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HomeMy WebLinkAbout7. MANAGERS REPORT 06/16/2009 Mount Prospect Village of Mount Prospect Mount Prospect, Illinois ~ INTEROFFICE MEMORANDUM FROM: MICHAEL E. JANONIS, VILLAGE MANAGER DIRECTOR OF FINANCE ~'\G' l)\) ~\ \lo\ 0 TO: DATE: JUNE 11, 2009 SUBJECT: DEBT SERVICE POLICY UPDATE A proposed Debt Service Policy was presented to the Village Board and Finance Commission at the Long-Range Financial Planning Workshop held on April 28. Discussion focused on the purpose of the policy and the general debt management guidelines contained within. Also discussed were policy guidelines for assessing debt capacity and the ongoing administration of the Village's debt program. A copy of the original memo and a revised policy are included with this update. At the April 28 workshop, staff was directed to bring the policy before the Finance Commission for a second read for further comment and any final changes before bringing to the Village Board for approval. The Debt Service Policy was discussed at the May 28 Finance Commission meeting. Additional questions and comments were addressed by staff. There was one recommended change made by the Finance Commission which has been incorporated into the policy. A new section Jl....ti was added and reads: H. Current and Advance Refunding of Debt. 1. The Village will consider the refunding of current debt obligations (existing debt is redeemed and replaced by new debt) when conditions are economically favorable to do so. 2. The Village will consider the advance refunding of debt obligations (new debt is issued to replace or redeem old debt before the maturity or call date of the old debt) when conditions are economically favorable to do so. Under these circumstances, the proceeds of the new debt must be placed in escrow and used to pay interest on old, outstanding debt as it becomes due, and to pay the principal on the old debt either as it matures or at an earlier call date. As with other parts of the new debt policy, the addition of this section merely formalizes current practice. Refundings of debt have been done by the Village when the opportunity has presented itself. A current refunding was done in 1999 while an advance refunding was done in 2006. Debt Service Policy Update June 11, 2009 Page 2 of 2 This new debt service policy serves to further support our existing financial controls. It is recommended the Village Board approve the attached debt service policy that sets parameters for issuing and managing debt and provides guidance to the Village Board for future debt issues. ~t:/ t:-L DAVID O. ERB DIRECTOR OF FINANCE DOE/ 1:\Policies\Debt Service Policy - June 16 Update.doc Mount Prospect Village of Mount Prospect Mount Prospect, Illinois ~ INTEROFFICE MEMORANDUM TO: FROM: DATE: SUBJECT: MICHAEL E. JANONIS, VILLAGE MANAGER DIRECTOR OF FINANCE APRIL 24, 2009 PROPOSED DEBT SERVICE POLICY PURPOSE: To present for the Board's consideration a debt service policy that sets parameters for issuing and managing debt and provides guidance to the Village Board on future debt issues. BACKGROUND The Village Board utilizes various administrative policies to help guide decision making throughout Village operations. A debt management policy provides guidance and support for decisions in the types and structure of debt used, identifies policy goals and objectives and demonstrates a commitment to long-term financial planning. When used in conjunction with other financial tools such as the fund balance policy or investment policy, these policies provide a solid framework to make budgetary and programmatic decisions and ensure financial stability in the long-term. DISCUSSION: It was recommended coming out of our bond rating meetings with Standard and Poor's that the Village implement a debt service policy to help support our existing financial controls. In addition, the Government Finance Officers Association (GFOA) maintains as one of its financial recommended practices the establishment of a formal debt service policy. As stated in their Recommended Practice on Debt Management Policies "A debt management policy improves the quality of decisions, provides justification for the structure of debt issuance, identifies policy goals, and demonstrates a commitment to long-term financial planning, including a multi-year capital plan. Adherence to a debt management policy signals to rating agencies and the capital markets that a government is well managed and should meet its obligations in a timely manner." The Village has utilized debt only for capital improvements that cannot be financed from current revenue streams. The Village has not used long-term debt to finance operations. The purpose of this policy is to provide a functional tool for debt management and capital planning, as well as, enhance the Village's