E. Debt Policy Draft
CITY OF
CHANHASSEN
7700 Market Boulevard
PO Box 147
Chanhassen, MN 55317
Administration
Phone 952.227.1100
Fax: 952.227.1110
Building Inspections
Phone: 952.227.1180
Fax: 952.227.1190
Engineering
Phone: 952.227.1160
Fax: 952.227.1170
Finance
Phone: 952.227.1140
Fax: 952.227.1110
Park & Recreation
Phone: 952.227.1120
Fax: 952.227.1110
Recreation Center
2310 Coulter Boulevard
Phone: 952.227.1400
Fax: 952.227.1404
Planning &
Natural Resources
Phone: 952.227.1130
Fax: 952.227.1110
Public Works
1591 Park Road
Phone: 952.227.1300
Fax: 952.227.1310
Senior Center
Phone: 952.227.1125
Fax: 952.227.1110
Web Site
www.ci.chanhassen.mn.us
E
MEMORANDUM
TO:
Mayor
City Council Members
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FROM:
Greg Sticha, Finance Director
DATE:
May 14,2007
SUBJ:
Review of Initial Draft of Debt Policy
BACKGROUND
In the summer of 2006, I attended a presentation made by Standard & Poor's (the
city's Bond Rating Agency), in which they discussed a new program they are
using to rate their clients. This new program is called, "Financial Management
Assessment." The purpose of this program is to determine which of their clients
have in place good, sound financial management tools and practices. After
hearing the presentation, it became clear that the City of Chanhassen is considered
strong in almost all categories graded by S & P, and good in most others, based on
my evaluations.
One criterion they evaluate is Debt Management Policies. The City does not have
a formal debt policy in place, but based on our past debt practices, we are very
good stewards of our debt use. With that in mind, staff thought it would be a
good idea to put into place a formal debt policy. When setting goals for 2007,
creating a debt policy was added to the list of goals for our Key Financial
Strategies for 2007. One item of note, you will not see any measurements of our
enterprise or revenue backed debt, those debt issues are monitored as part of our
annual rate study in the fall.
Attached is the initial draft of a debt policy for discussion at the May 14th work
session. During that work session, staff will be looking for feedback or
recommendations on any portions of this initial draft of the policy. Keep in mind
that the purpose of the debt policy is to have a tool in place that sets guidelines for
issuing debt, but does not limit or strain the city's ability to issue debt when
needed. Representatives from Ehlers and Associates will also be present to guide
us through the discussion.
RECOMMENDA TION
Staff recommends that the City Council review and make suggestions to staff on
this initial draft of the City's debt policy. Once the document is in final form, it
will be scheduled for approval at a regular Council meeting.
ATTACHMENT
1. Initial Draft of Debt Policy.
The City of Chanhassen · A growing community with clean lakes, quality schools, a chamning downtown, thriving businesses, winding trails, and beautiful parks. A great place to live, work, and play.
Chanhassen Debt Policy
The City of Chanhassen has chosen, by policy, to guide its issuance of debt by following
the guidelines listed below. These practices were identified through examination of
materials from state statutes, bond rating agencies, and the Oovernment Finance Officers
Association (OFOA). This policy can be amended in the future by the City Council, but
is consistent with general municipal practices at the time of its adoption.
Policy Adoption
In accordance with the authorities cited in the background section, the City of
Chanhassen will use the following policies in determining when and how to use debt for
financing capital and equipment needs.
I. Debt Limits
a. Legal Limits:
1. Minnesota Statutes, Section 475 states that the statutory limit for
outstanding debt principal cannot exceed 2% of the taxable market
value. This limitation applies only to debt that is wholly tax-
supported. The type of debt included is either general obligation
debt of any size bond issue (0.0.), or lease revenue bond issues
that were over $1,000,000 at the time of issuance. However, there
are also several other types of debt, including 0.0. tax increment,
0.0. abatement, 0.0. special assessment, 0.0. utility revenue, and
most HRA or EDA-issued debt that have a separate revenue source
other than taxes, and are therefore excluded from the legal debt
limit calculation. HRA and EDA public project revenue bonds or
lease revenue bonds that have a financing lease agreement with a
city or county do count against the statutory debt limit.
11. Local ordinances do not limit the City's ability to issue debt.
b. Policy Limits:
1. Uses of Debt: Debt will be used for capital costs only. The City
will not utilize debt for cash flow borrowing, even though this is
allowed by state statutes.
11. CIP and Financial Planning: The City's capital improvement plan
shall contain debt assumptions that match this policy and requires a
commitment to long-range financial planning that looks at multiple
years of capital and debt needs.
111. Tax Increment Bonds: The City shall use G.O. Tax Increment
Bonds only when the development merits special consideration.
c. Financial Limits:
1. Direct debt is the amount of general obligation principal or lease
obligations supported by taxes that are outstanding for the City
only. Indirect debt is the amount of the City's share of debt of
other taxing jurisdictions based upon the City's share of that taxing
jurisdiction's net tax capacity. Direct debt per capita shall not
exceed $1,000. Direct debt as a percentage of the City's taxable
market value shall not exceed 2%, excluding revenue-based debt.
