HomeMy WebLinkAbout[06] Debt Management Policyc1W of ST. J(AKPH
MEETING DATE: August 18, 2011
Council Agenda Item 6
AGENDA ITEM: Debt Management Policy — Requested Action: Adopt Debt Management Policy
SUBMITTED BY: Finance
BOARD /COMMISSION /COMMITTEE RECOMMENDATION: None
PREVIOUS COUNCIL ACTION: None
BACKGROUND INFORMATION:
The bond ratings we received the past couple years stated the City's financial position is very strong
based on the City's reserves and financial practices. Standard and Poor's assigned the City an A+ bond
rating long -term rating in 2010 as a reflection of the City's financial position. One question that comes
up with each bond rating the City receives is whether or not the City has a debt management policy.
Although the City follows sound debt management practices, the lack of a formal policy prohibits the
City from receiving a higher bond rating. By increasing the bond rating correlates to lower interest rates
on the City's bond issues. Staff enclosed last year's bond rating from Standard and Poor's to provide
information about the City's bond rating.
Staff worked with Monte Eastvold, Northland Securities financial advisor, to establish a draft debt
management policy. The policy includes restrictions based on Minnesota Statutes. The purpose of the
policy is to establish parameters and provide guidance for the debt management of the City. The
parameters will limit the amount of debt issued on a per capita basis and restrict the type of debt to be
issued. The policy further requires periodic disclosure about the City's debt and provides definitions
relating to debts to assist the public with understanding municipal debt.
Staff recommends Council to adopt the debt management policy before the next bond issue in
September. The upcoming bond issue is quite large and will require a bond rating. Maintaining or
increasing our bond rating will result in more favorable interest rates on the debt issue.
BUDGET /FISCAL IMPACT: Potential decrease in bond interest rates
ATTACHMENTS:
Request for Council Action —Debt Management Policy ..... ..........................6:1 -2
Draft Debt Management Policy .............................................. ..........................6:3 -8
Standard & Poor's Global Credit Portal [August 27, 2010] . .........................6:9 -14
REQUESTED COUNCIL ACTION: Adopt the Debt Management policy as presented.
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Section 1. Debt Management Policy Purpose
The purpose of this Debt Management Policy is to provide the City Council with written guidelines and
restrictions as follows:
1. To use in the capital planning funding decision to determine the amount and type of debt to be
issued, in the debt issuance process (including determining acceptable level of risk for a debt
transaction), and in the management of debt.
2. To provide limits:
a. on the amount of debt outstanding and on the amount of annual debt service;
b. on the use of and justification for variable -rate debt;
c. on the use of and justification for debt structures other than level principal or level debt
service;
d. on the maximum maturities of debt;
e. on the timing of principal and interest payments;
f. on the use of credit enhancements; and
3. To improve the quality of decision, provide the basis for determination of the structure of debt, to
identify policy goals, and to demonstrate a commitment to long -term financial planning,
including a multi -year capital plan;
4. To serve as a public commitment by the City Council to manage the financial affairs of the City
of St. Joseph so as:
a. to minimize legal risk by complying with all laws while planning debt transaction,
executing them, and through the life of the debt transactions;
b. to minimize the financial risk to current and future budgets especially the risk associated
with delayed principal payment, debt structures, and variable -rate interest;
c. to maximize future debt capacity;
d. to maintain access to the local, regional and national credit markets;
e. to minimize the financing cost of capital projects at the lowest level of risk;
f. to provide all disclosure required by law;
g. to adopt and adhere to financial management policies as a signal to the rating agencies,
capital markets, and citizens that the City of St. Joseph is well managed and meets
obligations in a timely manner.
To provide for public accountability and transparency as it relates to:
a. the selection of and payment for professional services related to the issuance of debt;
b. the avoidance of conflicts of interest;
c. full disclosure of all proposed and actual costs, to citizens, the Governing Body,
investors, regulators and other government official;
d. the debt financing decision, implementation, and maintenance.
