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HomeMy WebLinkAbout2016-10-17 - Board of Directors Meeting Agenda Packet AGENDA YORBA LINDA WATER DISTRICT BOARD OF DIRECTORS SPECIAL MEETING Monday, October 17, 2016, 9:00 AM 1717 E Miraloma Ave, Placentia CA 92870 1. CALL TO ORDER 2. PLEDGE OF ALLEGIANCE 3. ROLL CALL Ric Collett, President Michael J. Beverage, Vice President Phil Hawkins Robert R. Kiley Gary T. Melton 4. PUBLIC COMMENTS Any individual wishing to address the Board is requested to identify themselves and state the matter on which they wish to comment. If the matter is on the agenda, the Board will recognize the individual for their comment when the item is considered. No action will be taken on matters not listed on the agenda. Comments are limited to matters of public interest and matters within the jurisdiction of the Water District. Comments are limited to three minutes. 5. DISCUSSION ITEMS This portion of the agenda is for matters that cannot reasonably be expected to be concluded by action of the Board of Directors at the meeting, such as technical presentations, drafts of proposed policies, or similar items for which staff is seeking the advice and counsel of the Board of Directors. Time permitting, it is generally in the District’s interest to discuss these more complex matters at one meeting and consider formal action at another meeting. This portion of the agenda may also include items for information only. 5.1. Municipal Market Disclosure Training 5.2. Draft Debt Management Policy 6. CLOSED SESSION The Board may hold a closed session on items related to personnel, labor relations and/or litigation. The public is excused during these discussions. 6.1. Public Employee Performance Evaluation Pursuant to Section 54957 of the California Government Code Title: General Manager 7. ADJOURNMENT 7.1. The next Regular Board of Directors Meeting will be held Thursday, October 27, 2016 at 8:30 a.m. Items Distributed to the Board Less Than 72 Hours Prior to the Meeting Pursuant to Government Code section 54957.5, non-exempt public records that relate to open session agenda items and are distributed to a majority of the Board less than seventy-two (72) hours prior to the meeting will be available for public inspection in the lobby of the District’s business office located at 1717 E. Miraloma Avenue, Placentia, CA 92870, during regular business hours. When practical, these public records will also be made available on the District’s internet website accessible at http://www.ylwd.com/. Accommodations for the Disabled Any person may make a request for a disability-related modification or accommodation needed for that person to be able to participate in the public meeting by telephoning the Executive Secretary at 714-701-3020, or writing to Yorba Linda Water District, P.O. Box 309, Yorba Linda, CA 92885-0309. Requests must specify the nature of the disability and the type of accommodation requested. A telephone number or other contact information should be included so the District staff may discuss appropriate arrangements. Persons requesting a disability-related accommodation should make the request with adequate time before the meeting for the District to provide the requested accommodation. ITEM NO. 5.1 AGENDA REPORT Meeting Date: October 17, 2016 Subject:Municipal Market Disclosure Training DISCUSSION: Mr. Cyrus Torabi, of Straddling Yocca Carlson & Rauth (District Bond Counsel), will provide a presentation to the Board of Directors and key staff regarding securities laws and regulations applicable to municipal agencies that issue debt in the public capital markets. ATTACHMENTS: Name:Description:Type: Presentation.pdf Presentation Backup Material October 17, 2016 Disclosure Responsibilities Under the Federal Securities Laws Presented by: Cyrus Torabi, Esq. Bond Counsel Presentation to Yorba Linda Water District ∗The District issues securities in the public capital markets ∗Investors in municipal securities have rights under federal securities laws ∗All “material”information must be disclosed Why Is Disclosure Necessary? ∗1933 Act has two substantive rules: ∗Registration requirement ∗Antifraud rule ∗Municipal securities are exempt from the registration requirement,but are subject to antifraud rule ∗Two standards of culpability: Negligence (Section 17(a)) vs. Recklessness or Willful intent to defraud (Rule 10b-5) The Securities Act Of 1933 ∗The 1934 Act creates ongoing disclosure requirements for public companies ∗Regulates brokers and dealers such as underwriters of District financings ∗Also contains antifraud provisions ∗1975 amendments to the 1934 Act make it clear that antifraud provisions apply to government issuers Securities Exchange Act Of 1934 Rule 10b-5 “It shall be unlawful for any person . . . a)To employ any device,scheme or artifice to defraud, b)To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made,in the light of the circumstances under which they were made,not misleading ....” Rule 10b-5 ∗“[w]hether or not there is a substantial likelihood that a reasonable investor or prospective investor would consider the information important in deciding whether or not to invest.” ∗Materiality is determined in context of all the facts and circumstances,but usually on a retroactive basis ∗Guidance comes primarily from court decisions and SEC enforcement cases The “Materiality” Standard ∗Negligence ∗Recklessness ∗Intent to defraud (“scienter”) Levels Of Culpability ∗Unlike corporate securities, there is no “line item” set of rules for what goes into an Official Statement (“OS”) ∗Starting in 1975, leaders in the municipal market created a set of guidelines for OS content ∗Other groups have suggested disclosure for particular market segments ∗Look at practices in the industry;recent developments (e.g.New Jersey,Pension,Continuing Disclosure Compliance ) ∗In the end, the District must use its own good judgment What Should Be Disclosed? ∗New offerings ∗Annual Report under Rule 15c2-12 ∗Any other circumstance where the District is “speaking to the market” •Public statements by officials –whether this will be considered “speaking to the market”will depend on the official making the statement and the audience. •Investor website •At this time,securities