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HomeMy WebLinkAboutR2006-024FILE REFERENCE FORM R2006-024 X Additional File Exists Additional File Contains Records Not Public, According to the Public Records Act Other FILES Date Initials Replaced by Resolution No. R2010-007 03/02/10 R S.\Our Documents\Reso1utions\05\Debt Service Management Policy.doc RESOLUTION NO. A RESOLUTION REVISING ADMINISTRATIVE POLICY NO. 403.07 "DEBT SERVICE MANAGEMENT" AND PROVIDING FOR AN EFFECTIVE DATE. WHEREAS, on the 5°i day of March, 1996 the City Council passed Resolution No. 96-013 adopting Administrative Policy No. 403.07 "Debt Service Management"; and WHEREAS, the Assistant City Manager of the Finance Department for the City of Denton has presented a proposed revision of the Debt Service Management Policy for the Council's consideration; and WHEREAS, the City Manager recommends adoption of the revised policy and the City Council desires to adopt such policy as the official policy regarding Debt Service Management; NOW, THEREFORE, THE COUNCIL OF THE CITY OF DENTON HEREBY RESOLVES: SECTION 1. The following policy entitled "Policy No. 403.07 "Debt Service Management", attached hereto and made a part hereof, is hereby adopted as an official policy of the City of Denton, Texas and shall replace the existing Debt Service Management Policy. SECTION 2. The attached policy shall be filed in the official records with the City Secretary. SECTION 3. This resolution shall become effective immediately upon its passage and approval. T PASSED AND APPROVED this the,20 day of 2006. PERK McNEILL, MAYOR ATTEST: JENNIFER WALTERS, CITY SECRETARY VVBY: 4~ CITY OF DENTON PAGE I OF 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE REFERENCE NUMBER: SECTION: FINANCE 403.07 INITIAL EFECTIVE DATE: SUBJECT: DEBT MANAGEMENT 03/05/96 LAST REVISION DATE: TITLE:DEBT SERVICE MANAGEMENT 09/27/00 POLICY STATEMENT This policy shall provide general guidelines by which the City of Denton (the City) will issue debt. It is the objective of this policy that (1) the City obtain financing only when necessary, (2) the process for identifying the timing and amount of debt or other financing, proceed as efficiently as possible, and (3) the most favorable interest rate and other costs be obtained. This debt management policy applies,to the financing activities of the City of Denton, Texas. It also addresses the issues of process, use and limitations. Obligations will be timed for issuance and delivery of proceeds as close as possible to the time that contracts are expected to be awarded so that the proceeds are spent in the most efficient manner. ADMINSTRATIVE PROCEDURES 1.DEBT MANAGEMENT COMMITTEE A.Members The Debt Management Committee (the Committee) consists of the City Manager, Assistant City Manager (Utilities), Assistant City Manager (Finance), Chief Financial Officer, (Chief Budget Officer); and, financial advisor and bond counsel as ex-officio members. B.Scope The Committee shall meet as necessary to review the debt program. Included in its discussions will be such topics as: the Capital Improvement Program, status of financed projects, timing of additional financing needs, the effect of proposed financing activity on the related rates supporting the debt (i.e. property tax rate, utility rates, user fees, etc.). Page 2 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 403.07 II. RESPONSIBILITY AND STANDARD OF CARE The Fiscal and Municipal Services Department will coordinate all activities required for the issuance of all debt. A.Delegation The primary individual who shall be involved in the development of financing recommendations will be the Chief Financial Officer. The Assistant City Manager (Finance) shall be responsible for all debt financing activities and shall establish a system of controls to regulate the activities of the Chief Financial Officer. B.Conflicts of Interest All participants in the debt management process shall seek to act responsibly as custodians of public assets. Officers and employees involved in the debt management process shall refrain from personal business activity that could conflict with proper execution of the financing program, or which could impair their ability to make impartial financing decisions. C.Reporting The Chief Financial Officer shall prepare at least annually a report summarizing all debt outstanding by type (tax supported and revenue backed), remaining balance of bond proceeds, update of arbitrage liability, and update of pertinent legislative changes. D.Investor Relations The City shall endeavor to maintain a positive relationship with the investment community. The Chief Financial Officer and the City's financial advisor shall, as necessary, prepare reports and other forms of communications regarding the City's indebtedness, as well as its future financing plans. This includes information presented to the press and other media. The information includes annual program of services, comprehensive annual financial report, financial plans, capital improvement plans, comprehensive development plans, etc. All forms of media deemed appropriate and immediately