program’s success, as it guarantees the presence of skilled mental health staff to partner with the police in addressing community mental health challenges.
FISCAL IMPACT:
The project is currently budgeted in the Modesto Forward ARPA grant allocation for Workforce Services, Project Number 101546 which was $500,000 as of June 05, 2024. The proposed Grant Agreement will not exceed $500,000.
COMMITTEE ACTION:
On June 3, 2024, the Economic Development Committee recommended forwarding to Council for approval the Modesto Forward Grant Agreement with HeathForce Partners for a Workforce Development Program, for a total amount not to exceed $500,000 and forwarding to Council for approval.
RECOMMENDED COUNCIL ACTION:
Staff Recommendations:
Resolution approving a Modesto Forward Grant Agreement with United Way of San Joaquin County for the implementation of a Workforce Development Program by HealthForce Partners Northern San Joaquin Valley, for a total amount not to exceed $500,000 over two and a half years, and authorizing the City Manager, or his designee to execute the Agreement.
Approved by:
Jessica Hill, Director Community and Economic
Development
Joseph P. Lopez, City Manager
Attachments:
1. Resolution
2. Healthforce Partners Budget
3. Healthforce Partners Proposal
4. Agreement
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06/05/2024/CED/JHill/Item # 1 2024-XX
MODESTO CITY COUNCIL
RESOLUTION NO. 2024-XX
RESOLUTION APPROVING A MODESTO FORWARD GRANT AGREEMENT
WITH UNITED WAY OF SAN JOAQUIN COUNTY FOR THE
IMPLEMENTATION OF A WORKFORCE DEVELOPMENT PROGRAM BY
HEALTHFORCE PARTNERS NORTHERN SAN JOAQUIN VALLEY, FOR
A TOTAL AMOUNT NOT TO EXCEED $500,000 OVER TWO AND A HALF
YEARS AND AUTHORIZING THE CITY MANAGER, OR HIS DESIGNEE TO
EXECUTE THE AGREEMENT
WHEREAS, on March 11, 2021, President Joe Biden signed the American Rescue Plan Act (ARPA) into law. The City of Modesto received approximately $45.8 million in ARPA funds in two tranches to help address the continued impact of the COVID-19 pandemic on the economy, public health, individuals, and businesses; and WHEREAS, The City of Modesto may use ARPA funds to address a number of areas, including:
1. Replace revenue that was lost, delayed, or decreased as determined based on the projections as of January 27, 2020 as a result of the COVID-19 emergency,
2. Respond to the COVID-19 emergency and address its economic effects, including through aid to households, small businesses, nonprofits, and industries such as tourism and hospitality,
3. Cost overruns incurred as a result of the COVID-19 emergency; and WHEREAS, on May 25, 2021, the City Council approved Resolution No. 2021- 194 approving the Pandemic Recovery Strategy, Modesto Forward, and the associated spending plan for the American Rescue Plan funds; and authorizing the City Manager to carry out the necessary steps to implement the strategy and spending plan. The Modesto Forward plan allocated $500,000 in funding to support the “implementation of a workforce development program”; and
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06/05/2024/CED/JHill/Item # 2 2024-XX
WHEREAS, according to recent data, Modesto faces a severe shortage of behavioral health professionals. The ratio of behavioral health workers to the population is alarmingly low, resulting in inadequate access to mental health services. The demand for counseling, therapy, and crisis intervention far exceeds the available workforce; and WHEREAS, Stanislaus County Behavioral Health & Recovery Services (BHRS) contracts with the California Department of Health Care Services (DHCS) to provide specialty mental health and substance use disorder (SUD) services to Stanislaus County Medi-Cal beneficiaries and uninsured residents. Their services include an array of specialty mental health outpatient services for both children and adults, as well as an array of substance use disorder outpatient and residential treatment programs. BHRS also provides crisis services, including 24/7 mobile crisis, as well as supportive services, including employment and housing services for BHRS clients; and WHEREAS, recruiting and sustaining their workforce has been an ongoing challenge while the number of folks seeking services has significantly increased coming out of the pandemic. They provided clinical services/treatment to over 9,987 unique clients from January 1, 2023, to December 31, 2023. BHRS is over the capacity by about 457 clients. They currently have over 100 vacancies; and WHEREAS, HealthForce Partners North San Joaquin Valley proposes to deliver a targeted workforce pipeline for behavioral health clinicians, titled the “Behavioral Health Workforce Partnership”. Modesto is seeking to join Stanislaus Community Foundation as one of many funding partners, with a $500,000 contribution from ARPA. The goal is to close the workforce shortage gap by graduating and placing 20 behavioral health clinicians a year; and
WHEREAS, HealthForce Partners is already in the community working to #9..
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06/05/2024/CED/JHill/Item # 3 2024-XX
establish programming in Stanislaus Count. Their partners include Modesto Junior College, Kaiser Permanente, Sutter Health Central Valley, Doctors Medical Center, and Behavioral Health and Recovery Services. HealthForce Partners’ Behavioral Health Workforce Partnership seeks a unique and multi-layered approach to encourage and incentivize high road job education through providing paid internships, licensure supervision, loan forgiveness, tuition assistance, and peer support stipends; and WHEREAS, HealthForce Partners has confirmed that funding from the City of Modesto will be sufficient to pursue developing the pipeline and they have the existing capacity to operate and implement the program. HealthForce Partners will also pursue grants to continue to scale their operations.
NOW, THEREFORE, BE IT RESOLVED by the Council of the City of Modesto that it hereby approves a Modesto Forward Grant Agreement with San Joquin united Way County for a Workforce Development Program by Healthforce Partners of Northern San Juaquin Valley, for a total amount not to exceed $500,000.
BE IT FURTHER RESOLVED, that the City Manager or his designee is authorized to execute the agreement in a form approved by the City Attorney. #9..
