HomeMy WebLinkAboutAdopt Resolution No. 2019-79 Adopting the City's Debt Manage F.
City of Huntington Beach
File #: 19-1109 MEETING DATE: 11/4/2019
REQUEST FOR CITY COUNCIL ACTION
SUBMITTED TO: Honorable Mayor and City Council Members
SUBMITTED BY: Oliver Chi, City Manager
PREPARED BY: Dahle Bulosan, Interim Chief Financial Officer
Subject:
Adopt Resolution No. 2019-79 Adopting the City's Debt Management Policy
Statement of Issue:
Changes to California Government Code Section 8855, regarding how local agency debt is
managed, requires that the City of Huntington Beach update and formally adopt the City's Debt
Management Policy to meet additional requirements as amended by Senate Bill 1029 (SB 1029).
Financial Impact:
Not applicable.
Recommended Action:
Adopt Resolution No. 2019-79, "A Resolution of the City Council of the City of Huntington Beach
Adopting the City's Debt Management Policy."
Alternative Action(s):
Do not adopt Resolution No. 2019-79.
Analysis:
The City's Debt Management Policy was updated to ensure compliance with changes to the
California Government Code Section 8855 regarding how local agency debt is managed. KNN
Public Finance, LLC, expert municipal financing consultants, assisted the City in the development of
the Comprehensive Debt Management Policy.
SB 1029, which went into effect on January 1, 2017, amends California Government Code Section
8855 to facilitate improved financial transparency and accessibility to information about public debt.
SB 1029 requires that debt policies reflect local, state, and federal laws and regulations. Additionally,
Government Code Section 8855(i) now requires government agencies to adopt debt policies at least
30 days prior to any debt issued after January 21, 2017, that includes the following: 1) the purpose
for which the debt proceeds may be used; 2) the types of debt that may be issued; 3) the relationship
of the debt to, and integration with, the issuer's capital improvement program or budget, if applicable,
City of Huntington Beach Page 1 of 2 Printed on 10/31/2019
powered7b7 LegistarTM
File #: 19-1109 MEETING DATE: 11/4/2019
4) policy goals related to the issuer's planning goals and objectives; and, 5) the internal control
procedures that the issuer has implemented, or will implement, to ensure that the proceeds of the
proposed debt issuance will be directed to the intended use.
The updated Debt Management Policy (Attachment 2) satisfies all the requirements above and
establishes guidelines and parameters for the effective governance, management, and administration
of City debt and applies to the City and its related entities (such as the Huntington Beach Public
Financing Authority, the Successor Agency to the Redevelopment Agency of the City of Huntington
Beach, and the Huntington Beach Housing Authority). Furthermore, the policy is consistent with best
practices recommended by the California Debt and Advisory Commission and Government Finance
Officers Association.
While the updated Debt Management Policy contains a number of changes from the current policy, it
does not lessen the requirements of the current policy, but only strengthens the safeguards and
increases transparency.
The updated policy provides a greater level of detail about the allowable conditions and purposes of
debt issuance and was designed to ensure that a due diligence review is performed for each debt
transaction. This includes evaluating potential risks and benefits, as well as analyzing the impact that
the transaction will have on the City's creditworthiness, debt affordability, and capacity. The updated
policy also outlines how the debt may be structured and discusses refunding guidelines.
Environmental Status:
Not applicable.
Strategic Plan Goal:
Enhance and maintain high quality City services
Enhance and maintain the infrastructure
Strengthen long-term financial and economic sustainability
Enhance and modernize public safety service delivery
Attachment(s):
1. Resolution Number 2019-79, "A Resolution of the City Council of the City of Huntington Beach
Adopting the City's Debt Management Policy"
2. City of Huntington Beach Debt Management Policy
City of Huntington Beach Page 2 of 2 Printed on 10/31/2019
powered74 LegistarTIO
RESOLUTION NO. 2019-79
A RESOLUTION OF THE CITY COUNCIL OF THE
CITY OF HUNTINGTON BEACH ADOPTING THE
CITY'S DEBT MANAGEMENT POLICY
WHEREAS, the City or its related entities (such as the Huntington Beach Public
Financing Authority, the Successor Agency to the Redevelopment Agency of the City of
Huntington Beach, or the Huntington Beach Housing Authority) has issued bonds or other
financing obligations (collectively, "Local Debt") subject to the filing of reports with the
California Debt and Investment Advisory Commission ("CDIAC")pursuant to Section 8855 of
the California Government Code ("Section 8855"); and
Senate Bill No. 1029 ("SB 1029"), effective January 1, 2017, amended Section 8855 to
augment the information that must be provided by municipal issuers of Local Debt to CDIAC;
and
Prior to SB 1029, Section 8855 has required municipal issuers of Local Debt to file a
Report of Proposed Debt Issuance at least 30 days prior to the sale of any Local Debt issue; and
SB 1029 amends the requirements of the Report of Proposed Debt Issuance to require
that this report include a certification by the municipal issuer(the "City") that it has adopted
local debt policies concerning the use of Local Debt and that the contemplated Local Debt
issuance is consistent with those local debt policies; and
SB 1029 further requires that the local debt policy subject to the aforementioned
certification must include all five of the following elements: (1)the purposes for which the debt
proceeds may be used; (2) the types of debt that may be issued; (3) the relationship of the debt to,
and integration with, the issuer's capital improvement program or budget, if applicable; (4)
policy goals related to the issuer's planning goals and objectives; and (5) the internal control
procedures that the issuer has implemented, or will implement, to ensure that the proceeds of the
proposed debt issuance will be directed to the intended use;
The City or its related entities (such as the Huntington Beach Public Financing Authority,
the Successor Agency to the Redevelopment Agency of the City of Huntington Beach, or the
Huntington Beach Housing Authority) may also, in the future, issue Local Debt for which a
Report of Proposed Debt Issuance, including the aforementioned certification, will need to be
filed with CDIAC;
To facilitate issuance of Local Debt in the future and the ability of the City and its related
entities to make the requisite local debt policies certification required in connection therewith by
subdivision(i) of Section 8855, as amended by SB 1029, the City desires to amend the Debt
Management Policy to include all five elements required by Section 8855, as amended by SB
1029, as set forth in the City of Huntington Beach Debt Management Policy hereto;
19-8156/217118 1
RESOLUTION NO. 2019-79
NOW, THEREFORE, the City Council of the City of Huntington Beach does hereby
resolve as follows:
SECTION 1. The above recitals, and each of them, are true and correct.
SECTION 2. The City of Huntington Beach Debt Management Policy is hereby
approved and adopted and shall be made applicable to all Local Debt issued by or on behalf of
the City and its related entities (such as the Huntington Beach Public Financing Authority, the
Successor Agency to the Redevelopment Agency of the City of Huntington Beach, or the
Huntington Beach Housing Authority).
