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HomeMy WebLinkAboutRes 2017-15 - Local Debt Policy - SB 1029 RESOLUTION NO. 2017-15 CITY COUNCIL TO THE CITY OF PALM DESERT STAFF REPORT REQUEST: APPROVE RESOLUTION NO.2017-15ADOPTING A LOCAL DEBT POLICY PURSUANT TO SENATE BILL 1029 SUBMITTED BY: Janet Moore, Finance Director ��ra<F:i:-i ;.. • ()C/? 5 DATE: February 23, 2017 ",'' ; -• t,...f Y/trJ�►V �:: 2NC '" 94I'+meµ '• CONTENTS: Resolution No. 2017-15 Exhibit A- City of Palm Desert Lo Recommendation 2017-15 By Minute Motion that the City Council approve Resolution No. adopting the City of Palm Desert Local Debt Policy as it relates to bonds issued by the City and the City's related entities. Executive Summary The newly adopted Senate Bill 1029 ("SB 1029") amended Government Code Section 8855. SB 1029, among other things, effectively requires a local government agency to adopt a formal local debt policy before issuing bonds. The City and its related entities (such as the Successor Agency to the Palm Desert Redevelopment Agency and City-formed community facilities districts) have issued bonds from time to time, and will likely issue bonds in the future, when the City deems it prudent and appropriate to do so. Staff recommends that the City Council approve the proposed Local Debt Policy, to formally establish guidelines for the City's future bond issuances and the administration of bond records, reporting obligations and bond proceeds expenditures, and to comply with the requirements of SB 1029. Background The City of Palm Desert has had long standing practices and procedures that are followed whenever the issuance of debt is considered. Up until now, these practices have been implemented without a formal local debt policy. Pursuant to Government Code Section 8855, a Report of Proposed Debt Issuance must be filed with the California Debt and Investment Advisory Commission ("CDIAC") before the sale of any bond issue. Usually, Bond Counsel makes these filings on behalf of the City. SB 1029 was signed into law on September 12, 2016. Among other things, SB 1029 imposes a new requirement that each Report of Proposed Debt Issuance must include a certification by the issuer that it has adopted a local debt policy and that the contemplated bond issue is consistent with such adopted policy. SB 1029 provides that the local debt policy must include the following: G`rdaXeronica'I'aim\Word Files\Staff Reports`Palm Desert-staff report for local debt policy 2-23-17 rev does Staff Report Local Debt Policy February 23, 2017 Page 2 of 2 1. The purpose for which the debt proceeds may be used; 2. The types of debt that may be issued; 3. The relationship of the debt to, and integration with, the issuer's capital improvement program or budget, if applicable; 4. Policy goals related to the issuer's planning goals and objectives; and, 5. The internal control procedures that the issuer has implemented, or will implement, to ensure that the proceeds of the proposed debt issuance will be directed to the intended use. The attached resolution and Local Debt Policy have been drafted in accordance with current practices and includes the specific requirements of SB 1029. Staff recommends that the City Council adopt the resolution approving the Local Debt Policy. Fiscal Analysis There is currently no fiscal impact from this action. It merely formalizes the current practices and includes the specific requirements of SB 1029; however, these requirements may increase filing costs, but that is yet to be determined. It is intended to assist with the City's goal of maintaining fiscal sustainability and financial prudence. Submitted by: M. Moore, Finance Director Approval: Lauri Aylaian, City Mana err' G\rdaNeronica Tapia\Word Files\Staff Reports\Palm Desert-staff report for local debt policy 2-23-17 rev doco RESOLUTION NO. 2017-15 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PALM DESERT ADOPTING A LOCAL DEBT POLICY RECITALS: WHEREAS, the City of Palm Desert (the "City") or its related entities (such as the Palm Desert Financing Authority or the Successor Agency to the Palm Desert Redevelopment Agency) has issued bonds or other financing obligations (collectively, "Local Debt") subject to the filing of reports with the California Debt and Investment Advisory Commission ("CDIAC") pursuant to Section 8855 of the California Government Code ("Section 8855"); and WHEREAS, Senate Bill No. 1029 ("SB 1029"), effective January 1, 2017, amended Section 8855 to augment the information that must be provided by municipal issuers of Local Debt to CDIAC; and WHEREAS, prior to SB 1029, Section 8855 has required municipal issuers of Local Debt to file a Report of Proposed Debt Issuance at least 30 