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HomeMy WebLinkAboutAGENDA REPORT 2017 1101 CCSA REG ITEM 10I ITEM 10.1. MOORPARK CITY COUNCIL • AGENDA REPORT , _ TO: Honorable City Council FROM: Ron Ahlers, Finance Director t DATE: October 19, 2017 (City Council Meeting of November 1, 2017) SUBJECT: Consider Approving the Debt Management Policy in Compliance with Government Code Section 8855(i) SUMMARY A recent change in State law requires all governmental agencies to establish a Debt Management Policy. The Debt Management Policy needs to be adopted prior to the City issuing debt for the Pacific Communities project, called, "City of Moorpark Community Facilities District No. 2018-1)" (CFD No. 2018-1). Staff recommends the City Council approve a Debt Management Policy in compliance with Government Code Section (GC) 8855(i) for the City of Moorpark. • BACKGROUND On October 4, 2017, the City Council adopted Ordinance 453 which approved the residential planned developments RPD-9U and RPD-20U on application of Pacific Communities Builder, Inc. City Council Ordinance 454 approved the development agreement between the City and Pacific Communities Builder, Inc. Sections 6.21 and 7.3 of the Development Agreement discuss the formation of Mello-Roos Community Facilities District and the issuance of debt. Prior to the issuance of any new debt the City must approve of a debt management policy in compliance with GC 8855(i), which reads: (i) (1) The issuer of any proposed debt issue of state or local government shall, no later than 30 days prior to the sale of any debt issue, submit a report of the proposed issuance to the commission by any method approved by the commission. This subdivision shall also apply to any nonprofit public benefit corporation incorporated for the purpose of acquiring student loans. The commission may require information to be submitted in the report of proposed debt issuance that it considers appropriate. Failure to submit the report shall not affect the validity of the sale. The report of proposed debt issuance shall include a certification by the issuer that it has adopted local debt policies concerning the use of debt and that the contemplated 281 Honorable City Council November 1, 2017 Page 2 debt issuance is consistent with those local debt policies. A local debt policy shall include all of the following: (A) The purposes for which the debt proceeds may be used. (B) The types of debt that may be issued. (C) The relationship of the debt to, and integration with, the issuer's capital improvement program or budget, if applicable. (D) Policy goals related to the issuer's planning goals and objectives. (E) The internal control procedures that the issuer has implemented, or will implement, to ensure that the proceeds of the proposed debt issuance will be directed to the intended use. The attached Debt Management Policy includes all the items listed above. FISCAL IMPACT None. STAFF RECOMMENDATION Approve new Policy 5.10 Debt Management Policy and direct staff to incorporate the new Policy 5-.10 into the next comprehensive update of the City Council Policies Resolution. Attachment: Debt Management Policy 282 Page 1 of 16 Policy 5.10: Debt Management Policy 1. Introduction The City of Moorpark establishes this Debt Management Policy (Policy) to provide clear and comprehensive guidelines for the issuance and financial management of the City of Moorpark's debt portfolio. This policy supports the City of Moorpark's Mission of providing responsive and high quality public services for its citizens and ensures that the City of Moorpark is financially self-sustaining and fiscally strong. Finally, this Debt Management Policy requires that the City Council specifically authorize each debt financing by resolution. 2. Purpose The purpose of this Debt Management Policy is to establish guidelines and parameters for the effective governance, management and administration of debt and other financing obligations issued by the City and its related entities (such as, but not exclusive to, the Moorpark Public Financing Authority, the Moorpark Industrial Development Authority, Successor Agency to the Redevelopment Agency of the City of Moorpark, City-formed Community Facilities Districts and the City-formed Assessment Districts). This Debt Management Policy is intended to improve and direct decision making, assist with the structure of debt issuance, identify policy goals, and demonstrate a commitment to long-term planning, including the City's Seven-Year Capital Improvement Program. Adherence to a Debt Management Policy helps to ensure the City's debt is issued and managed prudently in order to maintain a sound financial position and credit worthiness. When used in this Debt Management Policy, "debt" refers to all indebtedness and financing obligations of the City and its related entities (together referred to as "City"). The City recognizes that changes in the capital markets and other unforeseen circumstances may require_ action which may deviate from this Debt Management Policy. In cases which require exceptions to this Debt Management Policy, approval from the City Council will be necessary for implementation. 