or projects to be financed.
The policy also establishes guidance for internal, inter -fund and inter -affiliate borrowing.
Because financing leases are a form of debt, the City will determine that the proposed
leased facility or asset is both necessary and desirable, and that no other financing
method is practical to finance it, before entering into capital leases in amounts greater
than $25,000. The City will apply the tests set forth in the policy to such financing leases.
The City will seek to maintain the highest possible credit ratings for all categories of short -
and long-term public debt that can be achieved consistent with its mission and
responsibilities to the citizens of Rancho Palos Verdes.
The City will seek to structure debt with debt service costs over the life of the debt.
The policy establishes a Debt Management Committee, comprised of the City Manager,
the Finance Director and the City Attorney.
PAGE 1
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Attachment B
The Debt Management Committee shall advise the City Council, the Finance Advisory
Committee, and the various Departments of the City in all matters pertaining to the
issuance of debt.
All direct or indirect debt of the City will be presented to the City's Finance Advisory
Committee for deliberation and recommendation prior to submittal to the City Council.
For all debt issuance, the City will require that the action taken by the City Council to incur
the debt will be taken as a regular business item, and at a regular or special City Council
meeting, consistent with state law.
The City may engage an underwriter for a negotiated sale of debt through a competitive
process administered by the City's Finance Department based on the prior
recommendation of the City's Debt Management Committee and the City's Finance
Advisory Committee.
All debt issued by the City will include a written opinion by bond counsel affirming that the
City is authorized to issue the debt, stating that the City has met all statutory requirements
necessary for issuance, and the federal income tax status of such debt.
Bond counsel will be selected by the City Council based on the prior recommendation of
the City's Debt Management Committee.
While engagement of a financial advisor on each City debt issue is not required, it is
strongly encouraged by this policy.
The City may engage an external financial advisor for a debt issue through a competitive
process administered by the City's Finance Department based on the prior
recommendation of the City's Debt Management Committee.
Any unsolicited financing proposal to a City department, agency, affiliate or employee
involving a pledge or other extension of the City's credit through a sale of securities,
execution of loans or leases, marketing guarantees, or otherwise involving directly or
indirectly the pledging of the City's credit, shall be referred to the Finance Department for
review by the City's Debt Management Committee prior to submittal to the City Council
for approval. All such proposals shall be consistent with the intent of the Municipal Advisor
Rules of the U.S. Securities and Exchange Commission, Rules 15Ba1-1 through 15Ba1-
8, and Rule 15Bc4-1, which became final in early 2014.
The SEC's Municipal Advisor Rules imposes a registration process upon municipal
advisors, firms that give advice absent an exemption or exclusion to municipal entities
and obligated persons, and imposes a fiduciary duty upon municipal advisors that give
advice to municipal entities. The Municipal Securities Rulemaking Board imposes
additional requirements and prohibitions on the conduct of municipal advisors.
PAGE 2
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Attachment B
Brokers, dealers, and other financial institutions ("financial services firms") that seek to
enter into principal transactions with municipal entities or obligated persons generally
cannot give advice unless they qualify for an exemption or exclusion to the SEC's
Municipal Advisor Rules. One such exclusion to the rule for financial services firms is
when the municipal entity or obligated person has an independent registered municipal
advisor. Accordingly, so long as the City is represented by an independent municipal
advisor, the following statement will be furnished to any such financial service firm
seeking to assist the City in the issuance of municipal securities, purchase of municipal
financial products or the investment of bond proceeds. This enables the financial services
firm to document their compliance with an exclusion to the rule, which would permit the
firm to give advice to the City as a municipal entity or obligated person.
The statement will be deemed to have been delivered to any such financial services firm
upon posting on the City's web site with the following introductory language: By publicly
posting the following written disclosure, the City of Rancho Palos Verdes intends that
market participants receive and use it for purposes of the independent registered
municipal advisor exemption to the SEC Municipal Advisor Rules.
[DATE]
The City of Rancho Palos Verdes has retained an independent registered municipal
advisor. The City is represented by and will rely on its municipal advisor, [name of
municipal advisory firm here], to provide advice on proposals from financial services firms
concerning the issuance of municipal securities and execution of municipal financial
products (including investments of bond proceeds and escrow investments). This
certificate may be relied upon until [date on which advisory contract terminates or earlier].
Proposals may be addressed to the City to the attention of the Finance Director or City
Manager, at 30940 Hawthorne Blvd, Rancho Palos Verdes, CA 90275. If the proposal
received will be seriously considered by the City, the City will elect when and how to share
the document with its municipal advisor. Please note, that aside from correspondence
required by regulation or law between an underwriter and municipal advisor, the
underwriter should not speak directly with or send documents directly to the municipal
advisor unless specifically directed to by the City.
PAGE 3
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Attachment B
INTRODUCTION
The following debt policy (herein, the "Policy") was developed to establish a rigorous
process for the issuance and management of debt by the City and its affiliated units.
The primary objective is to create procedures and a policy that minimize the City's debt
service and issuance costs, retain the highest practical credit rating, and maintain full and
complete financial disclosure and reporting.
The Policy applies to all direct and other debt issued or contracted by the City including
leases, debt guaranteed by the City, general obligation and revenue bonds issued by the
City. The Policy also applies to so-called no commitment debt of the City. The City
presently does not have any "no commitment" debt, but has been approached from time
to time to create such debt.
A debt policy can be an important tool to insure the sound use of the City's resources to
meet its mission and responsibilities to the citizens of Rancho Palos Verdes and to
maintain sound financial management practices. The Policy is a guideline for general use,
application, and to lead to informed decision making by the City Council.
In order to use the Policy properly, they must be applied in the context of the City's overall
budget and fiscal policies.
The City's budget practices generally have been that:
1. Operating expenses shall not exceed operating revenues;
2. Established reserves shall meet minimum policy levels;
3. "One-time" revenues shall be used to fund nonrecurring expenditures; and,
4. The prioritization of capital projects shall be accomplished through a "needs
assessment" undertaken in the formulation and development of the City's Capital
Improvement Plan.
The Policy is divided into discrete sections and sub -sections as outlined in the Table of
Contents.
PAGE 4
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Attachment B
CHAPTER ONE: PURPOSES AND USES OF DEBT
SECTION 1: CAPITAL FINANCING - IN GENERAL
The City normally will rely first on internally generated funds and/or grants and
contributions from other governments to finance its capital needs.
Debt will be considered for a capital project only when other forms of financing or internal
funding have been exhausted.
Debt shall not, in general, be used for projects solely because insufficient funds are
budgeted at the time of acquisition or construction of a capital asset. Exceptions to this
policy would be those instances in which the City is responding to an immediate
emergency affecting the health and welfare of its citizens, or for the protection of public
property or interests.
Debt will only be undertaken when the project revenues or specific resources will be
available and sufficient to service the debt over its entire life.
Debt financing will not be considered appropriate for any recurring purpose such as
operating or maintenance costs.
Capital improvements should be financed primarily through user fees, service charges,
assessments, special taxes or developer exactions so long as the benefits the City will
derive from such improvements can be attributed to the users of the improvements.
Moreover, the City will specifically consider the lifecycle costs associated with any asset
acquired with borrowed money in order to determine that the above funding sources are
adequate to service the proposed debt and cover future costs.
PAGE 5
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Attachment B
The City will evaluate the use of debt in -lieu of "pay-as-you-go" financing based on the
following criteria:
Factors Favoring "Pay -as -You -Go"
Financing:
1. current reserves or project revenues
are adequate to fund the project;
2. proposed debt levels would have a
deleterious effect on the City's credit
position or rating;
3. credit market conditions are unstable or
present difficulty in marketing the
proposed debt.
SECTION 2: CAPITAL PLANNING
Factors Favoring Use of Debt:
1. revenues are deemed to be stable and
reliable enough to support the
proposed debt at investment grade
rating levels;
2. the nature of the financed project will
support investment grade ratings;
3. credit market conditions present
favorable interest rates and demand for
financings such as the City's;
4. the proposed project is required by the
state or federal government and present
resources are insufficient or unavailable
to fund the project;
5. the proposed project is immediately
required to meet or relieve capacity
needs and current resources are
insufficient or unavailable;
6. the estimated useful life of the asset to
be financed is greater than 5 years.
To enhance creditworthiness and prudent financial management, the City is committed
to systematic capital planning, intergovernmental cooperation and coordination, and
realistic long-term financial planning.
SECTION 3: DEBT LIMITS
The City will keep outstanding debt within the limits prescribed by State statute and at
levels consistent with its creditworthiness objectives.
In the case of debt serviced solely from the City's General Fund, the City will observe a
guideline of 5% of annual revenue as the maximum permissible level for General Fund
resources committed to the repayment of debt.
PAGE 6
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Attachment B
SECTION 4: ASSET LIFE
The City will consider long-term financing for the acquisition, maintenance, replacement,
or expansion of physical assets (including land) only if they have a useful life of at least
five years.
City debt will not be issued for periods exceeding the useful life or average useful lives of
the project or projects to be financed.
SECTION 5: GENERAL OBLIGATION DEBT
General obligation bonds typically provide the lowest borrowing costs for most major
public assets.
The use of a general obligation pledge usually eliminates the need for a bond reserve
and due to its high credit quality and the ability to levy a tax to repay it, produces borrowing
terms and costs unavailable through other methods.
Moreover, since the source of repayment of a general obligation bond is from proceeds
of general taxes, the City's operating funds and its operating position are not impacted by
the issuance of general obligation bonds. Though the use of the term "general obligation
bond" implies that the City's "full faith and credit" would be pledged to the repayment of
the bond, the bond is actually repaid from an ad valorem tax on real property. Cities in
California may issue general obligation bonds only for the purpose of acquiring or making
improvements to real property.
Article XIII of the California Constitution requires that general obligation bonds be
submitted to the voters for approval and that the issuance of such bonds be approved by
a two-thirds majority vote.
Accordingly, it shall be the City's policy to issue general obligation bonds only for such
purposes and then only when the acquisition, improvement, or construction of the
proposed real property will provide benefits to the community.
The City recognizes that the imposition of a property tax does not occur in isolation and
that the capacity of property taxation is limited by demands that may be placed on the
owners of such property by other levels of government, including the Palos Verdes
Peninsula Unified School District, the County of Los Angeles, and other overlapping
agencies. Prior to considering imposition of a property tax to support a general obligation
bond, the City's Debt Management Committee will obtain and analyze an overlapping
debt statement to determine the level of indebtedness being supported by property
owners within the City to determine whether the proposed additional tax will create
irregular or unnecessary burdens on the City's property owners.
PAGE 7
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Attachment B
SECTION 6: CERTIFICATES OF PARTICIPATION OR FINANCING LEASES
Before issuing lease revenue debt or financing leases, the City will determine that the
proposed facility is both necessary and desirable, and that no other financing method is
practical to finance it.
The City may use lease revenue debt or financing leases for those projects that must be
financed at a time or in a manner which do not permit the use of general obligation bonds.
The City shall only use lease revenue debt or financing leases: (1) if the project to be
financed will generate positive net revenues after debt service; (2) if the project will reduce
City operating costs; (3) if an equal or greater amount of non -City matching funds will be
lost if City's lease revenue or financing lease funds are not applied in a timely manner;
or, (4) if the project to be financed is greater than $5,000,000 and no other practical means
of financing the project is available.
PAGE S
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Attachment B
CHAPTER TWO: CREDITWORTHINESS OBJECTIVES
SECTION 7: CREDIT RATINGS
The City will seek to maintain the highest possible credit ratings for all categories of short -
and long-term public debt that can be achieved consistent with its mission and
responsibilities to the citizens of Rancho Palos Verdes.
The City recognizes that there is a direct correlation between the credit rating it achieves
and the cost of borrowing.
Therefore, generally, the City will seek to acquire and maintain a minimum of an
investment grade rating on all of its direct debt.
The City recognizes that external economic, natural, or other events may from time to
time affect the creditworthiness of its debt.
Nevertheless, the City is committed to ensure that actions within its control are prudent
and consistent with the rating and creditworthiness objective set forth in this Policy.
SECTION 8: FINANCIAL DISCLOSURE, BOTH INITIAL AND CONTINUING
The City is committed to full and complete financial disclosure, and to cooperating fully
with rating agencies, institutional and individual investors, City departments, affiliates,
agencies, other levels of government, and the general public to share clear,
comprehensible, and accurate financial information.
The City is committed to meeting secondary disclosure requirements as set forth in
Securities and Exchange Commission Rule 15c2-12, and its amendments, on a timely
and comprehensive basis. Rule 15c2-12 requires broker-dealer firms, when underwriting
certain types of municipal securities, to require the issuer to provide certain information
to the Municipal Securities Rulemaking Board about the securities on an ongoing basis.
Such continuing disclosure normally requires the following: financial information and
operating data of the issuer (or other obligated persons); audited financial statements of
the issuer or other obligated persons, if available; and, certain specific "event" disclosures
the occurrence of which would cause the value of the municipal securities to change
adversely or which would affect the probability of prompt repayment of the municipal
securities.