law does not impose a requirement to update or correct any statement previously made,if there is no other reason to be making a statement to the market. •EXCEPTION:If an OS is found to contain a misstatement with respect to prior compliance with a Continuing Disclosure Undertaking (discussed below),such misstatement must be disclosed. When Do Disclosure Rules Apply? ∗Audited Financial Statements (NOTE: CAFR not required to be filed) ∗Financial information (i.e.tables)and operating information (identified in Continuing Disclosure Undertaking,but should be comprehensive)of the type found in the Official Statement) ∗The mere fact that information is presented in tabular format for clarity or ease of reference does not require the District to update such information in a Continuing Disclosure Undertaking Content of Annual Reports ∗Opportunity for additional voluntary information ∗Consider Rule 10b-5 implications –is there moreyoushouldbesayingwithrespecttosuchtables? ∗Has anything happened since the date of theauditedfinancialstatementsthathasmateriallyimpactedtheDistrict’s financial or operatingcondition? Content of Annual Reports (continued) ∗No obligation to communicate with investors individually ∗Tension between market (and SEC)desire for transparency and potential issuer liability ∗No corollary to Regulation FD (requiring public companies to disseminate specified information which it provides to any investor) ∗Establish a single point of contact ∗Consider voluntary dissemination of information provided to specific investors Investor Communications •May be “speaking to the market” •Has to be an official with responsibility for such disclosures •Should not include statements made in other, non market-driven contexts Speeches/Presentations ∗Official Statement is offering document to investors ∗equivalent to prospectus ∗Must contain all material information for the particular bond sale ∗Official Statement is the District’s document ∗Underwriters,financial advisors and lawyers can help develop the Official Statement,but the District is ultimately responsible for content District Disclosure ∗Broad description of District’s financial,operating and economic condition ∗Description of Water System ∗Description of budget process,major revenue sources and expenditure programs ∗Information on recent and current budgets –“structural” deficit? Disclosure Principles ∗Description of particular program ∗Sources of payment of bonds and parity obligations ∗Description of loan process,funding sources,program criteria ∗Description of borrowers and outstanding loans ∗Information on debt –types and amounts –and derivatives ∗Information on operations ∗Litigation Disclosure Principles –(cont.) ∗Provide main points but do not overwhelm readers with detail ∗Highlight important developments “up front” ∗Determine appropriate level of importance for any particular event or budgetary item ∗Bringing all these factors together into final product is ongoing process of give and take Disclosure Principles –(cont.) ∗Progression of an offering ∗POS/sale/final OS/closing ∗Supplements are possible ∗Very rare and may be disruptive after sale ∗Be mindful of public actions or releases likely to occur ∗State budget, District financial statements, mid-year reports Timing Considerations For Bond Sale ∗Obtain input from involved departments ∗Empower staff at all levels to raise issues ∗While District coordinates,counsel helps pull information together and maintains document ∗Drafts reviewed by working group ∗“Due diligence”meeting before distribution of Preliminary Official Statement Process ∗Pace of recovery from recession ∗Status of fund balance and reserves ∗Expected increases in retirement related payments; unfunded liabilities (pension and OPEB) ∗Potential effect of new GASB standards ∗Past compliance with Continuing Disclosure Undertakings ∗State and Federal issues (i.e.drought;DHCCP;MWD Capital Program;Salton Sea;desalination;sequester) ∗Derivative exposure ∗Bankruptcy considerations Current Hot Topics ∗Tomorrow’s “hot topic”may be different than today’s –For example,disclosure re recession and effect on housing market is no longer timely –should be recrafted as a risk factor ∗Disclosure must evolve to reflect changing circumstances ∗Read the disclosure with “fresh eyes” ∗If you think something may be a concern,raise the issue with colleagues and the working group ∗There are no “stupid questions” ∗Political sensitivity and confidentiality considerations are not exceptions to disclosure Disclosure Considerations ∗Orange County –(Board approved Official Statement without review.Failed to disclose risk of pool investments). ∗Board that authorizes securities is responsible for disclosure ∗Reliance on professionals must be reasonable What Can Go Wrong? –Major Prior Enforcement Actions ∗San Diego (City voluntarily files secondary market disclosure on pension and retiree healthcare liability and errors in financial statements.) ∗Conclusions from review: ∗“the City’s procedures,policies and practices for disclosure and financial reporting are inadequate in major respects.Undermining the reliability of its public disclosure have been,among other factors,(1)the City’s excessive reliance on outside professionals to generate its disclosure documents,(2)its lack of procedures to verify the accuracy of those documents and (3)the absence of high-level oversight to judge the clarity and completeness of information provided to the investment markets.” What Can Go Wrong? –(cont.) ●Orange County —Emphasized that disclosure is issuer’s responsibility;relianceonprofessionalsmustbereasonable ●San Diego —Focus on lack of disclosure procedures and excessive relianceonoutsideprofessionals —Some individuals paid fines from their own pocket ●Incomplete or Misleading Pension Disclosures —States of New Jersey,Illinois and Kansas --first SEC actionsagainstaState —Reinforced lessons of San Diego;importance of disclosurepoliciesandtraining Lessons Learned from SEC Actions ∗West Clark Community Schools District (Indiana)–The SECchargedthattheDistrictincludedfraudulentmisstatementina2007OfficialStatementwhenitstatedthatitwasincompliancewithitsdisclosureobligationsrelatedtopriorbondofferings.However,the District had not submitted any of the requiredannualreportsornoticesforaprevious2005bondoffering,andtheunderwriterdidnotconductadequateduediligencewithrespecttocontinuingdisclosurecompliance.