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Debt Management Policy
TO: The Honorable Mayor and City Council Members FROM: Michael C. Van Milligen, City Manager SUBJECT: Debt Management Policy DATE: October 2, 2012 Budget Director Jennifer Larson recommends City Council approval of a Debt Management Policy. The most significant components of the proposed Debt Management Policy include the following: Policy 4: Debt Limits —Sets an internal policy of maintaining the City's general obligation outstanding debt at no more than 95% (except as a result of disasters) of the limit prescribed by the State constitution as of June 30th of each year. Policy 5: Capital Financing —The City will not use short-term borrowing to finance operating needs except in the case of an extreme financial emergency which is beyond its control or reasonable ability to forecast. Recognizing that bond issuance costs (bond counsel, bond rating, and financial management fees) add to the total interest costs of financing, bond financing should not be used if the aggregate cost of projects to be financed by the bond issue does not exceed $500,000. Policy 6: Asset Life —The City will consider long-term financing for the construction, acquisition, maintenance, replacement, or expansion of physical assets (including land) only if they have a useful life of at least six years. Policy 8: Debt Structure - The City shall strive to repay 20 percent of the principal amount of its general obligation debt within five years and at least 40 percent within ten years. The City shall strive to repay 40 percent of the principal amount of its revenue debt within ten years. Total annual debt service payments on all outstanding debt of the City shall not exceed 25% of total annual receipts across all of the City's funds. As of June 30, 2013, it is projected the City will be at 17%. Policy 10: Abatement of levies on general obligation securities - It shall be the goal of the City to establish an internal reserve equal to maximum annual debt service on future general obligation bonds issued that are to be abated by revenues and not paid from ad-valorem property taxes in the debt service fund starting with debt issued after July 1, 2013. This reserve shall be established by the fund or revenue source that expects to abate the levy, and shall be carried in said fund or revenue source on the balance sheet as a restricted reserve. This reserve does not exist now, except where required by bond covenants. This internal reserve would be implemented by adding the cost of the reserve to each debt issuance. Policy 12: Refunding - Advance refundings for economic savings will be undertaken either (a) when a net present value savings of at least four percent of the refunded debt can be achieved; or (b) if the escrow structure results in a material negative arbitrage (i.e., the cost of the escrow is more expensive than the permitted cost of the escrow using then-current IRS rules), the NPV savings must be at least five percent of the refunded debt. Current refunding should produce net savings of at least three percent. Policy 26: Revenue Bonded Debt - It is a long-term goal that each utility or enterprise will ensure future capital financing needs are met by using a combination of current operating revenues, SRF (State Revolving Fund) and revenue bond financing. Therefore a goal is established that 10% of next fiscal year budget be allocated to an operation reserve in the utility or enterprise fund. It is City policy that each utility or enterprise should: (a) provide adequate debt service coverage of at least 1.10 times the annual debt service costs for State Revolving Loan Funds and provide adequate debt service coverage of at least 1.25 time the annual debt service costs for Revenue Bonds (or such higher amount as may be necessary to maintain bond ratings), and (b) provide adequate revenues such that the annual revenues fund the sum of: annual operating expenses plus debt service plus pay-as-you-go capital improvements plus creation of reasonable reserves. Policy 31: Inter-Fund Financing - In lieu of external financing the City may choose to fund a capital project in an enterprise fund with reserves in the general fund, so long as the general fund shall, at all times, have a minimum balance excluding the inter-fund financing equal to at least 10% of the annual general fund budgeted operating expenses, and shall be able to, at all times, cover cash flow needs of the general fund, when such project is part of the Capital Improvement Program. I concur with the recommendation and respectfully request Mayor and City Council approval. /72AAh Michael C. Van Milligen MCVM:jh Attachment 2 cc: Barry Lindahl, City Attorney Cindy Steinhauser, Assistant City Manager Teri Goodmann, Assistant City Manager Jennifer Larson, Budget Director 3 Masterpiece on the Mississippi TO: Michael C. Van Milligen, City Manager FROM: Jennifer Larson, Budget Director SUBJECT: Debt Management Policy DATE: October 1, 2012 INTRODUCTION Dubuque kard All-America City hill! 2007 The purpose of this memorandum is to request approval of a Debt Management Policy. DISCUSSION In October 2011, City Bond Counsel Bill Noth provided information to the City on post - issuance tax compliance based on recent Internal Revenue Service (IRS) Guidance. For some time now, the IRS has been urging issuers of tax - exempt bonds to adopt "written procedures" to help ensure their post- issuance compliance with the requirements of the Internal Revenue Code of1986, as amended. Recent informal guidance from the IRS and new questions on Form 8038 -G have now made it clear that detailed post- issuance compliance procedures should be an integral part of any issuer's bond program. The IRS has added specific, informal guidance on its website as to what it thinks an issuer's post- issuance compliance procedures should