HomeMy WebLinkAbout2018-30 - Amending City Council Policy F-6, Debt Management PolicyRESOLUTION NO. 2018-30
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
NEWPORT BEACH, CALIFORNIA, AMENDING CITY
COUNCIL POLICY F-6, DEBT MANAGEMENT POLICY
WHEREAS, the City of Newport Beach ("City") adopted Debt Management Policy
F-6 on May 14, 2013, to establish guidelines and parameters for the effective governance,
management and administration of the debt of the City;
WHEREAS, the Debt Management Policy is intended to comply with California
Government Code Section 8855(1), an any successor section, and shall govern all debt
which is contemplated or incurred by the City;
WHEREAS, the Finance Committee is charged to review and recommend financial
policies to the City Council on an ongoing basis and undertook a comprehensive analysis
of the Debt Management Policy to ensure that its provisions are consistent with the
California Government Code and that it remains consistent with the City's current
planning goals and objectives; and
WHEREAS, the City Manager reviewed the recommended revisions suggested by
the Director of Finance/Treasurer and the Finance Committee and recommends the City
Council amend the City's Debt Management Policy.
NOW, THEREFORE, the City Council of the City of Newport Beach hereby
resolves as follows:
Section 1: City Council Policy F-6 Debt Management, attached hereto as Exhibit
"A" and incorporated herein by reference is hereby approved and adopted, and thus
supersedes all prior versions of City Council Policy F-6.
Section 2: This amendment will align the policy with State law and be consistent
with the City's current planning goals and objectives.
Section 3: The recitals provided above are true and correct and incorporated into
the operative part of this resolution.
Section 4: If any section, subsection, sentence, clause or phrase of this resolution
is, for any reason, held to be invalid or unconstitutional, such decision shall not affect the
validity or constitutionality of the remaining portions of this resolution. The City Council
hereby declares that it would have passed this resolution, and each section, subsection,
sentence, clause or phrase hereof, irrespective of the fact that any one or more sections,
subsections, sentences, clauses or phrases be declared invalid or unconstitutional.
Section 5: The City Council finds the adoption of this resolution is not subject to
the California Environmental Quality Act ("CEQA") pursuant to Sections 15060(c)(2) (the
activity will not result in a direct or reasonably foreseeable indirect physical change in the
environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378)
of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3, because it
has no potential for resulting in physical change to the environment, directly or indirectly.
Resolution No. 2018-30
Page 2 of 2
Section 6: This resolution and City Council Policy F-6 shall take effect
immediately upon its adoption by the City Council, and the City Clerk shall certify the vote
adopting the resolution.
ADOPTED this 22nd day of May, 2018.
ATTEST: ar (yn�
r �\
Leilani I. Brown
City Clerk
APPROVED AS TO FORM:
CITY ATTORNEY'S OFFICE
`Aaron C. Hasp
City Attorney
SIiGL
Marshall "Duffy" D , field
Mayor
Attachments: Exhibit A — City Council Policy F-6 (clean)
Exhibit B — City Council Policy F-6 (with strikethroughs)
DEBT MANAGEMENT POLICY
WOW8 ttz6J.l
F-6
The purpose of this Debt Management Policy ("Policy') is to establish guidelines and
parameters for the effective governance, management and administration of the debt of
the City of Newport Beach ("City"). This Policy is intended to comply with California
Government Code Section 8855(i), and any successor statute, and shall govern all debt
which is contemplated or incurred by the City.
The City hereby recognizes that a fiscally prudent Policy is required 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
5. Ensure that the City's debt is consistent with the City's planning goals, objectives,
capital improvement program, and/or budget.
B. BACKGROUND
The City is committed to fiscal sustainability by employing long-term financial planning
efforts, maintaining appropriate reserves levels and employing prudent practices in
governance, management, budget administration and financial reporting.
Debt levels and their related annual costs are important long-term obligations that must
be managed within available resources. A disciplined, thoughtful approach to debt
management includes policies that provide guidelines for the City to manage its debt
consistent with available and reasonably anticipated resources. Therefore, the objective
of this Policy is to provide written guidelines concerning the amount and type of debt
which may be issued by the City and the ongoing management of debt obligations.
This Policy is intended to make all relevant information readily available to decision -
makers and the public to improve the quality of decisions, provide justification for the
structure of debt issuances, identify policy goals and demonstrate a commitment to long-
term financial planning, including a multi-year capital plan. Adherence to a Policy
signals to rating agencies and the capital markets that the City is well managed and able
to meet its obligations in a timely manner.
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C. RELATIONSHIP OF DEBT TO CAPITAL IMPROVEMENT PROGRAM AND
BUDGET
The City has 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
utilizes debt obligations only after giving due consideration to all available funding
sources, including but not limited to available cash reserves in the City's Facilities
Financial Plan ("FFP"), Harbor and Beaches Master Plan ("HBMP"), 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 to implement policy decisions incorporated in the FFP,
HBMP, and/or Capital Improvement Program.
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. To the extent practicable in the circumstances, the City will avoid the use of
debt to fund infrastructure and facilities improvements that are the result of normal wear
and tear. Rather, those readily anticipated infrastructure and facilities repairs and
replacements should be funded through reserve policies.
The City shall coordinate 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
expenditures for capital improvements or equipment from its General Fund.
D. 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 only for the purposes stated in this Policy
and to implement policy decisions incorporated in the FFP, HBMP, and/or Capital
Improvement Program. Adoption of this Policy will help ensure that debt is issued and
managed in a manner that protects the public interest.
It is a policy goal of the City to protect taxpayers, ratepayers (if applicable) 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.
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The City shall comply with applicable state and federal law as it pertains to debt and the
procedures for levying and imposing related taxes, assessments, rates, or charges.
E. CONDITIONS AND PURPOSES OF DEBT ISSUANCE
1. Acceptable Conditions for the Use of Debt
The City believes that prudent amounts of debt can be an effective means of financing
major infrastructure and capital project needs of the City. Debt will be considered to
finance such projects if:
a) It meets the City's goal of distributing costs of the asset over its useful life so
that benefits more closely match costs for both current and future residents.
b) It is the most cost-effective funding means available to the City, taking into
account cash flow needs, maintenance of prudent reserves and other funding
alternatives.
c) It is fiscally prudent and meets the guidelines of this Policy, the City's
Municipal Code, and the City's Charter. Any consideration of debt financing
shall consider financial alternatives, including pay-as-you-go funding,
proceeds derived from development or redevelopment of existing land and
capital assets owned by the City, and use of existing or future cash reserves, or
any combination thereof.
