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HomeMy WebLinkAboutItem 5City of Lakeville Finance Department Memorandum To: Mayor and Council Justin Miller, City Administrator From: Jerilyn Erickson, Finance Director Date: March 25, 2019 Subject: Proposed Debt Policy Amendment Over the past year, City staff, the Finance Committee and Springsted Inc (our municipal advisor) have been reviewing the City’s debt policy to make sure it reflected the following: 1) Current statutory authority; 2) Expectations for debt and capital improvement planning and the appropriate uses of debt; 3) Expectations for and acknowledging the benefits of maintaining credit quality. The proposed policy doesn’t lay out specific debt metrics. If the City Council would like to incorporate metrics into the debt policy, these could be developed over the next year and addressed with a separate policy amendment. Council Direction Staff is seeking Council direction on the policy changes presented. City staff and Springsted will be presenting information related to the 2019 bond issuance at the April 22, 2019 council workshop. Attachments: Current Debt Policy Proposed Debt Policy (Red-Lined) Proposed Debt Policy (Clean) CURRENT DEBT POLICY CURRENT DEBT POLICY Debt Policy- Proposed – Council Workshop 2019.03.25 – RED- LINED 4.01 1) PURPOSE a. To establish parameters and provide guidance governing the issuance, management, continuing evaluation of and reporting on all debt obligations issued by the City of Lakeville (the “City”) and to provide for the preparation and implementation necessary to assure compliance and conformity with this policy. 2) DEBT AND CAPITAL IMPROVEMENT PLANNING a. As part of its rigorous capital improvement planning process the cCity recognizes that debt is a tool to be used judiciously to finance certain types of projects, with long-term impacts on debt repayment sources. In the capital planning process the cCity will consider the use of debt consistent with this policy and its impact on overall financial standing. 2)3) DEBT LIMITS a. The statutory authority enabling Minnesota local governments to issue debt place various restrictions on certain kinds of debt. These restrictions can limit by type the principal amount of an individual issue, or the total amount of the debt category, or the maximum annual principal amounts among other requirements. For each such kind of debt the cCity in its capital planning, individual debt issuance will evaluate both the compliance with the specific requirements, and where maximums exist on the total amount of such debt, the remaining capacity for future use. b. Bond covenants are contractual obligations made by a bond issuer (City) and investors. The City will comply with all such covenants and include them in its capital improvement process.State of Minnesota Statutes limit the legal debt obligations to three percent (3%) of the City’s taxable market value for certain debt instruments. 4) CREDIT RATING a. The City will strive to maintain and achieve a stronghigh levels of credit quality (Aa and Aaa levels) recognizing that highstrong ratings lead to lower financing costs and reduced impactsdemand on repayment sources. As the cCity continues to grow it recognizes that capital infrastructure investment and related debt issuance are crucial to the quality of life of its constituents. In balancing highstrong credit quality with infrastructure investment the cCity will target debt levels consistentlimit the legal debt obligations to a lower percentage consistent at a minimum with an Aa level (Moody’s) or AA level (Standard and Poor’s) credit rating. Formatted Formatted: Highlight Formatted b. The City will proactively work to maintain frequent and regular communications with bond rating agencies about its financial condition. a. 3)5) DEBT MANAGEMENT a. Where possible, the City will endeavor to pledge special assessments, state- aid payments, utility revenues or other non-property tax revenues to debt service payments. The City will endeavor to minimize the use of property tax revenues to support debt service, except in those cases where the assets being finance have city-wide benefit. b. The City will consider providing a secondary, or subordinate General Obligation pledge of property tax or general revenues on bond issues where deemed appropriate, subject to City Council review and approval. c. The City will limit Limiting long-term borrowing to capital improvements or other long-term projects which cannot, and appropriately should not, be financed from current revenues. d. Debt will not be used to finance current operations. e. Long-term debt may be used for capital purchases or construction identified through the capital improvement or through another City planning process. f.e. Short-term debt may be used for certain projects and equipment financing. However, the City will minimize the use of short-term borrowings. When short- term debt is utilized as construction financing, in anticipation of the finalization of permanent financing, the information provided to the Council for the short- term financing will include a written plan detailing the permanent financing plan. g.f. Use of Derivatives or vVariable iInterest rRate securities The City willchooses not to use derivatives, variable rate debt or other exotic financial structures in the management of the City's debt portfolio. i The City does not anticipate the use of variable interest rate debt. Variable rate debt is a sophisticated debt type which requires significant oversight and managementunderstanding and diligence both at the time of issuance and in its ongoing management. If in a specific case if such debt is an possible option, the City and with its advisors will perform appropriate high degree of analysis and conduct a due diligence review to evaluate whether its use of variable interest rate debt is recommendedadvisable in that application. The City does not have outstanding any derivative structure or instrument. h.a. Prior to any reversal of, or amendment to this provision: Formatted: Normal, No bullets or numbering Formatted: Font: Arial Narrow, 14 pt Formatted: Indent: Left: 1", No bullets or numbering Commented [DM1]: Instead of this you can just say we won’t use VRDO’s. i. A written management report outlining the potential benefits and consequences of utilizing these structures must be submitted to the City Council; and ii. The City Council must adopt a specific amendment to this section of the policy concerning the use of derivatives or interest rate agreements that complies with any federal tax law and state statutory requirements. 