RES-11245 Update Debt Issuance, Management Policy & Continuing Disclosure Compliance ProceduresRESOLUTION NO. 11245
A RESOLUTION OF THE CITY COUNCIL TO THE
CITY OF ORANGE ADOPTING AN UPDATED
DEBT ISSUANCE AND MANAGEMENT POLICY
AND CONTINUING DISCLOSURE COMPLIANCE
PROCEDURES AND TAHING RELATED ACTIONS.
WHEREAS, the City of Orange and its related entities (such as the Successor Agency to
the Orange Redevelopment Agency, the Orange City Public Facilities Financing Authority, City-
formed communiTy facilities districts) (collectively, the"City") have issued or may issue bonds or
other financing obligations ("Local DebP')that aze subject to requirements for the filing of reports
to the Califomia Debt and Inveshnent Advisory Commission ("CDIAC") pursuant to California
Government Code Section 8855 ("Section 8855"); and
WFI REAS, under Secrion 8855, a municipal issuer of Local Debt must file a report(the
Report of Proposed Debt Issuance") at least 30 days before the sale of any Local Debt issue; and
WHEREAS, Section 8855, as amended in 2017, requires the Report of Proposed Debt
Issuance to include a certification that the municipal issuer has adopted a local debt policy and the
contemplated Local Debt issuance is consistent with such local debt policy; and
WHEREAS, Section 8855(i)(1) requires that the local debt policy must include the
following elements:
1) The purposes for which the debt proceeds may be used;
2) The types of debt that may be issued;
3) The relationship of the debt to, and integration with, the issuer's capital
improvement program or budget, if applicable;
4) Policy goals related to the issuer's planning goals and objectives; and
5) The internal control procedures that the issuer has implemented, or will
implement, to ensure that the proceeds of the proposed debt issuance will be directed to the
intended use; and
WHEREAS, in connection with Section 8855(i)(1), the City previously adopted a"Debt
Issuance and Management Policy(the"Policy")pursuant to Resolution No. 11072,adopted by the
City Council on April 10, 2018; and
WHEREAS,the City desires to update the Policy, in the form set forth in Exhibit A; and
WHEREAS, the Policy, as updated, will incorporate, as Appendix I thereto, compliance
procedures in connection with the City's undertaking of continuing disclosure obligations pursuant
to Rule 15c2-12 (the "Municipal Securities Disclosure Rule")promulgated by the U.S. Securities
and Exchange Commission under the Securities Exchange Act of 1934, including amendments to
the Municipal Securities Disclosure Rule which became effective on February 27, 2019.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Orange as
follows:
1.The above recitals aze true and correct and aze a substantive part of this Resolution.
2.The Policy, as updated, in the form set forth Eachibit A, is hereby approved and
adopted. The Policy, as so updated, shall be applicable to Local Debt issued by or on behalf of the
City (including its related entities such as, but not limited to,the Successor Agency to the Orange
Redevelopment Agency, the Orange City Public Facilities Financing Authority and City-formed
community facilities districts). The Policy, as so updated, shall supersede any prior debt policy
covering the same matters previously adopted by the CiTy.
3.The City Council hereby determines and finds that the Updated Policy complies
with the requirements of Section 8855(i)(1).
4.The Mayor, the Mayor Pro Tem, the City Manager, the Assistant City
Manager/Administrative Services D'uector, the Assistant Finance Director and other officers of
the City aze hereby authorized and d'uected,jointly and severally,to execute such instruments and
do any and all things wluch they may deem necessary or advisable to effectuate this Resolution
and any such actions previously taken by such officers and staff aze hereby ratified and confirmed.
ADOPTED this 9th day of June 2020.
i-
Maz . Murphy, Mayor, City f range
ATTEST:
Q vrt oa wn
Pamela Coleman, City Clerk, City of Orange
Resolu[ion No. 11245 2-
STATE OF CALIFORNIA )
COUNTY OF ORANGE )
CITY OF ORANGE
I, PAMELA COLEMAN, City Clerk of the City of Orange, Califomia, do hereby certify
that the foregoing Resolution was duly and regulazly adopted by the CiTy Council of the CiTy of
Orange at a regulaz meeting thereof held on the 9th day of June 2020, by the following vote:
AYES:COiJNCILMEMBERS: Alvazez, Murphy, Nichols, Monaco
NOES:COiJNCILMEMBERS: None
ABSENT: COiJNCILMEMBERS: None
ABSTAIN: COiJNCILMEMBERS: None
t,,D-.C.
Pamela Coleman, City Clerk, City of Orange
Resolution No. 11245 3-
EXHIBIT A
Updated Debt Issuance and Management Policy
see attached)
Resolution No. I 1245 4-
CITY OF ORANGE
DEBT ISSUANCE AND MANAGEMENT POLICY
updated per Resolution No. 11245, adopted on June 9, 2020)
A. PURPOSE
The purpose ofthis Debt Issuance and Management Policy(this"Policy")is to establish guidelines
and parameters for the effective governance, management and adminisuarion of debt and other
financing obligations issued by the City of Orange and its related entiries (such as the Successor
Agency to the Orange Redevelopment Agency, the Orange City Public Facilities Financing
Authority and City-formed community facilities districts).
As used in this Policy, "City" shall mean the City of Orange and/or its related entities, as the
wntext may require. As used in this Policy, "debY' shall be intetpreted broadly to mean bonds,
notes, certificates of participarion, financing leases or other financing obligations, but the use of
such term in this Policy shall be solely for convenience and shall not be interpreted to characterize
any such obligation as an indebtedness or debt within the meaning of any statutory or constitutional
debt limitation where the substance and terms of the obligation fall within exceptions to such
limitation. Tlus Policy shall apply to all debt issued or sold to third party lenders or investors and
does not pertain to City intemal interfund borrowings or any employee benefit obligations.
B. BACKGROUND
The City and its related entities are committed to fiscal sustainability by employing long-term
financial planning efforts,maintaining appmpriate reserves levels and employing prudent practices
in govemance,management,budget administration and financial reporting.
Debt levels and their related annual costs aze important long-temt obligarions that must be
managed within available resources. A disciplined thoughtful approach to debt management
includes policies that provide guidelines for the City and its related enrities to manage their
collective debt program in line with those resources. Therefore, the objective of this policy is to
provide written guidelines and restrictions conceming the amount and type of debt and other
financing obligations issued by the City and its related entities and the ongoing management of
the debt portfolio.
