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HomeMy WebLinkAbout06. (Handout) President Causey's Questions re proposed Debt PolicyItem 6. (Handout) Dear Board Members: Please find responses to questions raised by Board President Causey this morning on the Debt Policy. These answers 1. This policy should be done bv the whole board and not lust a committee? Delay for Concord workshop in the Fall? Response: The approach used to developthe policy has been the standard for any policy development; work with the Committee, then bringto Board. We understand if the Board would like further consideration of the matter given its importance. Today's meeting will determine whether additional time for review by the entire board is necessary. As to delay, we do not see a matter that would come out of the Concord workshop that would require us to wait until then. This policy provides for the possibility of the issuance of debt on behalf of other agencies (i.e. Concord), and requires risk assessment and analyses by Central San in connection with this. We would like to have the debt policy adopted as soon as possible (subject of course to adequate Board deliberation). One driver for this is the fact that Central San staff have been made aware of opportunities to economically refund existing debt and would like to begin working on this. Having the debt policy in place and behind us will allow us to move forward and focus on that opportunity. The refunding opportunity can save the District an approximated $1-1.5 million in present value interest savings. xiv. E. other Jurisdictions , From time to time the District may issue bands to fund projects that provide a benefit to other public entities, (e.g. City of Concord). The District will conduct such analyses as deemed necessaryto assure adequate cost recovery for such funding and to mitigate risks to the District. The District may participate artici ate 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. 2. Hold this over so we can see the final AP 029 along with this policy• Response: AP 029 was provided to the Committee, and is available for review by the entire Board. The document provides more detail about the policy. It is attached. 3. What is the weighted average maturity of bonds? Response: If a single bond was issued for $1,000,000 that was due 30 years from now, the weighted average maturity would be 30 years. However it gets more complicated with a typical bond issuance where individual bonds have varying due dates, and amounts for each due date. http://finance.zacks.com/calculate-weighted-average-life-bonds-6305 html Many bonds pay their principals as a single sum when the bond matures. Other bonds amortize their principals by paying their principals in installments over the course of the bond's life. with these bonds, investors like to receive their returns as soon as possible. The bond's weighted average life helps investors gauge how quickly bonds pay out returns. The average life is the average length of time that each dollar in the principal remains unpaid. Step 1: Multiply each of the bond's payments by the number of years until the issuer pays each of them. For example, if a bond pays $1,000 after one year, $2,000 after two years and $4,000 after three years, multiply $1,000 by 1 to get $1,000, multiply $ 2,000 by 2 to get $4,000 and multiply $4,000 by 3 to get $12,000. Step 2: Add together these time -weighted sums. Continuing the example, add $1,000, $4,000 and $12,000 to get $17,000. Step 3: Add together the bond's payments. Continuing the example, add $1,000, $2,000 and $4,000 to get $7,000. This is the bond's total principal. Step 4: Divide the sum of the time -weighted payments by the bond's principal. Continuing the example, divide $17,000 by $7,000 to get 2.4. The bond has a weighted average life of 2.4 years. 4. How is weighted average of useful life determined? Response: See #3 above S. Explain debt funding limit non -pipeline projects only — 60% or 80% Response: The policy does not have a debt funding limit for non -pipeline projects. It was considered, but not put in the "final" policy presented today. Instead, only a single limit is in the policy now, that not more than 60% of the CIP will be debt funded over a 10 year period. What the committee discussed was another overlay to indicate that apart from the collection system limitation all other CIP would be subject to another limit of either 60% or 80% debt funding. That additional limit was not adopted. 6. Why ►eras the administrative policy NOT given to the Board? Committee reviewed and had comments? Hold the policy over to receive a copy of the final AP 029 policy, Response: The AP is not typically provided to the Committee or Board, so that was something that we had to weigh in this case. We decided to provide it to the Committee so they could see a comprehensive debt management document. We are fine with providing it to the entire Board as well, and it is attached. 7. Whv 2 -OX debt coverage? What if 1.5X? Section VIIB Response: 2.ox or above debt service coverage is the level specified by Moody's as consistent with their highest "Aaa" rating, which is the current Central San rating. Central San projects debt service coverage well above 2.ox during the next ten years. So, the 2.ox coverage is not driving rates to be higher than they would ordinarily be. A lower coverage factor might be worth discussion if that were the case and Central San was willing to accept a lower credit rating. S. Why 2.OX debt coverage? What if 1.5X? Section VI[B Response: The weighted average debt phrase refers to how the debt is structured in terms of amounts and due dates. There is not a direct linkage to the capital program. only a limit by the IRS that the weighted average debt life cannot be more than 125% of the weighted average useful life of the assets being financed. The Admin Committee wanted to set a more conservative limit of 100%, so that is what is specified in the policy. 