SR 04-25-2017 3F
Ci ty Council
Report
City Council Meeting : April 25, 2017
Agenda Item: 3.F
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To: Mayor and City Council
From: Gigi Decavalles -Hughes, Director , Finance Department, Revenue
Subject: Amended City Debt Service Policy
Recommended Action
Staff recommends that Council adopt the amended debt policy for the City of Santa
Monica.
Execut ive Summary
The City Council approves the City's debt policy as part of the biennial Budget adoption .
The last update to the debt policy was made with the FY 2015 -17 Biennial Budget in
June 2015 . In September 2016, the Governor signed into law SB 1029 wh ich place s
additional reporting and control requirements on California agencies issuing public debt.
The law went into effect January 1, 2017. While the City’s current debt policy generally
complies with most requirements of the law, several amendments a re necessary to
bring th e policy into full compliance. The proposed revisions would m ore specifically
describe internal control procedures, e nsure compliance with requirements to maintain
the tax exempt status of tax exempt bonds , and i ncorporate requirem ents for the annual
Debt Transparency report and reporting on pre - and final - sale of debt issuance.
Background
The City’s debt policy was revised with adoption of the FY 2015 -17 Biennial Budget to
provide a more comprehensive debt issuance policy. Th at revised, expanded policy
increases transparency and ensures that staff, Council, and the public are weighing
debt -related decisions based on a standard set of guidelines. The policy is based on
best practices issued by the Government Finance Officers Asso ciation (GFOA) and the
California Debt and Investment Advisory Commission (CDIAC). It was also recently
certified by the Association of Public Treasurers of the United States and Canada.
In September 2016, the Governor signed into law SB 1029 which place s additional
reporting and control requirements on California agencies issuing public debt. The
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proposed revisions would bring the City’s existing debt policy into full compliance with
the legislation.
Discussion
SB 1029 amends section 8855 of the State Government Code by placing additional
reporting and certification requirements on issuers of public debt in California. The two
significant requirements are:
1. Effective January 1, 2017, prior to issuing new debt, an issuer must certify to
CDIAC that it ha s adopted local debt policies concerning the use of debt and that
the contemplated debt issuance is consistent with those local policies. A local
debt policy must include the following:
A. The purposes for which the debt proceeds may be used.
B. The ty pes of debt that may be issued.
C. The relationship of the debt to, and integration with, the issuer’s capital
improvement pr ogram or budget, if applicable.
D. Policy goals related to the issuer’s planning goals and objectives.
E. The internal control procedures that the issuer has implemented, or will
implement, to ensure that the proceeds of the proposed debt issuance will
b e directed to the intended use.
2. All issuers of public debt are required to provide a report of final sale of debt to
the CDIAC no later than 21 days after sale of debt with official documents
evidencing the sale of debt , and are required to submit an annual “Debt
Transparency Report ” to CDIAC detailing the authority, outstanding principal, and
use of bond proceeds during the prior fiscal year.
Wh ile staff believes that the City’s existing policy covers much of the legislation’s
requirements, several minor revisions to the debt policy are necessary . The proposed
revisions:
M ore specifically describe internal control procedures, including third par ty
trustee expenditure of bond funds monitoring , to ensure bond proceeds are
expended only for their intended use ;
Ensure compliance with requirements to maintain the tax exempt status of tax
exempt bonds ; and
Incorporate requirements for the annual Debt Transparency report and reporting
on pre - and final - sale of debt issuance .
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Financial Impacts and Budget Actions
Other than a possible increase in administrative costs related to debt management that
will be absorbed by the Finance Department , the revisi ons to the debt policy should
have no budget/financial impact.
Prepared By: David Carr, Assistant City Treasurer
Approved
Forwarded to Council
Attachments:
A. Fiscal Policies
B. Fiscal Policies_Redlined
Fiscal Policies
Debt Policy
Background
The City of Santa Monica (City) maintains conservative financial policies to assure strong financial
health both in the short - and long -term. The City issues debt primarily to finance large capital
investments such as construction of public infrastructure or property acquisitions.
Maintaining the City’s bond rating is an important objective of the City’s financial policies. To this
end, the City is constantly working to improve its financial policies, budgets, forecasts, and
financial health.
Effective Ja nuary 1, 2017, and in accordance with Section 8855 of the Government Code,
California public agencies that issue public debt are required to certify prior to the issuance of
debt that they have adopted debt policies concerning the use of debt and that the
contemplated debt issuance is consistent with those local policies. The City’s Debt Policy set forth
below complies with the requirements of Section 8855.
This debt policy shall apply to obligations issued by the City, the Santa Monica Public Financing
Authority , the Santa Monica Parking Authority , and the Successor Agency to the Santa Monica
Redevelopment Agency .
Purpose of Policy
This policy sets forth the criteria for issuance and repayment of debt. The primary objective of the
Debt Policy is to establish criteria that will protect the City’s financial integrity while providing a
funding mechanism to meet the City’s capital needs. The underlying approach of the City is to
borrow only for capital improvements that cannot be funded on a pay -as -you -go basis. The City
will not issue long -term debt to finance current operations.
All debt issued will be in compliance with this policy, t he debt limit noted in Article VI of the City
Charter and with all other relevant state and federal regulations.
A biennial review of the Debt Policy will be performed and any changes to the Debt Policy will be
brought forward for City Council consideratio n and approval. Further, in the event there are any
recommended deviations or exceptions from the Debt Policy when a certain bond issue is
structured, those exceptions will be discussed in the staff reports when the bond issue is presented
for City Council ’s consideration.
Responsibility
Authority to issue debt is given by the City Council, exercising the powers reserved to the City
under Section 6 of Article XI of the Constitution of the State of California and Section 400 of the
City Charter of the City o f Santa Monica. The Treasurer and designated staff, including the
Assistant City Treasurer, assist in the duties of debt issuance, interest payments, principal
repayments and other debt -related activities.
The Finance Director is responsible for assurin g that the activities related to the issuance and
payment of bonds or other obligations will not jeopardize the bond rating.
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Purpose of Financing
The City borrows money primarily to fund long -term capital improvement projects and to
refinance existing debt. The issuance of debt to fund operating deficits is not permitted.
