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1g. Approve Amendment to Debt Policy0 CITY OF CHANAASSEN 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 MEMORANDUM TO: Mayor and City Council FROM: Greg Sticha, Finance Director' DATE: June 25, 2012 SUBJ: Amend Debt Policy PROPOSED MOTION: Approval requires a simple majority vote of the city council. "The city council approves the amended Debt Policy for Arbitrage Post Issuance Compliance Issues." BACKGROUND 0 The Internal Revenue Service (IRS) is responsible for enforcing compliance with the Internal Revenue Code and regulations promulgated thereunder governing certain obligations (for example: tax- exempt obligations, Build America Bonds, Recovery Zone Development Bonds, and various Tax Credit Bonds). The IRS expects issuers and beneficiaries of these obligations to adopt and implement a post- issuance debt compliance policy and procedures to safeguard against post - issuance violations. All issuers of tax - exempt bonds are required to file IRS Form 8038 -G upon issuance. Late last September, the IRS revised this form, adding the following line items: Planning & • 43: Private use Natural Resources • 44: Arbitrage Phone: 952.227.1130 • 45 a & b: Reimbursement of Prior Expenditures Fax: 952.227.1110 Issuers want to be able to check lines 43 and 44 in the positive and fill out lines Public works 45 a and b correctly. Adoption, implementation and execution of the policies and 7901 Park Place procedures enable them to check the boxes to line items 43 and 44. Failure to Phone: 952.227.1300 Fax: 952.2271310 y gg check the box may trigger an audit. Senior Center As part of these requirements, Ehlers and Associates (the city's financial adviser), Phone: 952.227.1125 is advising all clients to implement "Post Issuance Guidance Practices and Fax: 952.227.1110 Procedures." In the attached amended Debt Policy, language has been added to address post issuance compliance issues. In addition, staff has updated the policy Web Site www.ci.chanhassen.mn.us with the current debt limit and other debt - related statistics of the city. Also Chanhassen is a Community for Life - Providing for Today and Planning for Tomorrow Mayor & City Council June 25, 2012 Page 2 attached are the procedures the city will follow when dealing with post issuance debt compliance and the related regulations. RECOMMENDATION Staff recommends the city council adopt the attached amended Debt policy for Arbitrage Post Issuance Compliance Issues. ATTACHMENTS 1. Amended Debt Policy 2. Post Issuance Debt Compliance Procedures f: \gregs \debt \amend debt policy memo 6- 25- 12.docx Amended June 25, 2012 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: Minnesota Statutes, Section 475 states that the statutory limit for outstanding debt principal cannot exceed 3% 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. ii. Local ordinances do not limit the City's ability to issue debt. b. Policy Limits: i. 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. ii. 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. iii. Tax Increment Bonds: The City shall use G.O. Tax Increment Bonds only when the development merits special consideration. c. Financial Limits: 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. ii. 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 30% 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. iii. 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 original 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 2 years. 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: 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. ii. 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. iii. 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 pay off 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. 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. VI. Post Issuance Debt Compliance The Finance Director of the City is designated as the City's and City's EDA agent who is responsible for post- issuance compliance of these obligations. Some of examples of this are tax- exempt obligations, Build America Bonds, Recovery Zone Development Bonds and various "Tax Credit" Bonds. In addition, this policy shall apply to the obligations mentioned above as well as bonds, notes, loans, lease purchase contracts, lines of credit, commercial paper or any other form of debt that is subject to compliance. The Finance Director shall assemble all relevant documentation, records and activities required to ensure post- issuance debt compliance as further detailed in corresponding procedures (the "Post- Issuance Debt Compliance Procedures "). At a minimum, the Post - Issuance Debt Compliance Procedures for each qualifying obligation will address the following: 1. General post- issuance compliance; 2. Proper and timely use of obligation proceeds and obligation - financed property; 3. Arbitrage yield restriction and rebate; 4. Timely filings and other general requirements; 5. Additional undertakings or activities that support points 1 through 4 above; 6. Maintenance of proper records related to the obligations and the investment of proceeds of obligations; 7. Other requirements that become necessary in the future. The Finance Director shall apply the Post - Issuance Debt Compliance Procedures to each qualifying obligation and maintain a record of the results. Further, the Finance Director will ensure that the Post - Issuance Debt Compliance Policy and Procedures are updated on a regular and as needed basis. The Finance