This Policy is intended to improve the quality of decisions, assist with the detemtination of the
structure of debt issuance, identify policy goals and demonstrate a commitment to long-tenn
financial planning, including a multi-year capital plan. Adherence to a Debt Issuance and
Management Policy signals to rating agencies and the capital mazkets that a government is well
managed and should meet its obligations in a timely manner.
C. CONDITIONS AND PURPOSES OF DEBT ISSUANCE
1. Acceptable CondiHons for the Use of Debt
The City believes that prudent amounts of debt can be an equitable and cost-
effective means of financing infrastructure, and capital asset and project needs of
the City. Debt will be considered to finance such projects if:
a) The project has been, or wil]be, included in the Ciry's capital improvement
plan or has otherwise been coordinated with the City's planning goals and
objec6ves.
b) The project can be financed with debt not exceeding the term specified in
Section E.1 of this Policy, to assure that long-term debt is not issued to
finance projects with a short useful life.
c) It is the most cost-effective funding means available to the City, taking into
account cash flow needs and other funding altematives.
d) It is fiscally prudent and meets the guidelines of this Policy. Any
consideration of debt financing shall consider financial alternatives,
including pay-as-you-go funding, proceeds derived from development or
redevelopment of existing land and capital assets owned by the City, and
use of existing or future cash reserves, or combinations thereof.
2. Acceptable Uses of Debt and Proceeds of Debt
The primary purpose of debt is to finance one of the following:
a) The City will consider long-tenn financing for the acquisition, substantial
refurbishment, replacement, or expansion of capital assets (including but
not limited to land improvements, infraslructure projects, equipment and
water rights) for the following purposes:
i.Acquisition and or improvement of land, right-of-way or long-term
easements.
ii. Acquisirion of a capital asset with a useful life of three or more
years.
iii. Construction or reconstruction of a facility.
iv. Although not the primary purpose of the financing effort, project
reimbursables that include project planning design, engineering and
other preconstrucrion efforts; project-associated fumiture fixtures
and equipment; capitalized interest (prefunded interest), original
issue discount,underwriter's discount,and other costs of issuance.
b) Refunding, refinancing or restructuring debt (including without limitation
the refinancing or advance funding of City pension obligarions), subject to
refiutding objectives and parameters discussed in Section G.
3.Short-Term Debt
a) In the event of temporary shortfalls in cash flow for City operation costs
due to timing of receipt of revenues and the lack of cash on hand to wver
the tecnporary deficit,the City may consider interim or cash flow financing,
such as anticipation notes. In compliance with applicable state law, any
such notes shall be payable either: (i)not later than the]ast day of the fiscal
yeaz in which it is issued, or(ii)during the fiscal year succeeding the fiscal
year in which issued, but in no event]ater than 15 months aRer the date of
issue, and only if such note is payable only from revenue received or
accrued during the fiscal year in which it was issued.
b) Short-tecm debt may also be used to finance short-lived capital projects,
such as lease-purchase financing or equipment.
c) Prior to issuance of any short-term debt, a reliable revenue source shall be
identified for repayment of the debt.
4. Internal Control Procedures Concerning Use of Proceeds of Debt
One of the City's priorities in the management of debt is to assure that the proceeds
of the debt will be directed to the intended use for which the debt has been issued.
In furtherance of this priority,the following procedures shall apply:
a) The Finance Director shall retain, for the applicable period specified in
Section H.4. oF this Policy, a copy of each annual repoct filed with the
Califomia Debt and Investment Advisory Commission ("CDIAC'
pursuant to Section 8855(k)of the California Govemment Code conceming
debt authorized during the applicable repoRing period (whether issued
or not), (2) debt outstanding during the reporting period, and (3) the use
during the reporting period of proceeds of issued debt.
b) In wnnection with the prepararion of each annual report to be filed with
CDIAC pursuant to Section 8855(k) of the Califomia Govemment Code,
the Finance Director shall keep a record of the original intended use for
which the debt has been issued, and indicate whether the proceeds spent
during the applicable one-year reporting period for such annual report
compoR with the intended use (at the time of original issuance or as
modified pursuant to the following sentence). If a change in intended use
has been authorized subsequent to the original issuance of the debt, the
Finance Department shall indicate in the record when the change in use was
authorized and whether the City Council, City Manager or another City
official has authorized the change in intended use. The Finance Director or
the Finance Director's designee shall repoR apparent deviations from the
intended use in debt proceeds to the City Manager for further discussion,
and if the City Manager determines appropriate in consultation witte legal
counse] (which may be bond counsel, if applicable, or the City Attorney),
to the City Council.
c) If the debt has been issued to finance a capital project and the project
timeline or scope of project has changed in a way that all or a portion of the
debt pmceeds cannot be expended on the original project, the Finance
Director shal] consult with the City Manager and legal counsel (which may
be bond counsel, if applicable, or the City Attomey) as to available
alternatives for the expenditure of the remaining debt proceeds (including
prepayment of the debt).
D. TYPES OF FINANCING INSTRUMENTS; AFFORDABILITY AND PLANNING
POLICIES
The City recognizes that there are numerous t}pes oF financing structures and funding sources
available, each with specific benefits,risks and costs. Al] potentia] funding sources aze reviewed
by management within the wntext of this Policy and the overall portfolio to ensure that any
financial product or structure is consistent with the City's objecrives. Regardless of what financing
structure(s) is utilized,due diligence review must be perfortned for each transaction, including the
quantification of potenHal risks and benefits and analysis of the impact on City creditworthiness
and debt affordability and capacity.
Prior to the issuance of debt or other financing obligations to finance a project, the City will
cazefully consider the overall long-term affordability of the proposed debt issuance. The City shall
not assume more debt or other financing obligations without conducting an objective analysis of
the City's ability to assume and support additiona] debt service paytnents. The City will consider
its long-tecm revenue and expenditure trends, the impact on operational flexibility and the overall
debt bwden on the taxpayers. The evaluation process shall include a review of generally accepted
measures of affordability and will strive to achieve and or maintain debt levels consistent with its
current operating and capita] needs.