(The District enteredintoconsentordertosettlethecharges.) ∗City of Harrisburg (Pennsylvania)–The SEC charged the City withsecuritiesfraudbasedonmaterialmisstatementsinbudgetdocuments,audited financial reports and public statements.Generally SEC actions are based on Official Statements orcontinuingdisclosurefilings;however the SEC stated that,sincetheCityfailedtomakerequiredannualdisclosurefilings,investorswereforcedtorelyonthepublicdocumentsandstatements.(TheCityenteredintoaconsentordertosettlethecharges.) Recent Enforcement Actions ∗City of Miami (Florida)–The SEC charged the City and its BudgetDirectorwithmakingmateriallyfalseandmisleadingstatementsandomissionstoinvestorsandratingagenciesaboutcertaininterfundtransfersinbondofferingsandinthecity’s audited financial reports.SEC Report:“[the Budget Director]orchestrated the transfers fromthecity’s Capital Improvement Fund to its General Fund in order tomaskincreasingdeficitsintheGeneralFund,which is viewed byinvestorsandbondratingagenciesasakeyindicatoroffinancialhealth.”(In September 2016,the SEC won a verdict against the CityanditsBudgetDirector.) ∗City of South Miami (Florida)–The SEC charged the City with makingmaterialmisstatementsindocumentsprovidedtotheissuerofbondstofinanceaCityproject,which the issuer relied on in connection withtheissuanceofthebonds.The misrepresentations related to theCity’s compliance with various tax requirements,and were notspecificallycontainedintheOfficialStatementforthebonds.(TheCityenteredintoaconsentordertosettlethecharges.) Recent Enforcement Actions –(cont.) ∗City of Victorville (California)–The SEC charged the City with securities fraud in connection with a 2008 bond offering,by utilizing inflated values relating to property securing the bonds.The SEC charged that the City and the bond underwriter were aware of facts that indicated that property values were overstated.(The City is contesting the charges.) ∗State of Illinois –The SEC charged the State with misleading investors by omitting material information relating to the unfunded liabilities of its pension system.(The State entered into a consent order to settle the charges.) Recent Enforcement Actions –(cont.) ∗Greater Wenatchee Regional Events Center Public Facilities District (WA)–The SEC charged the District and its Contracts Manager with misleading investors by providing financial projections for the Events Center in the Official Statement that were questioned by two independent reports and falsely stating that no other examination of the financial projections to verify the projections existed.The financial projections included in the Official Statement were also revised upwards based on optimistic statements by the Mayor and the Contracts Manager.(The District and Contracts Manager entered into a consent order to settle the charges.The District agreed to pay a $20,000 penalty and undertake remedial actions) ∗The SEC also charged the Underwriter and its Managing Director with misleading investors.The SEC stated that the Underwriter did not ask to see the two independent reports despite being made aware of their existence.The SEC charged the Underwriter with failing to perform the due diligence necessary to have a reasonable basis for the truthfulness of the misleading statements in the Official Statement.(The Underwriter and the Managing Director entered into a consent order to settle the charges.) Recent Enforcement Actions –(cont.) ∗City of Allen Park,Michigan (2014) ∗SEC alleged City’s Official Statement failed to disclose deterioration of a major development project and a budget deficit.City accepted a C&D order under Rule 10b-5. ∗City Administrator was responsible for Official Statement disclosures, should have known correct facts.He settled with a C&D order,and bar from working in future bond deals. ∗City’s Mayor was alleged to “control”the Administrator and so also be responsible for the improper disclosures.He settled with a C&D order, a bar and a $10,000 fine. Recent Enforcement Actions –(cont.) ∗City of Harvey,Illinois (2014) ∗SEC alleged scheme by City Controller to siphon off bond money for personal use.City’s bond offerings also did not disclose that planned hotel development was abandoned. ∗City agreed to C&D settlement,required to hire SEC- approved disclosure counsel for any deal in next 3 years ∗Controller was found liable for securities fraud in default judgment,barred from future involvement in securities offerings and fined total of $217,000 (Jan.2015) ∗SEC had earlier obtained a restraining order in June 2014 to prevent a planned bond sale Recent Enforcement Actions –(cont.) ∗SEC Investigation –fees for lawyers and consultants ∗Adverse publicity ∗Reduced market access ∗May have to impose new procedures and oversight to settle SEC actions ∗Obligation to disclose SEC actions in future Official Statements ∗Rating Downgrades (triggers increased credit / liquidity provider fees) ∗Fines against issuer or culpable officials (increasing) Consequences of Bad Disclosure ∗Have the right people involved –make sure that the personnel involved in disclosure preparation can reasonably be expected to know material information ∗Empower everyone in the organization ∗Give the investors all the material facts,and let them decide ∗Full and transparent disclosure is essential ∗Investors must be provided all material information when making their investment decision ∗Officials participating in the disclosure process must be in a position to know material information (i.e.,“the right people must be in the room”) ∗Vigorous disclosure program requires buy-in and encouragement from top levels Summary ∗Full and transparent disclosure is essential ∗Investors must be provided all material information when making their investment decision ∗Officials participating in the disclosure process must be in a position to know material information (i.e.,“the right people must be in the room”) ∗Vigorous disclosure program requires buy-in and encouragement from top levels ∗The District has a robust disclosure process,and must continue to be vigilant in training involved