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HomeMy WebLinkAboutItem 06.gApril 15, 2019 Item No. APPROVAL TO AMEND THE DEBT POLICY Proposed Action Staff recommends adoption of the following motion as part of the Consent Agenda: Move to approve an amendment of the Debt Policy. Overview Over the past year, City staff, the Finance Committee and Springsted Inc (our municipal advisor, now called Baker Tilly) have been reviewing the City’s debt policy. City Staff presented the amended Debt Policy to the City Council at its March 25, 2019 work session. The Council directed Staff to review a couple of sections. City staff and the Finance Committee reviewed the sections in question at their March 27, 2019 meeting. The following changes were made to address the City Council’s comments: 1) Section 5f – Debt Management – Use of Derivatives or Variable Interest Rate Securities – The Finance Committee recommended ending this section after the initial statement of “The City will not use derivatives, variable rate debt or other exotic financial structures in the management of the City’s debt portfolio.” 2) Section 11b – Internal Reporting and Amendments – The Finance Committee clarified that prior to any modifications or amendments to this policy, a written management report outlining the potential benefits and consequences related to the proposed policy changes must be prepared and submitted to the City Council. Also, the second paragraph referencing the required council action was deleted since this is required with any policy change. Primary Issues to Consider What are the key changes in the proposed policy? The Policy has been updated to reflect 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. Supporting Information  A copy of the amended Debt Policy is attached. Financial Impact: $ Budgeted: Y☐ N☒ Source: Related Documents: (CIP, ERP, etc.): Envision Lakeville Community Values: Good Value for Public Services Report Completed by: Jerilyn Erickson, Finance Director 0- N/A     Debt Policy- Proposed 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 financed 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. 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, a written management report outlining the potential benefits and consequences related to the proposed policy changes must be prepared and submitted to the City Council.