HomeMy WebLinkAbout2022-06-14; City Council; Resolution 2022-142RESOLUTION NO. 2022-142
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD,
CALIFORNIA, ADOPTING A CITY COUNCIL POLICY FOR DEBT MANAGEMENT
EXHIBIT 1
WHEREAS, the City Council of the City of Carlsbad, California believes financial policies are
central to a strategic, long-term approach to financial management; and
WHEREAS, the City Council desires to establish a debt management policy in order to meet
California Government Code Section 885S(i) requirements and to further support the city's other
financial management policies; and
WHEREAS, the debt management policy is applicable to all entities for which the City Council
acts as legislative body upon adoption of the policy by those entities.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as
follows:
1.That the above recitations are true and correct.
2.That the City Council adopts the new City Council Policy titled Debt Management Policy
as shown in Attachment A.
PASSED, APPROVED AND ADOPTED at a Joint Special Meeting of the City Council of the City of
Carlsbad, the Community Development Commission of the City of Carlsbad, and the Boards of Directors
of the Carlsbad Municipal Water Authority, Carlsbad Public Financing Authority, Carlsbad Public
Improvement Corporation, and Carlsbad Industrial Development Corporation on the 14th day of June,
2022, by the following vote, to wit:
AYES:
NAYS:
ABSENT:
Hall, Blackburn, Bhat-Patel, Acosta, Norby.
None.
None.
� FAVIOLA MEDINA, City Clerk Services Manager
(SEAL)
June 14, 2022 Item #9 Page 4 of 69
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City Council
POLICY STATEMENT
Policy No.
Date Issued
94
June 14, 2022
Resolution No. 2022-142
Subject: Debt Management Policy
Purpose
The purpose of the Debt Management Policy ("Policy") is to establish guidelines and
parameters for the effective governance, management and administration of the city's current
and future debt. This policy is intended to comply with California Government Code Section
88SS(i), and any successor statute, and shall govern all debt which is contemplated or incurred
by the city and city entities that adopt the policy.
Background
California Government Code Section 88SS(i) requires that the issuer of any proposed debt issue
of the state or local government shall, no later than 30 days prior to the sale of any debt issue,
submit a report of the proposed issuance to the California Debt and Investment Advisory
Commission by any method approved by the commission. The report of the proposed debt
issuance shall include a certification by the issuer that it has adopted local debt policies
concerning the use of debt and that the contemplated debt issuance is consistent with those
local debt policies. A local debt policy must include all of the following:
1.The purposes for which the debt proceeds may be used;
2.The types of debt that may be issued;
3.The relationship of the debt to, and integration with, the issuer's capital improvement
program or budget, if applicable;
4.Policy goals related to the issuer's planning goals and objectives; and
5.The internal control procedures that the issuer has implemented, or will implement, to
ensure that the proceeds of the proposed debt issuance will be directed to the intended
use.
Additionally, the city recognizes that a fiscally prudent policy is necessary to:
1.Maintain the city's sound financial position;
2.Ensure the city has the flexibility to respond to changes in future service priorities,
revenue levels, and operating expenses;
3.Protect the city's creditworthiness;
4.Ensure that all debt is structured to protect both current and future taxpayers,
ratepayers and constituents of the city; and
Attachment A
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City Council Policy Statement
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5.Ensure that the city's debt is consistent with the city's planning goals, objectives, capital
improvement program, and/or budget.
Statement of policy
SECTION 1: SCOPE AND AUTHORITY
This Policy governs the issuance, management and post issuance compliance of all debt funded
through the capital markets, including the selection and management of related financial and
advisory services and products, and the investment of bond proceeds. This Policy also governs
the use and issuance of debt used for financing the purchase of major and/or multiple pieces of
equipment.
The city will utilize debt obligations only after giving due consideration to all available funding
sources, including but not limited to available cash reserves in the city's General Fund, General
Capital Construction Fund, Infrastructure Replacement Fund, Water Replacement Funds, Sewer
Replacement Fund and other funds, as appropriate, other strategic savings programs, available
current revenues, potential future revenue sources, existing and potential grants, and all other
financial sources legally available to be used for such purposes. When and if deemed an
appropriate alternative, the city may issue debt for the purposes stated in this Policy.
