Chapter 4.25
DEBT MANAGEMENT POLICY
Sections:
4.25.010 Debt management objectives and goals.
4.25.040 Disclosure practices and procedures.
4.25.050 Debt administration – Investments, use of proceeds and tax compliance.
4.25.010 Debt management objectives and goals.
The Hi-Desert Water District (“district”) debt management policy sets forth certain debt management objectives for the district, establishes overall parameters for issuing and administering debt for which the district is financially obligated or is responsible for managing, and provides policy guidelines for decision makers. The district recognizes that cost-effective access to the capital markets depends on prudent management of the debt portfolio.
The purpose of this debt management policy is to assist the district in meeting the following equally important objectives and goals:
A. Minimize debt service and issuance costs;
B. Maintain access to cost-effective borrowing;
C. Achieve the highest practical credit rating;
D. Full and timely repayment of debt;
E. Maintain full and complete financial disclosure and reporting;
F. Ensure financial controls are in place with respect to proceeds of debt issuances; and
G. Ensure compliance with applicable state and federal laws. [Res. 18-22 § 1].
4.25.020 General provisions.
A. Scope of Application.
1. Parameters. These policies establish the parameters within which debt may be issued by or on behalf of the district. Additionally, these policies apply to debt issued by the district on behalf of an assessment district for a community development project, such as the wastewater treatment and reclamation facility project (“project”).
In the event the district becomes a member of joint powers authorities, the district will take these policies into account when considering approval of the issuance of joint powers authority debt for which the district is financially obligated. Supplemental policies, tailored to the specifics of certain types of financings, may be adopted by the board of directors (“board”) of the district in the future.
2. Types of Debt.
a. The following types of debt may be issued under this policy subject to state and federal law and district code as applicable. Prior to issuance of debt, a reliable revenue source shall be identified to secure repayment of the debt.
i. General obligation bonds.
ii. Bond or grant anticipation notes.
iii. Lease revenue bonds or notes, certificates of participation and lease purchase transactions.
iv. Other revenue bonds or notes and certificates of participation.
v. Tax and revenue anticipation bonds or notes.
vi. Land-secured financings, such as special tax revenue bonds and limited obligation assessment bonds.
vii. Tax increment financings to the extent permitted under state law.
b. Debt may be publicly issued or privately placed and may be issued on either a long term basis (“long-term borrowing”) or short-term basis (“short-term borrowing”) consistent with the provisions of this policy.
B. Responsibility for Debt Management Activities. The chief financial officer will be responsible for managing and coordinating all activities related to the issuance and administration of debt, including the implementation of internal control procedures to ensure that the proceeds of debt will be directed to the intended use. The chief financial officer is appointed by the general manager and is subject to his or her direction and supervision.
Departments implementing debt-financed capital programs will work in partnership with the chief financial officer to provide information and otherwise facilitate the issuance and administration of debt.
1. Debt Management Policy Review and Approval. This policy, adopted by resolution of the board, will be reviewed annually by the finance committee to ensure that the policy remains current. It is the intention of the district that any modifications to this policy will be reviewed by the finance committee and forwarded to the board with the committee’s recommendation, unless otherwise directed by the board.
2. Annual Debt Report. The chief financial officer will prepare an annual debt report for review by the finance committee and forwarded by the committee to the board for their consideration. The content of the annual debt report will include a summary of credit ratings, outstanding and newly-issued debt, a discussion of anticipated debt issues, refunding opportunities, a review of legislative, regulatory, and market issues, and an outline of any new or proposed changes to this debt management policy.
3. Debt Administration Activities. The chief financial officer is responsible for debt administration activities, particularly investment of bond proceeds, monitoring compliance with bond covenants, implementing internal control procedures to ensure the use of proceeds of bonds or other debt will be directed to the intended use, monitoring use of facilities financed with tax-exempt debt, continuing disclosure, monitoring arbitrage compliance for tax-exempt debt, and ongoing interactions with credit rating agencies, all of which shall be centralized within the finance department.