While the preferred means of financing projects is the “pay -as - you -go” method of using current
revenues to pay for capital projects because it avoids interest payments, the City would be able
to undertake capital projects under this method only if sufficient cash accumulates. Prudent use
of debt financing rather than pay -as - you -go funding of capital projects can distribute the cost of
a project over its useful life, facilitate better allocation of resources and increase financial flexibility.
Debt can also be used in conjunction with pay -as -you -go financing to pay only a portion of the
project using debt if insufficient funds are available from non -debt sources.
The Treasurer, working with the Assistant Treasurer, will periodically evaluate the City’s existing debt
and execute, upon approval of the City Council, a refinancing when economically beneficial. A
refinancing includes the issuance of bonds to refund existing bonds.
See “Bond Refunding” for refunding considerations.
Budgeting and Capital Planning
The City shall develop and maintain a Five -Year capital planning process that includes a Biennial
Capital Improvement Program budget that is approved and adopted by the City Council as part
of the budget process. The capital plan is informed by the City’s Five -Year forecasting process.
The decision to utilize debt to fund all or a portion of a capital project first requires an analysis by
the Finance Department of how the debt will b e repaid. The source of revenues to repay the
debt must be identified and the impact of repayment of the debt on existing budget
commitments must be assessed.
The Finance Department is responsible for coordinating and analyzing the debt requirements. Th is
will include timing of debt, calculation of outstanding debt, debt limitation calculations and
compliance, impact on future debt burdens, and current revenue requirements.
Asset Life
Generally, no debt will be issued for periods exceeding the useful l ife or average useful lives of
projects to be financed.
Types of Debt
The following is a description of the types of long -term debt the City may issue:
General Obligation Bonds
General Obligation (GO) bonds are secured by a pledge of full faith and cred it of an issuer and
a promise to levy taxes in an unlimited amount as necessary to pay debt service. GO bonds usually
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achieve lower rates of interest than other financing instruments since they are considered to be a
lower risk.
California State Constitut ion, Article 16 - Public Finance, Section 18, requires that the issuance of a
GO bond by the City must be approved by a two -thirds majority of those voting on the bond
proposition. Uses of bond proceeds are limited to the acquisition and improvement of rea l
property.
Lease Obligations
Lease financings are long -term obligations that include Lease Revenue Bonds and Certificates of
Participation. Lease Revenue Bonds (LRBs) are lease obligations secured by an installment sale or
by a lease -back arrangement b etween the City and the City’s Public Financing Authority, a joint
powers authority, where City revenues are pledged to pay the lease payments, which are, in turn,
used to pay debt service on the LRBs. Alternatively, Certificates of Participation (COPs) are lease
obligations secured by a financing lease between the lessee, which would be the City, and a
lessor, which may be the City’s Public Financing Authority, that undertakes the construction of a
project. These obligations do not constitute indebtednes s under the state constitutional debt
limitation and, therefore, are not subject to voter approval.
Payments to be made under valid leases are payable only in the year in which use and
occupancy of the leased property is available, and lease payments may not be accelerated.
Lease financing requires the fair market rental value of the leased property to be equal to or
greater than the required debt service or lease payment schedule. The governmental lessee is
obligated to place in its Annual Budget the rent al payments that are due and payable during
each fiscal year the lessee has use of the leased property.
Revenue Bonds
Revenue bonds are obligations payable from revenues generated by an enterprise as defined in
Section 54300 et seq . of the California Gov ernment Code. City issuance of revenue bonds is
specifically authorized by Chapter 2.36 of the City’s Municipal Code. Since the debt service is
directly paid by the enterprise, such debt is considered self -liquidating and generally is not
considered as p art of the maximum debt capacity of the issuer.
The City’s utility Revenue Bonds are payable solely from the appropriate City Enterprise Fund and
are not secured by any pledge of ad valorem taxes or general fund revenues of the City. In
accordance with th e agreed upon bond covenants, the revenues generated by these Enterprise
Funds must be sufficient to maintain required coverage levels, or the customer rates of the
enterprise have to be raised to maintain the coverages. The issuance of revenue bonds does not
require voter approval.
Bank Loans
Under certain circumstances, it may be advantageous to obtain financing through a direct bank
loan. Bank loans can be in the form of fixed rate or variable rate loans with defined maturities or
lines of credit that have variable interest rates and flexible payment provisions. One potential
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advantage of bank loans is that the process for execution is generally simpler and can be less
expensive to issue than a public bond issue. Additionally, a bank loan can often be structured in
a manner that more closely conforms with specific project or repayment considerations than a
bond issue. However, since bank loans are issued in an environment less transparent than a public
debt issue, it is more difficult to assess how th e proposed loan rates, fees, and terms compare to
the market. The City Treasurer will consult with the City’s Financial Advisor to determine the when
a bank loan is the appropriate financing measure.
Assessment District Financing
The Municipal Improvement Act of 1913 provides for a local agency to form an Assessment District
to finance certain infrastructure, including roadways, water and sewer facilities, storm drains, and
other improvements often required in connection with new d evelopment. An Assessment District
must include all properties that will benefit directly from the improvements to be constructed, and
formation of the district requires an election in which at least 50% of property owners vote in favor
of the district. If an Assessment District is formed, the City may levy assessments that can be utilized
to directly finance the public improvements, or may be pledged to support debt service on
bonds, which may be issued under the Improvement Bond Act of 1915. The assessmen ts that are
levied upon each parcel must be based upon the direct and special benefit received by the
property.
Limitation of Indebtedness
The City’s indebtedness is limited by Article VI of the City Charter, which states that the bonded
indebtedness of the City may not exceed the sum of ten (10%) percent of the total assessed
valuation of property within the City, exclusive of any indebtedness that has been or may
hereafter be incurred for the purpose of acquiring or establishing a system of waterworks for the
supplying of water, or for the purpose of constructing sewers or drains in the City, for which
purposes a further indebtedness may be incurred by the issuance of bonds, subject only to the
provisions of the State Constitution and of this Charter. The City will include all lease obligations
when calculating its compliance under this debt limit even though they may not constitute
bonded indebtedness.
Affordability Targets
General Obligation Debt
The decision on whether or not t o assume new general obligation debt shall be based on costs
and benefits, current conditions of the municipal bond market, and the City’s ability to afford new
debt and service it as determined by an objective analytical approach. This process shall
compa re generally accepted measures of affordability to the current values for the City. These
measures shall include:
Debt per capita: the outstanding principal as a percentage of population.