1. General Fund-Supported Debt—General Fund Supported Debt generally include
Certificates of ParticipaGon ("COPs") and Lease Revenue Bonds ("LRBs") which
are lease obligations that are secured by a lease-back azrangement between the City
and another public entity. Typically,the City appropriates available Genera] Fund
moneys to pay the lease payments to the other public entity and,in tum, the public
enrity uses such lease payments received to pay debt service on the bonds or
Certificates of Padicipation.
General Fund Supported Debt may also include bonds issued to refund obligations
imposed by law, such as judgments (judgment obligation bonds ("JOBs")) or
unfunded accrued actuarial liabilities for pension plans (pension obligation bonds
POBs")).
T'hese obligations do not constitute indebtedness under the state constitutional debt
limitation and, therefore, aze not subject to voter approval.
Without ]imiting the foregoing, the City may also enter into operating leases and
lease purchase agreements on an as-needed basis without voter approval.
Payments to be made under valid leases are payable only in the yeaz in which use
and occupancy of the leased property is available, and lease payments may not be
accelerated as a default remedy. Lease financing requires the fair mazket rental
value of the leased property to be equal to or greater than the required debt service
or lease payments. The lessee(the City)is obligated to include in its Annual Budget
and appropriate the rental payments that are due and payable during each fiscal yeaz
the lessee has use of the leased property.
The City should strive to maintain its net General Fund-backed annual debt service
at or less than 8%of available annually budgeted revenue. This ratio is defined as
the City's annual debt service requirements on Geaeral Fund Supporced Debt
including, but not limited to, COPs, LRBs, JOBs, and POBs) compazed to total
annual General Fund Revenues net of interfund transfers out.
2. Revenue Bonds—Long-term obligarions payable solely from specific special fund
sources, in general, aze not subject to a debt limitation. Examples of such long-
term obligations include those which aze payable from a special fund consisting of
restricted revenues or user fees (e.g., enterprise revenues) and revenues derived
om the system of which the project being funded is a part.
In detemuning the affordability of proposed revenue bonds, the City will perfoim
an analysis comparing projected annual net revenues (exclusive of depreciation
which is a non-cash related expense) to esfimated annual debt service. 'Che City
should strive to maintain an annual wverage ratio of 110%(or such higher coverage
ratio included in the City's exisring financing documents), using historical and/or
projected net revenues to cover annual debt service for bonds. To the extent
necessary, the City shall undertake pmceedings for a rate increase to cover both
operations and debt service costs, and create debt service reserve funds to maintain
the required coverage rario.
3. Special Districts Financing — 7'he City has formed and, if the City determines
appropriate,it may undertake proceedings to form additional,CommunityFacilities
Dishicts pursuant to the Mello-Roos Community Facilities District Act of 1982 or
assessment districts pursuant to the [mprovement Act of 1911, the Municipal
Improvement Act of 1913,or other applicable law. The City will wnsider requests
for special district formation and debt issuance when such requests address a public
need or provide a public benefit. Each application will be wnsidered on a case by
case basis, and the Finance Deparhnent may not recommend a financing if it is
determined that the financing wuld be detrimental to the debt position or the best
interests of the City.
4.General Obligation Bonds — Norivithstanding their name, General Obligation
Bonds aze not general obligations of the City,but instead they aze payable from and
secured by a dedicated, voter-approved property tax override rate (i.e., a property
tax in excess of the ]%basic ad valorem property tax rate which has received the
approving two-thirds vote of the City's electorate). While the dedicated revenue
stream to repay the debt makes General Obligation Bonds an attractive option,
additional considerations for this financing mechanism include the time and
expense of an election,the possibility that the electorate will not approve the ballot
measure, and the legal bonding capacity limit of the assessed value of all taxable
property within the City. (At the time of the adoption of this Policy, the legal
bonding capacity limit for a California general law city is 3.75% of the assessed
value of all taxable propeRy within the City.).
5. Tax Increment Financing — Tax increment financing is a financing method
whereby a portion of ad valorem property taxes (commonly called the "tax
incremenY') that are allocated to an entity, such as a successor agency to
redevelopment agency("Successor Agency"),an enhanced infrastructure financing
district ("EIFD"), a community revitalization and investment authority ("CRIA")
or an infrastructure and revitalization financing district("IRFD"), and the entity is
permitted to incur debt payable from and secured by the tax increment revenues.
While tax inaement debt for redevelopment agencies and Successor Agencies is
enritled to the benefits of Ar[icle XVI, Section 16, of the Califomia Constiturion,
no similaz provision exists for EIFDs, CRIAs and IRFDs at the time of adoption of
this Policy. Therefore, when considering EIFD, CRIA or IRFD financing or other
types of tax increment financing which may be permitted by law in the future, debt
limit concerns should be analyzed with respect to the proposed structure and taken
into account in determining the practical viability of the proposed financing.
6. Conduit Debt — Conduit financing provides for the issuance of securiries by a
government agency to finance a project of a third party, such.as a non-profit
organization or other private entity. The City may sponsor conduit financings for
those activities that have a general public purpose and aze consistent with the City's
overall service and policy objectives. Unless a compelling public policy rationale
exists, such conduit financings will not in any way pledge the City's faith and
credit.
E. STRUCTURE OF DEBT
1. Term of Debt — In keeping with Intemal Revenue Service regulations for tax-
exempt financing obligations,the weighted average maturity of the debt should not
exceed 120% of the weighted average usefiil life of the facilities or projects to be
financed, unless specific circumstances exist that would mirigate the extension of
time to repay the debt and it would not cause the City to violate any covenants to
maintain the tax-exempt status of such debt, if applicable.
2. Rapidity of Debt Payment; Level Payment—To the extent practical, bonds will
be amortized on a level repayment basis, and revenue bonds will be amortized on a
level repayment basis considering the forecasted available pledged revenues to
achieve the lowest rates possible. Bond repayments should not increase on an
annual basis in excess of 2% without a dedicated and supporting revenue funding
stream.
Accelerated repayment schedules reduce debt burden faster and reduce tota]
borrowing costs. The Finance Director will amortize debt through the most
financially advantageous debt structure and to the extent possible,match the City's
projected cash flow to the anticipated debt service payments. "Backloading" of
debt service will be considered only when one or more of the following occur:
a) Natural disasters or extraordinary or unanticipated extemal factors make
payments on the debt in eazly years prohibitive.
b) The benefits derived from the debt issuance can cleazly be derrtonsuated to
be greater in the future than in the present.
c) Such structuring is beneficial to the City's aggegate overall debt payment
schedule or achieves measurable interest savings.
d) Such structuring will allow debt service to more closely match projected
revenues, whether due to lower project revenues during the euly years of
the project's operation, inflation escalators in the enterprise user rates, or
other quantifiable reasons.
