HomeMy WebLinkAboutR-2011-065 - Adopts a City Debt Management Policy RESOLUTION NO. 2011-065
A RESOLUTION OF THE CITY COMMISSION OF THE CITY OF DANIA
BEACH, FLORIDA, ADOPTING A CITY "DEBT MANAGEMENT POLICY";
PROVIDING FOR CONFLICTS; FURTHER, PROVIDING FOR AN
EFFECTIVE DATE.
WHEREAS, pursuant to Section 2-12, entitled "Debt Management Policy", of Article I,
entitled "In General", of Chapter 2, entitled "Administration", of the City Code of Ordinances,
the City Commission shall, from time to time adopt a City Debt Management Policy; and
WHEREAS, the City Finance Department has prepared a Debt Management Policy with
the help and collaboration of the City's Financial Advisor an4 recommends such policy to the
City Commission for approval and adoption;
NOW, THEREFORE, BE IT RESOLVED BY THE CITY COMMISSION OF THE
CITY OF DANIA BEACH, FLORIDA:
Section 1. That pursuant to this Resolution, the City Commission adopts a City Debt
Management Policy, a copy of which Policy is attached, marked as Exhibit "A", and it is made a
part of and incorporated into this Resolution by this reference.
Section 2. That all resolutions or parts of resolutions in conflict with this Resolution
are repealed to the extent of such conflict.
Section 3. That this Resolution shall be in full force and take effect immediately
upon its passage and adoption.
PASSED AND ADOPTED on July 12, 2011.
ATTEST:
LOUISE STILSON, CMC PATRICIA A. FLURY
CITY CLERK MAYOR
APPROVED AS TO ORM AxIn CORRECTNESS:
THOM S J.J NsMbw7
CITY ATTORNEY
EXHIBIT "A"
DEBT MANAGEMENT POLICY
Definitions:
Amortization means the schedule of debt principal to be paid over a period of time.
Banking Fund- See Internal Loan Fund.
Bond Disclosure Supplement means the City's annual report which provides market
disclosure relating to the City's debt offerings.
Covenant Program means the City's debt program that is secured by covenant to budget
and appropriate from non-ad valorem revenues and encompasses all debt that is defined
as Covenant Obligations under the City's Debt Ordinance
Debt Hedging Products means interest rate risk mitigation products such as swaps, caps,
floors, collars and options in connection with the incurrence of City debt obligations.
Debt Service means scheduled payments of interest and principal on debt obligations.
Fixed Rate Debt means a debt obligation issued with a predetermined interest rate.
General Government Debt means all Non Self Supporting debt. These are the programs
whose expenditures for debt service are in direct competition with other General Fund
expenditures (salaries, utilities, supplies, etc.).
Hedged Variable Rate Debt means total variable rate debt less any associated Debt
Hedging Products and allocated Short-Term Investments.
Internal Loan Fund means a conduit financing device to distribute proceeds of debt into
loans to various operating funds of the City. The goal of Internal Loan Fund is to provide
funding for various projects around the City, with flexibility of loan terms and low,
blended rate. The blended loan rate is achieved through a mix of variable, medium-term,
and long-term Covenant backed debt instruments. In general, loan repayment schedules
are established that are shorter than bond repayment provisions, in order to provide the
City a revolving source of capital financing without needing to access the public markets
for each capital need.
Maturity means the length of time until the principal amount of a bond must be repaid.
Medium Term Loans means debt issued with a fifteen year or less maturity that is
Designated Maturity Debt as defined in the Covenant Program. See above, IX. Criteria
for Evaluating Debt Options, B. Market Options, (i) Election to Issue Fixed Rate Debt.
Net Variable Rate Debt means total Variable Rate Debt less Hedged Variable Rate Debt.
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Non-Self Supporting Debt means any indebtedness of the City other than Self Supporting
Debt
Pay-As-You-Go refers to the payment of capital projects or other non operating projects
using non-capitalized revenues.
