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HomeMy WebLinkAbout28. 19-614 NOVEMBER 26, 2019 19-614 RESOLUTION (CARRIED 7-0 LOST LAID OVER WITHDRAWN ) PURPOSE: ADOPT DEBT MANAGEMENT POLICY INITIATED BY: FINANCE DEPARTMENT LONG RANGE FINANCE COMMITTEE RECOMMENDATION: Approved WHEREAS, the Long Range Finance Committee was given the task of evaluating the creation of a Debt Management Policy for the City of Oshkosh; and WHEREAS, the committee researched best practices and reviewed the policies of other municipalities and has drafted and recommends the attached policy related to debt management. NOW, THEREFORE, BE IT RESOLVED by the Common Council of the City of Oshkosh that the attached "Debt Management Policy" is hereby approved and the proper City officials are hereby authorized and directed to take those steps necessary to carry out the Policy. 4 Oshkosh TO: Honorable Mayor and Members of the Common Council FROM: Russ Van Compel, Director of Finance DATE: November 14, 2019 RE: Recommendation to Establish a Debt Management Policy BACKGROUND As part of its mission to research, study, and address the long range financial issues of the City, the Long Range Finance Committee had been given the task of evaluating the creation of a Debt Management Policy for the City. As part of this study, the Committee has completed the following: • Researched best practices regarding all facets of Debt Management policies provided by the Government Finance Officers Association • Reviewed the Debt Management Policies of other cities • Drafted a prudent, fiscally responsible policy for the Council to consider ANALYSIS Debt management policies are written guidelines, allowances, and restrictions that guide the debt issuance practices of local governments, including the issuance process, management of a debt portfolio, and adherence to various laws and regulations. A debt management policy should improve the quality of decisions, articulate policy goals, provide guidelines for the structure of debt issuance, and demonstrate a commitment to long-term capital and financial planning. Adherence to a debt management policy signals to rating agencies and the capital markets that a government or city is well managed and therefore is likely to meet its debt obligation in a timely manner. The purpose of the attached policy is to record and clarify the City Council's policy regarding the management and issuance of debt. Finance Department City Hall,215 Church Avenue P 0 Box 1 130 Oshkosh,WI 54903-1130 920.236 5005 http//www.ci.oshkosh wi us Below are the details of the main features of the policy and where the city stands against these metrics: • Maximum amount of indebtedness—The City seek to remain below 3.5 percent of the equalized value (which is 70% of the maximum amount allowed by State Statutes). The City will strive to reach a goal of 2.5% of the equalized value, or 50% of the state debt limit. The city is currently at 59.92% of the state debt limit. • Net Direct Debt—Net Direct Debt should not exceed three time the operating revenues of the City. Net direct debt is approximately .8657 times operating revenues at this time. • Debt Levy—The levy for debt service shall be no greater than 33 percent of the total levy. The city currently commits 29.83% of the total levy to debt service. • Debt Amortization—Debt amortization should be structured so that 65% or more of total direct debt principal is retired in 10 years or less. The city currently has 84% of its debt amortizing at 10 years of less. FISCAL IMPACT There is no anticipated financial impact from the approval of the proposed Debt Management Policy. However, it is anticipated that future interest rates will be lowered and finances will be better managed by the adoption of a debt management policy. RECOMMENDATION The Long Range Finance Committee and Staff recommends that Council adopt the attached Debt Management Policy. We strongly believe that passage of this policy is in the best interest of the citizens of the City of Oshkosh as we move into the future. Respectfully Submitted, Approved: 74067a7/ Russ Van Gompel Mark A. Rohloff Director of Finance City Manager Finance Department City Hall,215 Church Avenue P.O. Box 1 130 Oshkosh,WI 54903-1130 920 236 5005 http//www.ci oshkosh wi us CITY OF OSHKOSH CITY COUNCIL POLICY STATEMENT General Subject: Administration Date Drafted: 9/23/2019 Revised Special Subject: Debt Management Effective Date: 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 of Oshkosh recognizes the primary purpose of using debt financing is to support the provisions of service to its residents. Using debt financing to meet the capital needs of the community must be evaluated according to three tests: Efficiency, effectiveness, and social equity. The test of efficiency equates to the highest rate of return for a given investment of resources. The test of effectiveness refers to a program creating a net benefit to residents. The test of social equity refers to a financed project promoting fairness in the delivery of service to all residents. Types of Debt and Uses A. General Obligation Bonds and Promissory Notes. The defining feature of general obligation debt 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 debt 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. Page 1 of 6 CITY OF OSHKOSH CITY COUNCIL POLICY STATEMENT General Subject: Administration Date Drafted: 9/23/2019 Revised Special Subject: Debt Management Effective Date: The City of Oshkosh 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, economic development projects, 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 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, and the loans may be secured by either a general obligation pledge, or a pledge of revenues. 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, or when flexible prepayment terms are required. 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 Oshkosh 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, required reserve funds and capitalized interest when appropriate. D. Capital Leases. Capital lease financing shall be considered only if verifiable operating savings, when properly discounted, outweigh the lease financing costs. Page 2 of 6 CITY OF OSHKOSH CITY COUNCIL POLICY STATEMENT General Subject: Administration Date Drafted: 9/23/2019 Revised Special Subject: Debt Management Effective Date: Written justification detailing the explanation of factors considered including cash flow analysis reviewed by the Finance Director will be submitted and approved before any lease is entered into. E. Other Debt Instruments. The City of Oshkosh 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. F. 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). The City will strive to reach a goal of 2.5 percent (50% of the state debt limit). 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. Page 3of6 CITY OF OSHKOSH CITY COUNCIL POLICY STATEMENT General Subject: Administration Date Drafted: 9/23/2019 Revised Special Subject: Debt Management Effective Date- D. Spend down of borrowed proceeds. All debt taken out will be for shovel-ready projects. Funds will be expended in accordance with applicable IRS rules pertaining to rebate and yield restriction as set forth in the tax certificate for each tax-exempt debt obligation. Should this schedule not be met, the balance of the amount borrowed and not spent will be applied to reduce the debt service levy after reserving any amounts needed to pay rebate, or to make yield restriction payments. Each tax-exempt debt obligation will be closely monitored so that it adheres to IRS regulations in respect to arbitrage and spend down rules. E. The City of Oshkosh 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 Oshkosh will follow a policy of full disclosure on every financial report and bond prospectus. Credit Objectives. A. The City of Oshkosh will strive to maintain or improve its current ratings with Moody's Investor Services: 1. General Obligation -Aa3 2. Sewer Enterprise —Aa3 3. Water Enterprise—Aa3 4. Storm Water Enterprise —Al 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 33 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. Page 4 of 6 CITY OF OSHKOSH CITY COUNCIL POLICY STATEMENT General Subject: Administration Date Drafted: 9/23/2019 Revised Special Subject: Debt Management Effective Date- 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. 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 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 debt will be considered in circumstances when complexity of the financed project, sources of revenue for repayment, market conditions, timing requirements, or other factors suggest that a competitive sale will not result in the lowest cost of financing for the City, or the ability to successfully market the securities. 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 Page 5 of 6 CITY OF OSHKOSH CITY COUNCIL POLICY STATEMENT General Subject: Administration Date Drafted: 9/23/2019 Revised Special Subject: Debt Management Effective Date: 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 the general public to share clear, comprehensible, and accurate financial information. B. The Finance Department will ensure compliance with the terms of each continuing disclosure undertaking the City has entered into for each debt issuance subject to Securities and Exchange Commission Rule 15c-2-12. 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