HomeMy WebLinkAbout24-2200RESOLUTION NO. 24-2200
A RESOLUTION OF THE CITY OF DENTON AMENDING POLICY NUMBER 403.07 “DEBT
SERVICE MANAGEMENT” TO MAKE ADMINISTRATIVE MAINTENANCE REVISIONS
BASED ON ANNUAL REVIEW OF THE POLICY; AND PROVIDING FOR AN EFFECTIVE
DATE
WHEREAS, on the 5th day of March 1996 the City Council passed Resolution No. 96-013
adopting Administrative Policy No. 403.07 “Debt Service Management”; and
WHEREAS, the policy was most recently amended by City Council on the 12th day of
December 2023, in Resolution No. 23-2180 adopting the current version of the Debt Service
Management Policy; and
WHEREAS, the Debt Management Policy provides for annual review by City Council, and
documentation of any modifications by resolution or ordinance; and
WHEREAS, staff recommends adding language requiring the annual submission of
Conflict of Interest Forms, the removal of the Controller from Debt Committee, and updating
revision references; 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 COUNCL OF THE CITY OF DENTON HEREBY RESOLVES:
SECTION 1. The findings and recitations contained in the preamble of this resolution are
incorporated herein by reference as true and as if fully set forth in the body of this resolution.
SECTION 2. The 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 3. The attached policy shall be filed in the official records with the City
Secretary.
SECTION 4. This resolution shall become effective immediately upon its passage and
approval.
The motion to approve this resolution was made by Brian Beck and seconded by Joe
Holland. The resolution was passed and approved by the following vote [7 - 0]:
Aye Nay Abstain Absent
Gerard Hudspeth, Mayor:X
XVicki Byrd, District 1 :
Brian Beck. District 2:
Paul Meltzer. District 3 :
Joe Holland. District 4:
Brandon Chase McGee, At Large Place 5 :
Jill Jester, At Large Place 6:
X
X
X
X
X
PASSED AND ADOPTED this the 3rd day of December, 2024.
ATTEST
LAUREN THODEN, CITY SECRETARY
APPROVED AS TO LEGAL FORM:
MACK REINWAND. CITY ATTORNEY
BY:
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lIBH
Digitally signed by Susan
SU sa n Keller Et:;r2024.1 1.26 11:19:05
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DENTON CITY OF DENTON
POLICY STATEMENT
This policy shall provide general guidelines by which the City of Denton (the “City”) will issue
debt. In as much as this policy may be in conflict or inconsistent with state law, state law will
prevail. Furthermore, state law will prevail on matters not specifically addressed in this policy. 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 City seek the most favorable interest rate and competitive costs in accordance with this
policy while maintaining financial flexibility.
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. Proceeds from debt issuances will be
delivered as closely as possible to the time that contracts are expected to be awarded so that the
proceeds are spent efficiently. In addition, the City Council may, through adoption of a
reimbursement ordinance, authorize the expenditure of funds prior to the bond sale for certain
capital expenses. The reimbursement ordinance is required by Federal Law to document the City’s
intent to reimburse expenses from the future sale of tax-exempt debt obligations. The City Council
shall review and approve the debt management policy at least annually and be documented by
ordinance or resolution, which shall include any changes made.
ADMINISTRATIVE PROCEDURES
I. DEBT MANAGEMENT COMMITTEE
A. Members
The Debt Management Committee (the “Committee”) will consist of the City Manager,
Chief Financial Officer/Director of Finance, Assistant Directors of Finance, and Treasury
Manager. The City’s financial advisor and bond counsel shall act as consultants to the
Committee. When needed, the City Attorney will act as a legal advisor to the Committee.
The City’s Internal Auditor will serve as a non-voting member of the Committee. A
quorum may be achieved by a member designating a substitute participant to serve in their
absence. That substitute participant will not be granted voting rights.
B. Scope
The Committee shall meet at least annually to review the debt program or as necessary.
Topics for discussion should include: the Capital Improvement Program (CIP), acquisition
of fixed assets, status of outstanding debt, unspent bond proceeds, unissued voter
authorized debt, timing of additional financing needs and financing options, and the effect
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of proposed financing activity on the related rates supporting the debt (i.e., property tax
rate, utility rates, user fees, etc.).
II. RESPONSIBILITY AND STANDARD CARE
The Finance Department will coordinate all activities required for the issuance of all debt.
A. Delegation
The Chief Financial Officer/Director of Finance shall have primary responsibility for
developing financing
recommendations. The Chief Financial Officer/Director of Finance shall :
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Meet at least annually during budget development with Department
Directors to consider the need for financing, review debt capacity and assess
progress on the Capital Improvement Program.
Periodically review changes in state and federal legislation.
Periodically review the provisions of ordinances authorizing issuance of
debt obligations.
Periodically review the City’s Charter to ensure compliance with state law.
Periodically review services provided by the financial advisor, bond
counsel, paying agent, and other service providers to evaluate the extent and
effectiveness of the services being provided.
B. Conflicts of Interest
All participants in the debt management process shall 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. An annual Conflict of Interest form will be completed by officers and employees
involved in the debt management process.
C. Reporting
The Chief Financial Officer/Director of Finance shall include in the Annual
Comprehensive Financial Report (“ACFR”) a report summarizing all debt outstanding by
type (tax-supported and self-supported general obligation debt, and revenue debt), and
update of pertinent legislative changes. Additionally, the Chief Financial Officer/Director
of Finance shall annually publish on the City’s website a Debt Report summarizing the
City’s total outstanding principal and interest for all long-term debt as of the end of the last
fiscal year, in accordance with House Bill 1378 passed during the 2015 legislative session.
