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HomeMy WebLinkAboutEau Claire Debt Policy CITY OF EAU CLAIRE CITY COUNCIL POLICY STATEMENT General Subject: Administration Date Issued: 9/9/2014 Revised: 12/22/2015 Special Subject: Debt Management Effective Date: 9/9/2014 Purpose To record and clarify the City Council's policy regarding the management and issuance of debt. Statement of Policy A debt policy is a tool which sets rules and provisions for the management of existing debt, issuance of additional debt and prompt and timely payment of all debt service. Such a policy improves the quality of decisions, provides justification for the structure of debt issuance, identifies policy goals, demonstrates a commitment to long-term financial planning and maintains the City's credit rating. A well-managed debt program should allow for funding of capital projects within anticipated funding sources. The City recognizes that access to capital markets over the long term is dependent upon the City's unwavering commitment to full and timely repayment of debt. Types of Debt A. General Obligation Bonds and Promissory Notes. The defining feature of general obligation is the source that secures its repayment: an ad valorem tax levied on all taxable property within the limits of the municipality at the time the general obligation is issued. Chapter 67 of the Wisconsin statutes governs the issuance of various general obligations known as "general obligation" bonds or notes. General obligation bonds may be issued by a municipality to finance projects as allowed by Wisconsin State Statute that are undertaken for a public purpose. The term of general obligation bonds is limited to 20 years from the original date of issuance. General obligation promissory notes may be issued for any public purpose. Unlike bonds, the issuance of notes is not limited to projects. Therefore, notes can be issued to fund general and current capital expenses other than those permitted in connection with bonds. The term of notes is limited to ten years from the original date of issuance. The City of Eau Claire shall limit issuance of bonds and notes exclusively for the acquisition, planning, design, construction, development, extension, enlargement, renovation, rebuilding, repair or improvement of land, waters, property, streets, buildings, equipment or facilities when it can be determined that future citizens will receive a benefit from the improvement(s) and the asset(s) outlive the length of the debt issued. Incidental to the issuance of bonds and notes, a portion of the proceeds can also be used to pay the associated issuance costs and Page 1 of 6 CITY OF EAU CLAIRE CITY COUNCIL POLICY STATEMENT General Subject: Administration Date Issued: 9/9/2014 Revised: 12/22/2015 Special Subject: Debt Management Effective Date: 9/9/2014 capitalized interest when appropriate. Proceeds from long-term debt shall not be used to fund current operating costs. B. State Trust Fund Loans. The Board of Commissioners of Public Lands of the State of Wisconsin has funds available to loan to Wisconsin cities and villages. The Board may loan trust fund money to a city for any project undertaken for a public purpose consistent with the purposes allowed for issuance of general obligation bonds. The term of trust fund loans is limited to 20 years. State trust fund loans should also be considered when the interest rate offered makes the cost of borrowing less than or comparable to general obligation bonds and notes after considering the cost of issuance. C. Revenue Bonds. Revenue bonds may be issued to finance public utilities, economic development projects or other projects allowed by Wisconsin State Statute. Repayment for this type of loan is made from the underlying revenues generated by the project. Revenue obligations have no claim on the taxes or other general revenues of the issuing municipality. Revenue obligations give municipalities the ability to recover the cost of a project from beneficiaries of the project or users of the facility. Chapter 66 of Wisconsin Statutes governs the issuance of revenue obligations. The City of Eau Claire should limit the use of revenue bonds to capital improvements for its water utility or other such enterprise utilities which may be created, economic development projects, or other projects as allowed by Wisconsin State Statute. Incidental to the issuance of the bonds, a portion of the proceeds can also be used to pay the associated issuance costs, project reserve funds and capitalized interest when appropriate. D. Inter-Fund loans. The City may use inter-fund loans (in lieu of borrowing from private parties) to minimize the expense and administrative effort associated with external borrowing. Inter-fund loans will be considered to finance high priority needs on a case-by-case