HomeMy WebLinkAbout2.d. Debt Management Policy CITY OF ROSEMOUNT
EXECUTIVE SUMMARY FOR ACTION
CITY COUNCIL MEETING DATE: March 10, 1999
AGENDA ITEM: Debt Management Policy AGENDA SECTION:
PREPARED BY: Jeff May, Finance Director AGEND���� �
�- �
ATTACHMENTS: Draft of Policy APPROVED BY:
Attached for your review and discussion is a draft Debt Management Policy. I hope to go through
this policy this evening and get your ideas and comments to further refine this policy if necessary
before we approve the document into policy. The format will be changed to match our City's other
policies after the content is agreed upon.
I hope to have handouts on Wednesday evening that will illustrate how some of the proposals in the
policy work with actual numbers calculated in. The policy will have percentages of certain items that
will be checked by staff annually or when debt is issued to make sure that we are following the policy.
The policy will not have included actual dollar figures that are used in computing those percentages
because we would then have to change the policy constantly.
Most of the information in the policy is standard information that we have been practicing for years.
We had assistance from Springsteds, our financial advisors, in getting samples from other cities and
counties on how they have put together debt management policies. I believe that having a written
policy in place gives everyone a confidence level that we have solid planning procedures in place for
our debt management.
This policy does not really address 429 special assessment debt, because this debt should normally
not affect the taxpayers of the City. This debt is typically collected through special assessments and
does not affect the ad valorem taxes of the City.
If there are any questions prior to the meeting please do not hesitate to call me. We will proceed with
the policy after the meeting as deemed appropriate.
RECOMMENDED ACTION:
COUNCIL ACTION:
Working Draft
Debt Management Policy of the
City of Rosemount, Minnesota
Ma�ch 10, 1999
Table of Contents
Pa e s
I. PURPOSE ........................................................................................ 1
II. DEBT ADMINISTRATION POLICIES ............................................. 1-2
III. DEBT PLANNING POLICIES ......................................................... 1-2
IV. TYPES OF INSTRUMENTS ........................................................... 1
List of Standard Disclosure Documents ................................... APPENDIX A
Definitions ................................................................................ APPENDIX B
Purpose Section I
The City of Rosemount and its subordinate entities, a metropolitan
unit of government, faces a continuous stream of infrastructure
demands from citizens and business interests. These demands upon
the capital resources of the City must be met in an orderly and
balanced manner that allow the City to:
. Acquire capital at the lowest-possible borrowing cost.
. Preserve debt capacity for future capital needs.
• Maintain a high credit standing.
. Administer its obligations in an efficient manner.
. Improve coordination between C.I.P. fund expenditures and
debt financed projects.
Page I-1
Debt Administration Policies Section II
In developing, offering and administering its debt obligations, the City
of Rosemount will adhere to the following policies:
A. Competitive and open process wi�� be the standard
related to the planning, structuring, approving, and selling of
general obligation and revenue bonds, and other obligations
issued by the City.
B. Communications with the investing public and the
national bond rating community will be given a high priority in
order to maintain credibility through the flow of information both
by personal contact and electronic means.
C. Complete and full disclosure of all financial and economic
operations will be met through the timely distribution of the
comprehensive annual financial report, prospectus, operating
budget, capital improvement plan, and the immediate
transmission of information and details related to any material
event.
D. Compliance with the terms, conditions, and covenants of
all outstanding bond or lease transactions will be continually
monitored and followed by the Finance Department.
E. Complex financial transactions requiring City limited or
unlimited guarantees may be publicly sold through negotiation
with a syndicate of investment banks, provided credit rating
agency communications and disclosure responsibilities are
closely coordinated with the Finance Department.
Page II-1
City of Rosemount, Minnesota
F. Determination of type and security of debt shou�d be
made based upon a review of the following factors:
. Direct and indirect beneficiaries of the project.
. Useful life of the project to be funded.