SECTION 3. The City Manager, the City Treasurer,the Chief Financial Officer, and all
other officers of the City are hereby authorized and directed,jointly and severally, to do any and
all things to effectuate the purposes of this Resolution and to implement the Amended Policy,
and any such actions previously taken by such officers are hereby ratified and confirmed.
SECTION 4. This Resolution shall take effect immediately upon adoption.
PASSED AND ADOPTED by the City Council of the City of Huntington Beach at a
regular meeting thereof held on the 4th day of November , 2019.
ayor
OviW AN AP VED: APPROVED FORM:
City Manager City Attorney
INITIATED AND APPROVED:
Acting Chief Financial Officer
19-8156/217118 2
Res. No. 2019-79
STATE OF CALIFORNIA
COUNTY OF ORANGE ) ss:
CITY OF HUNTINGTON BEACH )
I, ROBIN ESTANISLAU, the duly elected, qualified City Clerk of the
City of Huntington Beach, and ex-officio Clerk of the City Council of said City, do
hereby certify that the whole number of members of the City Council of the City of
Huntington Beach is seven; that the foregoing resolution was passed and adopted
by the affirmative vote of at least a majority of all the members of said City Council
at a Regular meeting thereof held on November 4, 2019 by the following vote:
AYES: Brenden, Carr, Semeta, Posey, Delgleize , Hardy
NOES: None
ABSENT: Peterson
RECUSE: None
City Clerk and ex-officio Clerk of the
City Council of the City of
Huntington Beach, California
ATTACHMENT 2
City of Huntington Beach
Debt Management Policy
PURPOSE
❑ The purpose of this Debt Management Policy ("Policy") is to establish guidelines and
parameters for the effective governance, management and administration of the debt of
the City of Huntington Beach ("City"). This Policy is intended to comply with California
Government Code Section 8855(i), and any successor statute, and shall govern all debt
which is contemplated or incurred by the City.
❑ The City hereby recognizes that a fiscally prudent Policy is required to:
■ Maintain the City's sound financial position;
■ Ensure the City has the flexibility to respond to changes in future service priorities,
revenue levels, and operating expenses;
■ Protect the City's creditworthiness;
■ Ensure that all debt is structured to protect both current and future taxpayers,
ratepayers and constituents of the City; and
■ Ensure that the City's debt is consistent with the City's strategic planning goals,
objectives, capital improvement program, and/or budget.
BACKGROUND
❑ The City is committed to fiscal sustainability by employing long-term financial planning
efforts, maintaining appropriate reserves levels and employing prudent practices in
governance, management, budget administration and financial reporting.
❑ Debt levels and their related annual costs are important long-term obligations that must
be managed within available resources. A disciplined, thoughtful approach to debt
management includes policies that provide guidelines for the City to manage its debt
consistent with available and reasonably anticipated resources. Therefore, the objective
of this Policy is to provide written guidelines concerning the amount and type of debt
which may be issued by the City and the ongoing management of debt obligations.
❑ This Policy is intended to make all relevant information readily available to decision-
makers and the public to improve the quality of decisions, provide justification for the
structure of debt issuances, identify policy goals and demonstrate a commitment to long-
term financial planning, including a multi-year capital plan.Adherence to a Policy signals
to rating agencies and the capital markets that the City is well managed and able to meet
its obligations in a timely manner.
RELATIONSHIP OF DEBT TO CAPITAL IMPROVEMENT PROGRAM AND BUDGET
❑ The City has established long-term plans for replacing aging physical infrastructure. The
City strives to maintain a level funding plan that will minimize the peaks and valleys in
General Fund support levels and allows the funding of projects over time. The City
utilizes debt obligations only after giving due consideration to all available funding
sources, including, but not limited to, available cash reserves, available current
revenues, potential future revenue sources, existing and potential grants, and all other
financial sources legally available to be used for such purposes. When and if deemed
an appropriate alternative, the City may issue debt for the purposes stated in this Policy
to implement policy decisions incorporated in the City's Capital Improvement Program
budget adopted by the City Council on an annual basis.
81
ATTACHMENT 2
City of Huntington Beach
.,,; . Debt Management Policy
❑ The City shall strive to fund the upkeep and maintenance of its infrastructure and
facilities due to normal wear and tear through the expenditure of available operating
revenues. To the extent practicable in the circumstances, the City will avoid the use of
debt to fund infrastructure and facilities improvements that are the result of normal wear
and tear. Rather, those readily anticipated infrastructure and facilities repairs and
replacements should be funded through reserve policies.
❑ The City shall coordinate its debt issuances with the goals of its Capital Improvement
Program by timing the issuance of debt to ensure that project funding is available when
needed in furtherance of the City's public purposes.
POLICY GOALS RELATED TO PLANNING GOALS AND OBJECTIVES
❑ The City is committed to long-term financial planning, maintaining appropriate reserve
levels, and employing prudent practices in governance, management, and budget
administration. The City intends to issue debt only for the purposes stated in this Policy
and to implement policy decisions incorporated in the City's Capital Improvement
Program. Adoption of this Policy will help ensure that debt is issued and managed in a
manner that protects the public interest.
❑ It is a policy goal of the City to protect taxpayers, ratepayers (if applicable) and
constituents by utilizing conservative financing methods and techniques so as to obtain
the highest practical credit ratings (if applicable) and the lowest practical borrowing
costs.
❑ The City shall comply with applicable state and federal law as it pertains to debt and the
procedures for levying and imposing related taxes, assessments, rates, or charges.
CONDITIONS AND PURPOSES OF DEBT ISSUANCE
❑ Acceptable Conditions for the Use of Debt
The City believes that prudent amounts of debt can be an effective means of financing
major infrastructure and capital project needs of the City. Debt will be considered to
finance such projects if:
■ It meets the City's goal of distributing costs of the asset over its useful life so that
benefits more closely match costs for both current and future residents.
■ It is the most cost-effective funding means available to the City, taking into
account cash flow needs, maintenance of prudent reserves and other funding
alternatives.
■ It is fiscally prudent and meets the guidelines of this Policy, the City's Municipal
Code, and the City's Charter. Any consideration of debt financing shall consider
financial alternatives, including pay-as-you-go funding, proceeds derived from
development or redevelopment of existing land and capital assets owned by the
City, and use of existing or future cash reserves, or any combination thereof.
❑ Purposes for Which Debt May Be Issued
The City may consider financing for the acquisition, substantial refurbishment,
replacement or expansion of physical assets, including land improvements. The primary
purpose of debt would be to finance one or more of the following:
■ Acquisition and or improvement of land, right-of-way, leaseholds or long- term
easements.
