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HomeMy WebLinkAbout2010-02-03 PACKET 04.E.REQUEST OF CITY COUNCIL ACTION COUNCIL AGENDA MEETING ITEM # DATE 2/3/2010 Finance ORIGINATING DEPARTMENT Robin Roland DEPARTMENT HEAD COUNCIL ACTION REQUEST Approve Debt Management Policy STAFF RECOMMENDATION Council review and approval of the Debt Management Policy which was presented at the Strategic Planning retreat on January 23, 2010. BUDGET IMPLICATION BUDGETED AMOUNT ADVISORY COMMISSION ACTION ❑ PLANNING ❑ PUBLIC SAFETY ❑ PUBLIC WORKS ❑ PARKS AND RECREATION ❑ HUMAN SERVICES /RIGHTS ❑ ECONOMIC DEV. AUTHORITY SUPPORTING DOCUMENTS DATE ® MEMO /LETTER: 1/27/2010 ❑ RESOLUTION: ❑ ORDINANCE: ❑ ENGINEERING RECOMMENDATION: ❑ LEGAL RECOMMENDA T !ON: ® OTHER: Debt Management Policy ADMINISTRATORS COMMENTS REVIEWED El El El El El ACTUAL AMOUNT APPROVED DENIED ❑ ❑ ❑ ❑ ❑ ❑ ❑ ❑ ❑ ❑ ❑ ❑ ❑ ❑ J t F La f aea City Administrator Date COUNCIL ACTION TAKEN: ❑APPROVED ❑ DENIED ❑ OTHER C: \Documents and Settings\rrolandWy Documents \Ci ouncil Action Form.doc 3 City of Cotta Grove Minnesota To: Honorable Mayor and City Council Ryan Schroeder, City Administrator From: Robin Roland, Finance Director ���',Li l Date: January 27, 2010 Subject: Debt Management Policy INTRODUCTION A Debt Management Policy is presented to be used to provide the general framework for planning and evaluating debt proposals in the course of City operations. DISCUSSION One of the most significant factors affecting City finances is the issuance of bonded debt. Debt is issued to construct infrastructure, buildings and parks and to finance economic development. As discussed at the Strategic Planning retreat with the City Council, strong debt management policies are one factor used by outside evaluators (such as bond rating agencies) in determining the stability of a government's financial situation. The Debt Management policy presented herein provides guidance to City Council and staff on what debt will be issued for, how it will be issued and various financial parameters which will be considered (and met) in the issuance of debt by the City. Sections of the policy include General Debt, Taxpayer Equity, Uses, Decision Analysis, Debt Planning, Communications and Disclosure and General Obligation and Revenue Debt. Some more specific guidance included in the policy covers how many years a project should be included in the Capital Improvement Plan before bonds are issued, as well as measures of debt burden such as the debt to market value ratio and debt as a percentage of operating expenditures ratio. The policy states: "City Council recognizes there are no absolute rules or easy formulas that can substitute for a thorough review of all information affecting the City's debt position," however, the policy is a good place to begin. RECOMMENDATION Approve the Debt Management Policy as presented. CITY OF COTTAGE GROVE DEBT MANAGEMENT POLICY The following debt management policy should be used to provide the general framework for planning and reviewing debt proposals. City Council recognizes there are no absolute rules or easy formulas that can substitute for a thorough review of all information affecting the City's debt position. Debt decisions should be the result of deliberative consideration of all factors involved. 1. General Debt Policy a. The City shall seek to maintain and improve its current AA2 /AA+ bond rating so borrowing costs are minimized and access to credit is preserved. It is imperative that the City demonstrate to rating agencies, investment bankers, creditors and taxpayers that City officials are following a prescribed financial plan. b. Every bond issue proposal will be accompanied by an analysis of the sources and uses of funds for the project to be financed with the bond proceeds and sources of funding for the repayment of the bonds. The analysis will reflect how the new bond will fit with the City's existing debt structure. c. The City will confine long -term borrowing to capital improvements or projects that cannot be funded from operating revenues and /or a reasonable amount of other resources. The City has developed a closed debt service fund which acts as a bridge to internally finance construction costs until property owner assessments or other third party revenues are received. Internal financing should significantly reduce the City's need to sell bonds and incur undue interest costs. d. Bonds will be sold on a competitive basis unless it is in the best interest of the City to conduct a negotiated sale. Competitive sales will be the preferred method. Negotiated sales may occur when selling bonds for a defeasance of existing debt, for current or advanced refunding of debt or for other appropriate reasons. 