include. Although the term "written procedures" is not defined anywhere in the tax regulations, the IRS' website guidance is very clear: "Issuers should adopt written procedures applicable to all bond issuances, which go beyond reliance on tax certificates included in bond documents provided at closing. Sole reliance on the closing bond documents may result in procedures insufficiently detailed or not incorporated into an issuer's operations. Written procedures should contain certain key characteristics, including making provisions for: • Due diligence review at regular intervals; • Identifying the official or employee responsible for review; • Training of the responsible official /employee; • Retention of adequate records to substantiate compliance (i.e. records related to the expenditure of proceeds); • Procedures reasonable expected to timely identify noncompliance; and • Procedures ensuring that the issuer will take steps to timey correct noncompliance." A Post Issuance Tax Compliance Policy was written by Finance Director Ken TeKippe in conjunction with Bond Counsel and the City's previous financial advisor (Public Financial Management) so that the City would be in compliance with the new questions on Form 8038 - G. This policy was approved by the City Manager on April 5, 2012. After these discussions, City staff determined that the City should develop a formal Debt Management Policy. While this debt management policy is just putting in writing what the City of Dubuque was already doing in practice, there are some changes to those policies. Sample debt policies from the City of Ames and the City of Ankeny were obtained. The Finance and Budget Departments worked on developing a formal debt policy for the City of Dubuque in conjunction with Piper Jaffray, the City's current financial advisor and the City's bond counsel. The Government Finance Officers Association recommends that the debt management policy include the purposes for which debt may be issued, legal debt limitations, types of debt permitted, structural features preferred, credit objectives, methods of sale and methods for selecting outside professionals. Basic questions that should be addressed in a debt management policy include: What is the purpose of the financing; What is the legal authority for issuance of the debt; How will the debt be repaid; Will bonds be sold with an investment grade rating and who will be the ultimate purchasers; What are the qualifications of the professional advisors and underwriters assisting in the financing and how will they be selected; and What is the proposed method of selling the debt? The City's debt management policy covers all of these topics. The most significant components of the proposed Debt Management Policy include the following: Policy 4: Debt Limits —Sets an internal policy of maintaining the City's general obligation outstanding debt at no more than 95% (except as a result of disasters) of the limit prescribed by the State constitution as of June 30th of each year. Policy 5: Capital Financing — The City will not use short -term borrowing to finance operating needs except in the case of an extreme financial emergency which is beyond its control or reasonable ability to forecast. Recognizing that bond issuance costs (bond counsel, bond rating, and financial management fees) add to the total interest costs of financing, bond financing should not be used if the aggregate cost of projects to be financed by the bond issue does not exceed $500,000. Policy 6: Asset Life — The City will consider long -term financing for the construction, acquisition, maintenance, replacement, or expansion of physical assets (including land) only if they have a useful life of at least six years. Policy 8: Debt Structure - The City shall strive to repay 20 percent of the principal amount of its general obligation debt within five years and at least 40 percent within ten years. The City 2 shall strive to repay 40 percent of the principal amount of its revenue debt within ten years. Total annual debt service payments on all outstanding debt of the City shall not exceed 25% of total annual receipts across all of the City's funds. As of June 30, 2013, it is projected the City will be at 17 %. Policy 10: Abatement of levies on general obligation securities - It shall be the goal of the City to establish an internal reserve equal to maximum annual debt service on future general obligation bonds issued that are to be abated by revenues and not paid from ad- valorem property taxes in the debt service fund starting with debt issued after July 1, 2013. This reserve shall be established by the fund or revenue source that expects to abate the levy, and shall be carried in said fund or revenue source on the balance sheet as a restricted reserve. This reserve does not exist now, except where required by bond covenants. This internal reserve would be implemented by adding the cost of the reserve to each debt issuance. The impact of this internal reserve based on the planned debt to be issued in the current five -year capital improvement program is as follows: Annual Debt Service on Internal Reserve GDTIF Debt Service Payment DICW Debt Service Payment Tech Park Debt Service Payment Water Debt Service Payment Storm Debt Service Payment Sewer Debt Service Payment Parking Debt Service Payment PFC Debt Service Payment DRA Debt Service Payment Sales Tax 20% Debt Service Payment Sales Tax 30% Debt Service Payment FY14 FY15 $ 2,051 $ 10,257 `$ 10,933 - 2,674 4,705 11,980 18,102 158,951 3,385 24,048 5,689 2,010 3,976 1,097 5,266 1,715 3,541 1,812 7,870 6,190 FY16 FY17 Total 2,598.33 $ 34,340 `$ 49,246 - ` 10,933 4,705 4,705 16,789 16,551 12,391 ` 59,023 3,769 2,587 ` 168,693 3,774 5,219 ` 38,730 1,501 547 ` 4,058 744 - ` 5,817 1,766 - ` 8,748 2,359 - ` 7,712 14,060 Total Annual Debt Service on Reserves $ 231,291 $ 54,961 $ 37,768 $ 59,789 $ 383,810 The following table shows the impact of the internal reserve on utility rates: Internal Reserve Impact on Utility Rates Water Storm Sewer FY14 0.22% 5.25% 0.34% FY15 0.33% 0.11% 0.08% FY16 0.30% 0.12% 0.54% FY17 0.23% 0.09% 0.75% Total 1.08% 5.57% 1.71% Policy 12: Refunding - Advance refundings for economic savings will be undertaken either (a) when a net present value savings of at least four percent of the refunded debt can be achieved; or (b) if the escrow structure results in a material negative arbitrage (i.e., the cost of the escrow is more expensive than the permitted cost of the escrow using then - current IRS rules), the NPV savings must be at least five percent of the refunded debt. Current refunding should produce net savings of at least three percent. 