. Ability of a project to fund itself through user fees.
G. Refunding and advance refunding. Savings
opportunities will be monitored by the Finance Department and
the City's financial advisors and action taken when determined
. financially advantageous. Net Present Value debt service
savings of a minimum of five percent (5%) will be the target
savings threshold.
Refundings at the time of the call or in advance of the call may
be considered from time to time to remove restrictive covenants
of revenue bond issues.
H. General obligation bond proceeds wi�� not be employed
to fund the general operation of the City.
Page II-2
Debt Planning Policies _ Section III
In planning capital facility and equipment needs, the City of
Rosemount will establish policies that promote balance as follows:
A. Monitor trends of key financial, economic, and debt ratios
such as:
. Debt service for general obligation property tax-supported
debt and capital leases will not exceed 15% of general and
special revenue fund expenditures.
. General obligation debt and capital leases will not exceed
90% of total C.I.P. budgeted expenditures.
. Direct general obligation debt and capital leases will not
exceed three and one-half percent (3.5%) of Assessor's
Market Value of taxable property.
. Direct general obligation debt and capital leases will not
exceed $1,800 per capita.
B. Structural considerations:
. Preservation of statutory debt capacity will be a primary
consideration. The minimum debt capacity (debt margin) to
be preserved for future projects and contingencies will be
thirty percent (30%).
. Scheduled maturities of long-term debt may not exceed the
expected useful life of the capital project or asset acquired.
. Average life of City general obligation property tax-supported
bonds should not exceed fifteen (15) years.
. Call features should be utilized to allow maximum future
debt management flexibility, but maintaining sensitivity to
bond market needs.
. Bids for bonds will be compared on a "True Interest Cost"
basis.
Page III-1
City of Rosemount, Minnesota
• Variable rate bond structures may be considered on
revenue-based flnancings where credit and liquidity
agreements are available.
. Variable rate debt will not make up more than twenty
percent (20%) of the combined debt portfolio of the City.
. Variable rate transactions will be structured by considering
the prevailing fixed interest rates, and the interest spread
accrued between the fixed and variable rate cost will be
used to call bonds.
C. Timing considerations:
• Need for Capital: The City's ability to currently fund
construction or acquisition.
• Market Volume: Similar types of debt and credit ratings that
will be offered in the targeted sale period.
. General Market Condition: The State, regional and national
economy; the bond market; and its ascending or descending
trends.
. Requlatory Compliance: The City's ability to meet federal
arbitrage spend-down requirements.
• Advance Refundinq Opportunities: Carefully evaluate the
optimal time including analysis of optional scenarios through
the call date.
. Bond Files: Included in closing file should be a pre-sale and
a post-sale report.
D. Coordination of capital needs with overlapping or other
units of government should be undertaken to avoid periodic
marketing conflicts as well as increase awareness of the impact
of debt on property tax-paying entities.
Page III-2
Types of Instruments _ Section IV
A. General Obligation Property Tax-Supported
. Used to finance only capital facilities and equipment that are
essential to the continued maintenance or development of
the City.
. Voted obligation debt service levy limited to seven and one-
half percent (7.5%) of the City's taxable net tax capacity.
B. Special Obligation Revenue Bonds
. City bonds that carry no direct financial or moral obligation
pledge should be issued where the proposed development
can be financially feasible and contributes to the general
welfare or development of the City.
. Bonds should be issued only where strong written
guarantees are provided related to the financial viability of
the project.
. Bonds issued on behalf of non-profit entities must be rated
investment grade, secured by a letter of credit, or privately
placed with a knowledgable buyer.
C. Lease Transactions
. Appropriate where borrowing costs for capital facilities or
equipment are equal to or less than the borrowing costs of
general obligation capital notes.
. Appropriate for the financing of capital facilities or equipment
where no other general statutory authority exists but
adequate general or enterprise revenues are available.