Debt as a percent of assessed valuation: outstanding principal as a percentage of
assessed valuation.
General Fund -Supported Debt
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The most important affordability ratio used in analyzing the City’s debt position with respect to
General Fund supported debt (e.g., lease obligations) is the Annual General Fund debt
servic e/lease payment (e.g., payment on lease revenue bonds) as a percentage of available
revenue or expenditures. This ratio, which pertains to only general fund backed debt, is often
referred to as “lease burden.” This analysis excludes enterprise revenue bond s and other
obligations supported by dedicated revenue pledges. Additionally, this analysis may exclude
other General Fund liabilities such as loan obligations or the City’s annually required contribution
to the pension system or retiree health care costs. Liabilities of the City’s related agencies are also
excluded from the debt affordability ratios.
Credit rating agency guidelines recommend a lease burden ratio of no more than 12%; the City
shall strive to maintain its lease burden ratio below 10%. Affor dability analysis as determined by this
measure will be undertaken before new General -Fund supported debt is issued.
In addition to the City’s direct debt burden, debt levels of underlying and overlapping entities
such as counties, school districts, and special districts add to a City’s overall debt burden. The
City’s proportional share of the debt of other local governmental units, which either overlap it or
underlie it is called the overlapping debt. Overlapping debt is generally apportioned based upon
relative assessed value. While the City does not control debt issuance by other entities, it
recognizes that its taxpayers share the overall debt burden. The City shall include a statement of
overlapping debt in its initial and continuing disclosure.
Reven ue Bonds
In determining the affordability of proposed revenue bonds, the City will perform an analysis
comparing projected annual net revenues (after payment of operating and maintenance
expense) to estimated annual debt service. Generally, legal covenant s requiring a minimum
coverage ratio are set forth in the bond documents, and are based on the level of security
provided to the bondholders. The City’s revenue bonds require a legal coverage ratio of at least
120% for senior bonds and a coverage ratio of at least 100% for senior and subordinate debt
combined. Credit rating agencies point to a target coverage ratio of 200% for programs with large
ongoing capital needs and 150% for programs without such needs, using historical and/or
projected net revenues t o cover annual debt service for bonds issued on a subordinate basis
which have a 100% legal coverage ratio requirement. The City will require a rate increase to cover
both operations and debt service costs, and create debt service reserve funds to maintain the
required coverage ratios.
Structure of Debt
Term of Debt
Debt will be structured consistent with a fair allocation of costs to current and future beneficiaries
or users. Borrowings by the City should be of a duration that does not exceed the useful li fe of the
improvement that it finances and where feasible, should be shorter than the projected economic
life. The standard term of long -term borrowing is typically 15 -30 years.
Debt Repayment
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The City shall pay all interest and repay all debt in accorda nce with the terms of the bond
ordinance and bond covenants. To the extent possible, the City will seek level or declining debt
service repayment schedules.
Variable -Rate Securities
When appropriate, the City may choose to issue securities that pay a rate of interest that varies
according to a pre -determined formula or results from a periodic remarketing of the securities.
Due to the potential volatility of such instruments, the City will limit the use of variable -rate debt to
the greater of $50 millio n or 20% of outstanding principal.
Derivatives
The City will not use derivatives when structuring debt.
Capitalized Interest
Where appropriate, interest may be capitalized for the construction period of a revenue -
producing project so that debt service exp ense does not begin until the project is expected to
be operational and producing revenues.
In addition, for lease back arrangements, such as those used for lease revenue bond transactions,
interest may be capitalized for the construction period, until th e asset is operational. Only under
extraordinary circumstances will interest be capitalized for a period longer than the construction
period. Capitalized interest is sometimes referred to as “funded interest.”
Call Options/Redemption Provisions
A call op tion, or optional redemption provision, gives the City the right to prepay or retire debt
prior to its stated maturity. This option may permit the City to achieve interest savings in the future
through refunding, or in some cases, full or partial redemptio n of the bonds. Generally, fixed rate
tax -exempt municipal bonds are structured with a 10 -year call at par (no premium). Because the
cost of call options can vary widely, depending largely on market conditions, an evaluation of
factors such as the followi ng will be conducted in connection with each issuance:
The time until the bonds may be called
The price at which the bonds may be called
The potential to generate future interest cost savings (or call option value)
Any need for additional flexibility with respect to repayment
Method of Sale
The City will generally issue its debt through a competitive process but may use a negotiated
process under the following conditions.
The bond issue is, or contains, a refinancing that is dependent on market/interest rate timing.
At the time of issuance, the interest rate environment or economic factors that affect the bond
issue are volatile.
The nature of the debt is unique and requires particular skills from the underwriter(s) involved.
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The debt issued is bound by a compressed time line due to extenuating circumstances such
that time is of the essence and a competitive process cannot be accomplished.
When determined appropriate by the City Treasurer, the City will negotiate financing terms with
banks and financi al institutions for specific borrowings on a private offering basis. Typically, private
placements are carried out by the City when extraneous circumstances preclude public offerings,
such as an interim financing, or to avoid the costs of a public offering for smaller issuances.
The City Treasurer will consult with the City’s Financial Advisor on an issue by issue basis to
determine the appropriate method of sale to be used.
Professional Services
The City’s Finance Department shall be responsible for the solicitation and selection of professional
services that are required to administer the City’s debt program, which will follow the City’s
Procurement Policy. The City Attorney’s Office will take the lead to solicit and select bond counsel.
The financial ad visor, bond and disclosure counsel, and trustee costs associated with the bond
issuance will be paid with bond proceeds. Eligible City staff costs related to issuance of long term
bonds may also be reimbursed from bond proceeds.
Financial Advisor
A Financial Advisor(s) will be used to assist in the issuance of the City’s debt. The Financial Advisor
will provide the City with objective advice and analysis on debt issuance. This includes, but is not
limited to, monitoring market opportunities, structur ing and pricing debt, and preparing official
statements of disclosure.
