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Staff Report
DATE: DECEMBER 7, 2016 CONSENT CALENDAR
SUBJECT: APPROVE DEBT POLICY
FROM: David H. Ready, City Manager
BY: Suzanne Harrell, City Financial Advisor
SUMMARY
The State Legislature recently adopted SB 1029, which requires municipalities to adopt
local debt policies, which are to include specified provisions concerning the use of debt.
The City and its related financing entities will be required to certify that any
contemplated future debt issuance is consistent with these local debt policies.
RECOMMENDATION:
Acting as the City Council:
• Adopt the Debt Management Policy.
Acting as the Successor Agency Board:
• Adopt the Debt Management Policy.
Acting as the Financing Authority Board:
• Adopt the Debt Management Policy.
STAFF ANALYSIS:
The Debt Policy has been developed to provide guidance in the issuance and
management of debt by the City or its related entities and is intended to comply with
ITEM NO. 1�
City Council
December 7, 2016 -- Page 2
Debt Policy
Government Code Section 8855(i), effective on January 1, 2017. The main objectives
of the Debt Policy are to establish conditions for the use of debt, to ensure that debt
capacity and affordability are adequately considered; to minimize the City's interest and
issuance costs, to maintain the highest possible credit rating, to provide complete
financial disclosure and reporting, and to maintain financial flexibility for the City.
In addition to describing the purposes for which debt may be issued and the types of
debt that may be issued, the Debt Policy includes the following sections, as required by
SB 1029:
• The relationship of the debt to, and integration with, the City's capital
improvement program or budget, if applicable.
• Policy goals related to the City's planning goals and objectives.
• The internal control procedures that the City has implemented, or will implement,
to ensure that the proceeds of the proposed debt issuance will be directed to the
intended use.
The City has previously adopted Local Goals and Policies relating to the issuance of
Special Tax Bonds by Community Facilities District, and those policies are incorporated
into the Debt Policy.
FISCAL IMPACT:
None. The Debt Policy formalizes the City's existing process for issuance of debt.
XW
SLrzall3ile Harrell GoffKehl
City Financial Advisor Director of Finance
David H. Ready Douglas C. Holland
City Manager City Attorney
Attachment:
Debt Policy
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DEBT MANAGEMENT POLICY
This Debt Management Policy (the "Debt Policy") of the City of Palm Springs (the "City") was
approved by the City Council on December 7, 2016. The Debt Policy may be amended by City Council
as it deems appropriate from time to time in the prudent management of the debt of the City.
This Debt Policy will also apply to any debt issued by the Successor Agency to the Palm
Springs Community Redevelopment Agency or the City of Palm Springs Financing Authority, as
applicable.
The Debt Policy has been developed to provide guidance in the issuance and management of
debt by the City of Palm Springs or its related entities and is intended to comply with Government Code
Section 8855(i), effective on January 1, 2017, The main objectives are to establish conditions for the
use of debt; to ensure that debt capacity and affordability are adequately considered; to minimize the
City's interest and issuance costs; to maintain the highest possible credit rating; to provide complete
financial disclosure and reporting; and to maintain financial flexibility for the City.
Debt, properly issued and managed, is a critical element in any financial management program.
It assists in the City's effort to allocate limited resources to provide the highest quality of service to the
public. The City understands that poor debt management can have ripple effects that hurt other areas
of the City. On the other hand, a properly managed debt program promotes economic growth and
enhances the vitality of the City of Palm Springs for its residents and businesses.
1. Findings
This Debt Policy shall govern all debt undertaken by the City. The City hereby recognizes that a
fiscally prudent debt policy is required in order to:
• Maintain the City's sound financial position.
• Ensure the City has the flexibility to respond to changes in future service priorities,
revenue levels, and operating expenses.
• Protect the City's credit-worthiness.
• Ensure that all debt is structured in order to protect both current and future taxpayers,
ratepayers and constituents of the City.
• Ensure that the City's debt is consistent with the City's planning goals and objectives
and capital improvement program or budget, as applicable.