available to the City will be utilized to disseminate information to all investors. Examples include Texas Municipal Report, The Bond Buyer, Nationally Recognized Municipal Security Information Repository and State Information Depository. Bond counsel will advise on the use of electronic media in connection with the City's debt program. Page 3 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 403.07 E.Financial Advisor The City shall retain an independent financial advisor for advice on the structuring of new debt, financial analysis of various options, the rating review process, marketing debt issues, marketability of City obligations, sale and post- sale services, the review of the official statement and other services as necessary. The City will seek the advice of the financial advisor on an ongoing basis. The financial advisor will perform other services as defined by the agreement approved by the City Council. F.Bond Counsel The City shall retain bond counsel for legal and procedural advice on all debt issues. Bond counsel shall advise the City Council in all matters pertaining to its bond ordinance(s) and/or resolution(s). No action shall be taken with respect to new obligations until a written instrument has been prepared by the bond attorneys certifying the legality of the proposal. The bond attorneys shall prepare all ordinances and other legal instruments required for the execution and sale of any bonds issued which shall then be reviewed by the City Attorney and Chief Financial Officer. The City will also seek the advice of bond counsel on all other types of debt and on any other questions involving federal tax or arbitrage law. Special counsel shall be retained to protect the City's interest in complex negotiations and comment review. III. OFFICIAL STATEMENT The preparation of the Official Statement is the responsibility of the financial advisor in concert with the Chief Financial Officer under the supervision of the Assistant City Manager Finance). Information for the Official Statement is gathered from departments/divisions throughout the City. The City will take all appropriate steps to comply with the federal disclosure rules (i.e., Securities and Exchange Commission Rule 15C2-12). The City will provide annual and event disclosure to information repositories throughout the term of securities for the benefit of the primary and secondary municipal market. IV. DISCLOSURE A.With each bond offering, and at least annually, in the preparation of Financial Reports or Official Statements of any bond prospectus, the City will follow a policy of full and complete disclosure of financial and legal conditions of the City, in conformance with guidelines issued by the Government Finance Officers Association Disclosure Guideline, and as advised by disclosure counsel or Page 4 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 40107 financial advisor. Furthermore, all City finance and debt-related information which may appear in publicly distributed documents in anticipation of the issuance of bonds by the City Enterprise Funds, Redevelopment Agency or Housing Authority should be reviewed by the Finance Department prior to distribution to ensure that the information is presented on an accurate and consistent basis. B.Material Events Securities and Exchange Commission (SEC) Rule 15c2-12 lists eleven events that, if material, must be reported in a timely fashion to each Nationally Recognized Municipal Security Information Repository (NRMSIR) or to the Municipal Security Rulemaking Board (MSRB) and to the appropriate State Information Depository (SID). The events that must be reported, if material, are: 1. Principal and interest payment delinquencies; 2. Nonpayment related defaults; 3. Unscheduled draws on debt service reserves reflecting financial difficulties; 4. Unscheduled draws on credit enhancements reflecting financial difficulties; 5. Substitution of credit or liquidity providers, or their failure to perform; 6. Adverse tax opinions or events affecting the tax-exempt status of the security; 7. Modifications to rights of security holders; 8. Bond calls; 9. Defeasances; 10. Release, substitution, or sale of property securing repayment of the securities; 11. Rating changes. Unofficially considered, the twelfth material event to be reported is the failure of any obligated person to provide the required annual financial information on or before the date specified in the related undertaking. According to the SEC, this requirement would be satisfied if a disclosure contract states that the annual information would be provided within a specified number of days after the fiscal year end. Full disclosure of the operations will be made to the bond rating agencies. The City staff, with the assistance of the financial advisors and bond counsel, will prepare the necessary materials for and presentation to the rating agencies. V.RATING AGENCY COMMUNICATIONS & CREDIT OBJECTIVES The City will seek to maintain and improve its current bond rating so its borrowing costs are reduced to a minimum and its access to credit is preserved. Page 5 