Section H. Debt Management Policy Goals
The goals for this Debt Management Policy are:
1. To identify and comply with all law related to debt issuance and management;
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2. To have citizens and stakeholders informed of contemplated and outstanding debt and all costs
proposed and actual;
3. To minimize the use of short-term cash flow borrowing by maintaining adequate working capital
and authorizing only the minimum amount required to offset mismatches between available cash
and cash outflows determined by cash flow analysis;
4. To issue debt to finance projects only which are included in the City of St Joseph Capital
Improvement Plan or Economic Development Strategic Plan; and
5. To establish criteria to determine any use of general obligation debt, revenue and tax debt,
revenue debt, conduit debt, short-term debt and capital leases.
Section III. Debt Administration Practices
In developing, offering and administering its debt obligations, the City of St. Joseph will adhere to the
following practices:
1. The sale process to be utilized will include the competitive sale as well as the negotiated sale
process depending upon the current market conditions. Recommendations for the preferred
process will be brought to the City Council during the development of each debt issuance.
2. Communications with the investing public and the national bond rating community will be given
a high priority in order to maintain credibility through the flow of information both by personal
contact and electronic means.
3. Complete and full disclosure of all financial and economic operations will be met through the
timely distribution of the annual audited financial report, debt offering statement, operating
budget, capital improvement plan, the immediate transmission of information and details related
to any material event, and the long -range financial plan.
4. Compliance with the terms, conditions, and covenants of all outstanding bond or lease
transactions will be continually monitored and followed.
Determination of type and security of debt should be made based upon a review of the following
factors:
a. Direct and indirect beneficiaries of the project.
b. Useful life of the project to be funded.
c. Ability of a project to fund itself through user fees.
6. Refunding and advance refunding. Savings opportunities will be monitored by the Finance
Department and the City's financial advisor and action will be taken when determined financially
advantageous. Net Present Value debt service savings of a minimum of three percent (3 %) will
be the target savings threshold.
Section IV. Debt Management Considerations
In planning capital facility and equipment needs, the City of St. Joseph will consider the following:
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1. General obligation bond proceeds will not be utilized to fund the general operation or cash flow
needs of the City, even though this is allowed by Minnesota Statutes.
2. Rating Agency: The City will employ a rating agency on all debt issues where the rating process
will enhance the offering to the public. The City shall employ one of the following rating
agencies:
a. Fitch Investors Service
b. Moody's Investors Service
c. Standards and Poor's Rating Services
3. Monitor trends of key financial, economic, and debt ratios such as:
a. Taxable market value per capita.
b. Available General fund balance compared to annual General fund expenditures.
c. Annual debt service for general obligation direct debt and contracts to total general
expenditures.
d. Direct general obligation debt and contracts as a percentage of taxable market value.
e. Direct general obligation debt and contracts per capita. Direct debt per capita shall not
exceed $2,500.
f. Overall general obligation debt and contracts per capita.
g. Debt Limit — The City of St. Joseph shall not exceed the statutory debt limits as identified
in MN Statute 475.
h. Debt Margin — The minimum debt margin to be preserved for future projects and
contingencies will be 50 %.
Section V. Issuance Provisions
When determining the structure of a debt obligation, the following provisions shall be considered:
1. The City's collective debt shall amortize at least 50% of its principal within 10 years.
2. Scheduled maturities of long -term debt may not exceed the expected useful life of the capital
project or asset acquired. In all cases, the maximum term cannot exceed 25 years.
3. The City's special debt levy shall not exceed 50% of the City's total levy.
4. The City will fund the annual principal and interest payments of each debt as required by
Minnesota Statutes.
5. Call features should be utilized to allow maximum future debt management flexibility, but
maintaining sensitivity to bond market needs.
6. Competitive bids for bonds will be compared on a "True Interest Cost" basis.
7. The City will issue fixed rate debt with level principal and interest payments, except in limited
cases where variable debt provides the best debt structure for the City.
8. The City will consider entering into Pay As You Go TIF agreements under the guidelines set
forth by the Economic Development Authority (EDA) and the City. The City may consider TIF
Bonds only when the City Council determines that issue will not be a risk to the City.
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9. Coordination of capital needs with overlapping or other units of government should be
undertaken to avoid periodic marketing conflicts as well as increase awareness of the impact of
debt on property tax - paying entities.