The Finance Department is designated as the responsible party for compliance with
disclosure standards promulgated by state and national regulatory bodies and for
compliance with continuing disclosure requirements required by contractual
arrangements necessary to comply with Rule 15c2-12.
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Attachment B
CHAPTER THREE: DEBT STANDARDS AND STRUCTURE
SECTION 9: TERM OF DEBT
Debt will be structured for the shortest period consistent with a useful life or benefit period
of facilities or assets financed with the proceeds of such debt.
SECTION 10: DEBT STRUCTURE
Debt will be structured to achieve the lowest possible net cost to the City given market
conditions, the urgency of the capital project, and the nature and type of security provided.
Moreover, to the extent possible, the City will design the repayment of its overall debt to
recapture rapidly its credit capacity for future use.
To accomplish the recapture and preservation of its future credit capacity, the City shall
strive to repay at least 20 percent of the principal amount of its general fund supported
debt within five years and at least 40 percent within ten years because these measures
are used by the major national credit rating agencies to determine the creditworthiness of
the City.
In applying the 20% and 40% tests, the debt repayment amounts are cumulative, that is,
the goal is to have each of the City's debt issuances to achieve a reduction in principal of
20% at the five-year mark and 40% at the ten-year mark.
Individual issues may be structured using either serial bonds or term bonds.
In the case of issues structured with term bonds, the City will use a sinking fund to retire
the term bonds. A sinking fund is the mechanism whereby money is accumulated on a
regular basis in a separate account for the purpose of redeeming the term bonds when
due.
Principal repayment will commence during the fiscal year in which the financed asset is
completed or is substantially available to the City.
Capitalized interest may be used in the City's debt structures, but only to the extent
necessary to accommodate the deferral of principal to the point of substantial availability
to the City.
SECTION 11: AMORTIZATION
The City will seek to structure debt with level principal and interest costs -over the life of
the debt.
So-called "back -loading" of debt service (repaying less at the beginning of the repayment
term) only will be considered when such structuring will allow debt service to more closely
match project revenues during the early years of the project's operation.
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Attachment B
In the case of an issue structured with term bonds and a sinking fund, the City's policy
will be to retire the term bonds in substantially level fashion over each year of the life of
the sinking fund unless the factors described above apply.
SECTION 12: SUBORDINATE DEBT
The City shall issue subordinate lien debt only if it is financially beneficial to the City and
is consistent with the City's creditworthiness objectives as set forth in this Policy under
the caption, "Credit Ratings." Generally, subordinated debt is that debt that has a lien
position on an asset or revenue stream that is junior in position to other debt issues.
Examples could include leases that are junior in payment obligation to senior leases.
SECTION 13: VARIABLE RATE DEBT
The City may choose to issue securities that pay a rate of interest that varies according
to pre -determined formula or results from a periodic remarketing of the securities,
consistent with state law and covenants of pre-existing bonds, and depending on market
conditions.
The City may elect to control its interest rate exposure on variable rate debt using financial
products designed to offset such risks, but only upon the express approval of the City
Council after an affirmative recommendation from the City's Debt Management
Committee.
SECTION 14: NON-TRADITIONAL FINANCIAL PRODUCTS
The City will consider the use of non-traditional financial products on a case by case basis
and consistent with state law and financial prudence.
Examples of such non-traditional products include: interest rate swaps, interest rate caps
and collars, "synthetic" refunding transactions, float contracts and asset-backed
securities.
Use of non-traditional financial products will only be undertaken upon approval by the City
Council. Further, the use of such products must achieve an effective hedge of the risk
which the hedge is intended to offset on the date of the debt issuance.
SECTION 15: REFUNDING (REFINANCING)
Periodic reviews of all outstanding debt will be undertaken to determine refunding
opportunities. In general, the periodic reviews will occur at least annually.
Refunding will be considered (within federal tax law constraints) when there is a net
economic benefit of the refunding or the refunding is essential in order to modernize
covenants essential to the City's financial or operating position.
In general, advance refunding for economic savings will be undertaken when significant
net present value savings can be achieved (net of the costs of refunding).
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Attachment B
Refunding with insignificant savings, or with negative savings, will not be considered
unless there is a compelling public policy objective.
The measurement of savings may, but is not required, to consider benefits to the City
from sources other than the proposed bond transaction, if deemed appropriate by the
City's Debt Management Committee.
SECTION 16: SHORT TERM BORROWINGS
Use of short-term borrowing, such as bond anticipation notes (BANs), tax and revenue
anticipation notes (TRANs), tax-exempt commercial paper and other similar short-term
borrowing vehicles will be undertaken only if the transaction costs plus interest of the debt
are less than the cost of internal financing, or available cash is insufficient to meet working
capital requirements. For purposes of this policy, short-term is defined as any borrowing
with a stated maturity of 13 months or less.
The City will not employ the use of such borrowings solely for earning arbitrage profits.
SECTION 17: CREDIT ENHANCEMENTS
Credit enhancement (letters of credit, bond insurance, etc.) will be used to the extent that
net debt service on the bonds is reduced by more than the costs of the enhancement,
measured in present value terms.
In order to calculate the economic effectiveness of a credit enhancement, the City will
compare the present worth of the debt service required on the proposed transaction on
both an enhanced and unenhanced basis to determine the economic benefits of the
enhancement offered.
Credit enhancement that does not produce economic benefits, in present value terms,
will be considered only if acceptance of the enhancement directly furthers other City goals
and objectives.
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Attachment B
CHAPTER FOUR: DEBT ADMINISTRATION AND PROCESS
SECTION 18: REVIEW BY CITY'S DEBT MANAGEMENT COMMITTEE
No City Department, agency, or sub -unit shall incur any long-term debt (including lease
commitments) without the approval of the City Council.
All recommendations to the City Council from the Debt Management Committee shall
specify the purpose of the borrowing, any options for financing the project without
borrowing, and specific sources of payment of debt service.
The Debt Management Committee will be comprised of the City Manager, the Finance
Director, and the City Attorney.
The City Manager may appoint additional members to the Debt Management Committee
on an ad hoc basis as individual circumstances warrant.
The Debt Management Committee is authorized to provide advice to the City Council and
the Finance Advisory Committee.
The Finance Director has responsibility for the oversight and periodic review of this Policy;
and will recommend amendments to the Finance Advisory Committee and the City
Council when applicable law or best practices change, or upon request of the City
Manager or City Council.
All direct and indirect debt of the City and its component units will be presented to the
Finance Advisory Committee for deliberation and recommendation prior to submittal to
the City Council.
SECTION 19: INVESTMENT OF BOND PROCEEDS
All general fund -supported and revenue bond proceeds shall be invested as part of the
City's consolidated pool, using appropriate trust fund accounting procedures, unless
otherwise specified by law or the controlling bond documents and approved in advance
by the City Treasurer.
Investments will be consistent with those authorized by existing state law and by the City's
investment policy.
It will also be the City's policy to select investment advisors, if appropriate to the facts and
circumstances of an individual borrowing or borrowing program, on a basis similar to that
which it uses to engage investment advisors for its investment portfolio.
The City will execute the investment directives for bond proceeds through the applicable
trustee for such proceeds.
SECTION 20: COSTS AND FEES
All costs and fees related to issuance of bonds will be paid out of bond proceeds.
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Attachment B
In the case of no -commitment financings, the City may require prepayment of certain
costs and fees from the project applicant(s). These advanced fees and costs may be
collected pursuant to a deposit and cost reimbursement agreement prepared by the City
Attorney.
Under certain extraordinary circumstances, the City may authorize the expenditure of City
funds for the engagement of outside counsel or consultants for assisting the City with the
feasibility analysis of the contemplated no -commitment debt. It is intended that any
expenditure for such purposes would be in anticipation of, or reliance upon,
reimbursement by a project applicant for such expenses. Should the proposed debt issue
be abandoned prior to its completion, the City will retain any deposits or prepayments in
amounts necessary to insure that its costs, both direct and indirect, are fully recovered.
SECTION 21: METHOD OF SALE
In general, City debt will be issued through a competitive bidding process.
Bids will be awarded on a true interest cost basis (TIC), providing other bidding
requirements are satisfied.
In such instances where the City deems the bids received through the competitive bidding
process to be unsatisfactory, it may, upon the prior authorization of the City Council, enter
into negotiation for sale of the securities.
Negotiated sales of debt will be considered in circumstances when the complexity of the
issue requires specialized expertise, when a change of underwriter may result in losses
(for example, changing the remarketing agent in mid -program for variable rate debt),
when the negotiated sale would result in substantial savings in time or money, or when
market conditions or City credit are unusually volatile or uncertain.
SECTION 22: ACTION TO BE REGULAR BUSINESS ITEM, NOT ON CONSENT
CALENDAR
For all debt sales, the City will require that the action taken by the City Council to incur
the debt will be taken as a regular business item, and at a regular or special City Council
meeting, consistent with state law.
Generally, it shall be the City's policy to submit the proposed debt issuance to the City's
Finance Advisory Committee for a recommendation prior to submittal to the City Council.
When submitted to the City Council, the proposed debt issuance will be presented in a
study session wherever possible prior to submittal to the City Council as an action item.
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Attachment B
CHAPTER FIVE: ENGAGEMENT OF SERVICE PROVIDERS
SECTION 23: UNDERWRITERS
For all competitive and negotiated sales, underwriters will be required to demonstrate
sufficient financial strength and experience related to the debt.
The City may engage an underwriter for a negotiated sale of debt through a competitive
process administered by the City's Finance Department based on the prior
recommendation of the City's Debt Management Committee.
The utilization of the underwriter for a particular bond sale will be at the discretion of the
City Council, pursuant to recommendation from the Debt Management Committee and a
written underwriting agreement.
The selection criteria for underwriters will require that the selected underwriter have
comprehensive municipal debt experience, experience with financial structuring
requirements consistent with the City's needs, and strong distribution capabilities for
municipal securities.
SECTION 24: PAYMENT OF UNDERWRITERS COUNSEL FEES
To control the integrity of the debt issuance process, the City has an interest to pay
underwriter's counsel fees. City payments for underwriter's counsel in negotiated sales
will be authorized by the City Manager, pursuant to the City's purchasing ordinance, on a
case-by-case basis depending on the nature and complexity of the transaction and the
needs expressed by the underwriters.
SECTION 25: BOND COUNSEL
The City will retain external bond counsel for all debt issues and such retainer will be
evidenced by a contract with the selected firm(s).
All debt issued by the City will include a written opinion by bond counsel affirming that the
City is authorized to issue the debt, stating that the City has met all statutory requirements
necessary for issuance, and determining the federal income tax status of such debt. Bond
counsel does not prepare disclosure documents.
Bond counsel will be selected by the City Council based on the prior recommendation of
the City's Debt Management Committee.
The selection criteria will require comprehensive municipal debt experience and clearly
demonstrated skill and capabilities in the municipal bond sector and with the type of
financing proposed. Bond counsel fees are paid from proceeds of the debt. However,
on occasion, bond counsel will make some portion of its fees non -contingent on the sale
of bonds; which would then be paid directly from the City's General Fund.
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Attachment B
SECTION 26: DISCLOSURE COUNSEL
In certain instances, the City may choose to engage the services of a disclosure counsel
for the purposes of assisting in the various aspects of the preparation of an official
statement, private placement memorandum or other form of offering, disclosure or
continuing disclosure document to be disseminated in connection with the sale of the
City's debt. Disclosure counsel does not render an opinion regarding the legality and tax-
exempt status of the proposed debt.
In performing these services, the disclosure counsel is clearly representing the City, as
the issuer of the debt, and not the underwriter as well, as is the case where underwriter's
counsel prepares such documents.
Disclosure counsel will be selected by the City Council based on the prior
recommendation of the City's Debt Management Committee.
Because disclosure counsel is engaged by the City, the cost of disclosure counsel's
services is typically paid from the proceeds of the debt issue, and may be structured as
hourly charges or fixed fees, depending on the circumstances.
SECTION 27: FINANCIAL ADVISOR
The utilization of the financial advisor for particular bond sales will be at the discretion of
the City Council on a case-by-case basis, based upon recommendation of the Debt
Management Committee. While engagement of a financial advisor on each City debt
issue is not required, it is strongly encouraged by this Policy.
The City may engage a financial advisor for a specific bond sale through a competitive
process administered by the City's Finance Department based on the prior
recommendation of the City's Debt Management Committee.
The selection criteria for financial advisors will require that the selected financial advisor
have comprehensive municipal debt experience, experience with diverse financial
structuring requirements and strong pricing capabilities for determining the fairness of the
prices received by the City for its debt issues.
SECTION 28: FISCAL AGENTS, PAYING AGENTS AND TRUSTEES
The Finance Department will utilize a fiscal agent, paying agent or trustee on all City
indebtedness, as may be legally required by the type of debt instrument being used.
Exceptions will be permitted on equipment leases of a size, tenor, or character that would
make appointment of a trustee infeasible.
Fees for such services on outstanding bonds will be paid from the resources of the
department or program supporting the debt service on the instrument.