D. Investor Relations
The City shall endeavor to maintain a positive relationship with the investment community.
The Chief Financial Officer/Director of Finance 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
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the press and other media. The information includes, but is not limited to, the annual
program of services, ACFR, financial plans, capital improvement plans, and
comprehensive development plans.
All forms of media deemed appropriate and immediately available to the City will be
utilized to disseminate information to all investors. Examples include the Texas Bond
Reporter and the Texas Municipal Reports published by the Municipal Advisory Council
of Texas (the “MAC”), The Bond Buyer, and the Electronic Municipal Market Access
system (“EMMA”) maintained by the Municipal Securities Rulemaking Board (the
“MSRB”). Bond counsel and financial advisor will advise on the use of electronic media
in connection with the City’s debt program.
E. Financial Advisor
The City shall retain an independent financial advisor for advice on the structuring of new
debt, financial analysis of various options, including refunding opportunities, the rating
review process, the marketing and marketability of City debt obligations, issuance and
post-issuance services, the preparation of Official Statements 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. The financial advisor will not bid on nor underwrite any City debt issues in
accordance with MSRB rules.
F. Bond Counsel
The City shall retain bond counsel for legal and procedural advice on all debt issues. Bond
counsel shall advise the City in all matters pertaining to its bond ordinance(s) and/or
resolution(s). No action shall be taken with respect to any obligation until a written
instrument (e.g., Certificate for Ordinance or other legal 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 the Chief Financial
Officer/Director of Finance. 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 may be retained to protect the City’s interest in complex negotiations.
G. Communications with Underwriters
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 mandated the
Securities and Exchange Commission (“SEC”) to establish the Municipal Advisor Rules
(the “MA Rules”) which were finalized in September of 2013 and became effective July 1,
2014. Under the MA Rules, any person that provides certain advice to the City with respect
to the issuance of bonds or municipal financial projects (including investment strategies
involving the investment of bond proceeds) is, absent an exemption under the MA Rules,
deemed to be a “municipal advisor.” Any person that is a municipal advisor under the MA
Rules is subject to a fiduciary duty to the City and would be precluded from acting as an
underwriter for bonds issued by the City. The City receives deal ideas, analysis,
suggestions, and related services for bond issues from underwriter banks that may be
considered “advice” for purposes of the MA Rules. So that the City may continue to receive
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this type of advice from underwriters/banks, the Chief Financial Officer/Director of
Finance may provide whatever communications to an underwriter/bank the Chief Financial
Officer/Director of Finance determines to be necessary to establish an exemption under the
MA Rules so that those underwriters/banks are not considered a “municipal advisor” for
purposes of the MA Rules. On September 23, 2016, the Chief Financial Officer/Director
of Finance filed an Independent Registered Municipal Advisor (IRMA) Certificate with
the MAC to be made available to underwriters/banks desiring to communicate with the
City. The IRMA Certificate was revised and re-filed with the MAC on September 23, 2016.
The Certificate does not expire and may be relied upon until withdrawn by the City. The
IRMA Certificate is also available on the City’s website.
III. OFFICIAL STATEMENT
The preparation of the Official Statement is the responsibility of the financial advisor in concert
with bond counsel and the Chief Financial Officer/Director of Finance. Information for the
Official Statement is gathered from departments/divisions throughout the City.
IV. DISCLOSURE
A. The City will take all appropriate steps to comply with federal securities laws, including,
but not limited to, SEC Rule 15c2-12 (the “Rule”). The City will make annual and event
disclosure filings to the MSRB via EMMA as required by its continuing disclosure
undertakings and in conformity with the Rule.
B.With each bond offering, in the preparation of an ACFR, Official Statement or any other
offering document, and with the City’s annual filings required by its continuing disclosure
undertakings pursuant to the Rule, the City will follow a policy of full and complete
disclosure of operating, financial and legal conditions of the City, in conformance with the
Government Finance Officers Association best practice, “Understanding Your Continuing
Disclosure Responsibilities , and as advised by the City’s bond counsel or financial advisor.
C. Notice of Disclosure Events
The City’s continuing disclosure undertakings list certain events described under the Rule
that must be reported in a timely fashion to the MSRB via EMMA. On August 15, 2018,
the SEC made amendments to the Rule, which only apply to primary offerings that occur
on or after February 27, 2019. While not required, the City will make every effort to apply
the new requirements to previously issued bonds since the amendments make the Rule
more stringent. The City’s continuing disclosure undertakings require that events be
reported to the MSRB within 10 business days after the occurrence of the event.
1. The events that must be reported, if material, are:
a.
b.
C.
d
Nonpayment related defaults.
Modifications of rights of security holders.
Bond calls.
Release, substitution, or sale of property securing repayment of the
securities.
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e.
f.
g.
h.
Mergers, consolidations, acquisitions, the sale of all or substantially all
of the assets of the City or other obligated entity or their termination.
Appointment of a successor or additional trustee or paying agent or the
change of the name of a trustee or paying agent.
The incurrence ofa material financial obligation, or material agreement
to covenants, events of default, remedies, priority rights, or other similar
terms of a financial obligation that affects security holders.
Default, event of acceleration, termination event, modification of terms,
or other similar events under the terms of the financial obligation, any
of which reflect financial difficulties.
2. The events that must be reported, regardless of materiality, are:
a.
b.
C.
d.
e.
Principal and interest payment delinquencies.
Unscheduled draws on debt service reserves reflecting financial
difficulties.
Unscheduled draws on credit enhancements reflecting financial
difficulties
Substitution of credit or liquidity providers, or their failure to perform.
