HomeMy WebLinkAbout03.b. Follow up discussion from June 6, June 20, and July 11, 2017 meetings on proposed new Board Policy No. BP 029 - Debt Management and Continuing DisclosureItem 3.b.
C entral C ontra Costa S anitary D istrict
August 1, 2017
T O: A D MI NI S T R AT I O N C O MMI T T E E
F RO M :P HI L I P L E I B E R, D I R E C TO R O F F I NA NC E A ND A D MI NI S T R AT I O N
S UB J E C T: F O L L O W-UP D I S C US S I O N F R O M J UNE 6, J UNE 20, A ND J ULY 11, 2017
ME E T I NG S O N P R O P O S E D NE W B O A R D P O L I C Y NO. B P 029 - DEBT
MANAGEMENT AND CONT INUING DISCL OSURE: A D D I T I O NA L
I NF O R MAT I O N R E G A R D I NG D E B T L I MI T S B Y P R O G R A M
A t the J uly 11 meeting, the Administration C ommittee requested additional information regarding
limitations on using debt to fund the f our programs in the D istrict’s 10-year C apital I mprovement Program
(C I P ). Previously, in consideration of a draft debt policy, limitations specified included the following:
A t least the amount of the collection system improvement program would be rate funded over a 10-
year period.
Not more than 60% of the 10-year C I P would be debt f unded.
The weighted average maturity of the bonds should not exceed 100% of the weighted average
useful life of the capital assets being financed, excluding land.
T he A dministration Committee requested information on the impact of additional limits to include the
f ollowing:
Not more than 80% of the non-pipeline C I P would be debt funded; or
Not more than 60% of the non-pipeline C I P would be debt funded.
Conclusion
The 80% bond f unding limitation for non-pipeline C I P does not appear to be a binding constraint and
would not trigger a material rate increase f rom the rates contemplated in the current f inancial plan.
A 60% bond funding limit f or non-pipeline C I P would require significant additional rate increases of
about 1.3% to 1.6% (depending on how the 60% limit is interpreted) over the nine-year period from
Fiscal Year (F Y) 2018-19 to F Y 2026-27.
S taff does not recommend codifying either of these limitations in the debt policy at this time f or the
f ollowing reasons:
T he policy, as draf ted, provides additional flexibility for bond f unding should additional
Treatment P lant project needs arise without signif icantly impacting rates.
Under the draf t debt policy, the B oard will be approving every bond issuance, and at each time
rates are proposed to be changed, a f inancial plan will be presented in which debt and rate
planning policy guidance can be provided to staf f .
A dditional development work may be needed on the f inancial model to ensure all policy
constraints and customer impacts for wholesale customers (C oncord) are appropriately
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addressed with accurate rate results.
F urther codification of policy constraints can take place at the next scheduled review of the
debt policy or bef ore (e.g., closer to the time of the upcoming bond issuance).
However, if the A dministration C ommittee decides to proceed with a limitation of this nature, the following
language could be inserted into the draft debt policy:
V I I . S TA ND A R D S F O R US E O F D E B T F I NA NC I NG
A. Use and Timing of Debt
..
1c. T he D istrict shall target rate or tax f unding of at least 20% of the non-pipeline
program components of the C I P.
Detailed Discussion and Analysis
Background Information on C urrent Financial Plan
$873 million of C I P through F Y 2026-27; with inf lation this is $1.017 billion comprised of the
f ollowing:
C ollection System = $421.6 million (41.4%); pipes only excluding Pump Stations ($38.6
million) = $383 million (37.6% of total C I P)
A ll others = $596.1 million (58.6%); with P ump S tations ($38.6 million)= $634.7 million (62.4%
of total C I P)
The current financial plan contemplates the following:
$513 million of bonds issued ($513 million/$1.017 billion = 50.4% of f unding needed).
A cumulative rate increase of 56% f rom F Y 2018-19 to F Y 2026-27 as shown below:
Baseline Rate I ncrease
F Y 2019 7.0%
F Y 2020 6.5%
F Y 2021 6.5%
F Y 2022 6.0%
F Y 2023 6.0%
F Y 2024 6.0%
F Y 2025 6.0%
F Y 2026 6.0%
F Y 2027 6.0%
Total I ncrease: 56%
Commentar y on 80% limitation on non-pipeline C IP debt
80% of non-pipeline C I P spending is $507.8 million ($634.7 million times 80%).
