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HomeMy WebLinkAboutG58-19 Ordinance No. G58-19 AN ORDINANCE ESTABLISHING AN AMENDED POLICY FOR INCURRING DEBT FOR THE CITY OF ELGIN WHEREAS, the City of Elgin is a home rule unit pursuant to Article VII Section 6 of the Constitution of the State of Illinois; and WHEREAS, as a home rule unit, the City of Elgin may exercise any power and perform any function pertaining to its government affairs; and WHEREAS, a policy for incurring debt for the City of Elgin pertains to the government and affairs of the City of Elgin; and WHEREAS, the City of Elgin's current policy for incurring debt was established pursuant to Resolution 02-161 approved by the city council of the City of Elgin on April 24, 2002; and WHEREAS, the city council of the City of Elgin has determined that it is necessary and desirable to update the city's policy for incurring debt. NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF ELGIN, ILLINOIS, that Resolution 02-161 adopted by the city council of the City of Elgin on April 24, 2002, establishing a policy of incurring debt, be and hereby is amended in its entirety and an amended policy for incurring debt for the City of Elgin be and is hereby established to read as follows: Section 1. Purpose. The City's Debt Management Policy provides comprehensive guidelines for the issuance and management of debt, as well as the reporting and continuing disclosure requirements related to the City of Elgin's debt financing. It is the objective of the policy for the City to obtain financing only when necessary,establish conditions to obtain financing at the lowest cost, retain the highest practical credit rating, and to maintain full and complete financial disclosure and reporting. In addition to adherence to this policy, the City's financing will also be in compliance with applicable Federal law, U.S. Securities and Exchange Commission(SEC)regulations, and Illinois Compiled Statutes(ILCS) as supplemented by the City's home rule powers. This policy provides a functional tool for debt management,as well as, enhancing the City's reputation for managing its debt in a conservative and prudent manner. Adherence to the policy is essential to ensure the City maintains a sound financial position and protects the credit quality of its obligations. Section 2. Scope. This policy will be all-inclusive of debt issued by the City including, but not limited to, general obligation bonds, revenue bonds, installment contracts, leases, special service area bonds, special assessment bonds, working cash bonds, tax anticipation warrants, tax anticipation notes, revenue anticipation notes, and tax increment bonds. In addition, refunding bonds may be issued and can save municipalities interest costs. This policy contains certain elements on procedures and practices to achieve the objectives of the policy and to ensure professional standards are defined and met in the policy's implementation. Section 3. Legal and Regulatory Requirements. A. Federal: The Internal Revenue Code (IRC) of 1986 as amended and its arbitrage and rebate regulations govern the tax-exempt status of municipal bonds. Upon issuance of any municipal bonds, the City will covenant to follow certain federal rules and regulations in order to maintain the tax-exempt status of the bonds. To receive these benefits, the City must ensure that the requirements under the IRC are met, generally for as long as the bonds remain outstanding. These requirements include, but are not limited to: 1. File Internal Revenue Service (IRS) Form 8038-G, Information Return for Tax-Exempt Governmental Obligations ($100,000 or greater) or Form 8038-GC, Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales (less than $100,000); 2. Bond proceeds must be used to finance activities of, or facilities owned, operated or used by, the issuer for its purpose or another state or local government for its own purposes; 3. Allocate to expenditures not later than 18 months after the later of the date each expenditure is paid or the date the project, if any, that is financed by the issue is placed in service; and 4. Rebate to the IRS for investments earning a yield materially higher than the yield of the bond issue (arbitrage), unless an appropriate exception to the rebate requirement is met. B. U.S. Securities and Exchange Commission (SEC): Congress passed the Securities Act of 1933 with the objective of providing investors full disclosure of material facts about securities offered and sold. In 1934, Congress passed the Securities Exchange Act of 1934 that created the Securities and Exchange Commission(SEC) and empowered the SEC with broad authority over most aspects of the securities industry. Although municipal securities are exempt from many of the requirements, the City is still subject to: 1. Rule 10b-5 of the Securities Exchange Act of 1934: Sets out the general statement of federal intent to protect investors against misleading statements or omissions of important facts in official statements or other documents pertaining to the bond issuance; and 2. Rule 15c2-12 of the Securities Exchange Act of 1934 ("Rule 15c2-12"): Governs the preparation and distribution of official statements for municipal securities and meeting continuing disclosure requirements. 