Present Value means the amount that a future sum of money is worth today given a
specified rate of return.
Ratings means ratings that are issued by Moody's Investors Service, Fitch and Standard
& Poor's Corporation and any other nationally recognized rating agency, to the extent
they have in effect a rating on City debt.
Self Supporting Debt means any indebtedness of the City for borrowed money that is
either (a) secured by or payable exclusively from a source of revenues other than
Covenant Revenues, or (b)primarily payable from revenues of the type described in
clause (a) above and secondarily from Covenant Revenues if the Covenant Revenues
have not been used (or, as provided below, deemed to have been used) to pay any portion
of such indebtedness for the three Fiscal Years preceding the date of determination and if
the City projects that the Covenant Revenues will not be so used during the next two
Fiscal Years; and either (c)that is secured by a revenue source that has been in effect for
at least three Fiscal Years and that would have provided coverage of at least 125% of the
average annual debt service on such obligations secured by such revenue source in each
of the three preceding Fiscal Years or, (d)if the revenue source has not been in existence
for at least three Fiscal Years, that is secured by a revenue source that would have
provided coverage of at least 150% of the average annual debt service on such
obligations secured by such revenue source in at least the last full Fiscal Year preceding
the issuance of such obligations and that is projected to provide at least 150% debt
service coverage (based on revenue and debt service projections by the City) in each of
the three ensuing Fiscal Years; and (e) in any such case, in the three preceding Fiscal
Years, no debt service on which has been paid (or, as provided below, deemed to have
been paid) from Covenant Revenues deposited in the General Fund or the Utilities
Services Tax Fund. For purposes of calculating the coverage requirements described in
this definition, the historical and projected receipts of a particular revenue source shall be
adjusted retroactively to the initial date of the calculation period to reflect changes in
rates, levies or impositions enacted prior to the date of calculation. For purposes of this
definition, Covenant Revenues will be deemed to have been used to pay debt service on
any debt if Covenant Revenues have been transferred in the relevant period, other than
pursuant to a Capital Transfer, to a fund or account used to pay debt service on such debt.
Synthetic Refunding means refunding transactions that include the use of interest rate risk
management products such as swaps, caps, floors, collars and options.
Short-term Investments means liquid investment assets of the City.
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Tax-Supported Debt means General Government Debt programs plus Other
Governmental Self-Supporting Debt. This creates two categories of debt which place
direct or indirect burden on the taxpayers of the City.
Un-hedged Variable Rate Debt means Net Variable Rate Debt.
Variable Rate Debt means debt obligations entered into that use a variable, auction reset,
adjustable, convertible or other similar interest rate which is not fixed in percentage at the
date of issue.
Section 1 —Purpose and framework
I. Introduction
The Debt Management Policy for the City of Dania Beach is intended for the following
purposes:
(a) establish parameters for issuing and managing debt;
(b) provide guidelines to decision makers relating to debt affordability standards; and
(c) ensure that future generations of elected officials have reasonable latitude in
addressing issues or problems of their tenure.
This Debt Management Policy sets forth the goals and objectives of the program and
defines targets and benchmarks within these parameters.
II. Scope
This Debt Management Policy shall apply to all debt issued by the City of Dania Beach
on behalf of the citizens, taxpayers and rate payers of the City of Dania Beach.
III. Objectives
The following goals shall define the objectives for the issuance of debt of the City of
Dania Beach, which are subject to the scope of this Debt Management Policy.
A. Balance multiple financial management objectives, including:
1. Creativity: to examine new or different means to achieve
established objectives at the lowest possible cost;
2. Innovation: to address, consider or conceive new financing options
which are either developed in the City's traditional municipal markets or
adaptable from other existing financial markets;
3. Flexibility: to retain the City's current and future options to meet
its financing challenges;
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4. Responsibility: to be fair, reasonable and equitable to each
generation of taxpayers, rate payers, users and other beneficiaries when
distributing the debt burden or costs of government;
5. Due Care: to pay timely attention to and comply with each and all
of the agreements, laws, contracts, covenants, policies and obligations,
which make up or are related to the City Debt Management Program(s).
