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HomeMy WebLinkAboutCOUNCIL - AGENDA ITEM - 11/19/2013 - RESOLUTION 2013-093 AMENDING THE CITY COUNCIL'S FIAgenda Item 8 Item # 8 Page 1 AGENDA ITEM SUMMARY November 19, 2013 City Council STAFF John Voss, Controller/Assistant Financial Officer Jessica Ping-Small, Revenue and Project Manager Mike Beckstead, Chief Financial Officer SUBJECT Resolution 2013-093 Amending the City Council's Financial Management Policies by Updating the Revenue and Debt Policies Sections Contained Therein. EXECUTIVE SUMMARY The purpose of this item is to approve an updated City Debt Policy and Revenue Policy. Neither policy has been updated in many years. Since the last update, staff has developed a new framework for updating, controlling, formatting and publishing financial policies. The most significant change to the Revenue Policy is the inclusion of six revenue principles that provide staff and City Council a foundation for making sound financial decisions that provide citizens of Fort Collins a diverse, stable and fair revenue stream equipped to provide the services necessary to keep Fort Collins great. Under the new Debt Policy, the City’s discrete governmental funds are limited to $70M in additional debt, compared to $150M under the existing policy. STAFF RECOMMENDATION Staff recommends adoption of the Resolution. BACKGROUND / DISCUSSION Both policies evolved as part of the Budget document. In that context, the Budget document focused on explaining revenue and debt concepts, rather than setting policy. Staff recently developed a new format for financial policies, and due to a major overhaul in both format and content, it is impractical to use “strike through and underline” of the new policy text. As such, adoption of a new set of policies is recommended. REVENUE-The only significant change to the revenue policy’s content is the addition of six revenue principles: 1. Maintain a diverse revenue base 2. Maintain a stable revenue base 3. Cultivate revenue sources that are equitable among all economic levels 4. As appropriate, the burden of the cost of services will be fairly placed on those using the services. 5. Generate adequate revenue to maintain core service levels 6. Maintain healthy reserves. These revenue principles provide staff and City Council a foundation for making sound financial decisions that will provide the citizens of Fort Collins a diverse, stable and fair revenue stream equipped to provide the services necessary to keep Fort Collins great. The principles were presented to the Council Finance Committee and the Futures Committee in 2012 as Packet Pg. 70 Agenda Item 8 Item # 8 Page 2 part of the ongoing revenue diversification study. The Council Finance Committee reviewed the principles again on October 21, 2013. ISSUING DEBT- The major changes to the Debt Policy are as follows: A. Changed method of limiting governmental debt, from “percent of General Fund” revenue to “percent of governmental fund” revenue. B. Added capacity guidelines for enterprise funds, i.e. the utility funds. C. Added information about Moral Obligation Pledge and when it may be used. D. Added language about goal to keep the City’s overall credit rating at AAA. E. Added guidance on refinancing. Under the current Debt Policy, City governmental funds may borrow up to an additional $150 million; whereas the new Debt Policy caps new debt obligations at $70 million. FINANCIAL / ECONOMIC IMPACT There are no immediate impacts. The long term strength of the City's financial and economic conditions should be enhanced and preserved by following of these policies. BOARD / COMMISSION RECOMMENDATION The Council Finance Committee reviewed the proposed new debt policy on August 16, 2013 and the proposed new revenue policy on October 21, 2013. ATTACHMENTS 1. : Council Finance Committee minutes, October 21, 2013 (PDF) 2. : Council Finance Minutes, August 19, 2013 (PDF) 3. : Current Debt Policy (PDF) 4. : Current Revenue Policies (PDF) Packet Pg. 71 Packet Pg. 72 Attachment8.1: Council Finance Committee minutes, October 21, 2013 (Debt & Revenue Policy) Packet Pg. 73 Attachment8.2: Council Finance Minutes, August 19, 2013 (Debt & Revenue Policy) Packet Pg. 74 Attachment8.2: Council Finance Minutes, August 19, 2013 (Debt & Revenue Policy) Financial Management Policy 7 Issuing Debt Issue Date: Version: 2 Issued by: Controller/Assistant Financial Officer Financial Policy 2 – Issuing Debt 1 7.1 Authorization for Municipal Borrowing The City Charter (Article V. Part II) authorizes the borrowing of money and the issuance of long term debt. The Charter and State Constitution determine which securities may be issued and when a vote of the electors of the City and approved by a majority of those voting on the issue. 7.2 Purpose and Uses of Debt Long term obligations should only be used to finance larger capital acquisitions and/or construction costs that are for high priority projects. Debt will not be used for operating purposes. Debt financing of capital improvements and equipment will be done only when the following conditions exist: a) When non-continuous projects (those not requiring continuous annual appropriations) are desired; b) When it can be determined that future users will receive a significant benefit from the improvement; c) When it is necessary to provide critical basic services to residents and taxpayers (for example, purchase of water rights); d) When total debt, including that issued by overlapping governmental entities, does not constitute an unreasonable burden to the residents and taxpayers. Objective: The purpose of this policy is to establish parameters and provide guidance governing the issuance of all debt obligations issued by the City of Fort Collins (City). Applicability: This debt policy applies to all funds and Service Areas of the City and closely related agencies such as the Downtown Development Authority (DDA), Fort Collins Leasing Corporation and the Fort Collins Urban Renewal Authority (URA). Authorized by: City Council Resolutions 2013-XXX, Last change was authorized through adoption of the 2006-07 Budget in November 2005. Packet Pg. 75 Attachment8.3: Current Debt Policy (Debt & Revenue Policy) Financial Policy 2 – Issuing Debt 2 7.3 Types of Debt and Financing Agreements The types of debt permitted are outlined in State statute. The City will avoid derivative type instruments. In general the following debt types are used by the City: a) General obligation bonds- backed by the credit and taxing power of the City and not from revenues of any specific project. Colorado law limits general obligation debt to 10% of the City’s assessed valuation. Under TABOR this type of debt must approved by voters. b) Revenue Bonds - issued and backed by the revenues of a specific project, tax increment district (TIF), enterprise fund, etc. The holders of these bonds can only consider this revenue source for repayment. TABOR does not require that voters approve these types of debt. c) Lease Purchase – issued whereby the asset acquired is used as collateral. Examples include Certificates of Participation (COP), Assignment of Lease Payments (ALP) and equipment leases. TABOR does not require that voters approve these types of agreements. d) Moral Obligation Pledge – Is a pledge to consider replenishing a debt reserve fund of another government agency if the reserve was used to make debt payments. This type of commitment will only be used to support the highest priority projects, or when the financial risk to the City does not increase significantly, or when the City’s overall credit rating is not expected to be negatively impacted. Because it is a pledge to consider replenishing, it is not a pledge of the City’s credit, and as such is not a violation of State statutes and City Charter. However, decision makers should keep in mind that not honoring a Moral Obligation Pledge will almost certainly negatively impact the City’s overall credit rating. TABOR does not require that voters approve these types of agreements. e) Interagency Borrowing – issued when the credit of an agency (DDA, URA) of the City does not permit financing at affordable terms. Usually used to facilitate a project until the revenue stream is established and investors can offer better terms to the agency. Program parameters are outlined in City’s Investment Policy. TABOR does not require that voters approve these types of agreements. f) Conduit Debt – Typically limited to Qualified Private Activity Bonds (PAB) defined by the IRS and limited to the annual allocation received from the State. Low income housing is one example of a qualified use of PAB. There is no pledge or guarantee to pay by the City. g) Any other securities not in contravention with City Charter or State statute. 