4)6) DEBT STRUCTURE PRACTICES a. The City will endeavor to keep the final maturity of general obligation bonds equal to or less than 20 years; and at least 50% of the principal shall be retired within 10 years. In all cases, the final maturity shall be shorter than the deemed useful life of the asset financed. b. Debt will be structured to achieve the lowest possible true interest cost to the City given market conditions at the time of debt issuance, the nature of the capital project and the revenue source(s) pledged to the repayment of the project debt. c. When refunding opportunities, natural disasters, uneven projected revenue patterns, uneven repayment patterns of existing debt, multi-stage financing plans, financing plans with contingencies, or other factors occur, the City may utilize non-level annual debt repayment methods. 5)7) DEBT ISSUANCE PRACTICES a. Absent a specific reason, the City will endeavor to market its bond issues on a competitive bid basis. However, negotiated financings may be used due to significant market volatility, the use of non-market standard or complex financing structures, credit quality issues or financings of very small or very large size. b. In the event of a negotiated bond sale process, the City will endeavor to engage in a Request for Proposal process to select a firm to market the bonds. 6)8) DEBT MANAGEMENT PRACTICES a. The City will periodically review all outstanding debt to determine if refunding or optional pre-payment provisionsopportunities or the exercise of optional prepayment provisions exist and may be exercised. Refunding outstanding debt will be considered (within federal tax law constraints) if and when there is a net economic benefit of the refunding; or. Potential refunding benefits include reductions in future interest costs, restructuring debt to better fit evolving revenue sources, integrate with future debt financing, and re- definingstructuring legal covenants to the benefit of the City. If undertaken for reductions in future interest costs, interest savings will equal or exceed Minnesota Statute minimum levels. Refunding with a negative interest cost savings will be considered if there is a compelling public policy objective. Any refunding will be considered on a case by case basis. b.a. The City will proactively work to maintain frequent and regular communications with bond rating agencies about its financial condition. 7)9) INTERFUND BORROWING a. Interfund borrowing for periods of more than one year shall only be undertaken for capital expenditures. A reasonable payment schedule for repayment of the borrowed amounts and enforceable covenants, established to ensure recourse if the schedule is not adhered to, shall be approved by the City Council. Market rate interest charges at the time of the interfund borrowing shall be included to compensate the lending fund for the use of its financial resources. Interest charges for interfund loans, utilizing tax increment bonding will follow Minnesota Statutes 469.178, Subd.7. Interfund borrowing that does not meet the criteria noted above shall not be considered as a loan in financial reports. 8)10) REGULATORY COMPLIANCE a. The issuance of municipal bonds requires compliance with federal and state laws. Of particular note are federal requirements relating to full and timely disclosure and rebate/arbitrage. b. The City shall comply with legal requirements for issuing debtance, publishing notice and for public meetings related to debt b. issuance. c. The terms and life of each debt issue shall be clearly presented and disclosed to the City Council and other stakeholders in a timely manner. d. Bank loans and private placements of debt shall be disclosed to the credit rating agencies and disseminated in the same manner as the City files continuing disclosure information and public bond issues [currently on the Municipal Securities Rulemaking Board's ("MSRB's") EMMA site].Policy Compliance Responsibility: While the Mayor and City Council have ultimate responsibility for policy compliance, professional assistance will be provided by the city’s Finance Director. e. All professionals engaged in assisting the City in the process of issuing debt shall clearly disclose to the City all compensation and consideration received related to services provided in the debt issuance process by both the City and the lender or conduit issuer, if any. This includes "soft" costs or compensations in lieu of direct payments. f. Disclosure: Formatted: Right: 0.08", Space After: 1.65 pt, Numbered + Level: 2 + Numbering Style: a, b, c, … + Start at: 1 + Alignment: Left + Aligned at: 0.75" + Indent at: 1" i. The city will follow requirements relating to initial and ongoing disclosure of information deemed appropriate for each of its bond issues. ii. The city will assign a member of its professional staff as being responsible for all disclosure compliance requirements. iii.i. The city will maintain records relating both to the initial issuance, the timing and use of proceeds and the ongoing use of finance assets to ensure