3. Serial Bonds, Term Bonds, and Capital Appreciation Bonds — For each
issuance,the City will select seria]bonds or term bonds, or both. On the occasions
where circumstances warrant, Capital Appreciarion Bonds("CABs")may be used.
The decision to use term bonds, serial bonds, or CABs is driven based on mazket
conditions. However, the use of CABs should be used as a last resort unless a
wmpelling financing need is presented and acceptable rates and tem s can be
secured.
4. Reserve Ftinds — To the extent that the ase of available City moneys to fund a
reserve fund provides an economic benefit that offsets the cost oF financing the
reserve fund from bond proceeds (as determined by the Finance Director in
wnsultation with the City's municipal advisor and, if applicable, the underwriter
for the bonds), the City may vse legally permitted moneys to fund a reserve fund
in cash or through the purchase of a debt service reserve surety bond or insurance
policy) for the proposed bonds,up to the maximum amount permitted by applicable
law or regulation. Typically, this amount is equal to the least of: (i)maximum
annual debt service on the bonds, (ii) 10%of the principal amount of the bonds (or
10% of the sale proceeds of the bonds, within the meaning of Section ]48 of the
federal Intemal Revenue Code),or(iii) 125%of average annual debt service on the
bonds.
F. USE OF ALTERNATIVE DEBT INSTRUMENTS
Altemative debt instruments and financing structures sometimes can provide a lower cost of
borrowing in the short run,but may involve greater medium-tertn or long-term risk. Due diligence
review must be performed for each transaction, including the quantification of potenHal risks and
benefits, analysis of the impact on City creditworthiness and debt affordability and capacity, and
an evaluation of the ability of the City to withstand the medium-term or long-term risk attendant
to alternarive debt instruments, including the feasibility of exit strategies.
1. Variable Rate Debt
Variable rate debt affords the City the potential to achieve a lower cost debt
depending on mazket conditions. However, the City will seek to limit the use of
variable-rate debt due to the potential risks of such instrucnents.
a) Purpose
The City shall wnsider the use of variable rate debt for the purposes of:
i.Reducing the costs of debt issues.
ii. Increasing flexibility for accelerating principal repayment and
amortization.
iii. Enhancing the management of assets and liabilities(matching short-
term"priced debY'with the City's short-term inveshnents).
b) Considerations and Limitations on Variable-Rate Debt
The City may consider the use of all altemative structures and modes of variable
rate debt to the extent pernussible under State law and will make determinations
among different types ofmodes of variable rate debt based on cost,benefit,and risk
factors. 'The Finance Direc[or shall consider the following factors in considering
whether to utilize variable rate debt:
i.With respect to General Fund supported debt, one of the following
two criteria should be met as determined by the Finance Director in
his or her discretion: 1) any variable rate debt should not exceed
20% of total City General Fund supported debt; or 2) annual debt
service on any variable rate debt should not exceed 5%of the annual
General Fund Revenue.
ii. Any variable rate debt should be fully hedged by expected future
cagital fund reserves or unrestricted General Fund reserve levels,as
applicable.
iii. Whether interest cost and market conditions (including the shape of
the yield curves and relative value considerations) aze unfavorable
for issuing fixed rate debt.
iv. The likelihood of projected debt service savings when comparing
the cost of fixed rate bonds.
v.Costs, implementation and administration are quantified and
considered.
vi. Cost and availability of liquidity facilities (lines of credit necessary
for variable rate debt obligations and commercial paper in the event
that the bonds are not successfully remazketed) are quantified and
considered.
vii. Whether the ability to convert debt to another mode(daily,monthly,
fixed)or redeem at par at any time is pemtitted.
viii. Cost and availability of derivative products to hedge interest rate
risk.
ix. The findings of a thomugh risk managetnent assessment.
c) Risk Management
Any issuance of variable rate debt shall require a rigorous risk assessment,
including, but not limited to factors discussed in this section. Variable rate debt
subjects the City to additional financial risks(relative to fixed rate bonds),including
interest nte risk,tax risk, and certain risks related to providing liquidity for certain
types of variable rate debt.
The City will properly manage the risks as follows:
i.lnterest Rate Risk and Tax Risk—The risk thaf mazket interest rates
increase on variable-rate debtbecause ofmazket conditions,changes
in taxarion of municipal bond interest or reductions in tax rates.
Mitigalion—Limit total variable rate exposure per the defined limits,
match the variable rate liabilities with short term assets, and/or
purchase appropriate derivative pmducts to hedge against the risk
see also Section F.2 below).
ii. Liquidity/Remarketing Risk—The risk that holders of variable rate
bonds exercise their"puY' option,tender their bonds, and the bonds
cannot be remarketed requiring the bond liquidity facility provider
to repurchase the bonds. This will result in the City paying a higher
rate of interest to the facility provider and the potential rapid
amortization of the repurchased bonds. Mitigation - Limit total
direct variable-rate exposure. Seek liquidity facilities which allow
For ]onger (5-10 yeazs) amortization of any draws on the facility.
Endeavor to secure credit support facilities that result in bond ratings
of the highest short-teim ratings and long-term ratings not lower
than the second tughest rating category(without taking into account
numerical or plus/minus sign modifiers). If the City's bonds are
downgraded below these levels (or such other rating levels as
provided in the applicable financing documents) as a result of the
facility provider's rarings, a replacement provider shall be sought.
iii. Liquidity/Rollover Risk—The risk that arises due to the shorter term
of most liquidity provider agreements (1-5 years) relative to the
longer-term amortization schedule of the City's variable-rate bonds.
Liquidity and rollover risk includes the following risks: (1)the City
may incur higher renewal fees when renewal agreements are
negoriated,and(2)the liquidity bank mazket may constrict such that
it is difficult to secure third party liquidity at any interest rate.
Mitigation — Negotiate longer terms on provider conh acts to
minimize the number of rollovers.