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Attachment B
SECTION 29: COMPENSATION FOR SERVICES
Compensation for bond counsel, underwriter's counsel, financial advisors, and other
financial service providers will be consistent with industry standards. When compensation
arrangements are presented on a contingency basis, the City will take steps to ensure
that potential conflicts of interest are identified and fully disclosed before such
compensation arrangements are approved by the City Council.
SECTION 30: SELECTION PROCESSES
The City Council shall make all final determinations of selection for underwriters, counsel,
and financial advisors based on the recommendation of the City's Debt Management
Committee.
The determination will be made following an independent review of competitive bids or
responses to requests for proposals (RFPs) or requests for statements of qualifications
(RFQs).
The City's Debt Management Committee will review the proposals or statements of
qualifications and make recommendations to City Council.
The City's financial advisor(s) may also review underwriter proposals at the direction of
the Finance Director.
SECTION 31: OTHER SERVICE PROVIDERS
The Finance Director shall have the authority to periodically select other service providers
(e.g., escrow agents, verification agents, trustees, arbitrage consultants, assessment
engineers, special tax consultants, investment advisors, etc.) as deemed necessary to
meet legal requirements and minimize net City debt costs.
The Finance Director may select firm(s) to provide such financial services related to debt
without a RFP or RFQ, consistent with City requirements, and pursuant to the
requirements of the purchasing ordinance and budget authorization.
A firm so selected must receive Finance Director written authorization to proceed before
undertaking any transaction or providing any service.
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CHAPTER VII: OTHER POLICY
SECTION 32: ARBITRAGE COMPLIANCE
The Finance Department shall maintain a system of record keeping and reporting to meet
the arbitrage rebate compliance requirements of the Federal Tax Code.
SECTION 33: UNSOLICITED FINANCING PROPOSALS
Any unsolicited financing proposal to a City department, agency, or employee involving
pledge or other extension of the City's credit through sale of securities, execution of loans
or leases, marketing or other guarantees, or otherwise involving directly or indirectly the
lending or pledging of the City's credit, shall be referred to the Finance Department for
review by the City's Debt Management Committee prior to submittal to the City Council
for approval.
SECTION 34: INTERNAL BORROWINGS
If sufficient resources are available, liquidity will not be impaired, and a defined source of
repayment is available, the City will generally favor internal borrowings over external
borrowings for short-term liquidity purposes.
The Finance Department may undertake inter -fund borrowings and such borrowings will
be evidenced by a written memorandum or agreement specifying the tenor and terms of
the borrowing, including repayment terms, interest rates and calculations and procedures
for amendment and must have the approval of the City Council, except for fiscal year end
accounting entries that create temporary loans for financial statement presentation
purposes.
Any internal borrowing must be first coordinated with the responsible managing
department.
All such inter -fund borrowings will be reflected in the City's accounting records as "due
to" and "due from" items respecting the funds and accounts borrowed from and loaned
to, respectively.
Inter -fund borrowing may bear interest at the rate being earned by the Local Agency
Investment Fund ("LAIF") administered by the California State Treasurer's Office.
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Attachment B
SECTION 35: SPECIAL DISTRICT FINANCING
This section outlines parameters for the public financing of major public facilities through
the establishment of Assessment Districts and Community Facilities Districts. It
establishes the standards and criteria for the review of these proposed projects in order
to determine the feasibility of special district financing given the public policy direction of
the legislative body.
The City may encourage the development of commercial or industrial property that results
in significant public benefit to the City (i.e., increased jobs, property or sales tax revenues,
major public improvements).
The City Council may consider the use of Community Facilities Districts (CFDs) as well
as other financing methods to assist these types of development in the financing of public
facilities necessary to serve such projects using no -commitment debt.
POTENTIAL PUBLIC BENEFIT
Where, in the City's opinion, such development results in a significant public benefit,
public financing may be considered. Significant public benefit means that the project will
enhance the economic, social or cultural quality of life for the residents of the City; or, that
it will stimulate employment within the City; and, that such enhancement or employment
gain can be measured in a manner which permits the City to evaluate the risks and
rewards of acting as the issuer of no -commitment, special district debt to facilitate such a
development. Significant public benefit can be based on the City's evaluation of the
availability of public access to the financed facility by the widest possible number of
residents of the City, depending on the context. Acceleration of the availability or a net
addition of public infrastructure in excess of that required by law or the City's land use
policies could also produce significant public benefit. Such benefits arise from either the
installation or completion of public infrastructure assets prior to the time they might
otherwise be installed or from the additional assets that might be realized because of
being able to finance the project more efficiently.
Finally, the finding of significant public benefit can arise from the installation or acquisition
of a community asset which produces additional employment opportunities or which
produces environmental benefits as a direct or secondary result of its completion.
In circumstances where the financed improvements generate regional benefits, the
finding of significant public benefit will be easier than in those where the financed facilities
serve only a small number of residents.
GENERALPROCEDURES
Facilities will be financed in accordance with the procedures of the Improvement Act of
1911 (1911 Act"), the Municipal Improvement Act of 1913 (1913 Act"), the Improvement
Bond Act of 1915 ("1915 Act") or the Mello -Roos Community Facilities Act of 1982 (The
"Mello -Roos Act").
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In compliance with Proposition 218, the 1996 California Constitutional Amendment known
as the "Right to Vote on Taxes Act," voter approval is required to implement new or
increased taxes, assessments, fees and charges.
A simple majority is required for general taxes, assessments, charges and fees.
Special taxes require a two-thirds majority approval.
All special district bonds shall be issued in accordance with the 1911 Act or 1915 Bond
Act or the Mello -Roos Act of 1982 as determined to be appropriate for the proposed
financing by the City.
The proposed project must be consistent with the City's General Plan and have secured
appropriate land use entitlements from the City to allow for the development of the project.
A written request for special district financing should be initiated by the owners of the
property subject to payment of the assessments or special tax, as defined per statutory
requirements.
The funding of public facilities to be owned and operated by public agencies other than
the City will be considered on a case-by-case basis. If the proposed facilities are
appropriate for financing by an assessment district or community facilities district and are
consistent with approved land use plans for the property, the City shall consider entering
into a joint community facilities agreement or other applicable agreement with such other
public agency in order to finance these facilities.
Such an agreement with the public agency that will own and operate any such facility
must be entered into prior to the adoption of the resolution of formation for any
assessment district or community facilities district.
In general, the financing of public facilities that are owned and operated by the City will
have priority over public facilities to be owned by another public agency; however, the
City has the final determination as to the eligibility of any public facility for financing, as
well as the prioritization of the financing of such facilities.
The Debt Management Committee shall review all special district financing applications
prior to the presentation of a district formation petition to the City Council.
All costs incurred by the City in the evaluation of applications for special district financing
and the proceedings to form either an assessment district or a community facilities district
and to issue bonds therefor will be paid by the applicant by advance deposit with the City
in an amount or amounts deemed sufficient by the City to pay all such costs.
The assessment engineer, appraiser, bond counsel, financial advisor, special tax
consultant, underwriter, and other necessary professional and technical advisors shall be
selected and retained by and shall be accountable to the City.
The obligation of the applicant shall be memorialized in an agreement between the
applicant and the City in a form and substance satisfactory to the City. Specific
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Attachment B
application procedures for Special District Financing have been included in Appendix B
of this policy document.
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Attachment B
APPENDIX A: GLOSSARY
AD VALOREM TAX
A tax calculated "according to the value" of property. Such a tax is based on the assessed
valuation of real property and, in certain cases, on a valuation of tangible personal
property. In most jurisdictions, the tax is a lien on the property enforceable by seizure and
sale of the property. General restrictions, such as overall restrictions on rates, or the
percent of charge allowed, sometimes apply. As a result, ad valorem taxes often function
as the balancing element in local budgets.
ADVANCE REFUNDING
A procedure whereby outstanding bonds are refinanced by the proceeds of a new bond
issue more than 90 days prior to the date on which outstanding bonds become due or are
callable. Generally, either the entire outstanding issue is refunded (full refunding) or only
the callable bonds are refunded (partial refunding). Typically, an advance refunding is
performed to take advantage of interest rates that are significantly lower than those
associated with the original bond issue.
At times, however, an advance refunding is performed to remove restrictive language or
debt service reserve requirements required by the original issue.
(See also "CURRENT REFUNDING")
AMORTIZATION
The planned reduction of a debt obligation according to a stated maturity or redemption
schedule.
ARBITRAGE
The gain that may be obtained by borrowing funds at a lower (often -tax-exempt) rate and
investing the proceeds at higher (often taxable) rates. The ability to earn arbitrage by
issuing tax-exempt securities has been severely curtailed by the Tax Reform Act of 1986,
as amended.
ASSESSED VALUATION
The appraised worth of property as set by a taxing authority through assessments for
purposes of ad valorem taxation. The method of establishing assessed valuation varies
from state to state, with the method generally specified by state law. For example, in
certain jurisdictions, the assessed evaluation is equal to the full or market value of the
property; in other jurisdictions, the assessed valuation is equal to a percentage of the full
market value.
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Attachment B
ASSESSMENT BONDS
Bonds issued to develop facilities and basic infrastructure for the benefit of specific
properties within the assessment district that directly benefit from the facilities.
The key consideration here is the "direct and special benefit" to be received by the
property subject to the assessment.
Voter approval is not required.
Instead, a majority vote of the property owners with a majority of assessments is needed
to authorize the issue.
The issuer's recourse for nonpayment is foreclosure.
This type of bond is normally not rated.
The bonds may be issued under the provisions of the various assessment bond acts of
the State, whichever is most appropriate.
(See also "Special Tax Bond" for a description of bonds issued pursuant to the Mello -
Roos Act.)
BALLOON MATURITY
A maturity within a serial issue of securities that contains a disproportionately large
percentage of the principal amount of the original issue. A balloon maturity is generally
distinguished from a term bond by the fact that a term bond generally has the benefit of
a sinking fund to smooth out the amount of principal paid from any single year's
operations. A balloon maturity increases the likelihood that the jurisdiction will need to
refinance the securities for an extended period of time upon their initial maturity.
BASIS POINT
One one-hundredth of one percent (0.0001).
BEARER BOND
A security that does not identify its owner on its face or by registration. The security is
presumed to be owned by the person possessing it. The Tax Equity and Fiscal
Responsibility Act of 1982 TEFRA) curtailed the issuance of tax-exempt bearer bonds.
BOND
A security that represents an obligation to pay a specified amount of money on a specific
date in the future, typically with periodic interest payments.
BOND ANTICIPATION NOTES
Notes issued to provide temporary financing, to be repaid from the proceeds of a
subsequent long-term financing.
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Attachment B
BOND COUNSEL
An attorney (or firm of attorneys) retained by the issuer to give a legal opinion concerning
the validity of the securities. The bond counsel's opinion usually addresses the subject of
tax exemption. Bond counsel may prepare, or review and advise the issuer regarding
authorizing resolutions or ordinances, trust indentures, official statements, validation
proceedings and litigation.
BONDINSURANCE
Bond insurance is a type of credit enhancement whereby a monoline insurance company
indemnifies an investor against default by the issuer. In the event of a failure by the issuer
to pay principal and interest in full and on time, investors may call upon the insurance
company to do so. Once assigned, the municipal bond insurance policy generally is
irrevocable. The insurance company receives an up -front fee, or premium, when the
policy is issued.
BOND RESERVE
See "Debt Service Reserve Fund".
BOOK -ENTRY -ONLY
Bonds that are issued in fully registered form but without certificates of ownership. The
ownership interest of each actual purchaser is recorded on computer.
CALL OPTION
The right to redeem a bond prior to its stated maturity, either on a given date or
continuously. The call option is also referred to as the optional redemption provision.
Often a "call premium" is added to the call option as compensation to the holders of the
earliest bonds called. Generally, the earliest callable bonds called carry a 102% premium,
the next earliest, a 101 % premium, and the balance of the bonds are called at par value.
CAPITAL APPRECIATION BOND
A bond without current interest coupons that is sold at a substantial discount from par.
Investors are provided with a return based upon the accretion of value in the bond through
maturity. (See: zero coupon bond)
CAPITAL LEASE
The acquisition of a capital asset over time rather than merely paying a rental fee for
temporary use. A lease -purchase agreement, in which provision is made for transfer of
ownership of the property for a nominal price at the scheduled termination of the lease,
is referred to as a capital lease.
CERTIFICATES OF PARTICIPATION
A lease agreement with another party (a lessor, such as a joint powers authority) to lease
an asset over a defined period at a prearranged annual payment.
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Attachment B
Voter approval is generally not required.
Lease payments are made primarily from general fund revenues.
Current law requires the lessee to make lease payments only if the City has beneficial
use of the facility to be leased.
The legislative body has to appropriate annual debt service payments.
For the security of the bondholders, a reserve fund is normally established and held by a
trustee until all bonds are paid.
Interest during project construction must be capitalized.
An "asset transfer" structure, whereby an existing facility is used as security to finance
construction or acquisition of another project, may be used for flexibility.
Sometimes this structure is styled as a "lease revenue bond," which is functionally the
same as Certificates of Participation.