7.4 Debt Structure and Terms The following are guidelines, and may be modified by the City to meet the particulars of the Packet Pg. 76 Attachment8.3: Current Debt Policy (Debt & Revenue Policy) Financial Policy 2 – Issuing Debt 3 financial markets at the time of the issuance of a debt obligation: a) Term of the Debt: The length of the financing will not exceed the useful life of the asset or average life of a group of assets, or 30 years, whichever is less. Terms longer than 20 years should be limited to the highest priority projects. b) Structure of Debt: Level debt service will be used unless otherwise dictated by the useful life of the asset(s) and/or upon the advice of the City's financial advisor. c) Credit Enhancements: The City will not use credit enhancements unless the cost of the enhancement is less than the differential between the net present value of the debt service without enhancement and the net present value of the debt service with the enhancement. d) Variable Rate Debt: The City will normally not issue variable rate debt, meaning debt at rates that may adjust depending upon changed market conditions. However, it is recognized that certain circumstances may warrant the issuance of variable rate debt, but the City will attempt to stabilize the debt service payments through the use of an appropriate stabilization arrangement. e) Derivative type instruments and terms will be avoided. f) Interest during construction will be capitalized when the debt is in an enterprise fund. 7.5 Refinancing Debt Refunding of outstanding debt will only be done if there is a resultant economic gain regardless of whether there is an accounting gain or loss, or a subsequent reduction or increase in cash flows. The net present value savings shall be at least 3%, preferably 5% or more. In an advanced refunding (before the call date), the ratio of present value savings to the negative arbitrage costs should be at least 2. 7.6 Debt Limitations and Capacity Debt capacity will be evaluated by the annual dollar amount paid and the total amount outstanding with the goal to maintain the City’s overall issuer rating at the very highest rating, AAA. Parameters are different for Governmental Funds, Enterprise Funds, and Related Agencies. a. Governmental Funds - Annual debt service (principal and interest) will not exceed 5% of annual revenues. For calculation, revenues will not include internal charges, transfers and large one-time grants. Outstanding debt in relation to population and assessed value will be monitored. b. Enterprise Funds – Each fund is unique and will be evaluated independently. Each funds debt will be managed to maintain a credit score of at least an A rating. These funds typically issue revenue bonds and investors closely watch revenue coverage ratio. Coverage ratios are usually published in the Statistical Section of the City’s Packet Pg. 77 Attachment8.3: Current Debt Policy (Debt & Revenue Policy) Financial Policy 2 – Issuing Debt 4 Comprehensive Annual Financial Statement. c. Related Agencies – Each agency will be evaluated independently, taking into account City Charter, State statutes, market conditions and financial feasibility. 7.7 Debt Issuance Process When the City utilizes debt financing, it will ensure that the debt is soundly financed by: a) Selecting an independent financial advisor to assist with determining the method of sale and the selection of other financing team members b) Conservatively projecting the revenue sources that will be used to pay the debt; c) Maintaining a debt service coverage ratio which ensures that combined debt service requirements will not exceed revenues pledged for the payment of debt. d) Evaluating proposed debt against the target debt indicators. 7.8 Other Debt Management - The City will also have an Administrative Policy and Procedure that includes guidance on: a) Investment of bond proceeds b) Market disclosure practices to primary and secondary markets, including annual certifications c) Arbitrage rebate monitoring and filing d) Federal and State law compliance practices Getting Help Please contact the Controller/Assistant Financial Officer with any questions at 970.221.6772 Related Policies/References The City of Fort Collins Charter (Article V. Part II) Packet Pg. 78 Attachment8.3: Current Debt Policy (Debt & Revenue Policy) Financial Policy 2 – Issuing Debt 5 e) Ongoing market and investor relations efforts DEBT POLICIES 7.1. POLICY STATEMENT The City of Fort Collins recognizes the primary purpose of capital facilities is to support provision of services to its residents. Using debt financing to meet the capital needs of the community must be evaluated according to two tests - efficiency and equity. The test of efficiency equates to the highest rate of return for a given investment of resources. The test of equity requires a determination of who should pay for the cost of capital improvements. In meeting the demand for additional capital facilities, the City will strive to balance the load between debt financing and "pay as you go" methods. The City realizes failure to meet the demands of growth may inhibit its continued economic viability, but also realizes too much debt may have detrimental effects. Through the rigorous testing of the need for additional debt financed facilities and the means by which the debt will be repaid, the City will strike an appropriate balance between service demands and the amount of debt. The City of Fort Collins uses lease purchase financing for the provision of new and replacement equipment, vehicles and rolling stock to ensure the timely replacement of equipment and vehicles and to decrease the impact of the cost to the user department by spreading the costs over several years. This method may also be used to acquire real property. The type of lease that the City uses is termed a conditional sales lease, in effect a purchase rather than a rental of property. The annual installments for all leases are appropriated by the Council each year. For Definitions Conduit Debt: when a government agency issues municipal securities to raise capital for revenue- generating projects where the funds generated are used by a third party (known as the "conduit borrower") to make payments to investors.. If a project fails and the security goes into default, it falls to the conduit borrower's financial obligation, not the conduit issuer (City). Common types of conduit financing include industrial development revenue bonds (IDRBs), private activity bonds and housing revenue bonds (both for single-family and multifamily projects). Most conduit-issued securities are for projects to benefit the public at large (i.e. airports, docks, sewage facilities) or specific population segments (i.e. students, low-income home buyers, veterans). Credit Enhancements: is usually bond insurance, but can be also subordination of other debt, reserve accounts, or other types of collateral. Agency: although the term is not normally used by local governments, an agency is an organization created by the City with separate powers and authorities. Debt Service Coverage Ratio: is a common measure of the ability to make debt service payments. The formula is net operating income (operating revenue – operating expense) divided by debt service (annual principal and interest) Packet Pg. 79 Attachment8.3: Current Debt Policy (Debt & Revenue Policy) Financial Policy 2 – Issuing Debt 6 purposes of securing credit ratings and monitoring annual debt service as a percentage of operating expenditures; lease purchase financing is considered a long-term liability of the City and therefore will be issued under the same conditions as long-term debt. 7.2. AUTHORIZATION FOR MUNICIPAL BORROWING The Charter authorizes the borrowing of money and the issuance of the following securities to evidence indebtedness: 1. short-term notes, 2. general obligation securities, 3. revenue securities, 4. refunding securities, 5. special assessment securities, 6. tax increment securities, and 7. any other securities not in contravention of the Charter. The Charter and State Constitution determine which securities may be issued only after a vote of the electors of the City and approved by a majority of those voting on the issue. 7.3. CONDITIONS FOR USING DEBT Debt financing of capital improvements and equipment will be done only when the following conditions exist: 1. When non-continuous projects (those not requiring continuous annual appropriations) are desired; 2. When it can be determined that future users will receive a benefit from the improvement; 3. When it is necessary to provide basic services to residents and taxpayers (for example, purchase of water rights); 4. When the rights of bond buyers and subsequent investors are protected through full disclosure; and 5. When total debt, including that issued by overlapping governmental entities, does not constitute an unreasonable burden to the residents and taxpayers. 