HomeMy WebLinkAboutAgenda Report - November 7, 2012 I-03AGENDA ITEM 0010
CITY OF LODI
COUNCIL COMMUNICATION
AGENDA TITLE: Adopt Resolution Approving Debt Management Policy
MEETING DATE: November7,2012
PREPARED BY: Deputy City Manager
RECOMMENDED ACTION: Adopt resolution approving Debt Management Policy.
BACKGROUND INFORMATION: The Government Finance Officers Association has adopted a best
practice that recommendsthat state and local governments have a
debt management policy in place. Debt management policies are
guidelines that affect the amount and type of debt that an entity issues, the issuance process, and the
management of the debt portfolio. A debt management policy should guide the quality of decisions,
provide justification for the structure of debt, identify policy goals and demonstrate a commitment to long-
term financial planning. Adherence to a debt management policy signals to rating agencies and the
capital markets that a government is well managed and should meet its obligations in a timely manner.
During the recent refinancing, one of the ratings agencies asked staff about our debt management policy.
Staff informed the rating agency that we did not have such a policy in place. While the rating agency did
not make this a significant issue, it did provide a signal to staff that we should bring such a policy to
Council for adoption. Attached is the proposed policy for your review and adoption.
FISCAL IMPACT:
FUNDING AVAILABLE:
JA/ja
Attachments
No direct fiscal impact at this time.
Not applicable.
Jordan Ayers Jy
Deputy City Manager
APPROVED:._----•-�
o radt Bartlam City Manager
RESOLUTION NO. 2012-178
A RESOLUTION OF THE LODI CITY
COUNCIL APPROVING THE CITY OF LODI
DEBT MANAGEMENT POLICY
BE IT RESOLVED that the City Council of the City of Lodi has reviewed and
hereby approves the attached City of Lodi Debt Management Policy, which shall be
effective this date.
Dated: November 7, 2012
hereby certify that Resolution No. 2012-178 was passed and adopted by the
City Council of the City of Lodi in a regular meeting held November 7, 2012, by the
following vote:
AYES: COUNCIL MEMBERS — Hansen, Johnson, Katzakian, and
Mayor Mounce
NOES: COUNCIL MEMBERS — None
ABSENT: COUNCIL MEMBERS — Nakanishi
ABSTAIN: COUNCIL MEMBERS — None
RAND JOHL
City Clerk
2012-178
City of Lodi
Debt Management Policy
Adopted November 7, 2012
Debt Management Policy Page 1
Adopted November 7,2012
Section 1— Introduction
The purpose of this Debt Management Policy (Policy) is to establish guidelines for the
issuance and management of the City's debt. While the City prefers to Em meprojects
on a pay-as-you-go basis, in the event debt is necessary, this Policy confirms the
commitment of the Council, management, staff, advisors and other decision makers to
adhere to sound financial management practices, including full and timely repayment of
borrowings, achieving the lowest possible cost of capital within prudent risk parameters.
Priorities ofthe Policy are:
1. Achieve the lowest cost of capital;
2. Maintain a prudent level of financial risk;
3. Preserve future financial flexibility;
4. Maintain full and complete financial disclosure and reporting;
5. Obtain highest practical credit ratings and good investor relations; and
6. Ensure compliance with state and federal laws and regulations.
The Policy shall govern, except as otherwise covered by the Investment Policy, the
issuance and management of all debt and lease financings funded from the capital
markets (includingprivate placement and bank loans), including the selection and
management of related financial services and products and investment of bond and lease
proceeds. While adherence to this policy is required inapplicable circumstances, it is
recognized that changes in the capital markets, agency programs and other unforeseen
circumstances may from time to time produce situations that are not covered by this
policy and will require modifications or exceptions to achieve policy goals. In these
cases, management flexibility is appropriate, provided specific authorizationfrom the
City Manager and the City Council is obtained.