days prior to the sale of any Local Debt issue; and WHEREAS, SB 1029 amends the requirements of the Report of Proposed Debt Issuance to require that this report include a certification by the municipal issuer that it has adopted local debt policies concerning the use of Local Debt and that the contemplated Local Debt issuance is consistent with those local debt policies; and WHEREAS, the City or its related entities (such as the Palm Desert Financing Authority or the Successor Agency to the Palm Desert Redevelopment Agency) may also, in the future, issue Local Debt for which a Report of Proposed Debt Issuance, including the aforementioned certification, will need to be filed with CDIAC; and WHEREAS, to facilitate issuance of Local Debt in the future and the ability of the City and its related entities to make the requisite local debt policies certification required in connection therewith by subdivision (i) of Section 8855, as amended by SB 1029, the City desires to adopt the Local Debt Policy (the "Policy"), as set forth in Exhibit A hereto; NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF PALM DESERT DOES HEREBY RESOLVE, DETERMINE AND ORDER AS FOLLOWS: Section 1. The above recitals, and each of them, are true and correct. Section 2. The Policy, as set forth in Exhibit A, is hereby approved and adopted and shall be made applicable to all Local Debt issued by or on behalf of the City and its related entities (including, but not limited to, the Palm Desert Financing Authority or the Successor Agency to the Palm Desert Redevelopment Agency). Section 3. The City Manager, the Director of Finance/Treasurer and all other officers of the City arc hereby authorized and directed,jointly and severally, to do any and all things to -1- G:\rda\Veronica Tapia\Word Piles\Stall Reports\Rc iseJ Palm Desert-Debi Policy red 5ve,7-9-l7 doe RESOLUTION NO. 2017-15 effectuate the purposes of this Resolution and to implement the Policy, and any such actions previously taken by such officers are hereby ratified and confirmed. Section 4. This Resolution shall take effect immediately upon adoption. APPROVED and ADOPTED at a regular meeting of the City Council of the City of Palm Desert at this day of , 2017. AYES: NOES: ABSTAIN: ABSENT: JAN C. HARNIK, MAYOR ATTEST: RACHELLE, CITY CLERK -2- (19rJa\veronica Tapia\Word Piles\Stall Repons\Revised Palm Desert-Ikht Policy red 5v6 3-9-17 doe RESOLUTION NO. 2017-15 EXHIBIT A CITY OF PALM DESERT LOCAL DEBT POLICY As of , 20_ (Resolution No. ) A. PURPOSE The purpose of this Local Debt Policy (this "Policy") is to establish guidelines and parameters for the effective governance, management and administration of debt and other financing obligations issued by the City and its related entities (such as the Palm Desert Financing Authority or the Successor Agency to the Palm Desert Redevelopment Agency). As used in this Policy, "City" shall mean the City and/or the City and its related entities, as the context may require. As used in this Policy, "debt" shall be interpreted broadly to mean bonds, notes, certificates of participation, financing leases, or other financing obligations, but the use of such term in this Policy shall be solely for convenience and shall not be interpreted to characterize any such obligation as an indebtedness or debt within the meaning of any constitutional debt limitation where the substance and terms of the obligation comport with exceptions thereto. B. BACKGROUND The City and its related entities are 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 and its related entities to manage their collective debt program in line with those resources. Therefore, the objective of this policy is to provide written guidelines and restrictions concerning the amount and type of debt and other financing obligations issued by the City and its related entities and the ongoing management of the debt portfolio. This Policy is intended to improve the quality of decisions, assist with the determination of the structure of debt issuance, identify policy goals, and demonstrate a commitment to long-term financial planning, including a multi-year capital plan. Adherence to a local debt policy signals to rating agencies and the capital markets that a government is well managed and should meet its obligations in a timely manner. A-1 G:\rda\Veronica Tapia\Word Files\Staff Reports\Revised Palm Desert-Debt Policy red 5v6 3-9-17.doc RESOLUTION NO. 2017-15 C. 