7.4. DEBT INDICATORS AND TARGET LEVELS OF DEBT While no absolute measures of debt burden exist, the City recognizes that municipal bond rating agencies and financial analysts have established key debt indicators by which they evaluate the credit strength of issuers. Since debt issued by entities sharing the same geographic area, for example, Poudre R-1 School District, cannot be controlled by the City, the indicator that will be used will be calculated using only direct debt issued by the City itself. The indicator does not include debt issued by the City or by the City Council as the Board of Directors for the City's utilities, as the revenue collected for services are the source of repayment. The City Council has chosen to use direct debt service as a percent of General Fund and debt service expenditures to monitor its debt. This indicator measures how the City's debt burden compares to financial operations. As debt Packet Pg. 80 Attachment8.3: Current Debt Policy (Debt & Revenue Policy) Financial Policy 2 – Issuing Debt 7 service requirements increase, the flexibility to make decisions regarding other expenditures is reduced. Excessive debt may be indicated if the percentage is maintained at very high levels. A debt service to operating budget expenses ratio of 10 to 15 percent is considered fair; over 15 percent is generally considered poor. THE TARGET INDICATOR IS: Direct debt service as a percent of operating expense: 15 percent for the 2004-2008 period. Using the debt indicator as defined above, the City will have some debt capacity. This means the City could use some of its operating revenue to support additional debt during the five-year projection period. Since the City=s sustained growth causes demand for capital improvements financed through debt or lease financing, the City target is set at a level slightly above the median for cities of comparable size. The indicator is a full loading of governmental debt and is calculated in the same manner that rating agencies use. 7.5. SOUND FINANCING OF DEBT When the City utilizes debt financing, it will ensure that the debt is soundly financed by: 1. Conservatively projecting the revenue sources that will be used to pay the debt; 2. Financing the improvement over a period not greater than the useful life of the improvements; 3. Determining that the benefits of the improvement exceed the costs, including interest costs; 4. Maintaining a debt service coverage ratio which ensures that combined debt service requirements will not exceed revenues pledged for the payment of debt; and 5. Evaluating proposed debt against the target debt indicators. 7.6. FINANCING METHODS The City maintains the following policies in relation to methods of financing used to issue debt: 1. Total General Obligation (payable from Property Tax levies) debt will not exceed 10% of assessed valuation per the City Charter; 2. Where possible, the City will use revenue or other self-supporting bonds instead of General Obligation Bonds; 3. When appropriate, the City will issue non-obligation debt, for example, Industrial Development Revenue Bonds, to promote community stability and economic growth; 4. Staff will maintain open communications with bond rating agencies about its financial condition and whenever possible, issue rated securities; and 5. Staff will exchange information with Larimer County, Poudre R-1 School District, the Poudre Valley Hospital District and other entities whose debt would contribute to the overlapping debt indicators for the purpose of monitoring such debt burdens. The budget includes appropriations for debt service payments and reserve requirements for all outstanding debt and for debt anticipated to be issued within the ensuing budget term. Packet Pg. 81 Attachment8.3: Current Debt Policy (Debt & Revenue Policy) Financial Policy 2 – Issuing Debt 8 7.7. BOND MARKET DISCLOSURE The Securities and Exchange Commission (SEC) requires the City of Fort Collins to covenant in its bond documents to provide bondholders certain annual financial information. The provision of the information is done through qualified information repositories. The SEC rule did not establish a standard format for the financial information. The required information may be presented in an appropriate disclosure document determined by the City in consultation with legal counsel. In addition to annual financial information, the City is required to covenant in the bond documents that it will provide notice of the following Amaterial events@ to the information repositories, with respect to the City=s bonds: 1. principal and interest payment delinquencies; 2. non-payment related defaults; 3. unscheduled draws on debt service reserves reflecting financial difficulties; 4. unscheduled draws on credit enhancements reflecting financial difficulties; 5. substitution of credit or liquidity providers, or their failure to perform; 6. adverse tax opinions or events affecting the tax-exempt status of the City=s bonds; 7. modifications to rights of the owners of City bonds or bond calls; or 8. rating changes. The City is further required to covenant that it will provide notice in a timely manner if it fails to comply with its disclosure undertakings. The City considers its Comprehensive and Financial Report (CAFR) to be the most appropriate document in which to provide the continuing disclosure information. In addition to the required annual financial information, the CAFR contains financial and statistical information and related disclosures that are useful to existing and potential investors in the secondary bond market as required by the rule. In accordance with the City=s bond ordinances, the Financial Officer is authorized and directed to report all material events, as defined above, to the appropriate information repositories. Packet Pg. 82 Attachment8.3: Current Debt Policy (Debt & Revenue Policy) REVENUE POLICIES 2.1. REVENUE LIMITATION The City of Fort Collins’ revenue and expenditures are limited by Section 20 of Article X, Section 20 of the Colorado Constitution (Article X, Section 20 or ATABOR@). While TABOR places limits on both revenue and expenditures, its primary application is in limiting of the State and all local governments. Even though the limit is placed on both revenue and expenditures, the constitutional amendment in reality applies to a limit on revenue collections. Growth in revenue is limited to the increase in the Denver-Boulder- Greeley Consumer Price Index plus local growth (new construction and annexation). This percentage is added to the preceding year’s revenue base, giving the dollar limit allowed for revenue collection in the ensuing year. Any revenue collected over the limit must be refunded to the citizens, unless the voters approve the retention of the excess revenue. Federal grants or gifts to the City are not included in the revenue limit. City enterprises (electric, water, wastewater and stormwater utilities) are also exempt from the imposed limits. Beginning in 2003, the Golf Fund revenue source was s will allow it to be considered for enterprise status for purposes of Article X, Section 20TABOR. In order for an entity toTo become an enterprise, voters would need tomust approve a Charter amendment for the Golf Fundthat entity. In November 1997, Fort Collins’ voters approved a ballot measure that allows the City to retain revenues that exceed the growth limit imposed by Article X, Section 20TABOR. The measure was effective for 1996 and ensuing years. The approved measure specified that any retained revenues over the growth limit must be used for certain designated purposes. $ Public health and safety (including, but not limited to, environmental monitoring and mitigation) $ Transportation $ Growth management $ Maintenance and repair of public facilities While not included as part of the approved ballot measure, legal Legal principles require that those revenues collected in excess of the growth limit from fees charged or other legally restricted revenues must be used for the purpose for which they were collected. In addition, such revenues must also be used for the designated purposes approved by the voters. 