9. Does the collection system program mean that pump stations are excluded from bond funding? Definitely opposed to this concept as they are 20 year assets not 50 or 100 year assets. Response: The policy currently is written to require that the "collection system replacement program" over a ten year period be funded with SSC and taxes. This is a point that can be further clarified if desired. we intended it to mean that planned routine pipeline replacement work would need to be funded with SSC and taxes, not debt. 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 consistent with the rate and financial planning parameters specified in the District's long-term financial plans. The Board shall be presented with a longterm 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 collections stem re lacement ro ram component of the CIP. For further clarification, the FY15/16 CIP had four categories of work for the collection system including: (1) Renovation (2) regulatory compliance/planning/safety (3) expansion (4) Pump stations Our intent was that clearly the type of projects in (1) would need to be funded by SSC and taxes over the planning horizon. However, bond funding of the other work such as pump stations or expansions could be permissible. 10.Rate/tax revenue to fund pipeline replacement program over aten-year period? What happens at the end of 10 years? Why? Response: This ten year horizon is merely an indicator that over a particular period, SSC and taxes should fund at least a specified percentage of the program. That wouldn't change in the future (unless the policy was changed). 11.Correct the draft to assure applies to Finance Authority —define "District" to mean both agencies Response: This provision is included. "This Debt Policy is applicable to both the District and the Central Contra Costa Sanitary District Facilities Financing Authority.", but we can also add: This Debt Policy is applicable to both the District and the Central Contra Costa Sanitary District Facilities Financing Authority, and the use of the term "the District" hereafter refers to both entities. 12.Would all debt be issued through the Financing Authority Response: No. That structure was necessary for the issuance of certificates of participation. Other types of debt, such as revenue bonds, would be issued directly by Central San. 13.Should the Financing Authority formally adopt the policy later this year? To assure conformance? Response: That would likely be a good step. Though only "required" under SBI029 if that entity was going to issue addition bonds. 14.How does this debt policy work with the Financing authority? Response: The debt policy is intended to be applicable to both entities. 15.Roles and responsibilities —add statement for Financing authority Response: Will consider if additional language is needed. Is there a position in the Financing authority that is to be addressed? 16.Does debt financing include P3 programs? Section VII -grants. SRF loans.. Research grants, etc Response: This is a good question, and one that may require us to be further down the road on what the nature of the P3 relationship Central San could enter into would look like. However, a contractual payment to a P party for services under a P3 arrangement would not appear at first indication to be "debt" that would be subject to this policy. When and if Central San is further down the path of considering such an arrangement, we could revisit any such concerns. In the accounting world, the standard setting body for commercial entities (FASB) has recently adopted a new standard regarding leases that requires these to be put on the balance sheet. The standard setting body for governmental entities commercial entities (GASB) is also working on such a standard. However, even in this case, a lease wouldn't be considered "debt" for purposes of this debt policy, as currently contemplated. 17 -How does intergenerational equity fit into this policy? Section VII Response: We believe the concept of intergeneration equity is covered under the "public policy", "general ratemaking principles" and "equity" concepts. if desired by the Board, we can specifically add "intergenerational equity", but we don't see that as a "required" reference or that it would lead us to a different place. 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. 18.Whv are long term financial plans to be limited to only when sewer service charge rates are to be adjusted? Section VIIA Response: There is no intention to limit when the Board would be provided with long term financial plans. The policy mentions a minimum of when rates are to be changed. The Board can engage as frequently as desired on those financial plans. 19.No funding at all for collection system replacement programs? Does this exclude pump stations and other collections infrastructure? Section VIIA- 1 Response: 1. From a financial planning standpoint, rates and taxes are to provide at least the amount of funding needed for the "collection system replacement program" over a 10 year horizon. we intended this to mean at least pipeline replacement funding, per the Board's previous discussion of these matters. But our current interpretation would be that the term would exclude pump stations. The Board can deliberate on this. 2. Rates/taxes would be set to provide a minimum of funding, but it would permit the application of bond proceeds to ANY cIP item so long as the threshold was met. This flexibility would be useful to ensure bond proceeds were spent within the required 2--3 year timeframes to avoid IRS arbitrage rebate requirements, and other factors. 