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 cost- effective means of financing major infrastructure and capital project needs of the City. Debt will be considered to finance such projects if: a) The capital project has been, or will be, included in the City's capital improvement plan or has otherwise been coordinated with the City's planning goals and objectives. b) The capital project can be financed with debt not exceeding the term specified in Section E.1. of this Policy, to assure that long-term debt is not issued to finance projects with a short useful life. c) It is the most cost-effective funding means available to the City, taking into account cash flow needs and other funding alternatives. d) It is fiscally prudent and meets the guidelines of this Policy. 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 combinations thereof. 2. Acceptable Uses of Debt and Proceeds of Debt The primary purpose of debt is to finance one of the following: a) The City will consider financing for the acquisition, substantial refurbishment, replacement, or expansion of physical assets, including land improvements, for the following purposes: i. Acquisition and or improvement of land, right-of-way or long-term easements. ii. Acquisition of a capital asset with a useful life of 3 or more years. iii. Construction or reconstruction of a facility. iv. Although not the primary purpose of the financing effort, project reimbursables that include project planning design, engineering and other preconstruction efforts; project-associated furniture fixtures and equipment; capitalized interest, original issue discount, underwriter's discount, and other costs of issuance. b) Refunding, refinancing, or restructuring debt (including without limitation the refinancing or advance funding of City pension obligations), subject to refunding objectives and parameters discussed in Section G. A-2 Garda\Veronica Tapia\word 1'iles\SI.II RcponsUicvised Palm Desert-Ikht Policy red 5,6 5-9-17 doe RESOLUTION NO. 2017-15 c) In the event of temporary shortfalls in cash flow for City operation costs due to timing of receipt of revenues and the lack of cash on hand to cover the temporary deficit, the City may consider interim or cash flow financing, such as anticipation notes. In compliance with applicable state law, any such notes shall be payable either (i) not later than the last day of the fiscal year in which it is issued, or (ii) during the fiscal year succeeding the fiscal year in which issued, but in no event later than 15 months after the date of issue, and only if such note is payable only from revenue received or accrued during the fiscal year in which it was issued. 3. Prohibited Uses of Debt and Proceeds of Debt Prohibited uses of debt include the following: a) Financing of operating costs, except for anticipation notes satisfying the criteria set forth in Section C.2.c. b) Debt issuance used to address budgetary deficits. c) Debt issued for which the term of the debt exceeds the term specified in Section E.1 of this Policy. 4. Internal Control Procedures Concerning Use of Proceeds of Debt One of the City's priorities in the management of debt is to assure that the proceeds of the debt will be directed to the intended use for which the debt has been issued. In furtherance of this priority, the following procedures shall apply: a) The Director of Finance shall retain, for the applicable period specified in Section H.4. of this Policy, a copy of each annual report filed with the California Debt and Investment Advisory Commission (CDIAC) pursuant to Section 8855(k) of the California Government Code concerning (1) debt authorized during the applicable reporting period (whether issued or not), (2) debt outstanding during the reporting period, and (3) the use during the reporting period of proceeds of issued debt. b) In connection with the preparation of each annual report to be filed with CDIAC pursuant to Section 8855(k) of the California Government Code, the Director of Finance or the designee of the Director of Finance shall keep a record of the original intended use for which the debt has been issued, and indicate whether the proceeds spent during the applicable one- year reporting period for such annual report comport with the intended use (at the time of original issuance or as modified pursuant to the following sentence). If a change in intended use has been authorized subsequent to the original issuance of the debt, the Director of Finance or the designee of the Director of Finance shall indicate in the record when the change in use was authorized and whether the City Council, City Manager, or another City official has authorized the change in intended use. The Director of Finance shall report apparent deviations from the intended use in debt A-3 Gala\Veronica Tapia\Word Files\SIall Repons\Revbed Palm Ikscn-[khi Policy red 5%6 7-9-17 doe RESOLUTION NO. 2017-15 proceeds to the City Manager for further discussion, and if the City Manager determines