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HomeMy WebLinkAbout03. Adopt revisions to BP 029 - Debt Management and Continuing Disclosure Page 1 of 13 Item 3. CENTRAL SAN BOARD OF DIRECTORS POSITION PAPER MEETING DATE: APRIL 16, 2020 SUBJECT: ADOPT PROPOSED REVISION TO BOARD POLICY NO. BP 029 -DEBT MANAGEMENTAND CONTINUING DISCLOSURE, EFFECTIVE IMMEDIATELY SUBMITTED BY: INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION-FINANCE REVIEWED BY: PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION ANN SASAKI, DEPUTY GENERAL MANAGER Roger S. Bailey General Manager ISSUE The District's Debt Management and Continuing Disclosure Policy(BP 029) is reviewed everytwo years. Staff has conducted a review of BP 029 and recommends one minor revision to Section X, "Types of Debt." BACKGROUND On September 7, 2017, following extensive review and analysis by the Administration Committee and staff, the District Board voted unanimously (4-0 by Board Members present at the meeting)to adopt its first formal Debt Management and Continuing Disclosure Policy (BP 029). Section XVI I I of BP 029 states the policy shall be reviewed on a biennial basis. The policy further states any changes must be approved by the Board, as well as the individual(s) charged with maintaining internal controls. In light of the biennial policy review requirement, staff considered several factors and performed the following: 1. Obtained and reviewed several current debt policies from other California municipalities; 2. Reviewed the latest California Debt Financing Guide published by the California Debt and April 16, 2020 Regular Board Meeting Agenda Packet- Page 43 of 208 Page 2 of 13 1 nvestment Advisory Commission in J my 2019; 3. Consulted the District's Other Post Employment Benefit and Pension Prefunding Trust financial advisor with the firm Public Financial Management (PFM); 4. Reviewed the latest best practice materials pertaining to debt management published by the GFOA, and; 5. Conducted an internal review of the current policy document for any changes necessitated by revisions to other existing District policies, goals and objectives since the original adoption of the policy. Following this review, one area was identified warranting a minor revision to BP 029 pertaining to derivative instruments. A derivative instrument is a financial instrument which "derives" its own value from the value of another instrument, usually an underlying asset such as a stock, bond or an underlying reference such as an interest rate index. Most commonly, derivative instrument investments for governmental agencies are in the form of an interest rate swap agreement. Per a review of the GFOA's recommended best practice on debt management policy it was identified the GFOA recommends a local government's debt policy"clearly state whether or not the entity can or should use derivatives." As currently written, although BP 029 references derivatives in section VI I I "Financing Criteria", derivatives are not specifically listed as an allowable debt type in Section X "Types of Debt." Staff recommends the District's debt policy be updated to reflect the GFOA's best practice on derivative instruments, as the GFOA is a nationally recognized leader in issuing guidance, interpretations, and best practices on public accounting and finance matters. Staff recommends BP 029 be revised to include the following language at the end of section X: "The use of certain derivative products to hedge variable rate debt, such as interest rates swaps, may be considered to the extent the District has such debt outstanding or under consideration. The District shall exercise extreme caution in the use of derivative instruments for hedging purposes, and may consider their utilization only when sufficient understanding of the products and sufficient expertise for their appropriate use has been developed. A comprehensive derivative policy shall be adopted by the District prior to any utilization of such instruments." This new revision to BP 029 would accomplish three objectives. First, it would not preclude the District from taking advantage of a derivative instrument investment in the future should one arise. Second, the revision acknowledges the complexity and risk associated with derivative instruments stipulating a separate policy be adopted by the District prior to the execution of a derivative investment agreement. Lastly, the provision will bring the District's policy in line with GFOA recommended best practices. Staff has no current plans to utilize derivatives with respect to the Debt Program. ALTERNATIVES/CONSIDERATIONS Some alternative actions deviating from staff's recommendation may include the following: 1. The Board may choose not to make the recommended revision to BP 029. This would have the adverse impact of making the policy inconsistent with best practices recommended by the GFOA. 2. The Board may direct staff to revise BP 029 to explicitly disallow derivative instruments as an allowable debt type. Like the action recommended by staff, this alternative action would still cause the policy to be in compliance with best practices issued by the GFOA where derivatives are mentioned as either permissible or not. April 16, 2020 Regular Board Meeting Agenda Packet- Page 44 of 208 Page 3 of 13 FINANCIAL IMPACTS The adoption of the proposed revisions to BP 029 do not have an immediate financial impact. Rather the content of the policy would govern any subsequent debt issuance or debt-related agreement. COMMITTEE RECOMMENDATION At its October 15, 2019 meeting, the Administration Committee recommended approval of the proposed revision to BP 029. RECOMMENDED BOARD ACTION Adopt revision to Section X of the Board Policy No. B P 029 - Debt Management and Continuing Disclosure to account for derivative