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 403.07 In conjunction with the financial advisor, the City shall maintain a line of communication with the rating agencies (Moody's, Standard & Poor's, and Fitch), informing them of major financial events in the City as they occur. The Comprehensive Annual Financial Report, Annual Program of Services, and Capital Improvement Plan, shall be distributed to the rating agencies after they have been accepted/adopted by the City Council on an annual basis. When necessary, a personal meeting with representatives of the rating agencies will be scheduled when a major capital improvement program is initiated, or to discuss economical and/or financial developments which might impact credit ratings. The following documents may be required for the rating agencies: Most recent annual audit reports, including a description of accounting practices. Accounting changes in the past three years and the impact on financial results should be explained. Current budget. Current capital improvement program/plan. Official statements for new financings. Description of projects being financed. Sources and uses statement for project being financed. If additional funds are required to complete project, the source of the funds and any conditional requirements will be discussed. Engineering and feasibility report (if applicable). Zoning or land-use map (if applicable). Cash flow statement, in the case of interim borrowing. Statement of long - and short-term debt with annual and monthly maturity dates as appropriate. Also, a report of any lease obligations, their nature and term. Indication of appropriate authority for debt issuance Investment policy (if applicable). Statement concerning remaining borrowing capacity plus tax rate and levy capacity or other revenue capacity. VI. LIMITATIONS OF INDEBTEDNESS City staff, in conjunction with the financial advisor and bond counsel, will produce a comprehensive analysis of debt capacity prior to issuing bonds. This document should cover a broad range of factors, including: Legal debt limits, tax or expenditure ceilings. Coverage requirements or additional bonds tests in accordance with bond covenants. Measures of the tax and revenue base, such as projections of relevant economic variables (e.g., assessed property values, employment base, unemployment rates, income levels, and retail sales). Page 6 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 403.07 Population trends. Utilization trends for services underlying revenues. Factors affecting tax collections, including types of property, goods, or services taxed, assessment practices and collection rates, evaluation of trends relating to the City's financial performance, such as revenues and expenditures, net revenues available after meeting operating requirements. Reliability of revenues expected to pay debt service. Unreserved fund balance levels. Debt service obligations, such as existing debt service requirements. Debt service as a percentage of expenditures or tax or system revenues. Measures of debt burden on the community, such as debt per capita, debt as a percentage of personal income, debt as a percentage of full or equalized assessed property value, and overlapping or underlying debt. Tax-exempt market factors' affecting interest costs, such as interest rates, market receptivity, and credit rating. The City has both revenue bonds and other indebtedness of the Electric, Water, Wastewater, and Solid Waste Funds. The City will endeavor to maintain two coverage ratios as provided in the City's outstanding bond covenants (e.g. 1.25 and/or 1.50 times, or as required by individual bond covenants). i The Electric, Water, Wastewater, and Solid Waste Funds' total long-term debt outstanding shall not exceed the amount of combined fund equity. VII. TYPES OF DEBT The City's bond counsel and financial advisor will present the different types of debt best suited and legally permissible under state law for each debt issue. These types may include: short-term vs. long-term debt, general obligation vs. revenue debt, fixed vs. variable rate debt, lease-backed debt, special obligation debt such as assessment district debt, conduit issues, and taxable debt; A The City will seek all possible federal and state reimbursement for mandated projects and/or programs. The City will pursue a balanced relationship between issuing debt and pay-as-you-go financing. B.The City will match the term of long-term debt issued up to the life of the projects financed. Current operations will not be financed with long-term debt. Page 7 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 403.07 Debt incurred to finance capital improvements will be repaid within the useful life of the project. C.High priority will be assigned to the replacement of capital improvements when they have deteriorated to the point there they are hazardous, incur high maintenance costs, negatively affect property values, or no longer serve their intended purposes. D.An updated Capital Improvement Plan will be presented to the City Council for approval on an annual basis. This plan will be used as a basis for the