appropriate in consultation with legal counsel (which may be bond counsel, if applicable, or the City Attorney), to the City Council. c) If the debt has been issued to finance a capital project and the project timeline or scope of project has changed in a way that all or a portion of the debt proceeds cannot be expended on the original project, the Director of Finance shall consult with the City Manager and legal counsel (which may be bond counsel, if applicable, or the City Attorney) as to available alternatives for the expenditure of the remaining debt proceeds (including prepayment of the debt). D. TYPE OF FINANCING INSTRUMENTS; AFFORDABILITY AND PLANNING POLICIES 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 are 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. Prior to the issuance of debt or other financing obligations to finance a project, the City will carefully consider the overall long-term affordability of the proposed debt issuance. The City shall not assume more debt or other financing obligations without conducting an objective analysis of the City's ability to assume and support additional debt service payments. The City will consider its long-term revenue and expenditure trends, the impact on operational flexibility and the overall debt burden on the taxpayers. 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. 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 public entity. Typically, the City appropriates available General Fund moneys to pay the lease payments to the other public entity and, in turn, the public entity uses such lease payments received to pay debt service on the bonds or Certificates of Participation. General Fund Supported Debt may also include bonds issued to refund obligations imposed by law, such as judgments (judgment obligation bonds (JOBs)) or unfunded accrued actuarial liabilities for pension plans (pension obligation bonds (POBs)). These obligations do not constitute indebtedness under the state constitutional debt limitation and, therefore, are not subject to voter approval. A-4 (i:\rda\Veronica Tapia\Word Files\Stall Rcpons\Revised Palm Dessert-Debi Policy red 5%6 3-9-17.doe RESOLUTION NO. 2017-15 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 lessee (City) is obligated to include in its Annual Budget and appropriate the rental payments that are due and payable during each fiscal year the lessee has use of the leased property. The City should strive to maintain its net General Fund-backed annual debt service at or less than 8% of available annually budgeted revenue. This ratio is defined as the City's annual debt service requirements on General Fund Supported Debt (including, but not limited to, COPs, LRBs, JOBs, and POBs) compared to total annual General Fund Revenues net of interfund transfers. 2. Revenue Bonds — Long-term obligations payable solely from specific special fund sources, in general, are not subject to a debt limitation. Examples of such long-term obligations include those which are payable from a special fund consisting of restricted revenues or user fees (Enterprise Revenues) and revenues derived from the system of which the project being funded is a part. In determining the affordability of proposed revenue bonds, the City will perform an analysis comparing projected annual net revenues (exclusive of depreciation which is a non-cash related expense) to estimated annual debt service. The City should strive to maintain a coverage ratio of 110% (or such higher coverage ratio included in the City's existing financing documents), using historical and/or projected net revenues to cover annual debt service for bonds. To the extent necessary, the City shall undertake proceedings for a rate increase to 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 will consider requests for special district formation and debt issuance when such requests address a public need or provide a public benefit. Each application will be considered on a case by case basis, and the Finance Department may not recommend a financing if it is determined that the financing could be detrimental to the debt position or the best interests of the City. 4. General Obligation Bonds — Notwithstanding their name, General Obligation Bonds are not general obligations of the City, but instead they are payable from and secured by a dedicated, voter-approved property tax override rate (i.e., a property tax in excess of the 1% basic ad valorem property tax rate which has received the approving two-thirds vote of the City's electorate). While the dedicated revenue stream to repay the debt makes General Obligation Bonds an attractive option, additional considerations for this financing mechanism include the time