3. Objectives This Debt Management Policy is intended to comply with the requirements of Senate Bill 1029 (SB 1029), codified as part of California Government Code Section 8855(i), effective on January 1, 2017 and shall govern all debt undertaken by the City. The primary objectives of the City's debt and financing related activities are to: A. Maintain the City's sound financial position. B. Maintain good communications with bond rating Agencies and investors. C. Ensure the City has the flexibility to respond to possible changes in future service obligations, revenues, and operating expenses. D. Ensure that all debt is structured in order to protect both current and future taxpayers and constituents of the City. E. Minimize debt service commitments through efficient planning and cash 283 Page 2 of 16 management. F. Protect the City's credit worthiness and achieve the highest practical credit ratings, when applicable. G. Ensure the City is in compliance with all relevant State and Federal securities laws, debt covenants, and other applicable laws and regulations. H. Provide financial support for the City's strategic and capital plan objectives through the most safe and cost effective means of debt issuance. I. Preserve financial flexibility. J. Ensure that any debt instruments utilized be fully understood by Staff. K. Mandate that the City comply with all debt covenants. 4. Delegation of Authority Pursuant to the provisions of Sections 37209 and 40805.5 of the Government Code of the State of California and Moorpark Municipal Code (MMC) section 2.14, the Finance Director shall be the head of the City's finance area and shall be responsible for all of the financial affairs of the City. A financing team may be used to assist in the coordination of the issuance of debt. Below is a brief description of the main Financing Team, along with their functions, and the mandated frequency of soliciting Requests for Proposals (RFPs). Vendors and advisors utilized by the Financing Team should be reviewed periodically or as necessary for appropriate expense and service levels and the City should obtain vendors and advisors as needed in accordance with applicable City procurement procedures. A typical Debt Financing Team consists of: A. Financial Advisor • Assists with capital planning and long-term financial planning; • Coordinates the financing and debt issuance process; • Helps evaluate underwriter proposals and provides financial analysis and recommendations; • Assists with the securing of other professional services and other members of the financing team; • Monitors and evaluates market conditions for opportunities to issue debt at low interest rates; • Works with the City and Underwriter to develop investor outreach and market approach; • Manages competitive bid process; and • Ensures negotiated prices are "fair" and reasonable in the marketplace. B. Bond Counsel • Prepares an approving legal opinion; • Provides expert and objective legal opinion and advice; 284 Page 3 of 16 • Prepares and reviews documents necessary to authorize, issue sale of, and deliver the bonds, and coordinates the authorization and execution of closing documents; • Reviews legal issues relating to the structure of the bond issue; • Prepares election proceedings or pursues validation proceedings if necessary; • Reviews or prepares those sections of the official statement that relate to the bonds, financing documents, bond counsel opinion, and tax exemption; • Assists the City in presenting information to bond rating organizations and credit enhancement providers relating to legal issues affecting the issuance of the bonds; • Reviews or prepares the Notice of Sale of Bond Purchase Contract for the bonds and reviews or drafts the continuing disclosure undertaking of the City; and • Provides post-issuance advice for bond covenant compliance. C. Underwriter • Provides the City with market knowledge; • Assists with credit analysis and preparation; • Premarket trading of the bonds; • Prices and sells the bonds; and • Trades the bonds. D. Trustee/Fiscal Agent/Paying Agent • Establishes and holds the funds and accounts relating to the bond issue; • Maintains the list of names and addresses of all registered owners of the bonds and recordings of transfers and exchanges of the bonds; • Acts as the authenticating agent; • Acts as the paying agent; • Protects the interests of the bondholders by monitoring compliance with covenants and acts on behalf of the bondholders in the event of default; • As the escrow agent, holds the investments acquired with the proceeds of an advance refunding and uses those funds for payments on those investments to pay debt service on the refunding bonds; and • As a dissemination agent, acts on behalf of the issuer or other obligated person to disseminate annual reports and event notices to repositories under SEC Rule 15c2-12. Fees for Trustee services should be periodically reviewed to ensure rates and fees are appropriate and competitive. 