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HomeMy WebLinkAbout2013-06-24 13-225 ORDERCOUNCIL ACTION Item No. 13-225 Date: June 24, 2013 Item/Subject: Order, Adopting Debt Policy Responsible Department: Finance Commentary: This Order will adopt a Debt Policy for the City of Bangor, which has existed informally since the mid 1990's. The ability of a municipality to issue debt is regulated and defined by State statute, City Charter and is further subject to regulations of the Internal Revenue Service, Securities and Exchange Commission, and Municipal Securities Rulemaking Board rules and regulations. Recent changes to laws and rules governing municipal debt have meant that the issuance of municipal bonds has been subject of greater scrutiny and transparency within the finance arena, ensuring that issuers need to be sure to have a complete and comprehensive Debt Policy in place. The policy should not only provide an overview of the process to issue the debt; but also required post issuance monitoring -and compliance requirements. The attached Debt Policy has been reviewed by the City's Bond Counsel and Financial Advisor. It has been reviewed by the Finance Committee is unanimously recommend for approval. Manager's Comments: Associated Information: Debt Policy Budget Approval: Legal Approval: Introduced for X Passage First Reading Referral Department Head City Manage""r Finance Director Page _ of _ 13-225 JUNE 24, 2013 Assigned to Councilor Nealley CITY OF BANGOR (TITLE.) Order, Adopting Debt Policy By the City Council of the City of Bangor: ORDERED, THAT, the attached Debt Policy is hereby adopted and shall supersede any other prior Council action(s) related to the issuance of Debt in their entirety. IN CITY COUNCIL June 24, 2013 Motion made and seconded fbW Passage Passed CITY CLW CITY OF BANGOR, MAINE DEBT POLICY A. Statement 13-225 JUNE 24, 2013 The ability of a municipality to issue debt is regulated and defined by State statute, City Charter and is subject to Internal Revenue Service ("IRS'), Securities and Exchange Commission ("SEC's and Municipal Securities Rulemaking Board ("MSRB'� rules and regulations, directly or indirectly. The City of Bangor (the "City'l recognizes the foundation of any well-managed debt program is a comprehensive debt policy. A debt policy sets forth the parameters for issuing debt, managing the outstanding debt portfolio and provides guidance to decision makers regarding the purposes for which debt may be issued, types and amounts of permissible debt, timing and method of sale that may be used, structural features that may be incorporated, as well as, other regulatory and post issuance compliance issues. Adherence to a debt policy helps to ensure that government maintains a sound debt position and that credit quality is protected. While the issuance of debt may lead to greater equity by spreading the cost of financing a project to the end users over the project's life, overall debt levels must be evaluated by comparing the need for capital investment against the capacity to pay for financing the overall costs. Portions of the policy also apply to lease purchases, that while not secured by the general obligation pledge of the City's taxpayers, the City has a "moral obligation" to service these instruments. B. Purpose Article VIII, Section 13(a) of the City of Bangor Charter authorizes the issuance of debt for the following purposes: acquisition of land or interest in land or personal property; construction and equipment of building and other permanent public improvements; purchase of equipment; refunding of indebtedness previously issued; any other purposes authorized by general or special law; and emergency appropriations in accordance with Article VIII, Section 11. Article VIII, Section 13(a) specifically prohibits the issuance of debt to fund current operating expenses. Article VIII, Section 15 allows for temporary borrowing in anticipation of tax revenue receipts, in anticipation of future bond or note issues, and of other revenues payable to the City from any source, as provided by general or special law. ,13-225 JUNE 24.9 2013 C. Capital Improvement Plan Typically, the starting point for any consideration of the issuance of debt is the Capital Improvement Plan ("CIP'O. The CIP is an integral part of the annual budget process. A complete list of near term improvements is included as part of the City Manager's budget submission for all City functions, with an indication of how the City anticipates funding the improvements. During the Council review of the departmental budgets, departments also present a five-year plan for improvements. The City assesses all financial alternatives for funding improvements prior to issuing debt. Pay-as-you-go financing is economically preferable and will be considered before issuing any debt. Pay-as-you-go financing may include: intergovernmental grants from federal, State and other sources, current revenues and fund balances; private sector contributions; public/private partnerships; leasing payments. In general projects, with a useful life of less than ten (10) years and/or an estimated cost of less than $50,000 will be funded with pay -as -you -go -financing. The estimated annual debt service costs associated with improvements anticipated to be funded through the issuance of debt as part of the annual operating budget shall be included within a Council approved operating budget. This amount will either be appropriated as debt service or to fund balance(s), depending upon the anticipated timeframe