Section 2 - Responsibilities
The City's debt program for all City funds shall be operated in conformance with
applicable federal, state and other legal requirements, includingthe Lodi Municipal Code.
Responsibility for managing and coordinating all activities related to the structure,
issuance and administration of all long- and short-term debt obligations shall rest with the
Deputy City Managerhternal Services Director.
No debt obligations shall be presented to the City Council for their authorization without
the joint assessment and recommendation of the City Manager, Deputy City Manager/
Internal Services Director and the City Attorney. Departmentsplanning debt-financed
capital programs or equipment acquisitions shall work closely with the City Manager,
Deputy City Manager/Intemal Services Director and City Attorney to provide
information and otherwise to facilitatethe issuance and on-going administrationof debt.
Debt ManagementPolicy Page 2
Adopted November 7, 20I2
The Deputy City Manager/Internal Services Director shall be responsible for maintaining
good communication with rating agencies, investors and other debt related service
providers about the City's financial condition and will follow a policy of full disclosure.
The Deputy City Manager/Internal Services Director shall conduct an annual review of
this Policy and bring forward to the City Council any amendments deemed necessary and
appropriate.
Section 3 —Debt Considerations
The City will evaluate the need for debt financing a project compared to a pay-as-you-go
financing methodology. The City prefers to fund projects on a pay-as-you-go basis.
A. Factors favoring a pay-as-you-go methodology include:
a. Current proj ected revenues and fund balances available are sufficient to fund
the project,
b. Long-term total costs are lower due to the avoidance of interest expense.
c. Existing debt capacity is insufficient to absorb the additional debt without
adverse impact to credit ratings.
d. Market conditions are unfavorable or present difficulties in marketing.
B. Factors favoring debt financing include:
a. Current and projected revenues available for debt service are sufficient and
reliable so that financings can be marketed with investment grade credit
ratings.
h Market conditionspresent favorable interest rates and demand for the City
financings.
c. A project is mandated by state or federal requirements, and current resources
are insufficient or unavailable to fully fund the project.
d. The project is immediately required to meet or relieve capacity needs or
emergency conditions and current resources are insufficient or unavailable.
Section 4 —Debt Term
The City Council recognizes that any new debt obligation will have an impact on the
long-term affordability of all outstanding debt and any future planned debt, as well as
budgetary impacts associatedwith the maintenance and operating costs of debt-financed
facilities.
A. Term of Debt —Debt will be structured for the shortest period possible, consistent
ra a fair allocation of costs to current and future beneficiaries or users. Debt shall
not be issued for a term that exceeds the useful life of the debt-financedasset.
Debt Management Policy Page 3
Adopted November 7,2012
B. Debt Reoavment — Typically, the City desires level debt service payments over the
term of the debt. However, the cost of capital, financialrisk, current economic
conditions, future financial flexibility, credit ratings and available cash flow will be
evaluated to determine the most appropriate method of debt amortization for each
debt issue. Notwithstanding the above, back loading of debt service will be evaluated
as the circumstances dictate. Back loading occurs when debt service payments are
lower in the initial years of a debt term and higher toward the later years of a debt
term.
Section 5 - Debt Issuance
The City has the capacity to issue long- and short-term debt and to refund any
outstanding debt. The following section details the purposes of debt issuance, the method
of sale for such debt and the practices for obtainingprofessional assistance in the debt
issuanceprocess.
A. Long-term Debt — Long-term debt may be used to finance the acquisition or
improvement of land, infrastructure, facilities, or equipment for which it is
appropriate to spread the costs of such over more than one budget year. Long-term
debt may be used to fund capitalized interest, cost of issuance, required reserves and
any other financing related costs that maybe legally capitalized. Long-term debt
shall not be used to fund City operating costs.
B. Short-termDebt - Short-term debt will be considered as an interim source of funding
in anticipation of long-term debt. Short-term debt maybe issued for any purpose for
which long-term debt may be issued, including capitalized interest and financing -
related costs.