Adverse tax opinions, the issuance by the IRS of proposed or final
determinations of taxability, Notices of Proposed Issue (1RS Form
5701-TEB) or other material notices or determinations with respect to
the tax status of the security, or other material events affecting the tax
status of the security.
Tender offers.
Defeasances
Rating changes.
Bankruptcy, insolvency, receivership, or similar proceeding.
f.
g.
h.
1.
The City’s continuing disclosure undertakings requires the City to report to the MSRB the
failure of the City to provide the required annual financial information or operating data on
or before the dates specified under a continuing disclosure undertaking in conformity with
the Rule.
V. RATING AGENCY COMMUNICATIONS & CREDIT OBJECTIVES
The City will seek to maintain and improve its current bond ratings when financially feasible,
so its borrowing costs are reduced to a minimum and its access to credit is preserved.
In conjunction with the financial advisor, the City shall maintain a line of communication with
at least two of the rating agencies (Moody’s, Standard & Poor’s, or Fitch), informing them of
major financial events in the City as they occur. The ACFR, Annual Program of Services, and
Capital Improvement Program shall be distributed to the rating agencies after they have been
accepted and adopted by the City Council on an annual basis.
When necessary, a conference call or personal meetings with representatives of the rating
agencies will be scheduled when a major capital improvement program is initiated, or to discuss
economic and/or financial developments which might impact credit ratings. The following
documents may be required by the rating agencies:
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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.
Official Statements for new financings.
Description of projects being financed.
Sources and uses statement for bond issuance. If additional funds are required to
complete specific projects being financed, the source of the funds and any
conditional requirements may 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.
Cyber security update.
Investment policy (if applicable) .
Statement concerning remaining borrowing capacity plus tax rate and levy capacity
or other revenue capacity.
Full disclosure of the City’s 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.
VI. LIMITATIONS OF INDEBTEDNESS AND AFFORDABILITY STATEMENT
City staff, in conjunction with the financial advisor and bond counsel, will present to the City
Council, and any City committee, as appropriate, a comprehensive analysis of debt capacity
prior to issuing bonds. This analysis should include relevant information such as:
•
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Legal debt limitations, 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).
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 full or equalized assessed property value and overlapping or
underlying debt.
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•
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• Tax-exempt and taxable market factors affecting interest costs, such as interest
rates, market receptivity, and credit rating.
Annual debt service on long term general obligation debt (tax-supported), which excludes self-
supported debt, shall be limited to no more than 30% of budgeted expenditures in the City’s
General Fund.
The City has revenue bonds and other indebtedness of the Electric, Water, and Wastewater
Funds, which are collectively known as the City’s “Utility System.” The City will maintain
coverage ratios as dictated by the City’s outstanding bond covenants, including any other
indebtedness of the Utility System. In addition, the City will follow a policy that the Utility
System will maintain a debt service coverage ratio of at least 1.50 on all outstanding revenue
bonds and other indebtedness of the Utility System. For this purpose, the debt coverage ratio is
defined as the net revenue of the Utility System for a fiscal year (as set out in the audited
financial statements for that fiscal year) divided by the maximum annual debt service for all
then outstanding revenue bonds and other indebtedness of the Utility System, as determined
utilizing the Debt Coverage Ratio Calculations. The City will strive to further maintain this debt
service coverage ratio for each separate utility.
The Electric, Water, and Wastewater Funds’ will strive to maintain total long-term outstanding
debt less than the amount of combined fund equity.
VII. CAPITAL IMPROVEMENT PROGRAM
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 as dictated by prevailing economic factors and as directed by
the City Council.
B.Current operations will not be financed with long-term debt, except as directed by City
Council.
C.
D.
Debt incurred to finance capital improvements will be repaid within the useful life of
the asset.
High priority will be assigned to the replacement of capital improvements and fixed
assets when they have deteriorated to the point they are hazardous, incur high
maintenance costs, negatively affect property values, or no longer serve their intended
purposes.
E.An updated Capital Improvement Program 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. 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 and assist in analyzing the use of
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capital lease purchases or the use of lines of credit. These types may include, but are not limited
to
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Short-term vs. long-term debt.
General obligation debt vs. revenue debt.
Fixed rate debt.
Lease-backed debt.
Special obligation debt, such as assessment district debt.
Certificates of obligation.
Combination tax and revenue debt.
Tax Increment Reinvestment Zone (TIRZ) debt.
Public Improvement District (PID) debt.
Conduit issues.
Tax Notes
Taxable and tax-exempt debt.
Commercial Paper.
The issuance of long-term variable rate debt and interest rate swaps are expressly prohibited by
this policy. The Chief Financial Officer/Director of Finance will be responsible for evaluating
this type of debt and will present a variable rate debt policy or interest rate swap policy to the
City Council for approval as necessary.
IX. BOND STRUCTURE
Factors that may be considered when structuring debt include the following:
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Final maturity of the debt.
Setting the final maturity of the debt equal to or less than the useful life of the
asset(s) being financed.
Use of zero coupon bonds, capital appreciation bonds, discount and deep discount
bonds or premium bonds.
Principal and interest payment structure (e.g., level debt service payments, level
principal payments, bullet and term maturities, interest only, or other payment
structures).
Redemption provisions (e.g., mandatory and optional call features).
Use of credit enhancement (e.g., bond insurance).
Use of senior lien and junior lien obligations.
Capitalized interest.
Other factors as deemed appropriate in consultation with the City’s financial
advisor and bond counsel.
X. 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 interim financing which will eventually be refunded with the proceeds of long-
term obligations).
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Short-term obligations may be backed with a tax and/or revenue pledge or a pledge of
proceeds ofrefunding bonds or notes or other available resources.
Interim financing may be appropriate when long-term interest rates are forecasted to
remain relatively stable or decline in the future or to finance projects with long lead times.