2. Purposes for Which Debt May Be Issued
The City may consider financing for the acquisition, substantial refurbishment,
replacement or expansion of physical assets, including land improvements. The
primary purpose of debt would be to finance one or more of the following:
a) Acquisition and or improvement of land, right-of-way, leaseholds or long-term
easements.
b) Acquisition of equipment or a capital asset with a useful life of three (3) or more
years.
c) Construction or reconstruction of a facility.
d) Refunding, refinancing, or restructuring debt, subject to refunding objectives
and parameters discussed herein.
e) Although not the primary purpose of the financing effort, project reimbursable
costs that include project planning, design, engineering and other
preconstruction efforts; project -associated furniture, fixtures and equipment;
capitalized interest, original issuer's discount, underwriter's discount and
other costs of issuance.
f) Interim or cash flow financing, such as tax, revenue or bond anticipation notes.
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3. Prohibited Uses of Debt
Prohibited uses of debt include the following:
a) Financing of operating costs except for anticipation notes with a term of less
than one year.
b) Debt issuance used to address budgetary deficits.
c) Debt issued for periods exceeding the useful life of the asset or projects to be
financed.
4. Approval Process for the Issuance of Debt
Any issuance of debt, either through a public sale of securities, private placement or
direct purchase is subject to the formal approval of the City Council as a non -consent
item on a City Council agenda. As part of the City Council approval, a formal
resolution authorizing the issuance of a specific form of debt shall be required as part
of the authorizing documents. The resolution shall include, at a minimum, the
following:
a) The specific project(s) for which the debt is being incurred;
b) The maximum principal amount to be borrowed;
c) The maximum term, which will be no greater than the useful life of the
project(s), equipment, or capital asset, whichever is applicable and longer;
d) The maximum interest rate or true interest cost;
e) The maximum annual debt service;
f) Call Provisions, including specifically identifying any deviation from Section
F(9) below;
g) Estimated Costs of Issuance;
h) Maximum Underwriter's Discount; and
i) A list of all consultants hired for the issuance including, at a minimum, bond
counsel, disclosure counsel, municipal advisor and underwriter(s).
In addition to the authorizing resolution, the City Council shall be provided copies of
the various financing documents including indentures, purchase agreements and
preliminary official statements. For any sale of securities, the City shall be required to
retain an Independent Registered Municipal Advisor ("IRMA") to serve as the City's
fiduciary on every sale. The IRMA will provide independent analysis of all financing
scenarios considered with a specific recommendation to the City Council supported
by the analysis. The written recommendation of the IRMA shall be provided to City
Council as an attachment to the City's Staff Report.
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F. STRUCTURE OF DEBT (Fixed Rate)
1. Term of Debt - Unless financially beneficial to do otherwise, debt shall be
structured with the goal of spreading payments for the project, equipment, or
capital asset over its useful life so that benefits more closely match costs for both
current and future residents. The duration of borrowings by the City shall not
exceed the useful life of the project, equipment, or capital asset it finances. The
standard term of long-term borrowing is typically fifteen to thirty years.
2. Pace of Debt Payment - Accelerated repayment schedules reduce debt burden
faster and reduce total borrowing costs. Debt repayment shall be amortized
through the most financially advantageous debt structure and, if applicable, to
match the City's projected cash flow to the anticipated debt service payments, to
the extent possible. "Backloading" of debt service should be considered only
when one or more of the following occur:
a) Natural disasters or extraordinary or unanticipated external factors make
payments on the debt in early years impractical.
b) The benefits derived from the debt issuance can clearly be demonstrated to
be greater in the future than in the present.
c) Such structuring is beneficial to the City's aggregate overall debt payment
schedule or achieves measurable interest savings.
d) Such structuring will allow debt service to more closely match project
revenues during the early years of the project's operation.
3. Level Payment - To the extent practical, bonds will be amortized on a level
repayment basis, and revenue bonds will be amortized on a level repayment
basis considering the forecasted available pledged revenues to achieve the
lowest rates possible. Bond repayments should not increase on an annual basis
in excess of two percent (2%) without a dedicated and supporting revenue -
funding stream.
4. Serial Bonds, Term Bonds, and Capital Appreciation Bonds - For each
issuance, the City shall select serial bonds or term bonds, or both. On the
occasions where circumstances warrant, Capital Appreciation Bonds ("CAB")
may be used. The decision to use term, serial, or CAB bonds shall be based on
market conditions.
5. Reserve Funds - The City shall strive to maintain a fund balance in the FFP or
other designated reserve at a level equal to or greater than the maximum annual
debt service of existing obligations.
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6. Capitalized Interest - The City shall seek to avoid the use of capitalized interest,
which defers debt service by increasing the size of a debt issue to fund interest.
On occasion, capitalized interest may be considered to the extent that the City
wishes to defer the beginning of debt service until project completion, to match
project revenues with debt service.
7. Discount Bonds - While discount and deep discount bonds may reduce the
interest cost of the bonds below that of par or premium bonds, they should only
be used in limited situations as they reduce the potential for future savings from
refunding of the bonds.
s. Premium Bonds - Premium bonds may provide for a lower overall interest cost
compared to par or discount bonds. An analysis should be prepared comparing
the yield to maturity and yield to call of the premium bond structure compared
to alternative couponing. This comparison should be done on maturity -by -
maturity basis. The value of the call option of the higher coupon with respect to
the future ability to refund should be reviewed as well.
9. Call Provisions - In general, the City's debt obligations should include an
optional redemption feature at par that arises not later than ten (10) years after
the issuance of the debt. However, if market conditions exist where a call option
at par arising later than ten (10) years after issuance of debt, or a "make -whole'
call would benefit the City, the authorizing bond resolution must explicitly
provide staff the authorization to negotiate these options. The City Council
should set parameters that guide staff's negotiations. Alternatively, since
decisions on pricing of debt and financial consequences of call or make whole
provisions can arise in a very compressed timeframe with the potential for
unanticipated market conditions, in connection with approving an authorizing
bond resolution, the City Council should designate a date for pricing and call
and notice a special or regular meeting of the City Council for that date in the
event the alternatives available to the staff are outside the parameters set by the
City Council. It is the City's intent to maximize prepayment flexibility on all
bond issues. Shorter call provisions may be considered on a case-by-case basis.
I.