C. Purposes for which Debt May Be Issued.
1. Long-Term Borrowing. Long-term borrowing may be used to finance the acquisition or improvement of land, facilities, conveyance systems or equipment for which it is appropriate to spread these costs over more than one budget year and, with respect to the district, will be reflected in the adopted annual capital budget and adopted five-year capital improvement plan. Long-term borrowing may also be used to fund capitalized interest, costs of issuance, required reserves, and any other financing-related costs which may be legally capitalized. Long-term borrowing shall not be used to fund normal and recurring operating costs.
2. Short-Term Borrowing. In general, short-term borrowing through financing vehicles, such as commercial paper and lines of credit, will be considered as an interim source of funding for a capital improvement in anticipation of long-term borrowing or for the acquisition of equipment. Short-term debt may be issued for any purpose for which long-term debt may be issued, including capitalized interest and other financing-related costs. The final maturity of the debt issued to finance the project shall be consistent with the economic or useful life of the project and, unless the district’s board determines that extraordinary circumstances exist, must not exceed seven years. The board may also authorize the use of a short-term financing vehicle with a maturity longer than seven years consistent with the useful life of the financed project if use of a short-term financing vehicle would be a beneficial component to the applicable debt portfolio. Additionally, short-term borrowing may be considered if available cash is insufficient to meet short-term operating needs.
3. Refunding. Periodic reviews of outstanding debt will be undertaken to identify refunding opportunities. Refunding will be considered (within federal tax law constraints) if and when there is a net economic benefit of the refunding. Refundings which are noneconomic may be undertaken to achieve objectives relating to changes in covenants, call provisions, operational flexibility, tax status, issuer, or the debt service profile.
In general, refundings which produce a net present value savings of at least three percent of the refunded debt will be considered economically viable.
Refundings which produce a net present value savings of less than three percent will be considered on a case-by-case basis. Refundings with negative savings will not be considered unless there is a compelling public policy objective that is accomplished by retiring the debt.
4. Lease Financing.
a. As used in this section, the term “lease financing” means any lease or sublease made between the district and another party for the purpose of financing the acquisition, construction or improvement by the district of real property or equipment. By way of example and not limitation, the term “lease financing” includes certificates of participation, lease revenue bonds or lease revenue notes.
b. Prior to bringing a lease financing to the board for approval, the chief financial officer will perform initial due diligence on the project to be financed. The chief financial officer’s due diligence review will include the following elements:
i. Any lease financing must have an identified revenue source for repayment, which may include the general fund, eligible special funds or project revenues.
ii. Prior to embarking on a lease financing in which project revenues are identified as the repayment source, a feasibility study will be performed to determine the volatility of the revenue and provide a sensitivity analysis on project revenue projections including worst/best case scenarios, including without limitation, the impact on any repayment source identified as the backstop to the project revenues as the repayment source.
iii. The chief financial officer will present the results of the due diligence review including any feasibility study to the general manager for review, then to the finance committee, and finally to the board for review and consideration, in order to proceed with the preparation of the documents necessary for the lease financing. A majority vote by the board is required.
iv. At the time the chief financial officer brings forward the lease financing for board approval, he/she will also provide the board with an update to the due diligence report, if available, and any feasibility study. A majority vote by the board is required.
c. The provisions of this section will not apply to a refunding of a lease financing transaction. [Res. 18-22 § 1].
4.25.030 Debt issuance.
A. Debt Capacity. The district will keep outstanding debt within the limits of applicable law and at levels consistent with its credit worthiness objectives. Without limiting the foregoing, the district will keep outstanding debt within the limits established by the board.
In particular, the district will assess the impact of new debt issuance on the long-term affordability of all outstanding and planned debt issuance. Such analysis recognizes that the district may have limited capacity for debt service in its budget, and that each newly issued financing will obligate the district to a series of payments until the bonds are repaid.
B. Credit Quality. The district seeks to obtain and maintain from rating agencies the highest possible credit ratings for all categories of short-term and long-term debt. The district will not issue bonds that do not carry investment grade ratings. However, the district will consider the issuance of nonrated special assessment, community facilities, and special facility bonds.1
C. Structural Features.
1. Debt Repayment. Debt will be structured for a period consistent with a fair allocation of costs to current and future beneficiaries of the financed capital project, and consideration will be given so that the maturity of the debt issue is consistent with the economic or useful life of the capital project to be financed.
