City of
Lawrence
Administrative
Policy
|
SUBJECT Debt Management & Fiscal Policy |
APPLIES TO All Departments and Divisions |
|
EFFECTIVE DATE July 23, 2002 |
REVISED DATE |
NEXT REVIEW DATE |
|
APPROVED BY City Commission |
TOTAL PAGES 8 |
POLICY NUMBER AP-88 |
1.0 Purpose
The Debt Management Policy
Statement sets forth comprehensive guidelines for the financing of capital
expenditures.
2.0 Policy
It is the objective of the policies that (1) the City
obtain financing only when desirable, (2) the process for identifying the
timing and amount of debt financing be as efficient as possible and (3) the
most favorable interest rate and other related costs be obtained.
Debt
financing, to include general obligation bonds, special assessment bonds,
revenue bonds, temporary notes, lease/purchase agreements, and other City
obligations permitted to be issued or incurred under Kansas law, shall only be
used to purchase capital assets that will not be acquired from current
resources. The useful life of the asset or project shall exceed the payout
schedule of any debt the City assumes.
This allows for a closer match between those who benefit from the asset
and those that pay for it.
To enhance creditworthiness and prudent financial management, the City is committed to systematic capital planning, intergovernmental cooperation and coordination, and long-term financial planning. Evidence of this commitment to capital planning will be demonstrated through adoption and periodic adjustment of the City’s Capital Improvement Plan and the annual adoption of a multi-year Capital Improvement Budget.
3.0 Procedure
3.1 RESPONSIBILITY
FOR DEBT MANAGEMENT
The
primary responsibility for making debt-financing recommendations rests with the
Director of Finance. In developing such recommendations, the Finance Director
shall be assisted by other City staff. The responsibilities of City staff shall
be to:
l
Consider the need for debt financing and assess progress on
the current Capital Improvement Budget and any other program/improvement deemed
necessary by the City Manager;
l
Test adherence to this policy statement and to review
applicable debt ratios listed in the Debt Issuance Guidelines,
·
Review changes in federal and state legislation that affect
the City’s ability to issue debt and report such findings to the City Manager
as appropriate;
·
Review annually the provisions of ordinances authorizing
issuance of general obligation bonds of the City;
·
Review the opportunities for refinancing current debt; and,
·
Recommend services by a financial advisor, bond trustees,
bond counsel, paying agents and other debt financing service providers when
appropriate.
In developing financing
recommendations, the City staff shall consider:
·
Options for interim financing including short term and
inter-fund borrowing, taking into consideration federal and state
reimbursements;
·
Effects of proposed actions on the tax rate and user
charges;
·
Trends in bond markets structures;
·
Trends in interest rates; and,
·
Other factors as deemed appropriate.
3.2 USE OF
DEBT FINANCING
Debt financing will not be considered appropriate for
any recurring purpose such as current operating and maintenance expenditures.
The City will use debt financing only for one-time capital improvement projects
and unusual equipment purchases under the following circumstances:
·
The project is included in the City's capital improvement
budget and is in conformance with the City's general plan;
l
The project is the result of growth-related activities
within the community that require unanticipated and unplanned infrastructure or
capital improvements by the City;
·
The project's useful life, or the projected service life of
the equipment, will be equal to or exceed the term of the financing;
l
There are revenues sufficient to service the debt, whether
from future property taxes, user fees, or other specified and reserved
resources, debt supported by user fees, special assessments or special charges
shall be preferred,
l
The debt shall be primarily used to finance capital projects
with a relatively long life, typically ten years or longer.
l
The equipment is an item that is purchased infrequently, has
an expected useful life of at least five years, and costs in excess of $100,000.
Debt will be structured to match projected cash flows, minimize the impact on future property tax levies, and maintain a relatively rapid payment of principal. As a benchmark, the City shall strive to repay at least 50% of the initial principal amount within ten years.
The City
shall use an objective analytical approach to determine whether it desires to
issue new general obligation bonds.
Generally, this process will compare ratios of key economic data. The goal will be for the City to maintain or
enhance its existing credit rating.
These
ratios shall include, at a minimum, debt per capita, debt as a percent of
statutory debt limit, debt as a percent of appraised valuation, debt service
payments as a percent of governmental expenditures, and the level of
overlapping net debt of all local taxing jurisdictions. A set of ratios shall be adopted and
itemized in the City’s Debt Issuance Guidelines.
The decision on whether or not to issue new general
obligation bonds shall, in part, be based on (a) costs and benefits, (b) the
current conditions of the municipal bond market, and (c) the City's ability to
issue new general obligation bonds as determined by the aforementioned
benchmarks.
For the
City to issue new revenue bonds, projected annual revenues as defined by the
ordinance authorizing such issuance, shall be a minimum of 125% of the issue’s
average annual revenue bond service or at a higher amount if required by the
bond indentures. If necessary, annual adjustments to the City's rate structures
will be considered in order to maintain the required coverage factor. Revenue bonds will be the preferred
financing option for enterprise funds.