In addition, some forms of short-term obligations may be obtained more quickly than long-
term obligations and, thus, may be used until long-term financing is secured.
B. Commercial Paper
The Chief Financial Officer/Director of Finance may consider the establishment of a
Commercial Paper (CP) program to determine its cost effectiveness and evaluate the
appropriateness of commercial paper including the advantages and disadvantages. The City
may consider using letters of credit, direct note purchase agreements, hybrid liquidity
facilities, extendable commercial paper and callable commercial paper. The establishment
of commercial paper program would require approval by the City Council. The City
currently has an Extendable Commercial Paper program for both General Obligations and
the Utility System.
Commercial paper programs may be used to satisfy the funding source as required by state
law for appropriation authority. The Chief Financial Officer/Director of Finance will notify
City Council prior to the issuance of any commercial paper notes. General Obligation CP
programs are limited to projects that have received voter approval. Annually the City
Council will adopt a resolution authorizing the refinancing of any outstanding commercial
paper to ensure the flexibility to best manage the program.
C. Anticipation Notes
Anticipation notes do not require giving a notice of intent. Anticipation notes may be
secured and repaid by a pledge of revenue, taxes, or the proceeds of a future debt issue and
have a maximum maturity of seven (7) years. 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 using certificates of obligation and have the following restrictions:
1. 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, and
2. The City may not issue anticipation notes that are payable from general
obligation bond proceeds unless the proposition authorizing the issuance of the
general obligation bonds has already been approved by the voters.
D. Line of Credit
To the extent authorized by state law and with the approval of the City Council, the City
may establish a line of credit with a financial institution selected through a competitive
process. Draws shall be made on the line of credit when (1) the need for financing is so
urgent that time does not permit the issuance of long-term debt, or (2) the need for financing
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is so small that the total cost of issuance of long-term debt including carrying costs of debt
proceeds not needed immediately is significantly higher. Draws will be made on the line
of credit to pay for projects designated for line of credit financing by the City Council.
Borrowings under the line of credit shall be repaid from current revenues. The Chief
Financial Officer/Director of Finance will authorize all draws on the line of credit, as
authorized in the agreement approved by the City Council. Under current state law, a line
of credit cannot extend past the end of the then current fiscal year. Borrowings under a line
of credit may be refinanced with long-term debt as approved by the City Council.
E. Capital Leasing
Capital leasing is an option for the acquisition of a piece or package of equipment.
Leasing shall not be considered when funds are on hand for the acquisition unless the
interest expense associated with the lease is less than the interest that can be earned by
investing the funds on hand or when other factors such as budget constraints or vendor
responsiveness override the economic consideration.
Whenever a lease is arranged with a private sector entity, a tax-exempt rate shall be sought.
Whenever a lease is arranged with a government or other tax-exempt entity, the City shall
obtain an explicitly defined taxable rate so that the lease will not be counted in the City’s
total annual borrowings subject to arbitrage rebate.
The lease agreement shall permit the City to refinance the lease at no more than reasonable
cost should the City decide to do so. A lease which may be called at will is preferable to
one which may merely be accelerated.
The City shall seek at least three (3) competitive proposals for any lease financing, except
those related to technology equipment. Due to the proprietary nature of most technology
equipment, lease financing is typically only offered through the technology’s vendor. The
net present value of competitive bids shall be compared, taking into account whether
payments are in advance or in arrears, and how frequently payments are made. The
purchase price of equipment shall be competitively bid, as required by state law, as well as
the financing costs.
The Chief Financial Officer/Director of Finance will ensure any leasing agreement is
compared to other financing options to ensure the lease is cost beneficial. Alternate
financing options will include revenue bonds, contractual obligations, certificates of
obligation, tax notes, and lines of credit. The Chief Financial Officer/Director of Finance
will be the person responsible for evaluating this financing source and will make a
recommendation to the City Council for approval.
F. Interfund Loans
As allowed by the City, the Chief Financial Officer/Director of Finance will review
opportunities whereby interfund loans may be utilized to meet short-term financing needs.
Interfund loans will only be utilized if economically beneficial to the lending fund and only
if the rate of return is comparable or higher than the rate of return the lending fund would
otherwise receive by keeping funds in the City’s investment pool. Any interfund loan must
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be approved by the City Council, excluding any interfund balances created during the
annual year-end close process relating to negative cash balances generated from activities
from reimbursement grants and inventory balances in the warehouse.
XI. LONG-TERM DEBT
A. General
Proceeds from the sale of long-term obligations will not be used for operating purposes,
and the final maturity of the obligations will not exceed the estimated useful life of the
asset(s) financed. Voter approved general obligation bonds will strive to have a final
maturity of twenty (20) years or less. Revenue bonds and certificates of obligation will
strive to have a final maturity of thirty (30) years or less. If deemed appropriate, staff may
present to the City Council extraordinary circumstances in which longer final maturities
may be necessary but never in excess of the useful life of an individual asset.
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 generally higher than for tax-exempt debt. However, the
issuance of taxable debt may be required or may be more appropriate in some
circumstances and may allow valuable flexibility in subsequent contracts with users or
managers of the improvements 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 debt, including certificates of obligation, or revenue bonds
shall be issued to finance significant and desirable capital improvements. Proceeds of
general obligation debt will be used only for the purposes approved by voters in bond
elections or set forth in the notices of intent for certificates of obligation or to refund
previously issued general obligation bonds, certificates of obligation or revenue bonds. All
bonds shall be sold in accordance with applicable law.
C. Certificates of Obligation
Certificates of obligation may be issued to:
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Finance permanent improvements and land acquisitions.
Finance costs associated with capital project overruns.