Section VI. Issuance Types
When the City Council determines that an eligible project will be funded through the issuance of debt, the
following types of debt structures shall be considered:
General Obligation Debt Bonds (G.O.)--- Property Tax supported. General obligation bonds are
direct obligations of the City and pledge the full faith and credit of the City. G.O. Debt Bonds are
used to finance only capital facilities and equipment that are essential to the continued
maintenance or development of the City.
a. Any project considered for funding must be included in the Capital Improvement Plan of
the City.
b. The revenue stream for re- payment of the debt is primarily general property tax, but in
some circumstances may include contract revenue.
2. General Obligation Improvement Bonds (G.O.). — General Obligation bonds are direct obligations
of the City and pledge the full faith and credit of the City. G.O. Improvement bonds are used to
finance street and utility improvements that are essential to the continued upkeep, maintenance,
and /or development of the City.
a. Any project considered for funding must be included in the Capital Improvement Plan of
the City.
b. The bonds are supported primarily by special assessment revenues and property tax
levies.
3. General Obligation Revenue Bonds. Bonds which are supported wholly by revenues not based
on real estate property values and can include: sales tax, enterprise revenues and other user fees.
4. Special Obligation Revenue Bonds (Conduit Debt). Conduit debt obligations are certain limited
obligation revenue bonds or similar debt instruments issued for the express purpose of providing
capital financing for a specific third party. Although these bonds bear the name of the City, the
City has no obligation for such debt.
a. These bonds should be issued when the proposed development is expected to be finically
feasible and contributes to the general welfare or development of the City.
b. The City will charge a fee of up to 2% of the bond offering.
Equipment Certificates. These bonds are direct obligations of the City and pledge the full faith
and credit of the City. Equipment Certificates shall be used to purchase equipment that is part of
the Capital Improvement Plan.
a. The City shall try and manage equipment certificates so that new certificates are only
issued when a certificate expires. However, there may be times when this is not feasible.
b. The revenue stream for re- payment of the debt is primarily general property tax, but in
some circumstances may include contract revenue.
6. Lease Transactions. The City shall have the option of financing equipment and facilities by
executing a lease agreement with a third apart. In considering leasing the following shall be
considered:
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a. Before execution of a lease agreement, the Finance Director and Bond Counsel shall
compare the cost of issuing long -term debt versus lease. A lease shall be utilized when
this comparison results in favorable to issuing long term debt.
b. Adequate general or enterprise revenues should be available to service the payments.
c. When possible, the lease should be structured to be subject to non - appropriation so that
the lease payments fall outside of any levy limits that may be imposed by the Legislature.
Section VII. Management and Monitoring
1. Post Sale: Immediately after the sale of debt, the process and outcome of the transaction will be
evaluated. This evaluation will contain at a minimum:
a. Market conditions at the time of sale or pricing
b. An evaluation of all borrowing costs including underwriting spread and a comparison of
rates on the City of St. Joseph's debt with similar issues;
c. For a negotiated sale, summary of comparable rates.
2. Investment of Debt Proceeds. Debt proceeds shall be invested in accordance with the St. Joseph
Investment Policy.
3. Project Compliance.
a. Debt proceeds shall be expended within the legally allowable construction/acquisition
period and accounted for in a manner that allows project expenditures to be traced to debt
proceeds to show compliance with the legal requirements.
b. Documents related to a debt issue shall be retained for the life of an issue or the life of the
refunding of the issue plus three years.
4. Continuing Disclosure Report. For each debt issue requiring continuing disclosure under
Securities and Exchange Commission Rule 15c2 -12 the Finance Director or a contracted
dissemination agent shall be named to be responsible for the required reporting.
a. The Finance Director shall monitor required reporting dates to ensure annual and period
reporting requirements are satisfied.
b. Bond counsel shall be required to determine requirements for disclosure to use in
developing procedures.
5. Refunding Debt. The Finance Director shall coordinate with the City Bond Counsel constant
review of City debt to evaluate optimal timing for refunding opportunities which will provide
interest savings.
a. Refunding opportunities shall be reported to the City Council if the net present value
savings of 3% or more can be achieved.
b. Comprehensive cost information associated with a refunding proposal shall be presented
to the City Council along with a benefit analysis.
