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Debt Management (BF-23, Rev. 1)CITY OF DELRAY BEACH ADMINISTRATIVE POLICIES AND PROCEDURES DEPARTMENT:Finance POLICY NUMBER:BF-23 SUBJECT:Debt Management SUPERSEDES:BF-23,Rev.0 (April 4,2000) REVISION:EFFECTIVE DATE: APPROVED BY:e R.Moore,ICMA-C ,City Manager BF-23.1 PURPOSE The following policies are enacted in an effort to standardize and rationalize the issuance and management of debt by the City of Delray Beach.The primary objective is to establish conditions for the use of debt and create procedures and policies that minimize the City's debt service and issuance costs,retain the highest practical credit rating,and maintain full and complete financial disclosure and reporting. POLICY BF-23.2 Responsibility: The Director of Finance and the Treasurer shall essentially be responsible for compliance of these guidelines and obtaining the necessary resources and assistance to assure their achievement in an economical manner.Where independent professionals are involved or charged with some aspect of the debt management,they shall also follow these guidelines.Responsibilities shall consist of the following: Meet as necessary to consider the need for financing and assess progress on the Capital Improvement Program. Discuss matters relative to the preparation of a financing,review changes in state and federal legislation. Review,as needed,the resolutions authorizing the issuance of obligations to ensure compliance,and to Review services provided by the Financial Advisor,Bond Counsel,Paying Agent and Registrar and other service providers to evaluate the extent and effectiveness of services being provided. BF-23.3 Capital Planning: To enhance creditworthiness and prudent financial management,the City of Delray Beach is committed to systematic capital planning,intergovernmental cooperation and coordination,and long-term financing financial planning.Evidence of this commitment to systematic capital planning will be demonstrated through adoption and periodic adjustment of a Comprehensive Plan.The Comprehensive Plan shall contain a Capital Improvement Element that shall serve as a guide to the development of a five-year Capital Improvement Plan consisting of project lists and revenue sources for the current year as well as the next five. Debt Management BF-23 Page 2 of 8 The CIP shall be reviewed by the Capital Improvement Committee consisting of the City Manager,Assistant City Manager,Director of Finance,Environmental Services Director,and the City Engineer.The final draft of the Capital Improvement Plan shall be submitted for review to the Planning and Zoning Board to ensure that projects are in compliance with the Comprehensive Plan. BF-23.4 Limitations on City Indebtedness: The City will attempt to maintain primarily a "pay as you go"financing program for capital improvements. Debt financing,to include general obligation bonds,revenue bonds,certificates of participation, lease/purchase agreements,and other obligations permitted to be issued under Florida state law,shall only be used to purchase capital assets and infrastructure that cannot be acquired from either current revenues or fund balance. Long term debt will not be issued in order to finance current operating costs or normal,routine maintenance. All long-term debt will be repaid in a period of time not to exceed the estimated useful life of the asset being purchased or constructed. The City shall not assume more tax-supported general purpose debt without conducting an objective analysis as to the community's ability to assume and support additional debt service payments. For the City to issue additional pari passu bonds,covenants as authorized in the respective bond issues must be complied with. When appropriate,self-supporting revenue bonds shall be issued before general obligation bonds. The City will strive to maintain a gross bonded general obligation principal debt at a level not to exceed 2% of the assessed value of taxable property within the City. The City will strive to ensure that its net bonded debt per capita does not exceed $700. The City will strive to ensure that the combined total of its direct net bonded debt and its share of overlapping debt issued within Palm Beach County does not exceed $2,000 per capita. The City will strive to ensure that annual general bonded debt service costs (principal and interest)will not exceed 15%of General Fund Expenditures (excluding one-time bond and extraordinary expenses). BF-23.5 Other Fiscal Policies: The City will adopt an annual budget for all funds as required by the State of Florida in which expenditures do not exceed projected revenues. The City will strive to develop and maintain a General Fund Unassigned Fund Balance of 10-15% of annual General Fund revenues (excluding one-time bond and extraordinary receipts). The City will strive to maintain a water/sewer renewal and replacement program annually consisting of 2.5%of the value of fixed assets of the Water and Sewer Fund excluding land and work in progress. Debt Management BF-23 Page 3 of 8 BF-23.6 Method of Sale: Competitive Sale The City,as a matter of policy,shall seek to issue its debt obligations in a competitive sale unless it is determined that such a sale method will not produce the best results for the City.In such instances where the City in a competitive bidding for its debt securities (whether general obligation or non-general obligation debt)deems the bids received as unsatisfactory or does not receive bids,it may enter negotiation for sale of the securities. Negotiated Sale When determined appropriate,the City may elect to sell its debt obligations through a negotiated sale. Such determination may be made on an issue-by-issue basis,for a series of issues,or for part or all of a specific financing program. Private Placement When determined appropriate,the City may elect to sell its debt obligations through a private placement or limited public offering. BF-23.7 Short Term and Interim Financing: A Lines and Letters of Credit Where their use is judged by the Director of Finance to be prudent and advantageous to the City,the City has the power to enter into agreements with commercial banks or other financial entities for purposes of acquiring lines or letters of credit that shall provide the City with access to credit under terms and conditions as specified in such agreements.Before entering into any such agreements,takeout financing for such lines or letters of credit must be planned for and determined to be feasible.Lines and letter of credit may be issued in the form of either a competitive or negotiated sale.The City Commission shall approve any agreements with financial institutions for the acquisition of lines or letters of credit.Lines and letters of credit entered into by the City shall be in support of projects contained in the approved Capital Improvement Plan. A Bond Anticipation Notes Where their use is judged by the Director of Finance to be prudent and advantageous to the City,the City may choose to issue Bond Anticipation Notes as a source of interim construction financing.Before issuing such notes,takeout financing for such notes must be planned for and determined to be feasible.Bond Anticipation Notes may be sold in either a competitive or negotiated sale,subject to authorization and approval by the City Commission. B.Tax and Revenue Anticipation Notes Where their use is judged by the Director of Finance to be prudent and advantageous to the City,the City may choose to issue Tax and Revenue Anticipation Notes to fund working cash flow needs.Cash flow projections shall be made prior to the issuance of such notes.Tax and Revenue Anticipation Notes may Debt Management BF-23 Page 4 of 8 be sold in either a competitive or negotiated sale,subject to authorization and approval by the City Commission. BF-23.8 Derivatives: The City will consider the use of derivative products on a case by case basis and consistent with state statute and financial prudence. BF-23.9 Refunding of City Indebtedness: A Debt Service Savings -Advance Refunding The City may issue advance refunding bonds (as defined for federal tax law purposes)when advantageous, legally permissible,prudent,with net present savings,expressed as a percentage of the par amount of the refunding bonds,equal to or exceeding 3 percent.Exceptions to this requirement shall be made only upon the approval of the City Commission upon recommendation of the Director of Finance. Debt Service Savings -Current Refunding The City may issue current refunding bonds (as defined for federal tax purposes)when advantageous, legally permissible,prudent,with net present value savings equal to or exceeding 3%.Exceptions to this requirement shall be made only upon the approval of the City Commission upon recommendation of the Director of Finance. Restructuring of Debt The City may choose to refund outstanding indebtedness when existing bond covenants or other financial structures impinge on prudent and sound financial management.Savings requirements for current or advance refundings undertaken to restructure debt may be waived by the City Commission upon recommendation of the Director of Finance. Open Market Purchase of City Securities The City may choose to defease its outstanding indebtedness through purchases of its securities on the open market when market conditions make such an option financially feasible.The Director of Finance will be responsible for developing procedures for executing open market purchases and the savings objectives to be achieved by undertaking such actions. BF-23.10 Credit Enhancement: The City may seek to use credit enhancement (letters of credit,bond insurance,surety bonds,etc.)when such credit enhancement proves to be cost effective.If multiple providers are available,selection of credit enhancement shall be subject to a competitive bid process.Credit enhancement may be used to improve or establish a credit rating on debt obligation,even when such credit enhancement is not cost effective if the use of such credit enhancement meets the City's debt financing goals and objectives. Debt Management BF-23 Page 5 of 8 BF-23.11 Conduit Financings: Conduit financings are securities issued by a government agency to finance a project of a third party,such as a non-profit organization or other private entity.The City may sponsor conduit financings for those activities (e.g.,economic development,housing)that have a general public purpose and are consistent with the City's overall service and policy objectives.Such conduit financings will not in any way pledge the City's faith and credit. BF-23.12 Management Practices: The City has instituted sound management practices and will continue to follow practices that will reflect positively on it in