Acquire equipment/vehicles.
Leverage grant funding.
Renovate, and improve existing facilities.
Construct street improvements.
Provide funding for master plans/studies.
Address necessary life safety needs.
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• Finance new public safety facilities.
• Finance revenue supported projects/assets if determined to be more
economical than revenue bonds.
To the extent required by 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
forty-six (46) days prior to the date set for passage of the ordinance authorizing the sale of
the certificates. Additionally, the notice of intent shall be posted to the City’s website at
least forty-five (45) days prior to date set for passage of the ordinance authorizing the sale
of the certificates.
Certificates of obligation may be backed by a tax pledge under certain circumstances as
permitted by law. They may also be backed by a combination tax and revenue pledge as
permitted under state law. Some revenues are restricted as to the uses for which they may
be pledged. Electric, Water, and Wastewater revenues may be pledged without limit for
Electric, Water, and Wastewater purposes but may only be pledged to a limit of $1,000
for any one series of bonds issued for non-utility system purposes.
The final maturity of certificates of obligation will be in accordance with Section XI (A).
As prescribed in Section 271.047, Local Government Code, the City Council may not
authorize certificates of obligation to pay a contractual obligation to be incurred if a bond
proposition to authorize the issuance of bonds for the same purpose was submitted to the
voters during the preceding three years and failed to be approved. The City Council may
authorize a certificate that it is otherwise prohibited from authorizing:
1.
2.
3
4.
In a case of public calamity if it is necessary to act promptly to relieve the
necessity of residents or to preserve the property of the City.
A case in which it is necessary to preserve or protect the public health of the
residents of the City.
A case of unforeseen damage to public machinery, equipment or other property.
To comply with a state or federal law, rule, or regulation if the City has been
officially notified ofnoncompliance with the law, rule, or regulation.
D.Public Property Finance Contractual Obligations
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 state law, the City may consider the use of surety bonds, letters of credit, or
similar instruments to satisfy debt service reserve fund requirements on outstanding and/or
proposed revenue bonds.
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F. Combination Tax and Revenue Bonds
In addition to the policies set forth above, when cost-beneficial and when permitted under
applicable state law, the City may consider the use of tax bonds or combination tax and
revenue bonds for refunding obligations of the Electric, Water and Wastewater combined
utility system, and Solid Waste or any other self-supporting revenue-producing City
enterprise. Combination tax and revenue bonds will comply with applicable state law and
are assigned the full faith and credit of the City, thereby enhancing the credit rating
otherwise obtained from debt that is strictly supported by non-tax revenues (i.e., revenue
bonds).
G. Capital Appreciation Bonds (CABS)
As prescribed by Section 1201.0245, Government Code, a municipality may not issue
capital appreciation bonds that are secured by ad valorem taxes (other than as refunding
bonds or for the purpose of financing transportation projects) unless:
1.
2.
3.
The bonds have a scheduled maturity date that is not later than 20 years after
the date of issuance.
The City Council has received a written estimate of the cost of the issuance as
prescribed in the statute.
The City Council has determined in writing whether any personal or financial
relationship exists between the members of the City Council and any financial
advisor, bond counsel, bond underwriter or other professional associated with
the bond issuance.
The City Council posts prominently on the City’s website and enters in the
minutes the required information as prescribed in the statute.
4.
CABS may not be used to purchase items more regularly considered maintenance items,
including replacement HVAC units, upgraded plumbing or similar items, or transportation-
related items, including buses, unless the item has an expected useful life that exceeds the
CABS maturity date. The total amount of CABS may not exceed 25 percent of the City’s
total outstanding bonded indebtedness at the time of the issuance, including the amount of
principal and interest to be paid on the outstanding bonds until maturity. The City may not
extend the maturity date of an issued capital appreciation bond, including through the
issuance ofrefunding bonds that extend the maturity date, except in the event the extension
of the maturity date will decrease the total amount of projected principal and interest to
rnaturlty .
XII. CREDIT ENHANCEMENTS
Credit enhancements are mechanisms which guarantee principal and interest payments. They
include bond insurance, lines of credit, surety bonds and letters of credit. A credit enhancement,
while costly, is intended to bring a lower interest rate on debt and a higher rating from the rating
agencies, thus lowering overall borrowing costs.
The City’s financial advisor will advise the City whether or not a credit enhancement is cost
effective under the circumstances and what type of credit enhancement, if any, should be
purchased. In a negotiated sale, bids will be taken during the period prior to the pricing of the
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debt. In a competitive sale, bond insurance may be provided by the purchaser if the purchaser
finds it cost effective.
Other credit enhancements may arise in the future, which may be beneficial. The City’s
financial advisor will present these options for consideration.
XIII. REFUNDING AND RESTRUCTURING OPTIONS
To the extent permitted by law, the City shall consider advance refunding debt whenever an
analysis indicates the potential for present value savings of at least 3% of the par amount being
refunded. In the case of current refundings, the City shall consider refunding debt whenever an
analysis indicates the potential for present value savings above the costs of refunding the
outstanding debt. Refunding for savings should not extend the final maturity of the original
obligations, unless specifically approved by the City Council. Refunding of contractual
obligations not currently recorded as an outstanding debt obligation of the City (e.g., TMPA
debt) may be restructured to extend the final maturity if specifically approved by the City
Council
XIV. REIMBURSEMENT ORDINANCES
The IRS has specific regulations that govern the City’s ability to use tax-exempt financing to
reimburse expenditures made prior to the date of the financing. Bond proceeds may be allocated
to a prior capital expenditure for a period of time after the expenditure is made, but only if a
formal declaration by City Council is made. Bond counsel should be included in all
reimbursement resolution discussions.
