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B Review of Initial Draft of Debt Policy 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 WIVW.ci .chanhassen. mn .us B MEMORANDUM TO: Mayor City Council Members FROM: G~- Greg Sticha, Finance Director DATE: June 25, 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 01 Chanhassen · A growing community with clean lakes, quality schools, a charming downtown, thriving businesses, winding trails, and beautiful parks. A great place to live, work, and play. e e 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 Government Finance Officers Association (GFOA). 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 (G.O.), 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 G.O. tax increment, G.O. abatement, G.O. special assessment, G.O. 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. e e 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 upfront 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. 2 e e 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. 3 e e 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. 4 e -- 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% A vailable 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 ~_~_!!!!!!!!J!I_________ ~ - ---------. - - ---- - ------- - . $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 474 449 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. 5