20.Delete de minimus O&M from Section VIIA-1 Response: No use of bond proceeds for known O&M expenses in advance is intended. That said, we believe maintaining this references is customary and important. There are times when an agency may pay for an item that appears to be a capital expenditure appropriately paid for with bond proceeds, but which is later found to be properly classified as O&M. An example could be a cancelled software development project. Another example would be an item that is determined through the audit process to have been improperly classified as capital. The IRS regulations for use of tax exempt bond proceeds provide for a "de minimis" exception of up to 5%, and this language is intended to align with that. 21 -Financing Criteria —add rate impacts to the list of things to the Board to be consistent with earlier comments Section VIII Response: We can add this (see additional text in red below), and in all likelihood would present such an updated rate plan even without the requirement in the policy. We didn't specify itin the policy as the view was that we would be providing financial plans and rate impacts regularly, and certainly when rates were set, as required in Section VII: 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 consistent with the rate and financial planning parameters s ecified in the District's long-term financial Mans. The Board shall be presented with a long-term financial Ian in each instance Sewer Service Charge rates are to be adjusted. At the time of Board approval of the bond issuance, generally we would expect the overall bond parameters would be consistent with the bond issuance contemplated in the financial plan. At the time of approval exact "as issued" interest rates would not be available so any additional rate impact analysis would still be "estimated" and not final. However, itis true that market interest rates at the time might be different from when rates where last set and the financial plan was provided to the Board, so providing a rate forecast at the time of issuance approval could still represent an "update". The same could be true with respect to other bond terms such as overall amount and amortization schedule. With respect to amortization schedule that can even change to a limited degree after approval and during issuance if the underwriter is able to sell more bonds for a particular duration because interest rates are particularly attractive. 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. An u dated financial plan with rate impacts shall be presented based on available information as to the proposed issuance. 22.Tvpes of Debt add WIFIA funding to this —does P3 need to be added also? JPAs ? Response: We can add any specific types, but note that there is a catch-all that could allow for various types of debt not listed: "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." Debt issued by a JPA and assessable to Central San's customers may be a possibility, but could also be covered by the catch-all. if we wanted to spell out those two additions, language could be as follows. • State Revolving Fund Loans and Federally backed debt such as `Water Infrastructure Finance and Innovation Act WIFIA loans" Debt issued by a JPA with repayment required by Central San customers on the Central San bills or tax assessments to those customers. 23.Section Xl add "and approved" Response: The addition would appear as: 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 and approved. 24 -Section XIl add "as approved by the Board" at the end of the paragraph. Response: The report referred to below is indicating that we would bring potential opportunities for consideration. The report would discuss a potential transaction, not one that has been approved yet by the Board, so the "as approved by the Board" language does not appear to fit there. Any actually refunding transaction would need to be approved by the Board like any other bond offering in this policy. 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. 25. Section XIV E Other Jurisdictions —full cost recovery and mitigate risks — doesthis mean loss of bond capacity? Why would we do this? Concord CCWD -add reference to WIFIA here Response: We believe the language "The District will conduct such analyses as deemed necessary to assure adequate cost recovery for such funding and to mitigate risks to the District. " is reasonably comprehensive to require a full discussion of issues related to use of Central San and use of its debt capacity for the benefit of other entities. The "mitigate risks" term would include risks to allowing another entity to use a portion of our bond capacity that we may later need. We are not sure why a reference to WIFIA is needed here. 26.Section XVIA —what is MSRB —Municipal Securities Rulemaking Board? Response: The Municipal Securities Rulemaking Board (MSRB) writes investor protection rules and other rules regulating broker-dealers and banks in the United States municipal securities market, including tax-exempt and taxable municipal bonds, municipal notes, and other securities issued by states, cities, and counties or their agencies to help finance public projects or for other public policy purposes. The MSRB is composed of members from regulated broker-dealers and banks as well as from the public. Beginning on October 1, 2010, the MSRB will be recomposed to consist of a majority of independent public members and to include representatives of municipal advisors. 27.Section XV11-- last sentence change to bond --proposal — timing_ issuehere Response: Not sure why necessary, but can change "bond issue" to "bond proposal" if preferred. 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. 28.Section XVIII — remove Administration committee from this section -gust briny it to the full board or the finance committee Response: This is a call of the Board; current practice is all items routed through a Committee, this language reflects that practice. But "after review by the Administration Committee" can be removed if desired. 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.