3 Policy 26: Revenue Bonded Debt - It is a long -term goal that each utility or enterprise will ensure future capital financing needs are met by using a combination of current operating revenues, SRF (State Revolving Fund) and revenue bond financing. Therefore a goal is established that 10% of next fiscal year budget be allocated to an operation reserve in the utility or enterprise fund. It is City policy that each utility or enterprise should: (a) provide adequate debt service coverage of at least 1.10 times the annual debt service costs for State Revolving Loan Funds and provide adequate debt service coverage of at least 1.25 time the annual debt service costs for Revenue Bonds (or such higher amount as may be necessary to maintain bond ratings), and (b) provide adequate revenues such that the annual revenues fund the sum of: annual operating expenses plus debt service plus pay -as- you -go capital improvements plus creation of reasonable reserves. Policy 31: Inter -Fund Financing - In lieu of external financing the City may choose to fund a capital project in an enterprise fund with reserves in the general fund, so long as the general fund shall, at all times, have a minimum balance excluding the inter -fund financing equal to at least 10% of the annual general fund budgeted operating expenses, and shall be able to, at all times, cover cash flow needs of the general fund, when such project is part of the Capital Improvement Program. ACTION STEP I respectfully recommend the adoption of the attached debt management policies. Attachment 4 CITY OF DUBUQUE DEBT MANAGEMENT POLICIES Contents INTRODUCTION 3 CREDITWORTHINESS OBJECTIVES 3 Policy 1. Credit Ratings 3 Policy 2. Financial Disclosure 3 Policy 3. Capital Planning 4 Policy 4. Debt Limits 4 PURPOSES AND USES OF DEBT 4 Policy 5. Capital Financing 4 Policy 6. Asset Life 5 DEBT STANDARDS AND STRUCTURE 5 Policy 7. Length of Debt 5 Policy 8. Debt Structure 5 Policy 9. Decision Analysis 6 Policy 10. Abatement of levies on general obligation securities 7 Policy 11. Backloading 7 Policy 12. Refunding 7 Policy 13. Credit Enhancements 8 Policy 14. Investment of Bond Proceeds 8 Policy 15. Costs and Fees 8 Policy 16. Competitive Sale 8 Policy 17. Negotiated Sale 8 Policy 18. Bond Counsel 8 Policy 19. Financial Advisor 9 Policy 20. Compensation for Services 9 Policy 21. RFP Process 9 Policy 22. Other Service Providers 9 Policy 23. Arbitrage Compliance 9 Policy 24. Financing Proposals 10 Policy 25. Communication and Disclosure 10 Policy 26. Revenue Bonded Debt 10 Policy 27. Short Term Financing /Capital Lease Debt 11 Policy 28. Conduit Financings 11 Policy 29. Assessment Bonds 12 Policy 30. Tax Increment Financing 13 Policy 31. Inter -Fund Financing 14 1 CITY OF DUBUQUE DEBT MANAGEMENT POLICIES Policy 32. Bank Qualification 14 2 CITY OF DUBUQUE DEBT MANAGEMENT POLICIES INTRODUCTION The following policies are enacted to provide direction and limits for the issuance and management of debt by the City of Dubuque. The objective is to establish conditions for the use of debt and to create procedures and policies that minimize the City's debt service and issuance costs, retain the highest possible credit rating, maximize future debt capacity and maintain full and complete financial disclosure and reporting and federal tax compliance. The policies apply to all general obligation and revenue debt issued by the City of Dubuque, including leases, debt guaranteed by the City, and any other forms of taxable and tax - exempt indebtedness, including Build America or other tax credit bonds, and urban renewal debt. Regular, updated debt policies can be an important tool to ensure the use of the City's resources to meet its commitments to provide needed services to the citizens of Dubuque and to maintain sound financial management practices. These policies are therefore guidelines for general use, and allow for exceptions in extraordinary conditions. These policies have been adopted by the City Council by resolution. The Debt Management Policies of the City can be adjusted at any time by resolution of the City Council. CREDITWORTHINESS OBJECTIVES Policy 1. Credit Ratings The City of Dubuque seeks to maintain the highest possible credit ratings for all categories of short and long term general obligation and revenue debt that can be achieved without compromising the delivery of basic City services and the achievement of adopted City policy objectives. The City recognizes that external economic, natural, or other events may from time to time affect the creditworthiness of its debt. Nevertheless, the City is committed to ensuring that actions within its control are prudent. Policy 2. Financial Disclosure The City is committed to full and complete financial disclosure, and to cooperating fully with rating agencies, financial advisor, bond counsel, institutional and individual investors, City departments and agencies, other levels of government, and the general public to share comprehensible and accurate financial information. The City is dedicated to meeting secondary disclosure requirements on a timely and comprehensive basis, as promulgated by the Securities and Exchange Commission. 