the rating process.Among these are the City development of and adherence to long-term financial and capital improvement plans,management of expense growth in line with revenues and maintenance of an adequate level of reserves. BF-23.13 Rebate Reporting and Covenant Compliance: The Director of Finance shall essentially be responsible for maintaining a system of record keeping to meet the arbitrage rebate compliance requirements of the tax code.This effort includes tracking investment earnings on bond proceeds,obtaining assistance in calculating rebate payments in compliance with tax law,and remitting any rebatable earnings to the federal government in a timely manner in order to preserve the tax-exempt status of the City's outstanding debt issues.Additionally,general financial reporting and certification requirements embodied in bond covenants are monitored to ensure that all covenants are complied with. BF-23.14 Reporting/Continuing Disclosure: The City will comply with the standards of the Government Finance Officers Association for financial reporting and budget presentation and the disclosure requirements of the Securities and Exchange Commission.The City is committed to continuing disclosure of financial and pertinent credit information relevant to the City's outstanding debt and will maintain compliance with disclosure standards promulgated by state and national regulatory bodies. BF-23.15 Credit Ratings: The City of Delray Beach seeks to maintain the highest possible credit ratings for all categories of short and long-term debt that can be achieved without compromising delivery of basic City services and achievement of adopted City policy objectives.Full disclosure of operations and open lines of communication shall be made to rating agencies.City staff,with the assistance of financial advisors,shall prepare the necessary materials and presentation to the rating agencies.Credit ratings will be sought from Moody's,Standard &Peer's,and/or Fitch as recommended by the City's financial advisor. BF-23-16 Definitions: Advanced Refunding-A financing technique that allows an issuer to obtain the benefit of lower interest rates when the outstanding bonds are not currently callable.The proceeds from the sale of the refunding bonds are used to purchase taxable government securities,which are deposited in an escrow account. Debt Management BF-23 Page 6 of 8 Arbitrage Rebate Compliance-Tax-Exempt bonds issued on or after Sept 1,1986 are monitored to determine if the interest rate differential that exists when proceeds from a municipal bond -which is tax- free and carries a lower yield -are invested in taxable securities with a yield that is higher..Any profit or "arbitrage"is "rebated"to the Federal Assessed Value-A valuation set upon real estate or other personal property by a government as a basis for levying taxes.The assessed value is set by the Property Appraiser. Bond Anticipation Notes-Bond anticipation notes are smaller short-term bonds that are issued by corporations and governments,such as local municipalities wishing to generate funds for upcoming projects Bond Covenant-An agreement between the issuer and holder of a bond,requiring or forbidding certain actions of the issuer. Bond Counsel-An attorney who writes an official opinion stating that a local government is legally permitted to issue a municipal bond. Certificates of Participation-A type of financing where an investor purchases a share of the lease revenues of a program rather than the bond being secured by those revenues.The investor usually uses the proceeds to construct a facility that is leased to the municipality,releasing the municipality from restriction on the amount of debt that they can incur. Direct Debt or Gross Bonded Debt-The sum of the total bonded debt and any unfunded debt (typically short-term notes)of the issuer. Capital Improvement Plan (CIP)-The financial plan of capital project expenditures for the fiscal year beginning October 1.It incorporates anticipated revenues and appropriations included in the first year of the five-year Capital Improvement Program (CIP),and any anticipated unspent budget appropriation balances from the previous fiscal year. Capital Project -Any improvement or acquisition of major capital;facilities,roads,bridges,buildings or land with a useful life of at least five years. Competitive Bid-A method of submitting proposals to purchase a new issue of bonds by which the bonds are awarded to the underwriting syndicate presenting the best bid according to stipulated criteria set forth in the notice of sale.Underwriting bonds in this manner is also referred to as a competitive or public sale. Conduit Financing-Bonds issued by a governmental unit to finance a project to be used primarily by a third party,usually a corporation engaged in private enterprise.The security for such bonds is the credit of the private user rather than the governmental issuer.Generally such bonds do not constitute obligations of the issuer because the corporate obliger is liable for generating pledged revenues.Industrial revenue bonds are common examples of conduit financing.The City serves as a conduit for the Miami Parking System,the Miami Sports and Exhibition Authority and the City of Miami Health Facility Authority. Current Refunding-A transaction in which the outstanding bonds to be refunded are called and paid off within 90 days of