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R2000-060 05-08-00RESOLUTION NO. R2000-60 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS, APPROVING A DEBT POLICY DESIGNED TO UTILIZE DEBT FINANCING TO PROVIDE NEEDED CAPITAL EQUIPMENT AND INFRASTRUCTURE IMPROVEMENTS WHILE MINIMIZING THE IMPACT OF DEBT PAYMENTS ON CURRENT REVENUES. BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS: Section1. ThattheCityCouncilherebyapprovesadebtpolicydesignedto utilize debt financing to provide needed capital equipment and infrastructure improvements while minimizing the impact of debt payments on current revenues. Section 2. That certain debt policy of the City of Pearland, a copy of which is attached hereto as Exhibit "A" and made a part hereof for all purposes, is hereby approved. PASSED, APPROVEDandADOPTEDthisthe 8th dayof IViay A.D., 2000. TOM REID MAYOR ATTEST: "~(Dp N G L/~F~G / ,// APPROVED AS TO FORM: DARRIN M. COKER CITY ATTORNEY City of Pearland, Texas Debt Policies To utilize debt financing which will provide needed capital equipment and infrastructure improvements while minimizing the impact of debt payments on current revenues. A. Use of Debt Financing Debt financing, to include general obligation bonds, revenue bonds, certificates of obligation, certificates of participation, commercial paper, lease/purchase agreements, and other obligations permitted to be issued or incurred under Texas law, shall only be used to purchase capital assets that cannot be acquired from either current revenues or fund balance/retained earnings and to fund infrastructure improvements and additions. The useful life of the asset or project shall exceed the payout schedule of any debt the City assumes. B. Assumption of Additional Debt The City shall not assume more tax-supported general-purpose debt than it retires each year without conducting an objective analysis as to the community's ability to assume and support additional debt service payments. When appropriate, self-supporting revenue bonds shall be issued before general obligation bonds. C. Affordability Targets 1. General Obligation Bonds and Certificates of Obligation The City shall use an objective analytical approach to determine whether it can afford to assume new general-purpose debt beyond what it retires each year. This process shall compare generally accepted standards of affordability to the current values for the City. These standards shall include debt per capita, debt as a percent of taxable value, debt service payments as. a percent of current revenues and current expenditures, and the level of overlapping net debt of all local taxing jurisdictions. The process shall also examine the direct costs and benefits of the proposed expenditures or capital improvements. The decision on whether or not to assume new debt shall be based on these costs and benefits, the current conditions of the municipal bond market, and the City's ability to "afford" new debt as determined by the aforementioned standards. The City shall strive to achieve and/or maintain its combined debt at a low to moderate classification of each of the objective standards mentioned above. 2. Revenue Bonds For the City to issue new revenue bonds, available revenues (total revenues less operational expenses excluding non-cash items), are required to be a minimum of 125% of the annual debt service. However, for financial planning purposes, the City will maintain available revenues at 150% of the annual debt · service. Annual adjustments to the City's rate structures will be made as necessary to maintain a 150% coverage factor. Debt Advisory Committee The City will appoint a committee each year consisting of four members. The members will be the Director of Finance, City Manager (or his representative), one member from City Council, and one member from the Pearland Economic Development Corporation. This committee will assess the City's ability to generate and repay bond debt and to analyze the standards of affordability discussed below to determine if it is in the City's best interest to incur additional bond debt. Debt Structure The City shall normally issue bonds with a weighted average life of 12 years or less for general obligation bonds and 18.0 years for revenue bonds. Weighting the bond payments in this manner will promote the payment of 60% of the debt within twelve years ofissning it. The actual term of bond debt shall be no longer than 20 years for general obligation bonds and 30 years for revenue bonds. The actual term of certificates of obligation shall be no longer than 20 years. The structure should approximate level principal on combined general obligation bonds and level debt service for revenue bonds. There shall be no debt structures that include increasing debt service levels in subsequent years, with the following exceptions; 1)the first and second year of a bond payout schedule may be less than subsequent year annual payments 2) annual payments may increase as long as the combined debt payments of the City rema'm level. There