2. Derivatives
The use of certain derivafive products to hedge variable rate debt, such as interest
rate swaps, may be considered to the extent the City has such debt outstanding or
under consideration. The City will exercise extreme caution in the use of derivative
instruments for hedging purposes, and will consider their utilization only when
sufficient understanding of the products and sufficient expertise for their
appropriate use has been developed. A comprehensive derivative policy will be
adopted by the City prior to any urilization of such instnunents.
G. REFUNDING GUIDELINES
The Finance Director shal] monitor all outstanding City debt obligations for potential refinancing
opportunities. The City will consider refinancing of outstanding debt to achieve annual savings or
to refinance a bullet payment or spike in debt service. Except for instances in which a bullet
payment or spike in debt service is being refinanced, absent a compelling reason or financial
benefit to the CiTy, any refinancing should not result in an increase to the weighted average life of
the refinanced debt.
Except for instances in which a bullet payment or spike in debt service is being refinanced or
another City policy objective is being accomplished, the City will generally seek to achieve debt
service savings which, on a net present value basis, aze at least 3% of the debt being refinanced.
The net present value assessment shall factor in all costs,including issuance,escrow,and foregone
interest eamings of any contributed funds on hand. Any potential refinancing shall additionally
consider whether an altemative refinancing opportunity with higher savings is reasonably expected
in the future. Refundings which produce a net present value savings of less than 3°/a will be
considered on a case-by-case basis. Notwithstanding the foregoing, a refunding of Successor
Agency bonds shall be determined based on the requirements of Health and Safety Code Section
34177.5.
H. MARKET COMMUNICATION,ADMINISTRATION,AND REPORTING
1. Rating Agency Relations and Annual or Ongoing Surveillance — The Finance
Director shall be responsible for maintaining the City's relationships with the major
rating agencies that rate municipal bond issues(such as S&P Global Ratings,Fitch
Ratings and Moody's Investors Service). These agencies' rating criteria often
change and the City cannot control the decisions made by any rating agency.
However, for each debt issue that the City will seek a rating assigunent, the City
will strive to obtain and maintain the highest possible underlying,uninsured raring.
In addition to general communication,the Finance Director shall:
a) Ensure the rating agencies are provided updated financial statements of the
City as they become publically available.
b) Communicate with credit analysts at each agency as may be requested by
the agencies.
c) Prior to each proposed new debt issuance, schedule meetings or conference
calls with agency analysts and provide a thorough update on the City's
financial position, including the impacts of the proposed debt issuance.
2. Council Communication — The Finance Director should report feedback from
rating agencies, when and if available,regazding the City's financial strengths and
weaknesses and azeas of concem relating to weaknesses as they pertain to
maintaining the City's existing credit ratings.
3. Continuing Disclosure Compliance —The City shall remain in compliance with
Rule I Sc2-12,promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934,by filing(to the extent required by the applicable
continuing disclosure undertaking). To that end, the "Continuing Disclosure
Compliance Procedures,"attached as Appendix I, is hereby incorporated as part of
this Policy.
4. Debt Issue Record-Keeping—A copy of all debt-related records shall be retained
at the City's offices. At minimum, these rewrds shall include all official
statements, bond legal documents/transcripts, resolutions, trustee statements,
leases, and ritle reports for each City financing (to the extent available).
Such records shall be retained while any bonds of an issue are outstanding and
during the six-year period following the final maturity or redemption of the bond
issue or, if later, while any bonds that refund bonds of that original issue are
outstandin and for the six year period following the final maturity or redemption
date of the latest refunding bond issue.
5. Arbitrage Rebate — The use of bond proceeds and their investments must be
monitored to ensure compliance with all azbifrage rebate requirements of the
lnternal Revenue Code and related Intemal Revenue Service regulations, in
keeping with the covenants of the City and/or related entity in the ta c certificate for
any federally tax-exempt financing. The Finance Director shall ensure that all bond
proceeds and investments aze hacked in a manner which facilitates accurate
calculation; and, if a rebate payment is due, such payment is made in a timely
manner.
I.CREDIT RATINGS
The City will consider published ratings agency guidelines regarding best financial practices and
guidelines for structuring its capital funding and debt strategies to maintain the highest possible
credit ratings consistent with its current operaring and capital needs.
J. CREDIT ENHANCEMENT
Credit enhancement may be used to improve or establish a credit raNng on a City debt obligation.
Types of credit enhancement include letters of credit,bond insurance and surety policies.T'he City,
in consultation with the City municipal advisor, may determine the use of a credit enhancement,
for any debt issue,if it reduces the overall cost of the proposed financing or if the use of such credit
enhancement furthers the City's overall financing objectives.
K. SB 1029 COMPLIANCE
Senate Bill 1029, signed by the State Govemor on September 12, 2016, and enacted as Chapter
307, Statutes of 2016, requires issuers to adopt debt policies addressing each of the five items
below:
i. The purposes for which the debt proceeds may be used.
Section C.2 (Acceptable Uses of Debt and Proceeds of Debt) and Section C.3
Short-Term Debt) address the purposes for which debt proceeds may be used.
ii.The types of debl that may be issued.
Section C.3 (Shoct-Tetm Debt), Section D (Types of Financing Instmments;
Affordable and Planning Policies),Section E(Structure ofDebt)and Section F(Use
of Alternative Debt Inshuments)aze among the provisions that provide infocmafion
regazding the types of debt that may be issued.
iii. The relationship of the debt to, and integration with, the issuer's capital
improvement program or budget, if applicable.
Section C.I (Acceptable Conditions for the Use of Debt) provides information
reguding the relationship between the City's debt and Capital Impmvement
Progam.
iv. Policy goals related to the issuer's planning goals and objectives.
As described in Section B (Backgound), Section D (Types Of Financing;
Affordability and Planning Policies) and other sections, this Policy has been
adopted to assist with the City's goal of maintaining fiscal sustainability and
financial prndence.
v.The internal control procedures that the issuer has implemented, or will implement,
to ensure that the proceedr of the proposed debt issuance will be directed to the
intended use.
Section C.4 (Intemal Control Procedures Concerning Use of Proceeds of Debt)
provides informarion regazding the City's intemal control procedures designed to
ensure that the proceeds of its debt issues are spent as intended.