• Encourage those that benefit from a facility/improvement to pay the cost of that
facility/improvement without the need for the expenditure of limited general fund resources.
2. Policies
A. Purposes For Which Debt May Be Issued
The City will consider the use of debt financing primarily for capital improvement projects (CIP)
when the project's useful life will equal or exceed the term of the financing and when resources are
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identified sufficient to fund the debt service requirements. An exception to this CIP driven focus is the
issuance of short-term instruments such as tax and revenue anticipation notes, which are to be used for
prudent cash management purposes and conduit financing, as described below. Bonded debt should
not be issued for projects with minimal public benefit or support, or to finance normal operating
expenses.
If a department has any project which is expected to use debt financing, the department director
is responsible for expeditiously providing the City Manager and the Director of Finance with reasonable
cost estimates, including specific revenue accounts that will provide payment for the debt service. This
will allow an analysis of the project's potential impact on the City's debt capacity and limitations. The
department director shall also provide an estimate of any incremental operating and/or additional
maintenance costs associated with the project and identify sources of revenue, if any, to pay for such
incremental costs.
(i) Long-Term Debt. Long-term debt may be issued to finance or refinance the construction,
acquisition, and rehabilitation of capital improvements and facilities, equipment and land to be
owned and/or operated by the City.
(a) Long-term debt financings are appropriate when the following conditions exist:
• When the project to be financed is necessary to provide basic services.
• When the project to be financed will provide benefit to constituents over multiple
years.
• When total debt does not constitute an unreasonable burden to the City and its
taxpayers and ratepayers.
• When the debt is used to refinance outstanding debt in order to produce debt
service savings or to realize the benefits of a debt restructuring.
(b) Long-term debt financings will not generally be considered appropriate for current
operating expenses and routine maintenance expenses.
(c) The City may use long-term debt financings subject to the following conditions:
• The project to be financed has been or will be approved by the City Council.
• The weighted average maturity of the debt (or the portion of the debt allocated to
the project) will not exceed the average useful life of the project to be financed by
more than 20%, unless specific conditions exist that would mitigate the extension
of time to repay the debt and it would not cause the City to violate any covenants to
maintain the tax-exempt status of such debt, if applicable.
• The City estimates that sufficient income or revenues will be available to service
the debt through its maturity.
• The City determines that the issuance of the debt will comply with the applicable
requirements of state and federal law.
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• The City considers the improvement/facility to be of vital, time-sensitive need of the
community and there are no plausible alternative financing sources
(d) Periodic reviews of outstanding long-term debt will be undertaken to identify refunding
opportunities. Refunding will be considered (within federal tax law constraints, if applicable) if
and when there is a net economic benefit of the refunding. Refundings which are non-economic
may be undertaken to achieve City objectives relating to changes in covenants, call provisions,
operational flexibility, tax status of the issuer, or the debt service profile.
In general, refundings which produce a net present value savings of at least four (4) percent
of the refunded debt will be considered economically viable. Refundings which produce a net
present value savings of less than four (4) percent or negative savings will be considered on a
case-by-case basis, and are subject to City Council approval.
(ii) Short-term debt. Short-term borrowing may be issued to generate funding for cash flow
needs in the form of Tax and Revenue Anticipation Notes (TRAN).
Short-term borrowing, such as commercial paper, and lines of credit, will be considered as
an interim source of funding in anticipation of long-term borrowing. Short-term debt may be issued
for any purpose for which long-term debt may be issued, including capitalized interest and other
financing-related costs. Prior to issuance of the short-term debt, a reliable revenue source shall be
identified to secure repayment of the debt. The final maturity of the debt issued to finance the
project shall be consistent with the economic or useful life of the project and, unless the City
Council determines that extraordinary circumstances exist, must not exceed seven (7) years.
Short-term debt may also be used to finance short-lived capital projects; for example, the
City may undertake lease-purchase financing for equipment.