Bond Counsel
The City Attorney’s Office will take the lead in selecting and contracting with the Bond Counsel
and Disclosure Counsel. All debt issued by the City will include a writte n opinion by bond counsel
affirming that the City is authorized to issue the proposed debt. The opinion shall include
confirmation that the City has met all City and state constitutional and statutory requirements
necessary for issuance, a determination of the proposed debt’s federal income tax status and
any other components necessary for the proposed debt. Bond counsel is also responsible for
preparing all financing documents including Trust Indentures and Bond resolutions and assists in
preparation of O fficial Statements. Disclosure Counsel shall be required to deliver a customary
10(b)-5 opinion on City offering documents. The Disclosure Counsel will work with City staff to draft
all disclosure documents for a bond financing. The City Attorney’s Office may engage separate
firms in the capacity of Bond and Disclosure Counsel or one single firm to perform bond and
disclosure counsel functions.
Underwriters
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An Underwriter(s) will be used for all debt issued in a negotiated or private placement sale
method . The Underwriter is responsible for purchasing negotiated or private placement debt and
reselling the debt to investors.
Trustee/ Fiscal Agent
A Fiscal Agent and or Third Party Trustee will be used to provide accurate and timely payment to
bondholders a nd securities processing. If there are unspent bond proceeds, funds will be held by
the third part y trustee. The Finance Department will monitor funds held by third party trustees and
review trustee bank statements on a monthly basis to ensure any expen ditures from the trustee
accounts are in accordance with the intended use of the bonds.
Credit Ratings
The City will maintain good communication with bond rating agencies about its financial
condition. This effort will include providing periodic updates o n the City’s general financial
condition, coordinating meetings, and presentations in conjunction with a new issuance. The City
will continually strive to maintain its bond rating by improving financial policies, budgets, forecasts
and the financial health of the City.
Credit enhancements may be used to improve or establish a credit rating on a City debt
obligation. Credit enhancements should only be used if cost effective.
Refunding Debt
A debt refunding is a refinance of debt typically done to take adva ntage of lower interest rates.
Current Refunding
A current refunding is one in which the refunding bonds are issued no more than 90 days before
the date upon which the refunded bonds will be redeemed.
Advance Refunding
An advance refunding is one in which the refunding bonds are issued more than 90 days prior to
the date upon which the refunded bonds will be redeemed. Advance refundings are used to
refinance outstanding debt before the date the outstanding debt becomes d ue or callable.
Internal Revenue Code §149(d)(3) provides that governmental bonds issued after 1985 may only
be advanced refunded once over the life of a bond issuance.
Unless otherwise justified, such as a desire to remove or change a bond covenant, a de bt
refunding will require a minimum present value savings of 3%. This savings requirement for a
refunding may be waived by the City Treasurer upon a finding that such a refunding is in the City’s
overall best financial interest.
Debt Service Reserve Fund/Surety Policy
In instances where there is no market or credit rating agency requirement to fund a debt service
reserve, or where there is an economic cost associated with borrowing to fund a reserve fund, the
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City will attempt to avoid their use. If a de bt service reserve funded by bond proceeds is
determined to be necessary or in the City’s best interest, the debt service reserve fund will be held
by and available to the Trustee to make principal and interest payments to bondholders in the
event that ple dged revenues are insufficient to do so. The maximum size of the reserve fund is
generally governed by tax law, which permits the lesser of: 1) 10% of par; 2) 125% of average
annual debt service and 3) 100% of maximum annual debt service. Reserve funds are typically
equal to approximately one year’s maximum debt service on the bonds. On a case -by -case basis,
assuming there is no economic or credit disadvantage, the City may issue bonds with a debt
service reserve fund that is sized at a lower level.
The re serve fund requirement may also be satisfied by a surety policy, a form of insurance provided
by a bond insurer to satisfy a reserve fund requirement for a bond issuance. Under this
arrangement, instead of depositing cash in a reserve fund, the issuer buys a surety policy by
paying a one -time premium equal to a percentage of the face amount of the policy. The City
may use a surety policy instead of a debt service reserve fund when economically feasible.
The City will not rely on any uncollateralized credit instruments for any reserve requirement unless
justified by significant financial advantage.
Arbitrage Rebate Monitoring and Reporting
The City will, unless otherwise justified, use bond proceeds within the established time frame
pursuant to the bond ordinance, contract or other documents to avoid arbitrage rebate.
Arbitrage is the interest earned on the investment of the bond proceeds at a rate above the
interest rate paid on the debt. If arbitrage occurs, the City may be required to pay the amount of
the arbitrage to the Federal Government as required by Internal Revenue Service Regulation
1.148 -11. The City will maintain a system of rec ordkeeping and reporting to meet the arbitrage
rebate compliance requirement of the IRS regulation. For each bond issue not used within the
established time frame, the recordkeeping shall include tracking investment earnings on bond
proceeds, calculating r ebate payments, and remitting any rebatable earnings to the federal
government in a timely manner in order to preserve the tax -exempt status of the outstanding debt.
Tax Certificate Compliance
The City will comply with requirements imposed in any tax cert ificate to maintain the tax -exempt
status of the City’s bonds.
Covenant Compliance
The City will comply with all covenants stated in the bond ordinance, contract, etc.
Debt Issuance Reporting
The City will comply with all state reporting requirements for issuance of debt, including a report
to the CDIAC of any proposed debt issuance no later than 30 days prior to the sale of any debt
issue. The report shall include a certification by the issuer that it has adopted local debt policies
concerning the use of debt and that the contemplated debt issuance is consistent with these
policies. The City shall also submit a report to CDIAC of final sale no later than 21 days after sale
of debt , by any method approved by the CDIAC . The report on final sale shall in clude a copy of
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the official statement for the issue or, if there is no official statement, the other disclosure
documents and indenture.
Ongoing Disclosure
The City will meet secondary disclosure requirements in a timely and comprehensive manner, a s
stipulated by the SEC Rule 15c2 -12. The City Treasurer shall be responsible for providing ongoing
disclosure information to the Municipal Securities Rulemaking Board’s (MSRB’s) Electronic
Municipal Market Access (EMMA) system, the central depository desi gnated by the SEC for
ongoing disclosures by municipal issuers. The City Treasurer is responsible for maintaining
compliance with disclosure standards promulgated by state and national regulatory bodies,
including the Government Accounting Standards Board (GASB), the National Federation of
Municipal Analysts, the Securities and Exchange Commission (SEC), and Generally Accepted
Accounting Principles (GAAP). The City may also employ the services of firms that improve the
availability of or supplement the City ’s EMMA filings. The City will also complete and file an annual
Debt Transparency Report with the California Debt Investment Advisory Commission (CDIAC) in
compliance with Section 8855 of the Government Code.