5. Types of Debt There are a number of market factors that will affect the success of a bond offering, and each should be carefully considered before selecting a method of sale. These factors include, but are not limited to, the following: i) market perception of the City's credit quality; ii) interest rate volatility; iii) size of the proposed issue; iv) complexity of the proposed issue; and v) competition with other issuers for investor interest (bond 285 Page 4 of 16 supply). The City, with the assistance of a financial advisor, will examine and evaluate all available alternatives for new issues and make a recommendation to the City Manager. Factors that should be considered include: i) Is the issuing option appropriate under existing laws?; ii) Are there formal policies with respect to the method of sale?; iii) Does the nature of the proposed offering suggest that one method of marketing is more efficient than another?; and iv) Have the City's past issuance practices yielded acceptable results? Once all alternatives are addressed, the proposed new bond issuance will be presented to the City Council for review and consent. The City will consider the use of debt financing primarily for assets and capital projects only if the term of debt shall not exceed the asset(s) or project's useful life or will otherwise comply with Federal tax law requirements. An exception to this long- term driven focus is the issuance of short-term instruments, such as tax and revenue anticipation notes, which are to be used for reasonable cash management purposes, as described below. Bonded debt should not be issued to finance normal operating expenses. General Fund debt will not be issued to support ongoing operational costs unless such debt issuance achieves net operating cost savings and such savings are verified by independent analysis. In order to maximize the financial options available to benefit the public, it is the City's policy to allow the consideration of issuing all generally accepted types of debt, including, but not exclusive to the following: A. New Money Bonds New Money bonds are bonds issued to finance the cost of capital improvement projects or other large and/or extraordinary costs as approved by the City Council. B. Refunding Bonds The City shall refinance debt pursuant to the authorization that is provided under California law, including but not limited to Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code, as market opportunities arise. Refundings may be undertaken in order: (1) To take advantage of lower interest rates and achieve debt service costs savings; (2) To eliminate restrictive or burdensome bond covenants; or (3) To restructure debt to lengthen the duration of repayment, relieve debt service spikes, reduce volatility in interest rates or free up reserve funds. Generally, the City shall strive to achieve a minimum of 5% net present value savings. The net present value assessment shall factor in all costs, including issuance, escrow, and foregone interest earnings of any contributed funds on hand. Refundings which produce a net present value savings of less than 5% will be considered on a case-by-case basis. With the assistance of a financial advisor and bond counsel, the City will consider undertaking refundings for other than 286 Page 5 of 16 economic purposes based upon a finding that such a restructuring is in the City's overall best financial interest. C. Revenue Bonds Revenue Bonds are generally issued by enterprise funds that are financially self- sustaining without the use of taxes and therefore rely on the revenue collected by the enterprise fund to repay the debt. D. Fixed vs. Variable Rate Debt • Fixed interest rate debt is typically preferred to maintain a more predictable debt service burden. Variable rate debt can be utilized on a limited basis when the potential advantages of capturing the lowest interest rates available in the current market outweigh forecasted risks. E. Variable Rate Debt Obligation (VRDO) Predetermined intervals are set where the rate can be reset to current market conditions. VRDO's with a long maturity can be priced as short-term instruments making it potentially a less costly option in a normal upward sloping yield curve environment. F. Assessment Bonds The City will consider requests from developers and property owner groups for the use of debt financing secured by property-based assessments or special taxes in order to provide for necessary infrastructure for new development under guidelines adopted by City Council, which may include minimum value-to-lien ratios and maximum tax burdens. Examples of this type of debt are Assessment Districts (ADs) and Community Facilities Districts (CFDs), also known as Mello-Roos Districts. In order to protect bondholders as well as the City's credit rating, the City will also comply with all State guidelines regarding the issuance of special tax or special assessment debt. G. General Obligation (GO) Bonds GO Bonds are generally suitable for use in the construction or acquisition of improvements to real property or public infrastructure that benefit the public at large. The California Government Code, Division 4, Chapter 4, Article 1 commencing with section 43600 authorizes cities to finance certain municipal improvements through GO bonds when a city determines the public interest and necessity demands the acquisition, construction or completion of such municipal improvements, including property or structures necessary or convenient to carry out the objects, purposes, and powers of a city. Examples of projects include but are not limited to libraries, parks, public services, and public safety facilities. All GO bonds shall be authorized by the requisite number of voters in order to pass. Most GO bonds are backed by the issuer's ability to levy an ad valorem tax in amounts sufficient to meet debt service requirements. 