The Chief Financial Officer/Director of Finance will review and approve all reimbursement
ordinances from City departments, including enterprise fund departments, before forwarding to
the City Council for consideration. Initially, funding for the capital expenditures will be
provided with existing bond proceeds or unresewed fund balance. Once the debt is sold, these
expenditures will be reimbursed from the debt proceeds. Commercial paper proceeds may also
be an interim funding option with City Council approval.
Reimbursement ordinances must be adopted within sixty (60) days of the date the original
expenditures were paid. Debt obligations must be issued, and the reimbursement allocation
made not later than eighteen (18) months after the later of (1) the date the original expenditures
were paid, or (2) the date the project is placed in service or abandoned, but in no event more
than three (3) years after the original expenditures were paid.
XV. USE OF ANTICIPATED BOND PROCEEDS
The use of anticipated bond proceeds will be limited to preliminary (soft) costs, which may
include engineering fees, architect fees, feasibility studies, etc. unless a reimbursement
ordinance has been adopted pursuant to Section XIV. The Chief Financial Officer/Director of
Finance may provide additional parameters regarding qualifying uses and will review and
approve all requests for the use of anticipated bond proceeds. Departments may not use
anticipated bond proceeds for preliminary costs earlier than 60 days from the date the City
Council adopts an ordinance authorizing the sale of said bonds unless a reimbursement
ordinance has been adopted pursuant to Section XIV. A reimbursement ordinance is not
required to expend anticipated bond proceeds for preliminary soft costs (indirect costs related
to construction i.e., engineering or design). In no event will the use of anticipated bond proceeds
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exceed the unreserved fund equity of the combined Utility System for Electric, Water or
Wastewater requests or the operating fund of any other department making a request.
XVI. 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.
An active secondary market with a broad investor base for the issuer’s debt.
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 debt’s soundness.
Interest rates are relatively stable, market demand is strong, and the market
is able to absorb a reasonable amount of buying or selling at reasonable
price changes.
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 may include:
•
•
•
•
•
•
•
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).
Use of bond insurance
Serial debt versus term debt with mandatory sinking fund redemptions.
Call provisions.
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 ofrefunding 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 negotiated sales, the City attempts to involve qualified and experienced firms which
consistently submit financing plans to the City and actively participate in the City’s
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competitive sales. The criteria used to select an underwriter in a negotiated sale may
include the following:
•
•
•
•
•
•
•
•
•
Overall experience.
Participation in the City’s past competitive sales.
Marketing philosophy.
Capability .
Previous experience as managing or co-managing underwriter.
Financial statement and financing plans that are relevant and appropriate.
MWB (Minority and Women Owned Businesses) status as it relates to the
City’s goal.
Public finance team and resources.
Breakdown of underwriter’s discount, which includes management fee,
underwriting fee, average takedown and other administrative expenses.
C. Private Placement
When cost-beneficial, the City may privately place its debt. Since underwriting and rating
agency expenses may be avoided, it may result in a lower cost of borrowing. Private
placement is sometimes an option for small issues that have a term less than 15 years. The
opportunity may be identified by the financial advisor.
XVII. 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 and the City’s
liquidity needs. Specific investment strategies for the investment of bond proceeds are
provided in the City’s Policy No. 403.06 (“1nvestment Policy”).
B. Arbitrage Compliance
With respect to the investment and expenditure of the proceeds of tax-exempt obligations,
the Chief Financial Officer/Director of Finance will:
•Instruct the appropriate person or persons that the construction, renovation
or acquisition of the facilities financed with tax-exempt obligations must
proceed with due diligence and that binding contracts for the expenditure of
at least 5% of the proceeds of the tax-exempt obligations must be entered
into within six months of the date of delivery of such obligations (“Issue
Date”)
Monitor that at least 85% of the proceeds of tax-exempt obligations to be
used for the construction, renovation or acquisition of any facilities are
expended within three years of the Issue Date.
Monitor investment of proceeds of the tax-exempt obligations and restrict
the yield of the investments to the yield on the tax-exempt obligations after
three years of the Issue Date.
•
•
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•Monitor all amounts deposited into a sinking fund or funds, (e.g., the
Interest and Sinking Fund established under each ordinance authorizing the
issuance of the tax-exempt obligations), to assure that the maximum amount
invested at a yield higher than the yield on the obligations does not exceed
an amount equal to the debt service on the obligations in the succeeding 12
month period plus a carryover amount equal to one-twelfth of the principal
and interest payable on the obligations for the immediately preceding 12-
month period.
Assure that the maximum amount of any debt service reserve fund for tax-
exempt obligations invested at a yield higher than the yield on the related
tax-exempt obligations will not exceed the lesser of (1) 10% of the principal
amount of the related tax-exempt obligations, (2) 125% of the average
annual debt service on the related tax-exempt obligations measured as of
the Issue Date for such obligations, or (3) 100% of the maximum annual
debt service on the related tax-exempt obligations as of the Issue Date for
such obligations.
Ensure that no more than 509'6 of the proceeds of tax-exempt obligations are
invested in an investment with a guaranteed yield for four years or more.
Monitor the actions of the escrow agent (to the extent an escrow is funded
with proceeds of tax-exempt obligations) to ensure compliance with the
applicable provisions of the escrow agreement, including with respect to
reinvestment of cash balances.
Maintain any official action of the City (such as a reimbursement ordinance)
stating its intent to reimburse with the proceeds of tax-exempt obligations
any amount expended prior to the Issue Date for the acquisition, renovation
or construction of the facilities financed with the obligations.
Ensure that the applicable information return (e.g., Internal Revenue
Service (“IRS”) Form 8038-G, 8038-GC, or any successor forms) is timely
filed with the IRS.