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G. USE OF ALTERNATIVE DEBT INSTRUMENTS
The City recognizes that there are numerous types of financing structures and funding
sources available, each with specific benefits, risks, and costs. All potential funding
sources shall be reviewed by management within the context of this Policy and the overall
portfolio to ensure that any financial product or structure is consistent with the City's
objectives. Regardless of what financing structure(s) is utilized, due -diligence review
must be performed for each transaction, including the quantification of potential risks
and benefits, and analysis of the impact on City creditworthiness and debt affordability
and capacity. Because fixed rate debt transfers most financial risks to bondholders, fixed
rate debt should be considered the preferred method of financing long-term capital
needs. Therefore, while permitted for consideration, the following instruments are
disfavored:
1. Variable Rate Debt
Variable rate debt affords the City the potential to achieve a lower cost debt
depending on market conditions. However, the City shall seek to limit the use of
variable-rate debt due to the potential risks of such instruments.
a) Purpose
The City may consider the use of variable rate debt for the purposes of:
i. Reducing the costs of debt issues.
ii. Increasing flexibility for accelerating principal repayment and
amortization (often variable rate debt may be prepaid without penalty).
iii. Enhancing the management of assets and liabilities (matching short-
term "priced debt" with the City's short-term investments).
iv. Diversifying interest rate exposure.
V. As a short-term source of construction or acquisition financing, (i.e.,
commercial paper, to reduce interest cost).
b) Considerations and Limitations on Variable -Rate Debt
The City may consider the use of all alternative structures and modes of variable
rate debt to the extent permissible under State law and shall make determinations
among different types of modes of variable-rate debt based on cost, benefit, and
risk factors. The Finance Director shall consider the following factors in
considering whether to recommend variable rate debt:
i. Any long-term issuance of variable rate debt should not exceed twenty
percent (20%) of total City General Fund supported debt.
ii. Any long-term issuance of variable rate debt should not exceed the
expected future FFP reserves in the medium term or then current
unrestricted General Fund reserve levels.
.iii. Whether interest cost and market conditions (including the shape of the
yield curves and relative value considerations) are unfavorable for
issuing fixed rate debt.
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iv. The likelihood of projected debt service savings when comparing the
cost of fixed rate bonds.
V. Costs, implementation and administration are quantified and
considered.
vi. Cost and availability of liquidity facilities (lines of credit necessary for
variable rate debt obligations and commercial paper in the event that
the bonds are not successfully remarketed) are quantified and
considered.
vii. The ability to convert debt to a fully amortizing fixed rate or the
permissibility to redeem at par at any time.
viii. The findings of a thorough risk management assessment.
c) Risk Management
Any issuance of variable rate debt shall require a rigorous risk assessment,
including, but not limited to factors discussed in this section. Variable rate debt
subjects the City to additional financial risks (relative to fixed rate bonds),
including interest rate risk, tax risk, and certain risks related to providing the
necessary liquidity required for variable rate debt.
The City shall properly manage risks associated with variable rate debt as follows:
i. Interest Rate Risk and Tax Risk - The risk that market interest rates
increase on variable-rate debt because of market conditions, changes in
taxation of municipal bond interest, or reductions in tax rates.
Mitigation - Limit total variable rate exposure per the defined limits
and match the variable rate liabilities with short-term assets.
ii. Liquidity/Remarketing Risk - The risk that holders of variable rate
bonds exercise their "put" option, tender their bonds, and the bonds
cannot be remarketed requiring the bond liquidity facility provider to
repurchase the bonds. This will result in the City paying a higher rate
of interest to the facility provider and the potential rapid amortization
of the repurchased bonds.
Mitigation - Limit total direct variable-rate exposure. Seek liquidity
facilities, which allow for longer (5-10 years) amortization of any draws
on the facility. Secure credit support facilities that result in bond ratings
of the highest short-term ratings and long-term ratings not less than AA.
If the City's bonds are downgraded below these levels as a result of the
facility provider's ratings, a replacement provider shall be sought.
iii. Liquidity/Rollover Risk - The risk that arises due to the shorter term of
most liquidity provider agreements (1-5 years) relative to the longer-
term amortization schedule of the City's variable-rate bonds. In
particular, (1) the City may incur higher renewal fees when renewal
agreements are negotiated and (2) the liquidity bank market constricts
such that it is difficult to secure third party liquidity at any interest rate.
iv.
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Mitigation - Negotiate longer terms on provider contracts to minimize
the number of rollovers.
2. Derivatives
The use of certain derivative products to hedge variable rate debt, such as interest rate
swaps, may be considered to the extent the City has such debt outstanding or under
consideration. The City shall exercise extreme caution in the use of derivative
instruments for hedging purposes, and may consider their utilization only when
sufficient understanding of the products and sufficient expertise for their appropriate
use has been developed. A comprehensive derivative policy shall be adopted by the
City prior to any utilization of such instruments.
H. REFUNDING GUIDELINES
The Finance Director shall monitor at least annually all outstanding City debt obligations
for potential refinancing opportunities. The City should consider refinancing of
outstanding debt to achieve annual savings. Absent a compelling economic reason or
financial benefit to the City, any refinancing should not result in any increase to the
weighted average life of the refinanced debt.
The City will generally seek to achieve debt service savings that on a net present value
basis are at least three percent (3%) of the current debt being refinanced. Any potential
refinancing executed more than ninety (90) calendar days in advance of the outstanding
debt optional call date shall require at least a three percent net present value savings
threshold. If there is negative arbitrage in an advance refunding, the interest efficiency
should at least be fifty percent (50%). Under any savings scenario, the net present value
assessment shall factor in all costs, including the total cost of issuance, escrow, and
foregone interest earnings of any contributed funds on hand. Any potential refinancing
shall additionally consider whether an alternative refinancing opportunity with higher
savings can be reasonably expected in the future.
Consideration of this method of refinancing shall place greater emphasis on determining
whether an alternative refinancing opportunity with higher savings is reasonably
expected in the future.
I. COMMUNICATION, ADMINISTRATION AND REPORTING, AND
INTERNAL CONTROL PROCEDURES
1. Rating Agency Relations and Annual or Ongoing Surveillance - The Finance
Director shall be responsible for maintaining the City's relationships with
Standard & Poor's Ratings Services, Fitch Ratings and Moody's Investor's Service.
The City is committed to maintaining or improving its existing rating levels. In
addition to general communication, the Finance Director shall:
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a) Ensure the rating agencies are provided updated financial information of
the City as it becomes publicly available.
b) Communicate with credit analysts at each agency at least once each year, or
as may be requested by the agencies.
c) Prior to each proposed new debt issuance, schedule meetings or conference
calls with agency analysts and provide a thorough update on the City's
financial position, including the impacts of the proposed debt issuance.