Investment of Bond Proceeds
The proceeds of the bond sales will be invested until used for the intended project in order to
maximize utilization of the public funds. The investments will be made to obtain the highest level
of safety. The City of Santa Monica Investment Policy and the bond indentures govern objectives
and criteria for investment of bond proceeds. The City Treasurer and Assistant City Treasurer, or
the bond trustees under the direction of the City Treasurer or Assistant City Treasurer, will invest the
bond proceeds in a manner to avoid , if possible, and minimize any potential negative arbitrage
over the life of the bond issuance, while complying with arbitrage and tax provisions.
In certain cases, particularly for bond reserve funds, it may be fiscally prudent to invest funds using
a fo rward delivery agreement or some other type of guaranteed investment contract. Such
agreements should be obtained under a competitive bid process under consultation with the
Financial Advisor.
State and Local Government Securities (SLGS) are the preferred investment option rather than
open market securities for escrows for refunded bonds to allow for better matching of settlement
dates and fewer arbitrage regulation compliance issues.
Internal Control Procedures
The City Treasurer is responsible for ensuri ng compliance with the Debt Policy .
The Finance Department will monitor the expenditure of bond proceeds in a manner consistent
with its monitoring of other City funds and will ensure that bond proceeds are expended
exclusively for their authorized purpo se. Specifically , t he City’s Capital Improvement Project
budget will include appropriations specifically for the authorized purpose . Disbursement of bond
proceeds from the trustee may be made either to reimburse the City for expenditures the City has
mad e to project contractors or directly from the trustee to the contractor. In either case, the
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Finance Depart will prepare the certificate or other required document requesting disbursement
of funds by the trustee. Internal control procedures will be revie wed and amended as necessary
to ensure compliance.
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Debt Policy
Background
The City of Santa Monica (City) maintains conservative financial policies to assure strong financial
health both in the short - and long -term. The City issues debt primarily to finance large capital
investments such as construction of public infrastructure or property acquisitions.
Maintaining the City’s bond rating is an important objective of the City’s financial policies. To this
end, the City is constantly working to improve its financial policies, budgets, forecasts, and
financial health.
Effective Ja nuary 1, 2017 , and in accordance with Section 8855 of the Government Code ,
California public agencies that issue public debt are required to certify prior to the issuance of
debt whether that they have adopted debt policies that comply concerning the use of debt and
that the contemplated debt issuance is consistent with Section 8855 of the Government
Code.those local policies. The City’s Debt Policy set forth below complies with the requirements
of Section 8855.
This debt policy shall apply to obligations issued by the City, the Santa Monica Public Financing
Authority , the Santa Monica Parking Authority , and the Successor Agency to the Santa Monica
Redevelopment Agency .
Purpose of Policy
This policy sets forth the criteria for issuance and repayment of d ebt. The primary objective of the
Debt Policy is to establish criteria that will protect the City’s financial integrity while providing a
funding mechanism to meet the City’s capital needs. The underlying approach of the City is to
borrow only for capital improvements that cannot be funded on a pay -as -you -go basis. The City
will not issue long -term debt to finance current operations.
All debt issued will be in compliance with this policy, the debt limit noted in Article VI of the City
Charter and with all other relevant state and federal regulations.
A biennial review of the Debt Policy will be performed and any changes to the Debt Policy will be
brought forward for City Council consideration and approval. Further, in the event there are any
recommended dev iations or exceptions from the Debt Policy when a certain bond issue is
structured, those exceptions will be discussed in the staff reports when the bond issue is presented
for City Council’s consideration.
Responsibility
Authority to issue debt is given by the City Council, exercising the powers reserved to the City
under Section 6 of Article XI of the Constitution of the State of California and Section 400 of the
City Charter of the City of Santa Monica. The Treasurer a nd designated staff, including the
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Assistant City Treasurer, assist in the duties of debt issuance, interest payments, principal
repayments and other debt -related activities.
The Finance Director is responsible for assuring that the activities related to the issuance and
payment of bonds or other obligations will not jeopardize the bond rating.
Purpose of Financing
The City borrows money primarily to fund long -term capital imp rovement projects and to
refinance existing debt. The issuance of debt to fund operating deficits is not permitted.
While the preferred means of financing projects is the “pay -as - you -go” method of using current
revenues to pay for capital projects because it avoids interest payments, the City would be able
to undertake capital projects under this method only if sufficient cash accumulates. Prudent use
of debt financing rather than pay -as - you -go funding of capital projects can distribute the cost of
a proj ect over its useful life, facilitate better allocation of resources and increase financial flexibility.
Debt can also be used in conjunction with pay -as -you -go financing to pay only a portion of the
project using debt if insufficient funds are available f rom non -debt sources.
The Treasurer, working with the Assistant Treasurer, will periodically evaluate the City’s existing debt
and execute, upon approval of the City Council, refinancings a refinancing when economically
beneficial. A refinancing includes th e issuance of bonds to refund existing bonds.
See “Bond Refunding” for refunding considerations.
Budgeting and Capital Planning
The City shall develop and maintain a Five -Year capital planning process that includes a Biennial
Capital Improvement Program budget that is approved and adopted by the City Council as part
of the budget process. The capital plan is informed by the City’s Five -Year forecasting process.
The decision to utilize debt to fund all or a portion of a capital project first requires an a nalysis by
the Finance Department of how the debt will be repaid. The source of revenues to repay the
debt must be identified and the impact of repayment of the debt on existing budget
commitments must be assessed.
The Finance Department is responsible for coordinating and analyzing the debt requirements. This
will include timing of debt, calculation of outstanding debt, debt limitation calculations and
compliance, impact on future debt burdens, and current revenue requirements.
Asset Life
Generally, n o debt will be issued for periods exceeding the useful life or average useful lives of
projects to be financed.
Types of Debt
The following is a description of the types of long -term debt the City may issue:
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General Obligation Bonds
General Obligation (GO) bonds are secured by a pledge of full faith and credit of an issuer and
a promise to levy taxes in an unlimited amount as necessary to pay debt service. GO bonds usually
achieve lower rates of interest than other financing instruments since they are co nsidered to be a
lower risk.