GLOSSARY
Ad Valorem Tax: A tax calculated "according to the value"of property. In Califomia, propeRy
which is subject to ad valorem taxes is classified as "secured" or "unsecured." The secured
classification includes proper[y on which any property ta c levied by a county bewmes a lien on
that property. A tax levied on unsecured property does not become a lien against the unsecured
property,but may become a lien on certain other property owned by the taxpayer.
AnnuaJ Coverage Ratio: With respect to any bonds that are secured by a particulaz source of
revenue for a particulaz 12 month period, the ratio obtained from dividing the estimated dollaz
amount of the revenue during such period by the scheduled principal and interest payment for the
bonds during such period.
Anticipadon Notes: Short term notes (such as Tax and Revenue Anticipation Notes, Grant
Anticipation Notes and Bond Anticipation Notes) issued to provide interim Snancing anticipated
to be paid off from sources to be received at or before the maturity date of the anticipation notes
such as tax revenues, grant fitnds,proceeds of long-term bonds).
Arbitrage: The gain that may be obtained by borrowing funds at a lower(often tax-exempt) rate
and investing the proceeds at higher(often taxable) rates. The ability to eam azbitrage by issuing
ta c-exempt securities has been severely curtailed by the Intemal Revenue Code of 1986, as
amended.
Assessed Voluation: The "value" of property as set by a taxing authority (such as the county
assessor) on the ta:c roll for purposes of ad valorem taxation.
Bond: A security that represents an obligation to pay a specified amount of money on a specific
date in Ute future,typically with periodic interest payments.
Bond Anticipation Notes: Short-term notes issued usually for capital projects and paid from the
proceeds of the issuance of long-term bonds. Provide interim financing in anticipation of bond
issuance.
Bond Counsel: A specialized, qualified attomey retained by the issuer to give a legal opinion
conceming the validity of securities. The bond counsel's opinion usually addresses the subject of
tax exemption. Bond counsel typically prepazes and/or advises the issuer regarding legal structure,
authorizing resolurions, trust indentures and the like.
Bond lnsurance: A type of credit enhancement whereby an insurance company indemnifies an
investor against default by the issuer. In the event of failure by the issuer to pay principal and
interest in full and on time, investors may call upon the insurance company to do so. Once issued,
the municipal bond insurance policy is generally irrevocable. The insurance company receives its
premium when the po]icy is issued and this premium is typically paid out of the bond issue.
Capital Appreciation Bond: A municipal security on which the invesrinent return on an initial
principal amount is reinvested at a stated compounded rate until maturity, at which time the
investor receives a single paytnent representing both the initial principal amount and the total
investment return.
CDIAC: Califomia Debt and Investment Advisory Commission.
Certificates of Participation: A financial instrument representing a proportionate interest in
payments (such as lease paymenu)by one party(such as a city acting as a lessee) to another party
often a JPA or non-profit).
Competitive Sale: A sale of bonds in which an undenvriter or syndicate of underwriters submit
sealed bids to purchase the bonds. Bids are awarded on a true interest cost basis (TIC), providing
that other bidding requirements are satisfied. Comperitive sales aze recommended for simple
financings with a strong underlying credit rating. This type of sale is in contrast to a Negotiated
Sale
Continuing Disclosure: An issuer's obligations under its conHnuing disclosure agreements
executed in connecrion with its bond issues. See "Rule 15c2-12"below. Under each conrinuing
disclosure ageement, the issuer agees to periodicaliy provide certain relevant information and
make such infomiation available to the investing mazket. The info xnation is generally required to
be posted on MSRB's Elecfronic Municipal Market Access(EMMA)website.
Credit Enhancement: An insUvment (such as a bond insurance policy, a debt service reserve
insurance policy or surety bond, a letter of credit) which may be purchased to provide additional
assurance that the repayment of the debt will be honored, and hence may enhance the credit rating
for the debt issue.
Credit Ratingftgency: A company that rates the relative credit quality of a bond issue and assigas
a letter rating. These rating agencies include Moody's Investors Service, Standazd &Poor's, and
Fitch Ratings.
Debt Limit: The maximum amount of debt that is legally permitted by applicable charter,
constitution, or statutes.
Debt Service: The amount necessary to pay principal and interest requirements on outstanding
bonds for a given yeaz or series of years.
Default: The failure to pay principal or interest in full or on rime and, in some cases, the failure
to comply with non-payment obligations after notice and the opportunity to cure.
Derivative: A financial instrument which derives its own value from the value of another
instrument, usually an undeclying asset such as a stock, bond, or an underlying reference such as
an interest rate index.
Disclosure Counse[: A specialized, qualified attomey retained to provide advice on issuer
disclosure obligations,to prepare the official statement and to prepare the continuing disclosure
undertaking.
Discount: The difference between a bond's par value and the price for which it is sold when the
atter is less than paz.Also lmown as"underwriter discount,"this is the fee paid to the
underwriter its banking and bond mazketing services.
Enterprise Activiry: Specific activity that generates revenues. Common examples include water,
wastewater and solid waste enterprises. A use of revenues generated by an enterprise activity for
pucposes unrelated to that enterprise is often subject to restrictions imposed by law. Debt
service on bonds issued to finance facilities or projects for an enterprise is usually paid with the
revenues of such enterprise.
Frnancing Team: The working group of City staff and outside consultants necessary to
complete a debt issuance.
Indenture: A contract between the issuer and the trustee stipulating the characteristics of the
financial inshument, the issuer's obligation to pay debt service, and the remedies available to the
trustee in the event of default.
Issuance Costs: The costs incurred by the bond issuer during the planning and sale of securities.
These costs include by aze not limited to municipal advisory,bond counsel, disclosure counsel,
printing, advertising costs, credit enhancement, rating agencies fees, and other expenses incurred
in the mazketing of an issue.
Lease: An obligation wherein a lessee agrees to make payments to a lessor in exchange for the
use of certain property. The term may refer to a capital lease or to an operating lease.
Lease Reversue Bands: Bonds that are secured by the revenue from lease payments made by one
party to another.
Maturiry Date: The date upon which a specified amount of debt principal or bonds matures, or
becomes due and payable by the issuer of the debt.
Municipa(Advisor. A wnsultant who provides the municipal issuer with advice on the structure
of the bond issue, timing, terms and related matters for a new bond issue.