long-range financial planning process. VIII. BOND STRUCTURE Structural features that may be considered are: maturity of the debt, setting the maturities of the debt equal to or less than the useful life of the project, use of zero coupon bonds, capital appreciation bonds, deep discount bonds, or premium bonds, debt service structure (level debt service payments, level principal payments or other repayment' structure defined by state law), redemption provisions (mandatory and optional call features), use of credit enhancement, use of senior lien and junior lien obligations, and use of derivative products; IX. SHORT-TERM DEBT A.General Short-term obligations may be issued to finance projects or portions of projects for which the City ultimately intends to issue long-term debt; i.e., it will be used, when appropriate, to provide in financing which will eventually be refunded with the proceeds of long-term obligations. Short-term obligations may be backed with a tax and/or revenue pledge or a pledge of other available resources. Interim financing may be appropriate when long-term interest rates are expected to decline in the future. In addition, some forms of short-term obligations can be Page 8 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 403.07 obtained quicker than long-term obligations and thus can be used until long-term financing can be obtained. B.Commercial Paper Due to the issuance costs associated with the marketing and placement of commercial paper in amounts of less than approximately $25 million, it is not considered feasible for the City of Denton to issue this type of debt. Should the opportunity to participate in a commercial paper issuance pool present itself, the advantages and disadvantages shall be evaluated by the Chief Financial Officer. C.Anticipation Notes Anticipation notes empower municipalities to issue debt without giving notice of intent. Anticipation notes may be secured and repaid by a singular pledge, but not a plural pledge, of revenue, 'taxes, or the proceeds of a future debt issue. Anticipation notes may be authorized by an ordinance adopted by the City Council. Anticipation notes may be used to finance projects or acquisitions that could also be financed with Certificates of Obligation. Anticipation notes have several restrictions, which include: 1) Anticipation notes issued for general purposes must mature before the seventh anniversary of the date the attorney general approves the issue, 2) Anticipation notes may not be used to repay interfund borrowing or a borrowing that occurred up to/or more than 24-months prior to the date of issuance, 3) A governing body may not issue anticipation notes that are payable from bond proceeds unless the proposition authorizing the issuance of the bonds has already been approved by the voters. X.LONG-TERM DEBT A.General Proceeds from the sale of long-term obligations will not be used for operating purposes, and the life of the obligations will not exceed the estimated useful life of the projects financed. Page 9 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: FTITLE: DEBT SERVICE MANAGEMENT 403.07 A level debt service structure will be used unless operational matters and marketing considerations dictate otherwise. The cost of issuance of private activity bonds is usually higher than for governmental purpose bonds. Consequently, private activity bonds will be issued only when they will economically benefit the City. The cost of taxable debt is higher than for tax-exempt debt. However, the issuance of taxable debt may be more appropriate in some circumstances and may allow valuable flexibility in subsequent contracts with users or managers of the improvement constructed with the bond proceeds. Therefore, the City will usually issue tax-exempt obligations but may occasionally issue taxable obligations. B.Bonds Long-term general obligation or revenue bonds shall be issued to finance significant and desirable capital, improvements. The general obligation bonds will be used for purposes set forth by voters in bond elections. General obligation bonds will strive to have an average life of approximately fifteen (15) years or less, and revenue bonds will strive to have an average life of approximately twenty (20) years or less. A resolution of intent to issue bonds authorizing staff to proceed with preparations shall be presented for the consideration of the City Council when the capital budget is presented or as soon thereafter as reasonably possible. Unless a compelling reason is identified by the Debt Committee, all bonds issued for the purpose of supplying new monies as needed for current, ongoing public improvements shall be sold at a public, competitive sale based upon sealed bids pursuant to terns and conditions specified in the City's Home Rule Charter which requires "the publication of a proper notice of sale in a national publication which regularly includes municipal bond sale notices, stating pertinent facts relating to the proposed sale including, but not limited to, the time, the date, and the place which shall be in the City of Denton) that all sealed bids will be