2. Council and Finance Committee Communication - The Finance Director should
report feedback from rating agencies to the City Council and/or Finance
Committee, when and if available, regarding the City's financial strengths and
weaknesses and recommendations for addressing any weaknesses as they pertain
to maintaining the City's existing credit ratings.
3. Debt Issue Record -Keeping - A copy of all debt -related records shall be retained
at the City's offices. At minimum, these records shall include all official
statements, bond legal documents/ transcripts, resolutions, trustee statements,
leases, and title reports for each City financing (to the extent available).
4. 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 the
investment of bond proceeds in accordance with applicable bond indentures and
City Administrative Procedures (AP -009), concerning tax compliance with tax
exempt bonds and Build America Bonds. Without limiting the generality of the
foregoing, the City shall periodically review the requirements of and will remain
in compliance with the following:
a) Continuing Disclosure - The City shall comply with federal securities law,
including any continuing disclosure undertakings entered into by the City in
accordance with Securities and Exchange Commission Rule 15c2-12. The City
shall file its annual financial statements and other financial and operating data
for the benefit of its bondholders within 270 days of the close of the fiscal year,
or as required in any such agreement for any debt .issue. The City shall
maintain a log or file evidencing that all continuing disclosure filings have been
timely made.
b) Arbitrage Rebate - The use of bond proceeds and their investments shall be
monitored by the Finance Director to ensure compliance with all Internal
Revenue Code Arbitrage Rebate Requirements. The Finance Director shall
ensure that all bond proceeds and investments are tracked in a manner that
facilitates accurate calculation; and, if a rebate payment is due, such payment
is made in a timely manner.
c) Annual Reporting - California Government Code Section 8855(k), or any
successor statute, and the annual reporting requirements therein.
d) Other Compliance - Other compliance requirements imposed by regulatory
bodies.
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5. Proceeds Administration - Proceeds of debt will be held either (a) by a third -party
trustee or fiscal agent, which will disburse such proceeds to or upon the order of
the City upon the submission of one or more written requisitions by the City
Manager (or his or her written designee), or (b) by the City, to be held and
accounted for in a separate fund or account, the expenditure of which will be
carefully documented by the City. On a quarterly basis, the Finance Director shall
monitor the proceeds and the disposition of unexpended proceeds.
J. CREDIT RATINGS
The City shall consider published ratings agency guidelines regarding best financial
practices and guidelines for structuring its capital funding and debt strategies to maintain
the highest possible credit ratings consistent with its current operating and capital needs.
K. LEGAL DEBT LIMIT
Newport Beach City Charter Section 1109 provides that "The City shall not incur an
indebtedness evidenced by general obligation bonds which shall in the aggregate exceed
the sum of fifteen percent of the total assessed valuation, for purposes of City taxation, of
all the real and personal property within the City." While this limit defines the absolute
maximum legal debt limit for the City, it is not an effective indicator of the City's
affordable debt capacity.
L. AFFORDABILITY
Prior to the issuance of debt to finance a project, the City shall carefully consider the
overall long-term affordability of the proposed debt issuance. The City shall not assume
more debt without conducting an objective analysis of the City's ability to assume and
support additional debt service payments. The City shall consider its long-term revenue
and expenditure trends, the impact on operational flexibility and the overall debt burden
on the tax payers. The evaluation process shall include a review of generally accepted
measures of affordability and will strive to achieve and or maintain debt levels consistent
with its current operating and capital needs. The Finance Director shall review
benchmarking results of other California cities of comparable size with the City Council
prior to any significant project financing.
1. General Fund -Supported Debt - General Fund Supported Debt generally include
Certificates of Participation ("COPs") and Lease Revenue Bonds ("LRBs") which
are lease obligations that are secured by an installment sale or by a lease -back
arrangement between the City and another related public entity. The general
operating revenues of the City are pledged to pay the lease payments, which are,
in turn, used to pay debt service on the LRBs or COPS. These obligations do not
constitute indebtedness under the state constitutional debt limitation and,
therefore, are not subject to voter approval.
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Payments to be made under valid leases are payable only in the year in which use
and occupancy of the leased property is available, and lease payments may not be
accelerated. Lease financing requires the fair market rental value of the leased
property to be equal to or greater than the required debt service or lease payment
schedule. The City as lessee is obligated to place in its Annual Budget the rental
payments that are due and payable during each fiscal year the City has use of the
leased property.
The City should strive to maintain its net General Fund -backed debt service at or
less than eight percent (8%) of annually budgeted General Fund revenue. This
ratio is defined as the City's annual debt service requirements on COPS and LRBs
compared to total General Fund Revenues. This ratio, which pertains to only
General Fund backed debt, is often referred to as "lease burden."
2. Revenue Bonds - Long-term obligations payable solely from specific pledged
sources, in general, are not subject to a debt limitation. Examples of such long-
term obligations include those which achieve the financing or refinancing of
projects provided by the issuance of debt instruments that are payable from
restricted revenues or user fees (Enterprise Revenues) and revenues generated
from a project.
In determining the affordability of proposed revenue bonds, the City shall perform
an analysis comparing projected annual net revenues from pledged sources to
estimated annual debt service on revenue bonds. The City should strive to
maintain a debt service coverage ratio of at least 125% using historical and/or
projected net revenues to cover annual debt service for bonds. The City may
require a revenue rate increase or reduce operating costs so that revenues cover
both operations and debt service costs, and create debt service reserve funds to
maintain the required coverage ratio.
3. Special Districts Financing - The City's Special Districts primarily consist of
Community Facilities Districts ("CFDs") and 1913/1915 Act Assessment Districts
("Assessment Districts"). The City may consider requests for Special District
formation and debt issuance when such requests address a public need or provide
a public benefit. Each application shall be considered on a case-by-case basis as
long as the City assumes no obligation under, or in connection with, such debt
issuance. The Finance Department shall not recommend a financing if it is
determined that the financing could be indirectly detrimental to the financial
standing of the City or such financing would otherwise not be in the best interests
of the City.
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4. Conduit Debt - Conduit financing provides for the issuance of securities by a
government agency to finance a project of a third party, such as a non-profit
organization or other private entity. The City may sponsor conduit financings for
those activities that have a general public purpose and are consistent with the
City's overall service and policy objectives. Unless a compelling public policy
rationale exists, such conduit financings will not in any way obligate the City or
otherwise pledge the City's faith and credit.