COMMERCIAL PAPER (TAX-EXEMPT)
By convention, short-term, unsecured promissory notes issued in either registered or
bearer form with a stated maturity of 270 days or less.
COMPETITIVE SALE
Sales of securities in which the securities are awarded to the bidder who offers to
purchase the issue at the best price or lowest cost.
CONTINUING DISCLOSURE
The requirement by the Securities and Exchange Commission for most issuers of
municipal debt to provide current financial information to the informational repositories for
access by the general marketplace.
Generally, SEC Rule 15c2-12 requires issuers of municipal securities and certain other
"obligated persons" to make contractual promises to provide continuing information to the
marketplace during the life of securities issues.
Under the rule, an underwriter is not permitted to purchase or sell municipal securities in
connection with a primary offering of $1.0 million or more unless it has entered into such
a contractual arrangement with the issuer of the securities for the benefit of the holders
of the securities.
In conduit issues, the obligation to maintain continuing disclosure efforts should be
imposed on the project sponsors.
COUPON RATE
The interest rate on specific maturities of a bond issue. While the term "coupon' derives
from the days when virtually all municipal bonds were in bearer form with coupons
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Attachment B
attached, the term is still frequently used to refer to the interest rate on different maturities
of bonds in registered form.
CURRENT REFUNDING
A procedure whereby outstanding bonds are refinanced by the proceeds of a new bond
issue within 90 days of the date on which outstanding bonds become due or are callable.
Generally, either the entire outstanding issue is refunded (full refunding) or only the
callable bonds are refunded (partial refunding). Typically, a current refunding is performed
to take advantage of interest rates that are significantly lower than those associated with
the original bond issue.
At times, however, a current refunding is performed to remove restrictive language or
debt service reserve requirements required by the original issue.
(See also "ADVANCE REFUNDING")
CUSIP NUMBER
The term CUSIP is an acronym for the Committee on Uniform Securities Identification
Procedures. An identification number is assigned to each maturity of an issue, and is
usually printed on the face of each individual certificate of the issue. The CUSIP numbers
are intended to help facilitate the identification and clearance of municipal securities. As
the municipal market has evolved, and new derivative products are devised, the
importance of the CUSIP system for identification purposes has increased.
DEBT BURDEN
The ratio of outstanding tax -supported debt to the market value of property within a
jurisdiction. The overall debt burden includes a jurisdiction's proportionate share of
overlapping debt as well as the municipality's direct net debt.
DEBT LIMITATION
The maximum amount of debt that is legally permitted by a jurisdiction's charter,
constitution, or statutory requirements.
DEBT SERVICE
The amount necessary to pay principal and interest requirements on outstanding bonds
for a given year or series of years.
DEBT SERVICE RESERVE FUND
The fund into which moneys are placed which may be used to pay debt service if pledged
revenues are insufficient to satisfy the debt service requirements. The debt service
reserve fund may be entirely funded with bond proceeds, or it may only be partly funded
at the time of the issuance and allowed to reach its full funding requirement over time,
due to the accumulation of pledged revenues. If the debt service reserve fund is used in
whole or part to pay debt service, the issuer usually is required to replenish the funds
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Attachment B
from the first available funds or revenues. A typical reserve requirement might be the
maximum aggregate annual debt service for any year remaining until the bonds reach
maturity. The size of the reserve fund, and the manner in which it is invested, may be
subject to arbitrage regulations.
DEFAULT
The failure to pay principal or interest in full or on time. An actual default should be
distinguished from technical default. The latter refers to a failure by an issuer to abide by
certain covenants but does not necessarily result in a failure to pay principal or interest
when due.
DEFEASANCE
Providing for payment of principal of premium, if any, and interest on debt through the
first call date or scheduled principal maturity in accordance with the terms and
requirements of the instrument pursuant to which the debt was issued. A legal defeasance
usually involves establishing an irrevocable escrow funded with only cash and US.
Government obligations.
DEPOSITORY TRUST COMPANY (DTC)
A limited purpose trust company organized under the New York Banking Law. DTC
facilitates the settlement of transactions in municipal securities.
DERIVATIVES
Financial products whose value is derived from the value of an underlying asset,
reference rate, or index. Typically, these agreements are contracts between a
lender/investor and a borrower and include interest rate swaps, caps, floors, collars, and
forward purchase agreements.
DISCOUNT
The difference between a bond's par value and the price for which it is sold when the
latter is less than par.
DOUBLE-BARRELED BOND
A bond secured by a defined source of revenue (other than general property taxes) and
the full faith and credit of an issuer.
ENTERPRISE ACTIVITY
A revenue -generating project or business. The project often provides funds necessary to
pay debt service on securities issued to finance the facility. The debts of such projects
are self-liquidating when the projects earn sufficient monies to cover all debt service and
other requirements imposed under the bond contract. Common examples include water
and sewer treatment facilities and utility facilities.
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Attachment B
FINANCIAL ADVISOR
A consultant who advises an issuer on matters pertinent to a debt issue, such as structure,
sizing, timing, marketing, pricing, terms, and bond ratings.
FITCH INVESTORS SERVICE
A financial services company, founded in 1913, which provides investors with an
independent assessment of the credit worthiness of debt obligations.
FINAL OFFICIAL STATEMENT (FOS)
A document published by the issuer that generally discloses material information on a
new issue of municipal securities including the purposes of the issue, how the securities
will be repaid, and the financial, economic and social characteristics of the issuing
government. Investors may use this information to evaluate the credit quality of the
securities. (See also Official Statement)
FLOW OF FUNDS
The order in which pledged revenues must be disbursed, as set forth in the trust indenture
or bond resolution. In most instances, the pledged revenues are deposited into a general
collection account or revenue fund as they are received and subsequently transferred into
the other accounts established by the bond resolution or trust indenture. The other
accounts provide for payment of the costs of debt service, debt service reserve deposits,
operation and maintenance costs, renewal and replacement, and other requirements.
GENERAL OBLIGATION BONDS
Bonds backed by the full faith and credit of the City.
The taxing power is an unlimited ad valorem tax, usually on real estate and personal
property.
A special rate is incorporated in the property tax bili annually to pay for debt service.
A two-thirds voter approval is required for authorization.
Because it is secured by an unlimited tax levy, this structure has strong marketability and
lower interest costs.
GENERAL OBLIGATION DEBT
Debt that is secured by a pledge of the ad valorem taxing power of the issuer. Also known
as a full faith and credit obligation.
INDENTURE
A contract between the issuer and a trustee stipulating the characteristics of the financial
instrument, the issuer's obligation to pay debt service, and the remedies available to the
trustee in the event of a default.
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Attachment B
INVESTMENT GRADE
The broad designation given bonds that have a high probability of being paid, and minor,
if any, speculative features.
Bonds rated "BBB" or higher by Standard & Poor's Corporation, "Baa" or higher by
Moody's Investor's Service, and "BBB" or higher by Fitch IBCA Rating Service are
deemed by those agencies to be "investment grade."
ISSUANCE COSTS
The costs incurred by the bond issuer during the planning and sale of securities. These
costs include but are not limited to financial advisory and bond counsel fees, printing and
advertising costs, rating agency fees, and other expenses incurred in the marketing of an
issue.
ISSUER COUNSEL
An attorney engaged by the issuer to represent its best interest in a debt transaction.
Often this role is performed by bond counsel, however, at time separate counsel is
engaged that does not have responsibility to issue the bond opinion as well as represent
the issuer's best interests.
JUNIOR LIEN BONDS
Bonds that have a subordinate claim against pledged revenues.
LEASE
An obligation wherein a lessee agrees to make payments to a lessor in exchange for the
use of certain property. The term may refer to a capital lease or to an operating lease.
LEASE REVENUE BONDS
Bonds that are secured by an obligation of one party to make annual lease payments to
another.
LESSEE
The party to a lease agreement that obtains use of a facility or piece of equipment on
exchange for rental payments.
LESSOR
The owner of the property being leased.
LETTER OF CREDIT
Bank credit facility whereby a bank will honor the payment of an issuer's debt, in the event
that an issuer is unable to do so, thereby providing an additional source of security for
bondholders for a predetermined period. A letter of credit often is referred to as an L/C or
an LOC. Letter of Credit can be issued on a "stand-by" or "direct pay" basis.
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Attachment B
LINE OF CREDIT
Bank credit facility wherein the bank agrees to lend up to a maximum amount of funds at
some date in the future in return for a commitment fee.
MANAGER
The member (or members) of an underwriting syndicate charged with the primary
responsibility for conducting the affairs of the syndicate. The managers take the largest
underwriting commitment.
Underwriter
The underwriter serving as head of the syndicate. The lead Manager generally handles
negotiations in a negotiated underwriting of a new issue of municipal securities or directs
the process by which a bid is determined for a competitive underwriting. The lead
Manager also is charged with allocating securities among the members of the syndicate
in accordance with the terms of the syndicate agreement or agreement among
underwriters.
Underwriting Group
Any member of the management group.
MASTER LEASE AGREEMENTS
A lease agreement with a provider to lease equipment or facilities whose useful life is too
short, or whose cost is too small to finance with conventional long-term debt.
Various pieces and types of real and personal property from different vendors over a
period of time can be acquired under one master lease agreement.
Interest can be fixed or tied to an index.
Financing costs are normally minimal, but the interest cost may be higher than with other
instruments.
MARKS-ROOS BONDS
Bonds issued by a joint powers authority to buy other bond issues.
By pooling bond issues, marketability can be improved and administration costs are
reduced.
Often used in the case of a negotiated sale of redevelopment agency debt in order to
avoid the competitive sale requirements for such debt.
MOODY'S INVESTORS SERVICE, INC.
A financial service company, a subsidiary of Dun & Bradstreet Corp. has provided ratings
for municipal securities and other financial information to investors since 1918.
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Attachment B
MUNICIPAL SECURITIES RULEMAKING BOARD (MSRB)
A self-regulating organization established on September 5, 1975 upon the appointment
of a 15 -member Board by the Securities and Exchange Agreement. The MSRB,
comprised of representatives from investment banking firms, dealer bank
representatives, and public representatives, is entrusted with the responsibility of writing
rules of conduct for the municipal securities market. New board members are selected by
the MSRB pursuant to the method set forth in Board rules.
NEGOTIATED SALE
A sale of securities in which the terms of sale are determined through negotiation between
the issuer and the purchaser, typically an underwriter, without competitive bidding
NET INTEREST COST (NIC)
The average interest cost of a bond issue calculated based on simple interest. This
calculation involves a fraction in which the numerator is the gross amount of interest to
be paid over the bonds' life (adjusted for the amount of discount or premium granted at
the time of sale), and the denominator is the average life of the bond issue multiplied by
the issue's par value.
NO COMMITMENT DEBT
A debt that is generally a sub -type called land secured debt, such as Mello -Roos or
assessment district debt that indirectly benefits selected stakeholders in the City, but for
which the City would have no financial commitment. Thus, this type of debt bears unique
risks in the event of non-compliance with the borrowing agreements.
NOTE
A written promise to pay a certain amount of money on a specific date, with interest. By
convention, the maturity of a note is one year or less, making it short-term debt. However,
financial instruments with a longer stated maturity sometimes are called Notes. For
example, a bond anticipation note can have maturities of two years or longer.
OFFICIAL STATEMENT (OS)
A document published by the issuer that generally discloses material information on a
new issue of municipal securities including the purposes of the issue, how the securities
will be repaid, and the financial, economic and social characteristics of the issuing
government. Investors may use this information to evaluate the credit quality of the
securities. (See also Final Official Statement)
OPERATING LEASE
A lease that enables the lessee to acquire the use of an asset only, not its ownership as
in a capital lease. The lease term typically runs for only a portion of the asset's useful life.
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Attachment B
ORIGINAL ISSUE DISCOUNT BONDS
Bonds that are sold at a substantial discount from their par value at the time of the original
sale.
OVERLAPPING DEBT
The legal jurisdictions of local governments often overlap one another. In some cases,
one unit of government is located entirely within the boundaries of another. Overlapping
debt represents the proportionate share of debt that must be borne by one unit of
government because another government with overlapping or underlying taxing authority
issued its own bonds.
PAR VALUE
The face value or principal amount of a security.
PAYING AGENT
An agent of the issuer with responsibility for timely payment of principal and interest to
bond holders.
PRELIMINARY OFFICIAL STATEMENT (POS)
The POS is a preliminary version of the official statement that is used by an issuer or
underwriters to describe the proposed issue of municipal securities prior to the
determination of the interest rate(s) and offering price(s). The preliminary official
statement, also called a "red herring," often is examined upon by potential purchasers
prior to making an investment decision.
PREMIUM
The excess of the price at which a bond is sold over its face value.
PRESENT VALUE
The value of a future amount or stream of revenues or expenditures in current dollars.
PRIVATE ACTIVITY BONDS
A bond where the use of bond proceeds is used for private purposes. If deemed a private
activity bond, the interest is not tax exempt unless the use of the proceeds meets certain
requirements of the Internal Revenue Code.