shall be no "balloon" bond repayment schedules that consist of low annual payments and one large payment of the balance due at the end of the term. Them shall always be at least interest paid in the first fiscal year after a bond sale. Normally, there shall be no capitalized interest included in the debt structure unless advised by the financial advisor that it is in the City's overall best financial interest, or there are no historical reserves upon which to draw. The life of certificates of obligation shall not exceed the useful life of the assets they are used to finance. Call Provisions Call provisions for bond issues shall be made as short as possible consistent with the lowest interest cost to the City. When possible, all bonds shall be Jo callable only at par. SaleProcess The City shall use a competitive bidd'mg process in the sale of debt unless the nature of the issue warrants a negotiated sale. The City shall award the bonds based on a tree interest cost (TIC), or a net interest cost (NIC) basis, as long as the financial advisor agrees that the basis used can satisfactorily determine the lowest and best bid. Rating Agencies Presentations Full disclosure of operations and open lines of communication shall be made to the rating agencies. City staff, with assistance of £mancial advisors, shall prepare the necessary materials and presentation to the rating agencies. Credit .rating will be sought from Moody's, Standard & Poor's, and, or, Fitch Investors Service as recommended by the City's financial advisor. Continuing Disclosure The City must meet the requirements for continuing disclosure of financial and pertinent credit information relevant to the City's outstanding securities and will abide by the provisions of Securities and Exchange Commission (SEC) Rule 15c2-12 concerning primary and secondary market disclosure. Debt Refunding City staff and the financial advisor shall monitor the municipal bond market for opportunities to obtain interest savings by refunding outstanding debt. As a general role, the present value savings of a particular refunding should exceed 3.5% of the refunded maturities. This refunding may be accomplished by advance refimding to the first call, or by defeasance to maturity. Restructuring of Debt The City may choose to refund outstanding indebtedness when existing bond covenants or other financial structures impinge on prudent and sound financial management. Savings requirements for a current or advance refunding undertaken to restructure debt may be waived by the City Council upon a finding that such a restructuring is in the City's overall best financial interests. Interest Earnings/Arbitrage Interest earnings received on the investment of bond proceeds shall be used to assist in paying the interest due on bond issues or to pay related project costs, to the extent permitted by law. The City shall maintain a system of record keeping and reporting to meet the arbitrage rebate compliance requirements of the federal tax code and remit any rebatable earnings to the federal government in a timely manner in order to preserve the tax-exempt status of the City's outstanding debt issues. Lease/Purchase Agreements Over the lifetime of a lease, the total cost to the City will generally be higher than purchasing the asset outright. As a result, the use of lease/purchase agreements and certificates of participation in the acquisition of vehicles, equipment and other capital assets shall generally be avoided, particularly if smaller quantifies of the capital asset(s) can be purchased on a "pay-as-you- go" basis. Accrued Compensated Absences Accrued compensated absence benefits are earned by City employees based on time of service, and the rights to such benefits are vested. The City records vested benefits as earned in accordance with generally accepted accounting principles. In the Governmental Funds, the total amount of vacation benefits is recorded as a liability in the Long-Term Obligations Account Group, and the liability related to the Enterprise Fund is accrued as an expense and liability in that fund. The amount of vested benefits is not included in measures used to evaluate the City's debt affordability. However, an evaluation should be made, at least annually, projecting the potential cost of paying current liabilities. This evaluation should include an analysis of the current ages of vested participants in comparison with the retirement age, and a review of employees who have previously indicated a decision to terminate employment. Conduit Financings The City may sponsor conduit financings for those activities (i.e., economic development, housing, health facilities, etc.) that have a general public purpose and are consistent with the City's overall service and policy objectives as determined by the City Council, the Pearland Economic Development Corporation, or other Council appointed body. All conduit financings must insulate the City completely from any credit risk or exposure and must be approved by the City Council.