2 C. State: By virtue of its population and pursuant to the provisions of Section 6 of Article VII of the Constitution of the State of Illinois (the "Constitution"), the City is a home rule unit and may exercise any power or perform any function pertaining to its government and affairs including, but not limited to, the power to tax and to incur debt. Pursuant to the provisions of said Section 6, the City has the power to incur debt payable from ad valorem property tax receipts or from any other lawful source and maturing within 40 years from the time it is incurred without prior referendum approval. On the 23rd day of April, 1975, the City Council of the City adopted an ordinance determining the procedures to be followed in the borrowing of money for public purposes of the City and in evidence of such borrowing the issuing of full faith and credit bonds of the City without referendum approval, such ordinance being entitled: Ordinance No. G22-75 AN ORDINANCE establishing procedures to be followed by the City of Elgin, Kane and Cook Counties, Illinois, in issuing non-referendum general obligation bonds which ordinance was amended by Ordinance No. G14-80 adopted on January 28, 1980, by Ordinance No. 64-80 adopted on October 8, 1980, by Ordinance No. G39-82 adopted on July 28, 1982, and by Ordinance No. G31-92 adopted on June 17, 1992 (Ordinance No. G22-75 as so amended, the "Enabling Ordinance"). Any borrowing of money undertaken by the City shall be necessary for the welfare of the government and affairs of the City, for a proper public purpose or purposes and in the public interest. In addition, any borrowing shall be authorized pursuant to the applicable provisions of the Illinois Municipal Code, as amended, as further supplemented and, where necessary, superseded, by the powers of the City as a home rule unit under the provisions of Section 6 of Article VII of the Constitution and the Enabling Ordinance adopted pursuant to such home rule powers, and as further supplemented by the Local Government Debt Reform Act, as amended. Section 4. Guidelines for Use. Debt is a financing tool which should be thoughtfully used and will be considered when some or all of the following conditions exist: A. Adequate resources —future revenues sufficient to cover debt service; B. Characteristics — projects represent a one-time investment (e.g. building) rather than ongoing operations (e.g. maintenance of building); C. Favorable market conditions —interest rates and construction costs are reasonable; 3 D. Intergenerational equity — help distribute costs and benefits of capital assets over their useful lives; E. Length of issuance—term of financing will not exceed expected life of capital asset; F. Mandates—improvements required by federal or state authorities; G. Options — other financing has been explored and is not viable for the timely acquisition or completion of a capital asset; and H. Within financial limits—consistent with federal, state, and local regulations. Section 5. Types of Debt. The types of debt permitted by the City to meet its financing objectives includes, but is not limited to: A. General obligation bonds — financing secured by the credit and taxing power of the City; with a defined source of revenue often times being used to abate all or a portion of the property taxes supporting the general obligation bonds. B. Revenue bonds — financing secured only by a defined source of revenue (not property tax); C. Capital leases — financing of a vehicle or equipment over time with a provision to transfer ownership at a nominal amount at the termination of the lease; D. Loans — federal and state low interest financing secured by a defined source of revenue (not property tax) typically used for water and wastewater projects; and E. Other— special circumstances may exist when other forms of debt are appropriate, necessary, and advantageous to the City. State and local governments receive tax benefits under the IRC that lower borrowing costs on their bonds. Bondholders are willing to accept a lower interest rate because interest paid to bondholders on these obligations is not includable in their gross income for federal income tax purposes. The City will generally issue tax-exempt bonds. However, the City may occasionally issue taxable bonds which have a higher interest rate. In addition,the City shall be mindful of the potential benefits of bank qualified bonds. This designation is given to a bond issuance if the City reasonably expects to issue in the calendar year of such offering no more than $10 million of bonds. When purchased by a commercial bank for its portfolio, the bank may deduct a portion of the interest cost of carry for the position. Therefore, the