2 82
ATTACHMENT 2
City of Huntington Beach
: Debt Management Policy
■ Acquisition of equipment or a capital asset with a useful life of three (3) or more
years.
■ Construction or reconstruction of a facility.
■ Refunding, refinancing, or restructuring debt, subject to refunding objectives and
parameters discussed herein.
■ Although not the primary purpose of the financing effort, project reimbursable
costs that include project planning, design, engineering and other
preconstruction efforts; project-associated furniture, fixtures and equipment;
capitalized interest, original issuer's discount, underwriter's discount and other
costs of issuance.
■ Interim or cash flow financing, such as tax, revenue or bond anticipation notes.
❑ Prohibited Uses of Debt
Prohibited uses of debt include the following:
■ Financing of operating costs except for anticipation notes with a term of less than
one year.
■ Debt issuance used to address budgetary deficits.
■ Debt issued for periods exceeding the useful life of the asset or projects to be
financed.
❑ Approval Process for the Issuance of Debt
Any issuance of debt, either through a public sale of securities, private placement or
direct purchase is subject to the formal approval of the City Council as a non- consent
item on a City Council agenda. As part of the City Council approval, a formal resolution
authorizing the issuance of a specific form of debt shall be required as part of the
authorizing documents. The resolution shall include, at a minimum, the following:
■ The specific project(s) for which the debt is being incurred;
■ The maximum principal amount to be borrowed;
■ The maximum term, which will be no greater than the useful life of the project(s),
equipment, or capital asset, whichever is applicable and longer;
■ The maximum interest rate or true interest cost;
■ The maximum annual debt service;
• Estimated Costs of Issuance; and
■ Maximum Underwriter's Discount.
❑ In addition to the authorizing resolution, the City Council shall be provided copies of the
various financing documents including indentures, purchase agreements and
preliminary official statements.
STRUCTURE OF DEBT (FIXED RATE)
❑ Term of Debt — Unless financially beneficial to do otherwise, debt shall be structured
with the goal of spreading payments for the project, equipment, or capital asset over its
useful life so that benefits more closely match costs for both current and future residents.
The duration of borrowings by the City shall not exceed the useful life of the project,
equipment, or capital asset it finances. The standard term of long-term borrowing is
typically fifteen to thirty years.
3 83
ATTACHMENT 2
City of Huntington Beach
Debt Management Policy
❑ Pace of Debt Payment—Accelerated repayment schedules reduce debt burden faster
and reduce total borrowing costs. Debt repayment shall be amortized through the most
financially advantageous debt structure and, if applicable, to match the City's projected
cash flow to the anticipated debt service payments, to the extent possible. "Backloading"
of debt service should be considered only when one or more of the following occur:
■ Natural disasters or extraordinary or unanticipated external factors make
payments on the debt in early years impractical.
■ The benefits derived from the debt issuance can clearly be demonstrated to be
greater in the future than in the present.
■ Such structuring is beneficial to the City's aggregate overall debt payment
schedule or achieves measurable interest savings.
■ Such structuring will allow debt service to more closely match project revenues
during the early years of the project's operation.
❑ Level Payment—To the extent practical, bonds will be amortized on a level repayment
basis, and revenue bonds will be amortized on a level repayment basis considering the
forecasted available pledged revenues to achieve the lowest rates possible. Bond
repayments should not increase on an annual basis in excess of two percent (2%)
without a dedicated and supporting revenue-funding stream.
❑ Serial Bonds, Term Bonds, and Capital Appreciation Bonds — For each issuance,
the City shall select serial bonds or term bonds, or both. On the occasions where
circumstances warrant, Capital Appreciation Bonds ("CAB") may be used. The decision
to use term, serial, or CAB bonds shall be based on market conditions.
❑ Reserve Funds — The City shall strive to maintain a fund balance or other designated
reserve at a level equal to or greater than the maximum annual debt service of existing
obligations.
❑ Capitalized Interest- The City shall seek to avoid the use of capitalized interest, which
defers debt service by increasing the size of a debt issue to fund interest. On occasion,
capitalized interest may be considered to the extent that the City wishes to defer the
beginning of debt service until project completion, to match project revenues with debt
service.
❑ Discount Bonds - While discount and deep discount bonds may reduce the interest
cost of the bonds below that of par or premium bonds, they should only be used in limited
situations as they reduce the potential for future savings from refunding of the bonds.
❑ Premium Bonds - Premium bonds may provide for a lower overall interest cost
compared to par or discount bonds. An analysis should be prepared comparing the yield
to maturity and yield to call of the premium bond structure compared to alternative
couponing. This comparison should be done on maturity-by-maturity basis. The value of
the call option of the higher coupon with respect to the future ability to refund should be
reviewed as well.
❑ Call Provisions - In general, the City's debt obligations should include an optional
redemption feature at par that arises not later than ten (10) years after the issuance of
the debt. This option may permit the City to achieve higher interest savings in the future
through the refunding of the bonds. It is the City's intent to maximize prepayment
flexibility on all bond issues. Because the cost of call options can vary depending on
market conditions, an evaluation of factors will be conducted in connection with each
issuance and shorter call provisions may be considered on a case-by-case basis.
4 84
ATTACHMENT 2
_ City of Huntington Beach
Debt Management Policy
USE OF ALTERNATIVE DEBT INSTRUMENTS
❑ The City recognizes that there are numerous types of financing structures and funding
sources available, each with specific benefits, risks, and costs. All potential funding
sources shall be reviewed by management within the context of this Policy and the
overall portfolio to ensure that any financial product or structure is consistent with the
City's objectives. Regardless of what financing structure(s) is utilized, due-diligence
review must be performed for each transaction, including the quantification of potential
risks and benefits, and analysis of the impact on City creditworthiness and debt
affordability and capacity. Because fixed rate debt transfers most financial risks to
bondholders, fixed rate debt should be considered the preferred method of financing
long-term capital needs. Therefore, while permitted for consideration, the following
instruments are disfavored:
■ Variable Rate Debt
Variable rate debt affords the City the potential to achieve a lower cost debt
depending on market conditions. However, the City shall seek to limit the use of
variable-rate debt due to the potential risks of such instruments.
■ Purpose
The City may consider the use of variable rate debt for the purposes of:
• Reducing the costs of debt issues.
• Increasing flexibility for accelerating principal repayment and
amortization (often variable rate debt may be prepaid without
penalty).
• Enhancing the management of assets and liabilities (matching
short-term "priced debt" with the City's short-term investments).
• Diversifying interest rate exposure.
• As a short-term source of construction or acquisition financing, (i.e.,
commercial paper, to reduce interest cost).