and expense of an election, the possibility that the electorate will not approve the ballot measure, and the legal bonding capacity limit of the assessed value of all taxable property within the City. (At the time of the adoption of this A-5 G:\rda\Veronica Tapia\Word Piles\Stall Reports\Revised Palm Desert-Ikht Policy red 5,6 3-9-l7.doe RESOLUTION NO. 2017-15 Policy, the legal bonding capacity limit is 3.75% of the assessed value of all taxable property within the City, which is the same as the limit for California general law cities. If, after the adoption of this Policy, City Council establishes a different legal bonding capacity limit for general obligation bonds pursuant Section 301 of the City Charter, such different legal bonding capacity limit shall apply.) 5. Tax Increment Financing — Tax Aincrement financing is a financing method whereby a portion of ad valorem property taxes (commonly called the "tax increment") that are allocated to an entity, such as a successor agency to redevelopment agency (Successor Agency), an enhanced infrastructure financing district (EIFD), or a community revitalization and investment authority (CRIA)A, and the entity is permitted to incur debt payable from the and secured by the tax increment revenues. While tax increment debt for redevelopment agencies and Successor Agencies is entitled to the benefits of Article XVI, Section 16, of the California Constitution, no similar provision exists for E1FDs and CRIAs at the time of adoption of this Policy. Therefore, when considering EIFD or CRIA financing, or other types of tax increment financing which may be permitted by law in the future, debt limit concerns should be analyzed with respect to the proposed structure and taken into account in determining the practical viability of the proposed financing. 6. 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 pledge the City's faith and credit. E. STRUCTURE OF DEBT 1. Term of Debt — In keeping with Internal Revenue Service regulations for tax- exempt financing obligations, the weighted average maturity of the debt should not exceed 120 percent of the weighted average economic life of the facilities or projects to be financed, unless specific circumstances exist that would mitigate the extension of time to repay the debt and it would not cause the City to violate any covenants to maintain the tax-exempt status of such debt, if applicable. 2. Rapidity of Debt Payment; 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 2% without a dedicated and supporting revenue funding stream. Accelerated repayment schedules reduce debt burden faster and reduce total borrowing costs. The Finance Department will amortize debt through the most financially advantageous debt structure and to the extent possible, match the A-6 G:VdalVeromca'lpialWord F ikslSiaff Ref ons.Remild Palm Desert-Debt Policy red 5v6 3-9-17.doe RESOLUTION NO. 2017-15 City's projected cash flow to the anticipated debt service payments. "Backloading" of debt service will 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 prohibitive. 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 projected revenues, whether due to lower project revenues during the early years of the project's operation, inflation escalators in the enterprise user rates, or other quantifiable reasons. 3. Serial Bonds, Term Bonds, and Capital Appreciation Bonds — For each issuance, the City will select serial bonds or term bonds, or both. On the occasions where circumstances warrant, Capital Appreciation Bonds (CABs) may be used. The decision to use term, serial, or CAB bonds is driven based on market conditions. 4. Reserve Funds —To the extent pre-funding a reserve fund provides an economic benefit that offsets the cost of financing the reserve fund, as determined by the Director of Finance in consultation with the City's municipal advisor and, if applicable, the underwriter for the bonds, the City may fund a reserve fund for the proposed bonds, up to the maximum amount permitted by applicable law or regulation. Typically, this amount is equal to the least of: (i) maximum annual debt service on the bonds, (ii) 10% of the principal amount of the bonds (or 10% of the sale proceeds of the bonds, within the meaning of Section 148 of the federal Internal Revenue Code), or (iii) 125% of average annual debt service on the bonds. F. USE OF ALTERNATIVE DEBT INSTRUMENTS Alternative debt instruments and financing structures sometimes can provide a lower cost of borrowing in the short run, but may involve greater medium-term or long-term risk. Due diligence review must be performed for each transaction, including the quantification of potential risks and benefits, analysis of the impact on City creditworthiness and debt affordability and capacity, and an evaluation of the ability of the City to withstand the medium-term or long-term risk attendant to alternative debt instruments, including the feasibility of exit strategies. 