This Policy will be reviewed and updated periodically, as required. Any changes to the policy are
subject to approval by the City Council at a noticed and public meeting. While adherence to this
Policy is required in applicable circumstances, the city recognizes that changes in the capital
markets, city programs and other unforeseen circumstances may from time to time produce
situations that are not covered by the Policy and require modifications or exceptions to achieve
policy goals. In these situations, management flexibility is appropriate, provided specific
authorization from the City Council is obtained.
Overall policy direction of this Policy will be provided by the City Council. Responsibility for
implementation of the Policy, and day-to-day responsibility for structuring, implementing, and
prudently and properly managing any and all debt incurred by the city will lie with the Finance
Director. The following policy provides the methods, procedures, policies and practices which,
when exercised, ensure the sound fiscal management of the city's debt program.
SECTION 2: PURPOSES FOR WHICH DEBT MAY BE ISSUED
Long-term debt may be issued to finance the construction, acquisition, and rehabilitation of
capital improvements and facilities, equipment and land to be owned and operated by the city.
Long-term debt financing may be deemed appropriate when the following conditions exist:
1.The project to be financed is necessary to provide basic services; and
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City Council Policy Statement
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2.The project to be financed will provide benefit to constituents over multiple years; and
3.Total debt does not constitute an unreasonable burden to the issuer and its taxpayers
and ratepayers; or
4.Debt is issued to refinance outstanding debt to produce debt service savings or to
realize the benefits of a debt restructuring.
The city may use long-term financing subject to the following conditions:
1.The project to be financed must be approved by the City Council;
2.The city determines the issuance of the debt will comply with the applicable state and
federal law;
3.Debt services should not affect the city's ability to meet future operating, capital and
reserve requirements;
4.The maximum term of each debt financing should be no longer than the expected useful
life of the asset or improvement financed;
5.Debt should be used only to finance improvements that cannot be paid for with current
reserves or revenues, unless the purpose of the debt is to spread improvement costs to
ensure future users become responsible for portions of the cost; and
6.The city shall not use long-term debt for current operations.
Short-term debt may be issued to provide financing for the city's operational cash flows to
maintain a steady and even cash flow balance. The city may use short-term financing subject to
the following conditions:
1.Short-term debt may be issued to provide financing for short-lived capital projects; and
2.Short-term debt, such as bond anticipation notes, grant anticipation notes, commercial
paper or a line of credit, may be used to provide interim financing in connection with
the implementation of a capital program or to smooth out the city's cash flow
requirements.
SECTION 3: TYPES OF DEBT
The city may issue all such types of debt as are permitted by the state constitution, applicable
state statutes, and the city's ordinances, and may include, but are not limited to:
l.Internal borrowing1
2.Bank or agency loans
1 The city may borrow internally from other funds with surplus cash in lieu of issuing debt. Purposes warranting the
use of this type of borrowing could include, without limitation, addressing cash flow issues; offsetting timing
differentials between expenditures and reimbursements (typically associated with grant funding, impact fees, etc.);
funding a future project prior to securing project financing; and for other needs as deemed appropriate by the City
Council.
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3.General obligation bonds
4.Capital appreciation bonds
5.Revenue bonds
6.Special assessment/community facilities district/bridge and thoroughfare district debt2
7.Tax and revenue anticipation notes
8.Line of credit
9.Refunding obligations
SECTION 4: RELATIONSHIP OF DEBT TO CAPITAL IMPROVEMENT PROGRAM AND BUDGET
The city's multi-year Capital Improvement Program (CIP) sets priorities for projects and funding
while this Policy provides policy direction and limitations for proposed financings undertaken to
implement the CIP. Debt issuance for capital projects should be incorporated into the CIP to be
recommended for City Council approval.