Adopted - May 14, 2013
Amended - May 22, 2018
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DEBT MANAGEMENT POLICY
A. PURPOSE
F-6
The purpose of this policy bt Management Policy ("Policy) is to establish guidelines
and parameters for the effective governance, management and administration of Oty
debtahe debt of the City of Newport Beach ("City") -debt. This Policy is intended to
comply with California Government Code Section 8855(i), and any successor
sectienstatute, and shall govern all debt which is contemplated or incurred by the City.
The City hereby recognizes that a fiscally prudent Policy is required to:
1. Maintain the City's sound financial position;
2. Ensure the City has the flexibilitytpond 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
5. Ensure that the City's debt is consistent with the City's planning goals objectives
capital improvement program, and/or budget.
B. BACKGROUND
The City is committed to fiscal sustainability by employing long-term financial planning
efforts, maintaining appropriate reserves levels and employing prudent practices in
governance, management, budget administration and financial reporting.
Debt levels and their related annual costs are important long-term obligations that must
be managed within available resources. A disciplined, thoughtful approach to debt
management includes policies that provide guidelines for the City to manage its debt
program in lineconsistent with theseavailable and reasonably anticipated resources.
Therefore, the objective of this poheyPolicy is to provide written guidelines afrtd
rem s: oncerning the amount and type of debt which may be issued by the City and
the ongoing management of the -debt pertfel-i )obligations.
Thisdebt ' Policy is intended to make all relevant information readily
available to decision -makers and the public to improve the quality of decisions, provide
justification for the structure of debt issuanEeissuances, identify policy goals and
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demonstrate a commitment to long-term financial planning, including a multi-year
capital plan. Adherence to a debt ma eyPolicy signals to rating agencies
and the capital markets that a-gever uaiefftLhe City is well managed and shouldable to
meet its obligations in a timely manner.
C. RELATIONSHIP OF DEBT TO CAPITAL IMPROVEMENT PROGRAM AND
BUDGET
The City has 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
utilizes debt obligations only after giving due consideration to all available funding
sources, including but not limited to available cash reserves in the City's Facilities
Financial Plan ("FFP"), Harbor and Beaches Master Plan ("HBMP") 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 to implement policy decisions incorporated in the FFP
HBMP, and/or Capital Improvement Program.
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. To the extent practicable in the circumstances, the City will avoid the use of
debt to fund infrastructure and facilities improvements that are the result of normal wear
and tear. Rather, those readily anticipated infrastructure and facilities repairs and
replacements should be funded through reserve policies
The City shall coordinate 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 Cit public purposes.
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.
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D. 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 only for the purposes stated in this Policy
and to implement policy decisions incorporated in the FFP, HBMP and/or Capital
Improvement Program. Adoption of this Policy will help ensure that debt is issued and
managed in a manner that protects the public interest.
It is a policy goal of the City to protect taxpayers ratepayers (if applicable) 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 shall comply with applicable state and federal law as it pertains to debt and the
procedures for levying and imposing related taxes assessments rates or charges
QE. CONDITIONS AND PURPOSES OF DEBT ISSUANCE
1. Acceptable Conditions for the Use of Debt
The City believes that prudent amounts of debt can be an equitable and Eest effective
means of financing major infrastructure and capital project needs of the City. Debt
will be considered to finance such projects if:
a) It meets the City's goal of distributing the payments forcosts of the asset over
its useful life so that benefits more closely match costs for both current and
future residents.
b) It is the most cost-effective funding means available to the City, taking into
account cash flow needs, maintenance of prudent reserves and other funding
alternatives.
c) It is fiscally prudent and meets the guidelines of this Policy, the City's
Municipal Code, and the City's Charter. Any consideration of debt financing
shall consider financial alternatives, including pay-as-you-go funding,
proceeds derived from development or redevelopment of existing land and
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capital assets owned by the City, and use of existing or future cash reserves, or
eembinatiertsthereof.
2. Acceptable Uses OfPurposes for Which Debt May Be Issued
The City w-illmay consider financing for the acquisition, substantial refurbishment,
replacement or expansion of physical assets, including land improvements. The
primary purpose of debt iswould be to finance one or more of the following:
a) Acquisition and or improvement of land, right-of-way, leaseholds or long-term
easements.
b) Acquisition of equipment or a capital asset with a useful life of 3three 3 or
more years.
c) Construction or reconstruction of a facility.
d) Refunding, refinancing, or restructuring debt, subject to refunding objectives
and parameters discussed i=herein.
e) Although not the primary purpose of the financing effort, project
^tea -,bursahlesreimbursable costs that include project planning, design,
engineering and other preconstruction efforts; project -associated furniture,
fixtures and equipment; capitalized interest, original issuer's discount,
underwriter's discount and other costs of issuance.
f) Interim or cash flow financing, such as tax, revenue or bond anticipation notes.
extentg) RefinanEing or advance funding of City pension obligations, but only to t
significant finanrial..::exit is uchieved a-rrrazrccca--vy Section F.
3. Prohibited Uses of Debt
Prohibited uses of debt include the following:
a) Financing of operating costs except for anticipation notes with a tern of less
than one year.
b) Debt issuance used to address budgetary deficits.
c) Debt issued for periods exceeding the useful life of the asset or projects to be
financed.
4. Approval Process for the Issuance of Debt
Any issuance of debt, either through a public sale of securities private placement or
direct purchase is subject to the formal approval of the City Council as a non -consent
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item on a City Council agenda. As part of the City Council approval a formal
resolution authorizing the issuance of a specific form of debt shall be required as part
of the authorizing documents. The resolution shall include at a minimum the
following:
a) The specific project(s) for which the debt is being incurred
b) The maximum principal amount to be borrowed;
c) The maximum term, which will be no greater than the useful life of the
project(s), equipment, or capital asset, whichever is applicable and longer•
d) The maximum interest rate or true interest cost;
e) The maximum annual debt service;
f) Call Provisions, including specifically identifying any deviation from Section
F(9) below•
g) Estimated Costs of Issuance;
h) Maximum Underwriter's Discount; and
i) A list of all consultants hired for the issuance including at a minimum bond
counsel, disclosure counsel, municipal advisor and underwriter(s)-
In addition to the authorizing resolution, the City Council shall be provided copies of
the various financing documents including indentures purchase agreements and
preliminary official statements. For any sale of securities, the City shall be required to
retain an Independent Registered Municipal Advisor ("IRMA") to serve as the City's
fiduciary on every sale. The IRMA will provide independent analysis of all financing
scenarios considered with a specific recommendation to the City Council supported
by the analysis. The written recommendation of the IRMA shall be provided to City
Council as an attachment to the City's Staff Report.