The City
shall maintain a watchful attitude over the issuance of special assessment bonds
for benefit district improvements. The City’s share of any benefit district
project may not exceed more than 95% of any proposed costs related to a benefit
district. The developer shall be required to deposit 25% of the costs allocated
to the benefit district prior to authorization. In most cases, the debt will have a maximum term of ten years,
however, a longer term may be allowed provided it does not exceed the life of
the improvements included in the benefit district. The benefit district will be assigned costs such as
administration, engineering, financing and legal associated with the formation
of the district and issuance of any debt.
The City
will typically not use of its debt capacity for projects by entities or other
special purpose units of government that have the ability to issue tax exempt
debt. The City’s issuance of debt will be made only (1) after the prior
commitment of the full assets and resources of the authority to debt service; (2)
if project revenues, or development authority revenues pledged to debt service,
are at least 115% of debt service; (3) if debt service reserves provided by the
authority's own resources are equal to at least six months debt service; and,
(4) if all other viable means financing have been examined. The City will also enter into arrangements
with other governmental entities where a portion of the project costs will be
reimbursed by the other government. An
agreement as to how the project costs will be allocated and reimbursements made
must be approved by the governing bodies.
The City
normally shall issue bonds with an average life of 10 years or less for general
obligation and special assessment bonds and 10-20 years for revenue bonds. The typical structure of general obligation
bonds will result in even principal and interest payments over the term of the
debt. There shall be no "balloon" bond repayment schedules, which consist
of low annual payments and one large payment of the balance due at the end of
the term. There shall always be at least interest paid in the first fiscal year
after a bond sale. In cases where related revenues may not occur for several
years, it may be desirable to capitalize the interest by increasing the size of
the issue and deferring the principal payments so that only interest is paid on
the debt for the first few years.
Call provisions for bond issues will be evaluated
based upon current market conditions.
All bonds shall be callable only at par.
The City
may choose to issue bonds 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.
A Capital Improvement Budget shall be prepared and
submitted to the City Commission annually.
The budget shall provide a list of projects and the means of
financing. The budget should cover a
five-year period of time. The projects
included in the budget should be part of the City’s Capital Improvement
Plan. Projects must be in either the
Capital Improvement Budget or Plan to be authorized.
Generally,
payment of general obligation bonds and special assessment bonds shall be from
the City’s Bond & Interest Fund. However, in situations where General
Obligation bonds are to be paid from user fees or sales taxes, bond payments
should be made from the fund that receives the revenue. The minimum fund balance in the Bond &
Interest Fund will be maintained at a level equal to or greater than 50% of the
total principal and interest payable from that Fund for the upcoming year.
Reserve Funds
Adequate
operating reserves are important to insure the functions of the City during
economic downturns. The City shall
budget a contingency reserve in the General Fund of no less than $150,000. The
City will maintain working capital in an enterprise fund sufficient to finance
120 days of operations, if the fund supports debt payments. In addition, all reserves specified by bond
indentures must be maintained. The
Equipment Reserve Fund will be funded sufficiently to ensure that adequate
funds are available to purchase replacement equipment on a timely basis.
It shall be the responsibility of the Finance
Department to prepare the Preliminary and final Official Statements. The City Clerk is responsible for collecting
and maintaining all supporting documentation such as minutes of the City
Commission meetings and relevant resolutions and ordinances. In the case of general obligation bonds, an
estimate of the mill levy required to pay off the debt should be provided to
the City Commission. The department
will also be responsible following applicable secondary disclosure
requirements.
Investments
The bond proceeds will be invested in accordance with
the City’s investment policy. Adherence
to the guidelines on arbitrage shall be followed, which at times, may require
that the investment yield be restricted.
In most cases, the investment will be selected to maximize interest with
the assumption that the City will meet the IRS spend down requirement that
allows for an exemption from arbitrage calculations.
The City
will utilize external bond counsel for all debt issues. 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 Federal and State
constitutional and statutory requirements necessary for issuance, and
determining the debt’s federal income tax status. The City’s Bond Counsel will be selected on a competitive basis.
City payments for Underwriters Counsel will be
authorized for negotiated sales by the Department of Finance on a case-by-case
basis depending on the nature and complexity of the transaction and the needs
expressed by the underwriters.
The City
may utilize an external financial advisor.
The utilization of the financial advisor for debt issuance will be at
the discretion of the Director of Finance on a case-by-case basis. For each
City bond sale, the financial advisor will provide the City with information on
structure, pricing and underwriting fees for comparable sales by other
issuers. The Financial Advisor will be
selected on a competitive basis for a period not to exceed five years.
Use of
short-term borrowing, such as temporary notes, will be undertaken until the
final cost of the project is known or can be accurately projected. In some cases, projects might be funded with
internal funds that will be reimbursed with bond funds at a future date.
Credit
enhancement (letters of credit, bond insurance, etc.) may be used if the costs
of such enhancements will reduce the debt service payments on the bonds or if
such an enhancement is necessary to market the bonds.