officials and maintaining rigorous disclosure practices Summary ITEM NO. 5.2 AGENDA REPORT Meeting Date: October 17, 2016 Subject:Draft Debt Management Policy ATTACHMENTS: Name:Description:Type: Draft_Debt_Mgmt_Policy.pdf Draft Policy Backup Material STATEMENT OF DEBT MANAGEMENT POLICY DRAFT 1 of 10 Section I. Introduction Purpose and Overview In its publication entitled Best Practice Debt Management Policy, the Government Finance Officers Association (GFOA) states that Debt management policies are written guidelines, allowances, and restrictions that guide debt issuance practices of Board adopted issuance processes, management of a debt portfolio, and adherence to state and federal laws and regulations. A debt management policy should improve the quality of decisions, and articulate policy goals, provide guidelines for the structure of debt issuance, and demonstrate a commitment to long-term capital financial planning. The Yorba Linda Water District Debt Management Policy as set forth herein provides a set of comprehensive guidelines for the issuance and management of District’s debt portfolio. Adherence to the policy is essential to ensure the District maintains a diversified debt portfolio that supports the District’s financing needs and minimizes the District’s cost of funds. Roles and Responsibilities Finance Manager– The primary responsibility for debt management rests with the Finance Manager. The Finance Manager shall: • Provide for the issuance of District debt at the lowest possible cost and risk; • Determine the available debt capacity of the District; • Provide for the issuance of District debt at appropriate intervals and in reasonable amounts as required to fund approved and budgeted capital expenditures; • Recommend to the District’s Board of Directors (the “Board”) the method and manner of sale of District debt; • Monitor opportunities to refund debt and recommend such refunding as appropriate to reduce costs or to achieve other policy objectives; • Comply with all Internal Revenue Service (IRS), Municipal Securities Rulemaking Board (MSRB), Securities and Exchange Commission (SEC), and California Debt Investment Advisory Commission (“CDIAC”) rules and regulations governing the issuance of debt; • Maintain a current database with all outstanding debt; • Provide for the timely payment of principal and interest on all debt; • Comply with all terms and conditions, including continuing disclosure, required by the legal documents governing the debt issued; • Submit to the Board all recommendations to issue debt in accordance with this Policy; • Distribute to appropriate repositories information regarding the District’s financial condition and affairs at such times and in the form required by law, regulation and general practice; • Provide for the frequent distribution of pertinent information to the rating agencies; • Apply and promote prudent fiscal practices; and • Ensure that proceeds of any debt issued are in accordance with its governing documents and this Policy, and that no disbursements shall be made without the approval of the Finance Manager and one other senior staff member. Approval shall only be provided when the Finance Manager is in receipt of an appropriate certification from the construction project manager with supporting invoices from suppliers and / or contractors evidencing appropriate expenses in connection with the project. STATEMENT OF DEBT MANAGEMENT POLICY DRAFT 2 of 10 • In the case of an issue of bonds the proceeds of which will be used by a governmental entity other than the District, the District may rely upon a certification by such other governmental entity that it has adopted the policies described in SB 1029. Section II. Legal Governing Principles In the issuance and management of debt, the District shall comply with all legal constraints and conditions imposed by federal, state and local law. The following section highlights the key governing documents and certain debt limitations. Governing Law County Water District Law – The District was established in 1959 as a county water district under the County Water District Law, Division 12 of the Water Code of the State of California, as the successor to a private water company that was incorporated in or about 1909, for purposes of supplying water for domestic, irrigation, sanitation, industrial, commercial, recreation and fire suppression use. Federal Tax Law – The District shall issue and manage debt in accordance with the limitations and constraints imposed by federal tax law, to maximize its ability to sell tax-exempt debt. Such constraints include, but are not limited to, private activity tests, review of eligible projects, spend-down tests, and arbitrage rebate limitations. Securities Law – The District shall comply with the requirements of federal and state securities laws in offering District debt and the District shall comply with securities law requirements in providing ongoing disclosure to the securities markets. Governing Legal Documents Indenture – The District’s debt issuance is further governed in part by the Indenture of Trust, adopted September 8, 2016 of which constitutes the “Indenture.” The Indenture establishes the basic security structure of debt issued by the District that is secured by Net Water Revenues. Key terms and conditions include, but are not limited to, the definition of pledged revenues, the rate covenant and the additional bonds test. A copy of the Indenture can be found in Appendix B. The District shall comply with all limitations imposed under the Indenture, so long as such Indenture is in full force and effect... Permitted Debt by Type The District may legally issue both short-term and long-term debt, using the debt instruments described below. The Finance Manager, in consultation with the District’s General Counsel, Bond Counsel, and Financial Advisor shall determine the most appropriate instrument for funding purposes. General Obligation Bonds – The District is empowered, under California law, to levy taxes on all taxable property within its boundaries for the purpose of paying its voter-approved general obligation bonds and, subject to certain limitations. Certificates of Participation – Certificates of Participation (COP) provide