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06/05/2024/CED/JHill/Item # 4 2024-XX
The foregoing resolution was introduced at a regular meeting of the Council of the City of Modesto held on the 25th day of June, 2024, by Councilmember , who moved its adoption, which motion being duly seconded by , was upon roll call carried and the resolution adopted by the following vote:
AYES: Councilmembers: None
NOES: Councilmembers: None
ABSENT: Councilmembers: None
ATTEST: _____________________________
DIANE NAYARES-PEREZ, CMC,
City Clerk
(SEAL)
APPROVED AS TO FORM:
BY: ________________________________
JOSE M. SANCHEZ, City Attorney
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Program Expense Description Year 1 # Year 1 $ Year 1 Total Year 2 # Year 2 $ Year 2 Total Year 3 # Year 3 $ Year 3 Total Total Master's Level Student Incentives
Master's Degree Scholarships - Stanislaus State/University of the Pacific up to $5,000 a year - $ 5,000 $ - 20 $ 5,000 $ 100,000 20 $ 5,000 $ 100,000 $ 200,000 Clinical Experience
Supervision Stipends to CBOs (contract) $5,000 per paid internship 7 $ 35,000 $ 35,000 10 $ 50,000 $ 50,000 10 $ 50,000 $ 50,000 $ 135,000 Total $ 35,000 $ 150,000 $ 150,000 $ 335,000
Non-Clinical Personnel Expense Description Year 1 # Year 1 $ Year 1 Total Year 2 # Year 2 $ Year 2 Total Year 3 # Year 3 $ Year 3 Total Total HealthForce Partners Program Administrator (.2 FTE) $18,000 + 30% benefits (3% COLA) 1 $ 23,400 $ 23,400 1 $ 24,102 $ 24,102 1 $ 24,825 $ 24,825 $ 72,327 Contracted Program Marketing/Communications Support Hourly rate for MarCom support 1 $ 10,000 $ 10,000 1 $ 10,000 $ 10,000 1 $ 5,000 $ 5,000 $ 25,000 Total $ 33,400 $ 34,102 $ 29,825 $ 97,327
Total Programmatic Budget $ 432,327
Admin for Fiscal Sponsor & Lead Agency
Program Expense Description Year 1 Total Year 2 Total Year 3 Total Total Fiscal Sponsor 5% Admin Fee 5% of Program Budget $ 3,420 $ 9,205 $ 8,991 $ 21,616 Lead Agency 10% Admin Fee 10% of Program Budget $ 6,840 $ 18,410 $ 17,983 $ 43,233 Admin Fees Total $ 10,260 $ 27,615 $ 26,974 $ 64,849
Total Grant Request $ 497,176
Northern San Joaquin Valley Behavioral Health Workforce Partnership Economic Development Pilot Budget HealthForce Partners Northern San Joaquin Valley
Stanislaus County BHWP Program Startup Budget
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PROPOSAL
City of Modesto
Behavioral Health Workforce Partnership (BHWP)
In HealthForce Partners’ Behavioral Health Workforce Partnership, the organization seeks a unique and multi-layered approach to encourage and incentivize high road job education through providing paid internships, licensure supervision, loan forgiveness, tuition assistance, and peer support stipends. For Stanislaus County, this program replicates the partnership HealthForce Partners launched in Spring of 2023 in adjacent San Joaquin County. HealthForce Partners is already seeking additional funding from other sources for the expansion of the current San Joaquin Behavioral Health Workforce Partnership with an eye toward enhancing and sustaining its impact, as well as the introduction of a similar program in Stanislaus County.
The existing BHWP allows HealthForce Partners to begin working right away with county partners to meet regional healthcare workforce goals while building its capacity to delineate healthcare career pathways. Since the goal is to remove these higher-skilled career building barriers, HealthForce Partners is beginning at the ground level with educators, healthcare providers, and its own residents. An example of this is immediately providing scholarships to current healthcare employees for advanced degrees leading to clinical licensure. The goal is to increase the number of current residents who are able to pursue what can be very expensive degrees. This pilot allows the region to get a jump start on workforce development solutions with these ready-to-implement programs.
Below is the pilot program outline for Stanislaus County, including both programmatic and administrative components.
Proposed Stanislaus County Behavioral Health Workforce Partnership Project Scholarships – HealthForce Partners will identify and award scholarships to current healthcare employees in the City of Modesto for advanced degrees leading to clinical licensure. These individuals will be Stanislaus County residents pursuing master’s degrees at either University of the Pacific or Stanislaus State University in behavioral health fields (social work, clinical counseling, marriage & family therapy). This enables and incentivizes local residents to pursue advanced degrees and licensure while continuing to live and work locally, ultimately aiding in the growth of the local behavioral health workforce.
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Clinical Licensing: At maturity, our Stanislaus County BHWP will oversee supervision requirements for students enrolled in the program including hiring and managing a licensed supervisor, provide stipends to CBOs providing paid internship supervision, and a one-time licensure fee reimbursement. In this pilot program phase, we seek to contract with local CBOs to provide supervision stipends for their clinical supervisors, adding capacity to these agencies’ ability to supervise additional clinical practicum students.
Supervision Stipends to CBOs – Northern San Joaquin Valley (BHWP) will issue funds in the form of $5,000 stipends per supervised paid internship, from $120,000 to $200,000 annually per approved agency in the form of a stipend to support licensed supervision by local communitybased organizations who are Medi-Cal certified and contracted with County Behavioral Health Services to provide outpatient behavioral health services.
Overall Behavioral Health Workforce Partnership Internal Programs HealthForce Partners Program Administrator – As HealthForce Partners expands this pilot into Stanislaus County, it will be eventually hire an administrator to handle all inquiries into programs, provide information for partners, organize disbursements, and gather and maintain program data for funding requirements. In the pilot phase, that work will be conducted by existing staff until such time as adequate funding is identified to expand the program and staffing supports.
Attached is a proposed budget for the pilot phase of this program. #9..
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Funding Contribution Agreement – United Way of San Joaquin County
CITY OF MODESTO PANDEMIC RECOVERY STRATEGY
MODESTO FORWARD GRANT AGREEMENT
This Modesto Forward Grant Agreement (“Agreement”) is entered into in the City of Modesto, State of California, this ____ day of __________ of ____________ 20__ (“Effective Date”) by and between the City of Modesto, a California municipal corporation (“City”), and United Way of San Joaquin County (“Recipient”). The City and United Way of San Joaquin County.
This Agreement is made with regard to the following recitals:
WHEREAS, the City of Modesto received an allotment of funds from the United States Department of Treasury through the Coronavirus Local Fiscal Recovery Fund established by the American Rescue Plan Act (“ARPA”); and
WHEREAS, on June 22, 2021, by Resolution No. 2021-194, the Council of the City of Modesto approved the Pandemic Recovery Strategy – Modesto Forward, hereinafter referred to as “Modesto Forward”, to support local recovery from the pandemic; and WHEREAS, in alignment with the City’s 5-Year Strategic Plan, Modesto Forward includes three post pandemic funding initiatives to help the community exit the pandemic period and focused on Economic Vitality, Governance and Service Delivery, and Quality of Life; and WHEREAS, Economic Vitality initiatives are intended to improve the economic vitality of the community; Governance and Service Delivery initiatives are intended to improve the organization and service delivery for residents; and Quality of Life initiatives are intended to improve the quality of life for residents; and
WHEREAS, the City wishes to assist in the development of a targeted workforce pipeline for behavioral health clinicians; and
WHEREAS, the Recipient serves as a fiscal sponsor for HealthForce Partners Northern San Joaquin Valley which administers medical workforce development programs in San Joaquin County; and
WHEREAS, the Recipient along with HealthForce Partners represents that it is qualified, willing, and able to provide the services necessary to implement and administer a behavioral health workforce partnership program in the City of Modesto.
NOW THEREFORE, the City and Recipient agree as follows:
1. Term
The term of this Agreement (the “Term”) shall commence upon the effective date.
Scope of Work (Exhibit A) deliverables must be completed by June 30, 2026; the #9..
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Funding Contribution Agreement – United Way of San Joaquin County Agreement shall terminate upon fulfillment of Federal reporting requirements (Exhibit B), no later than January 15, 2027.
2. Grant Award
A. The City shall provide Recipient with a grant of Five Hundred Thousand Dollars ($500,000) (the “Grant”) for the purposes and activities further specified in Exhibit A, attached hereto and incorporated by referenced (the “Activities”). Disbursement of the Grant is dependent upon Recipient providing all records and documentation reasonably required by the City.
B. Recipient shall expend the Grant solely on the Activities, as specified in Exhibit A, and shall be held responsible to the requirements outlined in Exhibit A. Recipient shall not use the Grant for any other purpose or activity without the prior written consent of the City.