City will strive to limit its annual issuance of bonds to $10 million or less, as amended from time to time, when the estimated benefits are greater than the benefits of exceeding the bank qualification limit. The City shall not be permitted to use derivative instruments including interest rate swaps, forward swaps, swap options, basis swaps, caps, floors, collars, rate locks, cancellation options or any similar hedge, derivative, or synthetic instrument. Section 6. Standards of Care. 4 A. Prudence: Debt shall be issued with judgment and care under the circumstances then prevailing, which persons of prudence, discretion, and intelligence exercise in the management of their own affairs. The standard of prudence to be used by debt management officials shall be the "prudent person" standard and shall be applied in the context of managing an overall debt portfolio. City officers and employees acting in accordance with this policy, and any other written procedures, and exercising due diligence shall be relieved of personal liability, provided that officers and employees report deviations from expectations in a timely fashion and take appropriate action to control adverse developments. B. Maintaining the Public Trust: All participants in the debt management process shall seek to act responsibly as custodians of the public trust and shall avoid any transaction that might impair public confidence in the City. C. Ethics and Conflicts of Interest: Officers and employees of the City who are involved in the debt management process shall refrain from personal business activity that could conflict with proper execution and management of the debt program, or which could impair their ability to make impartial decisions. Employees and officials shall disclose to the Board any material interests in financial institutions with which they conduct business. Section 7. Structuring Practices. The duration of a bond issue shall not exceed the economic or useful life of the improvement or asset that the issue is financing. The City shall design the financing schedule and repayment of bonds to take best advantage of market conditions and, as practical, to recapture or maximize its credit capacity for future use, and moderate the impact to the taxpayer. A. Maturity guidelines 1. Governmental activities —maturity limited to twenty years 2. Business-type activities —maturity limited to forty years B. Debt service schedule 1. A level or declining debt service schedule will be employed unless operational matters dictate otherwise, or except to achieve overall level debt service with existing bonds. 2. The City will use the debt service schedule which will best fit with the overall debt structure or revenue source of the City's bonds at the time the new bonds are issued. 3. Consideration will be given to coordinating the length of the issue with the lives of assets, whenever practicable. C. Use of redemption features A call option, or optional redemption provision, gives the City the right to prepay or retire bonds prior to their stated maturity. These prepayment provisions are structured into the original bond issuance to provide the City an opportunity to manage its debt portfolio. The exercise of these prepayment provisions is usually 5 through the issuance of refunding bonds, although cash on hand is also a source. Bonds can be refunded to achieve one or more of the following objectives: 1. Reduce future interest costs— shall be at least 2% present value savings for current refunding; 2. Restructure future debt service in response to evolving conditions regarding anticipated revenue sources; 3. Alter bond characteristics, such as call provisions or payment dates, on existing bonds; and 4. Change the legal requirements, termed covenants, of the original issue to reflect more closely the changing conditions of the City or the type of bond. Section 8. Debt Issuance Process A. Approval of issuance — The City Council shall adopt an ordinance authorizing the issuance of bonds. B. Method of sale The City will select the method of sale which best fits the type of bonds being sold, market conditions, and the desire to structure bond maturities to enhance the overall performance of the debt portfolio. The general methods for the sale of municipal bonds include: 1. Competitive sale — Bonds are marketed to a wide audience of investment banking firms (underwriting). Their bids are submitted electronically at a specific time and the bonds will be sold to the bidder proposing the lowest true interest cost (TIC). 2. Negotiated sale—The City will negotiate all rates and terms of the sale with an underwriter who is selected in advance of the bond sale. 3. Private placement — The City sells its bonds to a limited number of sophisticated investors, but not the general public. C. Selection and use of professional service providers The City will procure professional services as needed to successfully authorize, structure, and market bonds due to the complex nature of the transactions. These professional service providers may include arbitrage consultants, bond counsel, escrow agents, financial advisors, paying agents, underwriters, and verification agents. 