(iii) Financings on Behalf of Other Entities. The City may also find it beneficial to issue debt
on behalf of other governmental agencies or private third parties in order to further the public
purposes of City. In such cases, the City shall take reasonable steps to confirm the financial
feasibility of the project to be financed and the financial solvency of any borrower and that the
issuance of such debt is consistent with the policies set forth herein. In no event will the City incur
any liability or assume responsibility for payment of debt service on such debt.
B. Types of Debt
In order to maximize the financial options available to benefit the public, it is the policy of the
City of Palm Springs to allow for the consideration of issuing all generally accepted types of debt,
including, but not exclusive to the following:
• General Obligation (GO) Bonds: General Obligation Bonds are suitable for use in the
construction or acquisition of improvements to real property that benefit the public at
large. Examples of projects include libraries, parks, and public safety facilities. All GO
bonds shall be authorized by the requisite number of voters in order to pass.
• Revenue Bonds: Revenue Bonds are limited-liability obligations tied to a specific
enterprise or special fund revenue stream where the projects financed clearly benefit or
relate to the enterprise or are otherwise permissible uses of the special revenue. An
example of projects that would be financed by a Revenue Bond would be improvements
to the airport, which would be paid back with money raised from the passenger facilities
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charges or airline rates and charges. Generally, no voter approval is required to issue
this type of obligation but in some cases, the City must comply with proposition 218
regarding rate adjustments.
• Lease-Backed Debt/Certificates of Participation (COP): Issuance of Lease-backed debt
is a commonly used form of debt that allows a City to finance projects where the debt
service is secured via a lease or installment agreement and where the payments are
budgeted in the annual budget appropriation by the City from the general fund. Lease-
Backed debt does not constitute indebtedness under the state or the City's constitutional
debt limit and does not require voter approval.
• Special Assessment/Special District Debt: The City will consider requests from
developers for the use of debt financing secured by property based assessments or
special taxes in order to provide for necessary infrastructure for new development only
under strict guidelines adopted by City Council, which may include minimum value-to-
lien ratios and maximum tax burdens. Examples of this type of debt are Assessment
Districts (AD) and Community Facilities Districts (CFD) or more commonly known as
Mello-Roos Districts. In order to protect bondholders as well as the City's credit rating,
the City will also comply with all State guidelines regarding the issuance of special
district or special assessment debt, as well as the City's Special Assessment and
Community Facilities District Financing Programs - Statement of Policies and
Procedures for New Development Projects, adopted by Resolution No. 17774 on
January 22, 1992 and as amended from time to time, included as amended by
Resolution No. 20304 adopted on April 3, 2002.
The City will also consider allowing developers to finance development impact fees
and/or infrastructure through the California Statewide Community Development
Authority's Statewide Community Infrastructure Program (SCIP) or its CFD Financing
program, so long as (1) the City can meet any tax law restrictions on the use or
reimbursement to the developer of proceeds of such financing and (2) the assessment is
considered reasonable if applicable to residential development or allows for the
completion of residential development to provide moderate priced housing to be
developed.
• Tax Allocation Bonds: Tax Allocation Bonds are special obligations that are secured by
the allocation of tax increment revenues that are generated by increased property taxes
in the designated redevelopment area. Tax Allocation Bonds are not debt of the City.
Due to changes in the law affecting California Redevelopment agencies with the
passage of ABX1 26 (as amended, the Dissolution Act) as codified in the California
Health and Safety Code, the Community Redevelopment Agency of the City of Palm
Springs (RDA) was dissolved as of February 1, 2012, and its operations substantially
eliminated but for the continuation of certain enforceable RDA obligations to be
administered by the Successor Agency to the Palm Springs Community Redevelopment
Agency (Successor Agency). The Successor Agency may issue Tax Allocation Bonds to
refinance outstanding obligations of the RDA, subject to limitations included in the
Dissolution Act.
• Multi-Family Mortgage Revenue Bonds: The City is authorized to issue mortgage
revenue bonds to finance the development, acquisition and rehabilitation of multi-family
rental projects. The interest on the bonds can be exempt from Federal and State
taxation. As a result, bonds provide below market financing for qualified rental projects.