C. The Recipient shall operate within the territorial limits of the City of Modesto and the beneficiaries, if any, of the Activities shall be the residents of the City of Modesto.
D. Recipient shall expend the entirety of the Grant by no later than December 31, 2026.
Any portion of the Grant that has not been expended by December 31, 2026 shall be returned to the City no later than January 10, 2027.
3. Recipient’s Obligations
A. Throughout the term of this Agreement, the Recipient shall obtain and maintain all licenses, permits, qualifications and approvals legally required to conduct business.
The Recipient warrants that it has all of the necessary professional capabilities and experience, as well as all tools, instrumentalities, facilities and other resources necessary to perform the Activities specified by this Agreement. Recipient shall perform the Activities requires pursuant to this Agreement according to the standards observed by a competent practitioner of the profession in which Recipient is engaged.
B. The Recipient shall provide appropriate acknowledgement of the Grant by using the City’s logo or making a written acknowledgement in its publicity, promotional materials, information materials, press materials, at public occasions relating to the Activities, and on any website maintained by the Recipient.
4. Quarterly Reporting Requirements
Recipient shall submit quarterly reports to the City on the form attached hereto as Exhibit D, and incorporated herein by reference, or on such other form as required by the City.
5. Annual Reporting Requirements
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Funding Contribution Agreement – United Way of San Joaquin County Recipient shall submit an annual report, in accordance with the requirements set forth in Exhibit C, attached hereto and incorporated herein, to the City within 180 days of the end of the Recipient’s fiscal year in a form approved by the City. The annual report shall be in addition to the reporting required by Section 4, and shall include, but not limited to:
A. Summary of activities and accomplishments, mandate and/or mission of the organization;
B. List of Board Directors with title, contact information and mandate term of each Director;
C. Organizational Chart;
D. Project/Program Expenditures-to-date (including receipts); E. Any other information reasonably requested by the City.
6. Audit Requirements
A. In addition to all other reports and records required by this Agreement, the Recipient shall keep and make available proper books of account and records of the financial management of the Grant provided under this agreement, in accordance with generally accepted business and accounting practices. Such records shall include, but not be limited to, records providing a full description and accounting of each activity undertaken.
B. Recipient agrees to keep all necessary books and records required by this Agreement for five (5) years following the end of this Agreement, and shall document all transactions so that all expenditures may be properly audited.
C. Recipient agrees that City or any authorized representative has access to and the right to examine all records, books, papers, or documents related to the project.
Recipient shall allow the City or any authorized representative access to all records, books, papers, or documents related to the project within forty-eight (48) hours of a request to examine.
7. Preservation of Assets
Any assets purchased with the Grant, the cost of which exceed $5,000, shall be preserved by the Recipient and shall not be sold, leased, given away or otherwise disposed of prior to the end of the useful life of the asset without prior written consent of the City.
8. Termination, Suspension and/or Repayment of Grant
The City may terminate, suspend and/or require repayment of the Grant in the event of any of the following circumstances, after notice from the City and a reasonable opportunity to cure:
A. The Recipient fails to provide the Activities, or any portion of the Activities, described in Exhibit A of this Agreement or substandard performance of the Activities;
B. The Recipient suspends or fails to carry on and continuously conduct its operations, or there is a disruption on the performance of the Activities; #9..
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Funding Contribution Agreement – United Way of San Joaquin County C. The Recipient has a partisan political affiliation and/or participates in partisan political activities.
D. The Recipient uses the Grant for a purpose or activity other than those specified in Exhibit A.
E. The Recipient becomes bankrupt or insolvent, goes into receivership or becomes subject to the provisions of any bankruptcy, insolvency, or any other Act for the benefit of creditors, or makes a general assignment for the benefit of its creditors or otherwise acknowledges its insolvency;
F. The Recipient fails to provide to the City with any report, record, or documentation required by this Agreement, or t fails to provide any documentation requested by the City in accordance with the terms of this agreement;
G. The Recipient has made any material misrepresentation to the City or its representatives with respect to any of the matters contained herein and/or in the Recipient’s funding submission/proposal/application for the Grant, or which have been made or may be made in the future surrounding these matters; H. The Recipient breaches any term of this Agreement, after notice from the City and a reasonable opportunity to cure the breach;
9. Compliance with Applicable Laws
Recipient shall carry out, and cause its contractors, consultants, employees and agents to carry out, the Activities, in compliance all applicable federal, state and local laws, rules, ordinances, orders, and regulations, including without limitation and to the extent applicable, the prevailing wage provisions of the federal Davis-Bacon Act and implementing rules and regulations and state prevailing wages pursuant to Labor Code Section 1770 et seq. Without limiting the foregoing, Recipient shall comply with ARPA, the regulations implement ARPA (31 CFR Part 35), any interpretative guidance issued by the United Stated Department of Treasury, and those Grant terms and conditions attached hereto as Exhibit B, and incorporated herein.
10. Non-Assignment
The Recipient shall not assign this Agreement, the Grant, or any part thereof, without the Prior written consent of the City. Any assignment in violation of this section shall require an immediate repayment of the Grant to City by the Recipient.
11. Indemnity and Liability
A. The Recipient shall indemnify , defend with counsel acceptable to City, and hold harmless the City, its officials, officers, employees, and agents (“Indemnitees”) from and against all liability, loss, cost, expense (including without limitation attorneys’ fees and costs of litigation), claim, demand, action, suit, judicial or administrative proceeding, penalty, deficiency, fine, order, and damage (all of the foregoing collectively “Claims”) which, directly or indirectly, arises out of or relates to this Agreement or the performance of the Activities, except to the extent the Claims arise from the gross negligence or willful misconduct of City. #9..
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Funding Contribution Agreement – United Way of San Joaquin County B. The City shall not be liable to the Recipient or any other party in relation to the Grant and/or the services provided by the Recipient pursuant to the terms of this agreement. The Recipient shall be solely responsible for the payment of any individuals employed, engaged or retained by the Recipient for the purpose of assisting it in the fulfilment of its obligations under this agreement.
12. Insurance
The Recipient shall provide at its own expense and maintain at all times the following insurance with insurance companies licensed in the State of California and shall provide evidence of such insurance to the City as may be required by the Risk Manager of the City. The policies or certificates thereof shall provide that, thirty (30) days prior to cancellation or material change in the policy, notices of same shall be given to the Risk Manager of the City by certified mail, return receipt requested, for all of the following stated insurance policies.
In the event the certificates of insurance required hereunder do not provide for notice of cancellation to the certificate holder and/or additional insureds, the Recipient shall provide, and shall require its subcontractors to provide, as an express condition precedent to payment hereunder, an endorsement from their insurers providing that the additional insureds identified herein shall be provided 30 days’ notice of the cancellation on the policies of insurance required hereunder (10 days’ notice if the policies are cancelled for non-payment of premium). In addition, the named insured on all such policies shall provide to the additional insureds identified herein any notices of cancellation of said insurance policies within 5 business days of receipt of such notice.
The Recipient shall, as a further express condition precedent to payment for work performed, affirm under penalty of perjury that the required insurance on the project remains in place and said insurance has not been cancelled. (a) Worker's Compensation - in compliance with the statutes of the State of California, plus employer's liability with a minimum limit of liability of $1,000,000.