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St. Joseph, MN's Band Ratings Raised To 'A +'
On Increased Reserves And Improved Financial
Practices
Primary Credit Analyst:
Blake Yocom, Chicago (1) 312 - 233 -7056; blake _yocom @standardandpoors.com
Secondary Credit Analyst:
Caroline West, Chicago 312 - 233 -7047; caroline _west@standardandpoors.com
CHICAGO (Standard & Poor's) Aug. 27, 2010 -- Standard & Poor's Ratings Services
raised its long -term rating and underlying rating (SPUR) on St. Joseph,
Minn.'s outstanding debt to 'A +' from 'A'. At the same time, Standard & Poor's
assigned its 'A +' long -term rating to the city's series 2010B general
obligation (GO) improvement bonds. The outlook on all ratings is stable.
"The ratings reflect an increase in city reserves, as well as management's
improved financial practices," said Standard & Poor's credit analyst Blake
Yocom.
We consider St. Joseph's financial position to be very strong, as evidenced by
very strong general fund reserves. At fiscal year -end 2009 (Dec. 31), the
general fund balance (all unreserved) totaled $1.66 million after a large
$599,000 surplus, or, in our opinion, a very strong 69.3% of expenditures.
Management attributes the surplus to an allocation error that returned
$100,000 to the general fund, unfilled positions, and reduced capital
expenditures. After the state cut local government aid to the city by a total
of $200,000 in fiscals 2008 and 2009, management expects an additional
$295,000 reduction in fiscal 2010. Management had anticipated and budgeted for
$200,000 in local government aid cuts. After further reductions in capital
expenditures, unfilled positions, and other savings, management expects to be
close to break -even in fiscal 2010. Although the city is early in the budget
process, management is projecting a break -even budget in fiscal 2011 with no
use of reserves.
www. standardandpoors .com/ratingsdirect
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St. Joseph, MN's Bond Ratings Raised To 'A +' On Increased Reserves And Improved Financial Practices
Officials will use proceeds from the series 2010B bonds to finance street
improvements in the city and to crossover refund the city's series 2005B GO
improvement bonds.
St. Joseph covers 4.1 square miles and is in Stearns County, about 8 miles
west of St. Cloud and 70 miles northwest of the Minneapolis -St. Paul
metropolitan area. The city has about 6,066 residents.
RELATED CRITERIA AND RESEARCH
• USPF Criteria: GO Debt, Oct. 12, 2006
• USPF Criteria: Key General Obligation Ratio Credit Ranges - Analysis Vs.
Reality, April 2, 2008
Complete ratings information is available to RatingsDirect subscribers on
the Global Credit Portal at www.globalcreditportal.com and RatingsDirect
subscribers at www.ratingsdirect.com. All ratings affected by this rating
action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column.
Standard & Poor's I RatingsDirect on the Global Credit Portal I August 27, 2010
1,t
August 23, 2010
Summary:
St. Joseph, Minnesota; General
Obligation
Primary Credit Analyst:
Blake Yocom, Chicago (1 ) 312 -233 -7056; blake youcom ®standardandpoors.com
Secondary Credit Analyst.
Caroline West, Chicago 312 -233 -7047; caroline _westQstandardandpoors.com
"Table Of Contents
Rationale
Outlook
Related Criteria And Research
% s www. standardandpoors .com/ratingsdirect
r;
Rationale
Standard & Poor's Ratings Services raised its long -term rating and underlying rating (SPUR) on St. Joseph, Minn.'s
outstanding debt to 'A +' from 'A', reflecting an increase in reserves and improved financial practices. At the same
time, Standard & Poor's assigned its 'A +' long -term rating to the city's series 2010B general obligation (GO)
improvement bonds. The outlook on all ratings is stable.
In our opinion, the ratings reflect the city's:
• Proximity and access to St. Cloud, Minn., which provides a diverse employment base;
• Adequate income and strong wealth levels measured by market value per capita; and
• Maintenance of very strong reserves.
Partially offsetting the preceding credit strengths are the city's high carrying charges, as well as our concerns about
the financial strength of the city's water and sewer operations and the debt obligations of those funds.
Officials will use proceeds from the series 2010B bonds to finance street improvements in the city and to crossover
refund the city's series 2005B GO improvement bonds. The bonds are secured by the city's full faith and credit
pledge.