reputation for managing its finances in a conservative and responsible manner. Attached is a copy of the draft debt policy for your review. RECOMMENDATION: It is recommended the Village Board approve the attached debt service policy that sets parameters for issuing and managing debt and provides guidance to the Village Board for future debt issues. J-/t? vL- DAVID O. ERB DIRECTOR OF FINANCE DOE/ 1:\Policies\Debt Service Policy.doc (Revised June 2009) VILLAGE OF MOUNT PROSPECT, ILLINOIS DEBT SERVICE POLICY I. PURPOSE AND GENERAL POLICIES A. Purpose. This policy establishes guidelines for use of debt financing that will allow the Village to minimize financing costs and retain or improve its current bond rating from Standard & Poor's (or an equivalent rating from a similar firm.) B. Conditions under which the Village may consider use of debt financing. The Village may consider the use of debt financing when all of the following conditions apply: 1. for one-time capital improvement projects or other capital purchases 2. when the project's useful life, or the projected service life of the equipment, will exceed the term of financing 3. when the Village has identified revenues sufficient to service the debt, either from existing revenues or increased taxes or fees The Village will not use debt for any recurring purpose such as current operating and infrastructure maintenance expenditures, nor will the Village use short-term debt unless under extraordinary circumstances. C. The Village will use the following criteria to evaluate pay-as-you-go financing versus debt financing in funding capital improvements: 1. Factors that favor pay-as-you-go financing. a) current revenues and/or adequate fund balances are available to finance the project b) project phasing could allow the Village to finance the project over time without debt c) additional debt would adversely affect the Village's credit rating d) market conditions are unstable or the project presents marketing difficulties 2. Factors that favor debt financing. a) revenues available for debt service are sufficient and reliable b) issuance of debt will not jeopardize the Village's current credit rating c) market conditions present favorable interest rates and good demand for municipal financing d) a project is mandated by state or federal requirements and current revenues and fund balances are insufficient to pay project costs e) a project is immediately required to meet or relieve infrastructure needs, and current revenues and fund balances are not sufficient to finance the project f) the life of the project or asset financed is ten years or longer II. DEBT ISSUANCE GUIDELINES A. Considerations in issuing General Obligation (G.O.) or Revenue Bonds. When the Village has the option of using G.O. or revenue bonds, the Village will consider the benefits of reduced debt expense and flexibility achievable through G.O. debt versus reserving the Village's G.O. debt capacity by issuing revenue debt. The Village may use General Obligation bonds in lieu of revenue bonds if debt expense can be significantly reduced (as compared to financing with revenue debt) and if special or enterprise fund revenue is sufficient and reliable to fund debt service costs. In such cases, the Village Board will adopt ordinances abating the debt tax levies and direct staff to pay debt service costs with alternative revenues. B. Credit Enhancements. The Village will seek credit enhancements such as letters of credit or insurance when necessary to make the financing more cost-effective. C. Debt Structure Guidelines 1. In general, the Village will maintain a debt structure under which 50% of the outstanding principal will be repaid within ten years 2. The term of financing (final bond maturity) will not exceed the expected useful life of the project or equipment financed with the debt 3. If the Village plans to pay debt service expenses from a specific revenue source, the Village will use conservative assumptions in its revenue projections D. Professional Services. To provide assistance in debt issuance, the Village will select a financial advisor and/or investment banker and bond counsel on a competitive basis; these advisors will be retained for several years to provide continuity and allow them to develop an understanding of the Village's needs. E. Competitive versus negotiated debt issuance. The Village will generally conduct financing on a competitive basis; however, negotiated financing may be used where market volatility or the use of an unusual or complex financing or security structure causes a concern with regard to marketability. F. Inter-Fund Loans. The Village may use inter-fund loans (in lieu of borrowing from private parties) to minimize the expense and administrative effort associated with external borrowing. Inter-fund loans are typically made for relatively short periods of time (under five years) and relatively low amounts (under one million dollars). Inter-fund loans will be considered to finance high priority needs on a case-by-case basis, only when other planned expenditures in the fund making the loan would not be affected. Inter-fund loans are generally made by the Village's pooled cash account and shall be limited to 10% of the total cash balances in Village operating funds. 