(b) General Liability insurance with a minimum limit of liability per occurrence of $1,000,000 for bodily injury and property damage. If Commercial General Liability Insurance or other form with a general aggregate limit is used, either the general aggregate limit shall apply separately to this project/location or the general aggregate limit shall be twice the required occurrence limit. This insurance shall indicate on the certificate of insurance the following coverages and indicate the policy aggregate limit applying to: premises and operations; broad form contractual; independent The Recipients and subcontractors; products and completed operations as applicable.
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Funding Contribution Agreement – United Way of San Joaquin County (c) Automobile Liability insurance with a minimum limit of liability per occurrence of $1,000,000 for bodily injury and property damage . This insurance shall cover any automobile for bodily injury and property damage.
(d) Professional Liability insurance with a minimum limit of $1,000,000 per claim and policy aggregate. If coverage is on a claims made basis it shall be maintained for at least three (3) years following completion of the work.
If at any time any of said policies shall be unsatisfactory to the City, as to form or substance, or if a company issuing such policy shall be unsatisfactory to the City, the Recipient shall promptly obtain a new policy, submit the same to the Risk Manager for approval and submit a certificate thereof as hereinabove provided. Upon failure of the Recipient to furnish, deliver or maintain such insurance and certificates as above provided, this Agreement, at the election of the City, may be forthwith declared suspended or terminated. Failure of the Recipient to obtain and/or maintain any required insurance shall not relieve the Recipient from any liability under this Agreement, nor shall the insurance requirements be construed to conflict with or otherwise limit the obligations of the Recipient concerning indemnification. The City, its agents, officers, employees, and volunteers shall be named as an additional insured on all insurance policies required herein, except Workers' Compensation and Professional Liability. The Workers' Compensation insurer shall agree to waive all rights of subrogation against the City, its agents, officers, employees, and volunteers for losses arising from work performed by The Recipient for the City. The Recipient's insurance policy(ies) shall include a provision that the coverage is primary as respects the City; shall include no special limitations to coverage provided to additional insured; and, shall be placed with insurer(s) with acceptable Best's rating of A:VII or with approval of the Risk Manager. The Recipient must deliver certificates evidencing existence of the insurance listed above to the City prior to the time the contract is signed.
THE RECIPIENT shall provide CITY with separate endorsements evidencing proof of the CITY’s additional insured status as to both the general liability and automobile liability insurance policies. In addition, THE RECIPIENT shall provide CITY with a Workers Compensation subrogation waiver by way of a separate endorsement. All endorsements referenced above must include the applicable policy number.
For any claims related to this project, the RECIPIENT’S insurance coverage shall be primary insurance as respects the Entity, its officers, officials, employees, and volunteers. Any insurance or self-insurance maintained by the Entity, its officers, officials, employees, or volunteers shall be excess of the RECIPIENT’S insurance and shall not contribute with it.
13. Non-Discrimination
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Funding Contribution Agreement – United Way of San Joaquin County Recipient shall not discriminate, on the basis of a person’s race, religion, color, national origin, age, physical or mental handicap or disability, medical condition, marital status, sex, or sexual orientation, against any employee, applicant for employment, subcontractor, bidder for a subcontract, or participant in, recipient of, or applicant for any services or programs provided by Recipient under this Agreement. Recipient shall comply with all applicable federal, state, and local laws, policies, rules, and requirements related to equal opportunity and nondiscrimination in employment, contracting, and the provision of any services that are the subject of this Recipient, including but not limited to the satisfaction of any positive obligations required of Recipient thereby.
14. NOTIFICATION
Any notice, communication, amendment, addition or deletion to this Agreement, including change of address of either Party during the term of this Agreement, which Recipient or City shall be required or may desire to make shall be in writing and may be personally served or, alternately, sent by prepaid first class mail to the respective Parties as follows:
To City:
City of Modesto
Attn: Jessica Hill, Director of Community and Economic Development 1010 10th Street
Modesto, CA 95353
To Recipient:
United Way of San Joaquin County
HealthForce Partners, Inc.
Attn: Paul I. Lanning, MS, EdD, CFRE
11810 N Creek Pkwy N, Suite 105
Bothell, WA 98011
15. SEVERABILITY
If any portion of this Agreement or application thereof to any person or circumstance shall be declared invalid by a court of competent jurisdiction or if it is found in contravention of any federal, state or City statute, ordinance or regulation; the remaining provisions of this Agreement or the application thereof shall not be invalidated thereby and shall remain in full force and effect to the extent that the provisions of this Agreement are severable.
16. DISPUTE RESOLUTION
All claims, controversies, or disputes arising out of, or relating to the formation of this Agreement, or the breach, termination execution, enforcement, interpretation, or validity of this Agreement, including the determination of the scope or applicability of this contract provision shall be determined by binding arbitration in Modesto, California #9..
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Funding Contribution Agreement – United Way of San Joaquin County by one arbitrator, except as otherwise specified in this Agreement. The American Arbitration Association shall administer the arbitration under its Arbitration Rules then in effect, subject to the modifications of those rules contained in this paragraph. This agreement to arbitrate shall be specifically enforceable under the prevailing law of any court having jurisdiction, and the award rendered by the arbitrator may be entered in any court having jurisdiction. The appropriate venue for any arbitration or court proceeding relating to or arising out of this provision shall be in Stanislaus County, California.
This paragraph is not intended to and does not waive the claim filing requirements found in California Government Code section 900 et seq. In the event that a timely and legally sufficient, arbitrable claim is filed by the Recipient with City, and the claim is rejected in whole or in part by City, this paragraph shall result in the conclusive, final, and binding resolution of all the issues presented in the claim by The Recipient so long as any issues presented by the claim are arbitrable. Claims rejected by City or by operation of law, shall be submitted by the Recipient to arbitration pursuant to the Arbitration Rules of the American Arbitration Association within ninety (90) days after mailing of the written rejection by City to the Recipient. Otherwise, the claim or claims shall be deemed waived in their entirety.
The “fast track’ rules of the American Arbitration Association shall apply to any claim or counterclaim less than ONE HUNDRED FIFTY THOUSAND AND 00/100 ($150,000.00) DOLLARS. In arbitration not proceeding under the “fast track” rules, the arbitrator shall have the power to order that depositions be taken and other discovery be made. Both City and the Recipient shall have the right, upon written notice, to take no more than three (3) depositions of the other as a matter of right in an arbitration proceeding under the “fast track” rules.
Whether or not City and the Recipient may be engaged in interstate commerce, any controversy or dispute mentioned above shall be determined by, and the parties shall be bound by, the substantive law of the State of California, and not the Federal Arbitration Act at 9 USC Section 1 et seq.
The arbitrator may grant any remedy or relief deemed by the arbitrator just and equitable under the circumstances, whether or not such relief could be awarded in a court of law. The arbitrator shall be empowered to award monetary sanctions against a party for failure of cooperation in the arbitration. The arbitrator shall, in written award, allocate all the costs of the arbitration, including the fees of the arbitrator and the reasonable attorney fees of the prevailing party, against the party who did not prevail.
The prevailing party shall be the party in whose favor the majority of the central issues in the case are resolved.
Notwithstanding anything in this provision to the contrary, the arbitrator shall have no power to award punitive damages or other damages not measured by the party’s actual #9..