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In addition, the bonds issued can qualify projects for allocations of Federal low-income
housing tax credits, which can provide a significant portion of the funding necessary to
develop affordable housing.
HUD Section 108 Loan Guarantee Program: The U.S. Department of Housing and
Urban Development (HUD) Section 108 Loan Guarantee Program allows cities to use
their annual Community Development Block Grant (CDBG) entitlement grants to obtain
federally guaranteed funds large enough to stimulate or pay for major community
development and economic development projects. The program does not require a
pledge of the City's General Fund, only of future CDBG entitlements. By pledging future
CDBG entitlement grants as security, the City can borrow at favorable interest rates
because of HUD's guarantee of repayment to investors.
The City may from time to time find that other forms of debt would be beneficial to further
its public purposes and may approve such debt without an amendment of this Debt Policy.
To maintain a predictable debt service burden, the City will give preference to debt that
carries a fixed interest rate. An alternative to the use of fixed rate debt is variable rate debt. The
City may choose to issue securities that pay a rate of interest that varies according to a pre-
determined formula or results from a periodic remarketing of securities. When making the
determination to issue bonds in a variable rate mode, consideration will be given in regards to
the useful life of the project or facility being financed or the term of the project requiring the
funding, market conditions, credit risk and third party risk analysis, and the overall debt portfolio
structure when issuing variable rate debt for any purpose. The maximum amount of variable-
rate debt should be limited to no more than 20 percent of the total debt portfolio.
The City will not employ derivatives, such as interest rate swaps, in its debt program. A
derivative product is a financial instrument which derives its own value from the value of another
instrument, usually an underlying asset such as a stock, bond, or an underlying reference such
as an interest rate. Derivatives are commonly used as hedging devices in managing interest
rate risk and thereby reducing borrowing costs. However, these products bear certain risks not
associated with standard debt instruments.
C. Relationship of Debt to Capital Improvement Program and Budget
The City intends to issue debt for the purposes stated in this Debt Policy and to
implement policy decisions incorporated in the City's capital budget and the capital improvement
plan.
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, unless a specific revenue source has been identified
for this purpose, such as Gas Tax, Measure A funds or Measure J funds.
The City shall integrate its debt issuances with the goals of its capital improvement
program by timing the issuance of debt to ensure that projects are available when needed in
furtherance of the City's public purposes.
The City shall seek to issue debt in a timely manner to avoid having to make unplanned
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expenditures for capital improvements or equipment from its general fund.
D. Policy Goals Related to Planning Goals and Objectives
The City is committed to financial planning, maintaining appropriate reserves levels and
employing prudent practices in governance, management and budget administration. The City
intends to issue debt for the purposes stated in this Debt Policy and to implement policy
decisions incorporated in the City's annual operating budget.
It is a policy goal of the City to protect taxpayers, ratepayers and constituents by utilizing
conservative financing methods and techniques so as to obtain the highest practical credit
ratings (if applicable) and the lowest practical borrowing costs.
The City will comply with applicable state and federal law as it pertains to the maximum
term of debt and the procedures for levying and imposing any related taxes, assessments,
rates and charges.
Except as described in Section 2.A., when refinancing debt, it shall be the policy goal of
the City to realize, whenever possible, and subject to any overriding non-financial policy
considerations minimum net present value debt service savings equal to or greater than 4% of
the refunded principal amount.
E. Internal Control Procedures
When issuing debt, in addition to complying with the terms of this Debt 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:
• any continuing disclosure undertakings under SEC Rule 15c2-12,
• any federal tax compliance requirements, including without limitation arbitrage
and rebate compliance, related to any prior bond issues, and
• 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 signature of the City Manager or the Director of Finance /Treasurer.
F. Relationship to Other Policies
The City has adopted a Special Assessment and Community Facilities District Financing
Programs - Statement of Policies and Procedures for New Development Projects. Special Tax
Bonds issued on behalf of a community facilities district will also comply with these policy
requirements.
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