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 will seek to limit the use of variable-rate debt due to the potential risks of such instruments. A-7 G:\rda\Veronica Tapia\Word Piles\titatt Reports\Revised I'alm Desert-Ikht Policy red 5,6 1-9.17 doe RESOLUTION NO. 2017-15 a) Purpose The City shall 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. iii. Enhancing the management of assets and liabilities (matching short-term "priced debt" with the City's short-term investments). 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 will make determinations among different types of modes of variable rate debt based on cost, benefit, and risk factors. The Director of Finance shall consider the following factors in considering whether to utilize variable rate debt: i. With respect to General Fund supported debt, one of the following two criteria should be met as determined by the Director of Finance in his or her discretion: 1) any variable rate debt should not exceed 20% of total City General Fund supported debt; or 2) annual debt service on any variable rate debt should not exceed 5% of the annual General Fund Revenue. ii. Any variable rate debt should be fully hedged by expected future capital fund reserves or unrestricted General Fund reserve levels, as applicable. 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. Whether the ability to convert debt to another mode (daily, monthly, fixed) or redeem at par at any time is permitted. A-8 (1:\rda\veronica Tapia\Word File\Stall Repo t'Reised Palm Desert-Debt Policy red 5v6 3-9-17.doc RESOLUTION ID. 2017-15 viii. Cost and availability of derivative products to hedge interest rate risk. ix. 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 liquidity for certain types of variable rate debt. The City will properly manage the risks 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, match the variable rate liabilities with short term assets, and/or purchase appropriate derivative products to hedge against the risk (see also Section F.2 below). 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. Endeavor to 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 (or such other rating levels as provided in the applicable financing documents) 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. Liquidity and rollover risk includes the following risks: (1) the City may incur higher renewal fees when renewal agreements are negotiated, and (2) the liquidity bank market may constrict 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. A-9 Gala\Veronica Tapia\Word Piles\Stale Reports\Revised Palm Ikon-Ikht Polley red SO 3-9-17 Joe RESOLUTiFION NO. 2017-15 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 will exercise extreme caution in the use of derivative instruments for hedging purposes, and will consider their utilization only when sufficient understanding of the products and sufficient expertise for their appropriate use has been developed. Only those derivatives governed by an ISDA Master Agreement provided by the International Swaps and Derivatives Association, Inc. will be considered. A comprehensive derivative policy will be adopted by the City prior to any utilization of such instruments. G. REFUNDING GUIDELINES The Director of Finance shall perpetually monitor all outstanding City debt obligations for potential refinancing opportunities. The City will consider refinancing of outstanding debt to achieve annual savings or to refinance a bullet payment or spike in debt service. Except for instances in which a bullet payment or spike in debt service is being refinanced, absent a compelling reason or financial benefit to the City, any refinancing should not result in an increase to the weighted average life of the refinanced debt. Except for instances in which a bullet payment or spike in debt service is being refinanced, the City will generally seek to achieve debt service savings which, on a net present value basis, are at least 3% of the debt being refinanced. The net present value assessment shall factor in all costs, including 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 is reasonably expected in the future. Refundings which produce a net present value savings of less than 3% will be considered on a case-by-case basis. Notwithstanding the foregoing, a refunding of Successor Agency bonds shall be determined based on the requirements of Health and Safety Code Section 34177.5. H. MARKET COMMUNICATION,ADMINISTRATION,AND REPORTING 1. Rating Agency