the continuance of the tax-exempt status of its bond issues. iii. The city will comply with all federal rebate and arbitrage regulations. It will take steps to issue its tax-exempt bonds in a manner which facilitates compliance, and where appropriate, seek eligibility for permitted safe harbor exemptions. g. Maintenance of issue tax exemption Federal requlationsregulations related tofor the issuance of tax- exempt debt imposesplace certain obligations on the issuer both at the time of issueance, and over the life of the issue. The cCity will take all steps necessary to ensure the ongoing tax exemption of its bonds by maintaining records relating both to the initial issuance of debt, the timing, and use and investment of proceeds, appropriate disclosure and the ongoing use and operation of financed assets. to ensure the continuance of the tax-exempt status of its bond issues. i. 11) INTERNAL REPORTING AND AMENDMENTS a. The City shall from time to time establish reporting systems for its debt management program to the Mayor and Council and/or advisory committees. b. Prior to any reversal of,modifications or amendments to any this provisions of this Debt Policy: i. A written management report outlining the potential benefits and consequences of utilizing these structures must be prepared and submitted to the City Council; and ii. The City Council must adopt a specific amendment to thise section of the policy concerning the use of derivatives or interest rate agreements that complies with any federal tax law and Minnesotastate statutory requirements. iv. Formatted Formatted: Indent: Left: 1.5", No bullets or numbering Formatted Formatted: Font: Formatted: Font: Formatted: Indent: Left: 1.5", No bullets or numbering Formatted: Indent: Left: 0.5", No bullets or numbering Debt Policy- Proposed – Council Workshop 2019.03.25 – CLEAN COPY 4.01 1) PURPOSE a. To establish parameters and provide guidance governing the issuance, management, continuing evaluation of and reporting on all debt obligations issued by the City of Lakeville (the “City”) and to provide for the preparation and implementation necessary to assure compliance and conformity with this policy. 2) DEBT AND CAPITAL IMPROVEMENT PLANNING a. As part of its rigorous capital improvement planning process the City recognizes that debt is a tool to be used judiciously to finance certain types of projects, with long-term impacts on debt repayment sources. In the capital planning process the City will consider the use of debt consistent with this policy and its impact on overall financial standing. 3) DEBT LIMITS a. The statutory authority enabling Minnesota local governments to issue debt place various restrictions on certain kinds of debt. These restrictions can limit by type the principal amount of an individual issue, or the total amount of the debt category, or the maximum annual principal amounts among other requirements. For each such kind of debt the City in its capital planning, individual debt issuance will evaluate both the compliance with the specific requirements, and where maximums exist on the total amount of such debt, the remaining capacity for future use. b. Bond covenants are contractual obligations made by a bond issuer (City) and investors. The City will comply with all such covenants and include them in its capital improvement process. 4) CREDIT RATING a. The City will strive to maintain and achieve a strong level of credit quality (Aa and Aaa levels) recognizing that strong ratings lead to lower financing costs and reduced demand on repayment sources. As the City continues to grow it recognizes that capital infrastructure investment and related debt issuance are crucial to the quality of life of its constituents. In balancing strong credit quality with infrastructure investment the City will target debt levels at a minimum with an Aa level (Moody’s) or AA level (Standard and Poor’s) credit rating. b. The City will proactively work to maintain frequent and regular communications with bond rating agencies about its financial condition. 5) DEBT MANAGEMENT a. Where possible, the City will endeavor to pledge special assessments, state- aid payments, utility revenues or other non-property tax revenues to debt service payments. The City will endeavor to minimize the use of property tax revenues to support debt service, except in those cases where the assets being finance have city-wide benefit. b. The City will consider providing a secondary, or subordinate General Obligation pledge of property tax or general revenues on bond issues where deemed appropriate, subject to City Council review and approval. c. The City will limit long-term borrowing to capital improvements or other long- term projects which cannot, and appropriately should not, be financed from current revenues. d. Debt will not be used to finance current operations. e. Short-term debt may be used for certain projects and equipment financing. However, the City will minimize the use of short-term borrowings. When short- term debt is utilized as construction financing, in anticipation of the finalization of permanent financing, the information provided to the Council for the short- term financing will include a written plan detailing the permanent financing plan. f. Use of Derivatives or Variable Interest Rate securities The City will not use derivatives, variable rate debt or other exotic financial structures in the management of the City's debt portfolio. i The City does not anticipate the use of variable interest rate debt. Variable rate debt requires significant oversight and management at the time of issuance and in its ongoing management. If in a specific case if such debt is an option, the City and with its advisors will perform appropriate analysis and conduct a due diligence review to evaluate whether use of variable interest rate debt is recommended in that application. 