3 CITY OF DUBUQUE DEBT MANAGEMENT POLICIES The Official Statements accompanying debt issues, Comprehensive Annual Financial Reports, and Continuing Disclosure Statements will meet (at a minimum), the standards articulated by the Municipal Standards Rulemaking Board (MRSB), the Government Accounting Standards Board (GASB), and the Securities and Exchange Commission (SEC). The Finance Department shall be responsible for ongoing debt disclosure to established national information repositories and for maintaining compliance with disclosure standards promulgated by state and national regulatory bodies. Policy 3. Capital Planning To enhance creditworthiness and prudent financial management, the City of Dubuque is committed to systematic capital planning, intergovernmental cooperation and coordination, and long -term financial planning. Evidence of this commitment to systematic capital planning will be demonstrated through adoption and periodic adjustment of the five year Capital Improvement Plan (CIP). Policy 4. Debt Limits The constitutional limit on general obligation debt (not subject to annual appropriation) is equal to 5% of the actual value of taxable property within the City. The City voluntarily has set an internal policy of maintaining the City's general obligation outstanding debt at no more than 95% (except as a result of disasters or judgments against the City) of the limit prescribed by the State constitution as of June 30t of each year. These levels are consistent with the City's creditworthiness objectives. PURPOSES AND USES OF DEBT Policy 5. Capital Financing The City normally relies on internally generated funds and /or grants and contributions from other governments to finance many of its capital needs. Debt will be issued for a capital project only when it is an appropriate means to achieve a fair allocation of costs between current and future beneficiaries or users, or in the case of an emergency capital need. Debt shall not fund operating expenses with the only exception being operating costs related to disaster recovery. Bond proceeds should be limited to financing capital expenditures such as the costs of planning, external or internal design, construction management, land or right of way acquisition, acquisition of, construction of or renovations/rehabilitation to buildings, permanent structures, attached fixtures or equipment, and movable pieces of equipment, such as fire engines, economic development or other costs as permitted by law. Acceptable uses of bond proceeds can be viewed as items which can be capitalized. Capitalized interest is an eligible item for bonding. Utility revenue bond proceeds may be used to establish a debt service reserve as allowed by federal and state law. Operating expenses may not be financed with long -term bonds. Non - capital expenses are not financed from bond proceeds, except as allowed under specific circumstances approved by the City Manager or City Council. Refunding bond issues designed to restructure currently outstanding debt are an acceptable use of bonds proceeds. The City will not use short -term borrowing to finance operating needs except in the case of 4 CITY OF DUBUQUE DEBT MANAGEMENT POLICIES an extreme financial emergency which is beyond its control or reasonable ability to forecast. Recognizing that bond issuance costs (bond counsel, bond rating, and financial management fees) add to the total interest costs of financing, bond financing should not be used if the aggregate cost of projects to be financed by the bond issue does not exceed $500,000. Consideration should be given, whenever possible, to combine borrowings to minimize issuance fees. Urban Renewal purposes (See Policy 30 — Tax Increment Financing herein) Policy 6. Asset Life Excluding Urban Renewal purposes. The City will consider long -term financing for the construction, acquisition, maintenance, replacement, or expansion of physical assets (including land) only if they have a useful life of at least six years. Debt will be used only to finance capital projects and equipment, except in cases of emergency. City debt will not be issued for periods exceeding the useful life or average useful lives of the project or projects to be financed. Urban Renewal purposes (See Policy 30 — Tax Increment Financing herein) DEBT STANDARDS AND STRUCTURE Policy 7. Length of Debt Debt will be structured for the shortest period consistent with a fair allocation of costs to current and future beneficiaries or users. General obligation bonds will adhere to State Code as to length of debt. Policy 8. Debt Structure Debt will be structured to achieve the lowest possible net cost to the City given market conditions, the urgency of the capital project, the type of debt being issued, and the nature and type of repayment source. Moreover, to the extent possible, the City will design the repayment of its overall debt so as to rapidly recapture its credit capacity for future use. The City shall strive to repay 20 percent of the principal amount of its general obligation debt within five years and at least 40 percent within ten years. The City shall strive to repay 40 percent of the principal amount of its revenue debt within ten years. Total annual debt service payments on all outstanding debt of the City shall not exceed 25% of total annual receipts across all of the City's funds. Fixed interest rates shall be used on general obligation Bonds and Notes, including short term Notes, and on any utility revenue bonds or notes. Variable interest rate structures will not be utilized. Derivative instruments (for example, interest rate swaps) shall not be utilized on any general obligation bonds or notes, short term notes, or utility revenue bonds or notes. The City may enter into a forward- delivery agreement