Director or any other individuals responsible for assisting the Finance Director in maintaining records needed to ensure post - issuance debt compliance, are authorized to expend funds as needed to attend training or secure use of other educational resources for ensuring compliance such as consulting, publications, and compliance assistance. Most of the provisions of this Post - Issuance Debt Compliance Policy are not applicable to taxable governmental obligations unless there is a reasonable possibility that the City may refund their taxable governmental obligation, in whole or in part, with the proceeds of a tax- exempt governmental obligation. If this refunding possibility exists, then the Finance Director shall treat the taxable governmental obligation as if such issue were an 4 issue of tax- exempt governmental obligations and comply with the requirements of this Post - Issuance Debt Compliance Policy. Private Activity Bonds The City may issue tax- exempt obligations that are "private activity" bonds because either (1) the bonds finance a facility that is owned by the City but used by one or more qualified 501(c)(3) organizations, or (2) the bonds are so- called "conduit bonds ", where the proceeds are loaned to a qualified 501(c)(3) organization or another private entity that finances activities eligible for tax- exempt financing under federal law (such as certain manufacturing projects and certain affordable housing projects). Prior to the issuance of either of these types of bonds, the Finance Director shall take steps necessary to ensure that such obligations will remain in compliance with the requirements of this Post - Issuance Debt Compliance Policy. In a case where compliance activities are reasonably within the control of a private party (i.e., a 501(c)(3) organization or conduit borrower), the Finance Director may determine that all or some portion of compliance responsibilities described in this Post - Issuance Debt Compliance Policy shall be assigned to the relevant party. In the case of conduit bonds, the conduit borrower will be assigned all compliance responsibilities other than those required to be undertaken by the City under federal law. In a case where the Finance Director is concerned about the compliance ability of a private party, the Finance Director may require that a trustee or other independent third party be retained to assist with record keeping for the obligation and/or that the trustee or such third party be responsible for all or some portion of the compliance responsibilities. The Finance Director is additionally authorized to seek the advice, as necessary, of bond counsel and/or its financial advisor to ensure the City is in compliance with this Post - Issuance Debt Compliance Policy. ANNUAL MEASUREMENT TO DEBT POLICIES Debt Limit as of December 31, 2011 Amount Percent of Market Value Maximum Debt Limit Allowed by State Law (Based on Market Value $100,504,254 3.0% Actual Outstanding Debt $ 13,585,258 0.4% Available Debt $86,918,996 2.6% Debt Limit: As of 12- 31 -11, the City's debt limit was $100,504,254 (based on market value) and the debt outstanding that is subject to the limit was $13,585,258. Direct debt as a percentage of the City's taxable market value is 0.4% as of 12- 31 -11. Amount of City's Property Tax Levy Dedicated to Debt Service (Princi al & Interest 2012 2011 Total Levy $10,153,690 $10,267,390 Maximum Allowed Per Policy $3,046,107 30% $3,080,217 30% Actual Amount $1,719,190 17% $1,809,190 18% The amount of the City's property tax levy dedicated to debt service (principal and interest) is 17% of the total tax levy (2012 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, 2011, 83% of the City's debt will be amortized within 10 years. 6 rnrcct ueoL per capua is .3JbO as oI 1 L -J t - l t. City of Chanhassen, Minnesota Post - Issuance Debt Compliance Procedures The City Council (the "Council ") of the City of Chanhassen, Minnesota (the "City ") has adopted the attached Post - Issuance Debt Compliance Policy dated June 25, 2012. The Post - Issuance Debt Compliance Policy applies to qualifying debt obligations issued by the City. As directed by the adoption of the Post - Issuance Debt Compliance Policy, the Finance Director of the City will perform the following Post - Issuance Debt Compliance Procedures for all of the City's outstanding debt. 1. General Post - Issuance Compliance a. Ensure written procedures and/or guidelines have been put in place for individuals to follow when more than one person is responsible for ensuring compliance with Post - Issuance Debt Compliance Procedures. b. Ensure training and/or educational resources for post- issuance compliance have been approved and obtained. c. The Finance Director understands that there are options for voluntarily correcting failures to comply with post - issuance compliance requirements (such as remedial actions under Section 1.141 -12 of the Treasury Regulations and the ability to enter into a closing agreement under the Tax - Exempt Bonds Voluntary Closing Agreement Program described in Notice 2008- 31(the "VCAP Program ")). 