The current bond issuance amount of $513 million is slightly above that $507.8 million. T hat said,
the bond issuance amount could be reduced by $5.2 million without impacting the rate schedule
above (the rate impact is negligible). A dditionally, deducting the bond reserve of $32.8 million from
$513 million (which is borrowed money set aside as a reserve and not spent on C I P ), the net
proceeds available for C I P and issuance costs is $480 million. A ccordingly, bonds are not funding
more than 80% of these projects, so the existing planned rate schedule would not need to change
under this limitation and interpretation.
Comme ntary on 60% limitation on non-colle ction sy stem debt
60% of treatment non-pipeline C I P spending is $380.8 million ($634.7 million times 60%).
The current bond issuance amount of $513 million exceeds that $380.8 million limit by $132.2
million. A ccordingly, a 60% debt funding limit would be a binding constraint requiring a reduction in
debt to be issued, and a corresponding increase in rates. R educing debt by $132.2 million would
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require a total rate increase of 70.7% from F Y 2018-19 to F Y 2026-27, an amount 14.7% higher
(1.6% per year over nine years) than the baseline rate increase of 56% over this period, as shown
below:
R equired I ncrease
F Y 2019 7.85%
F Y 2020 7.85%
F Y 2021 7.85%
F Y 2022 7.85 %
F Y 2023 7.85 %
F Y 2024 7.85 %
F Y 2025 7.85 %
F Y 2026 7.85 %
F Y 2027 7.85 %
Total I ncrease: 70.7%
Average I ncrease from Baseline P er Year: 1.6%
E ven deducting the bond reserve of $32.8 million from $513 million (which is borrowed money
set aside as a reserve and not spent on C I P ), the net proceeds available for C I P and issuance
costs is $480 million, which is $99.2 million above the 60% limitation bond f unding limit of
$380.8 million. Accordingly, bonds would need to be reduced, and rates would need to be
raised a total of 67.5% (11.6% more than the baseline, or 1.3% more per year) over the nine-
year period to maintain a 60% limit on non-collection system debt, as shown below:
Required Increase
FY 2019 7.5%
F Y 2020 7.5%
F Y 2021 7.5%
F Y 2022 7.5%
F Y 2023 7.5%
F Y 2024 7.5%
F Y 2025 7.5%
F Y 2026 7.5%
F Y 2027 7.5%
Total I ncrease: 67.5%
Average I ncrease from Baseline P er Year: 1.3%
S taff will be available at the meeting to answer any questions.
Strategic Plan Tie-I n
G O A L T H R E E : Be a Fiscally Sound and Effective Water Sector Utility
Strategy 1 - Conduct Long-Range Financial Planning, Strategy 2 - Manage Costs
AT TAC HM E NT S :
Description
1. Proposed B P 029 - D ebt Management and Continuing D isclosure
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Number: BP 029
Related Admin. Procedure AP 029
Authority: Board of Directors
Effective: __________, 2017
Revised:
Reviewed:
Initiating Dept./Div.: Administration/Finance
BOARD POLICY
DEBT MANAGEMENT AND CONTINUING DISCLOSURE
I. PURPOSE
The Government Finance Officers Association (GFOA) recommends1 as a best
management practice that state and local governments adopt comprehensive
written debt management policies to improve the quality of decisions, articulate
policy goals, provide guidelines for the structure of debt issuance, and
demonstrate a commitment to long-term capital financial planning. Additionally,
California SB 1029 requires public agency issuers of debt to adopt
comprehensive written debt management policies pursuant to the GFOA
recommendation, and to provide reports on any issuance prior to and after the
debt sale, and on an ongoing basis, to the California Debt and Investment
Advisory Commission (CDIAC).2
The purpose of this Debt Management and Continuing Disclosure Policy (Debt Policy) is
to organize and formalize debt issuance and management related policies and
procedures for the Central Contra Costa Sanitary District (District). This Debt Policy is
applicable to both the District and the Central Contra Costa Sanitary District Facilities
Financing Authority. This Debt Policy is intended to comply with Government Code
Section 8855(i). General Manager maintained procedures amplify and provide
additional guidance to staff related to the Debt Policy. The debt policies and procedures
of the District are subject to and limited by applicable provisions of State and Federal
law.