publicly opened, read, and tabulated before the City Council. The date advertised for opening of the bids shall be not less than 30 days from the date of publication." C.Certificates of Obligation Certificates of obligation may be issued to finance permanent improvements and land acquisition, the need for which arose between bond elections. In addition, they may also be used to finance costs associated with capital project overruns or to acquire equipment. Page 10 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 403.07 In accordance with state law, a resolution authorizing publication of notice of intent to issue certificates of obligation shall be presented for the consideration of the City Council. The notice of intent shall be published in a newspaper of general circulation in the City,once a week for two consecutive weeks with the first publication to be at least fifteen (15) days prior to the sale date. Certificates of obligation may be backed by a tax pledge under certain circumstances as defined by law. They may also be backed by a combination tax and revenue pledge eligible under state law. Some revenues are restricted as to the uses for which they may be pledged. Electric, Water, Wastewater, and Solid Waste revenues may be pledged without limit for Electric, Water, Wastewater, and Solid Waste purposes but may only be pledged up to $10,000 for non-utility system purposes. D.Public Property Finance Contractual Obligation Public property finance contractual obligations may be issued to finance the acquisition of personal property. E.Revenue Bonds In addition to the policies set forth above, when cost-beneficial and when permitted under applicable ordinances, the City may consider the use of surety bonds, lines of credit, or similar instruments to satisfy mandated debt service fund requirements on outstanding and/or proposed revenue bonds. XI. REFUNDING AND RESTRUCTURING OPTIONS The City shall consider refunding debt whenever an analysis indicates the potential for present value savings of approximately 3.5% of the debt service being refunded or if beneficial to the City in another way. XIL METHOD OF SALE A.Competitive Sale When feasible and economical, obligations shall be issued by competitive rather than negotiated sale. Favorable conditions for a competitive method of sale include the following: The market is familiar with the issuer, and the issuer is a stable and regular borrower in the public market. Page II of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 403.07 An active secondary market with a broad investor base for the issuer's bonds. The issue is neither too large to be easily absorbed by the market nor too small to attract investors without a'concerted sales effort. The issue is not viewed by the market as carrying overly complex features or requiring explanation as to the bonds' soundness. Interest rates are stable, market demand is strong, and the market is able to absorb a reasonable amount of buying or selling at reasonable price changes. B.Negotiated Sale Bonds issued for the purpose of refunding and/or restructuring outstanding debt may appropriately be sold on a negotiated basis when maximum flexibility is required in order for the City to respond to day-to-day nuances in the marketplace and other complications peculiar to the issuance of refunding debt. Whenever the option exists to sell an issue on a negotiated basis, an analysis of the options shall be performed to aid in the decision-making process. The City will present the reasons and will actively participate in the selection of the underwriter or direct purchaser. In a negotiated sale, the underwriter may be selected through a request for proposals (RFP) or because of a relationship established by previous debt transactions. The criteria used to select an underwriter in a negotiated sale should include the following: Overall experience Marketing philosophy Capability Previous experience as managing or co-managing partner Financial statement Public finance team and resources Breakdown of underwriter's discount C.Private Placement When cost-beneficial, the City may privately place its debt. Since no underwriter participates in a private placement, it may result in lower cost of issuance. Private placement is sometimes an option for small issues. The opportunity may be identified by the financial advisor. D.Bidding Parameters The notice of sale will be carefully constructed so as to ensure the best possible bid for the City, in light of existing market conditions and other prevailing factors. Parameters to be examined include: Page 12 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 403.07 i Limits between lowest and highest coupons Coupon requirements relative to the yield curve Method of underwriter compensation, discount, or premium coupons Use of true interest cost (TIC) versus net interest cost (NIC) Use of bond insurance Deep discount bonds Variable rate bonds Call provisions XIII. INVESTMENT OF BOND PROCEEDS A.Strategy The City should actively monitor its investment practices to ensure maximum returns on its invested bond funds while complying with