2.2 REVENUE REVIEW, OBJECTIVES, AND MONITORING a. Review and Projections The City reviews estimated revenue and fee schedules as part of the budget process. The Major major revenue sources in the general General fund Fund are sales & use tax, property tax, lodging tax, intergovernmental revenues, fines & and Formatted: Indent: Left: 0.5" Formatted: Indent: Left: 0.5", First line: 0" Formatted: Font: (Default) Arial, 11 pt Formatted: Indent: Left: 0.5" Formatted: Indent: Left: 0.5", First line: 0" Formatted: Font: (Default) Arial, 11 pt Formatted: Indent: Left: 0.5" Formatted: Indent: Left: 0.5", First line: 0" Formatted: Font: (Default) Arial, 11 pt Formatted: Indent: Left: 0.5" Formatted: Indent: Left: 0.5", First line: 0" Formatted: Font: (Default) Arial, 11 pt Packet Pg. 83 Attachment8.4: Current Revenue Policies (Debt & Revenue Policy) forfeitures, user fees & and charges, and transfers from other funds. Conservative revenue projections are made for the budget term. The projections are monitored and updated as necessary. b. ObjectivesPrinciples The City has established six (6) general principles that will be used to guide decisions on revenue 1. Develop and maintain stable revenue sources. The City will strive to maintain stable revenue sources by: a. Targeting revenue sources with minimal volatility b. Monitoring current revenue sources for variability c. Adjusting forecasts as necessary to accommodate unanticipated increases and declines d. Monitoring and adjusting expenditures for unanticipated revenue gains/losses 2. Develop and maintain a diverse revenue base. A. For all general government operations, the City will strive to maintain diverse revenue sources. The City recognizes that becoming too dependent upon one revenue source would make revenue yields more vulnerable to economic cycles. Therefore, the City will strive to maintain diverse revenue sources by: a. Targeting revenue from multiple sources b. Working to expand fee based revenue where possible c. Working to minimize overdependence on any single revenue source d. Staff will monitor dependency on sales and use tax to ensure an over reliance does not occur 3. Cultivate revenue sources that are equitable among citizens of different economic levels. The City will strive to preserve a revenue stream that does not overburden low income residents by: a. Providing low income citizens with opportunities to participate in programs through reduced fee structures and scholarships b. Providing a Sales Tax on Food and Utility rebate to lessen the burden of taxes and fees on low income citizens c. Ensuring fees do not exceed cost to provide service 4. As appropriate, the burden of the cost of services will be fairly placed on those using the services. a. Fees for services will be based on a cost recovery model and assessed to the users of the service when applicable Formatted: Font: Not Bold, No underline Formatted: Indent: Left: 0.88", First line: 0" Formatted: Font: Not Bold, No underline Formatted: Indent: Left: 1.25", No bullets or numbering Formatted: Font: Not Bold Formatted: Underline Formatted: Font: (Default) Arial, 11 pt Formatted: Normal, Indent: Left: 1.5", No bullets or numbering, Tab stops: Not at 0" Formatted: Font: (Default) Arial, 11 pt Formatted: Indent: Left: 1.25", No bullets or numbering Formatted: Font: Not Bold Formatted: Font: Not Bold Formatted: Font: Not Bold Formatted: Font: Not Bold Formatted: Font: Not Bold Formatted: Indent: Left: 1.75", No bullets or numbering Packet Pg. 84 b. With the exception of services provided for the common good of the community, service fees will be based on the need of the users and paid by the specific users 5. Generate adequate revenue to maintain service levels in line with citizen expectations. The City will generate adequate revenue to maintain core service levels by: a. Ensuring fees for service do not exceed cost to provide service b. Maintaining a cost recovery model c. Monitoring service level performance annually through the Community Scorecard d. Regularly reviewing services to assess core vs. desired 6. Maintain healthy reserves. The City will maintain healthy reserves by: a. Adhering to State mandated reserve and internal reserve policies b. Maintaining a Tabor (State) reserve for the General Fund of 3% or more of the City’s fiscal year spending c. Meeting City policy for the General Fund of an additional contingency of 60 days or 17% of next year’s adopted budgeted expenditures For all general government operations, the City will strive to maintain diverse revenue sources. The City recognizes that becoming too dependent upon one revenue source would make revenue yields more vulnerable to economic cycles. c. Targets The City's major source of revenue for governmental activities and more specifically for programs within the General Fund is the Sales and Use Tax. The City will monitor the dependency on sales and use tax by tracking the percentage of the General Fund and General Government that comes from sales and use tax. Over the past five years, 2000-2004, the percentage of General Government Total Revenue from sales and use tax (the 2.25% portion not dedicated for specific uses by the voters) has been approximately 38%. The target for this percentage shall be 40%. For the General Fund, the percentage of revenues from sales & use tax has been approximately 60%. When the Comprehensive Annual Financial Report is completed each year, the Finance Department will monitor these two percentages and report the results to Council. For the General Fund the target shall be 60%. Formatted: Indent: Left: 1.25", No bullets or numbering Formatted: List Paragraph, Left, Numbered + Level: 1 + Numbering Style: a, b, c, … + Start at: 1 + Alignment: Left + Aligned at: 1.5" + Indent at: 1.75", Tab stops: Not at -0.83" + -0.5" + 0" + 0.5" + 0.88" + 1.25" + 1.63" + 2" + 2.5" + 3" + 3.5" + 4" + 4.5" + 5" + 5.5" + 6" + 6.5" Formatted: Font: +Headings (Cambria) Packet Pg. 85 Attachment8.4: Current Revenue Policies (Debt & Revenue Policy) d. Monitoring The percentages will beare monitored each year with the preparation of the annual financial report. Preliminary estimates of the percentages should be available in April and be incorporated into the budget process. The percentages will beare reviewed by Council Finance Committee annually. and Council annually.Council. e. Policy Action In the event the percentages exceed the targets, the City Manager will provide an analysis of the City's revenues to the Council. The City Manager may propose adjustments to revenue sources other than the sales and use tax (some examples include user fees, fines & forfeitures, transfers from other funds) to meet the targets or decrease the trend of increasing dependency on sales and use tax. Generally, for this policy to be effective, revenues from all other sources will need to grow at roughly the same rate as the sales and use tax collections. 2.3. FEE POLICY As a home rule municipality, the City of Fort Collins has the ability to determine the extent to which fees should be used to fund City facilities, infrastructure and services. There are two kinds of fees that the City may establish: impact fees and special service fees. Impact fees are typically one-time charges levied by the City against new development. The fees are based on current levels of service and act as a buy-in method for new development. The revenue can only be used for capital infrastructure needs created by the impact of the new development. to generate revenue for the construction of infrastructure and capital facilities needed to offset the impacts of the new development. Special service fees are charges imposed on persons or property that are designed to defray the overall cost of the particular municipal service for which the fee is imposed. This Policy sets forth principles for identifying: 1) the kinds of services for which the City could appropriately fees could appropriately be imposed by the Cityimpose fees; 2) methods for calculating the percentage of costs to be recovered by such fees; and 3) the manner in which the fees should be allocated among individual fee payers. a. Fees Should Be Cost Related The amount of a fee should not exceed the overall cost of providing the facility, infrastructure or service for which the fee is imposed. In calculating that cost, direct and indirect costs may be included. That is: 1. costs which are directly related to the provision of the service; and, 2. support costs which are more general in nature but provide support for the provision of the service. b. Percentage of Cost Recovery The extent to which the total cost of service should be recovered through fees depends upon the following factors: Formatted: Indent: Left: 0.88" Packet Pg. 86 Attachment8.4: Current Revenue Policies (Debt & Revenue Policy) 1. The nature of the facilities, infrastructure or services. In the case of fees for facilities, infrastructure as well as governmental and proprietary services, total cost recovery may be warranted. In the case of governmental services, it may be appropriate for a substantial portion of the cost of such services to be borne by the City=’s taxpayers, rather than the individual users of such services. Governmental services are those which are provided by the City for the public good such as regulating land use, maintaining streets, and providing police and fire protection. Proprietary services are those which are provided for the benefit and enjoyment of the residents of the City, at their discretion, such as parks and recreation services. 2. The nature and extent of the benefit to the fee payers. When a particular facility or service results in substantial, immediate and direct benefit to fee payers, a higher percentage of the cost of providing the facility or service should be recovered by the fee. When a particular facility or service benefits not only the fee payer but also a substantial segment of the community, lower cost recovery is warranted. 3. The level of demand for a particular service. Because the pricing of services can significantly affect demand, full cost recovery for services is more appropriate when the market for the services is strong and will support a high level of cost recovery. 