B. Define and categorize the City's current debt programs as governmental or
proprietary within the self-supporting and non-self supporting categories.
C, Enhance the City's ability to access the credit markets and enhance or
maintain the credit ratings for each of its programs.
D. Consider conditions of Debt Issuance (strategic, economic, financial,
operational and environmental).
E. Evaluate each of the following in anticipation of new borrowing
initiatives:
I. Appropriate final maturity (three (3)to thirty (30) years);
2. Principal Amortization pattern (e.g., level principal, level debt
service, etc.);
3. Use of long-term fixed, intermediate term fixed or variable rate
debt price and risks.
F. Review benchmark at least once every three (3) years and recommend any
changes in targets and proposition any amendments to City Manager for approval,
including development of an appropriate time frame to implement such changes.
Section 2—Guidelines
I. Categorize Debt Program(s)
The City of Dania Beach shall periodically establish standards for and, classify each, of
the City's debt programs into one of the following categories:
A. Self-Supporting Debt:
Proprietary operations
State Revolving Loan
Revenue Bond
Capital Leases
Line of Credit
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B. Non Self-supporting Debt:
General Governmental (including the General Fund)
Covenant Program
Revenue Bond
Capital Leases
Line of Credit
General Obligation
This distinction recognizes that self-supporting proprietary programs do not directly or
indirectly place a burden on taxpayers in the form of increased taxes. As long as each
system's user rates meet the needs of both operations and debt service, the debt program
is not considered part of either the General Government or Tax-Supported Debt of the
City of Dania Beach.
Having made these classifications,the City Administration shall commit to the following:
A. Act in regard to self-supporting proprietary operations, when necessary, to
increase rates to ensure that each operation maintains rate coverages (revenue to
debt service ratios) as required by the higher of either City policy or related debt
covenants.
B. Limit the level of annual debt service as a percentage of available annual
revenues to ensure a reasonable ability to address recurring operations and
maintenance and capital requirements on a pay-as-you-go basis for all self-
supporting governmental operations.
C. Establish the annual subsidy required and compare it to the actual subsidy
needed for all non self-supporting proprietary operations.
D. Adhere to debt limits established in the Debt Management Policy to
ensure current and future flexibility for all Non Self-Supporting Debt.
II. Credit Worthiness Objectives
Rating agencies issue credit rating based upon their ways to improve or maintain a
municipal credit rating as published by Standard & Poor's Ratings are:
1) Establish or enhance rainy day/budget stabilization reserves.
Some considerations when establishing a reserve are as follows:
a What the government's cash flow/operating requirements are;
b The historic volatility of revenues and expenditures through
economic cycles;
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c Are formal policies established outlining under what circumstances
reserves can be drawn down; and
d Will there be a mechanism to rebuild reserves once they are
utilized.
2) Establish regular economic and revenue reviews to identify early potential
budget problems
3) Prioritize spending and establish contingency plans for operating
budgets as a fallback financial strategy. When budget imbalances occur in
a downfall situation, the following analysis should be conducted:
a What art of the budget is discretionary;
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b What spending areas can be legally or practically reduced;
c The time frame necessary to achieve reductions for various
programs;
e Which part of the revenue is flexible; and
f What action is to be adopted on the revenue side under different
economic scenarios.
III. Conditions of Debt Issuance
a Issuance of debt to fund operating deficits operations IS NOT permitted.
b Debt issuance is permissible for fixed assets acquisition and infrastructure
improvement.
IV. Final Maturity
The following is the guideline and is not a mandatory schedule; however, in no
circumstances should the maturity of the loan be longer than the life of the assets.
a Computer equipment: 3 to 7 years;
b Vehicles: 5 to 7 years;
c Fire Engine: 10 to 15 years;
d Rescue Truck: 5 to 8 years;
e Heavy Equipment such as loader, dump truck: 5 to 8 years;
f Building: 20 to 30 years;
g Infrastructure Improvement: 20 to 50 years; and
h Land: 20 to 50 years.