of the debt issuance. D. Limitations Currently, Maine Revised Statutes Annotated (MRSA), Title 30-A, §5702, establishes limits on the amount of debt that a municipality may issue. In general, no municipality may incur debt which would cause its total debt outstanding at any time, exclusive of debt incurred for school, storm or sanitary sewer, energy facility or municipal airport purposes to exceed 7 1/2% of its last full state valuation. A municipality may incur debt for school purposes to an amount outstanding at any time not exceeding 10% of its last full state valuation, for storm or sanitary sewer purposes to an amount at any time not exceeding 7 1/2% of its last full state valuation, and for municipal airport or special district purposes to an amount outstanding at any time not exceeding 3% of its last full state valuation. Certain forms of debt are exempt from the above noted limitations, the most commons exemptions are listed in MRSA Title 30-A, §5703 related to temporary and certain school debt. In addition, the 125th Maine Legislature enacted Private & Special Law, Chapter 15, which excluded the indebtedness for the City's Arena project from the City's statutory debt limits. 2 13-225 JUNE 24, 2013 E. Types of Debt The City may utilize the following types of debt; General Obligation, Limited Obligation and Refunding Debt. While certain "non -appropriation" leases may not legally constitute "debt", leases will be included in this policy as if it were debt. General Obligation debt pledges the "full faith and credit" and, unless paid from other sources, will be paid with the ad valorem taxing power of the City. While other revenue sources may be used for the payment of the debt, should those revenues not be sufficient, the City pledges to use its power to tax as the ultimate source of monies to pay debt service, when due. Limited Obligation debt, which may include revenue bonds, do not pledge the power of taxation but, rather, a particular revenue stream or other source of funds (CDBG grants, federal grants, etc.). The revenue pledge must be of sufficient amount to meet the debt service requirements on a ratio of at least 1.25x annual revenues/annual debt service. Refunding Debt may be either General or Limited Obligation debt. The purpose of refunding debt is to take advantage of a reduction in interest rates, restructure principal payment and/or eliminate burdensome covenants or other legal burdens. Refunding debt should not be used to extend the maturity date of existing obligation, unless a restructuring is deemed an extraordinary event, in the best interests of the City. In addition, Article VIII, Section 13(d) and (e) further distinguishes types of debt by General Fund or Enterprise Debt. General Fund debt denotes that the debt is expected to be paid from the City's General Fund. Enterprise Debt is expected to be self-supporting and to be repaid from a separate revenue -generating project, business or activity treated by the City as a separate enterprise (e.g., Bangor International Airport). Enterprise Debt may still be issued as a general obligation, full faith and credit bond of the City. Lease purchase agreements are an agreement in which property or equipment is acquired and periodic payments, which are sufficient to pay debt service, are made. The property that is leased is liened to secure future lease payments. The City uses this type of financing for short-term (2 — 5 years) equipment purchases. 3 13-225 JUNE 24, 2013 F. Authority to Borrow All Orders providing for borrowing must provide at least a ten (10) day public notice period. In addition, on the date of Council action, the Order is subject to a public hearing and passage must be by the affirmative vote of at least two-thirds of all the members of the City Council. Article VIII, Section 19 requires that, with certain exceptions, orders or resolves authorizing the issuance of general obligation securities of the City in a principal amount of five one-hundredth of one percent of the last certified state valuation for a single capital improvement or item of capital equipment be submitted to voter referendum. Article VIII, Section 19(b) provides that the voter referendum requirement does not apply to any order or resolve authorizing "...(i) the refunding of any securities or other obligations of the City; (ii) the issuance of general obligation securities, or other direct or indirect obligations, of the City for streets, sidewalks, or storm or sanitary sewers; or (iii) the issuance of general obligation securities, or other direct or indirect obligations, of the City for the City's self- sustaining enterprise funds....". G. Debt Term and Features Short term obligations have a final maturity of one (1) year or less and may be issued to finance projects or portions of projects for which the City ultimately intends to issue long term debt or in anticipation of the receipt of revenues. Long-term obligations have a maturity greater than one (1) year and may be issued to finance significant long-lived projects as allowed. In no case shall the term of the obligation exceed the estimated period of utility of the project, nor shall the term within which the obligation is paid in full exceed 30 years. Principal and interest retirement schedules shall be structured to: (1) achieve a low borrowing cost for the City, (2) accommodate the debt service payments of existing debt and (3) respond to perceptions of market factors and demand. Shorter maturities shall always be encouraged, if possible and prudent, to