287 Page 6 of 16 H. Certificate of Participation (COPS) COPs are limited-liability obligations tied to a specific enterprise or special fund revenue stream where the projects financed clearly benefit or relate to the enterprise or are otherwise permissible uses of the special revenue. Generally, no voter approval is required to issue this type of obligation but in some cases, the City must comply with Proposition 218 regarding rate adjustments. This security represents a share of an issuer's lease payment. When a City finances a public facility through a lease-purchase transaction, the interest in that City's lease payment often is assigned to a third party that issues certificates of participation. The certificates represent a share of the lease payment to be received by the investor. I. Tax Allocation Bonds (TABs) Tax Allocation Bonds are special obligations that are secured by the allocation of tax increment revenues that are generated by increased property taxes in the designated (now former) redevelopment project areas. Tax Allocation Bonds are not debt of the City. California Health and Safety Code, Division 24, Parts 1.8 and 1.85 limit the authority to issuance of tax allocation bonds only as to refunding of bonds properly and timely issued prior to January 1, 2011; such laws are referred to as the "Dissolution Law" and govern successor agencies to now dissolved redevelopment agencies. J. Short-Term Debt Short-term borrowing, such as commercial paper, Tax and Revenue Anticipation Notes (TRANS), and lines of credit, will be considered as an interim source of funding in anticipation of long-term borrowing and may be issued to generate funding for cash flow needs. The final maturity of the debt issued to finance the project shall be consistent with the useful life of the project. Short-term debt may also be used to finance short-lived capital projects such as lease-purchase financing for equipment or construction and/or rehabilitation of infrastructure. K. Joint Powers Authority (JPA) Lease Revenue Bonds As an alternative to COPs, the City may obtain financing through the issuance of debt by a joint exercise of powers agency with such debt payable from amounts paid by the City under a lease, installment sale agreement, or contract of indebtedness. L. Loans The City is authorized to enter into loans, installment payment obligations, or other similar funding structures secured by a prudent source(s) of repayment. The City may from time to time find that other forms of debt would be beneficial to further its public purposes and may approve such debt without an amendment of this Debt Management Policy. However, the other form or forms of debt must comply with 288 Page 7 of 16 this Debt Management Policy. Competitive Sales of Bonds The terms and prices of the bonds will be negotiated by the City and various underwriters through a bidding process amongst approved, impartial underwriters and/or underwriting syndicates. Both the City and the underwriter collaborate in the origination and pricing of the bond issue. The issue is awarded to the underwriter judged to have submitted the best bid that offers the lowest interest rate, taking into account underwriting spread, interest rates, and any discounts or premiums. Negotiated Sale of Bonds A method of sale for bonds, notes, or other financing vehicles in which the City selects in advance, on the basis of proposals received or by other means, one of more underwriters to work with it in structuring, marketing, and finally offering an issue to investors. The negotiated sale method is typically used when the issue is: a first time sale by a particular issuer (a new credit), a complex security structure, such as a variable rate transaction, an unusually large issue, or in a highly volatile or congested market. Private Placement A private placement is a variation of a negotiated sale in which the City, usually with the help of a financial advisor, will attempt to place the entire new issue directly with an investor. The investor will negotiate the specific terms and conditions of the financing before agreeing to purchase the issue. Private placements are generally undertaken because the transaction is complex or unique, requiring direct negotiations with the investor, or because the issue is small and a direct offering provides economies of scale. Derivative Products Because of their complexity, unless otherwise amended, Derivative Products such as Interest Rate Swaps, Inverse Floaters, and other hybrid securities are prohibited from the City of Moorpark's Debt Management Policy. Other Debt Financing The City may participate in Other Debt Financing such as State or Federal loan programs, or private funding. Other Debt Financing will be subject to the underwriting criteria and applicable processes contained in this Policy and will require pre-approval by the City Council before submittal of a financing application. The City will provide notice of Other Debt Financing to financial markets through the Electronic Municipal Market Access (EMMA) website of the Municipal Securities Rulemaking Board (MSRB) disclosure database, or other S.E.C.