■ Considerations and Limitations on Variable-Rate Debt
The City may consider the use of all alternative structures and modes of
variable rate debt to the extent permissible under State law and shall make
determinations among different types of modes of variable-rate debt based
on cost, benefit, and risk factors. The Chief Financial Officer shall consider
the following factors in considering whether to recommend variable rate
debt:
• Any long-term issuance of variable rate debt should not exceed
twenty percent (20%) of total City General Fund supported debt.
• Any long-term issuance of variable rate debt should not exceed the
current unrestricted General Fund reserve levels.
• Whether interest cost and market conditions (including the shape of
the yield curves and relative value considerations) are unfavorable
for issuing fixed rate debt.
• The likelihood of projected debt service savings when comparing
the cost of fixed rate bonds.
• Costs, implementation and administration are quantified and
considered.
5 85
ATTACHMENT 2
City of Huntington Beach
Debt Management Policy
• Cost and availability of liquidity facilities (lines of credit necessary
for variable rate debt obligations and commercial paper in the event
that the bonds are not successfully remarketed) are quantified and
considered.
• The ability to convert debt to a fully amortizing fixed rate or the
permissibility to redeem at par at any time.
• The findings of a thorough risk management assessment.
■ Risk Management
Any issuance of variable rate debt shall require a rigorous risk assessment,
including, but not limited to factors discussed in this section. Variable rate
debt subjects the City to additional financial risks (relative to fixed rate
bonds), including interest rate risk, tax risk, and certain risks related to
providing the necessary liquidity required for variable rate debt.
The City shall properly manage risks associated with variable rate debt as
follows:
• Interest Rate Risk and Tax Risk — The risk that market interest
rates increase on variable-rate debt because of market conditions,
changes in taxation of municipal bond interest, or reductions in tax
rates. Mitigation — Limit total variable rate exposure per the defined
limits and match the variable rate liabilities with short-term assets.
• Liquidity/Remarketing Risk—The risk that holders of variable rate
bonds exercise their"put" option, tender their bonds, and the bonds
cannot be remarketed requiring the bond liquidity facility provider to
repurchase the bonds. This will result in the City paying a higher
rate of interest to the facility provider and the potential rapid
amortization of the repurchased bonds.
• Mitigation - Limit total direct variable-rate exposure. Seek liquidity
facilities, which allow for longer (5-10 years) amortization of any
draws on the facility. Secure credit support facilities that result in
bond ratings of the highest short-term ratings and long-term ratings
not less than AA. If the City's bonds are downgraded below these
levels as a result of the facility provider's ratings, a replacement
provider shall be sought.
• Liquidity/Rollover Risk — The risk that arises due to the shorter
term of most liquidity provider agreements (1-5 years)relative to the
longer-term amortization schedule of the City's variable-rate bonds.
In particular, (1) the City may incur higher renewal fees when
renewal agreements are negotiated and (2) the liquidity bank
market constricts such that it is difficult to secure third party liquidity
at any interest rate.
• Mitigation — Negotiate longer terms on provider contracts to
minimize the number of rollovers.
6 86
ATTACHMENT 2
City of Huntington Beach
, a Debt Management Policy
l
REFUNDING GUIDELINES
❑ The Chief Financial Officer shall monitor at least annually all outstanding City debt
obligations for potential refinancing opportunities. The City should consider refinancing
of outstanding debt to achieve annual savings. Absent a compelling economic reason
or financial benefit to the City, any refinancing should not result in any increase to the
weighted average life of the refinanced debt.
❑ The City will generally seek to achieve debt service savings that on a net present value
basis are at least three percent (3%) of the current debt being refinanced. Any potential
refinancing executed more than ninety(90) calendar days in advance of the outstanding
debt optional call date shall require at least a three percent net present value savings
threshold. If there is negative arbitrage in an advance refunding, the interest efficiency
should at least be fifty percent(50%). Under any savings scenario, the net present value
assessment shall factor in all costs, including the total cost of issuance, escrow, and
foregone interest earnings of any contributed funds on hand. Any potential refinancing
shall additionally consider whether an alternative refinancing opportunity with higher
savings can be reasonably expected in the future.
❑ Consideration of this method of refinancing shall place greater emphasis on determining
whether an alternative refinancing opportunity with higher savings is reasonably
expected in the future.
COMMUNICATION, ADMINISTRATION AND REPORTING, AND INTERNAL CONTROL
PROCEDURES
❑ Rating Agency Relations and Annual or Ongoing Surveillance—The Chief Financial
Officer shall be responsible for maintaining the City's relationships with Standard &
Poor's Ratings Services, Fitch Ratings and Moody's Investor's Service. The City is
committed to maintaining or improving its existing rating levels. In addition to general
communication, the Chief Financial Officer shall:
■ Ensure the rating agencies are provided updated financial information of the City
as it becomes publicly available.
■ Communicate with credit analysts at each agency at least once each year, or as
may be requested by the agencies.
■ Prior to each proposed new debt issuance, schedule meetings or conference calls
with agency analysts and provide a thorough update on the City's financial
position, including the impacts of the proposed debt issuance.
❑ Council and Finance Commission Communication — The Chief Financial Officer
should report feedback from rating agencies to the City Council and/or Finance
Commission, when and if available, regarding the City's financial strengths and
weaknesses and recommendations for addressing any weaknesses as they pertain to
maintaining the City's existing credit ratings.
❑ Debt Issue Record-Keeping — A copy of all debt-related records shall be retained at
the City's offices. At minimum, these records shall include all official statements, bond
legal documents/transcripts, resolutions, trustee statements, leases, and title reports for
each City financing (to the extent available).
❑ Compliance -When issuing debt, in addition to complying with the terms of this Policy,
the City shall comply with any other applicable policies regarding initial bond disclosure,
continuing disclosure, post-issuance compliance, and the investment of bond proceeds
in accordance with applicable bond indentures concerning tax compliance with tax
7 87
ATTACHMENT 2
City of Huntington Beach
Debt Management Policy
exempt bonds. Without limiting the generality of the foregoing, the City shall periodically
review the requirements of and will remain in compliance with the following:
■ Continuing Disclosure — The City shall comply with federal securities law,
including any continuing disclosure undertakings entered into by the City in
accordance with Securities and Exchange Commission Rule 15c2-12. The City
shall file its annual financial statements and other financial and operating data for
the benefit of its bondholders as required in any such agreement for any debt issue.
The City shall maintain a log or file evidencing that all continuing disclosure filings
have been timely made.