New debt issuances, and refinancing of existing debt, should be analyzed for compatibility with
the city's established long-term plans for replacing aging physical infrastructure. The city strives
to maintain a level funding plan that will minimize the peaks and valleys in General Fund
support levels and allows the funding of projects over time. The city shall strive to fund the
upkeep and maintenance of its infrastructure and facilities due to normal wear and tear
through the expenditure of available operating revenues. The city shall seek to avoid the use of
debt to fund infrastructure and facilities improvements that are the result of normal wear and
tear. The city shall seek to issue debt in a timely manner to avoid having to make unplanned
expenditures for capital improvements or equipment from its General Fund.
SECTION 5: POLICY GOALS RELATED TO PLANNING GOALS AND OBJECTIVES
The city is committed to long-term financial planning, maintaining appropriate reserve levels,
and employing prudent practices in governance, management and budget administration. The
city intends to issue debt for the purposes stated in this Policy and, in doing so, to implement
policy decisions incorporated in the city's long-term capital plans and its annual operating
budget.
It is a policy goal of the city to protect taxpayers, ratepayers (when applicable) and constituents
by utilizing conservative financing methods and techniques to obtain the highest practical credit
ratings (when applicable) and the lowest practical borrowing costs.
2 Special assessment districts, community facilities districts, and bridge and thoroughfare districts also subject to
Council Policy Statement 33 (2002) which sets policy for financing such districts.
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City Council Policy Statement
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SECTION 6: GENERAL DEBT GUIDELINES
6.1 METHOD OF ISSUANCE AND SALE OF BONDS
The city will strive to sell its bonds competitively but may pursue negotiated sales when
conditions warrant.
6.2: STRUCTURE AND TERM
The city will establish all terms and conditions relating to the issuance of debt, and will control,
manage, and invest all debt proceeds. The following restrictions will be followed unless
otherwise authorized by the City Council:
1.Term of Debt -Debt will be structured for the shortest period practicable, consistent
with a fair allocation of costs to current and future users. The standard term of long
term debt borrowing will typically be 5-30 years.
Consistent with its philosophy of keeping its capital facilities and infrastructure systems
in good condition and maximizing a capital asset's useful life, the city will make every
effort to set aside sufficient current revenues to finance ongoing maintenance needs
and to provide reserves for periodic replacement and renewal. Generally, debt will not
be issued for periods exceeding the useful life or average useful lives of projects, or
equipment, to be financed.
2.Debt Repayment Structure -In structuring a debt issuance, the city will manage the
amortization of the debt and, to the extent possible, track the anticipated debt service
payments to its projected cash flow. In addition, the city will seek to structure debt with
aggregate level annual debt service payments over the life of the debt. Structures with
unlevel debt service will be considered when one or more of the following exist:
A.Natural disaster or extraordinary unanticipated external factors make payments on
the debt in the early years prohibitive;
B.Such a structure is beneficial to the city' s aggregate overall debt payment schedule;
C.Such a structure will allow debt service to more closely match project revenues.
3.Bond Maturity Options -For each bond issuance, the city will select serial bonds or term
bonds, or both. On the occasion where circumstances warrant, capital appreciation
bonds (CABs) may be used. The decision to use term, serial or CABs is typically driven by
market conditions.
4.Interest Rate Structure -The city' s practice has been to issue fixed rate debt. Such debt
provides certainty, at the time of debt issuance, as to the level of principal and interest
owed annually. Moreover, it allows the city to have even debt service payments over
time.
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Specific conditions may arise where the city would consider the use of variable interest
rate debt. Variable debt has interest rates that reset on a periodic basis (e.g., daily,
weekly, monthly). Conditions which would cause consideration of variable rate debt are:
A.An adverse fixed-rate municipal market
B.Uncertainty over the level of annual revenues to cover debt service
C.The potential for rapid repayment of debt
D.The need or desire to optimize the city' s asset/liability balance
Variable interest rate debt, however, exposes the city to interest rate risk over the term
of the financing. While credit rating agencies are supportive of variable rate debt, the
magnitude of any unhedged variable rate debt could raise concerns. Rating agencies
suggest the aggregate amount of such debt be capped at a level not exceeding 20-25
percent of debt outstanding.