Federal arbitrage guidelines. Specific investment strategies for the investment of bond proceeds are provided in the City's investment policy #408.04. B.Arbitrage Compliance The City will follow a policy of full compliance with all arbitrage rebate requirements of the federal tax code and Internal Revenue Service regulations, and will perform (internally or by contract consultants) arbitrage rebate calculations for each issue subject to rebate on an annual basis. All necessary rebates will be filed and paid when due. C.Arbitrage Liability Management The Chief Financial Officer will maintain a system for tracking arbitrage rebate liability and ensuring that required calculations are performed on a timely basis. These calculations will be performed annually. Funds should be set aside in anticipation of potential rebate liabilities. Due to the complexity of the arbitrage calculations and regulations, and to the severity of the penalties for noncompliance, the advice of Bond Counsel and qualified experts will be pursued on an ongoing basis. D.All bond proceeds will be separately accounted for in the financial accounting system to facilitate arbitrage tracking and reporting. Arbitrage rebate liability reports shall be generated semi-annually and submitted to the Investment Committee and to the Debt Management Committee for review. Page 13 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 403.07 GLOSSARY Amortization - The planned reduction of a debt obligation according to a stated maturity or redemption schedule Arbitrage - The gain which may be obtained by borrowing funds at a lower (often tax-exempt) rate and investing the proceeds at higher (often taxable) rates. The ability to earn arbitrage by issuing tax-exempt securities has been severely curtailed by the Tax Reform Act of 1986, as amended Average Life - The average length of time debt is expected to be outstanding Basis Point - One one-hundredth of one percent (0.0001) BBI - Bond Buyer Index. Comparison of current rates for various maturities Bid Form - The document used by an underwriter to submit his bid at a competitive sale Bond - A security that represents an obligation to pay a specified amount of money on a specific date in the future, typically with periodic interest payments Bond Counsel - An attorney (or firm of attorneys) retained by the issuer to give a legal opinion concerning the validity of the securities. The bond counsel's opinion usually addresses the subject of tax exemption. Bond counsel may prepare, or review and advise the issuer regarding authorizing resolutions or ordinances, trust indentures, official statements, validation proceedings and litigation Bond Insurance - Bond insurance is a type of credit enhancement whereby a monoline insurance company indemnifies an investor against a default by the issuer to pay principal and interest in-full and on-time. Once assigned, the municipal bond insurance policy generally is irrevocable. The insurance company receives an up-front fee, or premium, when the policy is issued Book-Entry-Only - Bonds that are issued in fully-registered form but without certificates of ownership. The ownership interest of each actual purchaser is recorded on computer Bond Years - $1,000 of debt outstanding for one year used to compute average life and net interest cost Call Option - The right to redeem a bond prior to its stated maturity, either on a given date or continuously. The call option is also referred to as the optional redemption provision Capital Appreciation Bond - A bond without current interest coupons that is sold at a substantial discount from par. Investors are provided with a return based upon the accretion of value in the bond through maturity Page 14 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 403.07 Capital Lease - The acquisition of a capital asset over time rather than merely paying a rental fee for temporary use. A lease-purchase agreement, in which provision is made for transfer of ownership of the property for a nominal price at the scheduled termination of the lease, is referred to as a capital lease Closing - When bonds are exchanged for money (a/k/a delivery or settlement) Commercial Paper (Tax-Exempt) - By convention, short-term, unsecured promissory notes issued in either registered or bearer form with a stated maturity of 270 days or less Competitive Sale - A sale of securities in which the securities are awarded to the bidder who offers to purchase the issue at the best price or lowest cost Coupon Rate - The interest rate on specific maturities of a bond issue. While the term "coupon" derives from the days when virtually all municipal bonds were in bearer form with coupons attached, the term is still frequently used to refer to the interest rate on different maturities of bonds in registered form Cover Bid - The runner-up in a competitive bond sale Credit Enhancements - Credit enhancements are mechanisms which guarantee principal and interest payments. They include bond insurance and a line or letter of credit. A credit enhancement, while costly, will usually bring a lower interest rate on debt and a higher rating