V. Manage the Use and Commitment of Resources that may be pledged and the City
Code of Ordinance
a. The City of Dania Beach has established through Ordinance that the
maximum amount of outstanding revenue bond is not to exceed $20,000,000.00 in
any one Fund.
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b. The City of Dania Beach recognizes that the pledgable revenue sources are
limited and that careful consideration must be exercised so as not to over
extend the capability. The City is to limit future flexibility in using
collateralization. Only the following revenues in the General Fund should be
used for pledging:
1) Electric Franchise Fees;
2) Electric Utility Taxes; and
3) Sales Tax.
VI. Measuring Inter-period Equity
When measuring its commitment to infrastructure and related service delivery potential,
the City shall address both its capital, operating and maintenance requirements. For
purposes of this Policy, the City shall focus on its capital portion. When measuring inter-
period equity, the City must consider the need to allocate the burden between generations
and, more specifically, between fiscal periods. The City will seek to measure the impact
of proposed capital funding sources (debt and Pay-as-you-go) for both a single year and
longer-term forward forecasts. This future capacity analysis shall consider debt service
maturities and payment patterns, as well as the City's use of Pay-as-you-go budgetary
capital allocations.
VII. Maintaining/Improving Credit Ratings
The City shall strive to maintain its ratings and enhance the overall credit standing of not
only its general credit, but also each of its specific debt programs. When addressing
efforts to enhance its current ratings, the City will seek to balance its current flexibility
(and related ability to meet the challenges facing the community) with potential
limitations or restrictions which may be required to enhance a bond rating. In light of the
then current market conditions, the City will have to judge the enhanced market
advantage of a projected rating by program against the potential loss of flexibility, which
may be necessary to achieve the rating enhancement. The City's current ratings are
regularly published by the Rating Agencies and are summarized annually in the City's
Bond Disclosure Supplement.
The need for multiple ratings and merit of various rating services' ratings may be judged
at the time and in the circumstances of the contemplated issue and in the perspective of
the City's overall programs.
VIII. The Internal Loan Fund
The City shall establish a Loan Covenant Program, which will be used as the primary
funding source for the Internal Loan Fund. The goal of the Internal Loan Fund is to
provide funding for various projects around the City with the flexibility of loan terms and
a low, fixed and stated interest rate. The fixed loan rate shall be 140% of the ten (10)
year treasury yield. In general, loan repayment schedules are established that are shorter
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than bond repayment provisions in order to provide the City an internal and revolving
source of capital financing, without needing to access the public markets for small
proj ects.
Loans may be provided to both proprietary and non-proprietary operations. Loan
repayments from proprietary operations are subordinate to revenue bond debt issued for
and secured by proprietary funds.
IX. Criteria for Evaluating Debt Options
The CityAdministration has authorized the Finance Department to establish specific
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target benchmarks for potential exercise of debt options. Further, within the framework
established by the goals, objectives and established target benchmarks, the City Manager
authorizes the Chief Financial Officer to act on behalf of the City in a manner intended to
lower the effective cost of debt to the taxpayers and citizens of the City of Dania Beach.
With regard to this delegation of authority to the Chief Financial Officer, the following
criteria for evaluating debt options has been established:
A. Maturity Analysis
For self-supporting proprietary operations, the primary strategy is to use a long-term debt
service maturity structure. Generally, level debt service is preferable, unless user capacity
increases, which results in higher revenues and are planned and forecast in later years.
To the extent that shorter maturities or alternative amortization strategies are utilized in
an effort to reduce the effective borrowing costs, a comparative advantage must be
considered in relationship to the potential negative impacts on user rates and charges.
For all other categories of debt, the City may consider opportunities to either shorten
maturities or alter amortization structures. A level principal structure may be considered,
versus level debt service generally, as long as the structure does not dramatically increase
the maximum annual debt service (for example by more than 25%). Additionally, the
City should consider a level principal maturity structure compared to shorter maturity
level debt service structure when maximum annual debt service is similar.