4. Ease of collection. In the case of impact fees, which can be collected at the time of issuance of a building permit, ease of collection is generally not a factor. In the case of fees for services, however, such fees may prove to be impractical for the City to utilize if they are too costly to administer. c. Establishment and Modification of Fees and Charges Aside from user fees, (e.g. Recreation classes and facility room rentals), all fees imposed by the City will be established by the City Council by ordinance. In the case of impact fees, utility fees and charges, and special service fees assessed against property the ordinance establishing the fees will determine: 1. the level of cost that should be recovered through the fees according to the criteria established in this Policy; 2. an appropriate method for apportioning the cost of providing each service among the users of the service; and, 3. a procedure for periodically reviewing and modifying the amount of fees in order to maintain appropriate cost recovery levels. The amounts of these kinds of fees may be modified only by ordinance of the City Council. The amounts of other kinds of special service fees, such as user fees charged for the use of City recreational and cultural facilities, may be determined by the City Manager, according to criteria established by the City Council by ordinance, absent any provision of the City Charter or Code to the contrary. Formatted: Font color: Red Packet Pg. 87 Attachment8.4: Current Revenue Policies (Debt & Revenue Policy) All fee revenues will be estimated by the City Manager and submitted to the City Council as part of the City Manager=’s recommended budget. d. Rebate Programs If the amount of a particular fee is considered to be too high to accommodate the needs of particular segments of the community and the public interest would be served by adjusting the amount or manner of payment of such fees in particular instances, the amount of the fee may be waived, rebated, or deferred as appropriate. In the case of fees established by ordinance, the criteria for waiving, rebating, or deferring payment of such fees shall be established by the City Council by ordinance. 2.4. SALES AND USE TAX DISTRIBUTION The City's Sales and Use Tax totals 3.00 cents, developed as follows: 1968 - General City uses 1.00 cent 1980 - General City uses 1.00 cent 1982 - General City uses 0.25 cent 2006 - Street Maintenance 0.25 cent* 2006 - Building on Basics 0.25 cent* 2006 - Natural Areas & Open Space 0.25 cent* 2011 - Keeping Fort Collins Great 0.85 cent* 3.85 cents *Excluding sales of grocery food. Revenue generated by the Sales and Use Tax will be distributed, based on adopted budgets, in the following manner: TAX ON ALL SALES & USES: 2.25 cents $ Fixed Dollar Amounts Annual Debt Service Sales & Use Tax Debt Service Reserves $ General Fund Subject to appropriations, actual Sales and Use Tax revenue generated by the 2.25 cent tax in excess of the fixed dollar amounts listed above, will be transferred deposited to the General Fund. Actual sales and use tax revenue generated by the 0.25 cent tax for Natural Areas and Open Space will be transferred to, and be retained in the Natural Areas Fund to be used to acquire, operate and maintain open spaces, community separators, natural areas, wildlife habitat, riparian areas, wetlands and valued agricultural lands and to provide for the appropriate use and enjoyment of these areas by the citizenry, through land conservation projects to be undertaken where there is an identifiable benefit to the Formatted: Indent: Left: 0", First line: 0" Packet Pg. 88 Attachment8.4: Current Revenue Policies (Debt & Revenue Policy) residents of the City, as determined by the City Council, either within the City or its growth management or regionally, provided certain provisions are met. Actual sales and use tax revenue generated by the 0.25 cent tax for Street Maintenance will be deposited transferred to, and retained in the Transportation Services Fund to be used to pay the costs of planning, design, right-of-way acquisition, incidental upgrades and other costs associated with: the repair and renovation of City streets, including but not limited to curbs, gutters, bridges, sidewalks, parkways, shoulders and medians. Actual sales and use tax revenue generated by the 0.25 cent tax for Building on Basics projects will be transferred to, and be retained in the Capital Projects Fund or corresponding operating funds to be used to pay the costs of planning, design, right-of- way acquisition, construction, and at least seven (7) years of operation and maintenance for street/transportation projects and other community capital projects, identified during the Building on Basics process, approved by the voters. 2.5. PRIVATE CONTRIBUTIONS The City encourages the solicitation of private contributions. These services and programs represent extra services that the City has not been able to provide to residents through its regular revenue base. In times of revenue constraints the City may not be able to provide the same level of service without additional support. Therefore, efforts should be made to secure private contributions in support of these programs and services, as these contributions are an integral part of their successful operation. With respect to Article X, Section 20 of the State ConstitutionTABOR, the City=’s Finance Department will make a determination as to whether a contribution is a gift and is therefore excluded from constitutional limits. Formatted: Font color: Red Packet Pg. 89 Attachment8.4: Current Revenue Policies (Debt & Revenue Policy) Getting Help Please contact the Revenue and Project Manager with any questions at 970.221.6626. Related Policies/References Information about related policies or procedures, guidelines, forms, etc. Give complete references and ensure that documents cited are readily available (i.e. either as widely distributed manuals or online). If needed provide additional background discussion here. Reference to detailed procedures that are recommended in order to carry out the intent of the policy. Definitions Governmental Services: services provided by the City for the public good such as regulating land use, maintaining streets, and providing police and fire protection. Impact Fees: usually one-time charges, levied by the City against new development to offset the impacts of the new developments Proprietary Services: services provided for the benefit and enjoyment of the residents of the City, at their discretion, such as parks and recreation services Special Service Fee: charges imposed on persons or property that are designed to defray the overall cost of the particular municipal service for which the fee is imposed Formatted: Font color: Red Formatted: Font color: Red Packet Pg. 90 Attachment8.4: Current Revenue Policies (Debt & Revenue Policy) - 1 - RESOLUTION 2013-093 OF THE COUNCIL OF THE CITY OF FORT COLLINS AMENDING THE CITY COUNCIL’S FINANCIAL MANAGEMENT POLICIES BY UPDATING THE REVENUE AND DEBT POLICIES SECTIONS CONTAINED THEREIN WHEREAS, in 1994, the City Council adopted Resolution 1994-174 approving certain Financial Management Policies (the “Policies”) for the City, which Policies establish guidelines for the preparation of the annual budgets of the City and its long-range financial plans; and WHEREAS, the City Council has periodically amended the Policies; and WHEREAS, the City Manager and Financial Officer have recommended that the City Council further amend the Policies to include updated details in the Revenue and Debt Policy sections; and WHEREAS, the purpose of the Revenue Policy update is to include the addition of revenue principles to provide staff and City Council a foundation for making sound financial decisions, which principles call for maintaining a diverse and stable revenue base; cultivating revenue sources that are equitable among all economic levels; placing the burden of the cost of service on those using the services; generating adequate revenue to maintain core service levels; and maintaining healthy reserves; and WHEREAS, the purposes of the Debt Policy updates are to: include a revised method of limiting government debt from “percent of General Fund” revenue to “percent of government fund” revenue; add capacity guidelines for enterprise funds; add information about “moral obligation pledges” and guidelines as to when such pledges may be used; add language about maintaining the City’s overall credit rating at AAA; and add refinancing guidance; and WHEREAS, the City Council Finance Committee has reviewed the proposed changes to the Revenue and Debt Policies and has recommended approval of the same. NOW, THEREFORE, BE IT RESOLVED BY THE COUNCIL OF THE CITY OF FORT COLLINS that the Financial Management Policies, as previously amended, are hereby further amended by the incorporation of updated Revenue and Debt Policy sections, as