■ Arbitrage Rebate — The use of bond proceeds and their investments shall be
monitored by the Chief Financial Officer to ensure compliance with all Internal
Revenue Code Arbitrage Rebate Requirements. The Chief Financial Officer shall
ensure that all bond proceeds and investments are tracked in a manner that
facilitates accurate calculation; and, if a rebate payment is due, such payment is
made in a timely manner.
■ Annual Reporting — California Government Code Section 8855(k), or any
successor statute, and the annual reporting requirements therein.
■ Other Compliance - Other compliance requirements imposed by regulatory
bodies.
Comprehensive post-issuance policies are listed in Appendix A.
❑ Proceeds Administration - Proceeds of debt will be held either (a) by a third-party
trustee or fiscal agent, which will disburse such proceeds to or upon the order of the City
upon the submission of one or more written requisitions by the City Manager (or his or
her written designee), or (b) by the City, to be held and accounted for in a separate fund
or account, the expenditure of which will be carefully documented by the City. On a
quarterly basis, the Chief Financial Officer (or his or her designee) shall monitor the
proceeds and the disposition of unexpended proceeds.
CREDIT RATINGS
❑ The City shall consider published ratings agency guidelines regarding best financial
practices and guidelines for structuring its capital funding and debt strategies to maintain
the highest possible credit ratings consistent with its current operating and capital needs.
LEGAL DEBT LIMIT
❑ Huntington Beach City Charter Section 610 provides that "The City shall not incur an
indebtedness evidenced by general obligation bonds which shall in the aggregate
exceed the sum of 12 percent of the total assessed valuation, for purposes of City
taxation, of all the real and personal property within the City."While this limit defines the
absolute maximum legal debt limit for the City, it is not an effective indicator of the City's
affordable debt capacity.
AFFORDABILITY
❑ Prior to the issuance of debt to finance a project, the City shall carefully consider the
overall long-term affordability of the proposed debt issuance. The City shall not assume
more debt without conducting an objective analysis of the City's ability to assume and
support additional debt service payments. The City shall consider its long-term revenue
8 88
ATTACHMENT 2
City of Huntington Beach
Debt Management Policy
and expenditure trends, the impact on operational flexibility and the overall debt burden
on the tax payers. The evaluation process shall include a review of generally accepted
measures of affordability and will strive to achieve and or maintain debt levels consistent
with its current operating and capital needs.
■ General Fund-Supported Debt—General Fund Supported Debt generally include
Certificates of Participation ("COPs") and Lease Revenue Bonds ("LRBs") which
are lease obligations that are secured by an installment sale or by a lease-back
arrangement between the City and another related public entity. The general
operating revenues of the City are pledged to pay the lease payments, which are,
in turn, used to pay debt service on the LRBs or COPs. 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 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 City as lessee is obligated to place in its Annual Budget the rental
payments that are due and payable during each fiscal year the City has use of the
leased property.
The City should strive to maintain its net General Fund-backed debt service at or
less than eight percent (8%) of annually budgeted General Fund revenue. This
ratio is defined as the City's annual debt service requirements on COPs and LRBs
compared to total General Fund Revenues. This ratio, which pertains to only
General Fund backed debt, is often referred to as "lease burden."
■ Revenue Bonds — Long-term obligations payable solely from specific pledged
sources, in general, are not subject to a debt limitation. Examples of such long-
term obligations include those which achieve the financing or refinancing of
projects provided by the issuance of debt instruments that are payable from
restricted revenues or user fees (Enterprise Revenues) and revenues generated
from a project.
In determining the affordability of proposed revenue bonds, the City shall perform
an analysis comparing projected annual net revenues from pledged sources to
estimated annual debt service on revenue bonds. The City should strive to
maintain a debt service coverage ratio of at least 125% using historical and/or
projected net revenues to cover annual debt service for bonds. The City may
require a revenue rate increase or reduce operating costs so that revenues cover
both operations and debt service costs, and create debt service reserve funds to
maintain the required coverage ratio.
■ Special Districts Financing — The City's Special Districts primarily consist of
Community Facilities Districts ("CFDs"). The City may consider requests for
Special District formation and debt issuance when such requests address a public
need or provide a public benefit. Each application shall be considered on a case-
by-case basis as long as the City assumes no obligation under, or in connection
with, such debt issuance. The Finance Department shall not recommend a
financing if it is determined that the financing could be indirectly detrimental to the
financial standing of the City or such financing would otherwise not be in the best
interests of the City.
9 89
ATTACHMENT 2
City of Huntington Beach
Debt Management Policy
• Conduit Debt — Conduit financing provides for the issuance of securities by a
government agency to finance a project of a third party, such as a non-profit
organization or other private entity. The City may sponsor conduit financings for
those activities that have a general public purpose and are consistent with the
City's overall service and policy objectives. Unless a compelling public policy
rationale exists, such conduit financings will not in any way obligate the City or
otherwise pledge the City's faith and credit.
10 90
r ATTACHMENT 2
City of Huntington Beach
a Debt Management Policy
APPENDIX A
POST ISSUANCE COMPLIANCE POLICY AND PROCEDURE MANUAL
PURPOSE
❑ The purpose of this post-issuance compliance policy and procedure manual is to adopt
policies and procedures to guide the City in meeting the requirements of the Internal
Revenue Code of 1986, as amended, and Treasury Regulations (the "Tax Code")
concerning tax-exempt and tax-advantaged debt ("debt issuances"). Non-compliance
with the Tax Code may result in fines and/or loss of the preferential status of the debt
issuances.
The Finance Department will be primarily responsible for ensuring that the City
successfully carries out its post-issuance compliance requirements under applicable
provisions of the Tax Code with regard to all debt issuances of the City. The Finance
Department shall be assisted by other City staff and officials when appropriate. The
Finance Department will also be assisted in carrying out post-issuance compliance
requirements by contracted entities including Bond Counsel, Municipal Advisor, Paying
Agent, Trustee, Arbitrage Consultant, and/or other consultants deemed necessary.
The Finance Department shall be responsible for assigning post-issuance compliance
responsibilities to other City staff, Bond Counsel, the Municipal Advisor, the Paying
Agent, the Trustee and the Arbitrage Consultant. The Finance Department shall utilize
such other professional service organizations as are necessary to ensure compliance
with the post-issuance compliance requirements of the City.
GENERAL OVERVIEW OF ARBITRAGE, YIELD RESTRICTION AND REBATE
REQUIREMENTS
❑ Overview
The purpose of this section is to introduce the concept of arbitrage and its requirements.
There are exceptions to many of the arbitrage rules. Advice from the City's Arbitrage
Consultant and/or Bond Counsel is strongly recommended before any action is taken.