for purpose of selling a bond in the future at an 5 CITY OF DUBUQUE DEBT MANAGEMENT POLICIES interest rate agreed to at the time of issuance, so long as the liability to the City is limited to the delivery of the bond or note at the specified date and at the specified interest rate. Policy 9. Decision Analysis Whenever the City is contemplating a possible bond issue, information will be developed concerning the following four categories commonly used by rating agencies assessing the City's creditworthiness. The subcategories are representative of the types of items to be considered. The information below will be presented by the Finance Director or Budget Director to the City Manager or City Council. Debt Analysis ➢ Debt capacity analysis ➢ Purpose for which debt is issued ➢ Debt structure ➢ Debt burden ➢ Debt history and trends ➢ Adequacy of debt and capital planning The Finance Director or Budget Director will present the following information to the City Manager or City Council, when required and if applicable. Financial Analysis - Stability, diversity, and growth rates of tax or other revenue sources ➢ Trend in assessed valuation and collections ➢ Current budget trends ➢ Appraisal of past revenue and expenditure trends ➢ History and long -term trends of revenues and expenditures ➢ Evidence of financial planning ➢ Adherence to generally accepted accounting principles ➢ Audit results ➢ Fund balance status and trends in operating and debt funds ➢ Financial monitoring systems and capabilities ➢ Cash flow projections Governmental and Administrative Analysis ➢ Government organization structure ➢ Location of financial responsibilities and degree of control ➢ Adequacy of basic service provision ➢ Intergovernmental cooperation / conflict and extent of duplication ➢ Overall city planning efforts Economic Analysis ➢ Geographic and location advantages ➢ Population and demographic characteristics ➢ Wealth indicators ➢ Housing characteristics 6 CITY OF DUBUQUE DEBT MANAGEMENT POLICIES ➢ Level of new construction ➢ Types of employment, industry, and occupation ➢ Evidences of industrial decline ➢ Trend of the economy Policy 10. Abatement of levies on general obligation securities It shall be the goal of the City to establish an internal reserve equal to maximum annual debt service on future general obligation bonds issued that are to be abated by revenues and not paid from ad- valorem property taxes in the debt service fund starting with debt issued after July 1, 2013. This reserve shall be established by the fund or revenue source that expects to abate the levy, and shall be carried in said fund or revenue source on the balance sheet as a restricted reserve. On July 1 of each fiscal year, the amount on hand in the various restricted reserves shall be transferred from the fund in question to the City's debt service fund. This reserve shall not be pledged to the repayment of general obligation bonds issued. Policy 11. Backloading Excluding Urban Renewal purposes. The City generally will seek to structure its total debt with level principal and interest payments over the life of the debt. "Backloading" of costs will be considered only when: natural disasters or extraordinary or unanticipated external factors make the short -term cost of the debt prohibitive; when the benefits derived from the debt issuance can be clearly demonstrated to be greater in the future than in the present; or when such structuring will allow debt service to more closely match project revenues during the early years of the operation. Urban Renewal purposes (See Policy 30 — Tax Increment Financing herein) Policy 12. Refunding 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 of the refunding or the refunding is essential in order to release restrictive bond covenants, which affect the operations and management of the City. Advance refundings for economic savings will be undertaken either (a) when a net present value savings of at least four percent of the refunded debt can be achieved; or (b) if the escrow structure results in a material negative arbitrage (i.e., the cost of the escrow is more expensive than the permitted cost of the escrow using then - current IRS rules), the net present value savings must be at least five percent of the refunded debt. Current refundings, which should produce a net present value savings of not less than three percent, will be considered on a case -by -case basis taking into consideration bond covenants and general conditions. Refundings with negative savings will not be considered unless there is a compelling public policy objective. 7 CITY OF DUBUQUE DEBT MANAGEMENT POLICIES Policy 13. Credit Enhancements Credit enhancement (letters of credit, bond insurance, etc.) may be used, but only when the net present value of the net debt service on the bonds is reduced by more than the up -front costs of the enhancement. Policy 14. Investment of Bond Proceeds General obligation and revenue bond proceeds shall be invested separate from the City's consolidated cash pool unless otherwise specified by the bond legislation. Investments will be consistent with those authorized by state law and the City's investment policies in order to maintain safety and liquidity of the funds and ensure the highest possible interest rate is obtained. Policy 15. Costs and Fees All costs and fees related to issuance of bonds will be paid out of bond proceeds and allocated across all projects receiving bond proceeds from the issue. Where appropriate, this fee will be invoiced against the bond proceeds after the bond closing. Fees will be absorbed by the project or projects funded by the bond sales. Policy 16. Competitive Sale In general, City debt will be issued through a competitive bidding process. Bids will be awarded on a true interest cost basis (TIC), providing other bidding requirements are satisfied. The City will