from the rating agencies, thus lowering overall costs. Cost effectiveness of credit enhancement will be evaluated for each debt issue CUSIP Number - The term CUSIP is an acronym for the Committee on Uniform Securities Identification Procedures. An identification number is assigned to each maturity of an issue, and is usually printed on the face of each individual certificate of the issue. The CUSIP numbers are intended to help facilitate the identification and clearance of municipal securities. As the municipal market has evolved, and the new derivative products are devised, the importance of the CUSIP system for identification purposes has increased Dated Date - A defined date at which interest begins to accrue from Debt Burden - The ratio of outstanding tax-supported debt to the market value of property within a jurisdiction. The overall debt burden includes a jurisdiction's proportionate share of overlapping debt as well as the municipality's direct net debt Debt Limitation - The maximum amount of, debt that is legally permitted by a jurisdiction's charter, constitution, or statutory requirements Page 15 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 403.07 Debt Service - The amount necessary to pay principal and interest requirements on outstanding bonds for a given year or series of years Debt Service Reserve Fund - The fund into which moneys are placed which may be used to pay debt service if pledged revenues are insufficient to satisfy the debt service requirements. The debt service reserve fund may be entirely funded with bond proceeds, or it may only be partly funded at the time of the issuance and allowed to reach its full funding requirement over time, due to the accumulation of pledged revenues. If the debt service reserve fund is used in whole or part to pay debt service, the issuer usually is required to replenish the funds from the first available funds or revenues. A typical reserve requirement might be the maximum aggregate annual debt service requirement for any year remaining until the bonds reach maturity. The size of the reserve fund, and the manner in which it is invested, may be subject to arbitrage regulations. Default - The failure to pay principal or interest in full or on time. An actual default should be distinguished from technical default. The latter refers to a failure by an issuer to abide by certain covenants but does not necessarily result in a failure to pay principle or interest when due. Defeasance - Providing for payment of principal of premium, if any, and interest on debt through the first call date or scheduled principal maturity in accordance with the terms and requirements of the instrument pursuant to which the debt was issued. A legal defeasance usually involves establishing an irrevocable escrow funded with only cash and U.S. government obligations Depository Trust Company (DTC) - A limited purpose trust company organized under the New York Banking Law. DTC facilitates the settlement of transactions in municipal securities Downgrade - A reduction in credit rating Enterprise Activity - A revenue-generating project or business. The project often provides funds necessary to pay debt service on securities issued to finance the facility. The debts of such projects are self-liquidating when the projects earn sufficient monies to cover all debt service and other requirements' imposed under the bond contract. Common examples include water and sewer treatment facilities and utility facilities Final Official Statement (FOS) - A document published by the issuer which generally discloses material information on a new issue of, municipal securities including the purposes of the issue, how the securities will be repaid, and the financial, economic and social characteristics of the issuing government. Investors may use this information to evaluate the credit quality of the securities Page 16 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 403.07 Flow of Funds - The order in which pledged revenues must be disbursed, as set forth in the trust indenture or bond resolution. In most instances, the pledged revenues are deposited into a general collection account or revenue fund as they are received and subsequently transferred into the other accounts established by the bond resolution or trust indenture. The other accounts provide for payment of the costs of debt service, debt service reserve deposits, operation and maintenance costs, renewal and replacement, and other requirements General Obligation Debt- Debt that is secured by a pledge of the ad valorem taxing power of the issuer. Also known as a full faith and credit obligation Good Faith Deposit - A sum of money given by the Underwriter to assure his bid Institutional Buyer- Banks, financial institutions, insurance companies, and bond funds Issuance Costs - The costs incurred by the bond issuer during the planning and sale of securities. These costs include but are not limited to financial advisory and bond counsel fees, printing and advertising costs, rating agencies fees, and other expenses incurred in the marketing of an issue Junior Lien Bonds - Bonds which