-recognized disclosure method, whether or not disclosure of such information would be required under S.E.C. Rule 15c2-12. See Section 9, Continuing Disclosure, below. 6. Debt Capacity 289 Page 8 of 16 In general, Article XVI, Section 18 of the California Constitution (the "debt limit") prohibits cities from entering into indebtedness or liability that in any year exceeds the income and revenue provided for such year unless the City first obtains two-thirds voter approval for the obligation, with certain exceptions for funds subject to the special fund doctrine or other requirements of law. Determining what the City's debt capacity is at any point in time is difficult. It depends on a number of factors including market conditions, amount of undesignated fund balance in the General Fund, fluctuating cash balances, financial policies, management and staff experience, new or existing revenues available to support additional debt, and availability of financial • consultants to assist in financial analysis. In the development of this Debt Management Policy, the goal is to serve as a framework within which the City can evaluate each potential debt issuance. This Debt Management Policy is not to be so restrictive that it interferes with the City's legitimate efforts to prudently provide public services and facilities. 7. Performance Standards Whenever the City of Moorpark will receive a credit rating, the City will strive to maintain 'investment grade' standings in the municipal market. Below is the credit rating scale of the three (3) major rating agencies: Standard & Fitch Moody's Poor's Investors Investor's Corporation Service. Inc. Service, Inc. Definition AAA AAA Aaa Highest grade credit • AA+ AA+ Aal Very high grade credit AA AA Aa2 AA- AA- Aa3 A+ A+ Al High grade credit A A A2 A- A- A3 BBB+ BBB+ Baal Good grade credit BBB BBB Baa2 BBB- BBB- Baa3 BB+ BB+ Bal Non-investment grade BB BB Ba2 Speculative credit BB- BB- Ba3 B+ B+ B1 Very speculative credit B B B2 B- B- B3 CCC+ CCC+ Caal Substantial risk CCC CCC Caa2 In or near default with CCC- CCC- Caa3 possibility of recovery CC CC Ca C C SD DDD C Default 290 Page 9 of 16 D DD Minimal chance of recovery D Note: Moody's uses the designation "1" to indicate greater strength within their ratings. Standard & Poor's and Fitch use "+" and "-" to indicate relative strength or weakness. 8. Market Relationships The City Manager and the Finance Director will be responsible for maintaining relationships with investors, credit analysts, and rating agencies. 9. Ongoing Debt Administration The Finance Director will regularly review the City's outstanding obligations, particularly in declining interest rate environments. When rates begin to approach levels at which refunding is cost-effective, the City shall select a financing team to begin preparations for a refunding issue. Continuing Disclosure The Finance staff will ensure that the City's Comprehensive Annual Financial Report (CAFR) and associated reports are posted on the City's web site. The City will also contract with Consultant(s) to comply with the Securities and Exchange Commission Rule 15c2 by filing its CAFR and other financial and operating data for the benefit of its bondholders on the Electronic Municipal Market Access (EMMA) website of the Municipal Securities Rulemaking Board (MSRB). Arbitrage Rebate Compliance and Reporting The use and investment of bond proceeds must be monitored to ensure compliance with arbitrage restrictions. Existing regulations require that issuers calculate rebate liabilities related to any bond issues, with rebates paid to the Federal Government every five years and as otherwise required by applicable provisions of the Internal Revenue Code and regulations. The Finance Director shall contract with a specialist to ensure that proceeds and investments are tracked in a manner that facilitates accurate, complete calculations, and, if necessary, timely rebate payments. 10.Debt Management Policy Review. The Finance Director shall review this Debt Management Policy at a minimum of every five years and recommend any changes to the City Manager and City Council. 11.Relationship to Capital Improvement Program and Operating Budget The City intends to issue debt for the purposes stated in this Debt Management Policy, and the decision to incur new indebtedness should be integrated with the City Council-adopted annual Operating Budget and Capital Improvement Program Budget. Prior to issuance of debt, a reliable revenue source shall be identified to secure 291 Page 10 of 16 repayment of the debt and the annual debt service payments shall be included in the Operating Budget. The City shall integrate its debt issuances with the goals of its Capital Improvement Program by timing the issuance of debt to ensure that projects are available when needed in furtherance of the City's public purposes. 