use an electronic bidding platform such as I -Deal LLC's PARITY© bidding system for the receipt of bids. Policy 17. Negotiated Sale Negotiated sales of debt will be considered in extraordinary circumstances when the complexity of the issue requires specialized expertise, when the negotiated sale would result in substantial savings in time or money; or when market conditions or City credit are unusually volatile or uncertain. Policy 18. Bond Counsel The City will retain 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 State constitutional and statutory requirements necessary for issuance, and determining the debt's federal income tax status. The bond counsel retained must have comprehensive municipal debt experience and a thorough understanding of Iowa law as it relates to the issuance of municipal debt. 8 CITY OF DUBUQUE DEBT MANAGEMENT POLICIES Policy 19. Financial Advisor The City will retain an external independent financial advisor to be selected through a competitive bid process administered by the Finance Director or Budget Director. The financial advisor is selected through a competitive Request for Proposal (RFP) for a period of approximately five years. The financial advisor's performance shall be reviewed at least annually. The utilization of the financial advisor for particular bond sales will be at the discretion of the Finance Director or Budget Director on a case -by -case basis and pursuant to the financial advisory services contract. The major criteria in the selection process for a financial advisor will be comprehensive municipal debt experience, experience with diverse financial structuring and pricing of municipal securities, as well as overall cost of services. Policy 20. Compensation for Services Compensation for bond counsel, financial advisors, bond rating agency, and other financial services will be as economical as possible and consistent with industry standards for the desired qualification levels. These costs will be tracked by the Finance Department. Policy 21. RFP Process The City Manager shall make a recommendation to the City Council for the selection of financial advisor. The determination generally will be made following an independent review of competitive bids, responses to requests for proposals (RFPs) or requests for qualifications (RFQs). The bids and RFPs will be reviewed by at least three City finance professionals or City appointed members. Policy 22. Other Service Providers The City Manager shall have the authority to periodically select other service providers (e.g., escrow agents, verification agents, trustees, arbitrage consultants, etc.) as necessary to meet legal requirements, minimize administrative work for City staff, or minimize net City debt costs. These services can include debt restructuring services and security or escrow purchases. The Finance Director or Budget Director may select firm(s) to provide such financial services related to debt without a RFP, consistent with City and State legal requirements, subject to approval by resolution. Policy 23. Arbitrage Compliance The Finance Director shall maintain a system of record keeping reporting and compliance procedures, with respect to all federal tax requirements which are currently, or may become, applicable throughout the lifetime of all tax - exempt, Build America, or other tax credit bonds in accordance with the Post Issuance Compliance Policy approved by the City Manager on April 5, 2012. The City Manager may amend the Post Issuance Compliance Policy as necessary or appropriate. Federal tax compliance, record - keeping, reporting and compliance procedures shall include, but shall not be limited to: (1) post- issuance compliance (including proper use of proceeds, 9 CITY OF DUBUQUE DEBT MANAGEMENT POLICIES timely expenditure of proceeds, proper use of bond finance property, yield restriction and rebate, and timely return filing); (2) proper maintenance of records to support federal tax compliance; (3) investments and arbitrage compliance; (4) expenditures and assets; (5) private business use; and (6) designation of primary responsibilities for federal tax compliance of all bond financings. Policy 24. Financing Proposals Any capital financing proposal to a City department involving pledge or other extension of the City's credit through sale of securities, execution of loans or leases, marketing guarantees, or otherwise involving directly or indirectly the lending or pledging of the City's credit, shall be referred to the Finance and Budget Director for review. The City Manager will determine a recommendation to be forwarded to the City Council for approval. Policy 25. Communication and Disclosure Significant financial reports affecting or commenting on the City will be forwarded to the rating agencies. Each bond prospectus will follow the disclosure guidelines of the Government Finance Officers Association of the U.S. & Canada. The City will attempt to develop coordinated communication processes with all other jurisdictions with which it shares a common property tax base concerning collective plans for future debt issues. Reciprocally, shared information on debt plans including amounts, purposes, timing, and types of debt would aid each jurisdiction in its debt planning decisions. Policy 26. Revenue Bonded Debt It is a long -term goal that each utility or enterprise will ensure future capital financing needs are met by using a combination of current operating revenues, SRF (State Revolving Fund) and revenue bond financing. Therefore a goal is established that 10% of next fiscal year operating budget be allocated to an operation reserve in the utility or enterprise fund. It is City policy that each utility or enterprise should: (a) provide adequate debt service coverage of at least 1.25 times the annual debt service costs of revenue bonds (or such higher amount as may be necessary