❑ Definition
Arbitrage is the price differential, or profit made, from investing inherently lower yielding
debt issuance proceeds in higher yielding taxable investments. Arbitrage is the
difference between the yield on an issuer's debt issuance and the investment income
earned on the proceeds invested in taxable instruments. Arbitrage rebate refers to the
positive or negative amount that must be paid (rebated) to the federal government.
❑ Areas of arbitrage compliance that must be addressed:
■ The arbitrage rebate requirements identify what must be done with any arbitrage
(profits or earnings) above the debt issuance's yield earned on the investment of
the gross proceeds of the debt issuance. Arbitrage on gross proceeds must be
rebated to the federal government every five years after the date of issuance (or
earlier if elected) through and including the final maturity ("filing date").
■ The yield restriction requirements set forth various investment yield limitation
conditions for different categories of gross proceeds from a debt issuance (e.g.
construction, refunding escrow, debt service, and reserve funds). The issuer
should meet these various yield restriction conditions to avoid compromising the
tax-exempt or tax-advantaged status of the debt issuance. Since the yield
11 91
j ATTACHMENT 2
_ City of Huntington Beach
.,,n.g Debt Management Policy
restriction requirements are specific to a debt issuance it is recommended that the
City consult with the Arbitrage Consultant and/or Bond Counsel to determine the
specific yield restriction requirements on a per debt issuance basis.
Construction Fund Yield Restriction: The most common yield restriction constraint
for an issuer is related to construction funds. Generally, if there are unexpended
project/construction proceeds at the end of the initial 3-year temporary period in
excess of the minor portion (the lesser of$100,000 or 5% of the sale proceeds of
the debt issuance), an issuer may no longer invest the remaining proceeds above
the materially higher yield (debt issuance yield + .125%) without taking corrective
actions to remedy interest earnings above the materially higher yield. The issuer
must yield restrict the proceeds below the materially higher yield, or a yield
reduction payment report will be required. Any yield reduction payment under the
yield restriction requirements must be paid per the same deadlines as the arbitrage
rebate requirements: every five years after the date of issuance (or earlier if
elected) through and including the final maturity.
❑ Purpose of the Tax Code regarding arbitrage:
■ The Tax Code was put into place to minimize the benefits of investing tax-exempt
or tax-advantaged debt proceeds, thus encouraging expenditures for the
governmental purpose of the debt issuance and to remove the incentive to:
■ Issue debt earlier than needed,
■ Leave debt outstanding longer than necessary, and/or
■ Issue more debt than necessary for a governmental purpose.
❑ Type of debt issuances and funds subject to arbitrage compliance:
■ The following types of debt issuances are subject to arbitrage compliance as of the
following dates:
■ Single Family Debt Issuances 09/25/79
■ Private Activity Debt Issuances 12/31/84
■ Student Loan Debt Issuances 12/31/85
■ Governmental Debt Issuances 08/31/86
• The following funds and proceeds of a debt issuance are defined as Gross
Proceeds of a debt issuance:
■ Project funds
■ Debt service funds
■ Costs of issuance funds
■ Refunding escrow funds
■ Reserve funds
■ Disposition proceeds
■ Replacement proceeds (other than debt service funds)
■ Transferred proceeds (if an old debt issuance has been refunded by a new
debt issuance and the old debt issuance has unspent funds, such funds
may transfer to the new debt issuance)
Note of Concern: An often misunderstood concept is that monies received upon
closing of a debt issuance are the only monies subject to arbitrage rebate. One of
the most common funds found to be subject to arbitrage rebate that is not funded
12 92
ATTACHMENT 2
City of Huntington Beach
Debt Management Policy
from debt issuance proceeds is the debt service fund. The debt service fund
receives a majority of its funding from tax or use revenues. The debt service fund
is required to be included in the arbitrage rebate calculation unless the fund
balance is depleted at least once each bond year, except for a reasonable
carryover amount not to exceed the greater of:
■ The earnings on the fund for the immediate preceding bond year; or
■ One-twelfth of the principal and interest payments on the Debt Issuance or
the immediately preceding bond year.
❑ Exceptions to the rebate requirements:
The Tax Code sets forth general arbitrage and rebate requirements for debt
issuances. The general rule is that any arbitrage earned must be determined and
reported to the federal government every fifth anniversary date after the date of
issuance of the debt issuance and on the final maturity, or as elected. Arbitrage
rebate is essentially 100% of investment earnings in excess of the debt issuance's
yield. There are several exceptions to the arbitrage and rebate requirements, and
if any one of these exceptions are met, all or a portion of the debt issuance's
proceeds are not subject to the arbitrage and rebate requirements. Consult with
the City's Arbitrage Consultant and/or Bond Counsel to determine if the debt
issuance is eligible for a particular exception, to establish the appropriate
investment plan for the debt issuance proceeds, and to assess whether the
exception requirements were met.
The purpose of this section is to introduce the concept of spending exceptions and
their requirements. There may be special elections and circumstances for a debt
issuance that can affect how the exceptions are tested. Advice from the City's
Arbitrage Consultant and/or Bond Counsel is strongly recommended before any
action is taken. Below are descriptions of the various exceptions:
■ 6-month spending exception: If all gross proceeds and actual interest
earnings are spent within 6-months after issuance, the interest earned
during that period is not subject to the rebate requirements. Intermediate
expenditure requirements are necessary (95% by 6 months and 100%
within 12 months).
If there are unspent proceeds remaining at the end of the 6-month period,
an issuer may still qualify for the spending exception under the following
condition:
• If the remaining amount is 5% or less and is spent within 6 months
from the end of the 6-month spending date.
■ 18-month spending exception: If a debt issuance does not qualify as a
construction issuance (75% of the debt issuance actually spent on
construction) then the debt issuance is eligible for the 18-month spending
exception, but not the 2-year spending exception. If all gross proceeds and
expected interest earnings for the 6-month and 12-month period and actual
interest for the 18-month period is spent within 18-months according to a
strict timetable, the interest earned during that period is not subject to the
rebate requirements. Intermediate expenditure requirements are
necessary (15% by 6 months, 60% by 12 months, 100% by 18 months.
13 93
ATTACHMENT 2
tit_ h _ City of Huntington Beach
Debt Management Policy
If there are unspent proceeds remaining at the end of the 18-month period,
an issuer may still qualify for the spending exception under the following
conditions:
• A reasonable retainage amount of 5% or less is allowed for
business purposes and the retainage is spent within 12 months
from the end of the 18-month spending date, or;
• If the remaining amount does not exceed the lessor of$250,000 or
3% of the issue price and due diligence is exercised to complete
the project and spend the remaining project/construction proceeds.