debt financing through a lease, installment sale agreement or contract of indebtedness and typically do not require voter approval. Board action is sufficient to legally authorize a COP issue. The District shall pledge net revenues to the repayment of its COPs, under the terms and conditions specified in the Indenture. STATEMENT OF DEBT MANAGEMENT POLICY DRAFT 3 of 10 JPA Revenue Bonds – As an alternative to COPs, the District may obtain financing through the issuance of Debt by a joint exercise of powers agency with such Debt payable from amounts paid by the District under a lease, installment sale agreement, or contract of indebtedness. Commercial Paper – The District may issue short-term revenue certificates, including commercial paper and extendable commercial paper. Board action is sufficient to legally authorize a commercial paper issue. The District’s commercial paper is secured by net revenues. Voter approval is not required to issue commercial paper. Lines of credit - The District may enter into financing arrangements providing for a source of funds that can be readily accessed by the District for capital or operational needs. Board action is sufficient to legally authorize the establishment of a line of credit. Voter approval is not required to establish or access a lien of credit. Variable Rate Debt – The District is authorized to issue variable rate debt including, but not limited to, public market indexed notes, indexed notes or loans placed directly with financial institutions and other alternative variable rate and market access products as well as traditional variable rate demand obligations backed by bank liquidity facilities. Prior to the issuance of variable rate debt, the savings and other possible advantages compared to a fixed rate borrowing will be evaluated and a comparative analysis presented to the Board of Directors as part of the approval process. Refunding Revenue Bonds – The District is authorized to issue refunding revenue bonds to refund outstanding District indebtedness pursuant to the State of California local agency refunding revenue bond law (Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code of the State of California). Loans – The District is authorized to enter into loans, installment payment obligations, or other similarly like funding structures secured by a prudent source, or sources of repayment. Assessment Bonds – The District is authorized to issue assessment bonds pursuant to the Improvement Bond Act of 1915, subject to requirements imposed by Proposition 218. Such bonds are typically repaid from assessments collected within an assessment district formed pursuant to the Municipal Improvement Act of 1913. Assessments are levies of charges on real property to pay for projects or services that specifically benefit that parcel of property. Special Tax Bonds – The District is authorized to issue special tax bonds pursuant to the Mello-Roos Community Facilities Act of 1982, as amended, being Chapter 2.5, Part 1, Division 2, and Title 5 of the Government Code of the State of California. Limitations on Debt Issuance Short-Term Debt – The District’s short-term debt shall not exceed 30 percent of its total debt at the time of issuance. The calculation of short-term debt shall include any variable rate obligations, the authorized amount of commercial paper, any notes/bonds with a maturity equal to or less than five years. Subordinate Lien Long-Term Debt - The District’s subordinate lien debt, for which net revenues are pledged, shall be limited to that amount for which current and projected revenues generate overall debt service coverage of at least 100 percent. Senior Lien Long-Term Debt – The District’s senior lien long-term debt, for which net revenues are pledged, shall be limited to that amount for which current and projected revenues generate a senior lien debt service coverage of at least 125 percent. The calculation of debt service shall not include General Obligation Bonds, Assessment Bonds, or Special Tax Bonds to which revenue sources other than pledged revenues, as defined in STATEMENT OF DEBT MANAGEMENT POLICY DRAFT 4 of 10 the Indenture, are pledged. It should be noted that the District will issue debt to attempt to meet the senior lien debt service coverage target of 225 percent in keeping with its prudent financial management practices and to maintain credit ratings aligned with rating agency methodologies. Purpose for Borrowing The District shall issue debt solely for the purpose of financing the cost of design, engineering acquisition, and/or construction of water and wastewater system improvements in furtherance of the District’s Capital Improvement Program (CIP). Additionally, the District may, subject to Federal tax code limitations, include operational expenses in any debt issuance. Ethical Standards Governing Conduct Members of the District, the Board and its consultants, service providers, and underwriters shall adhere to standards of conduct as stipulated by the California Political Reform Act, as applicable. All debt financing participants shall maintain the highest standards of professional conduct at all times, in accordance with: • MSRB Rules, including Rule G-37 and G-42 shall be followed at all times; • Debt financing participants will assist the District staff in achieving its goals and objectives as defined in this Debt Management Policy; and • All debt financing participants shall make cooperation with the District staff their highest priority. Use of Derivatives The use of derivative products can, among other things, increase District financial flexibility and provide opportunities for interest rate savings or enhanced investment yields. Careful monitoring of such products is required to preserve District credit strength and budget flexibility. Swaps will not be used to speculate on perceived movements in interest rates. Before the District enters into any derivative product associated with debt, the Board shall adopt an interest rate swap policy. Section III. Integration of Capital Planning and Debt Activities Evaluating Capital Improvement Program Spending The District shall develop and maintain a capital finance model to evaluate the impact of capital program spending, operations and