1 In their publication “Best Practice Debt Management Policy”
2 https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201520160SB1029
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Number: BP 029
DEBT MANAGEMENT AND CONTINUING DISCLOSURE
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II. POLICY OBJECTIVES
The primary objectives of the District’s debt and financing related activities are the
following:
• Maintain cost-effective access to the capital markets through prudent
fiscal management policies and practices;
• Specify parameters related to the prudent use of debt in the context of The
District’s rates and financial planning;
o Ensure debt proceeds are expenditures for permissible uses as
defined in this policy, and in accordance with bond covenants and
other applicable requirements;
• Minimize debt service commitments through effective planning and cash
management;
• Ensure the District is compliant with all applicable federal and state
securities laws;
• Protect the District’s creditworthiness and achieve the highest practical
credit ratings; and
• Maintain the District’s sound financial position.
III. SCOPE AND DELEGATION OF AUTHORITY
This Debt Policy will govern the issuance and management of all debt funded through
the capital markets, including the selection and management of related financial and
advisory services and products, and the investment of bond proceeds.
Overall policy direction of this Debt Policy will be provided by the District’s Board of
Directors (Board). Responsibility for implementation of the Debt Policy and day-to-day
responsibility for structuring, implementing, and managing the District’s debt and finance
program will lie with the General Manager or their designee (Director of Finance and
Administration). The Board’s adoption of the District’s Annual Budget and Capital
Improvement Program (CIP), or review of the financial plan, does not, in and of itself,
constitute authorization for debt issuance for any capital projects. This Debt Policy
requires that the Board specifically authorize each debt financing.
While adherence to this Debt Policy is required in applicable circumstances, the Board
recognizes that changes in the capital markets, District programs, and other unforeseen
circumstances may from time to time produce situations that are not covered by the
Debt Policy and will require modifications or exceptions to achieve policy goals. In these
cases, management flexibility is appropriate, provided specific authorization from the
Board is obtained.
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Number: BP 029
DEBT MANAGEMENT AND CONTINUING DISCLOSURE
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IV. ROLES AND RESPONSIBILITIES
• General Manager and/or Deputy General Manager – Provides oversight of
debt program and recommendations on debt to the Board.
• Director of Finance and Administration – Has primary responsibility for
debt issuance recommendations, financing transaction execution,
oversight of bond proceeds expenditures, and ongoing debt management.
• Board of Directors – Sets debt policy and approves individual
transactions.
V. ETHICS AND CONFLICTS OF INTEREST
Staff and Board involved in the debt management program will not engage in any
personal business activities that could conflict with proper and lawful execution of
securing capital financing and are to comply with the District’s Conflict of Interest
Code.
VI. INTEGRATION WITH OTHER FINANCIAL POLICIES AND DOCUMENTS
The District is committed to long-term capital and financial planning, maintaining
appropriate reserve levels and employing prudent practices in governance,
management and budget administration. Policies related to these topics are adopted
separately but affect this Debt Policy in the context of the overall long-term financial
plan. The Board shall be presented with the results of the long-term financial plan in
contemplation of any proposed rate adjustment where the capital budget, financial
policies, proposed debt issuances and resulting debt service are presented as elements
contributing to the calculation of overall projected customer rates.
VII. STANDARDS FOR USE OF DEBT FINANCING
In financial planning, the District will evaluate the use of various alternatives including
current year funding of capital projects through rates, various forms of debt financing,
use of reserves, and inter-fund borrowing. The District will utilize the most
advantageous financing alternative balancing the goals of long-term cost minimization,
risk exposure, and compliance with generally accepted ratemaking principles. The
District’s debt management program will consider debt issuance where public policy,
equity, general ratemaking principles, economic efficiency and compliance with long-
term financial planning parameters favor financing over cash funding.
A. Use and Timing of Debt
The District shall integrate its debt issuances with the goals of its Capital
Improvement Program by timing the issuance of debt to ensure that projects are
available when needed in furtherance of the District’s public purposes and are
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Number: BP 029
DEBT MANAGEMENT AND CONTINUING DISCLOSURE
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consistent with the rate and financial planning parameters specified in the
District’s long-term financial plans. The Board shall be presented with a long-term
financial plan in each instance Sewer Service Charge rates are to be adjusted.
1. The long-term financial plans will specify an expected debt issuance
amount over a decade or more long-term planning horizon.
a. The District shall target rate or tax revenue funding of, at a minimum,
the value of the collection system replacement program component of
the CIP.
b. Not more than 60% of the overall CIP shall be financed with debt.
2. All projects in the CIP are eligible to use debt financing, so long as the
minimum rate or tax revenues are generated as described in A.1 of this
section.
This policy does not contemplate the use of debt financing to fund ongoing
operating & maintenance expenditures; exceptions beyond a de-minimis amount
would require approval of the Board.