F. STRUCTURE OF DEBT (Fixed Rate)
1. Term of Debt -
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Unless financially beneficial to do otherwise, debt shall be structured with the
goal of spreading payments for the project, equipment, or capital asset over its
useful life so that benefits more closely match costs for both current and future
residents. The duration of borrowings by the City shall not exceed the useful life
of the project, equipment, or capital asset it finances. The standard term of long
term borrowing is typically fifteen to thirty years.
2. Pace of Debt Payment - Accelerated repayment schedules reduce debt burden
faster and reduce total borrowing costs. Debt repayment shall be amortized
through the most financially advantageous debt structure and, if applicable, to
match the City's projected cash flow to the anticipated debt service payments to
the extent possible. "Backloading" of debt service should be considered only
when one or more of the following occur:
a) Natural disasters or extraordinary or unanticipated external factors make
payments on the debt in early years impractical.
b) The benefits derived from the debt issuance can clearly be demonstrated to
be greater in the future than in the present.
c) Such structuring is beneficial to the City's aggregate overall debt payment
schedule or achieves measurable interest savings.
d) Such structuring will allow debt service to more closely match project
revenues during the early years of the prWgci is operation
3. Level Payment - To the extent practical, bonds will be amortized on a level
re2avment basis, and revenue bonds will be amortized on a level repayment
basis considering the forecasted available pledged revenues to achieve the
lowest rates possible. Bond repayments should not increase on an annual basis
in excess of two percent (2%) without a dedicated and supporting revenue -
funding stream.
4. Serial Bonds, Term Bonds, and Capital Appreciation Bonds - For each
issuance, the City shall select serial bonds or term bonds, or both. On the
occasions where circumstances warrant, Capital Appreciation Bonds ("CAB")
may be used. The decision to use term, serial, or CAB bonds shall be based on
market conditions.
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5. Reserve Funds - The City shall strive to maintain a fund balance in the FFP or
other designated reserve at a level equal to or greater than the maximum annual
debt service of existing obligations.
6. Capitalized Interest - The City shall seek to avoid the use of capitalized interest,
which defers debt service by increasing the size of a debt issue to fund interest
On occasion, capitalized interest may be considered to the extent that the City
wishes to defer the beginning of debt service until project completion to match
project revenues with debt service.
7. Discount Bonds - While discount and deep discount bonds may reduce the
interest cost of the bonds below that of par or premium bonds, they should only
be used in limited situations as they reduce the potential for future savings from
refunding of the bonds.
S. Premium Bonds - Premium bonds may provide for a lower overall interest cost
compared to par or discount bonds. An analysis should be prepared comparing
the yield to maturityand nd yield to call of the premium bond structure compared
to alternative couponing. This comparison should be done on maturity -by -
maturity basis. The value of the call option of the higher coupon with respect to
the future ability to refund should be reviewed as well.
9. Call Provisions - In general, the City's debt obligations should include an
optional redemption feature at par that arises not later than ten (10) years after
the issuance of the debt. However, if market conditions exist where a call option
at par arising later than ten (10) years after issuance of debt, or a "make -whole" -
call would benefit the City, the authorizing bond resolution must explicitly
provide staff the authorization to negotiate these options. The City Council
should set parameters that guide staffs negotiations. Alternatively, since
decisions on pricing of debt and financial consequences of call or make whole
provisions can arise in a very compressed timeframe with the potential for
unanticipated market conditions, in connection with approving an authorizing
bond resolution, the City COLmcll should designate a date for pricing and call
and notice a special or regular meeting of the City Council for that date in the
event the alternatives available to the staff are outside the parameters set by the
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City Council. It is the City's intent to maximize prepayment flexibility on all
bond issues. Shorter call provisions may be considered on a case-by-case basis.
I�G_USE OF ALTERNATIVE DEBT INSTRUMENTS
The City recognizes that there are numerous types of financing structures and funding
sources available, each with specific benefits, risks, and costs. All potential funding
sources areshall be reviewed by management within the context of thp Pl-htthis Policy
and the overall portfolio to ensure that any financial product or structure is consistent
with the City's objectives. Regardless of what financing structure(s) is utilized, due -
diligence review must be performed for each transaction, including the quantification of
potential risks and benefits, and analysis of the impact on City creditworthiness and debt
affordability and capacity. Because fixed rate debt transfers most financial risks to
bondholders, fixed rate debt should be considered the preferred method of financing
long-term capital needs. Therefore, while permitted for consideration, the following_
instruments are disfavored:
1. Variable Rate Debt
Variable rate debt affords the City the potential to achieve a lower cost debt
depending on market conditions. However, the City willshall seek to limit the use of
variable-rate debt due to the potential risks of such instruments.
a) Purpose
The City shal}may consider the use of variable rate debt for the purposes of:
i. Reducing the costs of debt issues.
ii. Increasing flexibility for accelerating principal repayment and
amortization.- (often variable rate debt may be prepaid without penalty
iii. Enhancing the management of assets and liabilities (matching short-
term "priced debt" with the City's short-term investments).
iv. Diversifying interest rate exposure.
V. As a short-term source of construction or acquisition financing, (i.e.
commercial paper, to reduce interest cost).
b) Considerations and Limitations on Variable -Rate Debt
The City may consider the use of all alternative structures and modes of variable
rate debt to the extent permissible under State law and willshall make
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determinations among different types of modes of variable-rate debt based on
cost, benefit, and risk factors. The Finance Director shall consider the following
factors in considering whether to utiliaerecommend variable rate debt:
i. Any long-term issuance of variable rate debt should not exceed
2-9°6twent percent M of total City General Fund supported debt.
ii. Any long-term issuance of variable rate debt should be fully
bynot exceed the expected future Faeflity Fin ,.., ing PlanFFP reserves in
the medium term or then current unrestricted General Fund reserve
levels.
iii. Whether interest cost and market conditions (including the shape of the
yield curves and relative value considerations) are unfavorable for
issuing fixed rate debt.
iv. The likelihood of projected debt service savings when comparing the
cost of fixed rate bonds.