2. Variable-Rate Debt. The district may choose to issue securities that pay a rate of interest that varies according to a predetermined formula or results from a periodic remarketing of the securities. Such issuance must be consistent with applicable law and covenants of preexisting bonds, and in an aggregate amount consistent with creditworthiness objectives. When making the determination to issue bonds in a variable rate mode, consideration will be given in regards to the useful life of the project or facility being financed or refinanced or the term of the project requiring the funding, market conditions, and the overall debt portfolio structure when issuing variable rate debt for any purpose.
D. Professional Assistance. The district will utilize the services of independent financial/municipal advisors and bond counsel on all debt financings. The general manager has the authority to periodically select service providers as necessary to meet legal requirements and minimize net debt costs. Such services, depending on the type of financing, may include financial advisory, underwriting, trustee, verification agent, escrow agent, arbitrage consulting, and special tax consulting. The general manager is responsible for selection of bond counsel and for publicly issued debt, disclosure counsel. Additionally, the general manager will be responsible for the selection of disclosure counsel in those circumstances where the general manager determines it to be necessary or desirable to retain disclosure counsel to generally advise the district with respect to its obligations under state and federal securities laws. The goal in selecting professional assistance advisors, whether through a competitive process or when appropriate, a sole-source selection, is to achieve an appropriate balance between service and cost.
E. Method of Sale. Except to the extent a competitive process is required by law, the general manager shall be responsible for determining the appropriate manner in which to offer any securities to investors. The preferred method of sale is competitive bid. However, other methods, such as negotiated sale and private placement, may be considered on a case-by-case basis. [Res. 18-22 § 1].
4.25.040 Disclosure practices and procedures.
A. Statement of Policy. The district is committed to full and complete primary (prior to issuance) and secondary (post issuance) market disclosure in accordance with disclosure requirements established by the Securities and Exchange Commission and Municipal Securities Rulemaking Board, as may be amended from time to time. The district is also committed to cooperating fully with rating agencies, institutional and individual investors, other levels of government, and the general public to share clear, timely, and accurate financial information.
B. Implementation of Policy Objectives.
1. Definitions. For purposes of this section, the following definitions apply:
“Continuing disclosure agreement” means the certificate or agreement entered into by the district in connection with the sale of bonds in order to satisfy the requirements of Securities and Exchange Rule 15c2-12 that requires the district to provide specified information and annual reports while the bonds remain outstanding.
“Offering document” means the document prepared in connection with the sale of bonds to the public.
2. Written Policies and Procedures. In order to carry out these policies objectives, the general manager, in consultation with district counsel, will implement written disclosure policies and procedures related to the provision of financial and other relevant information to investors, including preparation and review of offering documents before submission to the district’s board for approval, compliance with continuing disclosure agreements, and other related topics.
3. Review and Approval of Offering Documents. The district’s consideration of the approval of bonds and the offering document related to the bonds is to be placed on the applicable agenda as a new business matter and not on the consent calendar. Any offering document to be issued in connection with the sale of the bonds is to be transmitted to the district’s board in substantially final form for its consideration and approval to release to investors, subject to any updating required to make the offering document accurate and complete. The board’s review will consider whether the offering document includes all material information to an investor in the bonds – meaning information where there is a substantial likelihood that the information would have actual significance in the deliberations of the reasonable investor. At the board meeting at which the proposed sale of bonds is considered, the board will have the opportunity to address questions to staff and the professional advisors regarding the information presented in the offering document.
4. Responsibility for Disclosure. The general manager and the chief financial officer are the designated officials for communicating information concerning the finances and other information about the district that a reasonable investor would consider to be material in making a decision to purchase or sell debt issued by the district. Communications from other district officials or employees regarding the financial condition of the district will not be considered to be official communications to the investor marketplace. [Res. 18-22 § 1].
4.25.050 Debt administration – Investments, use of proceeds and tax compliance.
A. Investment and Use of Proceeds. Investments of proceeds of bonds or other forms of debt shall be consistent with federal tax requirements and any applicable state law requirements, and with requirements contained in the governing documents.
The chief financial officer will be responsible for the implementation of internal control procedures to ensure that the proceeds of debt, regardless of tax status, will be directed to the intended use. This responsibility is in addition to the specific requirements related to the monitoring use of tax-exempt proceeds specified below.