It is possible to issue a combination of both fixed and variable rate debt. The city could
use this tool, as well as others, such as front or back ending debt to manage its debt
portfolio. These structures should be used in a manner which best supports the city's
long-term financial condition. There are other types of debt that are a variation of fixed
and variable debt. These can involve swaps of fixed for variable debt (or vice versa)
depending on the interest rate environment and the city's general financial position.
These instruments can become most complex and sensitive to shifts in the interest rate
and economic environment. They require careful analysis and monitoring.
5.Credit Enhancement -Credit enhancement may be used to improve or establish a credit
rating on a city debt obligation. Types of credit enhancement include letters of credit,
bond insurance and surety policies. The financing team will recommend the use of a
credit enhancement if it reduces the overall cost of the proposed financing or if the use
of such credit enhancement furthers the city's overall financial objectives.
6.Debt Service Reserve Fund -Debt service reserve funds are held by the trustee to make
principal and interest payments to bondholders in the event that pledged revenues are
insufficient to do so. The city will fund debt service reserve funds when it is in the city's
overall best financial interest.
Under federal tax law, the size of the reserve fund is generally limited to the lesser of 1)
10% of par amount of bonds, 2) 125% of average annual debt service and 3) 100% of
maximum annual debt service.
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In lieu of holding a cash funded reserve, the city may substitute a surety bond or other
credit instrument in its place. The decision to fund a reserve fund with cash rather than
to use a credit facility is dependent upon the cost of the credit instrument and the
investment opportunities. Additionally, the city may decide not to utilize a reserve fund
if there would be no adverse impact to the city's credit rating or interest rates.
7.Capitalized Interest -Generally, the nature of the city's revenue stream is such that
funds are continuously available, and the use of capitalized interest should not normally
be necessary. However, certain types of financings may require the use of capitalized
interest from the issuance date until the city has constructive use/benefit of the
financed project. Unless otherwise required, the city will avoid the use of capitalized
interest to avoid unnecessarily increasing the bond size. Interest will not be funded
(capitalized) beyond three years or a shorter period if further restricted by statute.
8.Lien Levels -Senior and junior liens for each revenue source will be utilized in a manner
that will maximize the most critical constraint, typically either cost or capacity, thus
allowing for the most beneficial use of the revenue source securing the debt.
9.Call Provisions - A call option or optional redemption provision gives the city the right to
prepay or retire debt prior to its stated maturity date. This option may permit the city to
achieve interest savings in the future through the refunding of the debt. Often the city
will pay a higher interest rate as compensation to the buyer for the risk of having the
debt called in the future. In addition, if the debt is called, the holder may be entitled to a
premium payment ("call premium"). Because the cost of call options can vary depending
on market conditions, an evaluation of factors will be conducted in connection with
each issuance.
In general, the city's securities will include a call feature that is no later than ten years
from the date of delivery of the debt. The city will generally avoid the sale of non
callable debt. The use of a call option will be evaluated and recommended on a case-by
case basis.
10.Original Issue Discount -An original issue discount will be permitted only if the city
determines that such discount results in a lower true interest cost on the debt and that
the use of an original issue discount will not adversely affect the project identified by
the legal documents related to the debt.
11.Debt Limits -California Government Code Section 43605 states a city shall not incur
bonded indebtedness payable from the proceeds of property tax which exceeds 15
percent of the assessed value of all real and personal property of the city. This provision,
however, was enacted when assessed valuation was based upon 25 percent of market
value. Effective with the 1981-82 fiscal year, each parcel is now assessed at 100 percent
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of market value (as of the most recent change in ownership for that parcel). To reflect
the intent of the debt limit stipulation in Section 43605, the 15 percent limitation has
been adjusted to one-fourth of that level, or 3.75 percent, of the assessed value of all
real and personal property of the city.
The cumulative annual debt service of all bond issues supported by the General Fund is
restricted to no more than 8 percent of annual operating expenses for the General Fund
unless an exception is approved by the City Council.
Bond issues supported by Enterprise Funds should maintain a minimum ratio of net
operating income to annual debt service that the Finance Director concludes is
beneficial to the city. Typically, the higher the ratio the better the rating and the lower
the interest rate paid by the city. For all other city funds annual debt service shall not
exceed 15 percent of annual operating expenses unless an exception is approved by the
City Council.