basis. Inter-fund loans made subsequent to the adoption of this policy shall be repaid with interest at an annual rate equal to the lessor of the average cost of borrowing funds from external markets for that calendar year or the average rate of return on investments for the preceding 12 months. E. Capital Leases. Capital lease financing shall be considered only if verifiable operating savings, when properly discounted, outweigh the lease financing costs. Written justification detailing the explanation of factors considered including cash Page 2 of 6 CITY OF EAU CLAIRE CITY COUNCIL POLICY STATEMENT General Subject: Administration Date Issued: 9/9/2014 Revised: 12/22/2015 Special Subject: Debt Management Effective Date: 9/9/2014 flow analysis reviewed by the Finance Director will be submitted and approved before any lease is entered into. F. Other Debt Instruments. The City of Eau Claire shall primarily use those types of debt instruments outlined above. Other types of debt instruments can be used as appropriate if their use is necessary or advantageous to the City. If other types of debt instruments are utilized, applicable state and federal guidelines shall be followed. The City will attempt to limit the use of short-term debt to bond anticipation purposes. Proceeds from long-term debt shall not be used to pay for current operating expenses. G. Conduit Debt. From time to time, the City may be asked to act as a conduit to the bond market by for-profit or not-for-profit entities to promote economic development or secure quality of life issues. Prior to using the City as a conduit to the bond market, the entity shall provide substantive proof acceptable to the City that no budget appropriation shall be required to pay the debt. The City shall not allow the issuance of such debt on behalf of the entity, if doing so would prevent the City from issuing "bank qualified" debt for its own purposes without compensation from the entity to cover the additional debt service cost. Debt Limitations. A. Maximum amount of indebtedness. Section 67.03(1) of the Wisconsin Statutes provides that the amount of indebtedness of a municipality shall not exceed 5 percent of the equalized valuation of the taxable property in the municipality. Although State Statutes allow 5 percent of the equalized valuation, the City has set an internal debt goal, which seeks to remain below 3.5 percent (70% of the maximum amount allowed by the State Statutes). B. Net Direct Debt. Net Direct Debt should not exceed three times (3X) the operating revenues of the City. C. Asset life shall be longer than the debt issued for its purchase. The City shall consider the useful life of the project assets being financed and the long-range financial and credit objectives when determining the final maturity structure of the debt. D. Spend down of borrowed proceeds. All debt taken out will be for shovel-ready projects. Draw down of the funds will be in accordance with IRS rules for general obligation debt whereby 10 percent of the proceeds will be spent within 6 months Page 3of6 CITY OF EAU CLAIRE CITY COUNCIL POLICY STATEMENT General Subject: Administration Date Issued: 9/9/2014 Revised: 12/22/2015 Special Subject: Debt Management Effective Date: 9/9/2014 of the borrowing, 50 percent within 12 months of the borrowing, 75 percent within 18 months of the borrowing, and 100 percent within 24 months of the borrowing. Should this schedule not be met, the balance of the amount borrowed and not spent will be applied to debt service levy. Each general obligation debt will be closely monitored so that it adheres to IRS regulations in respect to arbitrage and spend down rules. Should State Trust Fund be utilized for the issuance of debt, all draw requests must be made within 1 year of receiving the approval of the State Trust Fund to borrow the funds. E. The City of Eau Claire shall utilize any debt obligations it has at its disposal to take advantage of the lowest cost of the debt or for another benefit for the City. F. The City of Eau Claire will follow a policy of full disclosure on every financial report and bond prospectus. Credit Objectives. A. The City of Eau Claire will strive to maintain or improve its current rating with Moody's Investor Services: (Aa1) and Standard and Poor's: (AA). The City will strive to maintain good relations with the rating agency and keep them informed of significant developments that could affect the City's credit rating. B. The following objectives will be used to maintain debt service requirements at an affordable level and enhance the credit quality of the City: 1. The levy for debt service shall be no greater than 25 percent of the total levy, with an effort to maintain the levy at a proportionate, even level for tax rate stabilization. 