to maintain bond ratings) and 1.10 times the annual debt service costs on State Revolving Loan Funds, and (b) provide adequate revenues such that the annual revenues fund the sum of: annual operating expenses plus debt service plus pay -as- you -go capital improvements plus creation of reasonable reserves. Utilities and enterprises should not operate in a fashion where operating deficits occur. An example of the debt coverage calculation is below Debt Coverage Example: Operating Revenues $19,903,166 Operating Investment Income 751,270 Total Operating Revenue $20,654,436 Operating Expenses $15,644,355 Less: Depreciation and Amortization 1,155,004 Net Expenses $ 14,489,351 10 CITY OF DUBUQUE DEBT MANAGEMENT POLICIES Net Revenue Available for Debt Service $ 6,165,085 (1*) Principal $ 1,520,000 Interest 1,963,116 Total Debt Service $ 3,483 116 (2 *) Debt Coverage Ratio (1 * divided by 2 *) 1.77 The City shall voluntarily create a debt service reserve, as allowed by the IRS, on all utility or enterprise revenue obligations, even if not required by the lender. Policy 27. Short Term Financing /Capital Lease Debt Short -term financing or capital lease debt will be considered to finance certain equipment and rolling stock purchases from time -to -time. Adequate funds for the repayment of principal and interest must be included in the requesting department's approved operating budget. The term of short- term financing will be limited to the usual useful life period of the vehicle or equipment, but in no case will exceed ten years. The City will comply with Iowa law in terms of public hearings and debt issuance process. The Finance Department or Budget Director will consolidate all requests and will make every effort to include the consolidated equipment financing as part of the City's general obligation bond process, or alternately, may solicit competitive or negotiated proposals for capital financing to insure the lowest possible interest costs. Policy 28. Conduit Financings The City may act as a conduit issuer and issue municipal securities to raise capital for revenue generating projects where the funds generated are used by a third party (known as the "conduit borrower") to make payments to investors. The conduit financing is backed by the conduit borrower's credit and funds pledged toward the project by outside investors. If a project fails and the security goes into default, it is the conduit borrower's financial obligation, not the conduit issuer. The City is not responsible for repayment of these bonds. The City will not consider conduit financing requests in any year in which the City is able to issue "bank qualified" bonds if the requested conduit bond amount would push the City's total bonding above the bank qualified limit, thus resulting in the City's bonding for that year being non -bank qualified, unless the conduit borrower agrees to reimburse the City, up- front, for 100% of the net present value of the cost differential between bank qualified bonds and non - bank qualified bonds on the City's annual bonding amount. The City will consider requests for conduit financing on a case -by -case basis using the following criteria: ➢ The City's bond counsel will review the terms of the financing and confirm that there will be no liability to the City in issuing the bonds on behalf of the applicant. ➢ The conduit borrower adequately indemnifies the City against any current or future liability or cost associated with the bond request ➢ There is a clearly articulated public purpose in providing the conduit financing. 11 CITY OF DUBUQUE DEBT MANAGEMENT POLICIES ➢ The applicant is capable of achieving this public purpose. The conduit financing will generally be a two -step process ➢ Asking the City Council if they are interested in considering the request, and the establishing the ground rules for evaluating it. ➢ Providing the City Council with the results of this evaluation, and recommending approval of appropriate financing documents, if warranted. This two -step approach ensures that the issues are clear for both the City and applicant, and that key policy questions are answered. The scope necessary to address these issues will vary from request to request, and will have to be determined on a case -by -case basis. The City will be fully reimbursed all costs associated with the conduit borrowing, unless the City Council determines, by resolution, to waive this requirement. Policy 29 Assessment Bonds Special assessment bonds are bonds whose proceeds fund a certain, defined project. Special assessments paying for the bond will be levied only on those directly benefiting from the project. Special assessment bonds are not backed by the full faith and credit of the City and as such, investors in such bonds have more risk than they would if the City issued general obligation bonds. Special assessment bonds are not subject to the statutory debt limit. The City will issue special assessment bonds if the benefit of the project would normally accrue to a limited number of taxpayers, instead of City residents as a whole, and /or if the issuance of general obligation bonds to finance the project would cause the City's debt limit to increase in a meaningful amount such that future capital improvement projects might be impaired due to lack of available debt limit. If approved by the City Council, general obligation bonds that are abated with special assessments may be issued that do pledge the full faith and credit of the City and these will be called "general obligation special assessment bonds." Except as otherwise provided by law, the rate of interest payable on unpaid balances of special assessments levied against benefited properties shall not exceed the maximum rate in effect at the time of adoption of the final assessment schedule, as established by rule pursuant to section 74A.6, subsection 2 of