assure that debt is being retired at a sufficiently rapid pace. Bonds may be issued as serial bonds, term bonds or any combination thereof. Such bonds shall bear either fixed or adjustable interest rates, contain redemption and conversion privileges, if prudent and desired, and provisions regarding security for 4 13-225 JUNE 24, 2013 the payment thereof, to be sold under such terms and conditions as the City Council may determine. Interest payments on all General Fund debt shall be paid on a current basis, annually; provided, however, that the first payment date for such interest payments may be extended up to 18 months from the issue date of such. Any obligation may be made subject to redemption prior to its stated dates) of maturity (i.e., callable). H. Method of Sale Debt obligations of the City may be sold by competitive or negotiated sale methods unless otherwise limited by State law. The selected method of sale is a policy decision, such that the option which is expected to result in the lowest cost, most favorable terms or greatest efficiency that benefits the City given the financial structure, market conditions and prior experience, etc.. I. External Financial Professionals The City may retain an independent financial advisor for advice on debt structuring, rating review process, marketing debt issuances, sale and post -sale services and to prepare and/or review the Official Statement. The City may also retain independent bond counsel for legal, tax and procedural advice on debt issuances. As necessary, the City may also retain other service advisors, such as trustees, underwriters, rebate consultants, paying agents, trustees and pricing advisors. The City shall consult with the City's bond counsel , financial advisor, rebate consultant or other such specialists, as available and necessary, to meet the requirements of this policy. J. Credit Rating Agencies The City shall seek a credit rating(s) on all new bond issues which are being sold in the public market. However, when privately placing a security with a sophisticated investor, exceptions to this requirement are permissible, if warranted by the circumstances. The City shall report annually all financial information, including its comprehensive annual financial report after been accepted by the City Council, to agencies which provide credit ratings or credit enhancement for the City's outstanding. 5 13-225 JUNE 24, 2013 The City either shall notify the bond rating agencies by telephone, through written correspondence or electronic means when the City begins preparation for a debt issuance. After the initial contact, a formal application will be delivered from the respective rating agency, executed by the City and sent, along with the draft of the Preliminary Official Statement and other salient information relating to the bond sale, to the rating agencies. This application and related documentation should be sent in sufficient time prior to the bond sale to allow the rating agencies reasonable time to perform their review and to prepare and publish their analysis for public dissemination timely before the proposed sale. The City's staff, with the assistance of its financial advisor, disclosure counsel, bond counsel and/or tax counsel, shall prepare the necessary materials for presentations to the bond rating agencies' review. K. Arbitrage Compliance It is the City's policy to minimize the cost of arbitrage reporting and rebate, if required, and yield restriction of unused bond proceeds while strictly complying with the law and IRS requirements. The City shall structure its financings in such a way as to reduce or eliminate future arbitrage rebate reporting and/or liability, wherever possible. For each tax-exempt or other tax advantaged obligation, in executing its Arbitrage and Use of Proceeds Certification, the City will make a determination as to whether the obligation meets the requirements of either the "small issuer" exception, the semi-annual target dates for the 6 -month, 18 -month, or 24 -month spending exception to arbitrage calculation, reporting or rebate. The City shall maintain separate accounts to track the deposit and use of the sale bond proceeds as well as an investment allocation by source of funds and record pro rata interest income of the commingled bond funds, monthly. All investment and expenditure records from such funds and accounts will be maintained until the bonds mature plus three (3) years. The City shall consult with bond counsel to identify and monitor any proceeds of a tax-exempt obligation that must be invested in yield restricted investments (i.e., at or below the "Bond Yield", as defined by the IRS in its Form 8038-G or other applicable Form 8308.) following the expiration of any applicable temporary period. 