V. Costs, implementation and administration are quantified and
considered.
vi. Cost and availability of liquidity facilities (lines of credit necessary for
variable rate debt obligations and commercial paper in the event that
the bonds are not successfully remarketed) are quantified and
considered.
vii. Abi4ty-jhci ability to convert debt to a
fully amortizing fixed) rate or the permissibility to redeem at par at any
time.
viii. The findings of a thorough risk management assessment.
c) Risk Management
Any issuance of variable rate debt shall require a rigorous risk assessment,
including, but not limited to factors discussed in this section. Variable rate debt
subjects the City to additional financial risks (relative to fixed rate bonds),
including interest rate risk, tax risk, and certain risks related to providing the
necessary liquidity required for eertain typeso variable rate debt.
The City willshall properly manage the -risks associated with variable rate debt as
follows:
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i. Interest Rate Risk and Tax Risk - The risk that market interest rates
increase on variable-rate debt because of market conditions, changes in
taxation of municipal bond interest, or reductions in tax rates.
Mitigation - Limit total variable rate exposure per the defined limits
and match the variable rate liabilities with short --term assets.
iiLiquidity/Remarketing Risk - The risk that holders of variable rate
bonds exercise their "put" option, tender their bonds, and the bonds
cannot be remarketed requiring the bond liquidity facility provider to
repurchase the bonds. This will result in the City paying a higher rate
of interest to the facility provider and the potential rapid amortization
of the repurchased bonds.
Mitigation - Limit total direct variable-rate exposure. Seek liquidity
facilities, which allow for longer (5-10 years) amortization of any draws
on the facility. Secure credit support facilities that result in bond ratings
of the highest short-term ratings and long-term ratings not less than AA.
If the City's bonds are downgraded below these levels as a result of the
facility provider's ratings, a replacement provider shall be sought.
ii:iii. Liquidity/Rollover Risk - The risk that arises due to the shorter term of
most liquidity provider agreements (1-5 years) relative to the longer-
term amortization schedule of the City's variable-rate bonds. In
particular, (1) the City may incur higher renewal fees when renewal
agreements are negotiated and (2) the liquidity bank market constricts
such that it is difficult to secure third party liquidity at any interest rate.
Mitigation - Negotiate longer terms on provider contracts to minimize
the number of rollovers,
2. Derivatives
The use of certain derivative products to hedge variable rate debt, such as interest rate
swaps, may be considered to the extent the City has such debt outstanding or under
consideration. The City willshall exercise extreme caution in the use of derivative
instruments for hedging purposes, and willmay consider their utilization only when
sufficient understanding of the products and sufficient expertise for their appropriate
use has been developed. A comprehensive derivative policy Willshall be adopted by
the City prior to any utilization of such instruments.
l H_REFUNDING GUIDELINES
IN
The Finance Director shall monitor at least annually all outstanding City debt obligations
for potential refinancing opportunities. The City wiilshould consider refinancing of
outstanding debt to achieve annual savings. Absent a compelling economic reason or
financial benefit to the City, any refinancing should not result in any increase to the
weighted average life of the refinanced debt.
The City will generally seek to achieve debt service savings whelrthat on a net present
value basis; are at least 3-°6of the current debt being refinanced.
TkeAny potential refinancinf* executed more than ninet�(90) -calendar days in advance
of the outstanding debt optional call date shall require at least a three percent net present
value savings threshold. If there is negative arbitrage in an advance refunding the
interest efficiency should at least be fifty percent (50%). Under any savings scenario the
net present value assessment shall factor in all costs, including the total cost of issuance,
escrow, and foregone interest earnings of any contributed funds on hand. Any potential
refinancing shall additionally consider whether an alternative refinancing opportunity
with higher savings iscan be reasonably expected in the future.
Any n. i potential fefi ......., ing executed more than O0 days : ..,7....nce of the outstanding d L.a
b J ��
Vona' call date shall require a higher savings Ohre � 'a r onsideration of this method
of refinancing shall place greater emphasis on determining whether an alternative
refinancing opportunity with higher savings is reasonably expected in the future.
I_M -MARKET COMMUNICATION, ADMINISTRATION; AND REPORTING, AND
INTERNAL CONTROL PROCEDURES
1. Rating Agency Relations and Annual or Ongoing Surveillance - The Finance
Director shall be responsible for maintaining the City's relationships with
Standard & Poor's Ratings Services, Fitch Ratings and Moody's Investor's Service.
The City is committed to maintaining or improving its existing rating levels. In
addition to general communication, the Finance Director shall:
a) Ensure the rating agencies are provided updated financial information of
the City as it becomes publically up blicly available.
b) Communicate with credit analysts at each agency at least once each year, or
as may be requested by the agencies.
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c) Prior to each proposed new debt issuance, schedule meetings or conference
calls with agency analysts and provide a thorough update on the City's
financial position, including the impacts of the proposed debt issuance.
2. Council and Finance Committee Communication - The Finance Director should
report feedback from rating agencies to the City Council and/or Finance
Committee, when and if available,- regarding the Qty's -City's financial strengths
and weaknesses and recommendations for addressing any weaknesses as they
pertain to maintaining the City's existing credit ratings.
3 Debt Issue Record -Keeping - A copy of all debt -related records shall be retained
at the City's offices. At minimum, these records shall include all official
statementsbond legal documents/ transcrintsresolutions,trustee statements
leases and title reports for each City financing (to the extent available
4. Compliance - When issuing debt, in addition to complying with the terms of this
Policy, the City shall comply with any other applicable policies regardinginitial
nitial
bond disclosure, continuing disclosure, post -issuance compliance and the
investment of bond proceeds in accordance with applicable bond indentures and
City Administrative Procedures (AP -009), concerning tax compliance with tax
exempt bonds and Build America Bonds. Without limiting the generality of the
foregoing, the Cit shall hall periodically review the requirements of and will remain
in compliance with the followin&.
a) Continuing Disclosure Compliance - The City shall remain in co -per
:vith Seeuritycomply with federal sealrities law, including any continuing
disclosure undertakings entered into by the City in accordance with Securities
and Exchange Commission Rule 15c2-12 by filing. The City shall file its annual
financial statements and other financial and operating data for the benefit of its
bondholders within 270 days of the close of the fiscal year, or as required in
any such agreement for any debt issue. The City shall maintain a log or file
evidencing that all continuing disclosure filings have been timely made
promptly.