B. Federal Tax Compliance.
1. Responsible Department. The finance department will have primary responsibility for all ongoing tax compliance matters relating to tax-exempt debt issued by the district. The chief financial officer, in consultation with the general manager, who may in turn consult with bond counsel, will be responsible for monitoring ongoing tax compliance matters relating to tax-exempt debt, including compliance with the arbitrage rebate requirements of Section 148 of the Internal Revenue Code, as set forth below. It is contemplated that additional policies and procedures will be implemented by either or both the general manager and the chief financial officer to supplement the policies and procedures set forth in this policy.
2. Arbitrage Compliance. The finance department will maintain a system of record keeping and reporting to meet the arbitrage compliance requirements of federal tax law for tax-exempt debt. In connection with this responsibility, the department will:
a. Program payment of required rebate amounts, if any, no later than 60 days after each five-year anniversary of the issue date of bonds or notes, and no later than 60 days after the last bond or notes of each issue is redeemed;
b. During the construction period of each capital project financed in whole or in part by bonds or notes, monitoring the investment and expenditure of proceeds and consult with rebate experts as necessary to determine compliance with any applicable exceptions from the arbitrage rebate requirements during each six-month spending period up to six months, 18 months or 24 months, as applicable, following the issue date of the bonds or notes; and
c. Retain copies of all arbitrage reports and account statements as described in subsection (B)(4) of this section, Record Keeping Requirements.
3. Use of Tax-Exempt Debt and Facilities. The chief financial officer, together with the applicable district departments, will be responsible for:
a. Monitoring the use of tax-exempt proceeds and the use of tax-exempt financed or refinanced assets (e.g., facilities, furnishings or equipment) throughout the term of the debt to ensure compliance with covenants and restrictions set forth in the governing documents relating to the debt;
b. Maintaining records identifying the assets or portion of assets that are financed or refinanced with proceeds of each issue of tax-exempt debt, including a final allocation of tax-exempt proceeds as described in subsection (B)(4) of this section, Record Keeping Requirements;
c. Consulting with the general manager, district counsel and bond counsel in the review of any contracts or arrangements involving use of tax-exempt financed or refinanced assets to ensure compliance with all covenants and restrictions set forth in the governing documents relating to the tax-exempt debt;
d. Maintaining records for any contracts or arrangements involving the use of tax-exempt financed or refinanced assets as described in subsection (B)(4) of this section, Record Keeping Requirements;
e. Conferring at least annually with personnel responsible for tax-exempt financed or refinanced assets to identify and discussing any existing or planned use of tax-exempt financed or refinanced assets, to ensure that those uses are consistent with all covenants and restrictions set forth in the governing documents relating to the tax-exempt debt; and
f. To the extent that the district discovers that any applicable tax restrictions regarding use of tax-exempt proceeds and tax-exempt-financed or refinanced assets will or may be violated, consulting promptly with the general manager, district counsel and bond counsel to develop a course of action to remediate any identified violation.
4. Record Keeping Requirements. The finance department and other applicable district departments, as may be necessary, will be responsible for maintaining the following documents for the term of each issue of tax-exempt debt (including debt issued to refinance existing debt, if any) plus at least three years:
a. A copy of the closing transcript(s) and other relevant documentation delivered to the district at or in connection with closing of the issue of tax exemption, including any elections made by the district in connection therewith;
b. A copy of all material documents relating to capital expenditures financed or refinanced by tax-exempt debt proceeds, including (without limitation) construction contracts, purchase orders, invoices, trustee requisitions and payment records, draw requests for tax-exempt debt proceeds and evidence as to the amount and date for each draw down of tax-exempt debt proceeds, as well as documents relating to costs paid or reimbursed with tax-exempt debt proceeds and records identifying the assets or portion of assets that are financed or refinanced with tax-exempt debt proceeds, including a final allocation of tax-exempt debt proceeds;
c. A copy of all contracts and arrangements involving the use of tax-exempt debt-financed or refinanced assets; and
d. A copy of all records of investments, investment agreements, arbitrage reports and underlying documents, including trustee statements, in connection with any investment agreements, and copies of all bidding documents, if any. [Res. 18-22 § 1].
In most cases, a bond which cannot achieve an investment-grade rating will not be rated at all.