12.Internal Control Procedures When issuing debt, in addition to complying with the terms of this Debt Management Policy, the City shall comply with any other applicable policies regarding initial bond disclosure, continuing disclosure, post-issuance compliance, and investment of bond proceeds. The City will periodically review the requirements of and will remain in compliance with the following: a. Federal securities law, including any continuing disclosure undertakings under SEC Rule 15c2-12; b. Any federal tax compliance requirements including without limitation _ arbitrage and rebate compliance, related to any prior bond issues; c. The City's investment policies as they relate to the investment of bond proceeds; and d. Government Code section 8855(k) and the annual reporting requirements therein. The City shall be vigilant in using bond proceeds in accordance with the stated purpose at the time that such debt was issued. The City Manager, the Finance Director, and their designees will monitor the expenditure of bond proceeds to ensure they are used only for the purpose and authority for which the bonds were issued. Whenever reasonably possible, proceeds of debt will be held by a third-party trustee and the City will submit written requisitions for such proceeds. The City will submit a requisition only after obtaining the signature of the City Manager, the Finance Director, or their designees. 13.Policy Goals Related to Planning Goals and Objectives This Debt Management Policy has been adopted to assist with the City's policy goal of financial sustainability and financial prudence. In following this Debt Management Policy, the City shall pursue the following policy goals: A. The City is committed to financial planning, maintaining appropriate reserves levels and employing prudent practices in governance, management, and budget administration. The City intends to issue debt for the purposes stated in this Debt Management Policy and to implement policy decisions incorporated in the City's annual Operating Budget; B. It is a policy goal of the City to protect taxpayers, ratepayers, and constituents by utilizing conservative financing methods and techniques so as to obtain the 292 Page 11 of 16 highest practical credit ratings, if applicable, and the lowest practical borrowing costs; C. It is a policy goal of the City to reduce the unfunded liabilities for employee pension and other post-employment benefits (OPEB); D. The City will comply with applicable State and Federal law as it pertains to the maximum term of debt and the procedures for levying and imposing any related taxes, assessments, rates, and charges; and E. When refinancing debt, it shall be the policy goal of the City to achieve, whenever possible and subject to any overriding non-financial policy, minimum aggregate net present value debt service savings of at least 5% of the refunded principal amount. 14.Amendment and Waivers of Debt Management Policy This Debt Management Policy will be reviewed and updated periodically as needed. Any amendments to this Debt Management Policy are only effective upon approval by the City Council. While adherence to this Debt Management Policy is required in_all applicable circumstances, on rare occasions there might be circumstances when strict adherence to a provision of this Debt Management Policy is not possible or not in the best interest of the City. If City staff has determined that a waiver of one or more provisions of this Debt Management Policy should be considered by the City Council based on a strong and compelling reason, it will prepare an analysis for the City Council describing the rationale for the waiver and the impact of the waiver on the proposed debt issuance and on taxpayers, if applicable. Upon a majority vote of the City Council, one or more provisions of this Debt Management Policy may be waived for a debt financing. The failure of a debt financing to comply with one or more provisions of this Debt Management Policy shall in no way affect the validity of any debt issued by the City in accordance with applicable laws. 15.SB 1029 Compliance SB 1029, signed by Governor Brown on September 12, 2016, and enacted as Chapter 307, Statutes of 2016, requires issuers to adopt debt policies addressing each of the five items below: A. The purposes for which the debt proceeds may be used. Section 5 (Acceptable Uses of Debt Proceeds) addresses the purposes for which debt proceeds may be used. B. The types of debt that may be issued. Section 5 (Types of Debt) provides information regarding the types of debt that may be issued. 293 Page 12 of 16 C. The relationship of the debt to, and integration with, the issuer's capital improvement program or budget, if applicable. Section 11 (Relationship to Capital Improvement Program and Operating Budget) provides information regarding the relationship between the City's debt and Capital Improvement Program and annual Operating Budget. D. Policy goals related to the issuer's planning goals and objectives. Section 3 (Debt Management Policy Objective) and Section 13 (Policy Goals Related to Planning Goals and Objectives) address some of the City's policy goals and how this Debt Management Policy has implemented them. E. The internal control procedures that the issuer has implemented, or will implement, to ensure that the proceeds of the proposed debt issuance will be directed to the intended use. Section 12 (Internal Control Procedures) provides information regarding the City's internal control procedures designed to ensure that the proceeds of its debt issues are spent as intended. 