13-225 JUNE 24, 2013 The City shall make a final allocation of the proceeds of any tax-exempt or other tax advantaged obligation expenditures by no later than (1) 18 months after the later of the date the expenditure was made or (2) the date the project being financed was "placed in service". Notwithstanding the forgoing, the final allocation shall be made not later than the earlier of five years after the particular tax-exempt or other tax advantaged obligations was issued or 60 days after the issue is retired. If the City fails to meet the requirements of the applicable temporary period, or exception to rebate, it shall (1) arrange for the timely calculation, reporting and payment of rebate liability, if any, or yield reduction payment, if available, and, as applicable (2) ensure that if rebate is due, the first rebate installment is paid by the fifth anniversary of the issue date of the particular tax-exempt or other tax advantaged obligation, plus 60 days and each fifth year anniversary thereafter until the final maturity dates, plus 60 days. L. Investment of Bond Proceeds All bond proceeds of debt issues shall be invested in accordance with federal and State law and in compliance with the City's Investment Policy, as approved by the City Council. In the event that an escrow account is to be funded with open -market securities, the Finance Director or City Manager shall encourage that a competitive process is undertaken, to the extent available to its means, to acquire the necessary securities. M. Finance Director Responsibilities The Finance Director is responsible for the City's compliance with its debt policy and is charged to review it annually and make recommendations for revision, as often as necessary. The Finance Director is responsible for the review and evaluation of debt financing operations including, but not limited to; issuance of long-term and short-term obligations, selection of type, structure, method of sale and marketing of obligations, investor and rating agency communications, review expenditures of issue proceeds and the status of various projects being financed, including the Capital Improvement Program (CIP) for timeliness of spent issue proceeds, and review and evaluate services provided by bond counsel, financial advisor, underwriters and other service providers in issuance transactions for effectiveness and quality of service. 13-225 JUNE 24, 2013 The Finance Director shall be responsible for reviewing and recommending, prior to release to the public, all Official Statements, including disclosure statements relating to municipal securities, as to which the City is the issuer or Obligated Person as defined by the SEC's Rule 15c2-12. The Finance Director shall confirm the proper filing of applicable IRS Form 8038 (e.g. IRS Forms 8038, 8038-13, 8038 -CP, 8038-G, 8038 -GC, 8038-R, 8038-T or 8038 - TC, etc., if applicable return for each tax-exempt or other tax advantaged obligation issued by the City. The Finance Director shall evaluate all modifications to any tax-exempt or other tax advantaged obligation to determine that such modifications do not result in a re - issuance or, if such modifications do not result in a re -issuance, to take all actions necessary to maintain the tax-exempt or other tax advantaged status of the obligation. The Finance Director is the responsible City Official, for post -issuance compliance with respect to the City's tax-exempt or other tax advantaged obligations. The Finance Director will receive continual training to implement and monitor this policy. N. Post Issuance Compliance To ensure the proper uses of tax-exempt or other tax advantaged bond financed property, the City shall maintain a record of all such bond financed property and the proceeds of any such obligations spent on each. The City shall monitor all non- governmental user(s) of any project financed with the proceeds of tax-exempt or other tax advantaged obligations and confer with bond counsel, as appropriate. Such non-governmental use may arise out of some of the following arrangements: non-qualified management or research contracts (refer to Rev. Procs. 97-13 and 97- 14), leases (including leases to the federal government), naming rights of the sale, disposition or other change in use of City property. The City shall maintain copies of any non-governmental use arrangement(s) and, in the event the City takes an action which causes the private activity bond tests to be met, contact bond counsel and take all actions necessary to ensure timely remedial action under applicable IRS Regulations. O. Disclosure C 13-225 JUNE 24, 2013 It is the City's policy to provide primary and secondary disclosure to all its bond investors on a periodic basis as required by the SEC Rule 15c2-12 (the "Rule'. The City shall file the annual financial statements, other financial information and operating data within 270 days of the end of its prior fiscal year (or within such other time as may be specified in the Rule); and shall provide notice of any material events as identified in the Continuing Disclosure undertaking, in a timely manner. The City will provide its comprehensive annual financial report (CAFR) to MSRB through its Electronic Municipal Market Access system ("EMMA'�. P. Records Retention Copies, of the transcript proceedings for each tax-exempt or other tax advantaged obligation issued by the City, including but not limited to all tax-exempt bonds, notes and lease purchase contracts will be maintained until the final maturity of such obligation is extinguished plus three (3). If not included in the closing transcript, copies of records required to qualify for the safe harbor for investment contracts or defeasance escrows and to identify hedge contracts on the City's books and records will be retained until the final date of such obligation is extinguished plus three (3) years. The closing transcript for each obligation, tax-exempt, tax advantaged or taxable, and other records to be retained shall be maintained until three (3) years after said obligation (or obligations issued to refund such obligations) has been retired. If records and material to be maintained are kept in electronic format, the record system shall comply with the requirements of Rev. Proc. 97-22, as may be amended, modified, superseded or replaced. 9