2. General Recordkeeping a. Retain records and documents for the obligation and all obligations issued to refund the obligation for a period of at least seven years following the final payment of the obligation (or if such obligation is refunded, the final payment of the refunding bond) unless otherwise directed by the City's bond counsel. b. Retain both paper and electronic versions of records and documents for the obligation. c. General records and documentation to be assembled and retained i. Description of the purpose of the obligation (referred to as the project) and the state statute authorizing the project. ii. Record of tax- exempt status or revocation of tax- exempt status, if applicable. iii. Any correspondence between the City and the IRS. iv. Audited financial statements. v. Bond transcripts, official statements and other offering documents of the obligation. vi. Minutes and resolutions authorizing the issuance of the obligation. vii. Certifications of the issue price of the obligation. viii. Any formal elections for the obligation (i.e. election to employ an accounting methodology other than the specific tracing method). ix. Appraisals, demand surveys, or feasibility studies for property financed by the obligation. x. Documents related to governmental grants, associated with construction, renovation or purchase of property financed with the obligation. xi. Reports of any prior IRS examinations of the City or the City's obligation. 3. Arbitrage Yield Restriction and Rebate Recordkeeping a. Investment and arbitrage documentation to be assembled and retained L An accounting of all deposits, expenditures, interest income and asset balances associated with each fund established in connection with the obligation. This includes an accounting of all monies deposited to the Debt Service Account to make debt service payments on the obligation, regardless of the source derived. Accounting for expenditures and assets is described in further detail in Section 4. ii. Statements prepared by Trustee or Investment Provider. iii. Documentation of at least quarterly allocations of investments and investment earnings to each obligation (i.e. uncommingling analysis). iv. Documentation for investments made with obligation proceeds such as: 1. Investment contracts (i.e. guaranteed investment contracts). 2. Credit enhancement transactions (i.e. bond insurance contracts). 3. Financial derivatives (swaps, caps, etc). 4. Bidding of financial products. • Investments acquired with obligation proceeds are purchased at fair market value (i.e. three bids for open market securities needed in advance refunding escrows). b. Computations of the arbitrage yield. c. Computations of yield restriction and rebate amounts including but not limited to: L Compliance in meeting the "Temporary Period from Yield Restriction Exception" and limiting the investment of funds after the temporary period expires. ii. Compliance in meeting the "Rebate Exception ". 1. Qualifying for the "Small Issuer Exception" 2. Qualifying for a "Spending Exception" • 6 Month Spending Exception • 18 Month Spending Exception • 24 Month Spending Exception 3. Qualifying for the "Bona Fide Debt Service Fund Exception" 4. Quantifying arbitrage on all funds established in connection with the obligation in lieu of satisfying arbitrage exceptions (including Reserve Funds and Debt Service Funds) d. Computations of yield restriction and rebate payments. e. Timely Tax Form 8038 -T filing, if applicable. i. Remit any arbitrage liability associated with the obligation to the IRS at each five year anniversary date of the obligation, and the date in which the obligation is no longer outstanding (redemption or maturity date), whichever comes sooner, within 60 days of said date. f. Timely Tax Form 8038 -R filing, if applicable. g. Procedures or guidelines for monitoring instances where compliance with applicable yield restriction requirements depends on subsequent reinvestment of obligation proceeds in lower yielding investments (for example: reinvestment in zero coupon SLGS). 4. Expenditure and Asset Documentation to be Assembled and Retained a. Documentation of allocations of obligation proceeds to expenditures (i.e. allocation of proceeds to expenditures for the construction, renovation or purchase of facilities owned and used in the performance of exempt purposes). i. Such allocation will be done not later than the earlier of: eighteen (18) months after the later of the date the expenditure is paid, or the date the project, if any, that is financed by the tax- exempt bond issue is placed in service; or the date sixty (60) days after the earlier of the fifth anniversary of the issue date of the tax- exempt bond issue, or the date sixty (60) days after the retirement of the tax- exempt bond issue. b. Documentation of allocations of obligation proceeds to issuance costs. c. Copies of requisitions, draw schedules, draw requests, invoices, bills and cancelled checks related to obligation proceed expenditures during the construction period. d. Copies of all contracts entered into for the construction, renovation or purchase of facilities financed with obligation proceeds. e. Records of expenditure reimbursements incurred prior to issuing bonds for facilities financed with obligation proceeds (Declaration of Official Intent/Reimbursement Resolutions including all modifications). f. List of all facilities and equipment financed with obligation proceeds. g. Depreciation schedules for depreciable property financed with obligation proceeds. h. Documentation that tracks the purchase and sale of assets financed with obligation proceeds. i. Documentation of timely payment of principal and interest payments on the obligation. j. Tracking of all issue proceeds and the transfer of proceeds into the debt service fund as appropriate. k. Documentation that excess earnings from a Reserve Fund is transferred to the Debt Service Fund on an annual basis. Excess earnings are balances in a Reserve Fund that exceed the Reserve Fund requirement. 