maintenance costs, and debt service on its financial condition. To that end, the Finance Manager shall oversee the ongoing maintenance of quantitative modeling that includes, but is not limited to, the following: • Five years of historic and projected cash flows; • Five years of historic and projected capital expenditures; • Five years of historic and projected operating costs; • Five years of historic and projected fund balances for any reserve funds established by the District’s then-adopted Reserve Policy; • Five years of historic and projected debt service coverage; • The most efficient mix of funding sources (long-term debt; short-term debt, and cash); • Projected revenue requirements; and STATEMENT OF DEBT MANAGEMENT POLICY DRAFT 5 of 10 • Projected rates and charges. Section IV. Procurement and Evaluation of Professional Services Appointment of Service Providers – The Finance Manager may solicit from time to time bids, quotes or proposals, including sole source proposals for the following services on an as needed basis: • Financial Advisor – Service provider that ensures the District complies with all financial management procedures and policies and ensures successful closing for bond transactions. • Bond Counsel – Service provider that drafts appropriate documentation to ensure successful and timely closing and create valid and legally binding security for bond issues, and provide appropriate advice and taking appropriate actions to ensure legal validity of bond issues under state and federal laws as applicable. Section V. Transaction-Specific Policies Method of Sale – The Finance Manager shall determine the most appropriate form of sale of its debt. In making a recommendation to the Board the Finance Manger may consult with the District’s Financial Advisor and Bond Counsel and may take into account, among other things, the type and tenor of the proposed debt; the District’s credit ratings; the amount of funding necessary; the timing of the needed funds; local and national economic conditions; and general bond market conditions. Competitive Bid Method - When necessary to minimize the costs and risks of any District borrowing, the Finance Manager may submit to the Board a request to sell bonds on a competitive basis. Such bids may take the form of hand- delivered or electronically transmitted offers to purchase the bonds. Any competitive sale of District debt will require approval of the Board. District debt issued on a competitive bid basis will be sold to the bidder proposing the lowest true interest cost to the District provided the bid conforms to the official notice of sale. Negotiated Bid Method – A negotiated bond issue will provide for the sale of debt by negotiating the terms and conditions of the sale, including price, interest rates, credit facilities, underwriter or remarketing fees, and commissions. Examples of such sales include: • Variable rate demand obligations; • An issue of debt so large that the number of potential bidders would be too limited to provide the District with truly competitive bids; • An issue requiring the ability to react quickly to sudden changes in interest rates (e.g. refunding bonds); • An issue requiring intensive marketing efforts to establish investor acceptance; • An issue of debt with specialized distribution requirements; and • An issue of debt sold during a period of extreme market disruption or volatility. If bonds are sold on a negotiated basis, the negotiations of terms and conditions shall include, but not be limited to, prices, interest rates, underwriting or remarketing fees, and underwriting spreads. The District, with the assistance of its Financial Advisor, shall evaluate the terms offered by the underwriting team. Guidelines with respect to price, interest rates, fees, and underwriting spreads shall be based on prevailing terms and conditions in the marketplace for comparable issuers, credit ratings, tenor, and par amount. STATEMENT OF DEBT MANAGEMENT POLICY DRAFT 6 of 10 If more than one underwriter is included in the negotiated sale of debt, the District shall establish appropriate levels of liability, participation and priority of orders. Such levels shall be based upon District policy with regards to the underwriting responsibility among the team members, the desired allocation of total fees, and the desired distribution of bonds. Guidelines for establishing liability, participation, and priority of orders shall be based on prevailing terms and conditions in the marketplace for comparable issuers. The District shall, with the assistance of its Financial Advisor, oversee the bond allocation process. The bond allocation process shall be managed by the lead underwriter, with the following requirements: • The bonds are allocated fairly among members of the underwriting team, consistent with the previously negotiated terms and conditions; • The allocation process complies with all MSRB regulations governing order priorities and allocations; • The lead underwriter shall submit to the Finance Manager a complete and timely account of all orders, allocations, and underwriting activities with the investor names identified as appropriate. The Finance Manager Services shall require a post-sale analysis and reporting for each negotiated bond sale. The Financial Advisor or the lead underwriter may perform such analysis. A post-sale analysis will include, but not be limited to: • Summary of the pricing, including copies of the actual pricing wires; • Results of comparable bond sales in the market at the time of the District’s pricing; • Detailed information on orders and allocation of bonds, by underwriting firm; • Detailed information on final designations earned by each underwriter; and • Summary of total compensation received by each underwriter. Structural Elements Pledge of Revenues – The District’s pledge of revenues shall be determined for each debt issue depending upon the debt instrument: • General Obligation Bonds of the District shall be repaid from voter-approved property taxes on property within the jurisdiction of the District. • Certificates of Participation of the District shall be repaid from net revenues, as defined in the Indenture. • Revenue Bonds of the District shall be repaid from net