Municipa[Securities Rulemaking Board(MSRB): A self-regulating organization established
on September 5, 1975 upon the appointment of a 15-member board by the Securities and
Exchange Ageement. The MSRB, wmprised of representatives from investment banking firms,
dealer bank representatives, and public representatives,is enhusted with the responsibility of
writing rules of conduct for the municipal securities market. The MSRB hosts the EMMA
website, which hosts information posted by issueis under their continuing disclosure
undertakings.
Negotiated Sale: A sale of securities in which the terms of the sale are determined through
negotiation between the issuer and the purchaser, typically an underv riter, without competitive
bidding. The negotiated sales process provides control over the financing structure and issuance
timing. NegoHated sales aze recommended for unusual financing terms, period of mazket
volatility and weaker credit quality. A thorough evaluation,usually with the assistance of the
City's Municipa] Advisor, of the proposed bond's credit characteristics in conjunction with
market conditions will be performed to ensure reasonable fina] pricing and underwriting spread.
Net Present Yalue (NPi—A financial measurement whereby savings of a transaction aze
discounted back to money into a"today's"dollars equivalent. Often the discount rate used is the
true interest cost(TIC--see definition below)rate on the proposed new bond issuance.
Typically, in the municipal mazket place it is common to then divide the NPV value by the
outstanding paz amount of the bonds that aze to be refunded to develop a percentage value.
O cia!Statement(Prospectus): A document published by the issuer in connection with a
primary offering of securities that discloses material informafion on a new security issue
including the purposes of the issue,how the securities will be repaid,and the financial, economic
and social characterisrics of the security for the bonds. Investors may use this information to
evaluate the aedit quality of the securities.
Par f alue: The face value or principal amount of a security.
Pension Obligation Bonds: Financing inshuments used to pay some or all of the unfunded
pension liability of a pension plan. POBs are issued as taxable instruments over a 10-40 yeaz
term or by matching the term with the amortization period of the outstanding unfunded actuarial
accrued liability.
Premium: The excess of the price at which a bond is sold over its face value.
Present I a[ue: The value of a future amount or stream of revenues or expenditures.
Private Placemenr A bond issue that is structured specifically For a small number of purchasers
or a single purchaser. Private placements are typically carried out when extraneous
cimumstances preclude public offerings. A private placement is considered to be a negoriated
sale.
Redemption: Depending on an issue's call provisions, an issuer may on certain dates and at
cer[ain premiums,redeem or call specific outstanding maturities. When a bond or certificate is
redeemed, the issuer is required to pay the mahuities' paz value, the accrued interest to the call
date,plus any premium required by the issue's call provisions.
Refunding: A procedure whereby an issuer refinances an outstanding debt issue by issuing a
new debtissue.
Rule ISc2-l2: Rule adopted by the Securiries and Exchange Commission setting forth certain
obligations of(i)underwriters to receive, review and disseminate official statements prepazed by
issueis of most primary offering of municipal securities, (ii) undenvriters to obtain continuing
disclosure a eements from issuers and other obligated persons to provide ongoing annual
financial information on a continuing basis, and(iii) broker-dealers to have access to such
continuing disclosure in order to make recommendarions of municipal securities in the sewndary
market.
Reserve Fund: A fund established by the indenture of a bond issue into which money is
deposited for payment of debt service in case of a shortfall in current revenues.
Revenue Bond: A bond which is payable from a specific source of revenue and to which the full
faith and credit of an issuer is not pledged. Revenue bonds aze payable from idenrified sources
of revenue, and do not permit the bondholders to compel a jurisdiction to pay debt service from
any other source. Pledged revenues often are derived from the operation of an enterprise.
Secondary Markeh. The mazket in which bonds aze sold afrer their inirial sale in the new issue
mazket.
Serial Bonds: Bonds of an issue that mature in consecurive years or other intervals and are not
subject to mandatory sinking fund provisions.
Tax and Revenue Anticipation Notes (TRANS): Short term notes issued in anticipation of
receiving tax receipts and revenues within a fiscal year. TRANs allow the municipality to
manage the period of cash shortfalls resulring from a mismatch between timing of revenues and
timing of expendihues.
Term Bonds: Bonds that come due in a single maturity but where the issuer may agree to make
periodic payments into a sinking fund for mandatory reclemption of term bonds before maturity
and for payment at maturity.
True Interest Cost(TIC): Under this method of computing the interest expense to the issuer of
bonds, true interest cost is defined as the rate necessary to discount the amounts payable on the
respective principal and interest payment dates to the purchase price received for the new issue
of bonds. Interest is assumed to be wmpounded semi-annually. TIC computations produce a
figure s]ightly different from the net interest cost (NIC) method because TIC considers the time
value of money while NIC does not.
Trustee: A bank retained by the issuer as custodian of bond proceeds and officia]representative
of bondholders. The trustee ensures compliance with the indenture. In many cases, the trustee
also acts as paying agent and is responsible for transmitting payments of interest and principal to
the bondholders.
Underwriter: A broker-dealer that pwchases a new issue of municipal securities from the issuer
for resale in a primary offering. The bonds may be purchased either through a negotiated sale
with the issuer or through a competitive sale.
i3'eighted Average Usejul Life: In reference to a pazticulaz bond issue,the weighted average
useful life of the assets financed with the proceeds of the bonds is calculated by giving weight to
both the relative dollaz amount spent on each asset and the useful life of that asset.
Yield: The net rate of retum, as a percentage,received by an investor on an investment. Yield
calculations on a fixed income investment, such as a bond issue,take purchase price and coupon
into account when calculating yield to maturity.
APPENDIXI
CONTINUING DISCLOSURE COMPLIANCE PROCEDURES
1. BACKGROUND AND TRAIIYING
Rule 15c2-12, promulgated by the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, requires certain information be disclosed to the municipal bond
mazketplace. The SEC has stated that it has a mandate "to adopt rules reasonably designed to
prevent fraudulent, deceptive or manipulative acts or practices in the mazket for municipal
securities." The SEC has taken the position that material non-compliance by an issuer with past
continuing disclosure obligations may warrant, without wrrective actions, an undenvriter being
prohibited from underwriting the issuer's bonds, and thus prevent the issuer from accessing the
municipal bond marketplace.