11. Bond issues may require a special debt levy. The City hereby
adopts a policy to limit the amount of the city's property tax levy
dedicated to debt service (principal and interest plus 5% for G.O.
bonds) to less than 25% of the total tax levy. Unlike rating
agencies, the City's definition of tax levy does not include special
assessments, tax abatements, or tax increments.
111. Conduit debt - The City will review requests for issuance of
conduit debt on a case-by-case basis. The city may request a fee
up front not to exceed 1 % of the par amount of the issuance.
II. Use of Variable Rate Debt and Derivatives
a. Variable Rate Debt. The City shall use variable rate debt only if the total
principal and interest of the debt constitutes less than 20% of the City's
total debt payments and only if circumstances dictate the need for a short
call date.
b. Derivatives. The City will not use derivative-based debt.
III. Debt Structuring Practices
a. Term: State law limits general obligation debt to 30 years in most
circumstances. The City shall not exceed 25 years in term of debt.
b. Term for Equipment: The city has a goal of paying for all capital
equipment with a useful life of five years or less from cash reserves or
annual operating budgets. State law does allow cities to issue debt (known
as equipment certificates or capital notes) with a term of ten years or the
useful life of the equipment if it is at least 10 years. The city would prefer,
within the bounds of levy limits, to fund capital equipment on a pay-as-
you-go basis. Capital equipment with a useful life greater than five years
may be financed with debt, but the bond term should not exceed ten years.
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c. The City's collective debt shall amortize at least 50% of its principal
within 10 years.
d. The City shall typically issue debt with level principal and interest
payments.
e. The City shall have a call date (pre-payment date) of no longer than
10 years on longer term debt and 6 to 8 years on shorter-term debt.
IV. Debt Issuance Practices
a. Rating Agencies: The City utilizes Standard and Poor's for all of its debt
issuance of more than $1 million or longer than 3 years in term.
b. Method of Sale: The City shall use competitive bidding for all of its debt
unless the debt is so specialized in its nature that it will not attract more
than 2 bids.
c. Refunding:
1. Advance refunding bonds shall not be utilized unless the present
value savings of 4% to 5% of refunded principal is achieved and
unless the call date is within 4 years. The state law minimum is
3% of refunded principal. Bonds shall not be advance refunded if
there is a reasonable chance that revenues will be sufficient to pre-
pay the debt at the call date.
11. Current refunding bonds shall be utilized when present value
savings of 3% of refunded principal is achieved or in concert with
other bond issues to save costs of issuance.
111. Special assessment or revenue debt will not be refunded unless the
Finance Director determines that special assessments or other
sufficient revenues will not be collected soon enough to payoff the
debt fully at that call date.
d. Professional Services. The City shall use an outside bond attorney and an
independent financial advisor to structure the sale.
V. Debt Management Practices
a. Investment of bond proceeds. The City shall follow the same investment
guidelines when investing debt proceeds as stated in the City's investment
policy.
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b. Disclosure: The City shall comply with SEC rule 15(c)2(12) on primary
and continuing disclosure. Continuing disclosure reports shall be filed no
later than 180 days after receipt of the City's annual financial report.
c. Arbitrage Rebate: The City shall complete an arbitrage rebate report for
each issue no less than every five years after its date of issuance.
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ANNUAL MEASUREMENT TO DEBT POLICIES
Percent of
Debt Limit as of December 31, 2005 Amount Market Value
Maximum Debt Limit Allowed by State Law $56,177,578 2.0%
(Based on Market Value)
Actual Outstanding Debt $ 8,150,626 .3%
Available Debt $48,026,952 1.7%
Debt Limit: As of 12-31-05, the City's debt limit was $56,177,758 (based on market
value) and the debt outstanding that is subject to the limit was $8,150,626. Direct debt as
a percentage of the City's taxable market value is .3% as of 12-31-05.
History of Debt Per Capita
$1,000 per capita limit
$1,000 -
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
342
2000
2001
2002
2003
2004
2005
Direct debt per capita is $342 as of 12-31-05.
Amount of City's Property Tax Levy Dedicated to Debt Service
(Principal & Interest)
2007 2006
Total Levy $9,575,778 $9,354,890
Maximum Allowed Per Policy $2,393,945 25% $2,338,723 25%
Actual Amount $1,942,928 20% $1,938,790 21%
The amount of the city's property tax levy dedicated to debt service (principal and
interest) is 20% of the total tax levy (2007 levy).
. The City currently has no outstanding variable rate debt. The policy requires that
50% of all debt be amortized within 10 years.
. As of December 31, 2006, 72% of the City's debt will amortized within 10 years.
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