12.Glossary of Terms Advance Refunding: For purposes of certain tax and securities laws and regulations, a refunding in which the refunded issue remains outstanding for a period of more than 90 days after the issuance of the refunding issue. The proceeds of the refunding issue are generally invested in Treasury securities or federal agency securities (although other instruments are sometimes used), with principal and interest from these investments being used (with limited exceptions) to pay principal and interest on the refunded issue. Bonds are "escrowed to maturity" when the proceeds of the refunding issue are deposited in an escrow account for investment in an amount sufficient to pay the principal of and interest on the issue being refunded on the original interest payment and maturity dates, although in some cases an issuer may expressly reserve its right (pursuant to certain procedures delineated by the Securities and Exchange Commission) to consider "pre-refunded" when the refunding issue's proceeds are escrowed only until a call date or dates on the refunded issue, with the refunded issue redeemed at that time. Amortization: The gradual reduction in principal and interest of an outstanding debt according to a specific repayment schedule, which details specific dates and repayment amounts on those dates. 294 Page 13 of 16 Arbitrage: In the municipal market, arbitrage refers to the difference between the tax- exempt interest rate paid by the borrower and the interest rate at which the proceeds of the issue are invested. The Internal Revenue Code contains specific regulations concerning the amount that can be earned from the investment of tax-exempt proceeds. Call Provisions: Mandatory or optional provisions that allow or require an issuer to prepay or refinance a bond prior to its stated maturity date. These provisions identify which bonds may be called, when they may be called, and what premium, if any, must be paid upon redemption prior to the stated maturity date of the bond. Capitalized Interest: Specific interest payments of a bond issue that are funded in advance, or capitalized, through proceeds of the same bond issue. These proceeds are set aside in a specially designated fund in order to pay these designated interest payments. Current Refunding: A refunding transaction where the municipal securities being refunded will all mature or be redeemed within 90 days or less from the date of issuance of the refunding issue. Debt Affordability: The principal amount of debt that an issuer can afford within the constraints of net revenues and debt coverage requirements. Debt Service Coverage: The ratio of the net revenue stream pledged against a debt to the debt service payments to the debt. Debt service coverage ratios are most often used by rating agencies to determine repayment sufficiency with respect to bonds secured by a specific revenue stream. Debt Service Reserve Fund: Traditional bond issues are structured with a debt service reserve fund, which assures the timely availability of sufficient funds for the repayment of debt service in the event that an issuer cannot make the required debt service payment(s). Typically, the required size of the reserve fund is determined by the lesser of: 100% of maximum annual debt service; 125% of average annual debt service; or 10% of the aggregate issue price. Reserve funds are usually fully funded out of bond proceeds and are set-aside in a separate fund, as long as the debt service fund is fully funded, and can only be used to offset debt service payments. Defeasance: Termination of rights and interests of the bondholders and their lien on the pledged revenues or other security in accordance with the terms of the bond contract for an issue of bonds. Defeasance usually occurs in connection with the refunding of an outstanding issue after provision has been made for future payment of all obligations under the outstanding bonds through funds provided by the issuance of a new series of bonds. 295 Page 14 of 16 Derivative Product: A product, such as an option or futures contract, whose value is derived from the performance of an underlying security. A commonly used derivative is an interest rate swap. Given the complexity of derivative products, the City of Moorpark and its related entities do not utilize derivative products in debt issuances. Discount Rate: The interest rate used for adjusting for the time value of money for net present value calculations, option pricing models, and other market models. The term "discount rate" can also refer to the rate that the Federal Reserve Bank charges its members for overnight deposits. Good Faith Deposit: A sum of money or, alternatively, a surety bond provided to an issuer of a new issue of municipal securities by an underwriter or