M&C Review


COUNCIL ACTION:  Approved on 12/13/2016 

DATE: 12/13/2016 REFERENCE NO.: **G-18900 LOG NAME: 131313PFY2017FMPSDEBT
CODE: G TYPE: CONSENT PUBLIC HEARING: NO
SUBJECT:  

Adopt Revised Debt Monitoring Policy as Amendment to the City's Financial Management Policy Statements, Effective October 1, 2016 and Authorize Incorporation of this Policy Into the Overall Financial Management Policy Document (ALL COUNCIL DISTRICTS)


RECOMMENDATION:

It is recommended the City Council:

1.  Adopt the attached policy governing debt monitoring as an amendment to the City's Financial Management Policy Statements effective October 1, 2016; and

2.  Authorize the incorporation of this policy into the Financial Management Policy Statements, including the making of non-substantive formatting changes and similar modifications or annotations.

 
DISCUSSION:

The Mayor and Council Communication (M&C) contains some of the revisions that Staff committed to bringing forward when the re-adoption of the Financial Management Policy Statements (FMPS) and revision of the gas-related revenue and expenditure/expense policy were presented on November 1, 2016 (M&C G-18872). Proposed revisions are the result of Staff's comprehensive review of both the FMPS and the Investment Policy and Strategy, and other changes that are currently being finalized will follow via M&C in the coming weeks.

Staff's intent in recommending adoption of a policy outlining how the City will monitor our outstanding debt is two-fold. The first goal is to show the City has a formal compliance program which has been adopted by the Mayor and City Council that supports the rules and regulations promulgated by the Internal Revenue Service (IRS). The second is to demonstrate our commitment to best practices.

Prior iterations of the FMPS did not include a Debt Monitoring Policy; however, this policy was formally adopted by the Mayor and Council on July 24, 2012 in connection with approval of a Water and Sewer revenue bond ordinance. The policy has been incorporated, by reference or as an attachment, for ordinances authorizing debt issuances since that date.  By restating this policy as part of the FMPS, additional visibility and transparency will be gained.

As a municipal government, the City issues both tax exempt and taxable securities in the form of general obligation and revenue bonds as part of our on-going goal to create the most livable and best managed city in the country. The proceeds from these debt transactions are utilized to fund the City's comprehensive Capital Improvement Program for multiple sectors of our operation. As part of the issuance of tax-exempt obligations, the City is required to complete an IRS form entitled 8038-G. This form provides the IRS with information the City is required to report under Internal Revenue Code (IRC) Section 149(e) and demonstrates the City's ability to monitor the debt transactions as required by IRC Sections 141 through 150. The form covers questions and topics ranging from the type of issue, the amount of proceeds, whether the transaction was a new money issue or a current /advanced refunding, reimbursement details, maturity information, and debt monitoring compliance.

Form 8038-G was revised in 2011 to require issuers to disclose whether they had adopted written policies and procedures addressing arbitrage, private use, refunding issues, and monitoring practices of tax exempt obligations. The theory then, and the prevailing view currently, is that by answering "NO" to these questions on the 8038-G form, tax exempt issuers would be subject to an increased risk of a bond issue being audited by the IRS. As such, the City adopted its first version of a debt monitoring policy in 2012 as part of an ordinance approving the issuance of Water and Sewer Debt (M&C G-17638 dated July 24, 2012). This policy has been applied to all tax-exempt obligations issued by the City after July 24, 2012.

The Debt Monitoring Policy covers topics including:

        Arbitrage Compliance – The federal government generally prohibits earning investment income on unspent bond proceeds in excess of the interest rate being paid on the bonds (a concept referred to as "arbitrage" ). There are circumstances where earning arbitrage is permitted; however in certain of these situations, such excess earnings are required to be paid to the federal government (i.e., "rebated" ). The IRS requires that the City calculate and report any investment income earned on the unspent proceeds. These earnings are compared to the interest rate being paid on the bonds. Arbitrage rebate calculations are to be reviewed annually and investments are to be monitored to ensure compliance with the IRS provisions.

        Spend Down Provisions – In order to comply with certain exceptions to the arbitrage and rebate requirements mentioned above, the City's Bond Counsel recommends the development of expenditure schedules that target proceeds to be spent within six months, eighteen months and two years. The development of this expenditure schedule will occur when the projects are identified and budget appropriations occur, consistent with applicable IRC provisions and regulations addressing tax-exempt treatment of interest.

        Sinking Funds and Reserve Funds – The City's debt transactions generally require the creation of sinking funds or reserve funds. The policy outlines how these sinking and reserve funds are to be administered and used to maintain compliance with the bond covenants.

        Escrow Management – Refunding issues often result in the requirement to create, establish and maintain escrow accounts until the refunded obligations have matured or been redeemed prior to their stated maturity. The Debt Monitoring Policy outlines the requirements to monitor the escrow account to ensure compliance with the applicable provisions of the escrow agreement.

        Private Business Use – Tax exempt proceeds cannot be used to directly or indirectly benefit private businesses. The policy requires the monitoring of projects resulting from debt programs to ensure compliance with this provision.

        Records Retention – All documents pertaining to the debt transactions must be maintained for a period not less than three years after complete extinguishment of the obligations.

This M&C does not request approval of a contract with a business entity.

 
FISCAL INFORMATION/CERTIFICATION:

The Director of Finance certifies that the Financial Management Policy Statements provide the foundation for solid fiscal management. The updated policy provides sound monetary guidance ensuring both short-term and long-term financial success for the City of Fort Worth.




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Submitted for City Manager's Office by:
Susan Alanis (8180)
Originating Department Head:
Aaron Bovos (8517)
Additional Information Contact:
Jim Benner (8510)

 
 
ATTACHMENTS
  2017 Debt Monitoring Policy 12062016.pdf