St. Joseph covers 4.1 square miles and is in Stearns County, about 8 miles west of St. Cloud and 70 miles northwest
of the Minneapolis -St. Paul metropolitan area. The city, with about 6,066 residents, provides residents with access
to various employment opportunities in nearby St. Cloud ('AA +' GO rating). St. Cloud (population: 65,650) serves
as the regional employment, retail, trade, and health care center for a three - county area in central Minnesota.
Unemployment in the St. Cloud metropolitan area as of May 2010 was 6.2 %, below the state and national rates.
The city's median household effective buying income is, in our opinion, adequate at 81 % of the state's average and
89% of the nation's average. However, per capita effective buying income is, in our opinion, a low 55% of the
national average. Management has stated that this is attributable mainly to the student population (about 2,100) at
the College of St. Benedict.
Tax capacity for the city increased by an average of 10.6% annually between 2006 and 2010, to $3.84 million. The
city's indicated market value, which is a better representation of area market prices, was $356.48 million, or, in our
Standard & Poor's I RatingsDirect on the Global Credit Portal I August 27, 2010 Q I�
Summary: St. Joseph, Minnesota; General Obligation
opinion, a strong $63,735 per capita, for 2010. The 10 leading taxpayers account for, in our opinion, a very diverse
10.8% of net tax capacity.
We consider St. Joseph's financial position to be very strong, as evidenced by very strong general fund reserves. At
fiscal year -end 2009 (Dec. 31), the general fund balance (all unreserved) totaled $1.66 million after a large $599,000
surplus, or� in our opinion, a very strong 69.3% of expenditures. Management attributes the surplus to an
allocation error that returned $100,000 to the general fund, unfilled positions, and reduced capital expenditures.
After the state cut local government aid to the city by a total of $200,000 in fiscals 2008 and 2009, management
expects an additional $295,000 reduction in fiscal 2010. Management had anticipated and budgeted for $200,000
in local government aid cuts. After further reductions in capital expenditures, unfilled positions, and other savings,
management expects to be close to break -even in fiscal 2010. Although the city is early in the budget process,
management is projecting a break -even budget in fiscal 2011 with no use of reserves. Property taxes (39.5 %) are the
leading revenue source, followed by intergovernmental aid (35 %).
Standard & Poor's considers St. Joseph's financial management practices "good" under its Financial Management
Assessment (FMA) methodology. An FMA of "good" indicates that practices exist in most areas, although not all
might be formalized or regularly monitored by governance officials. We changed the assessment to "good" from
"standard" based on clarification of the city's reserve policy. Management maintains a general fund reserves goal of
four to six months of expenditures. Management provides reperts on budgeted numbers compared to actual results
to the city council monthly. The city also uses a five -year capital improvement plan to address capital needs. The city
does not have a multiyear financial plan or a debt management policy.
In our opinion, St. Joseph's overall debt burden is a moderate $3,793 per capita, but a moderately high 6.5% of
market value. Debt service as a percentage of expenditures is, in our view, high at 54.8 %. The city supports
approximately 51 % of its GO debt with nonproperty tax sources such as special assessments. In addition, the water
and sewer GO debt accounts for 39% of the city's net direct debt obligation. Recent trends have shown a higher
reliance on water and sewer access fees to make debt service payments and operating losses in both the water and
sewer funds. Debt amortization is rapid, with officials retiring 83% of principal over 10 years. The city has no
formal debt plans at this time but anticipates a bond issuance for street improvements within the next two years.
Outlook
The stable outlook reflects our expectation that the city will maintain balanced financial operations and strong
reserves despite reductions in state aid. The city's access to St. Cloud, which serves as a regional economic center in
the area, provides further rating stability.
Related Criteria And Research
USPF Criteria: GO Debt, Oct. 12, 2006
USPF Criteria: Key General Obligation Ratio Credit Ranges — Analysis Vs. Reality, April 2, 2008
Complete ratings information is available to RatingsDirect subscribers on the Global Credit Portal at
www.globalcreditportal.com and RatingsDirect subscribers at www.ratingsdirect.com. All ratings affected by this
rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings
search box located in the left column.
www. standardandpoors .com/ratingsdirect
Summary: St. Joseph, Minnesota; General Obligation
Standard & Poor's I RatingsDirect on the Global Credit Portal I August 27, 2010