PUT OPTION
The right to demand repayment of principal prior to a bond's maturity. In the case of
short-term variable rate debt, this right often is referred to as a variable-rate demand
option.
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Attachment B
REFUNDING
A procedure whereby an issuer refinances an outstanding bond issue by issuing new
bonds.
REGISTERED BOND
A security on which the ownership is recorded by the issuer or its agent.
RESERVE FUND
A fund established by the indenture of a bond issue into which money is deposited for
payment of debt service in case of a shortfall in current revenues.
REVENUE BONDS
Bonds secured by revenues generated by the facility that is financed or by dedicated user
fees.
Voter approval may or may not be required.
Planning is more complex because costs and revenues affect each other.
Credit enhancement (e.g., insurance or letter of credit) may be needed because of the
limited source of debt service payment.
SECONDARY MARKET
The market in which bonds are sold after their initial sale in the new issue market.
SENIOR LIEN BONDS
Bonds having a prior or first claim on pledged revenues.
SERIAL BONDS
A bond issue in which the principal is repaid in periodic installments over the issue's life.
SINKING FUND
A fund into which funds are placed to be used to redeem securities in accordance with a
redemption schedule in a bond contract. This term is sometimes used interchangeably
with the term "mandatory redemption fund".
SOPHISTICATED INVESTOR
A purchaser of bonds, who is considered knowledgeable about the pricing and risk factors
associated with the repayment of bonds.
This type of investor usually purchases bonds in large dollar amounts, typically $100,000
or more.
SPECIAL ASSESSMENTS
A charge imposed against property or parcel of land that receives a special benefit by
virtue of some public improvement that is not, or cannot be enjoyed by the public at large.
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Attachment B
Special assessment debt issues are those that finance such improvements and are repaid
by the assessments charged to the benefiting property owners.
STANDARD & POOR'S CORPORATION (S&P)
A financial service company, a subsidiary of McGraw-Hill -Company. S&P provides
ratings for municipal securities and other financial information to investors.
TAX ALLOCATION BONDS
Bonds secured by property tax increment (property taxes generated on assessed value
in excess of the frozen property tax base) in a redevelopment project area.
These bonds are issued to promote economic development.
Voter approval is not required.
TAX INCREMENT
Property tax revenues derived from the incremental assessed value increases from the
redevelopment project area's frozen tax base.
TERM BONDS
A bond issue in which the entire principal matures on one date. Term bonds also refer to
a particularly large maturity of a bond issue that is created by aggregating a series of
maturities. In the latter instance, provision is made for mandatory structuring fund
installments in advance of the term bond's maturity to reduce the burden of a particular
large debt service payment in any one fiscal year.
TRUE INTEREST COST (TIC)
An expression of the average interest cost in present value terms. The true interest cost
is a more accurate measurement of the bond issue's effective interest cost and should be
used to ascertain the best bid in a competitive sale.
UNDERWRITER'S COUNSEL
An attorney engaged by the underwriter(s) to represent its interests in a debt transaction.
Generally, underwriter's counsel prepares the bond purchase agreement between the
issuer and the underwriter and, when more than one underwriter is involved, the
agreement among underwriters.
VARIABLE RATE BOND
A bond on which the interest rate is reset periodically, usually no less often than
semi-annually. The interest rate is reset either by means of an auction or through an
index.
VENDOR LEASES
A vendor of equipment acts as the lessor and investor, and holds the lease for its full term
or may assign the lease.
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Attachment B
The motivating factor to the vendor is usually to encourage future sales of its product.
YIELD CURVE
A graph that plots the market yields on securities with different maturities, at a given point
in time. The vertical axis represents the yields, while the horizontal axis depicts the time
to maturity. The term structure of interest rates, as reflected by the yield curve, will vary
according to market conditions, resulting in a wide variety of yield curve configurations.
YIELD -TO -MATURITY
The rate of return that an investor will receive if the bond remains outstanding and the
investor holds the bond to maturity. The investor must take into account the price paid for
the bonds, the dates of purchase and maturity, and the coupon rate on the bonds. The
"yield to maturity" assumes that interest payments will be re -invested at the same coupon
rate borne by the bond.
ZERO COUPON
A bond that does not pay interest periodically. Investors receive interest on the scheduled
principal maturity date of the obligation.
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Attachment B
APPENDIX B: SPECIAL DISTRICT FINANCING PROCEDURES
This appendix outlines specific procedures for special district financing. Proposals must
be initiated via an application process. The applicant shall pay all costs to evaluate the
application and undertake the proceedings to consider the formation of the assessment
district or the community facilities district.
DEPOSITS
Each application for the formation of an assessment district or a community facilities
district shall be accompanied by an initial deposit in an amount to be determined by the
City to be adequate to fund the evaluation of the application and undertake the
proceedings to consider the formation of the assessment district or the community
facilities district.
The City may, in its discretion, permit an applicant to make periodic deposits to cover
such expenses rather than a single lump sum deposit; provided, however, no
preformation costs shall be incurred by the City in excess of the amount then on deposit
for such purposes.
If additional funds are required to pay required preformation costs, the City may make
written demand upon the applicant for such additional funds and the applicant shall
deposit such additional funds with the City within five (5) working days of the date of
receipt of such demand.
Upon the depletion of the funds deposited by applicant for preformation costs, all
proceedings shall be suspended until receipt by the City of such additional funds as the
City may require.
PROJECT FISCAL FEASIBILITY
Project property "value -to -lien" ratios shall be based upon current bond market conditions
as proposed by Finance Director under the advice of selected financial advisor or
underwriter.
The property value shall be determined by an MAI (Member of the Appraisal Institute)
appraiser selected by the City.
A market absorption study of the proposed development project by an independent
consultant, chosen by the City, shall be required. The absorption study shall be used to
determine if the financing of the public facilities is appropriate, given the timing of
development and whether sufficient revenues will be generated by the project to retire the
debt service.
With regard to community facilities districts, the proposed rate and method of
apportionment of the special tax shall comply with the following criteria:
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Attachment B
1. The primary emphasis of the special tax formula shall be equitable for the
future property owner.
2. Special tax formulas shall provide for minimum special tax levels that satisfy the
following expenses of a community facilities district:
a. 110 percent gross debt service coverage for all bonded indebtedness;
b. The projected administrative expenses of the community facilities district;
and
C. An amount equal to the differences between expected earnings on any
escrow fund and the interest payments due on bonds of the community
facilities district.
d. Additionally, the special tax formula may provide for the following:
I. Any amounts required to establish or replenish any reserve fund
established in association with the indebtedness of the community
facilities district;
Il. The accumulation of funds reasonably required for future debt service;
III. Amounts equal to projected delinquencies of special tax payments;
IV. The cost of remarketing, credit enhancement, and liquidity facility fees;
V. The cost of acquisition, construction, furnishing, or equipping of eligible
public facilities;
VI. Lease payments for existing or future public facilities;
VII. Costs associated with the release of funds from an escrow account; and
VIII. Any other costs or payments permitted by the Mello -Roos Act.
3. All property, not otherwise statutorily exempted, shall bear its appropriate share of
the special tax liability.
The sole source of revenues pledged to repay bonds issued for an assessment
district or a community facilities district shall be the assessments or special taxes,
as applicable, levied or authorized to be levied within such assessment district or
community facilities district, proceeds of such bonds and reserve funds held under
the applicable bond documents, the proceeds of foreclosure proceedings and
additional security instruments provided at the time of issuance of such bonds.
Neither the faith, credit or taxing power of the City shall be pledged to the payment
of debt service on bonds issued for an assessment district or a community facilities
district nor shall the City have any obligation to replenish any reserve fund
established for any such bonds.
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Attachment B
4. The projected ad valorem property tax and other direct and overlapping debt for
the proposed development project, including the proposed maximum special tax,
should not exceed two percent (2%) of the appraised value of each improved
parcel upon completion of the improvements.
Any applicant shall be required to provide all information regarding the development of
the property within the assessment district or community facilities district, including
without limitation the financing plan for such development, which is necessary to ensure
that the official statement for any bond issue complies with the requirements of Rule 15c2-
12 of the Securities and Exchange Commission and all other applicable federal and state
securities laws.
The City's Debt Management Committee, in conjunction with advisors retained by the
City, shall determine whether the aggregate cost of public improvements and permitted
indirect costs, allowable under statute, shall equal an amount that renders formation of a
district, both economically cost-effective and efficient; and make a recommendation to the
City Council accordingly.
The recommended issue shall be sized by the Finance Director, in conjunction with City
financial advisors, and shall meet industry standards with respect to marketability.
Minimum bond issue size will be as determined by the Finance Director upon
recommendation of the Debt Management Committee. In very general terms, the
minimum bond issue size must be greater than $5.0 million to gain acceptable market
access and to distribute the transaction costs appropriately.
PROJECT DISCLOSURE
Additionally, any applicant may, as determined by disclosure counsel, underwriter or
underwriter's counsel be required to enter into a continuing disclosure agreement to
provide such continuing disclosure, pertaining to the assessment district or community
facilities district, the development thereof and the applicant, as necessary, to ensure
ongoing compliance with the continuing disclosure requirements of Rule 15c2-12.
With respect to community facilities districts and assessment districts, full disclosure to
prospective property owners of the special tax or assessment lien shall comply with
applicable statutory authority.
The City, in its sole judgment, may require additional property owner notification if it
deems such disclosure will assist subsequent property owners' awareness of the lien
obligation.
FINANCING COVENANTS
All statements and materials related to the sale of special tax bonds (community facilities
district) and improvement bonds (assessment district) shall emphasize and state that
neither the faith, credit, nor the taxing power of the City of Rancho Palos Verdes is
pledged to the repayment of the bonds, nor that there is an obligation of the City to
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Attachment B
replenish the reserve fund from revenue sources other than special taxes, annual
assessments or proceeds from foreclosure proceedings.
The City accepts no contingent liability for the debt service on no -commitment debt issued
by special districts.
All terms and conditions of any bonds issued for any special district, including, without
limitation, the sizing, timing, term, interest rates, discount redemption features, flow of
funds, investment provisions and foreclosure covenants, shall be established by the City.
Each bond issue shall be structured to adequately protect bond owners and to avoid
negatively affecting the bonding capacity or credit worthiness of the City.
Unless otherwise approved by the City Council, the following shall serve as minimum
bond requirements:
A. A reserve fund shall be established for each bond issue to be funded out of the
bond proceeds in an amount equal to 10% of the original proceeds of the bonds
or such lessor amount as may be required by federal tax law.
B. Interest shall be capitalized for a bond issue only so long as necessary to place
the assessments or special tax installments on the assessment roll; provided,
however, interest may be capitalized for a term to be established at the discretion
of the City Council on a case-by-case basis, not to exceed an aggregate of 18
months, taking into consideration the value -to -debt ratio, the expected timing of
initial occupancies, expected absorption and build out of the project, the expected
construction and completion schedule for the public improvements to be funded
from the proceeds of the bond issue in question, the size of the bond issue, the
development pro forma and the equity position of the applicant, and such other
factors as the City Council my deem relevant.
In instances where multiple series of bonds are to be issued, the City shall determine
what improvements shall be financed from the proceeds of each series of bonds.
PROJECT APPRAISAL
The definitions, standards, and assumptions to be used for appraisals shall be determined
by the City staff on a case-by-case basis, with input from City consultants and applicants,
and by reference to relevant materials and information promulgated by the State of
California.
In any event, the value -to -lien ratio shall be determined based upon an appraisal by an
independent MAI appraiser of the property within the proposed assessment district or
community facilities district that will be subject to the levy of special taxes.
The appraisal shall be coordinated by and under the direction of the City.
Definition of Appraisal
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Attachment B
An appraisal is a written statement independently and impartially prepared by a qualified
appraiser setting forth an opinion of defined value of an adequately described property
as of a specific date, supported by the presentation and analysis of relevant market
information.
Standards of Appraisal
The format and level of documentation for an appraisal depends on the complexity of the
appraisal.
A detailed appraisal shall be prepared for complex appraisals.
A detailed appraisal shall reflect nationally recognized appraisal standards, including to
the extent appropriate, the Uniform Appraisal Standards for Federal Land Acquisition.
An appraisal must contain sufficient documentation, including valuation data and the
appraiser's analysis of the data, to support the appraiser's opinion of value.
At a minimum, the appraisal shall contain the following items:
a. The purpose and/or the function of the appraisal, a definition of the estate being
appraised, and a statement of the assumption and limiting conditions affecting the
appraisal.
b. An adequate description of the physical characteristics of the property being
appraised, i.e., localization, zoning, present use, and an analysis of the highest and
best use.
c. All relevant and reliable approaches to value consistent with commonly accepted
professional appraisal practices.
d. If a discounted cash flow analysis is used, it should be supported with at least one
other valuation method such as a market approach using sales that are at the same
stage of land development, if available.
e. If more than one approach is used, there shall be an analysis and reconciliation of
approaches to value that is sufficient to support the appraiser's opinion of value.
f. A description of comparable sale, including a description of all relevant physical, legal,
and economic factors such as parties to the transaction, source and method of
financing, and verification by a party involved in the transaction.
g. A statement of the value of the real property.
h. The effective date of valuation, date of appraisal, signature, and certification of the
appraiser.
i. No appraiser or review appraiser shall have any interest direct or indirect in the real
property being appraised for the City that would in any way conflict with the preparation
or review of the appraisal.