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Funding Contribution Agreement – United Way of San Joaquin County damages (excluding litigation costs and fees) against any party. This limitation of the arbitrator’s powers under this Agreement shall not operate as an exclusion of the issue of punitive damages from this Agreement to Arbitrate sufficient to vest jurisdiction in a court with respect to that issue.
The Recipient shall include in all subcontracts a specification whereby the subcontractor consents to being joined in an arbitration between City and The Recipient involving the work of the subcontractor to be joined. The Recipient’s failure to do so shall be a breach of this Agreement.
The parties hereby waive any rights provided by Title 9.2 of the California Code of Civil Procedure, Section 1296. The arbitrator’s award shall be deemed final, conclusive and binding to the fullest extent allowed by California law.
17. INDEPENDENT PARTIES
Nothing in this Agreement is intended to or shall establish the Parties as partners, coventurers, or principal and agent with one another. At all times during the term of this Agreement, Recipient and City shall be independent parties, and Recipient shall not be an employee of the City. Except as Recipient may specify in writing, Recipient shall have no authority, express or implied, to act on behalf of City in any capacity whatsoever as an agent. Recipient shall have no authority, express or implied, pursuant to this Agreement to bind City to any obligation whatsoever. At all times during the term of this Agreement, Recipient and
18. ENTIRE AGREEMENT
This Agreement, including the exhibits attached hereto, represents the entire and integrated agreement between City and Recipient ant and supersedes all prior negotiations, representations, or agreements, either written or oral. No amendment of any of the terms or provisions of the Agreement shall be deemed valid unless it is in writing and signed by both Parties.
19. GENERAL PROVISIONS
A. Binding Agreement. This agreement shall be binding on and inure to the benefit of the City, the Recipient and their respective successors and assigns. Nothing contained in this Agreement is intended to or shall be deemed to confer upon any person, other than the Parties and their respective successors and assigns, any rights or remedies hereunder.
B. Severability. Any provision of this agreement, which is or becomes prohibited or unenforceable in any jurisdiction, shall not invalidate or impair the remaining provisions of this agreement which shall be deemed severable from the prohibited or unenforceable provision and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable that provision in any other jurisdiction.
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Funding Contribution Agreement – United Way of San Joaquin County C. Waiver. The fact that the City refrains from exercising a remedy it is entitled to exercise under this agreement shall not be considered to be a waiver of such right and, furthermore, partial or limited exercise of a right conferred upon the City shall not prevent the City in any way from later exercising any other right or remedy under this agreement or other applicable law. No waiver of any breach of any covenant or provision of this Agreement shall be deemed a waiver of any other covenant or provision hereof, and no waiver shall be valid unless in writing and executed by the waiving Party
D. Business License. Recipient will have a valid City of Modesto Business License.
E. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, excluding chose of law rules.
F. Construction of Agreement. The section headings and captions used herein are solely for convenience and shall not be used to interpret this Agreement. The Parties acknowledge that this Agreement is the product of negotiation and compromise on the part of both Parties, and the Parties agree, that since all of the Parties have participated in the negotiation and drafting of this Agreement, this Agreement shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if all Parties had prepared it.
G. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which taken together shall constitute one instrument. The persons executing this Agreement on behalf of Parties have been duly authorized to do so.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the effective date set forth above.
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Funding Contribution Agreement – United Way of San Joaquin County EXHIBIT A – SCOPE OF WORK
HealthForce Partners, Inc. will implement and administer a pilot Behavioral Health Workforce Partnership (BHWP) program in the City of Modesto to provide a unique and multi-layered approach to encourage and incentivize high road job education through providing paid internships, licensure supervision, loan forgiveness, tuition assistance, and peer support stipends. Through this program HealthForce Partners, Inc. will begin working right away with Stanislaus County partners to meet regional healthcare workforce goals.
Task
Number
Description Cost
1 HealthForce Partners will identify and award scholarships to current healthcare employees in the City of Modesto for advanced degrees leading to clinical licensure. These individuals will be Stanislaus County residents pursuing master’s degrees at either University of the Pacific or Stanislaus State University in behavioral health fields (social work, clinical counseling, marriage & family therapy).
$200,000
2 HealthForce Partners will issue funds in the form of $5,000 stipends per supervised paid internship in the form of a stipend to support licensed supervision by local community-based
organizations who are Medi-Cal certified and contracted with County Behavioral Health Services to provide outpatient behavioral health services. HealthForce Partners will oversee supervision requirements for students enrolled in the program including hiring and managing a licensed supervisor, providing stipends to community benefit organizations (CBOs) providing paid internship supervision, and a one-time licensure fee reimbursement.
$135,000
3 Program administrative costs (program administrator,
marking/communications support, and administrative fees) $165,000
Total program cost $500,000
All Scope of Work deliverables must be completed by June 30, 2026, and all expenses for performance of the Scope of Work must be incurred before December 31, 2026. #9..
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Funding Contribution Agreement – United Way of San Joaquin County
EXHIBIT B
U.S. DEPARTMENT OF THE TREASURY
CORONAVIRUS LOCAL FISCAL RECOVERY FUND
AWARD TERMS AND CONDITIONS
1. Use of Funds.
a. Recipient understands and agrees that the funds disbursed under this award may only be used in compliance with section 603(c) of the Social Security Act (the Act), U.S.
Department of Treasury’s (“Treasury”) regulations implementing that section, and guidance issued by Treasury regarding the foregoing.
b. Recipient will determine prior to engaging in any project using this assistance that it has the institutional, managerial, and financial capability to ensure proper planning, management, and completion of such project.
2. Period of Performance. The period of performance for this award begins on the date hereof and ends on December 31, 2026. As set forth in Treasury’s implementing regulations, Recipient may use award funds to cover eligible costs incurred during the period that begins on March 3, 2021, and ends on December 31, 2026.
3. Reporting. Recipient agrees to comply with any reporting obligations established by Treasury as they relate to this award.
4. Maintenance of and Access to Records
a. Recipient shall maintain records and financial documents sufficient to evidence compliance with section 603(c) of the Act, Treasury’s regulations implementing that section, and guidance issued by Treasury regarding the foregoing. b. The Treasury Office of Inspector General and the Government Accountability Office, or their authorized representatives, shall have the right of access to records (electronic and otherwise) of Recipient in order to conduct audits or other investigations. c. Records shall be maintained by Recipient for a period of five (5) years after all funds have been expended or returned to Treasury, whichever is later.
5. Pre-award Costs. Pre-award costs, as defined in 2 C.F.R. § 200.458, may not be paid with funding from this award.
6. Administrative Costs. Recipient may use funds provided under this award to cover both direct and indirect costs.
7. Cost Sharing. Cost sharing or matching funds are not required to be provided by Recipient.
8. Conflicts of Interest. Recipient understands and agrees it must maintain a conflict of interest policy consistent with 2 C.F.R. § 200.318(c) and that such conflict of interest policy is applicable to each activity funded under this award. Recipient and subrecipients must disclose in writing to #9..
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Funding Contribution Agreement – United Way of San Joaquin County Treasury or the pass-through entity, as appropriate, any potential conflict of interest affecting the awarded funds in accordance with 2 C.F.R. § 200.112.