instruments. Strategic Plan Tie-In GOAL THREE: Be a Fiscally Sound and Effective Water Sector Utility Strategy 1 - Conduct long-range financial planning, Strategy 2- Manage costs ATTACHMENTS: 1. BP 029 - Debt Management and Continuing Disclosure (with Proposed Revision) April 16, 2020 Regular Board Meeting Agenda Packet- Page 45 of 208 Page 4 of 13 Central Contra Costa Number: BP 029 Sanitary District Related Admin. Procedure AP 029 Authority: Board of Directors Effective: September 7, 2017 A51k Revised: April 16, 2020 Reviewed: November 7, 2019 Initiating Dept./Div.: Administration/Finance BOARD POLICY DEBT MANAGEMENT AND CONTINUING DISCLOSURE I. PURPOSE The Government Finance Officers Association (GFOA) recommends' 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. This Debt Policy is applicable to both the District and the Central Contra Costa Sanitary District Facilities Financing Authority, both hereinafter referred to as "the District". 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. 0 1 In their publication "Best Practice Debt Management Policy" 2 https://leg info.legislature.ca.gov/faces/bilINavClient.xhtmI?bill_id=201520160SB1029 April 16, 2020 Regular Board Meeting Agenda Packet- Page 46 of 208 Page 5 of 13 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 2 of 10 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 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. April 16, 2020 Regular Board Meeting Agenda Packet- Page 47 of 208 Page 6 of 13 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 3 of 10 IV. ROLES AND RESPONSIBILITIES • General Manager and/or Deputy General Manager— Provides oversight of debt program and recommendations on debt to the Board. • Executive Director of the Central Contra Costa Sanitary District Facilities Financing Authority— 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 authorizes 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 (including intergenerational equity), general ratemaking principles, economic efficiency and compliance with long-term financial planning parameters favor financing over cash funding. April 16, 2020 Regular Board Meeting Agenda Packet- Page 48 of 208 Page 7 of 13 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 4 of 10 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 (as articulated in, inter alia, the District's mission, vision, and goals) 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 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 (specifically, pipeline replacement) 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.Ox 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 April 16, 2020 Regular Board Meeting Agenda Packet- Page 49 of 208 Page 8 of 13 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 5 of 10 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). 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); • 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; • presents the impact of the bonds on the District's forecasted rates based on the anticipated maturity schedule. For refunding transactions, a comprehensive report on the debt to be redeemed, the replacement debt, and the anticipated 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 staff 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 April 16, 2020 Regular Board Meeting Agenda Packet- Page 50 of 208 Page 9 of 13 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 6 of 10 • 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 • 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. The use of certain derivative products to hedge variable rate debt, such as interest rates swaps, may be considered to the extent the District has such debt outstanding or under consideration. The District shall exercise extreme caution in the use of derivative instruments for hedging purposes, and may consider their utilization only when sufficient understanding of the products and sufficient expertise for their appropriate use has been developed. A comprehensive derivative policy shall be adopted by the District prior to any utilization of such instruments. 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 and authorized. 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, and any refunding transaction executed will be followed with a report on actual savings. 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 April 16, 2020 Regular Board Meeting Agenda Packet- Page 51 of 208 Page 10 of 13 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 7 of 10 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 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 (including consideration of the use of limited bonding capacity). 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 April 16, 2020 Regular Board Meeting Agenda Packet- Page 52 of 208 Page 11 of 13 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 8 of 10 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. April 16, 2020 Regular Board Meeting Agenda Packet- Page 53 of 208 Page 12 of 13 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 9 of 10 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. 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. April 16, 2020 Regular Board Meeting Agenda Packet- Page 54 of 208 Page 13 of 13 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 10 of 10 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. 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 proposal is agendized for Board consideration. XVIII. POLICY CONSIDERATION This policy shall be reviewed on a biennial basis. Any changes must be approved by the Board, as well as the individual(s) charged with maintaining internal controls. [Original retained by the Secretary of the District] April 16, 2020 Regular Board Meeting Agenda Packet- Page 55 of 208