Assure that, unless excepted from rebate and yield restriction under section
148(f) of the United States Internal Revenue Code of 1986, as amended (the
“Code”), excess investment earnings are computed and paid to the U.S.
government at such time and in such manner as directed by the IRS (i) at
least every five years after the Issue Date and (ii) within 30 days after the
date the tax-exempt obligations are retired.
•
•
•
•
•
•
The City will follow a policy of full compliance with all arbitrage rebate requirements of
the Code and IRS 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/Director of Finance 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 and as needed. 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
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ongoing basis. If deemed necessary, funds should be set aside in anticipation of potential
rebate liabilities.
XVIII. RESTRICTIONS ON PRIVATE BUSINESS USE
With respect to the use of the facilities financed or refinanced with the proceeds of tax-exempt
obligations the Chief Financial Officer/Director of Finance will:
•
•
•
Develop procedures or a tracking system to identify all property financed with tax-
exempt obligations.
Monitor the date on which the facilities are substantially complete and available to
be used for the purpose intended.
Monitor whether, at any time the tax-exempt obligations are outstanding, any
person, other than the City, the employees of the City, the agents of the City or
members of the general public has any contractual right (such as a lease, purchase,
management or other service agreement) with respect to any portion of the
facilities.
Monitor whether, at any time the tax-exempt obligations are outstanding, any
person, other than the City, the employees of the City, the agents of the City or
members of the general public has a right to use the output of the facilities (e.g.,
water, gas, electricity).
Determine whether, at any time the tax-exempt obligations are outstanding, any
person, other than the City, has a naming right for the facilities or any other
contractual right granting an intangible benefit.
Determine whether, at any time the tax-exempt obligations are outstanding, the
facilities are sold or otherwise disposed of. Prior to any sale of property owned by
the City (real or personal), the Chief Financial Officer/Director of Finance must
confirm whether such property was financed with tax-exempt obligations, and if
so, determine whether the proposed disposition of the property could impact the
tax-exempt status of the issue of tax-exempt obligations that financed the
acquisition of such property.
Before entering into any private business use arrangement that involves the use of
the facilities financed with tax-exempt obligations, the Chief Financial
Officer/Director of Finance must obtain a description of the proposed private
business use arrangement and determine whether such arrangement, if put into
effect, will be consistent with the restrictions on private business use of the
facilities. In connection with the evaluation of any proposed private business use
arrangement, the Chief Financial Officer/Director of Finance should consult with
bond counsel to discuss whether such arrangement, if put into effect, will be
consistent with the restrictions on private business use of the facility, and, if not,
whether any remedial action permitted under federal guidelines may be taken as a
means of enabling such private business use without adversely affecting the tax-
exempt status of the tax-exempt obligations which financed such facilities.
Take such action as is necessary to remediate any failure to maintain compliance
with the covenants contained in the ordinances authorizing tax-exempt obligations
related to the public use of the facilities financed by such obligations.
•
•
•
•
•
The City shall establish an appropriate record keeping system and designate the appropriate
City personnel for purposes of compliance with this section, and as stated in Section XIX.
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XIX. RECORD RETENTION
All proceeds of debt obligations will be separately accounted for in the City’s financial
accounting system to facilitate arbitrage tracking and reporting. The Chief Financial
Officer/Director of Finance shall include in the ACFR the City’s arbitrage rebate liability in
accordance with accounting standards established by GASB.
With respect to each issue of tax-exempt obligations issued by the City, the Chief Financial
Officer/Director of Finance will maintain or cause to be maintained all records relating to the
investment and expenditure of the proceeds of such issue and the use of the facilities financed
or refinanced thereby for a period ending six years after the complete extinguishment of such
issue of tax-exempt obligations. If any portion of an issue of tax-exempt obligations is refunded
with the proceeds of another series of tax-exempt obligations, such records shall be maintained
until the six years after the refunding obligations are completely extinguished. Such records
may be maintained in paper or electronic format.
XX. TRAINING
The Chief Financial Officer/Director of Finance shall receive appropriate training regarding the
City’s accounting system, contract intake system, facilities management and other systems
necessary to track the investment and expenditure of the proceeds and the use of the facilities
financed with the proceeds of debt obligations. The foregoing notwithstanding, the Chief
Financial Officer/Director of Finance is authorized and instructed to retain such experienced
advisors, agents and consultants as may be necessary to carry out the policies and procedures
described in Sections XVII, XVIII and XIX.
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DENTON CITY OF DENTON
GLOSSARY
ACFR – Annual Comprehensive Financial Report.
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. Generally, a level
debt service structure will limit the average life of a bond issue (i.e., a 20-year final maturity
will have an approximate average life of 12 years, and a 30-year final maturity will have
an approximate average life of 18 years).
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
CIP – Capital Improvement Program.
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.
Policy 403.07 Page 20 of 27
Callable Commercial Paper – A short term obligation that is issued with an original call date of a
business day at least 5 to no more than 120 days of issuance at a maturity date on a business
day no more than 270 days from the issuance date. Callable commercial paper can be issued
without the need of bank liquidity support.
Capital Appreciation Bond – A bond without current interest coupons that is typically sold at a
substantial discount from par. Investors are provided with a return based upon the accretion
and compounding of interest on the bond through maturity. As defined by Section
1201.0245, Government Code, means a bond that accrues and compounds interest from its
date of delivery, the interest on which by its terms is payable only upon maturity or prior
redemption.
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.
Certificates of Obligation – A type of debt authorized to be issued pursuant to the Certificates of
Obligation Act of 1971 (Subchapter C of Chapter 271, Texas Government Code).