■ 2-year spending exception: If a debt issuance qualifies as a construction
issuance (75% of the debt issuance is actually spent on construction) and
all gross proceeds and expected interest earnings for the 6-month, 12-
month, and 18-month period and actual interest for the 24-month period
are spent within 2 years according to a strict timetable, then interest earned
during that period is not subject to the rebate requirements. Intermediate
expenditure requirements are necessary (10% by 6 months, 45% by 12
months, 75% by 18 months and 100% by 2-years).
If there are unspent project/construction proceeds remaining at the end of
the 2-year period, an issuer may still qualify for the spending exception
under the following conditions:
• A reasonable retainage amount of 5% or less is allowed for
business purposes and the retainage is spent within 12 months
from the end of the 2-year spending date, or;
• If the remaining amount does not exceed the lessor of$250,000 or
3% of the issue price and due diligence is exercised to complete
the project and spend the remaining project/construction proceeds.
■ Small issuer exception: General taxing authorities reasonably expecting to
issue $51VI or less in tax-exempt or tax-advantaged debt during each
calendar year (cumulative for all debt issuances) may qualify for the small
issuer exception to the rebate requirements, but must still satisfy the yield
restriction requirements. The small issuer exception does not apply to
private activity, 501(c)(3) or student loan debt.
• General requirements:
o The issuer must have general taxing powers.
o The debt issuances must be governmental debt issuances.
o At least 95% of the proceeds must be used for local
governmental activities of the issuer or by governmental
units located within the issuer's boundaries.
o All tax-exempt or tax-advantaged debt issued in a calendar
year cannot exceed $5,000,000.
• Additional requirements for refunding debt issuances:
o The debt being refunded (old debt issuance) must have
qualified for the small issuer exception.
o The weighted average maturity of the refunding debt
issuance (new debt issuance) must not exceed the
weighted average maturity of the refunded debt (old debt
14 94
i ATTACHMENT 2
City of Huntington Beach
Debt Management Policy
issuance). Current refunding debt issuances that have a
three year or less weighted average maturity are exempt
from the weighted average maturity test.
o The refunding debt (new debt issuance) must not mature
more than thirty years after the issuance of the original
refunded debt (old debt issuance).
Note — Historically 113 of refunding debt issuances (new debt
issuances) will fail one of the three rules listed above and become
subject to the rebate requirements.
DUE DILIGENCE REVIEW AT REGULAR INTERVALS
❑ This policy and its related procedures start with a review of the due diligence measures
that will take place at regular intervals, as well as each filing date to ensure that each
debt issuance is compliant with the requirements of the Tax Code. The City will
complete the annual due diligence review on all debt issuances.
RETENTION OF ADEQUATE RECORDS TO SUBSTANTIATE COMPLIANCE
❑ General overview
■ Debt not refunded: Currently the IRS record retention requirements are to keep
all records, data and documents associated with non-refunded debt issuances for
three years past the final maturity date for the debt issuance (or longer if required
by local or state law.)
■ Refunded debt: Since the refunding debt issuance (new debt issuance) is
dependent on the tax-exempt or tax-advantaged status of the refunded debt
issuance (old debt issuance), all records are required to be maintained for three
years past the final maturity of both debt issuances (or longer if required by local
or state law).
■ Electronic data storage requirements: Electronic records may be stored in an
electronic format in lieu of hard copies if certain requirements are satisfied, for
example:
■ The system must ensure an accurate and complete transfer of the hard
copy books and records to the electronic storage system and contain a
retrieval system that indexes, stores, preserves, retrieves and reproduces
all transferred information.
■ The system must include reasonable controls and quality assurance
programs.
■ The information maintained in the system must be cross-referenced with
the books and records in a manner that provides an audit trail to the source
documents.
■ Upon request by the IRS, a complete description of the electronic storage
system, including all procedures relating to its use and the indexing system
must be provided.
■ Upon request by the IRS, the issuer must retrieve and reproduce hard
copies of all electronically stored records.
■ The system must not be subject to any agreement that would limit the IRS'
access to the use of the system.
15 95
ATTACHMENT 2
City of Huntington Beach
�= Debt Management Policy
❑ Electronic file storage and backup: Financial/accounting transactions will be retained
in a designated computer file folder within G:\FINANCE DEPARTMENT\ACCOUNTING
and will be backed up by the Information Services Department. Access to this folder will
be restricted to Finance Department staff.
❑ Storage of hard copies: A folder jacket, box or other media storage container
displaying the debt issuance description will be set up for each debt issuance. The
storage container will contain the documents mentioned in Section E on the next page.
Access will be restricted to persons authorized by the Finance Department.
❑ Destruction of records: A log will be kept of all debt issuances whose records are
destroyed after the IRS mandated retention period detailing the debt issuance
description, allowable destruction date, date records were destroyed, the Finance
Department's signature authorizing the record destruction, and witness signature.
Access to this information will be restricted as authorized by the Finance Department.
❑ Required information to be stored for each debt issuance
■ Documents: Bond Counsel shall send a Transcript for the debt issuance to the
Finance Department. If a Transcript was not compiled, then copies of the following
documents will be forwarded or made available to the Finance Department's office:
■ Bond Counsel Opinion
■ Final Official Statement or Private Placement Memorandum
■ Insurance Documents
• Council Certificate for Ordinance
• Copy of Ordinance Authorizing Debt Issuance
■ IRS Form 8038-G, Form 8038-GC, Form 8038, Form 8308-TC or Form
8038-B
■ CPA Verification Report (for refunding debt issuances only)
■ Non-Arbitrage Tax Certificate or similar document
■ All Debt Service Schedules not included in the Official Statement
■ Letter of Credit Agreement(generally for variable rate debt issuances only)
■ Swap Agreement (generally for variable rate debt issuances only)
■ Winning Bid Forms
■ Trust Indenture
■ Investment Banker's Closing Memorandum
■ Investment Banker's Notice of Delivery Memorandum
■ Investment Banker's Sources and Uses of Funds Memorandum
■ Reports completed after issuance
■ Rebate calculation reports
■ Yield restriction reports
■ Spending exception reports
■ Penalty in lieu of rebate reports
■ CPA verification report for restructuring of escrow
■ Payment documentation to include:
• Form 8038-T
• Cancelled check
16 96
..............
ATTACHMENT 2
_ City of Huntington Beach
Debt Management Policy
• Proof of mailing
■ Refund claims
■ Other reports related to the Debt Issuance
■ Correspondence
■ Bond Counsel
■ Board Meetings
■ Municipal Advisor
■ Arbitrage Consultant
■ Underwriter
■ Investment Firms
■ Other correspondence concerning any other aspect of the debt issuance
to include but not limited to expenditures, investments, allowable projects,
etc.