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Attachment B
j. Compensation for making an appraisal shall not be based on the amount of the
valuation.
k. The valuation of property within a proposed assessment district or community facilities
district should be based on each of the three (3) premises discussed below:
PREMISE NO. 1 —AS IS VALUE.
The total land within the proposed district is valued "as is":
a) With any existing infrastructure.
b) Without proposed infrastructure being financed.
c) With existing assessor parcel configuration.
d) With planned densities for residential land uses or with other planned
development for non-residential land uses authorized by the City's general plan
or specific plan, if any or, other approved land use entitlements applicable to
such property.
PREMISE NO. 2 — PROJECT BUILD OUT VALUE.
The total land within the proposed district is valued under projected conditions:
a) With proposed infrastructure being financed completely.
b) With the planned densities for residential land uses and other planned
development for non-residential land uses authorized by the City's general plan
or specific plan, if any, and any other approved land use entitlements
applicable to such property.
c) Land development is at the stage of being marketed to merchant builders or
tentative tract maps ready to be filed, as applicable.
This is a projected value based on development plans predicated on market
conditions continuing as projected.
PREMISE NO 3 — BULK LAND VALUE.
The total land within the proposed district is valued under projected conditions:
a) With proposed infrastructure being financed completely.
b) With existing parcel configuration.
c) Consideration planned densities allowed by the specific plan of the project.
This premise should consider a discounted or "quick sale" valuation considering
time, costs, and the possibility of a per unit value based on the total size of the
project.
Nothing contained in the foregoing premises shall prevent the appraiser from basing an
appraisal of property proposed to be included in an assessment district or a community
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Attachment B
facilities district on any other premise or premises which are deemed, in the professional
judgment of the appraiser, to be more appropriate to a special use to which property is or
is proposed to be made.
PROJECT CRITERIA
Special district financing shall be considered for development projects with land uses
consistent with the goals of the General Plan and specific plans, through:
1. Major streets and arterial thoroughfares.
2. Master planned storm drain facilities.
3. Regional sewer and/or water facilities.
4. Reclaim water distribution system.
5. Parks or open space construction/dedication beyond that which is required
to meet existing City standards.
6. Public safety facilities.
7. Other major public infrastructure or community facility improvements
required as a result of the development or its impact on the community.
If the improvements provide benefit beyond the immediate area of the proposed
development, then infrastructure and facility improvements may be prioritized and
considered for inclusion into special districts. Indirect ("soft") costs for engineering and
design associated with public improvement construction may be included within the
district to the extent they can be attributed directly to the public improvements.
No other "soft" costs shall be financed through the district, other than that which is allowed
by statutory regulations for assessment districts and community facilities districts.
The City Council shall authorize the issuance and sale of bonds for an assessment district
or a community facilities district only if the City Council has previously determined that:
1. The aggregate value of the real property within the District that will be
subject to the assessment or special tax to pay debt service on the bonds
will be at least three (3) times the applicable Public Lien Amount (defined
below).
2. For each common ownership of undeveloped property that will be subject
to the assessment or special tax to pay debt service on the bonds, the
aggregate value of all such undeveloped property under such common
ownership will be at least three (3) times the Public Lien Amount
apportioned to such properties.
3. The value of each parcel of undeveloped property that will be subject to the
special tax to pay debt service on the bonds will be at least two (2) times
the Public Lien Amount apportioned to such parcel.
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Attachment B
The "Public Lien Amount" shall mean the principal amount of the bond issue proposed to
be issued for the assessment district or community facilities district, plus the principal
amount of all other bonds outstanding that are secured by a special tax levied pursuant
to the Mello -Roos Act or a fixed lien assessment levied on property with the assessment
district or community facilities district for which the bonds are proposed to be issued.
An exception to one or more of the above determinations may be approved if the City
Council finds and determines that the proposed bonds do not present any unusual credit
risk due to the availability of credit enhancements or for other reasons specified by the
City Council, or as indicated by a four-fifths vote of the City Council that the proposed
bond issue should proceed for specified public policy reasons.
Other project elements that may determine the viability and desirability of special district
financing may include factors such as ownership composition, geographical isolation or
other pertinent economic or demographic factors that would enhance community
development in accordance with established City goals and objectives.
A land use project, exclusively residential, without public improvement contributions,
which meets the intent and philosophy of this policy, shall not warrant consideration for
special districts financing.
PROCEDURES FOR APPLICATION AND APPROVAL
These procedures are subject to administrative amendment as necessary by the City
Manager.
A. Pre -Application Conference:
1. Applicant should contact the Public Works Department.
Applicant will meet with Public Works staff to discuss the proposed
project and application procedures.
B. Application Submission:
Applicant submits an initial application, a processing fee to be determined
by the City, and 1 % of the estimated bond issue cost.
C. Application Review:
Public Works staff prepares and submits an application analysis packet to
the Debt Management Committee for review and discussion.
D. Application Process Funding:
Upon application approval by the Debt Management Committee, Public
Works staff will process and secure an Advance Funding Reimbursement
Agreement and funds from the applicant. The amount of funds from each
applicant will be individually determined by Finance Director and Public
PAGE 43
51
Attachment B
Works staff based upon the complexities of the proposed financing and
district administration.
Formation proceedings will not progress until the applicant's funds are on
deposit with the City.
E. Formation Proceedings:
1. Public Works/Finance staff will:
a. Process consultant agreements for special services as
selected and determined by the Debt Management
Committee, and coordinate City Council review/approval of
consultant agreements.
b. Coordinate receipt of project information from applicant and
applicant's consultants/engineers.
C. Coordinate consultant services for the City.
d. Coordinate City Council review/approval of the financing
district.
F. Formation Approval:
City Council grants or denies district formation.
G. Bond Sale:
Finance Director coordinates bond sale and all underwriter activities,
financial management, structuring, and trustee activity.
H. Construction Management/Acquisition:
Public Works staff coordinates and administers all public infrastructure
construction and acquisition of improvements.
CONTENT OF APPLICATION
A. Project Owner Information:
1. Company name, and DBAs if applicable.
2. Form of ownership (e.g. corporation or partnership), and descriptions of
affiliations with other organizations.
3. Mailing address, primary operating address, and phone numbers.
4. List of officers, home addresses and other business affiliations.
5. List of equity owners with a share of 10% or more, with home addresses.
6. If publicly held, indicate applicable stock exchange.
7. If partnership, list General and Limited Partners and interest owned by
each.
PAGE 44
52
Attachment B
8. If trust, list name, home address and percentage equity for all
beneficiaries.
9. Name, address, phone number and email address of officer to whom all
notices and communications concerning the project should be sent.
10. Principal bank(s) of account with name and phone number of contact
person.
11. Name, address, phone number and email address for:
a. Counsel to applicant.
b. Bond counsel on proposed project.
c. Investment banker for proposed project.
12. History of past tax-exempt financing transactions, including default
history, if applicable.
13. Express statement regarding whether the firm or any of its principals are
currently or in the past 10 years been engaged in any litigation involving
financing of the type and nature being proposed to the City. If
applicable, include the names of the principals and details of the
litigation.
B. Proposed Project:
1. Brief narrative explanation of why project is being undertaken.
2. Narrative description of proposed project, including renderings if
available.
3. Proposed facilities to be constructed with bond proceeds.
4. Express statement about whether the applicant now owns the site of the
proposed facility; and if not, whether the applicant has entered into an
option or commitment or other agreement to purchase it.
5. Estimated useful life of buildings, equipment, or off-site improvements.
6. Express statement about whether the project involves, in whole or in
part, residential real property, sports facilities, commercial property,
health care facilities, manufacturing facilities, entertainment facilities, or
industrial land development activities. Include explanations for any
applicable facilities.
7. Estimated dates for start and completion of facility construction.
C. Cost of the Project:
State the costs reasonably necessary for the acquisition or construction of
the proposed project together with any machinery and equipment
necessary or convenient in connection therewith, and including any utilities,
access roads or apportionment facilities.
PAGE 45
53
Attachment B
1. Land and facilities.
2. Architectural and engineering.
3. Construction costs.
4. Interest during construction.
5. Financing, legal and miscellaneous costs.
6. Contingency, if appropriate.
D. Significant Public Benefits:
Include a description of the significant public benefits that will arise from the
issuance of bonds in the maximum amount proposed in the application.
1. Employment creation/displacement.
2. Energy, mineral, or natural or cultivated resource conservation.
a. Estimate of increased utilization of resources.
b. Estimate of increases in cost to the public due to increased
utilization.
3. Describe any adverse environmental impacts due to the construction or
completion of the project, including additional waste disposal. Include
estimates and copies of any required Environmental Impact Reports.
PAGE 46
54
Attachment C
Debt Management Policy
Background, Debt managcnacTnt policics arc vvrrttcn guidc:liucs, allom anc m and
restrictions that guide they dc:ht isstaarrcc practices of stat.e or local ?ovcrnnacnts,
including thac issilauce process, managovent of a debt portfolio. and adherence to
various lmvs and regulations. A debt rnanagc rnerat poli(y Should iml-wove tlae cluadity°
of decisions, articulate policy goals, provide° guidelhms for the structure of debt
issuaaace� and da.�anonstratc a commitment to long term capital and firnaancial
planning. Adlicrc•nce to adept rnanaM nlcnt Imlic:v s"nak to rating; aguIcks and
thc: capital rna rkcts that a govurmnc tit is w(Al managed and therefore is lik.cly to
meet its cac.bt obligations in a Andy rnarnmT. -Debt arranagcmunt policies should be
"Tit -tun wit -h attention to the iss'uer's specific- needs and avaailahlc fimmcing options
and are typically itn[demoHed through more:: specific operatitat, procedures. Finally,
de:bl nianaagenicnt policies should be approved hy the issuer's governing body to
provide: credibility, transparclicy and to ensure that there is at common
undci-standing an7ong ClcaON olIkials and AN regarding the hstmYs approach to
debt financing.
Recommendation. GFOA recomanCnds that state and local go��a:�rnanents adopt,
comprehensive writtcl) debt nran.q.4clucrat policies. 'T'hese. policies should r•eflco
local., state, and federal 1-aw-S and regulatiotrs. To assist, wkh the dcvc.loprnerat of
these polic:ics G 'O.A recommends that a k ovcrnnl(-rlt,s Dcbt Marnagenacnt Police
(f'olicy) should be rc yiewd periodicaalt (and uptime d if nc cv sary�) and should
address at ]cast the following:
1. Debt MS. The Polk} should consider setting specific limits or acceptable
manges for each type of richt. Limits generally arc set for legal, public: policy, and
financial reasons.
aa. nray be deterulined hy:
w Statc constitution or law,
Local ch;lrtcr, resolution or ordinancc. or covullant, an+.l
Bonet, referenda approved by votca:s.
h. Public Pofi ic',� will address thr incl -ail slaandards :arid considerations �'vitilin a
"m/ca"11111crit and can include:
Purlxwes for "WT dabs proc:euN may hu cased or p"AHA cd,
Types of debt than awy be isst.aed or prohibited.
lWationship to and intcgrat.ion with the. Capita] Improvement Program. acid
Policy goals related to economic development, including use of' tax
inc:rernent financing and public-private partnerships.
Attachment C
C. h7narrcM restrictions or phtrl.ohlA C017S0(-1-3tio17s generally reflect public policy
or other.r financial retiou ww cc>nstrainIS, srtcth as rTducc°c1 use of t particular type
of debt clue to changing financial conkhticmm An>ropriate debt limits can have a
positive impact on bond ratings, particular1 if' the govcrim-icni denrons(rmes
aclla Taxe to such polieW over t.irnc, hina,ncisd Limits often arc: expressed as
ratios c-ustornardy used bw-credit armlystrs. F)iffcrent hrianc:ial lirnits are; used for
difTcl•cnt wipes of l;xarnplc-s include:
Dirac t Dcht, including, general ol>ligatk>n bonds, aro subject to legal
reW imntu ats and mac bc: AM to ho' 111CaPMrcd or hinitcd by the, following
ratios:
DAL per capita,
Debt to personal income,,
{debt to taxable: property value;, rand
Debt service payer ents as a percentage of general fund revenues or
experulitures.
Revcnilc Licht lexAs often are Hrnkcd by debt sc wke cotiera<;e ratkA (op.
annual net plc:cli cd re°tienues Co annual (Acht service), additional bond
provisions contained in hoed Covenants, and potential credit rating impacts.
Comh it Dcbt HII-thatkIns nay re Elect the. right of the issuing government to
apprevc the horrowcr's creditworthiness, including a rnininrum credit
rating, and the purpose of they borrowing issue. Such limitations rc°flect
sound public policy, particrtlarla if there; is a contingent impact on the
rmwnd rmwiri es of r.he government or ruarl:etabilify of' the government's
own direct debt.