Relations and Annual or Ongoing Surveillance—The Director of Finance shall be responsible for maintaining the City's relationships with S&P Global Ratings, Fitch Ratings and Moody's a1nvestors Service, These agencies' ratin crit ri of en change d the Cit ❑t control decisi n • e b an rating agency. However, for each debt issue that the City will seek a rating s i nment Ci will 'v to b i maint in e highest _�9ssible underlying_uninsured rating. In addition to general communication, the Director of Finance shall: a) Ensure the rating agencies are provided updated financial statements of the City as they become publically available. b) Communicate with credit analysts at each agency as may be requested by the agencies. A-10 fi'IrdalVeronica Tai ialWord 1 iiesltitalT ReporceLHe.ised Palm Desert-Debt Policy rul 5r6 3.9.17.doc RESOLUTION NO. 2017-15 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 Communication —The Director of Finance should report feedback from rating agencies, when and if available, regarding the City's financial strengths and weaknesses and areas of concern relating to weaknesses as they pertain to maintaining the City's existing credit ratings. 3. Continuing Disclosure Compliance — The City shall remain in compliance with Rule 15c2-12, promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, by filing (to the extent required by the applicable continuing disclosure undertaking) 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 by such other annual deadline required in any continuing disclosure agreement or certificate for any debt issue. The City shall maintain a log or file evidencing that all continuing disclosure filings have been made promptly. 4. 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). Such records shall be retained while any bonds of an issue are outstanding and during the three-year period following the final maturity or redemption of the bond issue or, if later, while any bonds that refund bonds of that original issue are outstanding and for the three year period following the final maturity or redemption date of the latest refunding bond issue. 5. Arbitrage Rebate — The use of bond proceeds and their investments must be monitored to ensure compliance with all arbitrage rebate requirements of the Internal Revenue Code and related Internal Revenue Service regulations, in keeping with the covenants of the City and/or related entity in the tax certificate for any federally tax-exempt financing. The Director of Finance shall ensure that all bond proceeds and investments are tracked in a manner which facilitates accurate calculation; and, if a rebate payment is due, such payment is made in a timely manner. CREDIT RATINGS The City will 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. A-1 1 Gala\Veronica Tapia\Word Piles\titall Report.+\Reci ed Palm Ikxrt-Debt Policy red 5,6 3-9-17.doe RESOLUTION NO. 2017-15 J. SB 1029 COMPLIANCE Senate Bill 1029, signed by Governor Brown on September 12, 2016, and enacted as Chapter 307, Statutes of 2016, requires issuers to adopt debt policies addressing each of the five items below: i. The purposes,for which the debt proceeds may be used. Section C.2 (Acceptable Uses of Debt and Proceeds of Debt) and Section C.3 (Prohibited Use of Debt and Proceeds of Debt) address the purposes for which debt proceeds may be used. ii. The types of debt that ma}'be issued. Section D (Types of Financing Instruments; Affordable and Planning Policies), Section E (Structure of Debt) and Section F (Use of Alternative Debt Instruments) provide information regarding the types of debt that may be issued. iii. The relationship of the debt to, and integration with, the issuer's capital improvement program or budget, if applicable. Section C.1 (Acceptable Conditions for the Use of Debt) provides information regarding the relationship between the City's debt and Capital Improvement Program. iv. Policy goals related to the issuer's planning goals and objectives. As described in Section B (BACKGROUND), Section D (TYPES OF FINANCING; AFFORDABILITY AND PLANNING POLICIES) and other sections, this Policy has been adopted to assist with the City's goal of maintaining fiscal sustainability and financial prudence. v. The internal control procedures that the issuer has implemented, or will implement, to ensure that the proceeds of the proposed debt issuance will be directed to the intended use. Section 4 (Internal Control Procedures Concerning Use of Proceeds of Debt) provides information regarding the City's internal control procedures designed to ensure that the proceeds of its debt issues are spent as intended. A-12 G:\rda\veronica Tapia\Word Piles\Stall Report'Rcrrsed Palm Desert-Debt Polic%red 5%6 3-9-17.doe