■ Investment activity: Trust statements (or equivalent) with detailed investment
activity for the entire computation period for each fund/account in which gross
proceeds of the debt issuance were held. Investment information must be
recorded on a daily transactional level. This information is required to compute the
yield on the investments and to comply with archive requirements. Investment
activity details should include such items as:
■ General ledgers
■ Subsidiary ledgers
■ Investment statements (state pools, bank statements, etc.)
■ Type of investment
■ Date of purchase and purchase price
■ Interest rate
■ Interest payment amounts
■ Maturity date
■ Interest payment dates
■ Interest calculation methodology
■ Date of sale and sales price
■ Investment contract information to include:
• Evidence of the purchase price paid for investment contract
• Detailed documentation of the investment contract bid process
• Certification by the investment contract provider of fees paid for
contract
• All bid solicitation forms (3 bid minimum)
• Administrative costs
■ Expenditure information: The Finance Department will capture expenditure
information. The following expenditure information must be captured and stored
in accordance with the above mentioned record retention requirements to include:
■ Description of expenditure
■ Date of expenditure
17 97
ATTACHMENT 2
le h-
City of Huntington Beach
Debt Management Policy
■ Amount of expenditure
■ Invoices
• Proof of payment (canceled check, wire information, etc.)
■ Initial letter of credit information to include:
■ Payment amounts
■ Date of payment
■ Terms
■ Actual letter of credit information to include:
■ Actual amount paid
■ Actual date payment is made
■ Invoices
■ Statements
■ Allocation of gross proceeds to expenditures: Any allocation of gross proceeds to
expenditures must involve a current outlay of cash for the governmental purpose
of the debt issuance. A current outlay of cash is an outlay reasonably expected to
occur within five banking days after the date of an allocation. If expenditure is paid
by check, the outlay is the date the check is mailed, provided that it is expected to
be cashed in five days.
■ Allocation: Reasonable allocation methods for allocating funds from
different sources to expenditures for the same governmental purpose
include any of the following methods if consistently applied:
• The first in, first out/FIFO method permits the City to put the
proceeds of more than one debt issuance into a single account
(commingle) and treat all expenditures as coming from proceeds of
the first debt issuance until they are fully spent.
• The gross proceeds spent first method is used where available
funds include, tax revenues, private contributions, etc., in addition
to debt issuance proceeds. The debt issuance proceeds are
treated as spent first.
• The specific tracing method permits the City to keep proceeds from
different debt issuances in separate accounts. Costs may be
charged to any debt issuance/checking account at the City's
discretion.
• The ratable allocation method permits the City to place proceeds of
more than one debt issuance into a single account(commingle) and
treat expenditures as coming from proceeds of each debt issuance
that contributed proceeds to that account. The expenditures are
allocated to each debt issuance ratably based on each debt
issuance's proportion of ownership of the account.
■ Timing: An issuer must account for the allocation of proceeds to
expenditures not more than 18 months after the later of: the date the
expenditure is paid or the date the project, if any, that is financed by the
debt issuance is placed in service. This allocation must be made in any
event by the date 60 days after the fifth anniversary of the issuance date or
18 98
ATTACHMENT 2
City of Huntington Beach
.;,.m. Debt Management Policy
the date 60 days after the retirement of the debt issuance, if earlier. This
paragraph applies to debt issuances issued on or after May 16, 1997.
■ Allocation of investments in a commingled fund: The Tax Code requires that all
payments and receipts on investments held in a commingled fund must be
allocated to the different sources/investments in the fund not less frequently than
the close of a consistently used fiscal period (not in excess of three months); this
allocation must be based on a consistently applied, reasonable ratable allocation.
Treasury Reg. Section 1.148-6(e). Currently, the City allocates all payments and
receipts monthly.
■ Qualified use of proceeds, financed property, private business use: The qualified
use of proceeds, property financed, and private business use limitations by the
debt issuance should be identified and continually monitored to ensure compliance
with the limitations as defined in the debt issuance documents or if more restrictive,
state law or the Tax Code's limitations. Supporting documentation is required to
support qualified use of proceeds, property financed, and private business use.
The Finance Department will ensure such limitations are in compliance with debt
issuance documents or if more restrictive, state law or the Tax Code's limitations.
■ Issuance price and volume cap allocation: The issuance price and volume cap
allocation activity limitations should be identified and monitored to ensure
compliance with the limitations as defined in the debt issuance documents or if
more restrictive, state law or the Tax Code's limitations. Supporting documentation
is required for issuance price determination and volume cap allocation limitations
of the debt issuance. The Finance Department will ensure such limitations are in
compliance with the debt issuance documents or if more restrictive, state law or
the Tax Code's limitations.
■ Fair market value of investments: The City is to provide information to support that
the investments were purchased or sold at a fair value. The City may not purchase
an investment at a price in excess of fair market value with gross proceeds of the
debt issuance. Nor may the City sell an investment purchased with gross proceeds
at a price lower than fair market value. Treasury Regulations Section 1.148-6(c).
In dealing with fair market value requirements, the Tax Code specifically provides
three safe harbor categories of investments:
■ Securities traded on an established market from a willing seller in a bona
fide arm's-length transaction.
■ Certificates of deposit purchased using a safe harbor under the applicable
Tax Code. The safe harbor is available only for certificates that have a
fixed interest rate, a fixed payment schedule and a substantial penalty for
early withdrawal.
■ Guaranteed investment contracts purchased used a three-bid safe harbor
under the Tax Code.
■ Continuing disclosure: The City is to provide continuing disclosure, such as annual
financial information and material event notices in accordance with SEC rule 15c2-
12. The Finance Department is primarily responsible for undertaking such
continuing disclosure obligations and to monitor compliance with such obligations.
19 99
f ATTACHMENT 2
City of Huntington Beach
Debt Management Policy
PROCEDURES TO CORRECT NON-COMPLIANCE
❑ If it is determined that the requirements of the policies and procedures set forth herein
have been violated or if it is determined that the Tax Code related to each debt issuance
has been violated, the City will take the appropriate action described under the
applicable Tax Code to remediate such non-compliance.
❑ Such action may include, but is not limited to the following steps:
■ Notify Finance Department.
■ Notify Bond Counsel, Arbitrage Consultant, and/or Municipal Advisors.
■ Resolve non-compliance in a timely manner in order to reduce penalties and late
interest. A 60-day resolution period is recommended.
■ Take the appropriate remedial action as advised by Bond Counsel. Remedies may
include, but are not limited to:
■ Enter the Voluntary Closing Agreement Program (VCAP).
■ Pay all past due arbitrage rebate or yield restriction liabilities to the IRS to
include a letter of explanation for late payment, late interest and/or
penalties.
■ Correct non-compliance matter to ensure future compliance.
20 100