'Vor°t �rro L)cht should dC;,crih( thC specific perpotics and
cire-,urus,tanc:cs under "Tich it can be used. as "A as hinitmiom in term of,
size of borrowing.
I i(rirrhIc R:Itc- Licht WWI inciude information about slion using.; non-f3W
rate debt is acccprahic to the entity either Line to the term of the project,
n arkct coiditions, or debt portfolio structuririg purposcs,
2. Debt Structuring praclicu , Thc Policy shouid include spcc:ific guidelines
1-C,2, arding; the debt, I-)r-,ICdCCS for each type of f:x:rnd, including:;:
y'larimu n tont (often stated in absoln e leans or based on The useRd life° of
The asset(;;)),
r'1.vcragc_ 111,aturlL
Deht scarvicc pattern such as equal payrucrats or ecfual principal amortiZatiou,
We of optional rc,dcrn[Mion hatures that rkA'tcc't market conditions and/or
nerds of the government,
Ike of variable or fined mw- debt, credit enhanrcrnents, MOvativcs, shcwt-
term debt, and tirnitahons as to when, ,.and to «what extent, c<ach can be used,
and
pvornr7ir it 1--hor ice Office r s Assc)cn ion Best Practice
Attachment C
Other sinicturirtg practkTs Ahottld he considered, such as cWrdtalizing
intcrest during the construction of the ImQcct and dc•fc°rral o1' principal,
and/err other inlcrwd credit support, including general obligation plcdgcs.
3. Debt Issuance 11wic us. TO Policy should provide guidance mgaRhng Te
is,mancc procc,ss, vOlich rnwt) differ for each type of debt. These pracaices
include:
selection and use of professional scrvic-c: providers, including all
inde pc-rrdcnt financial advisor, to assist will) c etcrtuitnitr , the method of sale
and the sc kx ikm of other Financing team rnen'dws,
• t: ritcria for dc°tcmm0dy the We methocl ucgodatcd. private
pl,rccn�cnt) .uzd c>f pr-occcds,
a Kc of wnpunOw bone! pricing services or rnarkel indices as a benchmark
in rtggotiatcd transactions. as well as to evaluate final [)on([ pricing results,
• Criwria fpr isstrt.ute of advance relunding and current refunding, bonds, and
• We of crcmdh t aNgs, n-tinitnurn pond ratings; determination of the number
of ratlrirs, and selection o1 t Uing se ivices.
4. DeN Alartageiment I'racticm "Clic. 10licy should provide gnidwwr for wgcinf
admini nytive activities hvInAng:
w Investmentof bond procceds,
• Pdnmry and scamdary market d6clownT practices, incluclMg annual
certifications .rs rccluirccl,
• ;Arbitrage,: rcbmc. monitoring and filing;.
Federal and staid lata- cornpli.nncc hrmoiccs, and
M (Agoing market and investor relations cTl os.
S. the of Dcdvathw The Dccbt %Ia ia,,YC K W Prtlictif ",11OUld cicarl�� state rvhI21l1ear
or 1101 HIC cntitti' can or should Me cleri'vaiiwm If the pohcy allows for the mc
of derivatives, a separate aru.l wopmhensivc dcriva.tives policy should be
dw Hoprd (sec <;FC.t<4 s Ach,horv, 1:)eWophig a llc;t"r alkc.s Polic.v and
Derivatives C`hec:laist).
References.
(;FOA -Advisory, Using Variahlc Rate Deht, Instrurricnts, 2010,
GFOA Advisory. INC of De ATHated Derivativcs Product; and the Development of a
Ocrivativ es police. 2010.
CAM Dcri aiNcs (Mcc. klist. 2010.
GIM Yost Practice_ Selecting Bond Comad. AM,
C;lUA Best PracAW SrcWcting I:At7;Mal Mimns.2MM.
WA
r,Cwi9rnmo°��I f.:inprrt ?ftirc rs Best Practice
Attachment C
GFOA Hest Practice, Selectiris Linde nvriters for a Bond Sale, 2008.
(;PC)A/: ABI, Post Issu;incc- Compliancc. Cheddis(, 2003.
L3crrchmr ,lr%;ilig ,incl llcasrlril)g Debt (. rirlc ily. Rowan iVliranda and Ron Picur, GFOA,
2000.
A (r'rlido 1hr flrcparil g I L)rht floli^l', Patricia '1'it,ttc', GFOA. 1998, .
Approved 11-HIc r%TO,-9'5 1""wc utivr Ilox-cl, Oc tohcr,, 2012
w
BEST PRACTICES
Attachment D
Ernq-Aoying a, Debt Mar�,,agernent Policy
C<,1 /\
By the California Debt and Investment Advisory Commission
ublic agencies develop and
apply debt management poli-
cies to ensure that debt is issued
and managed prudently. This practice
is advocated by the Government
Finance Officers Association, which
has published best practice guidelines
for debt management policies.' These
guidelines, along with other GFOA pub-
lications, recommend that a formal
debt management policy, guiding debt
issuance, should be a part of a pub-
lic agency's debt administration? The
GFOA endorsed the use of a debt man-
agement policy to improve the qual-
ity of decisions, articulate policy goals,
provide guidelines for the structure
of debt issuance, and demonstrate a
commitment to long-term capital and
financial planning.
To assess the extent to which
local public agencies in the State of
California have adopted GFOA's rec-
ommendations, the California Debt and
Investment Advisory Commission com-
pared the debt management policies
adopted by a sample of local agencies
against the GFOA's best practice guide-
lines. Specifically, the study assessed
the degree to which local agency debt
management policies addressed debt
limits, debt structuring, debt issuance,
and debt management.
This study reveals that an unexpect-
edly low number of cities, counties,
and school districts that issued debt
between January 2001 and January
2012 have adopted debt management
policies. Based on a valid sampling of
issuers, 61 percent of county issuers,
49 percent of city issuers, and 23 per-
cent of school district issuers have
adopted policies.
Furthermore, the study finds (through
a review of the contents of 84 individual
debt management policies) that coun-
ty issuers more consistently complied
with the GFOA's best practice guide-
lines, while school district issuers were
the least likely to follow the guidelines.
The California Debt and Investment
Advisory Commission realizes that the
GFOA best practice guidelines do not
universally apply to all types of issuers
or all types of debt. But as a standard,
these guidelines and the GFOA's sup-
porting publications provide any pub-
lic agency with a comprehensive and
easy-to-use framework to develop a
debt management policy. Public agen-
cies that issue debt are more likely to
protect the interests of the agency and
the public if they give thought to the
structure, use, and administration of a
debt program in advance of entering
the market.
BENEFITS OF A DEBT
MANAGEMENT POLICY
A local agency's debt management
policy can help its debt managers with
making decisions and with support
54 Government Finance Review I August 2014 59
efforts to identify conflicts, inconsis-
tencies, and gaps in a local agency's
approach to project finance and debt
management. A debt policy can also be
instrumental in setting a proper balance
between limits on the use of debt financ-
ing and providing sufficient flexibility to
respond to unforeseen circumstances
and opportunities, Potential benefits of
a formal debt policy include:
Supporting financial decisions that
are transparent and consistent.
Establishing standard operating
procedures to guide daily financial
activities.
Providing performance measures
and limits based on predetermined
levels and benchmarks.
Providing justification for decisions.
Providing an interface between capi-
tal planning, long-term financing
objectives, and daily operations.
Focusing on the overall financial
plan in contrast to individual issues.
Proactively safeguarding public
agencies from making unsuitable
debt -related decisions.
Providing consistency and instruc-
tion to new and transitioning staff.
Establishing an effective manage-
ment mechanism for post -issuance
compliance.
Lacking at formal set of well -under-
stood and well -communicated policies,
issuers may run into problems in both
the issuance and administration of
debt. In the absence of policies, issuers
may fail to control the type, structure,
and maturity of debt being issued. They
may enter into service contracts that
are not well understood and potentially
harmful. And they may fail to meet
federal disclosure and tax compliance
obligations,
Failures such as these can result in
adverse outcomes for public agencies.
To the extent that a lack of policies
lead to the injudicious use of debt,
poorly structured debt or repayment
schedules, or the failure to meet disclo-
sure or tax obligations, the issuer may
be penalized by regulators, downgrad-
ed by ratings agencies or, at minimum,
lose investor and taxpayer confidence.
Equally painful are the implications of
a poorly managed debt portfolio to the
agency's fiscal conditions, including
cash shortfalls, missed debt service pay-
ments, or the inability to call or refund
Exhibit 1: Compliance with GFOA Best Practice Guidelines
By Type of Issuer
Attachment D
debt to take advantage of changing
market conditions. Well -constructed
and well -communicated policies pro-
tect the interests of the public as well
as the public servants who, acting in
good faith, seek to meet the needs of
their constituents,
The California Debt and Investment
Advisory Commission found that
compliance among cities, counties,
and school district issuers with the
GFOA's best practice guidelines for debt
management policies is poor. County
issuers are more likely to have
policies. Nearly 61 percent of coun-
ty issuers have policies. Forty-nine
percent of city issuers have adopted
policies, and just 23 percent of school
district issuers.
Of the county issuers that had adopt-
ed debt policies, 55 percent included at
least half of the elements of a complete
debt policy as recommended by the
GFOA (see Exhibit 1), Of the cities that
had adopted policies, only 22 percent
had incorporated more than 50 percent
of the GFOA's recommended elements.
Number Percent of Total
of Policies within Issuer Grol
I 55.0
9 45.0
Number Percent of Total
of Policies within Issuer Grot
' _ 3.6
27 96.4
I
August 2014 1 Government I ance Review S5
Cities
Debt Policy Score
Number Percent of Total
of Policies within Issuer GrOL
15 or more Elements
8 22.2
Addressed In Policy
Fewer than 15 Elements
28 77.8
Addressed in Policy
Total
36
Attachment D
debt to take advantage of changing
market conditions. Well -constructed
and well -communicated policies pro-
tect the interests of the public as well
as the public servants who, acting in
good faith, seek to meet the needs of
their constituents,
The California Debt and Investment
Advisory Commission found that
compliance among cities, counties,
and school district issuers with the
GFOA's best practice guidelines for debt
management policies is poor. County
issuers are more likely to have
policies. Nearly 61 percent of coun-
ty issuers have policies. Forty-nine
percent of city issuers have adopted
policies, and just 23 percent of school
district issuers.
Of the county issuers that had adopt-
ed debt policies, 55 percent included at
least half of the elements of a complete
debt policy as recommended by the
GFOA (see Exhibit 1), Of the cities that
had adopted policies, only 22 percent
had incorporated more than 50 percent
of the GFOA's recommended elements.
Number Percent of Total
of Policies within Issuer Grol
I 55.0
9 45.0
Number Percent of Total
of Policies within Issuer Grot
' _ 3.6
27 96.4
I
August 2014 1 Government I ance Review S5
School district issuers were the least
likely of the three categories of issuers
to adopt debt management policies,
but even if they did, less than 4 percent
addressed half of the GFOA elements.
As discussed, the GFOA identifies
four main categories of information to
be included in a public agency's debt
management policy. These include
debt limits, debt structuring, debt issu-
ance, and debt management. CDIAC
used this framework to analyze 84 debt
policies collected from cities, counties,
and school districts. While the results
of this analysis are not statistically sig-
nificant and cannot be projected on
the population of city, county, and
school district issuers that have debt
management policies, they do reveal
something about the adherence of issu-
ers to GFOA's best practice recom-
mendations. The following discussion
addresses each category.
The GFOA guidelines provide for three
subcategories within the debt limits cat-
egory: purpose of issue, legal limita-
tions, and types of debt and criteria for
issuance. These subcategories address
the specific legal, policy, and financial
parameters of each type of debt, These
subcategories are broken down into a
total of 10 elements. Exhibit 2 reports
Attachment D
on the compliance of city, county, and
school district issuers to the GFOA's rec-
ommended content for this category.