2. Debt amortization should be structured so that 65% or more of total direct debt principal is retired in 10 years or less. C. Each year, as part of the budget process, the City Council should consider the percentage increase in the tax levy for debt service for the year following the issuance of the debt. Flexibility to fund future expenditures necessary to provide essential City services and economic viability are essential considerations. Debt Issuance A. An analysis will be prepared by City staff for each proposed financing; such analysis will assess the impact of debt issuance on current and future operating and capital budgets and address the reliability of revenues to support debt service payments. Page 4 of 6 CITY OF EAU CLAIRE CITY COUNCIL POLICY STATEMENT General Subject: Administration Date Issued: 9/9/2014 Revised: 12/22/2015 Special Subject: Debt Management Effective Date: 9/9/2014 B. All feasible alternatives (for example, State Trust Fund loans, Clean Water Fund loans, and private placements with local financial institutions) for borrowing funds should be considered by the City depending on the uniqueness of the items or projects being financed by long-term debt. Method of sale A. The City shall issue general obligation debt through a competitive bidding process with the exception of Council authorized negotiated sales. Bids will be awarded on a true interest cost (TIC) basis, providing other bidding requirements are satisfied. In the instance in which staff believes competitive bidding produced unsatisfactory bids, the Council may authorize the Finance Director and its financial advisors to negotiate the sale of the securities. B. Negotiated sales of general obligation debt will be considered in circumstances when the complexity of the issue requires specialized expertise (such as advanced refunding or restructuring debt service), when time to complete a sale is critical or when a negotiated sale would result in substantial cost savings. Negotiated sales of debt will also be considered for revenue bonds, bond anticipation notes and leases when the complexity of the project, revenue source for debt service, or security for the debt makes it likely that a negotiated sale would result in a financial advantage to the City. Refinancing / refunding of debt A. Periodic reviews of outstanding debt will be undertaken to determine refinancing or refunding opportunities. Refinancing or refunding opportunities will be considered (within federal tax law constraints) if and when there is a net economic benefit for the refinancing or refunding. B. In general, the City may capitalize on a refinancing or a refunding opportunity for economic savings when net present value savings of at least 2 percent of the refinanced / refunded debt can be achieved. Current refinancing or refunding that produce net present values savings of less than 2 percent savings may be considered when there is a compelling public policy or long- range financing policy objective. Disclosure A. The City is committed to full and complete financial disclosure, and to cooperate fully with rating agencies, institutional investors, other units of government, and Page 5 of 6 CITY OF EAU CLAIRE CITY COUNCIL POLICY STATEMENT General Subject: Administration Date Issued: 9/9/2014 Revised: 12/22/2015 Special Subject: Debt Management Effective Date: 9/9/2014 the general public to share clear, comprehensible, and accurate financial information. B. The Finance Department will provide continuing disclosure in compliance with continuing disclosure certifications made at the time of each debt issuance, material events that may happen throughout the year and the required annual disclosures set forth by the Municipal Securities Rule Making Board (MSRB) and the Securities and Exchange Commission (SEC). Bond Counsel, Financial Advisors, and Debt Rating Agencies. A. Bond counsel, financial advisors, and debt rating agencies will be selected as necessary according to state statutes and City procurement policies. B. The City will utilize the services of a qualified financial advisor for preparing and marketing the City's bond issues and for monitoring its debt and debt service. C. The City should strive to maintain a long-term relationship with a financial advisor to allow for continuity and consistency in services provided by the advisor. However, the arrangement between the financial advisor and the City should be examined every three (3) to five (5) years or as deemed necessary by City administrative staff and the City Council. D. The City will work with the financial advisor to ensure that long-term debt issues are structured to protect the interest of the City for the present and in the future (for example, the inclusion of call provisions to protect the City against future interest rate fluctuations or other circumstances). Page 6of6