City of Stockton, CA DEBT MANAGEMENT

INTRODUCTION

Public agencies develop and apply debt management policies to ensure that debt is issued and managed prudently. This practice is advocated by the Government Finance Officers Association (GFOA) which published and subsequently updated best practice guidelines for debt management policies in 1995, 2003, and 2012. These guidelines along with other GFOA publications recommend that a formal debt management policy, guiding debt issuance, should be a part of a public agency's debt administration. The GFOA endorsed the use of a debt management policy to improve the quality of decisions, articulate policy goals, provide guidelines for the structure of debt issuance and demonstrate a commitment to long-term capital and financial planning.

To maintain the highest quality capital financing and debt management program, the City of Stockton prepared the policies outlined in this document, referred to hereafter as the "Debt Management Policy." The Debt Management Policy and related Departmental Policies are intended to guide decisions related to debt supported by the City's General Fund, Enterprise Funds, Land Secured Districts (Mello Roos, 1915 Act), and any other related funding entities including the Successor Agency to the former Redevelopment Agency.

To the extent that items have not been contemplated for inclusion in the Debt Management Policy, additions and revisions can be made by approval of the City Council. Any policy stated herein may be supplemented or amended or deviated from upon determination by the City Council that such supplement, amendment or deviation is necessary or desirable and in the best interests of the City, and any policy or procedure stated herein shall be deemed amended or supplemented in the event, and as of the date, if ever, that such amendment, supplement, or deviation is required to ensure compliance with the laws of the State of California or federal laws of the United States of America.

Note: All references to Director of Administrative Services/ City Treasurer/CFO (the "CFO"), refer to the Chief Financial Officer, or their designee responsible for managing and overseeing these separate debt functions of the City.

GOALS AND OBJECTIVES

The Debt Management Policy formally establishes parameters for issuing debt and managing a debt portfolio which encompasses the City's specific capital improvement needs and its ability to repay financial obligations utilizing a long range financial planning approach. Specifically, the policies outlined in this document and related Administrative Directives/Policies/ Procedures, are intended to guide the City in the following:

•	Evaluating critical debt issuance options.
•	Promoting sound financial management that utilizes long-range financial planning.
•	Providing accurate and timely information on financial conditions.
•	Maintaining appropriate capital assets for present and future needs.
•	Protecting and enhancing the City's credit rating.
•	Ensuring the legal and prudent use of the City's bonding authority through an effective system of financial security and internal controls.
•	Promoting cooperation and coordination with other public entities and the private sector in the financing and delivery of services.
•	Use debt financing where appropriate to match projected revenue streams with facility needs.

APPROACH TO FINANCING LONG-TERM DEBT

A sound debt management program integrates pay-as-you-go project financing with projects financed through the issuance of long-term debt. The City's Capital Improvement Program utilizes this combined approach to fund the City's capital projects. Therefore, it is important to integrate the City's Debt Management Policy with both the City's long-range financial plan and the capital improvement program. Debt issuance for capital projects should not be considered unless such issuance has been incorporated into the capital improvement program.

The City's Debt Management Policy promotes the use of debt only in those cases where public policy, equity, and economic efficiency favor debt over cash (i.e., pay-as-you-go) financing. When considering how to fund capital improvements, the City will use the following criteria to evaluate whether to fund the improvement project on a pay-as-you-go basis versus the use of long-term debt financing:

Factors Favoring Pay-As-You-Go Financing

•	Current revenues and adequate fund balances are available such that project phasing can be accomplished.
•	The useful life of the capital asset is 10 years or less.
•	Existing debt levels might have an adverse impact on the City's credit rating.
•	Market conditions are unstable or present difficulties in marketing the improvement project.

Factors Favoring Long-Term Financing

•	Revenues available for debt service are sufficient and reliable such that long-term financings can be marketed with an investment grade credit rating.
•	The project securing the financing is of the type which will support an investment grade credit rating.
•	Market conditions present favorable interest rates.
•	The project is required to meet or relieve capacity needs, and current resources are insufficient or unavailable.
•	The life of the project or capital asset to be financed is 10 years or longer.

Notwithstanding the above considerations, the City may consider the use of long-term debt in special circumstances for projects other than capital projects to better manage its assets and liabilities over time, including Tax and Revenue Anticipation Notes.

DEBT MANAGEMENT AND CAPACITY

The City's General Fund will not be used to provide back-up liquidity to improve the credit rating of a self-supported debt issue (i.e., an obligation that is expected to be paid through specific revenues).

The City will not use General Fund financial support for assessment, Mello-Roos or Successor Agency obligations.

General Purpose Debt Capacity

The City will carefully monitor its levels of general-purpose debt. In evaluating debt capacity, general purpose supported debt service will not exceed seven percent of total General Fund budgeted expenditures and transfers out.

Enterprise Fund Debt Capacity

The City will set enterprise fund rates at levels needed to fully cover debt service and coverage requirements, operations and maintenance, administration and capital improvement costs. The ability to afford new debt for enterprise operations will be evaluated as an integral part of the City's rate review and setting process.

Inter-Fund Loans Among City Funds

Inter-fund loans among City funds will be considered to finance high priority needs on a case-by-case basis, only when the fund making the loan would not be negatively impacted. Inter-fund borrowing may also be used when it would reduce costs of interest, avoid debt issuance, and/or reduce administrative burdens. Inter-fund loans require a written and signed loan agreement between the two City funds that includes a repayment schedule with a minimum of interest paid at the pooled cash investment rate for the term of the loan. The repayment term of inter-fund loans is limited to five years.

Land Secured Debt

The City will consider developer or property owner initiated applications requesting the formation of community facilities districts ("CFDs") and assessment districts (local improvement districts) ("LIDs") and the issuance of bonds to finance eligible public facilities necessary to serve developing commercial, industrial, residential, and/or mixed use developments of a regional nature, as described in the following eligible capital project facilities section.

Eligible Public Facilities

Facilities to be financed must be public facilities for which the City, or an agency as determined appropriate by the City, will be the owner or will have normal operating and maintenance responsibility. Priority will be given to those public facilities to be owned and operated by the City that are regional in nature. The City may finance public facilities, except for school facilities, which are to be owned and operated by other public agencies. The priority for the financing of infrastructure and public facilities will be determined at the sole discretion of the City. The highest priority will be placed on infrastructure that is for the health and safety of the public. The types of facilities generally eligible to be financed are:

•	Streets and roads (thoroughfares, arterials, major streets, highways and freeway improvements and major collector streets), highways and bridges, street lighting, traffic signals and safety lighting;
•	Public utilities, including, but not limited to, water, sewer and drainage related facilities;
•	Recreation facilities, including, but not limited to, parks, community centers, and golf courses;
•	Biological mitigation measures, including, but not limited to, land acquisition, dedication, and revegetation.

The City has final determination as to any facility's eligibility for financing and the prioritization of facilities to be included within a district financing. The City will give priority for the use of land-secured financing capacity for City services and those facilities that are regional in nature and for operations and maintenance. The City shall review financing "in-tract" facilities on a case-by-case basis, and the City may require information in addition to that contained in the normal application. The City shall determine what "in-tract" public facilities will be financed and which financing mechanism shall be used.