revenues, as defined in the Indenture. • Loans of the District may be repaid from net revenues of the water and or wastewater systems, or other financially prudent sources of repayment. • Assessment Bonds of the District shall be repaid levies or charges collected within an assessment district formed by the District pursuant to the Municipal Improvement Act of 1913. • Special Tax Bonds of the District shall be payable from net special taxes collected in applicable taxing jurisdiction as a result of the levy of special taxes. Maturity – The District may issue tax-exempt debt with an average life equal to, but no greater than 125% of, the average life of the assets being financed. The final maturity of the debt should be no longer than 40 years absent compelling circumstances or facts. Factors to be considered when determining the final maturity of debt include: the average useful life of the assets being financed, relative level of interest rates, intergenerational equity and the year-to-year differential in interest rates. Maturity Structure – The District’s long-term debt may include serial and term bonds. Other maturity structures may also be considered if they are consistent with prudent financial management practices. STATEMENT OF DEBT MANAGEMENT POLICY DRAFT 7 of 10 Coupon Structure – Debt may include par, discount and premium. Discount and premium bonds must be demonstrated to be advantageous relative to par bond structures taking into consideration market conditions and opportunities. For variable rate debt, the variable rate may be based on one of a number of commonly used interest rate indices and the index will be determined at the time of pricing. Debt Service Structure – Debt service may be structured primarily on an approximate level (combined annual principal and interest) basis. Certain individual bond issues, such as refunding bonds, may have debt service that is not level. However, on an aggregate basis, debt service should be structured primarily on a level basis. Redemption Features – In order to preserve flexibility and refinancing opportunities, District debt will generally be issued with call provisions. The District may consider calls that are shorter than traditional and/or non-call debt when warranted by market conditions and opportunities. For each transaction, the District will evaluate the efficiency of call provision alternatives. Credit Enhancement – The District shall competitively procure credit enhancement for an original sale of bonds if the Finance Manager in consultation with the Financial Advisor and the senior underwriter, determines that it is cost effective to do so. The Finance Manager may in consultation with the Financial Advisor and the senior underwriter determine that due to certain circumstances a sole source procurement process may be more advantageous than a competitive process. Senior/Subordinate Lien – The District may utilize both a senior and a subordinate lien structure. The choice of lien will be determined based on such factors as overall cost of debt, impact on debt service, impact on rates, and marketing considerations. Debt Service Reserve Funds – The District shall provide for debt service reserve funds to secure District debt when necessary. Section VI. Communication and Disclosure Rating Agencies The District shall maintain its strong ratings through prudent fiscal management and consistent communications with the rating analysts. The Finance Manager shall manage relationships with the rating analysts assigned to the District’s credit, using both informal and formal methods to disseminate information. Communication with the rating agencies may include one or more of the following: • Full disclosure on an annual basis of the financial condition of the District; • A formal presentation, at least annually or as becomes necessary to the rating agencies, covering economic, financial, operational, and other issues that impact the District’s credit; • Timely disclosure of major financial events that impact the District’s credit; • Timely dissemination of the Comprehensive Annual Financial Report, following its acceptance by the District’s Board; • Full and timely distribution of any documents pertaining to the sale of bonds; and • Periodic tours of the water system operations, as appropriate. Bond Insurers The Finance Manager shall manage relationships with the bond insurers, to the extent any Debt is so insured, by providing appropriate information. Communication with other bond insurers shall be undertaken when the STATEMENT OF DEBT MANAGEMENT POLICY DRAFT 8 of 10 Finance Manager, with the assistance of the District’s Financial Advisor, determines that credit enhancement is cost effective for a proposed bond issue. Disclosure Reports – The District shall comply with its disclosure undertakings and make disclosure reports readily available to market participants though the Electronic Municipal Market Access website. Web Site – The District may use its website as a tool for providing timely information to investors. Section VII. Refunding Policies The District shall strive to refinance debt to maximize savings and minimize the cost of funds as market opportunities arise. A net present value analysis will be prepared that identifies the economic effects of any refunding to be proposed to the Board. The District shall target a 3% net present value savings for current and 5% for advanced refunding transactions. Upon the advice of the Finance Manager, with the assistance of the Financial Advisor and Counsel, the District will consider undertaking refundings for other than economic purposes, such as to restructure debt, change the type of debt instruments being used, or to retire a bond issue and indenture in order to remove undesirable covenants. Savings Thresholds – Minimum savings thresholds have been established to help guide the economic analysis of refunding bonds. The minimum savings guidelines are applicable on a maturity-by-maturity basis and are expressed as a percentage of refunded bond par calculated by dividing the expected net present value savings generated by the proposed refunding by the par amount of refunded bonds. At the recommendation of the Finance Manager, with the assistance of the Financial