9. Compliance with Applicable Law and Regulations.
a. Recipient agrees to comply with the requirements of section 602 of the Act, regulations adopted by Treasury pursuant to section 602(f) of the Act, and guidance issued by Treasury regarding the foregoing. Recipient also agrees to comply with all other applicable federal statutes, regulations, and executive orders, and Recipient shall provide for such compliance by other parties in any agreements it enters into with other parties relating to this award.
b. Federal regulations applicable to this award include, without limitation, the following:
i. Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, 2 C.F.R. Part 200, other than such provisions as Treasury may determine are inapplicable to this Award and subject to such exceptions as may be otherwise provided by Treasury. Subpart F – Audit Requirements of the Uniform Guidance, implementing the Single Audit Act, shall apply to this award. ii. Universal Identifier and System for Award Management (SAM), 2 C.F.R. Part 25, pursuant to which the award term set forth in Appendix A to 2 C.F.R. Part 25 is hereby incorporated by reference.
iii. Reporting Subaward and Executive Compensation Information, 2 C.F.R. Part 170, pursuant to which the award term set forth in Appendix A to 2 C.F.R. Part 170 is hereby incorporated by reference.
iv. OMB Guidelines to Agencies on Governmentwide Debarment and Suspension (Nonprocurement), 2 C.F.R. Part 180, including the requirement to include a term or condition in all lower tier covered transactions (contracts and subcontracts described in 2 C.F.R. Part 180, subpart B) that the award is subject to 2 C.F.R. Part 180 and Treasury’s implementing regulation at 31 C.F.R. Part 19. v. Recipient Integrity and Performance Matters, pursuant to which the award term set forth in 2 C.F.R. Part 200, Appendix XII to Part 200 is hereby incorporated by reference.
vi. Governmentwide Requirements for Drug-Free Workplace, 31 C.F.R. Part 20. vii. New Restrictions on Lobbying, 31 C.F.R. Part 21.
viii. Uniform Relocation Assistance and Real Property Acquisitions Act of 1970 (42 U.S.C. §§ 4601-4655) and implementing regulations.
ix. Generally applicable federal environmental laws and regulations. c. Statutes and regulations prohibiting discrimination applicable to this award include, without limitation, the following:
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Funding Contribution Agreement – United Way of San Joaquin County i. Title VI of the Civil Rights Act of 1964 (42 U.S.C. §§ 2000d et seq.) and Treasury’s implementing regulations at 31 C.F.R. Part 22, which prohibit discrimination on the basis of race, color, or national origin under programs or activities receiving federal financial assistance;
ii. The Fair Housing Act, Title VIII of the Civil Rights Act of 1968 (42 U.S.C. §§ 3601 et seq.), which prohibits discrimination in housing on the basis of race, color, religion, national origin, sex, familial status, or disability; iii. Section 504 of the Rehabilitation Act of 1973, as amended (29 U.S.C. § 794), which prohibits discrimination on the basis of disability under any program or activity receiving federal financial assistance;
iv. The Age Discrimination Act of 1975, as amended (42 U.S.C. §§ 6101 et seq.), and Treasury’s implementing regulations at 31 C.F.R. Part 23, which prohibit discrimination on the basis of age in programs or activities receiving federal financial assistance; and
v. Title II of the Americans with Disabilities Act of 1990, as amended (42 U.S.C. §§ 12101 et seq.), which prohibits discrimination on the basis of disability under programs, activities, and services provided or made available by state and local governments or instrumentalities or agencies thereto.
10. Remedial Actions. In the event of Recipient’s noncompliance with section 602 of the Act, other applicable laws, Treasury’s implementing regulations, guidance, or any reporting or other program requirements, Treasury may impose additional conditions on the receipt of a subsequent tranche of future award funds, if any, or take other available remedies as set forth in 2 C.F.R. § 200.339. In the case of a violation of section 602(c) of the Act regarding the use of funds, previous payments shall be subject to recoupment as provided in section 602(e) of the Act and any additional payments may be subject to withholding as provided in sections 602(b)(6)(A)(ii)(III) of the Act, as applicable.
11. Hatch Act. Recipient agrees to comply, as applicable, with requirements of the Hatch Act (5 U.S.C. §§ 1501-1508 and 7324-7328), which limit certain political activities of State or local government employees whose principal employment is in connection with an activity financed in whole or in part by this federal assistance.
12. False Statements. Recipient understands that making false statements or claims in connection with this award is a violation of federal law and may result in criminal, civil, or administrative sanctions, including fines, imprisonment, civil damages and penalties, debarment from participating in federal awards or contracts, and/or any other remedy available by law.
13. Publications. Any publications produced with funds from this award must display the following language: “This project [is being] [was] supported, in whole or in part, by federal award number SLFRP2096 awarded to City of Modesto by the U.S. Department of the Treasury.”
14. Debts Owed the Federal Government.
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Funding Contribution Agreement – United Way of San Joaquin County a. Any funds paid to Recipient (1) in excess of the amount to which Recipient is finally determined to be authorized to retain under the terms of this award; (2) that are determined by the Treasury Office of Inspector General to have been misused; or (3) that are determined by Treasury to be subject to a repayment obligation pursuant to sections 602(e) and 603(b)(2)(D) of the Act and have not been repaid by Recipient shall constitute a debt to the federal government.
b. Any debts determined to be owed the federal government must be paid promptly by Recipient. A debt is delinquent if it has not been paid by the date specified in Treasury’s initial written demand for payment, unless other satisfactory arrangements have been made or if the Recipient knowingly or improperly retains funds that are a debt as defined in paragraph 14(a). Treasury will take any actions available to it to collect such a debt.
15. Disclaimer.
a. The United States expressly disclaims any and all responsibility or liability to Recipient or third persons for the actions of Recipient or third persons resulting in death, bodily injury, property damages, or any other losses resulting in any way from the performance of this award or any other losses resulting in any way from the performance of this award or any contract, or subcontract under this award. b. The acceptance of this award by Recipient does not in any way establish an agency relationship between the United States and Recipient.
16. Protections for Whistleblowers.
a. In accordance with 41 U.S.C. § 4712, Recipient may not discharge, demote, or otherwise discriminate against an employee in reprisal for disclosing to any of the list of persons or entities provided below, information that the employee reasonably believes is evidence of gross mismanagement of a federal contract or grant, a gross waste of federal funds, an abuse of authority relating to a federal contract or grant, a substantial and specific danger to public health or safety, or a violation of law, rule, or regulation related to a federal contract (including the competition for or negotiation of a contract) or grant. b. The list of persons and entities referenced in the paragraph above includes the following:
i. A member of Congress or a representative of a committee of Congress; ii. An Inspector General;
iii. The Government Accountability Office;
iv. A Treasury employee responsible for contract or grant oversight or management;
v. An authorized official of the Department of Justice or other law enforcement agency;
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Funding Contribution Agreement – United Way of San Joaquin County vi. A court or grand jury; or
vii. A management official or other employee of Recipient, contractor, or subcontractor who has the responsibility to investigate, discover, or address misconduct.
c. Recipient shall inform its employees in writing of the rights and remedies provided under this section, in the predominant native language of the workforce.
17. Increasing Seat Belt Use in the United States. Pursuant to Executive Order 13043, 62 FR 19217 (Apr. 18, 1997), Recipient should encourage its contractors to adopt and enforce on-the-job seat belt policies and programs for their employees when operating company-owned, rented or personally owned vehicles.