With respect to debt repayment and amortization, the debt repayment period
should be structured so that the weighted average maturity of the debt does not
exceed 100% of the expected average useful life of the project being financed.
B. Credit Quality
All District debt management activities for new debt issuances will be conducted
in a manner conducive to receiving the highest credit ratings possible consistent
with the District’s debt management objectives.
As debt service coverage is a key ratings consideration, the District shall target a
debt service coverage level of at least 2.0x or greater for financial planning and
ratemaking purposes.
C. Ongoing Debt Administration and Internal Controls
The District will maintain all debt-related records according to the District’s
Retention Policy. The District will maintain internal controls to ensure
compliance with the Debt Policy (including use of bond proceeds for
purposes specified in the applicable Bond Official Statements and in
compliance with this debt policy), all debt covenants and any applicable
requirements of Federal and State law, including but not limited to the
following: initial bond disclosure, continuing disclosure, tax-exemption,
post-issuance compliance, investment of bond proceeds (including, for
example, any continuing disclosure obligations under Securities and
Exchange Commission (SEC) Rule 15c2-12, and tax covenants, and
related federal tax compliance requirements such as arbitrage restrictions
and rebate requirements), and annual transparency reporting to CDIAC.
These internal controls are further specified in the related Debt
Management and Continuing Disclosure (AP 029).
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Number: BP 029
DEBT MANAGEMENT AND CONTINUING DISCLOSURE
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D. Rebate Policy and System
The District will develop a system of reporting interest earnings that
relates to and complies with Internal Revenue Code requirements relating
to rebate, yield limits and arbitrage. The District will accurately account for
all interest earnings in debt-related funds to ensure that the District is
compliant with all debt covenants and with state and federal laws. The
District will invest funds in accordance with the investment parameters set
forth in each respective bond indenture, and as permitted by the District’s
Statement of Investment Policy (BP 005).
VIII. FINANCING CRITERIA
When District staff determines the use of debt is appropriate, staff shall provide a report
to the Board that describes the intended use of the financing proceeds (funding for new
projects or to refund existing bonds), and recommends a specific debt type to include
duration, type, interest rate characteristics, call features, credit enhancement or financial
derivatives to be used in the transaction. For refunding transactions, a comprehensive
report on the debt to be redeemed, the replacement debt, and the benefits of the
transaction shall be provided.
IX. TERMS AND CONDITIONS OF DEBT
The District will establish all terms and conditions relating to the issuance of debt, and
will control, manage, and invest all debt proceeds. The District will specify to the Board
proposed debt terms, coupon structure, debt service structure, redemption features, any
use of capitalized interest, and lien structure.
X. TYPES OF DEBT
The following types of debt are allowable under this Debt Policy, subject to applicable
law, and the District’s statutory authority to issue debt:
• General obligation bonds
• Commercial paper
• Bond or grant anticipation notes
• Lease revenue bonds, certificates of participation and lease-purchase
transactions
• Other revenue bonds, including private placement obligations
• Tax and revenue anticipation notes
• Land-secured financings, such as special tax revenue bonds issued under
the Mello-Roos Community Facilities Act of 1982, as amended, and
limited obligation bonds issued under applicable assessment statutes
• Refunding Obligations
• State Revolving Fund Loans
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Number: BP 029
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• Lines of Credit
• Letters of Credit
• The Board may from time to time find that other forms of debt would be
beneficial to further its public purposes and may approve such debt
without an amendment of this Debt Policy.
XI. CREDIT ENHANCEMENTS
The District may consider the use of credit enhancement on a case-by-case basis,
evaluating the economic benefit versus cost for each case. Only when a clearly
demonstrable savings or other measurable advantages can be shown will enhancement
be considered.
XII. REFINANCING OUTSTANDING DEBT
The District will periodically evaluate outstanding bond issues for refunding
opportunities and will bring to the attention of the Board those opportunities that are in
the District’s interest. Reports to the Board on potential refunding shall describe
anticipated savings and the structure of refunding and refunded debt.
XIII. METHODS OF ISSUANCE
District bonds may be sold on a competitive or negotiated basis (including private
placement). A recommendation regarding the proposed use of either method shall be
prepared by staff and provided to the Board prior to or concurrent with the proposed
issuance.
XIV. MARKET RELATIONSHIPS
A. Rating Agencies and Investors
The General Manager and designees (Deputy General Manager and Director of
Finance and Administration) will be responsible for maintaining the District’s
relationships with rating agencies, which will typically include two or more of the
nationally recognized statistical rating agencies.