the State of Iowa Code. 12 CITY OF DUBUQUE DEBT MANAGEMENT POLICIES Policy 30. Tax Increment Financing Tax increment financing is a method of reallocating property tax revenues which are produced as a result of an increase in taxable valuation above a "base valuation" figure within an Urban Renewal Area. Until the tax increment debt within an area has been repaid, tax revenues produced by property tax levies imposed on the increased taxable valuation are all allocated back to the City (net of debt service, PPEL and Instructional Support Levy taxes on tax increment financing debt incurred after April 24, 2012, which are paid to the corresponding taxing entity) which has established the tax increment area. TIF taxes received must be spent for projects within the Urban Renewal Area. The City shall use various types of debt to finance Urban Renewal Projects (which could include incentives), including general obligation debt, pure tax increment revenue debt, internal loans between governmental funds and rebate agreements, in which all or a portion of annual tax increment revenues are paid back to developers. In Urban Renewal Projects where rebate agreements are used as a financing tool of the project, the development agreement shall include a non - appropriation /limited source of funding provision. The non - appropriation /limited source of funding provision shall limit the tax rebate obligation to: (a) TIF taxes received from the Project, and not from the entire TIF area; and (b) that the TIF obligation is not a general obligation or other indebtedness of the City, or a pledge of its full faith and credit with the meaning of any constitutional or statutory debt limitation, and shall be subject in all respects to the right of non - appropriation by the City Council. The City shall choose to appropriate, or not, at the last council meeting in November, at the latest, for the fiscal year starting the following July 1, such that the City can certify to the County TIF obligations outstanding as of December 1 of each year. The City may not certify an obligation on December 1 (for the fiscal year starting the following July 1) that was not previously appropriated by the City Council, by resolution, for the following fiscal year. The City may issue tax increment debt, including general obligation securities that the City intends to abate with tax increment revenues, anticipating future TIF revenues. In choosing to issue general obligation securities that the City reasonably intends to abate with TIF revenues, the City shall retire the general obligation securities over a period of not more than 20 years, and may use level or backloaded structuring. The sum of all prior obligations, plus the proposed obligations shall, at all times, be supported by the sum of existing TIF revenues plus reasonably expected future TIF revenues, without using an "annual growth factor" assumption larger than 2 %. The City may issue general obligation bonds to anticipate future TIF revenue growth where the City reasonably believes that the TIF revenue growth will occur based on current events occurring in the TIF area, or based on minimum assessment agreements that may be in place covering one or more projects. The City shall annually certify as TIF debt 100% of the total outstanding obligations that are yet to be reimbursed from TIF revenue, including but not limited to bonds, notes, leases, rebates, internal loans and other obligations. The City may voluntarily release any portion of 13 CITY OF DUBUQUE DEBT MANAGEMENT POLICIES a particular fiscal year's actual TIF receipts, on an annual basis, if the City can determine that it has sufficient cash on hand (not including reserves) that, when added to the TIF revenues anticipated to be collected, will be sufficient to fund all TIF liabilities in that particular fiscal year without creating a deficit balance. Policy 31. Inter -Fund Financing The City is committed to maintaining adequate liquidity in its general fund sufficient to provide for cash flow needs of the general fund and provide a reasonable balance available in the event of emergency. In lieu of external financing the City may choose to fund a capital project in an enterprise fund with reserves in the general fund, so long as the general fund shall, at all times, have a minimum balance excluding the inter -fund financing equal to at least 10% of the annual general fund budgeted operating expenses, and shall be able to, at all times, cover cash flow needs of the general fund, when such project is part of the Capital Improvement Program. The enterprise fund will pay interest on the loan as determined by market rates. The term of the loan is not to exceed ten years. Inter -fund loans will only be considered if there is no other planned borrowing at the time of the project, and the borrowing will not adversely impact future governmental projects. The cost of the financing and true interest costs should not exceed the cost of borrowing from traditional external sources. Policy 32. Bank Qualification The City recognizes that bank qualification can result in interest rates on bonds that are lower than the rates on non -bank qualified bonds. The spread between bank qualified and non - bank qualified bonds can vary from time to time; however, in those times when meaningful savings can be created, the City will attempt to employ strategies to ensure that bank qualification is preserved to the extent possible. This may include the creation or issuance of short -term bond anticipation notes, or draw -down bonds, at various times such that existing or future year's obligations may be deemed bank qualified. The City will endeavor to provide that, at a minimum, every other year's debt issuances are deemed bank qualified, unless the City determines that the spread differential that exists at that time does not justify the effort. 14