R
The GFOA guidelines recognize one
subcategory under the debt structure
category, which should make reference
to and discuss the structural aspects of
each type of debt to be issued by the
local agency (see Exhibit 3). Structural
characteristics to be considered should
include maturity limitations, level debt
service requirements, premium and
discount structures, the use of credit
enhancement, and facilities used to
retire debt early. As stressed in the debt
limits category above, the GFOA recom-
Exhibit 2: Percent of Debt Management Policies Addressing Debt Limit Elements
By Type of Issuer
Exhibit 3: Percent of Debt Management Policies Addressing Debt Structure Elements
By Type of Issuer
Percent of Reviewed Policies Addressing Elements
The Elements of a Debt Management Policies City County School District
Call Features
35.0
Percent of Reviewed Policies Addressing Elements
3.6
The Elements of a Debt Management Policies
City
County
School District
Features Credit Enhancement
Restrictions and Uses
95.0
80.6
78.6
Derivative Products
Purpose
Sources of Repayment
70.0
50.0
14.3
of issue
Useful Life, Matching Asset Life
80.0
86.1
32.1
Pay_ Go, Integration with Ca ltal Plan
g . P
70.0 _
52,8
_ _
_ , 3.6
Legal/Statutory Limits
75.0
30.6
50.0
Debt emits
Fiscal Condition, Ratios
70.0
47.2
3.6
°
Debt Service Capacity70.0
44,4
- 7,1
Short and Long Term
75,0
47.2
7.1
and Crtena
Fixed and Variable
45.0
25.0
3.6
Other Financing
90.0
417
21.4
Exhibit 3: Percent of Debt Management Policies Addressing Debt Structure Elements
By Type of Issuer
Percent of Reviewed Policies Addressing Elements
The Elements of a Debt Management Policies City County School District
56 Government Finance Review I August 2014 1
Call Features
35.0
13.9
3.6
Structural Maturity
45.0
36.1
42.9
Features Credit Enhancement
40.0
41.7
3.6
A
Derivative Products
35.0
19.4
3.6
56 Government Finance Review I August 2014 1
Study Methods
Sampling. In assessing the application of
the GFOA's best practices guidelines for
debt management policies, the California
Debt and Investment Committee reviewed
policies adopted by cities, counties, and
school districts in California that had issued
debt during the ten-year period between
January 2002 and January 2012. Fifty coun-
ties, 310 cities, and 666 school districts
issued debt during this period. From this
population of issuers, CDIAC randomly
selected 230 issuers to study, including
33 counties, 73 cities, and 124 school dis-
tricts, to produce a statistically significant
sample. (The sample produced a confi-
dence level of 95 percent with a margin
of error of plus or minus 10 percent.) This
sampling method enables the results to
be projected on the population of all city,
county, and school district issuers selling
debt during the study period.
Data Collection. CDIAC sought to
obtain the most current version of debt
management policies adopted by the cit-
ies, counties, and school districts compos-
ing the sample set. This often entailed a
two-step process. First, staff visited each
local agency's website to find the agency's
debt policy. If the agency had not posted
a document identified as a debt policy to
their website, staff contacted the agency
directly to obtain a copy. As a result, the
analysis conducted here was based only
on documents identified by the agencies
themselves as their debt policies.
Of the 230 issuers in the sample, CDIAC
sampled policies from 36 cities, 20 coun-
ties, and 28 school districts (see display).
Attachment D
Debt Management Policies Sampled by Type of Entity
Agency Type Sample Size Policies Collected Percent of Policies Collected
Cities 73 36 493
Counties 33 20 60.6
School Districts' 124
Scoring Design and Scoring
Procedures. The GFOA's best practice
guidelines for debt management policies
contain four categories of information.
The categories address specific content
with respect to the agency's policy for,
debt limits, structuring, issuance and man-
agement (see Exhibit 2), Within the best
practice categories, the GFOA identifies
a list of 30 elements that further detail
the content that should appear in an
agency's debt management policy. To
assess the compliance of cities, counties,
and school districts in California with the
GFOA's best practices for debt manage-
ment policies, CDIAC tested the sample
set of debt policies against these 30 ele-
ments. In addition, staff also determined if
each policy was dated and approved by an
oversight body,
Scoring of each debt management policy
was carried out using a standardized score
sheet. CDIAC staff divided the 84 sample
policies between two teams composed
of two research staff members each. Staff
scored each debt policy against the GFOA
recommended elements using a standard-
ized score sheet Staff assigned one point
to each element that appeared in the
policy. (Scoring was based on the pres-
ence or absence of an element and not
22,
on the depth or breath of the discussion,)
If the policy did not address the element, it
received a zero. In this way, a debt policy
received 0 to 30 total points depending
on the number of elements addressed in
the policy,
Since debt management policies are text -
based, they are subject to differing inter-
pretations. To control for this, the scoring
of each policy was internally and externally
validated. Scorers reviewed a set of poli-
cies and then exchanged the policies with
another scorer to validate the initial scores.
Next, each policy was exchanged with
another team of two scorers to be validat-
ed independently by each of these scorers.
After each step, differences were recon-
ciled within the team and then between
the two teams through consultation. In the
event a debt policy element was scored dif-
ferently, a consensus opinion was made on
the final score based on a joint review and
agreement among all team members. After
the review and reconciliation process was
completed, each scorers score sheet was
input into a spreadsheet, which was then
reviewed by another staff member — one
not participating in the scoring process —
to check for accuracy and to Identify scor-
ing irregularities.
August 2014 1 Government'f-'Mnce Review 57
Attachment D
GFOA Best Practice Guidelines: Content Categories, Subcategories, and Elements
GFOA Best Practice Categories GFOA Best Practice Subcategories Elements of Debt Management
Policy
Debt Limits. The policy should consider Purpose for which debt may be issued Restrictions and Uses
setting specific limits or acceptable ranges (purpose limits) Sources of Repayment
for each type of debt. Useful Life, Matching Asset -Life
Pay Go, Integration with Capital
Plan
Limits generally are set for legal, public
policy, and financial reasons.
Debt Structuring. The policy should
include specific guidelines regarding the
debt structuring practices for each type
of bond.
Debt Issuance. The policy should provide
guidance regarding the issuance process,
which may differ for each type of debt.
Debt Management. The policy
should provide guidance for
ongoing administrative activities.
mends that local agencies include a
reference to the types, Ievels, and struc-
ture of the debt financing. These would
include the use of different maturi-
ties, call options, and derivative (swap)
strategies, based on market conditions.
They should also reference the need
Legal debt limitations, or limitations Legal/Statutory Limits,,,,
established by state, local policy (policy limits) Fiscal Condition, Ratios
to adequately match debt service pay-
ments to tax and fee revenues.
DEBT ISSUANCE
The GFOA's debt issuance catego-
ry provides recommendations on the
method of sale, selection of the financ-
ing team, importance of a strong credit
rating, and need and requirements for
refunding existing debt (see Exhibit 4).
DEBT MANAGEMENT
The GFOA's debt management cat-
egory provides recommendations on
58 Governmenc Finance Review I August 2014 63
Debt Service Capacity
Types of debt permitted to be issued
Short and Long Term
and criteria for issuance (debt type limits)
Fixed and Variable
Other Financing
Structural features considered
Call features
Maturity
Credit Enhancement
Derivative Products
Credit objectives
Ratings
Relationships with Credit Raters
Method of sale
Competitive vs. Negotiated
Direct Loans
Private Placements
Premium Structures
Selection of external financial professionals
Request for Proposal (RFP)
Contract Evaluation and Terms
Conflict of Interest
_ _ -Interest-,-,
g of debt'
Refunding
Reasons for Refunding
Disclosure (primary and secondary market)
15c2-12 Requirements
Initial and Continuing
Obligated Person
to Communicate
Investment of bond proceeds
Compliance with Federal Tax Law
Arbitrage _Requirements
Direct to Investment Policy
to adequately match debt service pay-
ments to tax and fee revenues.
DEBT ISSUANCE
The GFOA's debt issuance catego-
ry provides recommendations on the
method of sale, selection of the financ-
ing team, importance of a strong credit
rating, and need and requirements for
refunding existing debt (see Exhibit 4).
DEBT MANAGEMENT
The GFOA's debt management cat-
egory provides recommendations on
58 Governmenc Finance Review I August 2014 63
Exhibit 5: Percent of Debt Management Policies Addressing Debt Management Elements
By Type of Issuer
Percent of
The Elements of a Debt Management Policies
Attachment D
Exhibit 4: Percent of Debt Management Policies Addressing
Debt Issuance Elements
55.0
By Type of Issuer
Disclosure Initial and Continuing
_ _
65.0
_.
W
110
Obligated Person to Communicate
Percent of Reviewed Policies Addressing
Elements
The Elements of a Debt Management Policies
City
County
School Distri
Credit Ratings
70.0
50.0
7.1.
Objectives Relationships with Credit Raters
-- _ __..
60.0
_. �.
38.9
_ �_. 3,6
Com p, etitive versus Negotiated
45.0
50.0
25.0
Method of Sale . Direct Loans _
10.0
2.8
0.0
H Private Placements
30.0
11.1
3.6
Premium Structures _- _- - ..r . _
0.0
_ _._
0.0
_ _
. 0.0
v
Request for Proposal (RFP)
20.0
22.2
7.1
Selection of + __ _ - r. ,
ProfessionalContract Evaluation and Terms
20.0
-- _
13.9
_-.
__..._Professional
3.6
Conflict of Interest
25.0
1 I. I
7.1
Refundings Reasons for Refunding
75.0
44.4
10.7
Exhibit 5: Percent of Debt Management Policies Addressing Debt Management Elements
By Type of Issuer
Percent of
initial and continuing disclosure along
with the investment of bond proceeds
(see Exhibit 5).
REVIEW AND APPROVAL
PRACTICES
In addition to the elements associat-
ed with the GFOA best practices, CDIAC
analyzed how the city, county, and
school district policies were present-
ed. Policies were either "stand-alone"
documents or they were published as
a section within a more comprehensive
finance policy. CDIAC also identified
several policies that made exclusive
reference to statutes but failed to pro-
vide additional discussion even of the
meaning of the statute. Three city poli-
cies, one county policy, and two school
district policies cited only the statutes
pertaining to debt. (If the referenced
statute addressed the element regard-
less of whether the policy provided
additional discussion, it was scored as
having addressed the element.)
CDIAC also examined the city,
county, and school district policies to
determine if they were being approved
and updated on a scheduled basis.
Establishing a process for approving
d Policies Addressing Elements
;ounty
The Elements of a Debt Management Policies
City,
_ 3.6. .. _
15c2-12 Requirements
55.0
E :,
Disclosure Initial and Continuing
_ _
65.0
_.
W
110
Obligated Person to Communicate
55.0
F
Investment Compliance with Federal Tax Law,
55.0
of Proceedsg q
Arbitra e Requirements
50.0
Directions to Investment Policy
15,0
initial and continuing disclosure along
with the investment of bond proceeds
(see Exhibit 5).
REVIEW AND APPROVAL
PRACTICES
In addition to the elements associat-
ed with the GFOA best practices, CDIAC
analyzed how the city, county, and
school district policies were present-
ed. Policies were either "stand-alone"
documents or they were published as
a section within a more comprehensive
finance policy. CDIAC also identified
several policies that made exclusive
reference to statutes but failed to pro-
vide additional discussion even of the
meaning of the statute. Three city poli-
cies, one county policy, and two school
district policies cited only the statutes
pertaining to debt. (If the referenced
statute addressed the element regard-
less of whether the policy provided
additional discussion, it was scored as
having addressed the element.)
CDIAC also examined the city,
county, and school district policies to
determine if they were being approved
and updated on a scheduled basis.
Establishing a process for approving
d Policies Addressing Elements
;ounty
School District
9.4
_ 3.6. .. _
41,7
10.7
16.7
3.6_
13.9
7.1
44.4
10.7
and updating a debt management pol-
icy suggests that the agency recognizes
the role the policy plays in managing
its financial and organizational affairs.
The policies were also inspected to
determine if they were dated and if they
included a process for approving and
updating the policy.
Counties and school districts were
likely to publish their debt manage-
ment policies as stand-alone docu-
ments (see Exhibit 6). Fewer than 30
percent of cities did so. Of the city
policies reviewed, 72 percent included
their debt management policies within
August 2014 1 Government'Fi lance Review 59
Attachment D
Exhibit 6: Provisions for Approval and Update
By Type of Issuer
Percent of City
Percent of County
Percent of School
Policy Was a Stand -Alone Document
22.7
80.0
89.2
Policy Was a Section in Another Plan
72.2
20.0
10.7
Policy was Dated
72.2
80.0
89.3
Policy Provides for Updates
16.7
35.0
7. I
Policy Identified an Approval Process
61.1
65.0
42.9
another document, typically in a more
comprehensive finance or account-
ing administration plan. The fact that
counties often published debt manage-
ment policies as an independent docu-
ment may have something to do with
these policies being more often con-
sistent with the GFOA's best practice
guidelines and, as a result, receiv-
ing higher scores in CDIAC's review.
The policies of the vast majority of
school districts were one-page docu-
ments describing the Education Code
section that authorizes the issuance of
debt by school districts. These policies
were the least compliant with the GFOA
best practices.
The majority of city, county, and
school district policies were dated.
However, few of them provided a mech-
anism for updating the policy. More
than 60 percent of city and county poli-
cies reviewed recognized a process for
approving the policy, while just 43 per-
cent school districts policies did so.
Notes
1. Debt Management Policies, GFOA best prac-
tice, 2012.
2. Rowan Mirada, Ronald Picur, Doug Straley,
"Elements of a Comprehensive Local
Government Debt Policy," Government
Finance Review, October 1994; and Patricia
Tigue, A Guide for Preparing a Debt Policy
(Chicago: Government Finance Officers
Association, 1998).
THE CALIFORNIA DEBT AND INVESTMENT
ADVISORY COMMISSION conducted this
research under the guidance of Doug Skarr;
Nova Edwards, Gentian Droboniku, and
Sandra Kent.
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Questions? E-mail publications@gfoa.org
60 Government Finance Review I August 2014 65