attached hereto as Exhibits "A" and “B” and incorporated herein by this reference. Packet Pg. 91 - 2 - Passed and adopted at a regular meeting of the Council of the City of Fort Collins this 19th day of November, A.D. 2013. _________________________________ Mayor ATTEST: _____________________________ Deputy City Clerk Packet Pg. 92 Financial Management Policy 2 Revenue Issue Date: Version: Issued by: Revenue and Project Manager Financial Policy 2 – Revenue 1 2.1 Limitations The City of Fort Collins’ revenue and expenditures are limited by Article X, Section 20 of the Colorado Constitution (TABOR). While TABOR limits both revenue and expenditures, its primarily application is in limiting revenue collections. Growth in revenue is limited to the increase in the Denver-Boulder-Greeley Consumer Price Index plus local growth (new construction and annexation). This percentage is added to the preceding year’s revenue base, giving the dollar limit allowed for revenue collection in the ensuing year. Any revenue collected over the limit must be refunded to the citizens unless the voters approve the retention of the excess revenue. Federal grants or gifts to the City are not included in the revenue limit. City enterprises (electric, water, wastewater and stormwater utilities) are also exempt from the imposed limits. In 2003, the Golf Fund revenue sources was considered for enterprise status for purposes of TABOR. In order for an entity to become an enterprise, voters must approve a Charter amendment for that entity. In November 1997, Fort Collins’ voters approved a ballot measure that allows the City to retain revenues that exceed the growth limit imposed by TABOR. The measure specified that any retained revenues over the growth limit must be used for certain designated purposes. Objective: Monitoring and controlling revenues is important to the City of Fort Collins. Through its revenue policy, the City primarily aims to maintain a diversified revenue system which will protect it from possible short-term fluctuations in any of its various revenue sources. To accomplish this, revenues are monitored on a continuous basis. An understanding of the economic and legal factors which directly and indirectly affect the level of revenue collections is an important part of the City’s revenue policy. Applicability: This policy applies to all City Revenues. This policy does/does not apply to or govern revenues generated by City-owned general improvement districts. Authorized by: City Council EXHIBIT A Packet Pg. 93 Attachmenta: Exhibit A (Debt & Revenue Policy - RESO) Financial Policy 2 – Revenue 2  Public Health and Safety (including, but not limited to, environmental monitoring and mitigation)  Transportation  Growth Management  Maintenance and Repair of Public Facilities Legal principles require that those revenues collected in excess of the growth limit from fees charged or other legally restricted revenues must be used for the purpose for which they were collected. In addition, such revenues must also be used for the designated purposes approved by the voters. 2.2 Revenue Review, Objectives and Monitoring A. Review and Projections The City reviews estimated revenue and fee schedules as part of the budget process. The major revenue sources in the General Fund are sales and use tax, property tax, lodging tax, intergovernmental revenues, fines and forfeitures, user fees and charges, and transfers from other funds. Conservative revenue projections are made for the budget term. The projections are monitored and updated as necessary. B. Principles The City has established six (6) general principles that will be used to guide decisions on revenue: 1. Develop and maintain stable revenue sources. The City will strive to maintain stable revenue sources by: a. Targeting revenue sources with minimal volatility b. Monitoring current revenue sources for variability c. Adjusting forecasts as necessary to accommodate unanticipated increases and declines d. Monitoring and adjusting expenditures for unanticipated revenue gains/losses 2. Develop and maintain a diverse revenue base. For all general government operations, the City will strive to maintain diverse revenue sources. The City recognizes that becoming too dependent upon one revenue source would make revenue yields more vulnerable to economic cycles. Therefore, the City will strive to maintain diverse revenue sources by: a. Targeting revenue from multiple sources b. Working to expand fee based revenue where possible c. Working to minimize overdependence on any single revenue source d. Staff will monitor dependency on sales and use tax to ensure an over Packet Pg. 94 Attachmenta: Exhibit A (Debt & Revenue Policy - RESO) Financial Policy 2 – Revenue 3 reliance does not occur 3. Cultivate revenue sources that are equitable among citizens of different economic levels. The City will strive to preserve a revenue stream that does not overburden low income residents by: a. Providing low income citizens with opportunities to participate in programs through reduced fee structures and scholarships b. Providing a Sales Tax on Food and Utility rebate to lessen the burden of taxes and fees on low income citizens c. Ensuring fees do not exceed cost to provide service 4. As appropriate, the burden of the cost of services will be fairly placed on those using the services. a. Fees for services will be based on a cost recovery model and assessed to the users of the service when applicable b. With the exception of services provided for the common good of the community, service fees will be based on the need of the users and paid by the specific users 5. Generate adequate revenue to maintain service levels in line with citizen expectations. The City will generate adequate revenue to maintain service levels by: a. Ensuring fees for service do not exceed cost to provide service b. Maintaining a cost recovery model c. Monitoring service level performance annually through the Community Scorecard 6. Maintain healthy reserves. The City will maintain healthy reserves by: a. Adhering to State mandated reserve and internal reserve policies b. Maintaining a Tabor (State) reserve for the General Fund of 3% or more of the City’s fiscal year spending c. Meeting City policy for the General Fund of an additional contingency of 60 days or 17% of next year’s adopted budgeted expenditures C. Targets The City's major source of revenue for governmental activities and more specifically for programs within the General Fund is Sales and Use Tax. The City will monitor the dependency on Sales and Use Tax by tracking the percentage of the General Fund and General Government that comes from Sales and Use Tax. Packet Pg. 95 Attachmenta: Exhibit A (Debt & Revenue Policy - RESO) Financial Policy 2 – Revenue 4 D. Monitoring The percentages are monitored each year with the preparation of the annual financial report. The percentages are reviewed by Council Finance Committee annually. 2.3 Fee Policy As a home rule municipality, the City of Fort Collins has the ability to determine the extent to which fees should be used to fund City facilities, infrastructure and services. There are two kinds of fees that the City may establish: Impact Fees and Special Service Fees. Impact fees are typically on-time charges levied by the City against new development. The fees are based on current levels of service and act as a buy-in method for new development. The revenue can only be used for capital infrastructure needs created by the impact of the new development. Special service fees are charges imposed on persons or property that are designed to defray the overall cost of the particular municipal service for which the fee is imposed. This Policy sets forth principles for identifying: 1) the kinds of services for which the City could appropriately impose fees; 2) methods for calculating the percentage of costs to be recovered by such fees; and 3) the manner in which the fees should be allocated among individual fee payers. A. Fees should be cost related The amount of a fee should not exceed the overall cost of providing the facility, infrastructure or service for which the fee is imposed. In calculating that cost, direct and indirect costs may be included. That is: 1. Costs which are directly related to the provision of the service; and, 2. Support costs which are more general in nature but provide support for the provision of the service. B. Percentage of cost recovery The extent to which the total cost of service should be recovered through fees depends upon the following factors: 1. The nature of the facilities, infrastructure or services. In the case of fees for facilities, infrastructure as well as governmental and proprietary services, total cost recovery may be warranted. In the case of governmental services, it may be appropriate for a substantial portion of the cost of such services to be borne by the City’s taxpayers, rather than the individual users of such services. 