B. Market Options
(i) Election to Issue Fixed Rate Debt
The City of Dania Beach has available to it two separate fixed rate programs;
1. Long-term Fixed Rate Debt and Medium Term Notes. Fixed Rate Debt is the
traditional way municipalities have issued debt. Debt is offered to investors with
a fixed maturity schedule at rates fixed in a single offering. Long-term Fixed
Rate Debt issuance should be based upon a consideration of the following factors:
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(a) the level of long-term rates at the time of issuance versus the last 3
to 10 years,
(b) a short to intermediate range forecast for long term rates to be
trending upwards,
(c) the ratio of short-term (or variable rate) debt to current program
debt outstanding and/or (d)the amount of Variable Rate Debt
outstanding by program.
(ii). Election to Issue Variable Rate
2. Issuing Variable Rate Debt permits the City to access rates on the very
short end of the yield curve. The difference in short versus long-term rates varies
with the shape of the yield curve and has typically ranged from 100-350 basis
points (or 1.0% to 3.5%). By issuing Variable Rate Debt, the issuer is subject to
interest rate risk; however, Variable Rate Debt has historically been at lower
interest rate levels than recognized fixed rate indices, and is generally able to
create a natural hedge against changes in the City's Short-Term Investment
portfolio.
Variable Rate Debt should be used for two purposes:
(1)as an interim financing device (during construction periods); and
(2), subject to limitations, as an integral portion of a long-term strategy to
lower the City's effective cost of capital. The City's interim Variable Rate
Program allows the City to avoid the inefficiency of borrowing for small projects
and allows for an aggregation of small projects and, thus, a more cost effective
Debt Management Program. Under either circumstance, when the cycle of long-
term rates moves down to or near historic lows, consideration should be given to
fixing (converting to a fixed rate to maturity alternative) a portion of the then
outstanding Variable Rate Debt to take advantage of the attractive long-term fixed
rates.
(iii). Hedging Election
The City of Dania Beach will not participate in any hedging of its debt without
prior Commission approval
(iv). Debt Program Targets
In general, the City seeks to lower its overall cost of funds through an issuance of
Variable Rate Debt and Medium Term Notes, since these products are generally
lower than fixed rates of interest. In addition, the Variable Rate Debt would
simultaneously create a hedge against its variable rate investments to protect its
financial condition in lower interest rate environments. The potential savings and
benefits justify interest rate exposure, as long as the risk is mitigated by limiting
the amount of the Net Variable Rate Debt.
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In considering Net Variable Rate Debt, the rating agencies generally recognize the
issuer's ability to match its assets and liabilities and generally exclude or net
Variable Rate Debt equal to: (i) certain variable rate assets, and (ii) applied Debt
Hedging Products, such as interest rate caps and swaps where appropriate.
The following targets are established for the overall debt portfolio for the City,
including all Self-Supporting Debt and Non Self Supporting Debt:
Overall City and CRA Debt
Werall Citv and CRA Targets
• Fixed Rate
• Goal 70-90%
• Unhedged or Net Variable Rate:
• Goal 10-20%
• Maximum 30%
Covenant Program
The following targets are established for the Covenant Program:
CoN,enant Program —Targets
• Fixed Rate
• Goal 40-50%
• Unhedged or Net Variable Rate:
• Goal 25-35%
• Maximum 50%
Other Debt Program Targets
In addition to the aforementioned targets for the overall City, CRA debt and the
Covenant Program, specific targets regarding the limits on unhedged or Net
Variable Rate Debt exposure for the senior debt of each separate borrowing
program are set forth below:
Other Debt Programs Target Maximum Net
Variable Rate Debt (1)
Exposure
Water/Sewer 45%
Stormwater 25%
Parking 15%
CRA (Downtown District) 25%
Special Assessment N/A
New Debt Programs: TBD
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(1) The maximum Net Variable Rate Debt exposure
limits have been established in recognition of
each program's variable rate exposure
associated with the Internal Loan Fund
exposure. The City's Wastewater program does
not currently have Internal Loan Fund exposure
and, therefore, a higher maximum is more
appropriate compared to the Parking and the
CRA (Downtown District) Programs, which
have Internal Loan Fund (subordinate lien)
variable rate exposure.