have a subordinate claim against pledged revenues Letter of Credit - Bank credit facility whereby a bank will honor the payment of an issuer's debt, in the event that an issuer is unable to do so, thereby providing an additional source of security for bondholders for a predetermined period of time. A letter of credit often is referred to as an L/C or an LOC. Letter of Credit can be issued on a "stand-by" or "direct pay" basis Level Debt Service - When annual payments are substantially the same each year Line of Credit - Bank credit facility wherein the bank agrees to lend up to a maximum amount of funds at some date in the future in return for a commitment fee Manager - The member (or members) of an underwriting syndicate charged with the primary responsibility for conducting the affairs of the syndicate. The managers take the largest underwriting commitment Lead Manager or Senior Manager The underwriter serving as head of the syndicate. The lead manager generally handles negotiations in a negotiated underwriting of a new issue of municipal securities or directs the process by which a bid is determined for a competitive underwriting. The lead manager also is charged with allocating securities among the members of the syndicate in accordance with the terms of the syndicate agreement or agreement among underwriters Page 17 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 403.07 Joint Manager or Co-Manager Any member of the management group Municipal Securities Rulemaking Board (MSRB) - A self-regulating organization established on September 5, 1975 upon the appointment of a 15-member Board by the Securities and Exchange Agreement. The MSRB, comprised of representatives from investment banking firms, dealer bank representatives, and public representatives, is entrusted with the responsibility of writing rules of conduct for the municipal securities market. New Board members are selected by the MSRB pursuant to the method set forth in Board rules Negotiated Sale - A sale of securities in which the terms of sale are determined through negotiation between the issuer and the purchaser, typically an underwriter, without competitive bidding Net Interest Cost - The average interest cost of a bond issue calculated on the basis of simple interest. Paying Agent - An agent of the issuer with responsibility for timely payment of principal and interest to bond holders Preliminary Official Statement (POS) - The POS is a preliminary version of the official statement which is used by an issuer or underwriters to describe the proposed issue of municipal securities prior to the determination of the interest rate(s) and offering prices(s). The preliminary official statement, also called a "red herring", often is examined upon by potential purchasers prior to making an investment decision Present Value - The value of a future amount or stream of revenues or expenditures in current dollars Refunding - An advance refunding is a refunding that occurs more than 90 days before the call date of the refunded bonds. A current refunding is a process of selling a new issue of securities to obtain funds needed to retire existing securities. Debt refunding is done to extend maturity and/or to reduce debt service cost Retail Buyer - Individual investors Revenue Bond - A bond which is payable from a specific source of revenue and to which the full faith and credit of an issuer with taxing power is not pledged. Revenue bonds are payable from identified sources of revenue, and do not permit the bondholders to compel a jurisdiction to pay debt service from any other source. Pledged revenues often are derived from the operation of an enterprise activity. Generally, no voter approval is required prior to issuance of such obligations Secondary Market - The market in which bonds are sold after their initial sale in the new issue market Page 18 of 19 POLICY/ADMINISTRATIVE PROCEDURE/ADMINISTRATIVE DIRECTIVE Continued REFERENCE NUMBER: TITLE: DEBT SERVICE MANAGEMENT 403.07 Senior Lien Bonds - Bonds having a prior, orf rst claim on pledged revenues Serial Bonds - A bond issue in which the principal is repaid in periodic installments over the issue's life Split ratings - Different rating levels from different rating agencies Surety Bond - A bond guaranteeing performance of a contract or obligation Term Bonds - Term bonds usually refer to a particularly large maturity of a bond issue that is created by aggregating a series of maturities. A provision is often made for the mandatory redemption of specified amounts of principal during several years prior to the stated maturity, which effectively simulates serial bonds True Interest Cost (TIC) - An expression of the average interest cost in present value terms. The true interest cost is a more accurate measurement of the bond issue's effective interest cost and should be used to ascertain the best bid in a competitive sale Variable Rate Bond - A bond on which the interest rate is reset periodically, usually no less often than semi-annually. The interest rate is reset either by means of an auction or through an index Upgrade - An increase in credit rating