underwriting syndicate as an assurance of performance on its offer to purchase the issue. Good faith deposits generally are required in connection with competitive sales and sometimes in connection with negotiated sales. Hedging: A strategy designed to reduce investment risk. A hedge can help reduce the risk and volatility of a portfolio. A common hedging strategy includes matching the amount of short-term assets with the amount of short- term variable rate debt outstanding. Letter of Credit: Two types of letter of credit are used in bond and other debt financings: standby letter of credit and direct pay letter of credit. They provide credit enhancement for debt issues by shifting the risk of repayment from the issuer to the bank issuing the letter of credit. Letters of credit are usually required for the issuance of variable rate debt. Letters of credit also are used to provide liquidity. A Standby Letter of Credit is an agreement issued by a commercial bank that commits the bank to pay a third party contingent upon the failure of bank's customer to perform under the terms of a contract or agreement with the beneficiary. Used as a substitute for a performance bond or payment guarantee, standby letters of credit are used mainly in the U.S where banks are legally barred from issuing certain types of guarantees. For bond or debt holders it serves as a secondary source of payment, in case the issuer fails to meet its payment obligations. A Direct Pay Letter of Credit is an agreement issued by a commercial bank that commits the bank to pay third parties upon a request presented by the beneficiaries to the bank issuing the direct pay letter of credit. Line of Credit: An arrangement in which a bank or other financial institution extends a specified amount of unsecured credit to a specific borrower for a specified time period. Maturity Date: The date upon which a specified amount of debt principal or bonds matures, or becomes due and payable by the issuer of the debt. 296 Page 15 of 16 Negotiated Sale: A method of sale of bonds, notes, or other financing vehicles in which the issuer selects in advance, on the basis of proposals received or by other means, one or more underwriters to work with it in structuring, marketing and finally offering an issue to investors. The negotiated sale method is often used when the issue is: a first time sale by a particular issuer, a complex security structure, such as a variable rate transaction, an unusually large issue, or in a highly volatile or congested market. Net Revenue: Gross revenues less operating and maintenance expenses. Official Statement: A comprehensive statement issued by the governmental entity prior to the sale of bonds, notes, or other financing vehicles that contains all the salient facts concerning the issuer, the issuer's financial condition, the security pledged for the securities being offered, the projected use of the proceeds of the sale, and other facts deemed necessary to enable the investor to judge the quality of the securities being offered. This is also known as the Disclosure Statement. Private Placement: A private placement is a variation of a negotiated sale in which an issuer, usually with the help of a financial advisor or placement agent, will attempt to place the entire issue directly with an investor. The investor will negotiate the specific terms and conditions of the financing before agreeing to the purchase of the issue. Redemption: Depending on an issue's call provisions, an issuer may on certain dates and at certain premiums, redeem or call specific outstanding maturities. When a bond or certificate is redeemed, the issuer is required to pay the maturities' par amount, the accrued interest to the call date, plus any premium required by the issue's call provisions. Senior Lien Debt: Debt whose terms require it to be repaid with a priority claim on pledged revenues. Subordinate Lien Debt: Debt whose terms require it to be repaid with pledged revenues net of the amount necessary to make debt service payments on senior lien debt. Surety Bond: An alternative to a fully funded debt service reserve fund. A surety bond can be purchased from a bond insurance provider to fulfill the role of debt service reserve fund and can be drawn upon in the event an issuer cannot make a regularly scheduled debt service payment. A surety bond must be purchased and is subject to credit approval by a bond insurance provider. The provider charges an upfront fee for the surety bond. 297 Page 16 of 16 Weighted Average Maturity: With respect to an issue of bonds, the weighted period of time required to repay half of the issue through scheduled principal payments. The weighted average maturity is also referred to as the "weighted average life" or "average life" reflects how rapidly the principal of an issue is expected to be paid. Under one commonly used calculation method, average life is equal to the total bond years divided by the total number of bonds. Yield: The net rate of return, as a percentage, received by an investor on an investment. Yield calculations on a fixed income investment, such as a bond issue, take purchase price and coupon into account when calculating yield to maturity. • 298