California State Constitution, Article 16 - Public Finance, Section 18, requires that the issuance of a
GO bond by the City must be approved by a two -thirds majority of those voting on the bond
proposition. Uses of bond procee ds are limited to the acquisition and improvement of real
property.
Lease Obligations
Lease financings are long -term obligations that include Lease Revenue Bonds and Certificates of
Participation. Lease Revenue Bonds (LRBs) are lease obligations secured by an installment sale or
by a lease -back arrangement between the City and the City’s Public Financing Authority, a joint
powers authority, where City revenues are pledged to pay the lease payments, which are, in turn,
used to pay debt service on the LRB s. Alternatively, Certificates of Participation (COPs) are lease
obligations secured by a financing lease between the lessee, which would be the City, and a
lessor, which may be the City’s Public Financing Authority, that undertakes the construction of a
project. These obligations do not constitute indebtedness under the state constitutional debt
limitation and, therefore, are not subject to voter approval.
Payments to be made under valid leases are payable only in the year in which use and
occupancy of t he leased property is available, and lease payments may not be accelerated.
Lease financing requires the fair market rental value of the leased property to be equal to or
greater than the required debt service or lease payment schedule. The governmental le ssee is
obligated to place in its Annual Budget the rental payments that are due and payable during
each fiscal year the lessee has use of the leased property.
Revenue Bonds
Revenue bonds are obligations payable from revenues generated by an enterprise a s defined in
Section 54300 et seq . of the California Government Code. City issuance of revenue bonds is
specifically authorized by Chapter 2.36 of the City’s Municipal Code. Since the debt service is
directly paid by the enterprise, such debt is considered self -liquidating and generally is not
considered as part of the maximum debt capacity of the issuer.
The City’s utility Revenue Bonds are payable solely from the appropriate City Enterprise Fund and
are not secured by any pledge of ad valorem taxes or general fund revenues of the City. In
accordance with the agreed upon bond covenants, the revenues generated by these Enterprise
Funds must be sufficient to maintain required coverage levels, or the customer rates of the
enterprise have to be raised to maintain the coverages. The issuance of revenue bonds does not
require voter approval.
Bank Loans
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Under certain circumstances, it may be advantageous to obtain financing through a direct bank
loan. Bank loans can be in the form of fixed rate or variable rate loans with defined maturities or
lines of credit that have variable interest rates and flexibl e payment provisions. One potential
advantage of bank loans is that the process for execution is generally simpler and can be less
expensive to issue than a public bond issue. Additionally, a bank loan can often be structured in
a manner that more closel y conforms with specific project or repayment considerations than a
bond issue. However, since bank loans are issued in an environment less transparent than a public
debt issue, it is more difficult to assess how the proposed loan rates, fees, and terms c ompare to
the market. The City Treasurer will consult with the City’s Financial Advisor to determine the when
a bank loan is the appropriate financing measure.
Assessment District Financing
The Municipal Improvement Act of 1913 provides for a local agency to form an Assessment District
to finance certain infrastructure, including roadways, water and sewer facilities, storm drains, and
other improvements often required in connection with new development. An Assessment District
must include all properties th at will benefit directly from the improvements to be constructed, and
formation of the district requires an election in which at least 50% of property owners vote in favor
of the district. If an Assessment District is formed, the City may levy assessments that can be utilized
to directly finance the public improvements, or may be pledged to support debt service on
bonds, which may be issued under the Improvement Bond Act of 1915. The assessments that are
levied upon each parcel must be based upon the direct and special benefit received by the
property.
Limitation of Indebtedness
The City’s indebtedness is limited by Article VI of the City Charter, which states that the bonded
indebtedness of the City may not exceed the sum of ten (10%) percent of the total assessed
valuation of property within the City, exclusive of any indebtedness that has been or may
hereafter be incurred for the purpose of acquiring or establishing a system of waterworks for the
supplying of water, or for the purpose of constructing sew ers or drains in the City, for which
purposes a further indebtedness may be incurred by the issuance of bonds, subject only to the
provisions of the State Constitution and of this Charter. The City will include all lease obligations
when calculating its c ompliance under this debt limit even though they may not constitute
bonded indebtedness.
Affordability Targets
General Obligation Debt
The decision on whether or not to assume new general obligation debt shall be based on costs
and benefits, current condit ions of the municipal bond market, and the City’s ability to afford new
debt and service it as determined by an objective analytical approach. This process shall
compare generally accepted measures of affordability to the current values for the City. These
measures shall include:
Debt per capita: the outstanding principal as a percentage of population.
Debt as a percent of assessed valuation: outstanding principal as a percentage of
assessed valuation.
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General Fund -Supported Debt
The most important affo rdability ratio used in analyzing the City’s debt position with respect to
General Fund supported debt (e.g., lease obligations) is the Annual General Fund debt
service/lease payment (e.g., payment on lease revenue bonds) as a percentage of available
reven ue or expenditures. This ratio, which pertains to only general fund backed debt, is often
referred to as “lease burden.” This analysis excludes enterprise revenue bonds and other
obligations supported by dedicated revenue pledges. Additionally, this analys is may exclude
other General Fund liabilities such as loan obligations or the City’s annually required contribution
to the pension system or retiree health care costs. Liabilities of the City’s related agencies are also
excluded from the debt affordability ratios.
Credit rating agency guidelines recommend a lease burden ratio of no more than 12%; the City
shall strive to maintain its lease burden ratio below 10%. Affordability analysis as determined by this
measure will be undertaken before new General -Fun d supported debt is issued.
In addition to the City’s direct debt burden, debt levels of underlying and overlapping entities
such as counties, school districts, and special districts add to a City’s overall debt burden. The
City’s proportional share of t he debt of other local governmental units, which either overlap it or
underlie it is called the overlapping debt. Overlapping debt is generally apportioned based upon
relative assessed value. While the City does not control debt issuance by other entities, it
recognizes that its taxpayers share the overall debt burden. The City shall include a statement of
overlapping debt in its initial and continuing disclosure.