B. Board Communication
The General Manager will make available to the Board any ratings report or other
relevant feedback provided from rating agencies and/or investors regarding the
District’s financial strengths and weaknesses and recommendations for
addressing any weaknesses.
C. Continuing Disclosure
The District will remain in compliance with SEC Rule 15c2-12 addressing
continuing disclosure obligations. The District will also comply with state
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reporting requirements specified in SB 1029, which require initial and
ongoing debt reporting requirements for California public agencies.
D. Rebate Reporting
The use and investment of bond proceeds shall be monitored to ensure
compliance with arbitrage restrictions.
E. Other Jurisdictions
From time to time, the District may issue bonds to fund projects that provide a
benefit to other public entities, (e.g. City of Concord). The District will conduct
such analyses as deemed necessary to assure adequate cost recovery for such
funding and to mitigate risks to the District.
The District may participate in a joint powers authority with one or more other
eligible entities pursuant to Section 6500 of the California Government Code if
deemed advantageous and appropriate and approved by the Board.
XV. CONSULTANTS
A. Selection of Financing Team Members
The General Manager or designee will make recommendations for all
financing team members, with the Board providing final approval.
Financing team members may include a financial advisor, bond counsel,
disclosure counsel (which may be the same firm as bond counsel), and
underwriter. Selection of those financing team members shall be in
accordance with Professional Service and Consultant provisions of the
District’s procurement policies, and consistent with Chapter 2.36
“Purchasing and Materials Policy” of the District Code. In the event of a
competitive bond sale, the District’s debt will be offered to the underwriter
providing the most cost advantageous proposal to the District.
B. Financial Advisor
The District may utilize a financial advisor to assist in its debt issuance
and debt administration processes as is deemed prudent and necessary
by management and in compliance with Municipal Securities Rulemaking
Board (MSRB) regulations.
C. Bond Counsel
District debt will include a written opinion by legal counsel affirming that
the District is authorized to issue the proposed debt and that the District
has met all constitutional and statutory requirements necessary for
issuance and a determination of the proposed debt’s federal income tax
status. The approving opinion and other documents relating to the
issuance of debt will be prepared by counsel with extensive experience in
public finance and tax issues.
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D. Disclosure Counsel
The District may utilize a separate firm to serve as disclosure counsel as it
deems necessary. If cost effective, bond counsel may also serve as disclosure
counsel.
E. Underwriter
The District will have the right to select a senior manager for a proposed
negotiated sale, as well as co-managers and selling group members, as
appropriate.
F. Conflict of Interest Disclosure by Financing Team Members
All financing team members will be required to provide full and complete
disclosure, relative to agreements with other financing team members and
outside parties. The extent of disclosure may vary depending on the
nature of the transaction. However, in general terms, no agreements will
be permitted which could compromise the firm’s ability to provide
independent advice that is solely in the District’s interests (to the extent
the firm’s role involves a duty to do so) or which could reasonably be
perceived as a conflict of interest.
XVI. INITIAL AND CONTINUING DISCLOSURE COMPLIANCE
A. Disclosure Coordinator and Overall Requirements for Initial and Continuing
Disclosure
The Director of Finance and Administration (or as designated, the Finance
Manager) for the District shall be the disclosure coordinator of the District
(Disclosure Coordinator). The Disclosure Coordinator shall perform the following
functions:
• Ensure that any Official Statement meets appropriate standards and is
approved by the Board as required.
• Ensure that initial and continuing disclosure obligations undertaken
by the District related to each debt issuance are met, including
State of California requirements, and MSRB requirements that the
District commits to undertake in the Continuing Disclosure
Certificate or Agreement over the life of the bonds to investors.
o Initial Disclosure requirements include preparation of the
Bond Official statement and reports on the issuance to the
CDIAC.
o Ongoing disclosure requirements include annual reports with
the MSRB Electronic Municipal Market Access (EMMA)
system and the CDIAC.
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Number: BP 029
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XVII. EXCEPTIONS
In the event there are any deviations or exceptions from the Debt Policy when a certain
bond issue is structured, those exceptions will be discussed in the staff reports when
the bond issue is agendized for Board consideration.
XVIII. POLICY CONSIDERATION
This policy shall be reviewed on a bi-annual basis. Any changes must be approved by
the Board after review by the Administration Committee, as well as the individual(s)
charged with maintaining internal controls.
[Original Retained by the Secretary of the District]
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