2 G. Maintenance of specific credit ratings 1. The Village will seek to maintain or improve its current bond rating and will specifically discuss with the Village Board any proposal which might cause that rating to be lowered. 2. An analysis will be prepared by Village staff for each proposed financing; such analysis will assess the impact of debt issuance on current and future operating and capital budgets and address the reliability of revenues to support debt service payments. H. Current and Advance Refundino of Debt. 1. The Villaoe will consider the refundino of current debt oblioations (existino debt is redeemed and replaced by a new debt) when conditions are economically favorable to do so. 2. The Villaoe will consider the advance refundino of debt obliaations (new debt is issued to replace or redeem old debt before the maturity or call date of the old debt) when conditions are economically favorable to do so. Under these circumstances. the proceeds of the new debt must be placed in escrow and used to pay interest on old. outstandino debt as it becomes due. and to pay the principal on the old debt either as it matures or at an earlier call date. III. DEBT CAPACITY GUIDELINES FOR GENERAL OBLIGATION DEBT A. Direct Debt. To maintain its sound fiscal condition and current debt rating, the Village will limit the amount of debt it will issue and its annual debt service expenses in accordance with the guidelines stated in Section B below. The guidelines are ranges for measures of debt capacity. Debt within the lower limits of the measures would be considered a low debt level given Mount Prospect's fiscal, demographic and economic characteristics, while debt in the higher limits of the measures would be considered a moderate debt level. Generally, the Village will maintain its debt below the 75% percentile of the ranges. However, the Village may issue debt at the higher levels of the ranges under certain circumstances such as the following: 1. The outstanding debt is general obligation debt, but the Village is not using property taxes to pay debt service costs 2. The Village's debt is at the lower end of the limits for two of the measures but above the 75% level for the third 3. The Village anticipates that while the amount of debt and/or debt service expenditures might be above the 75% level for a few years, debt will fall below that level after that 4. Current and anticipated overlapping debt levels are relatively low B. Guidelines for Direct Debt 1. Outstanding Debt as a Percent of the Market Value of Taxable Property · Guideline: 1 to 3.0% . 75% of Guideline: 2.5% 3 2. Debt Service Expenditures per Capita . Guideline: $500 to $1000 . 75% of Guideline: $875 3. Debt Service Expenditures as a Percent of General Fund Expenditures (including net transfers) and Debt Service Payments . Guideline: 5 to 10% . 75% of Guideline: 8.75% C. Overlapping Debt. The Village will monitor levels of overlapping debt and communicate debt plans with public entities that may issue overlapping debt. The Village will take into account overlapping debt in considering both the amount of debt that the Village will issue, and the timing of Village bond issues. IV. DEBT ADMINISTRATION A. Financial Disclosure. The Village will follow a policy of full disclosure on every financial report and bond prospectus (Official Statement), voluntarily following disclosure guidelines provided by the Government Finance Officers Association unless the cost of compliance with the higher standard is unreasonable. B. Monitoring Outstanding Debt. 1. The Village will monitor all forms of debt annually and include an analysis in the Village's annual budget; concerns and recommended remedies will be reported to the Village Board as necessary. 2. The Village will monitor bond covenants and federal regulations concerning debt, and adhere to those covenants and regulations at all times. 3. Investment of Bond Proceeds. The Village will invest bond proceeds in accordance with the Village's adopted investment policy and federal arbitrage regulations. C. Continuing Disclosure. The Village will adhere to all requirements related to primary and secondary market disclosure, including annual certifications as required. This would include arbitrage rebate monitoring, federal and state law compliance and market and investor relations. H:\ACCT\Debt Service\VOMP Debt Service Policy - April2009.doc 4