12.Derivatives -Derivative products may have application to certain city borrowing
programs. In certain circumstances these products can reduce borrowing costs and
assist in managing interest rate risk. However, these products carry with them certain
risks not faced in standard debt instruments. The use of derivative products shall be
evaluated on a case-by-case basis to determine whether the potential benefits are
sufficient to offset any potential costs.
13.Refunding -The city shall refinance debt to achieve savings as market opportunities
arise. The Finance Director shall remain cognizant of fluctuations in interest rates for the
purpose of identifying refunding opportunities and prepare a present value analysis
identifying the economic effects of a refunding to determine the value of refunding.
There are two types of refunding, current or advance.
Refunding may be undertaken in order to:
A.Take advantage of lower interest rates and achieve debt service costs
savings;
B.Eliminate restrictive or burdensome bond covenants; or
C.Restructure debt to either lengthen the duration of debt or free up reserve
funds.
Generally, the city shall strive to achieve a minimum of 3 percent net present value
savings for a current refunding and a minimum of 5 percent net present value savings
for an advance refunding. In addition, the total net present value savings should be
greater than the costs of doing the refunding. The city may consider undertaking a
refunding for other than economic purposes upon a finding that such a restructuring is
in the city's overall best financial interest.
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The city will generally refund debt within the term of the originally issued debt.
However, the city may consider maturity extension, when necessary to achieve a
desired outcome, provided that such extension is legally permissible. The city may also
consider shortening the term of the originally issued debt to realize sa.vings. The
remaining useful life of the financed asset will be given due consideration in formulating
these decisions.
The city will utilize the least costly securities available in structuring refunding escrows.
A certificate from a third-party agent, who is not a broker-dealer, is required stating that
the securities were procured through an arms-length, competitive bid process (in the
case of open market securities), that such securities were more cost effective than state
and local government obligations, and that the price paid for the securities was
reasonable within federal guidelines. Under no circumstances will an underwriter, agent
or municipal advisor sell escrow securities to the city from its own account.
The city will take all necessary steps to optimize escrows and to avoid negative arbitrage
in its refunding. Any resulting positive arbitrage will be rebated as necessary according
to federal guidelines.
6.3: THE FINANCING TEAM
The city will form a financing team for each debt issuance that will consist of the city treasurer,
finance director, and assistant finance director at a minimum. The team may also consist of any
other required staff, underwriter, bond counsel, financial advisor, or other consultants deemed
necessary by the city.
6.4: USE OF CONSULTANTS
The city may use outside consultants to complete a debt issuance including, but not limited to,
bond counsel, disclosure counsel, underwriter, municipal advisor, trustee, and/or arbitrage
analyst. In the case of land secured financings, an assessment engineer or special tax
consultant, as applicable, and an appraiser or market absorption consultant may be necessary.
In the case of tax increment financings, a fiscal consultant may be a necessary consultant.
Conflict of Interest Disclosure -All parties involved with city debt issuance will be required to
provide full and complete disclosure, relative to internal and external agreements. The extent
of disclosure may vary depending on the nature of the transaction. However, in general terms,
no agreements will be permitted which could compromise one's ability to provide independent
advice that is solely in the city's interest or which could reasonably be perceived as a conflict of
interest.
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SECTION 7: COMPLIANCE
When issuing debt, in addition to complying with the terms of this Policy, the city shall comply
with any other applicable policies regarding initial bond disclosure, continuing disclosure, post
issuance compliance, and investment of bond proceeds.
The city will periodically review the requirements of and will remain in compliance with the
following:
1.Any continuing disclosure requirements.
2.Any federal tax compliance requirements, including without limitation arbitrage and
rebate compliance, related to any prior bond issues.
3.The city's investment policies as they relate to the investment of bond proceeds.
Whenever reasonably possible, proceeds of debt will be held by a third-party trustee
and the city will submit written requisitions for such proceeds. The city will submit a
requisition only after obtaining the approval of the Finance Director.
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