3. Debt issue= Reeef44����U debt veeord--, A-11 --k-ai-e-
Elt tt - €--�rir-- --e
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b) Arbitrage Rebate - The use of bond proceeds and their investments mus shall
be monitored by the Finance Director to ensure compliance with all Internal
Revenue Code Arbitrage Rebate Requirements. The Finance Director shall
ensure that all bond proceeds and investments are tracked in a manner
whichthat facilitates accurate calculation; and, if a rebate payment is due, such
payment is made in a timely manner.
c) Annual Reporting - California Government Code Section 88550 or any
successor statute, and the annual reporting requirements therein.
d) Other Compliance - Other compliance requirements imposed by regulatory
bodies.
5. Proceeds Administration - Proceeds of debt will be held either (a)by a third -party
trustee or fiscal agent, which will disburse such proceeds to or upon the order of
the City upon the submission of one or more written requisitions by the City
Manager (or his or her written designee), or (b)by the City, to be held and
accounted for in a separate fund or account, the expenditure of which will be
carefully documented by the City. On a quarterly basis the Finance Director shall
monitor the proceeds and the disposition of unexpended proceeds
F:LCREDIT RATINGS
The City willshall consider published ratings agency guidelines regarding best financial
practices and guidelines for structuring its capital funding and debt strategies to maintain
the highest possible credit ratings consistent with its current operating and capital needs.
G:K_LEGAL DEBT LIMIT
Newport Beach City Charter seetionSection 1109 inElieatesprovides that the"The City
shall not incur an indebtedness evidenced by general obligation bondsz which shall in the
aggregate exceed the sum of fifteen percent (15A+of the total assessed valuation, for
purposes of City taxation, of all the real and personal property within the City:._ While
this limit defines the absolute maximum legal debt limit for the City, it is not an effective
indicator of the City's affordable debt capacity.
I�L_AFFORDABILITY
Prior to the issuance of debt to finance a project, the City svillshall carefully consider the
overall long-term affordability of the proposed debt issuance. The City shall not assume
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more debt without conducting an objective analysis of the City's ability to assume and
support additional debt service payments. The City willshall consider its long-term
revenue and expenditure trends, the impact on operational flexibility and the overall debt
burden on the tax payers. The evaluation process shall include a review of generally
accepted measures of affordability and will strive to achieve and or maintain debt levels
consistent with its current operating and capital needs. The Finance Director shall review
benchmarking results of other California cities of comparable size with the City's Fiance
Committee City Council prior to any significant project financing.
1. General Fund -Supported Debt - General Fund Supported Debt generally include
Certificates of Participation ((" COPs)o and Lease Revenue Bonds (CLRBs)O
which are lease obligations that are secured by an installment sale or by a lease-
back arrangement between the City and another related public entity. The general
operating revenues of the City are pledged to pay the lease payments, which are,
in turn, used to pay debt service on the bondsLRBs or Certificates of
Partx-ipationCOPs. These obligations do not constitute indebtedness under the
state constitutional debt limitation and, therefore, are not subject to voter
approval.
Payments to be made under valid leases are payable only in the year in which use
and occupancy of the leased property is available, and lease payments may not be
accelerated. Lease financing requires the fair market rental value of the leased
property to be equal to or greater than the required debt service or lease payment
schedule. The City as lessee-(Qty4 is obligated to place in its Annual Budget the
rental payments that are due and payable during each fiscal year the lesseeCity
has use of the leased property.
The City should strive to maintain its net General Fund -backed debt service at or
less than &%eight percentt! of available annually budgeted General Fund
revenue. This ratio is defined as the City's annual debt service requirements on
Certific-ates of COPS and Lease R...,..nue RonasLRBs compared to
total General Fund Revenues net of inte..tund transfers. , This ratio, which pertains
to only general-fuf�dGeneral Fund backed debt, is often referred to as "lease
burden."
2. Revenue Bonds - Long-term obligations payable solely from specific pledged
sources, in general, are not subject to a debt limitation. Examples of such long -
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term obligations include those which achieve the financing or refinancing of
projects provided by the issuance of debt instruments that are payable from
restricted revenues or user fees (Enterprise Revenues) and revenues generated
from a project.
In determining the affordability of proposed revenue bonds, the City willshall
perform an analysis comparing projected annual net revenues (exclusive e€
depreeia io which is a non cash related `from pledged sources to
estimated annual debt service: on revenue bonds. The City should strive to
maintain a debt service coverage ratio of at least 125% using historical and/or
projected net revenues to cover annual debt service for bonds. The City may
require a revenue rate increase teor reduce operating costs so that revenues cover
both operations and debt service costs, and create debt service reserve funds to
maintain the required coverage ratiesratio.
3. Special Districts Financing - The City's Special Districts primarily consist of
Community Facilities Districts ((" CFDs)o and 1913/1915 Act Assessment
Districts f-CAssessment Districts} a. The City willmay consider requests for
Special District formation and debt issuance when such requests address a public
need or provide a public benefit. Each application willshall be considered on a
case _by -_case basis an4 as IOnQ as the City assumes no obligation under, or in
connection with, such debt issuance. The Finance Department mayshall not
recommend a financing if it is determined that the financing could be indirectly
detrimental to the debt positian, orfinancial standing of the City or such financing
would otherwise not be in the best interests of the City.
4. Conduit Debt - Conduit financing provides for the issuance of securities by a
government agency to finance a project of a third party, such as a non-profit
organization or other private entity. The City may sponsor conduit financings for
those activities that have a general public purpose and are consistent with the
City's overall service and policy objectives. Unless a compelling public policy
rationale exists, such conduit financings will not in any way obligate the City or
otherwise pledge the City's faith and credit.
IF7
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16
1. Pill imill,
!lull'
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16
Adopted - May 14, 2013
Amended - May 22, 2018
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17
STATE OF CALIFORNIA }
COUNTY OF ORANGE } ss.
CITY OF NEWPORT BEACH }
I, Leilani I. Brown, City Clerk of the City of Newport Beach, California, do hereby certify that the
whole number of members of the City Council is seven; the foregoing resolution, being Resolution
No. 2018-30 was duly introduced before and adopted by the City Council of said City at a regular meeting
of said Council held on the 22nd day of May, 2018; and the same was so passed and adopted by the
following vote, to wit:
AYES: Council Member Herdman, Council Member Kevin Muldoon, Council Member Diane
Dixon, Council Member Scott Peotter, Council Member Brad Avery, Mayor Pro Tem Will
O'Neill, Mayor Duffy Duffield
NAYS: None
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the official seal of
said City this 23rd day of May, 2018.
Leilani I. Brown
City Clerk
Newport Beach, California