18. Reducing Text Messaging While Driving. Pursuant to Executive Order 13513, 74 FR 51225 (Oct. 6, 2009), Recipient should encourage its employees, subrecipients, and contractors to adopt and enforce policies that ban text messaging while driving, and Recipient should establish workplace safety policies to decrease accidents caused by distracted drivers.
ASSURANCES OF COMPLIANCE WITH CIVIL RIGHTS REQUIREMENTS ASSURANCES OF COMPLIANCE WITH TITLE VI OF THE CIVIL RIGHTS ACT OF 1964 As a condition of receipt of federal financial assistance from the Department of the Treasury, the recipient named below (hereinafter referred to as the “Recipient”) provides the assurances stated herein. The federal financial assistance may include federal grants, loans and contracts to provide assistance to the Recipient’s beneficiaries, the use or rent of Federal land or property at below market value, Federal training, a loan of Federal personnel, subsidies, and other arrangements with the intention of providing assistance. Federal financial assistance does not encompass contracts of guarantee or insurance, regulated programs, licenses, procurement contracts by the Federal government at market value, or programs that provide direct benefits.
The assurances apply to all federal financial assistance from or funds made available through the Department of the Treasury, including any assistance that the Recipient may request in the future.
The Civil Rights Restoration Act of 1987 provides that the provisions of the assurances apply to all of the operations of the Recipient’s program(s) and activity(ies), so long as any portion of the Recipient’s program(s) or activity(ies) is federally assisted in the manner prescribed above.
1. Recipient ensures its current and future compliance with Title VI of the Civil Rights Act of 1964, as amended, which prohibits exclusion from participation, denial of the benefits of, or subjection to discrimination under programs and activities receiving federal financial assistance, of any person in the United States on the ground of race, color, or national origin (42 U.S.C. § 2000d et seq.), as implemented by the Department of the Treasury Title VI regulations at 31 CFR Part 22 and other pertinent executive orders such as Executive Order 13166, directives, circulars, policies, memoranda, and/or guidance documents.
2. Recipient acknowledges that Executive Order 13166, “Improving Access to Services for Persons with Limited English Proficiency,” seeks to improve access to federally assisted programs and activities for individuals who, because of national origin, have Limited English proficiency (LEP).
Recipient understands that denying a person access to its programs, services, and activities #9..
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Funding Contribution Agreement – United Way of San Joaquin County because of LEP is a form of national origin discrimination prohibited under Title VI of the Civil Rights Act of 1964 and the Department of the Treasury’s implementing regulations. Accordingly, Recipient shall initiate reasonable steps, or comply with the Department of the Treasury’s directives, to ensure that LEP persons have meaningful access to its programs, services, and activities. Recipient understands and agrees that meaningful access may entail providing language assistance services, including oral interpretation and written translation where necessary, to ensure effective communication in the Recipient’s programs, services, and activities.
3. Recipient agrees to consider the need for language services for LEP persons when Recipient develops applicable budgets and conducts programs, services, and activities. As a resource, the Department of the Treasury has published its LEP guidance at 70 FR 6067. For more information on taking reasonable steps to provide meaningful access for LEP persons, please visit http://www.lep.gov.
4. Recipient acknowledges and agrees that compliance with the assurances constitutes a condition of continued receipt of federal financial assistance and is binding upon Recipient and Recipient’s successors, transferees, and assignees for the period in which such assistance is provided.
5. Recipient acknowledges and agrees that it must require any sub-grantees, contractors, subcontractors, successors, transferees, and assignees to comply with assurances 1-4 above, and agrees to incorporate the following language in every contract or agreement subject to Title VI and its regulations between the Recipient and the Recipient’s sub-grantees, contractors, subcontractors, successors, transferees, and assignees:
The sub-grantee, contractor, subcontractor, successor, transferee, and assignee shall comply with Title VI of the Civil Rights Act of 1964, which prohibits recipients of federal financial assistance from excluding from a program or activity, denying benefits of, or otherwise discriminating against a person on the basis of race, color, or national origin (42 U.S.C. § 2000d et seq.), as implemented by the Department of the Treasury’s Title VI regulations, 31 CFR Part 22, which are herein incorporated by reference and made a part of this contract (or agreement). Title VI also includes protection to persons with “Limited English Proficiency” in any program or activity receiving federal financial assistance, 42 U.S.C. § 2000d et seq., as implemented by the Department of the Treasury’s Title VI regulations, 31 CFR Part 22, and herein incorporated by reference and made a part of this contract or agreement.
6. Recipient understands and agrees that if any real property or structure is provided or improved with the aid of federal financial assistance by the Department of the Treasury, this assurance obligates the Recipient, or in the case of a subsequent transfer, the transferee, for the period during which the real property or structure is used for a purpose for which the federal 6 6. 7. 8. 9.
10. financial assistance is extended or for another purpose involving the provision of similar services or benefits. If any personal property is provided, this assurance obligates the Recipient for the period during which it retains ownership or possession of the property.
7. Recipient shall cooperate in any enforcement or compliance review activities by the Department of the Treasury of the aforementioned obligations. Enforcement may include investigation, arbitration, mediation, litigation, and monitoring of any settlement agreements that may result from these actions. The Recipient shall comply with information requests, on-site compliance reviews and reporting requirements.
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Funding Contribution Agreement – United Way of San Joaquin County
8. Recipient shall maintain a complaint log and inform the Department of the Treasury of any complaints of discrimination on the grounds of race, color, or national origin, and limited English proficiency covered by Title VI of the Civil Rights Act of 1964 and implementing regulations and provide, upon request, a list of all such reviews or proceedings based on the complaint, pending or completed, including outcome. Recipient also must inform the Department of the Treasury if Recipient has received no complaints under Title VI.
9. Recipient must provide documentation of an administrative agency’s or court’s findings of noncompliance of Title VI and efforts to address the non-compliance, including any voluntary compliance or other agreements between the Recipient and the administrative agency that made the finding. If the Recipient settles a case or matter alleging such discrimination, the Recipient must provide documentation of the settlement. If Recipient has not been the subject of any court or administrative agency finding of discrimination, please so state.
10. If the Recipient makes sub-awards to other agencies or other entities, the Recipient is responsible for ensuring that sub-recipients also comply with Title VI and other applicable authorities covered in this document State agencies that make sub-awards must have in place standard grant assurances and review procedures to demonstrate that that they are effectively monitoring the civil rights compliance of subrecipients.
The United States of America has the right to seek judicial enforcement of the terms of this assurances document and nothing in this document alters or limits the federal enforcement measures that the United States may take in order to address violations of this document or applicable federal law.
Under penalty of perjury, the undersigned official(s) certifies that official(s) has read and understood the Recipient’s obligations as herein described, that any information submitted in conjunction with this assurances document is accurate and complete, and that the Recipient is in compliance with the aforementioned nondiscrimination requirements.
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Funding Contribution Agreement – United Way of San Joaquin County
EXHIBIT C
ANNUAL REPORTING REQUIREMENTS
Contractor shall use Exhibit C to provide an annual performance report.
The initial report will cover the period from the date the contract was executed to the following June 30, and will be due to the Recipient within 15 days after the end of the reporting period. Thereafter, the report will cover a 12-month period and contractors will be required to submit the report to Recipient within 15 days after the end of the 12-month period (by July 15).
Notes on using this template
All contractors that are recipients of State and Local Fiscal Recovery Funds (SLFRF) awards are required to produce an Annual Report. The Annual Report provides information on the contractor’s project and how they plan to ensure program outcomes are achieved in an effective and equitable manner.