Closing – When bonds are exchanged for money (a/k/a delivery or settlement).
Commercial Paper – By convention, short-term, unsecured, tax-exempt, or taxable 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.
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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.
Debt Obligation – As defined by Section 1201.002, Government Code, means an issued public
security which is an instrument, including a bond, certificate, note, or other type of
obligation authorized to be issued by an issuer under a statute, a municipal home-rule
charter, or the constitution of the state.
Debt Coverage Ratio Calculations –
Electric: ((Total Revenue-Cost Participation)-(Personnel Expenses+O&M
Expenses+COS Transfers+Supplemental, Baseline Adjustments, Purchase Power+DEC
Fuel+Purchase Power Data Center+Transmission of Power)))/(Total Debt Service))
Water: ((Total Revenue-Impact Fees-Cost Participation)-(Personnel Expenses+O&M
Expenses+COS Transfers+Supplemental, Baseline Adjustments))/(Total Debt Service))
Wastewater: ((Total Revenue-Impact Fees-Cost Participation)-(Personnel
Expenses+O&M Expenses+COS Transfers+Supplemental, Baseline Adjustments))/(Total
Debt Service))
Solid Waste: ((Total Revenue)-(Personnel Expenses+O&M Expenses+COS
Transfers+Supplemental, Baseline Adjustments))/(Total Debt Service))
+COS-Cost of Service, O&M-Operations and Maintenance, DEC-Denton Energy Center
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.
Page 22 of 27
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.
Electronic Municipal Market Access (EMMA) – Effective July 1, 2009, the SEC implemented
amendments to SEC Rule 15c2-12 which approved the establishment by the MSRB of
EMMA, the sole successor to the nationally recognized municipal securities information
repositories with respect to filings made in connection with disclosure undertakings.
Access to filings are made free of charge to the general public by the MSRB.
Extendable Commercial Paper – A short term obligation with an original maturity of 1 to 120
days, but the issuer has the right to extend the maturity of the debt to a maximum maturity
of 270 days from the original offering date. Extendable commercial paper does not require
liquidity support.
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.
Financial Advisor – A person or firm of people that (i) provides advice to or on behalf of a
municipal entity or obligated person with respect to municipal financial products or the
issuance of municipal securities, including advice with respect to the structure, timing,
terms, and other similar matters concerning such financial products or issues, or (ii)
undertakes a solicitation of a municipal entity. Also known as a “municipal advisor”.
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.
GASB – Government Accounting Standards Board.
Page 23 of 27
GFOA – Government Finance Officers Association.
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.
Long-Term Debt – Will not exceed the estimated useful life of the asset(s) financed. Voter
approved general obligation bonds will strive to have a final maturity of twenty (20) years
or less. Revenue bonds and certificates of obligation will strive to have a final maturity of
thirty (30) years or less.
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.
Joint Manager or Co-Manager
Any member of the management group.
Municipal Advisory Council of Texas (MAC) – The designated State of Texas Information
Depository as approved by the SEC with respect to filings made in connection with
undertakings.
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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 IVISRB 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.
Net Revenue – Gross revenue excluding fair market value adjustment, capital contributions and
non-administrative transfers less Operating expenses excluding depreciation, ROI and
franchise fees.
Official Statement – A Preliminary Official Statement or a Final Official Statement, as applicable.
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 Final 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 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.
Private Business Use – Private business use occurs whenever tax-exempt obligation proceeds are
used to benefit any entity other than a state or local government, including non-profit
corporations and the federal government. In simple terms, an issue of tax-exempt
obligations may lose their tax-exempt status if (i) more than 10% of the proceeds of the
obligations are to be used for any private business use and the payment of the principal of,
or the interest, on more than 10% of the proceeds of the obligations is secured by or payable
from property used for a private business use or (ii) the amount of the proceeds of the
obligations used to make loans to borrowers other than state and local governments exceeds
the lesser of 5% of the proceeds or $5 million.
Refunding – An advance refunding is a refunding that occurs more than 90 days before the call
date of the refunded bonds, and a current refunding is a refunding that occurs 90 days or
less before the call date. A 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.
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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.
SEC – Securities and Exchange Commission.
Secondary Market – The market in which bonds are sold after their initial sale in the new issue
market.
SenIor Lien Bonds – Bonds having a prior or first claim on pledged revenues.
Serial Bonds – A bond issue in which the principal is repaid in periodic installments over the
issue’s life.
Short-Term Debt – 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
interim financing which will eventually be refunded with 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.
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 ofmaturities. 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 Bomd – 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.
REFERENCES
• None
REVISION HISTORY
Revision Date
12/03/2024
Policy Owner
R. Klingele
Summary
+ Administrative maintenance
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• Annual Submission of Conflict of Interest Forms
• Removal of Controller from Investment Committee
• Administrative maintenance
• Administrative maintenance
• Add language to allow line of credit to be refinanced with
long-term debt
• Update language to define facilities for CO issuances
• Add language to illustrate preliminary soft costs can be
expended without a RO
. Administrative maintenance
• Increase debt service coverage ratio from 1.25 to 1.50
• Add language to allow long-term debt for current operations
• Administrative maintenance
• Add Commercial Paper as a type of debt its use as short-term
financing and potential use as anticipated bond proceeds
• Add language to RO illustrating IRS’ regulation of using tax-
exempt financing to reimburse expenditures made prior to the
date of financing
• Short-term debt update to include using proceed of refunding
bonds or notes, LCs, direct note purchase agreements and
commercial paper programs
• Long-term debt update to number of days prior to the set date
for passage of ordinance authorizing sale of COs
12/12/2023
12/ 13/2022
R. Klingele
R. Klingele
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0
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