Revenue Bonds
In determining the affordability of proposed revenue bonds, the City will perfo rm an analysis
comparing projected annual net revenues (after payment of operating and maintenance
expense) to estimated annual debt service. Generally, legal covenants requiring a minimum
coverage ratio are set forth in the bond documents, and are based o n the level of security
provided to the bondholders. The City’s revenue bonds require a legal coverage ratio of at least
120% for senior bonds and a coverage ratio of at least 100% for senior and subordinate debt
combined. Credit rating agencies point to a target coverage ratio of 200% for programs with large
ongoing capital needs and 150% for programs without such needs, using historical and/or
projected net revenues to cover annual debt service for bonds issued on a subordinate basis
which have a 100% leg al coverage ratio requirement. The City will require a rate increase to cover
both operations and debt service costs, and create debt service reserve funds to maintain the
required coverage ratios.
Structure of Debt
Term of Debt
Debt will be structured con sistent with a fair allocation of costs to current and future beneficiaries
or users. Borrowings by the City should be of a duration that does not exceed the useful life of the
improvement that it finances and where feasible, should be shorter than the pro jected economic
life. The standard term of long -term borrowing is typically 15 -30 years.
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Debt Repayment
The City shall pay all interest and repay all debt in accordance with the terms of the bond
ordinance and bond covenants. To the extent possible, the City will seek level or declining debt
service repayment schedules.
Variable -Rate Securities
When approp riate, the City may choose to issue securities that pay a rate of interest that varies
according to a pre -determined formula or results from a periodic remarketing of the securities.
Due to the potential volatility of such instruments, the City will limit the use of variable -rate debt to
the greater of $50 million or 20% of outstanding principal.
Derivatives
The City will not use derivatives when structuring debt.
Capitalized Interest
Where appropriate, interest may be capitalized for the construction peri od of a revenue -
producing project so that debt service expense does not begin until the project is expected to
be operational and producing revenues.
In addition, for lease back arrangements, such as those used for lease revenue bond transactions,
interes t may be capitalized for the construction period, until the asset is operational. Only under
extraordinary circumstances will interest be capitalized for a period longer than the construction
period. Capitalized interest is sometimes referred to as “funded interest.”
Call Options/Redemption Provisions
A call option, or optional redemption provision, gives the City the right to prepay or retire debt
prior to its stated maturity. This option may permit the City to achieve interest savings in the future
thro ugh refunding, or in some cases, full or partial redemption of the bonds. Generally, fixed rate
tax -exempt municipal bonds are structured with a 10 -year call at par (no premium). Because the
cost of call options can vary widely, depending largely on marke t conditions, an evaluation of
factors such as the following will be conducted in connection with each issuance:
The time until the bonds may be called
The price at which the bonds may be called
The potential to generate future interest cost savings (or c all option value)
Any need for additional flexibility with respect to repayment
Method of Sale
The City will generally issue its debt through a competitive process but may use a negotiated
process under the following conditions.
The bond issue is, or contains, a refinancing that is dependent on market/interest rate timing.
At the time of issuance, the interest rate environment or economic factors that affect the bond
issue are volatile.
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The nature of the debt is unique and requi res particular skills from the underwriter(s) involved.
The debt issued is bound by a compressed time line due to extenuating circumstances such
that time is of the essence and a competitive process cannot be accomplished.
When determined appropriate by the City Treasurer, the City will negotiate financing terms with
banks and financial institutions for specific borrowings on a private offering basis. Typically, private
placements are carried out by the City when extraneous circumstances preclude public o fferings,
such as an interim financing, or to avoid the costs of a public offering for smaller issuances.
The City Treasurer will consult with the City’s Financial Advisor on an issue by issue basis to
determine the appropriate method of sale to be used.
P rofessional Services
The City’s Finance Department shall be responsible for the solicitation and selection of professional
services that are required to administer the City’s debt program, which will follow the City’s
Procurement Policy. The City Attorney’s Office will take the lead to solicit and select bond counsel.
The financial advisor, bond and disclosure counsel, and trustee costs associated with the bond
issuance will be paid with bond proceeds. Eligible City staff costs related to issuance of long term
bonds may also be reimbursed from bond proceeds.
Financial Advisor
A Financial Advisor(s) will be used to assist in the issuance of the City’s debt. The Financial Advisor
will provide the City with objective advice and analysis on debt issuance. Thi s includes, but is not
limited to, monitoring market opportunities, structuring and pricing debt, and preparing official
statements of disclosure.
Bond Counsel
The City Attorney’s Office will take the lead in selecting and contracting with the Bond Counse l
and Disclosure Counsel. All debt issued by the City will include a written opinion by bond counsel
affirming that the City is authorized to issue the proposed debt. The opinion shall include
confirmation that the City has met all City and state constitu tional and statutory requirements
necessary for issuance, a determination of the proposed debt’s federal income tax status and
any other components necessary for the proposed debt. Bond counsel is also responsible for
preparing all financing documents inc luding Trust Indentures and Bond resolutions and assists in
preparation of Official Statements. Disclosure Counsel shall be required to deliver a customary
10(b)-5 opinion on City offering documents. The Disclosure Counsel will work with City staff to dra ft
all disclosure documents for a bond financing. The City Attorney’s Office may engage separate
firms in the capacity of Bond and Disclosure Counsel or one single firm to perform bond and
disclosure counsel functions.
Underwriters
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An Underwriter(s) will be used for all debt issued in a negotiated or private placement sale
method. The Underwriter is responsible for purchasing negotiated or private placement debt and
reselling the debt to investors.
Trustee/ Fiscal Agent
A Fiscal Agent and or Third Party Trustee will be used to provide accurate and timely payment to
bondholders and securities processing. If there are unspent bond proceeds, funds will be held by
the third part y trustee. The Finance Department will monitor funds held by third party trustees and
review trustee bank statements on a monthly basis to ensure any expenditures from the trustee
accounts are in accordance with the intended use of the bonds.
Credit Ratings
The City will maintain good communic ation with bond rating agencies about its financial
condition. This effort will include providing periodic updates on the City’s general financial
condition, coordinating meetings, and presentations in conjunction with a new issuance. The City
will continu ally strive to maintain its bond rating by improving financial policies, budgets, forecasts
and the financial health of the City.
Credit enhancements may be used to improve or establish a credit rating on a City debt
obligation. Credit enhancements should only be used if cost effective.
Refunding Debt
A debt refunding is a refinance of debt typically done to take advantage of lower interest rates.
Current Refunding
A current refunding is one in which the refunding bonds are issued no more than 90 days b efore
the date upon which the refunded bonds will be redeemed.