(v). Refunding Options
Targets for a Fixed Rate Debt to Fixed Rate Debt refunding should include the
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following criteria:
1. A maximum true interest cost;
2. A minimum economic present value of at least 5% of refunded bonds; and
3. A minimum annual average debt service savings of at least One Hundred
Thousand Dollars ($100,000.00).
Lower net present value cost savings and annual average debt service savings
criteria may be appropriate for shorter term or smaller fixed rate refunding issues.
Refunding Variable Rate Debt to Fixed Rate Debt cannot provide for the similar
measurable benchmarks and should be based on the aforementioned election to
Issue Fixed Rate Debt criteria.
Refunding of Variable Rate Debt to Variable Rate Debt should be based primarily
on the economic or structured advantages of the new program.
Criteria and saving targets associated with Synthetic refundings that are consistent
with the provisions of the City's Interest Rate Risk Management Policy, should be
established on a case-by-case basis, and should generally be higher (more
restrictive)than the criteria for Fixed Rate Debt refundings.
While a framework (a delegation of authority) has been established regarding the
management of the City's debt portfolio, specific City Commission approval is
still required prior to the issuance of any new debt.
X. Measures of Future Flexibility
As the City addresses its needs at any one period in time, the Mayor and City
Commission must both be prepared to ensure the flexibility of this and future generations
of elected officials to meet the then present needs and challenges, which face the
community. Since neither State law nor the City Charter provide any fixed limits on the
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amount of debt which may be incurred (other than the requirement to have G. O. debt
approved in advance by referendum), the following targets or limits are established to
ensure future flexibility.
The following goals and targets are set to ensure the current and future flexibility, and
financial vitality of the City.
I)escription Targets
General Government Debt Service as a percentage of non-ad
valorem General Fund expenditures:
•Debt Limit(within the covenant program limitation) 20%max.
•-Goal/Target 10%max.
Weighted Average Maturity of Debt Program(s):
• Self-supporting 15 year max.
• Non self-supporting 20 year max.
Weighted Average Maturity of Internal Loan Program 12 year max.
General Government Direct Debt per capita $1,250 max.
Enterprise Fund Direct Debt per Customer Account $4,000 max.
Net Direct Tax Supported Debt as a percentage of ad valorem
property values:
• General Government 5% max.
• Total Tax Supported 7.5%max.
Debt Service requirement as a percentage of a new governmental 50%max.
revenue stream
General Fund reserve, (as a percentage of the current year's 20%to 25%
operating budget)
While the City currently operates well within these goals and targets, it is appropriate to
use these various common measures of debt burden as a means of setting parameters for
the overall Debt Management Program for the City of Dania Beach.
XI. Debt Management Policy Review and Modification
The City's Debt Management Policy will be submitted by the City Manager for
ratification by the City Commission, and for it to authorize and effect any change,
modification or amendment to this Debt Management Policy, which shall rest solely with
City Commission.
Finance Department and staff recommendations for policy changes may be submitted in
conjunction with the ratification or as deemed necessary. Policy changes initiated by the
City Commission may be made as deemed appropriate. Policy changes will become
effective on the date that the change or changes is/are adopted by the City Commission.
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XII. Time-Line for Implementation of Amendments
Considering the then current position of the interest rate curve, recent movements and
indication of possible short term direction, the City shall consider reasonable timelines to
bring the then current debt program in line with amendments to this Debt Management
Policy.
XIII. Effective Date
The Debt Management Policy of the City of Dania Beach will be effective upon the
ratification and approval of the City Commission.
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