5. Miscellaneous Documentation to be Assembled and Retained a. Ensure that the project, while the obligation is outstanding, will avoid IRS private activity concerns. i. The Finance Director shall monitor the use of all obligation - financed facilities in order to: determine whether private business uses of obligation - financed facilities have exceeded the de minimus limits set forth in Section 141(b) of the Code as a result of sale of the facilities (including sale of capacity rights, leases and subleases of facilities (including easements or use arrangements for areas outside the four walls, e.g., hosting of cell phone towers), leasehold improvement contracts, licenses, management contracts (in which the City authorizes a third party to operate a facility, e.g. cafeteria), research contracts, preference arrangements (in which the City permits a third parry preference, such as parking in a public parking lot), joint ventures, limited liability companies or partnership arrangements, output contracts or other contracts for use of utility facilities (including contracts with large utility users), development agreements which provide for guaranteed payments or property values from a developer, grants or loans made to private entities (including special assessment agreements), naming rights agreements, or other arrangements that provide special legal entitlements to nongovernmental persons; and determine whether private security or payments that exceed the de minimus limits set forth in Section 141(b) of the Code have been provided by nongovernmental persons with respect to such obligation - financed facilities. ii. The Finance Director shall provide training and educational resources to any City staff that have the primary responsibility for the operation, maintenance, or inspection of obligation - financed facilities with regard to the limitations on the private business use of obligation - financed facilities and as to the limitations on the private security or payments with respect to obligation - financed facilities. b. The Finance Director shall undertake the following with respect to the obligations: i. an annual review of the books and records maintained by the City with respect to such obligations; and ii. an annual physical inspection of the facilities financed with the proceeds of such obligations, conducted by the Finance Director with the assistance of any City staff who have the primary responsibility for the operation, maintenance, or inspection of such obligation - financed facilities. c. Changes in the project that impact the terms or commitments of the obligation are properly documented and necessary certificates or opinions are on file. 6. Additional Undertakings and Activities that Support Sections 1 through 5 above: a. The Finance Director will notify the City's bond counsel, financial advisor and arbitrage provider of any survey or inquiry by the IRS immediately upon receipt (Usually responses to IRS inquiries are due within 21 days of receipt. Such IRS responses require the review of the above mentioned data and must be in writing. As much time as possible is helpful in preparing the response). b. The Finance Director will consult with the City's bond counsel, financial advisor and arbitrage provider before engaging in post - issuance credit enhancement transactions (i.e. bond insurance, letter of credit, or hedging transactions (i.e. interest rate swap, cap). C. The Finance Director will monitor all "qualified tax- exempt debt obligations" within the first calendar year to determine if the limit is exceeded, and if exceeded, will address accordingly. For tax- exempt debt obligations issued during years 2009 and 2010, the limit is $30,000,000 (The limit was $10,000,000 prior to 2009. In 2011 and thereafter it will remain at $10,000,000 unless changed by Congress). During this period, the limit also applies to pooled financings of the governing body and provides a separate $30,000,000 for each 501 (c)(3) conduit borrower. d. Comply with Continuing Disclosure Requirements. i. If applicable, the timely filing of annual information agreed to in the Continuing Disclosure Certificate. ii. Give notice of any Material Event. e. Identify any post- issuance change to terms of bonds which could be treated as a current refunding of "old" bonds by "new" bonds, often referred to as a "reissuance ". f. The Finance Director will consult with the City's bond counsel prior to any sale, transfer, change in use or change in users of obligation - financed property which may require "remedial action" under applicable Treasury Regulations or resolution pursuant to the VCAP Program. A remedial action has the effect of curing a deliberate action taken by the City which results in satisfaction of the private business test or private loan test. Remedial actions under Section 1.141- 12(d)(e) and (f) include the redemption of non - qualified bonds and alternative uses of proceeds or the facility (i.e. use for a qualified purpose instead). g. The Finance Director will ensure that the appropriate tax form for federal subsidy payments is prepared and filed in a timely fashion for applicable obligations (i.e. Build America Bonds). 7. Compliance with Future Requirements a. Take measures to comply with any future requirements issued beyond the date of these Post - Issuance Debt Compliance Procedures which are essential to ensuring compliance with the applicable state and federal regulations.