2. The nature and extent of the benefit to the fee payers. When a particular facility or service results in substantial, immediate and direct benefit to fee payers, a higher percentage of the cost of providing the facility or service should be recovered by the fee. When a particular facility or service benefits not only the fee Packet Pg. 96 Attachmenta: Exhibit A (Debt & Revenue Policy - RESO) Financial Policy 2 – Revenue 5 payer but also a substantial segment of the community, lower cost recovery is warranted. 3. The level of demand for a particular service. Because the pricing of services can significantly affect demand, full cost recovery for services is more appropriate when the market for the services is strong and will support a high level of cost recovery. 4. Ease of collection. In the case of impact fees, ease of collection is generally not a factor. In the case of fees for services, however, such fees may prove to be impractical for the City to utilize if they are too costly to administer. C. Establishment and Modification of Fees and Charges Aside from user fees, (e.g. recreation classes and facility room rentals), all fees imposed by the City will be established by the City Council by ordinance. In the case of impact fees, utility fees and charges, and special service fees assessed against property the ordinance establishing the fees will determine: 1. The level of cost that should be recovered through the fees according to the criteria established in this Policy; 2. An appropriate method for apportioning the cost of providing each service among the users of the service; and, 3. A procedure for periodically reviewing and modifying the amount of fees in order to maintain appropriate cost recovery levels. The amounts of these kinds of fees may be modified only by ordinance of the City Council. The amounts of other Special Service Fees, such as user fees charged for the use of City facilities, may be determined by the City Manager, according to criteria established by the City Council by ordinance, absent any provision of the City Charter or Code to the contrary. All fee revenues will be estimated by the City Manager and submitted to the City Council as part of the City Manager’s recommended budget. D. Rebate Programs If the amount of a particular fee is considered to be too high to accommodate the needs of particular segments of the community and the public interest would be served by adjusting the amount or manner of payment of such fees in particular instances, the amount of the fee may be waived, rebated, or deferred as appropriate. In the case of fees established by ordinance, the criteria for waiving, rebating, or deferring payment of such fees shall be established by the City Council by ordinance. Packet Pg. 97 Attachmenta: Exhibit A (Debt & Revenue Policy - RESO) Financial Policy 2 – Revenue 6 2.4 Sales and Use Tax Distribution The City's Sales and Use Tax totals 3.00 cents, developed as follows: 1968 - General City uses 1.00 cent 1980 - General City uses 1.00 cent 1982 - General City uses 0.25 cent 2006 - Street Maintenance 0.25 cent* 2006 - Building on Basics 0.25 cent* 2006 - Natural Areas & Open Space 0.25 cent* 2011 - Keeping Fort Collins Great 0.85 cent* 3.85 cents *Excluding sales of grocery food. Revenue generated by the Sales and Use Tax will be distributed, based on adopted budgets, in the following manner: Subject to appropriations, actual Sales and Use Tax revenue generated by the 2.25 cent tax in excess of the fixed dollar amounts listed above, will be deposited to the General Fund. Actual sales and use tax revenue generated by the 0.25 cent tax for Natural Areas and Open Space will be transferred to, and be retained in the Natural Areas Fund to be used to acquire, operate and maintain open spaces, community separators, natural areas, wildlife habitat, riparian areas, wetlands and valued agricultural lands and to provide for the appropriate use and enjoyment of these areas by the citizenry, through land conservation projects to be undertaken where there is an identifiable benefit to the residents of the City, as determined by the City Council, either within the City or its growth management or regionally, provided certain provisions are met. Actual sales and use tax revenue generated by the 0.25 cent tax for Street Maintenance will be deposited and retained in the Transportation Services Fund to be used to pay the costs of planning, design, right-of-way acquisition, incidental upgrades and other costs associated with the repair and renovation of City streets, including but not limited to curbs, gutters, bridges, sidewalks, parkways, shoulders and medians. Actual sales and use tax revenue generated by the 0.25 cent tax for Building on Basics projects will be transferred to, and be retained in the Capital Projects Fund or corresponding operating funds to be used to pay the costs of planning, design, right-of-way acquisition, construction, and at least seven (7) years of operation and maintenance for street/transportation projects and other community capital projects, identified during the Building on Basics process, approved by the voters. Actual sales and use tax revenue generated by the 0.85 cent tax for Keep Fort Collins Great will be deposited and retained in the Keep Fort Collins Great Fund which is allocated as follows: 33% for street maintenance and repair; 17% for other street and transportation needs; 17% for police services; 11% for fire protection and other emergency services; 11% for parks maintenance and recreation services; and 11% for community priorities other than those listed above, as determined by the City Council. Packet Pg. 98 Attachmenta: Exhibit A (Debt & Revenue Policy - RESO) Financial Policy 2 – Revenue 7 2.5 Private Contributions The City encourages the solicitation of private contributions. These services and programs represent extra services that the City has not been able to provide to residents through its regular revenue base. In times of revenue constraints the City may not be able to provide the same level of service without additional support. Therefore, efforts should be made to secure private contributions in support of these programs and services, as these contributions are an integral part of their successful operation. With respect to TABOR, the City’s Finance Department will make a determination as to whether a contribution is a gift and is therefore excluded from constitutional limits. Packet Pg. 99 Attachmenta: Exhibit A (Debt & Revenue Policy - RESO) Financial Policy 2 – Revenue 8 Getting Help Please contact the Revenue and Project Manager with any questions at 970.221.6626. Related Policies/References Information about related policies or procedures, guidelines, forms, etc. Give complete references and ensure that documents cited are readily available (i.e. either as widely distributed manuals or online). If needed provide additional background discussion here. Reference to detailed procedures that are recommended in order to carry out the intent of the policy. Definitions Governmental Services: services provided by the City for the public good such as regulating land use, maintaining streets, and providing police and fire protection. Impact Fees: usually one-time charges, levied by the City against new development to offset the impacts of the new developments Proprietary Services: services provided for the benefit and enjoyment of the residents of the City, at their discretion, such as parks and recreation services Special Service Fee: charges imposed on persons or property that are designed to defray the overall cost of the particular municipal service for which the fee is imposed Packet Pg. 100 Attachmenta: Exhibit A (Debt & Revenue Policy - RESO) Financial Management Policy 2 Issuing Debt Issue Date: Version: 2 Issued by: Controller/Assistant Financial Officer Financial Policy 2 – Issuing Debt 1 2.1 Authorization for Municipal Borrowing The City Charter (Article V. Part II) authorizes the borrowing of money and the issuance of long term debt. The Charter and State Constitution determine which securities may be issued and when a vote of the electors of the City and approved by a majority of those voting on the issue. 