2. Taxpayer Equity a. Cottage Grove's property taxpayers and citizens who benefit from projects financed by bonds should be the source of the related debt service funding. This principle of taxpayer equity should be a primary consideration in determining the type of projects selected for financing through bonds. Furthermore, the principle of taxpayer equity shall be applied for setting rates in determining net revenues for bond coverage ratios. 3. Uses a. Acceptable uses of bond proceeds can be viewed as items which can be capitalized. Non - capital furnishings and supplies will not be financed from bond proceeds. b. Bond proceeds should be limited to financing the costs of project planning and design, land acquisition, buildings and other permanent structures, attached fixtures, equipment acquired as part of the construction project and /or other costs as permitted by law. Utility revenue bond proceeds may be used to establish a debt service reserve as allowed by State law. Refunding bond issues designed to restructure currently outstanding debt are an acceptable use of bond proceeds c. 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 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 $1,000,000. d. The City will not issue "interest only" debt. 4. Decision Analysis a. Whenever the City is contemplating a possible bond issue, infonnation will be developed concerning the following categories commonly used by rating agencies assessing the City's creditworthiness. The subcategories are representative of the types of items to be considered. This information will be presented by the Finance Director to the City Administrator and City Council. L Debt Analysis 1. Debt capacity analysis 2. Purpose for which debt is issued 3. Debt structure 4. Debt burden 5. Debt history and trends 6. Adequacy of debt and capital planning 7. Obsolescence of capital plant ii. Financial Analysis 1. Stability, diversity, and growth rates of tax or other revenue sources 2. Trend in assessed valuation and collections 3. Current budget trends 4. History and long term trends of revenues and expenditures 5. Fund balance status and trends in operating and debt funds 6. Cash flow projections iii. Economic Analysis 1. Population and demographics 2. Economic environment and trends b. The City may use the services of qualified internal staff and outside advisors to assist in the analysis, evaluation and decision process, including bond counsel and financial advisors. This policy is intended to insure that potential debt complies with all laws and regulations, as well as sound financial principles. 5. Debt Planning a. General obligation bond borrowing should be planned and the details of the plan must be incorporated in the City's Five Year Capital Improvement Plan. b. General obligation bond issues should be included in at least two Capital Improvement Plans proceeding the year of the bond sale. The first inclusion should contain a general description of the project, its timing and financial limits; subsequent inclusions should become increasingly specific. c. The annual debt levy required by the total of all City debt shall not comprise more than 15% of annual General Fund operating expenses. 6. Communication and Disclosure a. Financial reporting and disclosure requirements will be fulfilled annually according to the disclosure guidelines of the Government Finance Officers Association of the U.S. and Canada. 7. General Obligation Bonds a. Every project proposed for financing through general obligation debt should be accompanied by a full analysis of the future operating and maintenance costs associated with the project. b. Bonds cannot be issued for a longer maturity schedule than a conservative estimate of the useful life of the asset to be financed. The City will attempt to keep the average maturity of general obligation bonds at or below 20 years. c. The City will limit the total of its net (general obligation) debt to 0.80% of full market value of properties in the City. 8. Revenue Bonded Debt a. It will be 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 and revenue bond financing. b. Each utility or enterprise should provide adequate debt service coverage. A specific factor is established by the City Council that the net of enterprise revenues and expenditures (exclusive of depreciation/amortization) shall be a minimum of 1.25 times the annual debt service costs.