The following procedures will help ensure compliance by the City of Orange and its related
public entities such as, but not limited to, the Successor Agency to the Orange Redevelopment
Agency and the Orange City Public Facilities Financing Authority) (collectively, the City") with
Rule 15c2-12 and its continuing disclosure obligations under continuing disclosure a eements or
similar instruments executed in connection with its municipal bond offerings. Certain capitalized
terms herein will have the meanings ascribed to them in the respective continuing disclosure
agreements or similaz instruments.
2.DESIGNATION OF RESPONSIBLE OFFICER
The Responsible OfScer will be the officer or other employee responsible for compiling
and filing Annual Reports (as defined in the continuing disclosure agreements) and notices
regazding enumerated events ("Event Notices"), if requued to be filed pursuant to the continuing
disclosure agreements or similar instruments. The initial Responsible Officer shall be the City's
Finance Director. From time to time, the City Manager may designate a different person to serve
as the Responsible Officer.
3. RESPONSIBLE OFFICER TO BECOME FAMILIAR WITH EMMA" AND
FILING REQUIREMENTS UNDER CONTINUING DISCLOSURE
AGREEMENTS
A. T'he Responsibie Officer will take such acrion as may be necessary or appropriate
to become familiaz with the Municipal Securities Rulemaking Boazd's Electronic
Municipal Mazket Access ("EMMA") website. The Responsible Officer should
understand how to locate on EMMA the filings made by the City in connection
with bonds issued by the City. If the City is serving as its own Dissemination
Agent,the Responsible Officer will establish a user identification and password for
EMMA and become familiar with uploading documents onto EMMA.
B. For each sepazate issue of the City's outstanding bonds, the Responsible Officer
wil] read the related continuing disclosure a eement or similar insUvment and
identify the following:
i) The date by which the Annual Report must be filed;
ii) The contents needed to be included in the Annual Report;
iii) The Event Notices that must be filed; and
iv) When Event Notices aze required to be filed.
C. The Responsible Officer should be aware of the types of events (the "Listed
Events")that would require the filing of an Event Notice. If clarification is required
regazding what is meant by a Listed Event, the City's bond counsel or disclosure
wunsel should be contacted to seek such clarification.
4.PREPARATION AND FILING OF ANNUAL REPORTS AND EVENT NOTICES
A. The City will strive to begin the process of completing its audited financial
statements as soon as practicable after the close of each Fiscal Year. Such audited
financial statements should be completed in Hme to be submitted to the City
Council (or other goveming boazd)before the date that the Annual Report must be
filed.
B. The Responsible Officer will identify any information that is required to be
included in the Annual Report but is not part of the City's audited financial
statements, and contact the sources necessary to compile such informarion as soon
as possible after the close of each Fiscal Year. T'he Responsible Officer will
consider adding any information required by its continuing disclosure agreements
or similaz instrument not already included in its audited financial statements into a
supplementary information secrion of audited financial statements.
C. Following the compilation of the information that is to be included in the Annual
Report, the Responsible OfFicer will (or will cause the Dissemination Agent to)
submit the Annual Report to EMMA on or before the date on which the Annual
Report must be filed.
D. Each yeaz, by no later than the date that the Annua] Report is required to be filed
on EMMA,the Responsible Officer will review the EMMA website to wnfirm that
the Annual Report has been posted with respect to all applicable securities. If the
Annual Report has not been posted,the dissemination agent will be notified,or the
Responsible Officer will file the Annual Report, as applicable.
E. T'he Responsible Officer will identity,or with the assistance of consultants engaged
to monitor compliance will idenrify, the occurrence of a Listed Event and prepare,
or have prepazed, the appropriate Event Disclosure. The Responsible Officer will
file (or will cause the dissemination agent to file) Event Notices on EMMA in a
timely manner,when so required by the continuing disclosure agreements or similar
instrument. The Responsible Officer will contact the City's bond counsel or
disclosure wunsel if there aze any questions regazding whether an event constitutes
a Listed Event, and whether such occurrence will require the filing of an Event
Notice.
F. In connection with amendments to Rule 15c2-12 adopted in 2018, for any new
conrinuing disclosure agreement executed on or after Februazy 27, 2019 with
respect to a debt issue(the"DebY'), the Responsible Officer shall, before the Debt
issuance date, review the City's financial records and create a list of the City's
existing financial obligations (as such term is defined by Rule 15c2-12) (the
Financial Obligations LisY'). The Financial Obligations List shall be continuously
updated by the Responsible Officer. Whenever the City prepazes to enter into a
new financial obligation or modify the terms of an existing financial obligation,the
Responsible Officer shall determine whether the incuaence of such financial
obligation or modification of tertns would require an Event Notice under the
continuing disclosure agreement. If a determination is made that an Event Norice
would be required,the Responsible Officer,in consultation with legal counsel,shall
cause the Event Notice to be filed on a timely basis, when so required by the
continuing disclosure agreements or similar instrument.
G. Certain Listed Events aze qualified by a materiality standazd. Materiality is
determined according to SEC guidance available at the time. If clarification is
required regazding materiality on any potential Listed Event, the Responsible
Officer shall contact the City's bond counsel or disclosure counsel to seek
clarification. The Responsible Officer's determination of materiality will depend
on the facts and circumstances su[rounding the event and wil] take into
consideration many factors including,but not limited to, the following:
Source of security pledged for repayment of the financial obligation,
Ri ts associated with such a pledge(e.g., senior versus subordinate),
Principal amount or notional amount(in the case of a derivative inshnment
or gttarantee of a derivative instrument),
Covenants,
Events of default,
Remedies,
Other similaz tenns that affect security holders to which the issuer agreed at
the time of incurrence,
Size of the overall balance sheet,
Size of existing obligations,and
Size of the overall bond portfolio.
5.RETENTION OF RECORDS
A. The documents identified below should be retained for a period of at least six years
following the termination of the City's ob(igations(i.e.,the legal defeasance, prior
redemption or payment in full of the related issue of municipal securities) under a
continuing disclosure agreement or similaz instrument.
B. The City will retain,in its records,the transcripts containing the documents related
to each issue of.bonds or other obligations of the City.
C. The City will retain copies,in paper or electronic focm,of each Listed Event Notice
submitted to EMMA.
D. 'fhe City will retain copies, in paper or electronic fonn, of each Annua] Report
submitted to EMMA.
E. To the extent that the content of an Annual Report is based on source materials
created or obtained by the City, the City will retain in its records, such source
materials created or obtained by the City.