2.2 Purpose and Uses of Debt Long term obligations should only be used to finance larger capital acquisitions and/or construction costs that are for high priority projects. Debt will not be used for operating purposes. Debt financing of capital improvements and equipment will be done only when the following conditions exist: a) When non-continuous projects (those not requiring continuous annual appropriations) are desired; b) When it can be determined that future users will receive a significant benefit from the improvement; c) When it is necessary to provide critical basic services to residents and taxpayers (for example, purchase of water rights); d) When total debt, including that issued by overlapping governmental entities, does not constitute an unreasonable burden to the residents and taxpayers. Objective: The purpose of this policy is to establish parameters and provide guidance governing the issuance of all debt obligations issued by the City of Fort Collins (City). Applicability: This debt policy applies to all funds and Service Areas of the City and closely related agencies such as the Downtown Development Authority (DDA), Fort Collins Leasing Corporation and the Fort Collins Urban Renewal Authority (URA). Authorized by: City Council Resolutions 2013-XXX, Last change was authorized through adoption of the 2006-07 Budget in November 2005. EXHIBIT B Packet Pg. 101 Attachmentb: Exhibit B (Debt & Revenue Policy - RESO) Financial Policy 2 – Issuing Debt 2 2.3 Types of Debt and Financing Agreements The types of debt permitted are outlined in State statute. The City will avoid derivative type instruments. In general the following debt types are used by the City: a) General obligation bonds- backed by the credit and taxing power of the City and not from revenues of any specific project. Colorado law limits general obligation debt to 10% of the City’s assessed valuation. Under TABOR this type of debt must approved by voters. b) Revenue Bonds - issued and backed by the revenues of a specific project, tax increment district (TIF), enterprise fund, etc. The holders of these bonds can only consider this revenue source for repayment. TABOR does not require that voters approve these types of debt. c) Lease Purchase – issued whereby the asset acquired is used as collateral. Examples include Certificates of Participation (COP), Assignment of Lease Payments (ALP) and equipment leases. TABOR does not require that voters approve these types of agreements. d) Moral Obligation Pledge – Is a pledge to consider replenishing a debt reserve fund of another government agency if the reserve was used to make debt payments. This type of commitment will only be used to support the highest priority projects, or when the financial risk to the City does not increase significantly, or when the City’s overall credit rating is not expected to be negatively impacted. Because it is a pledge to consider replenishing, it is not a pledge of the City’s credit, and as such is not a violation of State statutes and City Charter. However, decision makers should keep in mind that not honoring a Moral Obligation Pledge will almost certainly negatively impact the City’s overall credit rating. TABOR does not require that voters approve these types of agreements. e) Interagency Borrowing – issued when the credit of an agency (DDA, URA) of the City does not permit financing at affordable terms. Usually used to facilitate a project until the revenue stream is established and investors can offer better terms to the agency. Program parameters are outlined in City’s Investment Policy. TABOR does not require that voters approve these types of agreements. f) Conduit Debt – Typically limited to Qualified Private Activity Bonds (PAB) defined by the IRS and limited to the annual allocation received from the State. Low income housing is one example of a qualified use of PAB. There is no pledge or guarantee to pay by the City. g) Any other securities not in contravention with City Charter or State statute. 2.4 Debt Structure and Terms The following are guidelines, and may be modified by the City to meet the particulars of the Packet Pg. 102 Attachmentb: Exhibit B (Debt & Revenue Policy - RESO) Financial Policy 2 – Issuing Debt 3 financial markets at the time of the issuance of a debt obligation: a) Term of the Debt: The length of the financing will not exceed the useful life of the asset or average life of a group of assets, or 30 years, whichever is less. Terms longer than 20 years should be limited to the highest priority projects. b) Structure of Debt: Level debt service will be used unless otherwise dictated by the useful life of the asset(s) and/or upon the advice of the City's financial advisor. c) Credit Enhancements: The City will not use credit enhancements unless the cost of the enhancement is less than the differential between the net present value of the debt service without enhancement and the net present value of the debt service with the enhancement. d) Variable Rate Debt: The City will normally not issue variable rate debt, meaning debt at rates that may adjust depending upon changed market conditions. However, it is recognized that certain circumstances may warrant the issuance of variable rate debt, but the City will attempt to stabilize the debt service payments through the use of an appropriate stabilization arrangement. e) Derivative type instruments and terms will be avoided. f) Interest during construction will be capitalized when the debt is in an enterprise fund. 2.5 Refinancing Debt Refunding of outstanding debt will only be done if there is a resultant economic gain regardless of whether there is an accounting gain or loss, or a subsequent reduction or increase in cash flows. The net present value savings shall be at least 3%, preferably 5% or more. In an advanced refunding (before the call date), the ratio of present value savings to the negative arbitrage costs should be at least 2. 2.6 Debt Limitations and Capacity Debt capacity will be evaluated by the annual dollar amount paid and the total amount outstanding with the goal to maintain the City’s overall issuer rating at the very highest rating, AAA. Parameters are different for Governmental Funds, Enterprise Funds, and Related Agencies. a. Governmental Funds - Annual debt service (principal and interest) will not exceed 5% of annual revenues. For calculation, revenues will not include internal charges, transfers and large one-time grants. Outstanding debt in relation to population and assessed value will be monitored. b. Enterprise Funds – Each fund is unique and will be evaluated independently. Each funds debt will be managed to maintain a credit score of at least an A rating. These funds typically issue revenue bonds and investors closely watch revenue coverage ratio. Coverage ratios are usually published in the Statistical Section of the City’s Packet Pg. 103 Attachmentb: Exhibit B (Debt & Revenue Policy - RESO) Financial Policy 2 – Issuing Debt 4 Comprehensive Annual Financial Statement. c. Related Agencies – Each agency will be evaluated independently, taking into account City Charter, State statutes, market conditions and financial feasibility. 2.7 Debt Issuance Process When the City utilizes debt financing, it will ensure that the debt is soundly financed by: a) Selecting an independent financial advisor to assist with determining the method of sale and the selection of other financing team members b) Conservatively projecting the revenue sources that will be used to pay the debt; c) Maintaining a debt service coverage ratio which ensures that combined debt service requirements will not exceed revenues pledged for the payment of debt. d) Evaluating proposed debt against the target debt indicators. 2.8 Other Debt Management - The City will also have an Administrative Policy and Procedure that includes guidance on: a) Investment of bond proceeds b) Market disclosure practices to primary and secondary markets, including annual certifications c) Arbitrage rebate monitoring and filing d) Federal and State law compliance practices Getting Help Please contact the Controller/Assistant Financial Officer with any questions at 970.221.6772 Related Policies/References  The City of Fort Collins Charter (Article V. Part II) Packet Pg. 104 Attachmentb: Exhibit B (Debt & Revenue Policy - RESO) Financial Policy 2 – Issuing Debt 5 e) Ongoing market and investor relations efforts Definitions Conduit Debt: when a government agency issues municipal securities to raise capital for revenue- generating projects where the funds generated are used by a third party (known as the "conduit borrower") to make payments to investors.. If a project fails and the security goes into default, it falls to the conduit borrower's financial obligation, not the conduit issuer (City). Common types of conduit financing include industrial development revenue bonds (IDRBs), private activity bonds and housing revenue bonds (both for single-family and multifamily projects). Most conduit-issued securities are for projects to benefit the public at large (i.e. airports, docks, sewage facilities) or specific population segments (i.e. students, low-income home buyers, veterans). Credit Enhancements: is usually bond insurance, but can be also subordination of other debt, reserve accounts, or other types of collateral. Agency: although the term is not normally used by local governments, an agency is an organization created by the City with separate powers and authorities. Debt Service Coverage Ratio: is a common measure of the ability to make debt service payments. The formula is net operating income (operating revenue – operating expense) divided by debt service (annual principal and interest) Packet Pg. 105 Attachmentb: Exhibit B (Debt & Revenue Policy - RESO) Attachment8.4: Current Revenue Policies (Debt & Revenue Policy)