DEBT MANAGEMENT PROGRAM UPDATE

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1 Photo by marnox1 DEBT MANAGEMENT PROGRAM UPDATE Precipitated by changes in Credit Ratings Methodology and the Franchise Fee Debt Issuance 1

2 DEBT MANAGEMENT PROGRAM ELEMENTS Process for issuance of debt and compliance of IRS and SEC requirements post-issuance Debt Planning Policy Debt Limit restrictions (Statutory and Self-imposed) General Obligation vs Revenue-Backed debt Fund Balance Policy Credit Rating Strategy Rating Agencies expecting more official policies Intent to maintain high ratings (AAA S&P & Aa1 Moody s) 2

3 CREDIT RATING AGENCY CHANGES Moody s and Standard and Poor s have changed their methodologies for how they rate cities Bankruptcies and pension obligations are the catalyst First time we are seeing detail on % share of weighting and measurements associated with excellent credit Decreased focus on economic measurements (valuation) Increased focus on amount of debt issued and other obligations such as pensions and post-employment benefits Forward-looking elements will be weighted higher than before Both have caveats to allow for adjustments 3

4 WHAT DOES THIS MEAN FOR US? Will soon know relative strength of current ratings Rewarded by having Official Council Policies in place Proactively implement opportunities to improve our credit metrics where most impactful Improve Fund Balances Promote tax base growth New development to improve our property valuations Seek out alternative revenues to diversify tax base Don t lose sight in goal to lower borrowing cost! 4

5 CURRENT DEBT LIMIT AND POLICY Iowa Constitutional Debt Limit (applies only to G.O.) 5% of Total Actual Valuation Current FY Valuation $10.9 billion Current Constitutional Debt Limit $545 million City has limited CIP spending in recent years Current G.O. Debt $412 million (75% of Limit) Opportunity to use some of the capacity to benefit the Enterprise Funds City Policy is for G.O. Debt to Not Exceed 4% of Total Valuation (80% of statutory limit) City Policy allows G.O. issuance for Enterprise Funds to lower cost to utility tax payers 5

6 COUNCIL DIRECTED POLICIES Debt Limit Policy 1. Utilize no more than 80% of the legal debt capacity 2. Utilize bond proceeds to pay for planned obligations such as capital outlays 3. Maintain the debt service levy as low as the prevailing market rates will allow. 4. Structure each debt issuance with the shortest reasonable maturities 5. Structure each debt issuance with the earliest market-viable and cost effective call date. 6. Issuance of General Obligation (G.O.) debt in place of Revenue debt shall not take place if it puts at risk the City s strong G.O. credit ratings. 7. Prior to issuance of debt associated with enterprise funds, the Finance Director shall make a recommendation as to whether it is in the best interest of the City to issue the debt as Revenue Bonds or as G.O. Bonds. 6

7 COUNCIL DIRECTED POLICIES Fund Balance Policy 1. The City s General Fund unassigned fund balance shall be maintained at no less than 10% of annual expenditures on every June 30th. 2. The City shall maintain sufficient General Fund cash liquidity throughout the fiscal year to pay current expenses. 3. Working Capital Balances for Enterprise Funds shall be maintained at not less than 15% of annual expenditures on every June 30th. 7

8 IMPACT OF FRANCHISE FEE BORROWING $41 million in G.O. Bonds 8-yr amortization schedule Structured to have first 6 years mimic 20-yr level payment 2.5% increase to Franchise Fee revenue would allow for accelerated payments (last two years of debt paid early) Depending on unclaimed amount and additional revenue, there may be unpaid portion to refinance after 7 years. 8

9 FUTURE DEBT NEEDS Future Debt Paid by Taxes and TIF is projected at $30 million annually Close to $25 million in borrowing needs for Sanitary Sewer Enterprise Will issue around $6 million as Revenue Debt at same time as Sewer Refunding for savings Remaining $18 million or so could be GO Debt $33 million in borrowing needs for Stormwater Enterprise (portion in 2014, remaining in 2016) Parking Enterprise may have capital borrowing need with aging garages 9

10 SUMMARY Credit Rating Agencies are changing their rating methodology The Franchise Fee debt would be categorized as non-capital and extra-ordinary and therefore the 80% self-imposed cap would be exceeded for five years Future capital debt associated with the CIP and Enterprise Funds would be structured to stay under the 80% rule Debt Paid by Taxes will be structured to maintain debt service tax rate at around $4.15 per $1,000 in valuation Excess capacity available for emergencies exceeds $70 million Policy approval will be on November 4 th Council meeting 10