6) DEBT STRUCTURE PRACTICES a. The City will endeavor to keep the final maturity of general obligation bonds equal to or less than 20 years; and at least 50% of the principal shall be retired within 10 years. In all cases, the final maturity shall be shorter than the deemed useful life of the asset financed. b. Debt will be structured to achieve the lowest possible true interest cost to the City given market conditions at the time of debt issuance, the nature of the capital project and the revenue source(s) pledged to the repayment of the project debt. c. When refunding opportunities, natural disasters, uneven projected revenue patterns, uneven repayment patterns of existing debt, multi-stage financing plans, financing plans with contingencies, or other factors occur, the City may utilize non-level annual debt repayment methods. 7) DEBT ISSUANCE PRACTICES a. Absent a specific reason, the City will endeavor to market its bond issues on a competitive bid basis. However, negotiated financings may be used due to significant market volatility, the use of non-market standard or complex financing structures, credit quality issues or financings of very small or very large size. b. In the event of a negotiated bond sale process, the City will endeavor to engage in a Request for Proposal process to select a firm to market the bonds. 8) DEBT MANAGEMENT PRACTICES a. The City will periodically review all outstanding debt to determine if refunding or optional pre-payment provisions exist and may be exercised. Refunding outstanding debt will be considered (within federal tax law constraints) if and when there is a net economic benefit of the refunding; or. restructuring debt to better fit evolving revenue sources, integrate with future debt financing, and re-defining legal covenants to the benefit of the City. If undertaken for reductions in future interest costs, interest savings will equal or exceed Minnesota Statute minimum levels. Refunding with a negative interest cost savings will be considered if there is a compelling public policy objective. Any refunding will be considered on a case by case basis. 9) INTERFUND BORROWING a. Interfund borrowing for periods of more than one year shall only be undertaken for capital expenditures. A reasonable payment schedule for repayment of the borrowed amounts and enforceable covenants, established to ensure recourse if the schedule is not adhered to, shall be approved by the City Council. Market rate interest charges at the time of the interfund borrowing shall be included to compensate the lending fund for the use of its financial resources. Interest charges for interfund loans, utilizing tax increment bonding will follow Minnesota Statutes 469.178, Subd.7. Interfund borrowing that does not meet the criteria noted above shall not be considered as a loan in financial reports. 10) REGULATORY COMPLIANCE a. The issuance of municipal bonds requires compliance with federal and state laws. Of particular note are federal requirements relating to full and timely disclosure and rebate/arbitrage. b. The City shall comply with legal requirements for issuing debt, publishing notice and public meetings related to debt issuance. c. The terms and life of each debt issue shall be clearly presented and disclosed to the City Council and other stakeholders in a timely manner. d. Bank loans and private placements of debt shall be disclosed to the credit rating agencies and disseminated in the same manner as the City files continuing disclosure information and public bond issues [currently on the Municipal Securities Rulemaking Board's ("MSRB's") EMMA site].Policy Compliance Responsibility: While the Mayor and City Council have ultimate responsibility for policy compliance, professional assistance will be provided by the city’s Finance Director. e. All professionals engaged in assisting the City in the process of issuing debt shall clearly disclose to the City all compensation and consideration received related to services provided in the debt issuance process by both the City and the lender or conduit issuer, if any. This includes "soft" costs or compensations in lieu of direct payments. f. Disclosure: i. The city will follow requirements relating to initial and ongoing disclosure of information deemed appropriate for each of its bond issues. ii. The city will assign a member of its professional staff as being responsible for all disclosure compliance requirements. iii. The city will comply with all federal rebate and arbitrage regulations. It will take steps to issue its tax-exempt bonds in a manner which facilitates compliance, and where appropriate, seek eligibility for permitted safe harbor exemptions. g. Maintenance of issue tax exemption i. Federal regulations related to the issuance of tax-exempt debt imposes certain obligations on the issuer both at the time of issue and over the life of the issue. The City will take all steps necessary to ensure the ongoing tax exemption of its bonds by maintaining records relating to the initial issuance of debt, the timing, use and investment of proceeds, appropriate disclosure and the ongoing use and operation of financed assets. 11) INTERNAL REPORTING AND AMENDMENTS a. The City shall from time to time establish reporting systems for its debt management program to the Mayor and Council and/or advisory committees. b. Prior to any modifications or amendments to any provisions of this Debt Policy: i. A written management report outlining the potential benefits and consequences of utilizing these structures must be prepared and submitted to the City Council; and ii. The City Council must adopt a specific amendment to the section of the policy concerning the use of derivatives or interest rate agreements that complies with any federal tax law and Minnesota statutory requirements.