Advance Refunding
An advance refunding is one in which the refunding bonds are issued more than 90 days prior to
the date upon which the refunded bonds will be redeemed. Advance refundings are used to
refinance outstanding debt before the date the outstanding debt becomes due or callable.
Internal Revenue Code §149(d)(3) provides that governmental bonds issued after 1985 may only
be advanced refunded once over the life of a bond issuance.
Unle ss otherwise justified, such as a desire to remove or change a bond covenant, a debt
refunding will require a minimum present value savings of 3%. This savings requirement for a
refunding may be waived by the City Treasurer upon a finding that such a refun ding is in the City’s
overall best financial interest.
Debt Service Reserve Fund/Surety Policy
In instances where there is no market or credit rating agency requirement to fund a debt service
reserve, or where there is an economic cost associated with bo rrowing to fund a reserve fund, the
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City will attempt to avoid their use. If a debt service reserve funded by bond proceeds is
determined to be necessary or in the City’s best interest, the debt service reserve fund will be held
by and available to the Tr ustee to make principal and interest payments to bondholders in the
event that pledged revenues are insufficient to do so. The maximum size of the reserve fund is
generally governed by tax law, which permits the lesser of: 1) 10% of par; 2) 125% of average
annual debt service and 3) 100% of maximum annual debt service. Reserve funds are typically
equal to approximately one year’s maximum debt service on the bonds. On a case -by -case basis,
assuming there is no economic or credit disadvantage, the City may is sue bonds with a debt
service reserve fund that is sized at a lower level.
The reserve fund requirement may also be satisfied by a surety policy, a form of insurance provided
by a bond insurer to satisfy a reserve fund requirement for a bond issuance. Under this
arrangement, instead of depositing cash in a reserve fund, the issue r buys a surety policy by
paying a one -time premium equal to a percentage of the face amount of the policy. The City
may use a surety policy instead of a debt service reserve fund when economically feasible.
The City will not rely on any uncollateralized credit instruments for any reserve requirement unless
justified by significant financial advantage.
Arbitrage Rebate Monitoring and Reporting
The City will, unless otherwise justified, use bond proceeds within the established time frame
pursuant to the bo nd ordinance, contract or other documents to avoid arbitrage rebate.
Arbitrage is the interest earned on the investment of the bond proceeds at a rate above the
interest rate paid on the debt. If arbitrage occurs, the City may be required to pay the amount of
the arbitrage to the Federal Government as required by Internal Revenue Service Regulation
1.148 -11. The City will maintain a system of recordkeeping and reporting to meet the arbitrage
rebate compliance requirement of the IRS regulation. For each bond issue not used within the
established time frame, the recordkeeping shall include tracking investment earnings on bond
proceeds, calculating rebate payments, and remitting any rebateable rebatable earnings to the
federal government in a timely manner in order to preserve the tax -exempt status of the
outstanding debt.
Tax Certificate Compliance
The City will comply with requirements imposed in any tax certificate to maintain the tax -exempt
status o f the City’s bonds.
Covenant Compliance
The City will comply with all covenants stated in the bond ordinance, contract, etc.
Debt Issuance Reporting
The City will comply with all state reporting requirements for issuance of debt, including a report
to the CDIAC of any proposed debt issuance no later than 30 days prior to the sale of any debt
issue. The report shall include a certification by the issuer that it has adopted local debt policies
concerning the use of debt and that the contemplated debt issuan ce is consistent with these
policies. The City shall also submit a report to CDIAC of final sale no later than 21 days after sale
of debt , by any method approved by the CDIAC . The report on final sale shall include a copy of
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the official statement for the issue or, if there is no official statement, the other disclosure
documents and indenture.
Ongoing Disclosure
The City will meet secondary disclosure requirements in a timely and comprehensive manner, as
stipulated by the SEC Rule 15c2 -12. The City Treasurer shall be responsible for providing ongoing
disclosure information to the Municipal Securities Rulemaking Bo ard’s (MSRB’s) Electronic
Municipal Market Access (EMMA) system, the central depository designated by the SEC for
ongoing disclosures by municipal issuers. The City Treasurer is responsible for maintaining
compliance with disclosure standards promulgated b y state and national regulatory bodies,
including the Government Accounting Standards Board (GASB), the National Federation of
Municipal Analysts, the Securities and Exchange Commission (SEC), and Generally Accepted
Accounting Principles (GAAP). The City m ay also employ the services of firms that improve the
availability of or supplement the City’s EMMA filings. The City will also complete and file an annual
Debt Transparency Report with the California Debt Investment Advisory Commission (CDIAC) in
complia nce with Section 8855 of the Government Code.
Investment of Bond Proceeds
The proceeds of the bond sales will be invested until used for the intended project in order to
maximize utilization of the public funds. The investments will be made to obtain the highest level
of safety. The City of Santa Monica Investment Policy and the bond indentures govern objectives
and criteria for investment of bond proceeds. The City Treasurer and Assistant City Treasurer, or
the bond trustees under the direction of the Cit y Treasurer or Assistant City Treasurer, will invest the
bond proceeds in a manner to avoid, if possible, and minimize any potential negative arbitrage
over the life of the bond issuance, while complying with arbitrage and tax provisions.
In certain cases, particularly for bond reserve funds, it may be fiscally prudent to invest funds using
a forward delivery agreement or some other type of guaranteed investment contract. Such
agreements should be obtained under a competitive bid process under consultation with the
Financial Advisor.
State and Local Government Securities (SLGS) are the preferred investment option rather than
open market securities for escrows for refunded bonds to allow for better matching of settlement
dates and fewer arbitrage regulation compliance issues.
Internal Control Procedures
The City Treasurer is responsible for ensuring compliance with the Debt Policy .
The Finance Department will monitor the expenditure of bond proceeds in a manner consistent
with its monitoring of other City f unds and will ensure that bond proceeds are expended
exclusivelyfor exclusively for their authorized purpose. Specifically The Specifically , t he City’s
Capital Improvement Project budget will include appropriations specifically for the authorized
purpose . Disbursement of bond proceeds from the trustee may be made either to reimburse the
City for expenditures the City has made to project contractors or directly from the trustee to the
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contractor. In either case, the Finance Depart will prepare the certifica te or other required
document requesting disbursement of funds by the trustee. Internal control procedures will be
reviewed and amended as necessary to ensure compliance.