. Centralized in the Finance Department, lease transactions
for periodic equipment acquisitions funded under a master
lease program are preferable to single vendor leases.
. Full disclosure of total lease payments and transaction costs
for the life of the obligation are required for all proposed
lease transactions.
. Secondary disclosure responsibility must be clear on any
potentially pooled lease.
Page IV-1
Appendix A
List of Standard Disclosure Documents
1. Comprehensive Annual Financial Report
This report shall contain audited financial statements in conformity with generally
accepted accounting principles on the City's reporting entity.
2. Annual Long-Term Debt Impact Report
This report shall include an analysis of the various debt structures and debt ratios that
are implied with the ten-year capital improvement plan adopted by the Council. This
report will attempt to incorporate an overlapping debt analysis. Typically this report will
be included with the information presented in an Official Statement issued during a
bonding process. If no debt is issued during a year, the Finance Department will
compile the information in a separate report or include the information with the
comprehensive annual financial report.
3. Ten-Year Capital Plan
This report will present a schedule of improvements, rationale for the project priorities,
and the recommended method of financing. Cumulative information on past
performance and justification for changes in programming or project priority should be
included in the detailed sheets describing the individual projects.
Appendix B
Definitions
Bond Years: The product of the number of bonds (1 bond - $1,000, regardless of actual
denomination) and the period of time from issuance to the stated maturity. It is used in
calculating the average life of an issue and the net interest cost. Computations often include
bond years for each maturity or for each interest rate, as well as total bond years for the entire
issue.
average life = Total bond years
number of bonds
Direct Debt: The sum of the total bonded debt and any unfunded debt (typically short-term
notes of the issuer).
Discretionary Revenues: Property taxes, local government aid, revenue sharing, sales taxes,
mortgage registration fees, fines and forfeitures.
Market Valuation: County Assessor's assessed market values.
Net Debt: Direct debt less sinking fund accumulations and all self-supporting debt.
Net Interest Costs (NIC): A common method of computing the interest expense to the issuer
of bonds. NIC allows for premium and discount and represents the dollar amount of interest
payable over the life of an issue, without taking into account the time value of money. While net
interest costs actually refers to the dollar amount of the issuer's interest costs, it is also used in
reference to the average net interest cost rate, which reflects the overall rate of interest to be
paid by the issuer over the life of the bonds.
Overlapping Debt: The issuer's proportionate share of the debt of the other local
governmental units which either overlap it (the issuer is located either wholly or partly within the
geographic limits of the other units) or underlie it (the other units are located within the
geographic limits of the issuer). The debt is generally apportioned based upon relative
assessed value.
Property Tax Supported: Directly supported by property taxes that are voted obiigations of
the City. Includes all net debt bond issues and the portions of those issues that are paid for by
property taxes.
Property Tax-Base Supported: Supported by property tax-base generated revenues, such as
general property tax. Includes all general obligation pledges of the City, even those bonds
supported by dedicated revenue sources.
Revenue-Supported: Non-general obligation bonds which are solely supported by revenues
not based on real estate property values, such as sales taxes, special assessments, parking
fees, and other user fees.
Self-Supporting or Self-Liquidating Debt: Debt which is to be repaid from proceeds derived
exclusively from the enterprise activity for which the debt was issued.
Special Obligation Revenue Bonds: Revenue bonds for which the City grants its tax
exemption, but for which no financial or moral obligation is assumed; including, but not limited
to, second party-supported industrial development and housing bonds.
Total Debt: All debt other than special obligation revenue bonds and general obligation debt
supported by a specific rate structure. "Total Debt" does not include overlapping debt or deduct
sinking fund assets.
True Interest Costs (TIC): Under this method of computing the borrower's cost, interest cost
is defined as the rate, compounded semiannually, necessary to discount the amounts payable
on the respective principal and interest maturity dates to the purchase price received for the
bonds. TIC computations produce a figure slightly different from the NIC method, since TIC
considers the time value of money which NIC does not.