1. Financial Advisor The Financial Advisor will recommend the financing structure; prepare and review preliminary and official statements; review ordinances concerning the authorization and award of financing; assist the City in developing and presenting information to rating agencies; provide the electronic bidding platform; and provide assistance with the closing and delivery of securities. To ensure independence,the Financial Advisor will not bid on or underwrite any City bond issues on which it is advising. 6 2. Bond Counsel Involvement Bond Counsel will prepare and review the ordinances authorizing and awarding the bonds; provide a written opinion regarding the validity and binding effect of the bonds; determine the federal tax status of any bonds; and prepare bound official transcripts related to the authorization, offering, sale and delivery of the bond issue. The City will also seek assistance from Bond Counsel on other types of debt financing, as well as on any questions involving federal tax or arbitrage law. To ensure independence, Bond Counsel will not simultaneously represent any other party involved in the financing unless a conflict waiver is obtained from the City. D. Credit ratings The City may seek a rating on all new bond issues being sold in the public market. Municipal bond ratings determine the amount of investment risk and interest cost on bonds used for financing City projects. These ratings assess several factors including, but not limited to, current state of the economy, debt structure, financial condition, and management practices. The City will use both formal and informal methods to disseminate information and communicate with the rating agencies as follows: 1. Full disclosure of the financial condition of the City on an annual basis; 2. Formal presentation on a regular basis covering economic, financial, operational, and other issues that impact the City's credit; 3. Disclosure of financial events that may impact the City's credit; 4. Dissemination of the Comprehensive Annual Financial Report(CAFR);and 5. Distribution of any documents pertaining to the sale of bonds. Section 9. Debt Management Process A. Investment of proceeds- The City acknowledges its ongoing fiduciary responsibilities to actively manage the proceeds of bonds issued for public purposes in a manner that is consistent with the City's investment policy, Illinois statutes that govern the investment of public funds, and consistent with the covenants of related bond documents. The investment of bond proceeds requires significant diligence in meeting the objectives of regulatory compliance, management of the covenants described in financing documents, and the needs of the projects being funded. B. Compliance practices 1. Arbitrage — It is the City's policy to minimize the cost of arbitrage rebate and yield restriction while strictly complying with the federal arbitrage and rebate regulations. The City will take the following steps to minimize any rebate liability through proactive management in the structuring and oversight of its bonds. a. Examine whether the City met the arbitrage rebate exception rules; b. Use bond proceeds only for the purpose and authority for which they were issued; 7 c. Monitor the expenditure of bond proceeds and exercise best efforts to spend proceeds in such a manner that the City will meet one of the spend-down exemptions from arbitrage rebate; d. Maintain detailed investment records and monitor the investment of bond proceeds with awareness of rules pertaining to yield restrictions; and e. Perform arbitrage rebate calculations as determined by the IRS. 2. Continuing disclosure — The City has covenanted and agreed in the bond ordinances authorizing its various bond issues, in accordance with Rule 15c2-12,to provide certain financial information and operating data relating to the City within 210 days after the close of the City's fiscal year; and, in a timely manner, to provide notices of the occurrence of certain reportable events.The following will be filed by the City with the Municipal Securities Rulemaking Board (MSRB) for disclosures on its Electronic Municipal Market Access(EMMA) system: a. Audited financial statements; b. Financial and operating data included in the original official statement; c. Required event notices; and d. Voluntary event notices. 3. Legal covenants—The City shall comply with all covenants and conditions contained in any legal document entered into at the time of the bond offering. Section 10. That this ordinance shall be in full force and effect upon its passage in the manner provided by law. / . David J. K.' n . ayor Presented: November 6, 2019 Passed: November 6, 2019 1"QP` Omnibus Vote: Yeas: 9 Nays: 0 ,•;C: . Recorded: November 6, 2019 ;7 '1- rte ��t Published: November 7, 2019 - l 41_ p Kimberly Dewis, Clcrl: 8