Advisor, the District may complete a refunding for net present values savings equal to the target specified above on an aggregate bond issue basis rather than a maturity by maturity basis. Generally, the District shall only refund bonds to generate debt service savings of the specified minimum savings set forth in the previous paragraph can be achieved. Coupon on Refunded Bond – The Finance Manager may take into consideration whether the coupon on the refunded bond is significantly higher or lower than the most common outstanding bond coupons of approximately five percent. General Interest Rate Environment – The Finance Manager may take into consideration whether the available refunding bond interest rates are generally high or generally low relative to long-term averages of historical rates. General Interest Rate Outlook – The Finance Manager may take into consideration the general outlook for future interest rates, as derived from economic forecasts, market forecasts, implied forward rates, or other sources. Debt Management Considerations – The Finance Manager may take into consideration debt management issues such as cost and staff efficiencies associated with combining multiple refunding bond issues or combining refunding and new money bond issues. Call Date – The Finance Manager may take into consideration the amount of time between the pricing/closing date of the refunding Debt and the call date of the Debt to be refunded. Final Maturity Date – The Finance Manager may take into consideration the amount of time remaining until the final maturity of the Debt to be refunded. STATEMENT OF DEBT MANAGEMENT POLICY DRAFT 9 of 10 Section VIII. Reinvestment of Proceeds General – The District shall comply with all applicable Federal, State, and contractual restrictions regarding the use and investment of bond proceeds. This includes compliance with restrictions on the types of investment securities allowed, restrictions on the allowable yield of some invested funds, as well as restrictions on the time period during over which some bond proceeds may be invested. To the extent that a bond issue is credit enhanced, the District shall adhere to the investment guidelines of the credit enhancement provider. Requirements of Indenture – The District will comply with all terms and conditions of the appropriate legal documents related to the Debt. Such limitations shall include, but not be limited to Investments in the Indenture. Section IX. Creation and Maintenance of Funds The District maintains a number of different funds integral to the long-range financial planning process. Each of these funds is held for a specific purpose and can generally be categorized as either an operating, capital, emergency or debt reserve fund. The District will comply with all requirements and limitations created under its then-adopted Reserve Policy. Section X. Compliance Arbitrage Liability Management The District shall minimize the cost of arbitrage rebate and yield restrictions while strictly complying with tax law. Because of the complexity of arbitrage rebate regulations and the severity of non-compliance penalties, the District shall solicit the advice of bond counsel and other qualified experts about arbitrage rebate calculations. The District shall contract with a qualified third-party for preparation of the arbitrage rebate calculation. The District shall maintain an internal system for tracking expenditure of bond proceeds and investment earnings. The expenditure of bond proceeds shall be tracked in the financial accounting system by issue. Investment may be pooled for financial accounting purposes and for investment purposes. When investment of bond proceeds are co-mingled with other investments, the District shall adhere to IRS rules on accounting allocations. Post-Issuance Tax Compliance The District has adopted Written Procedures to Ensure Compliance with Requirements for Tax-Exempt Bonds. The District shall comply with such procedures to maintain the tax-exempt status of District debt obligations or to maintain eligibility for direct pay subsidy payments, as applicable. Continuing Disclosure The District shall comply with the requirements of each Continuing Disclosure Certificate entered into at the time of a sale of bonds. Annual information provided by the District shall mirror the information in any District Continuing Disclosure Certificate at the time of a primary offering. Annual financial information will be sent by the District or its designated consultant, within the time required under the Continuing Disclosure Certificate to each Nationally Recognized Municipal Information Depositories (NRMSIRs) designated by the SEC and to the State Information Depository (SID), if one exists. STATEMENT OF DEBT MANAGEMENT POLICY DRAFT 10 of 10 This shall include: • Comprehensive Annual Financial Report of the District; and • Updated tables from the Official Statement, as detailed in the Continuing Disclosure Certificate. In addition to annual disclosure, the District shall provide ongoing information about certain enumerated events, as defined by regulation, to the NRMSIRs and to the SID. The District may engage a firm to assist it in ensuring timely completion and filing of annual reports and in identifying, and making timely filings with respect to, the occurrence of reportable enumerated events. Legal Covenants The District shall comply with all covenants and conditions contained in governing law and any legal documents entered into at the time of a bond offering. Section XI. Debt Database Management The District shall maintain complete information on its outstanding debt portfolio, in a spreadsheet or database program format. The information in the database shall include, but not be limited to, the following: • Issue Name • Initial Issue Par Amount • Dated Date of the Issue • Principal Maturity Amounts • Coupon Rate by Maturity • Amount Outstanding • Call Provisions • Purpose of the Issue • Credit Enhancer, if any • Competitive or Negotiated Sale • Names of Underwriting Team Members The District shall use the debt database for the following purposes: • Generate reports • Gross annual debt service • Net annual debt service • Refunding Analyses • Output to Fund Accounting System