Short-term debt is also appropriate to address legitimate short-term cash flow
requirements during a given fiscal year to fund the operating costs of the City to
provide necessary public services. The City will not engage in short-term borrowing
solely for the purpose of generating investment income.
C. Refunding - Refunding opportunities will be identifiedby periodic reviews of
outstanding debt obligations. Refunding will be considered when there is a net
economic benefit from the refunding. Non -economic refunding maybe undertaken to
achieve City objectives relating to changes in covenants, call provisions, operational
flexibility, tax status, issuer, or other non -economic factors related to the debt.
D. Method of Sale —Debt is typically issued under either a competitive sale or a
negotiated sale, The City shall have the flexibility to determine which method of sale
is appropriate for each debt issuance. Determination of the appropriate method of sale
will rest collectively with the City Manager, Deputy City Manager/Internal Services
and City Attorney.
Debt Management Policy Page 4
Adopted November 7,2012
E. Private Placement - The City may determine that private placement of debt is most
appropriate. Use of private placement will be considered collectively by the City
Manager, Deputy City Manager/Internal Services and City Attorney.
F. Pooled Financing —The City may also consideruse ofpooled financing as a method
of accessing the capital markets. Use of pooled financing will be evaluated
collectively by the City Manager, Deputy City Manager/Internal Services and City
Attorney on a case-by-case basis.
G. Selectionof Financing Professionals— Selection of financing professionals (financial
advisor, underwriter, bond counsel, disclosure counsel, trustee, etc.) shall generallybe
on a competitive basis; however, the City Manager is authorized to select financing
professionals on a sole source basis. Selection shall balance service (experience,
professional reputation and capabilities) with costs. Once selected, the Financial
Advisor may assist the City v&h selecting the rest ofthe members of the financing
team.
Section 6 —Debt Structure
A. Credit Ratings - The City seeks to obtain and rmhtWn the highest possible credit
ratings when issuing debt. The City will seek credit ratings from at least one of the
three major ratings agencies on all debt, as appropriate. Ratings from multiple rating
agencies may be sought for a single debt issue; based upon the market conditions at
the time of the issuance.
B. Fixed-rate and Variable-rate Debt - The City prefers to issue fixed-rate debt.
Variable-rate debt may be used, if market conditions warrant at the time of issuance.
It is acknowledgedthat variable-rate debt passes an unknown obligation onto future
budget cycles.
C. Derivatives - Derivative products may have application v&h regard to certain City
borrowing programs. The City Manager, Deputy City Manager/Internal Services
Director and City Attorney will evaluate the use of derivative products on a case-by-
case basis.
D. Call Provisions — The timing for when bonds are callable varies and is determined at
the time of pricing such bonds. The City's preferred stricture is to negotiate for
optional redemption at par in order to maintain flexibility in the fature.
E. Credit Enhancements — The City may use credit enhancements (letters of credit, bond
insurance, surety bonds, etc.) when such credit enhancements prove to be cost-
effective. The City will consider the use of credit enhancements on a case-by-case
basis.
DebtManagement Policy Page 5
Adopted November 7,2012
Section 7 - Interfund Borrowings
The City may borrow internallyfrom other funds with temporary cash surpluses to meet
short-term cash needs in lieu of issuing debt. The fund(s) from which the money is
borrowed shall be repaid nth interest at the average earnings rate of the City investment
pool.
Section 8 - Debt Administration
The Deputy City Manager/Internal Services Director shall be responsible for
administering the City's debt managementprogram, To that end, this position shall:
A. Comply �vdL all reporting requirements within the bond documents.
B. Review all outstanding debt for refunding opportunities.
C. Maintain positive working relationships �� rating agencies and other financial
professionals.
D. Review and recommend appropriate structures for all new debt issuances.
E. Ensure compliance nth the Investment Policy and bond documents regarding
investing bond proceeds.
Debt ManagementPoHey Page 6
Adopted November 7,2012