the date of issuance of the refunding bonds. Debt Management BF-23 Page 7 of 8 Debt Obligations-Bonds,notes,letters and lines of credit issued against a pledge of a specific revenue source or sources with proceeds used to fund a project providing for a public benefit. Debt Service-Required payments for principal and interest. Disclosure Rule-Rule 15c2-12 promulgated by the Securities and Exchange Commission,addressing specific ongoing disclosure requirements for the City. Derivative-An arrangement or instruments (such as a future,option or warrant)whose value derives from and is dependent on the value of an underlying asset,such as stocks,bonds,commodities,currencies, interest rates and market indexes. General Fund-This fund accounts for all financial transactions except those required to be accounted for in other funds.The fund's resources,ad valorem taxes,and other revenues,provide services or benefits to all residents of the City of Delray Beach General Fund Undesignated Fund Balance-A portion of the General Fund that is not designated for intended uses. General Obligation Bonds (G.O.Bonds)-Bonds which are secured by the full faith and credit of the issuer. General obligation bonds issued by local units of government are secured by a pledge of the issuer's ad valorem taxing power.Ad valorem taxes necessary to pay debt service on general obligation bonds are typically not subject to the constitutional property tax millage limits.Such bonds constitute debts of the issuer and normally require approval by election prior to issuance.In the event of default,the holders of general obligation bonds have the right to compel a tax levy or legislative appropriation,by mandamus or injunction,in order to satisfy the issuer's obligation. Government Finance Officers'Association-A national organization that,for over a century,has provided government finance professionals information on all aspects of public finance,educational opportunities, best practices,and public policies. Issuance Costs-Costs associated with issuing debt (loans and bonds),such as various fees and commissions paid to investment banks,law firms,auditors,regulators,and so on. Lease/Purchase Agreement-The right,but not the obligation,to buy a leased item at a predetermined price,usually exercised at the end of the scheduled lease term. Negotiated Sale-The sale of a new issue of municipal securities by an issuer through an exclusive agreement with a previously selected underwriter or underwriting syndicate.A negotiated sale should be distinguished from a competitive sale,which requires public bidding by underwriters.Primary points of negotiation for the issuer are the interest rate and purchase price,which reflect the issuer's costs of offering its securities in the market.The sale of a new issue of bonds in this manner is also known as a negotiated underwriting. Net Direct Debt or Net Bonded Debt-Direct debt less sinking fund accumulations and all self-supporting debt. Debt Management BF-23 Page 8 of 8 Operating Costs-Expenditures that will be consumed in a fixed period of time to provide for day-to-day operations (e.g.,salaries and related benefits;operating supplies;contractual maintenance services; professional services and operating equipment). Overlapping Debt-The financial obligations of one political jurisdiction that also falls partly on a nearby jurisdiction. Pari-passu Bonds-Meaning "equal footing"that describes situations where two or more assets,securities, creditors or obligations are equally managed without any display of preference. Paying Agent-An agent who accepts payments from the issuer of a security and then distributes the payments to the holders of the security.Also known as a "disbursing agent." Pay-As-You-Go-Basis-A term used to describe the financial policy of a governmental unit which finances all of its capital outlays from current revenues rather than by borrowing.A governmental unit which pays for some improvements from current revenues and for others by borrowing it on a partial or modified pay- as-you-go-basis. Per Capita Debt-The amount of an issuer's debt divided by population,which is used as an indication of the issuer's credit position by reference to the proportionate debt borne per resident. Useful Life-The duration for which the item will be useful (to the business),and not how long the property will actually last. Private Placement-The sale of securities to a relatively small number of select investors as a way of raising capital.Securities NOT for sale on the Open Market. Rating Agencies-Provide credit ratings on corporate and bank debt issues.Includes Moody's,S&P and Fitch. Registrar-An institution or organization that is responsible for keeping records of bondholders and shareholders. Revenue Anticipation Notes-Issued with the anticipation other Non-tax revenue (such as state aid)will pay the debt. Revenue Bonds-Revenue bonds are municipal bonds that finance income-producing projects and are secured by the specified revenue source of the project. Securities and Exchange Commission-A government commission created by Congress to regulate the securities markets and protects investors. Tax Anticipation Notes-Issued with the anticipation of future tax collections. Water/Sewer Renewal and Replacement Program-A fund into which funds are deposited to cover anticipated expenses for major repairs of the water/sewer facilities.