The City,
as a matter of policy, shall seek to issue its temporary notes, general and
revenue bond obligations through a competitive sale. In such instances where the City, through a competitive bidding
for its bonds, deems the bids received as unsatisfactory or does not receive
bids, it may, at the election of the City Commission, enter into negotiation
for sale of the bonds. In cases where
the circumstances of the bond issuance are complex or out of the ordinary, a
negotiated sale may be recommended if allowed by State statute.
3.5 REFUNDING OF DEBT
Periodic reviews of all outstanding debt will be undertaken to determine refunding opportunities. Refunding will be considered (within federal tax law constraints) if and when there is a net economic benefit from the refunding or the refunding is needed in order to modernize covenants essential to operations and management or to restructure the payment of existing debt.
City staff
and the financial advisor shall monitor the municipal bond market for
opportunities to obtain interest savings by refunding outstanding debt. As a
general rule, the present value savings of a particular refunding will exceed
3%.
Refunding
issues that produce a net present value savings of less than 3% percent will be
considered on a case-by-case basis. Refunding issues with negative savings will
not be considered unless there is a compelling public policy objective.
3.6 CONDUIT FINANCINGS
The City may sponsor conduit financings in the form of Industrial Revenue Bonds for those activities (i.e., economic development, housing, health facilities, etc.) that have a general public purpose and are consistent with the City's overall service and policy objectives as determined by the City Commission.
All conduit
financings must insulate the City completely from any credit risk or exposure
and must first be approved by the City Manager before being submitted to the
City Commission for consideration. The
City should review the selection of the underwriter and bond counsel, require
compliance with disclosure and arbitrage requirements, and establish minimum
credit ratings acceptable for the conduit debt. Credit enhancement, such as insurance, may be required for
certain issues.
3.7 ARBITRAGE LIABILITY MANAGEMENT
Federal arbitrage legislation is intended to discourage entities from issuing tax-exempt obligations unnecessarily. In compliance with the spirit of this legislation, the City will not issue obligations except for identifiable projects with good prospects of timely initiation. Temporary notes and subsequent general obligation bonds will be issued timely so that debt proceeds will be spent quickly.
Because of
the complexity of arbitrage rebate regulations and the severity of
non-compliance penalties, the City will be engage outside consultants to
calculate potential arbitrage liability.
3.8 CREDIT RATINGS
The
Director of Finance shall be responsible for maintaining relationships with the
rating agencies that assign ratings to the City's debt. This effort shall
include providing periodic updates on the City's general financial condition
along with coordinating meetings and presentations in conjunction with a new
debt issuance.
The City
will obtain a rating from Moody’s Investors Service. The Finance Director will recommend whether or not an additional
rating shall be requested on a particular financing and which of the major
rating agencies shall be asked to provide such a rating.
Full disclosure of operations and open lines of
communication shall be made to rating agencies used by the City. The Finance
Director, with assistance of City staff, shall prepare the necessary materials
and presentation to the rating agencies.
The City is committed to full and complete financial disclosure, and to cooperating fully with rating agencies, institutional and individual investors, City departments and 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 on a timely and comprehensive basis.
3.9 STANDARDS
Official statements accompanying debt issues, Comprehensive
Annual Financial Reports, and continuous disclosure statements will meet (at a
minimum), the standards articulated by the Government Accounting Standards
Board (GASB), the National Federation of Municipal Analysts, and Generally
Accepted Accounting Principles (GAAP). The Finance Director shall be
responsible for ongoing disclosure to established national information
repositories and for maintaining compliance with disclosure standards
promulgated by state and national regulatory bodies.
Appendix
City of Lawrence
Debt
Management Policy
Arbitrage.
Arbitrage refers to the rebate amount due to the Internal Revenue
Service where funds received from the issuance of tax-exempt debt have been
invested and excess interest earnings have occurred.
General
Obligation Bonds. Bonds backed by the full faith and credit of the
City. The taxing power may be an unlimited ad valorem tax or a limited tax,
usually on real estate and personal property. A special tax rate levied for the
Bond & Interest Fund annually to pay for general obligation LTO
service. Because it is secured by an
unlimited tax levy, this structure has strong marketability and lower interest
costs.
Revenue
Bonds. Bonds secured by revenues generated by the facility from
dedicated user fees. Planning for such issues generally are more complex
because future costs and revenues directly affect each other. Credit
enhancements (e.g., insurance or letter of credit) may be needed because of the
limited source of LTO service payments that may be available in outlying years.
Special
Assessment Bonds. Bonds issued to develop facilities and basic
infrastructure for the benefit of properties within the assessment district.
Assessments are levied on properties benefited by the project. The issuer's recourse for nonpayment is
foreclosure and the remaining LTO becomes the City’s direct obligation.
Temporary
Notes. Notes are issued to provide temporary financing, to be
repaid by long-term financing. This type of bridge financing has a maximum
maturity of four years under Kansas law.