The initial Annual Report will cover the period from the date of award to the following June 30 and must be submitted to Recipient within 15 calendar days after the end of the reporting period. Thereafter, the Annual Report will cover a 12-month period and contractors will be required to submit the report to Recipient within 15 calendar days after the end of the 12-month period (by July 15).
Annual Report Period Covered Due Date
1 Award – June 30, 2022 July 15, 2022
2 July 1, 2022 – June 30, 2023 July 15, 2023
3 July 1, 2023 – June 30, 2024 July 15, 2024
4 July 1, 2024 – June 30, 2025 July 15, 2025
5 July 1, 2025 – June 30, 2026 July 15, 2026
6 July 1, 2026 – December 31, 2026 January 15, 2027
Instructions:
Contractors should consult the SLFRF Guidance on Recipient Compliance and Reporting Responsibilities (Reporting Guidance) located at https://home.treasury.gov/system/files/136/SLFRF-Compliance-andReporting-Guidance.pdf for detailed guidance on the submission of this report or contact city staff for assistance with completing this exhibit.
Recipient recommends the use of infographics, tables, charts, pictures, case studies, and other explanatory elements in describing their programs.
Text in italics represents the requirements from the Reporting Guidance and is meant to serve as a reference as contractors prepare their Annual Report. This instructions page and the text in italics should be removed before the final transmitted report is published and submitted to Recipient. #9..
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Funding Contribution Agreement – United Way of San Joaquin County HealthForce Partners, Inc.
202x Annual Report
GENERAL OVERVIEW
Uses of Funds
Describe in further detail contractor’s intended and actual uses of the funds, such as how contractor’s approach would help support economic vitality. Describe any strategies employed to maximize programmatic impact and effective, efficient, and equitable outcomes. Given the broad eligible uses of funds and the specific needs of the jurisdiction, explain how the funds would support the communities, and target population. Address how you are promoting each of the following Expenditure Categories, to the extent they apply:
a) Addressing Educational Disparities: Academic, Social, and Emotional Services:
b) Education Assistance: Other:
c) Administrative Support:
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Funding Contribution Agreement – United Way of San Joaquin County
EXHIBIT D
QUARTERLY PROJECT AND EXPENDITURE REPORT REQUIREMENTS
Contractor shall use Exhibit D to provide a quarterly project and expenditure report.
The initial report will cover the period from the date the contract was executed through the end of the quarter, and will be due to the Recipient within 15 days after the end of the reporting period. Thereafter, the report will cover one quarter and contractors will be required to submit the report to Recipient within 15 days after the end of the quarter.
ARPA QUARTERLY PROJECT AND EXPENDITURE REPORT
Reporting on State and Local Fiscal Recovery Funds (SLFRF) Name of Entity:
Project Name:
Reporting Period Start Date:
Reporting Period End Date:
Expenditure Category:
2.13 Other Economic Support* ^
Please provide a brief description of the activities conducted:
Category Cumulative
Expenditures to
date ($)
Cumulative
Obligations to
date ($)
Current Period
Expenditures
Current Period
Obligations
2.25 Addressing Educational
Disparities: Academic, Social,
and Emotional
Services*^
3.5 Education Assistance: Other*^
7.1 Administrative
PROJECT
EXPENDITURES
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Funding Contribution Agreement – United Way of San Joaquin County [PLEASE SELECT ONE]
PROJECT STATUS
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CITY OF MODESTO
COUNCIL AGENDA REPORT
DATE OF MEETING:
June 25, 2024
Date: June 5, 2024
TO: Mayor and City Council
THROUGH: Joseph P. Lopez, City Manager
FROM: Toby Wells, Director of Engineering Services/City Engineer SUBJECT: Summary Vacation of Right-of-Way Dedication Located at APN 033-089-037 CONTACT: Jaspreet Mangat, Senior Civil Engineer, [email protected], 209-577-5253
DESCRIPTION:
Consider approving the summary vacation of an existing 60 feet wide by approximately 192 feet long (11,505.95 square feet) road right-of-way located at APN 033-089-037. (Funding Source:
Not Applicable)
STRATEGIC PLAN ELEMENT:
The recommended action supports the City’s 2020-2025 Strategic Goal “Ensure Safe, Efficient, and Reliable Infrastructure”.
BACKGROUND:
On November 22nd, 1976, by Resolution 76-1268, City Council approved the Final Map of Scott Estates, in the general vicinity of Yosemite Avenue east of Mariposa. Multiple parcels were created along with easements and road reservations for a potential future roadway north of Yosemite Avenue. As the area was developed over the years, some of the reserved areas were not utilized to build the roads as the development patterns changed the ultimate road configuration in the area. As a result, the previously dedicated road right-of-way can be abandoned in order to develop new businesses. Thus, TPC CS Holdings I, LLC, an Idaho Limited Liability Company, has requested the summary vacation of a 60 feet wide strip of property consisting of 11,505.95 square feet on their property at APN 033-089-037.
DISCUSSION:
In accordance with California Streets and Highways Code - Division 9, Part 3, Chapter 4 Article 1, Section 83311, the roadway is eligible for a summary vacation. 1 “The legislative body of a local agency may summarily vacate a street or highway if both of the following conditions exist:
(a) For a period of five consecutive years, the street or highway has been impassable for vehicular travel. (b) No public money was expended for maintenance on the street or highway during such period.” #10..
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City Council, June 25, 2024
Summary Vacation of Right-of-Way Dedication Located at APN 033-089-037
The street was never built or accepted by the City. This area was reserved for future road construction and dedication but as development occurred, it became clear that further road construction was not required. There are no City utilities or other easements in this area. This vacation of the street will allow Dutch Bros Coffee shop to be built on the undeveloped parcel.
Staff recommends the summary vacation consistent with the California Streets and Highways Code - Division 9, Part 3, Chapter 4 Article 1, Section 8331.
FISCAL IMPACT:
There is no fiscal impact to the City caused by this vacation.
COMMITTEE RECOMMENDATION:
This item was presented to the Economic Development Committee on June 3, 2024 and was recommended for forwarding to Council for Approval.
RECOMMENDED COMMITTEE ACTION:
Staff Recommendations:
Resolution approving the summary vacation of an existing 60 feet wide by approximately 192 feet long (11,505.95 square feet) road right-of-way located at APN 033-089-037.
Approved by:
Toby Wells, Director of Engineering Services/
City Engineer
Joseph P. Lopez, City Manager
Attachments:
1. Resolution
2. Exhibit A & B
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6/25/2024/ESD/twells 1 2024-
MODESTO CITY COUNCIL
RESOLUTION NO. 2024-
RESOLUTION APPROVING THE SUMMARY VACATION OF AN
EXISTING 60 FEET WIDE BY APPROXIMATELY 192 FEET LONG
(11,505.95 SQUARE FEET) ROAD RIGHT-OF-WAY LOCATED AT APN 033- 089-037
WHEREAS, Chapter 4, Part 3 of Division 9, Section 8331, states “The legislative body of a local agency may summarily vacate a street or highway if both of the following conditions exist: (a) For a period of five consecutive years, the street or highway has been impassable for vehicular travel. (b) No public money was expended for maintenance on the street or highway during such period.”; and WHEREAS, the City of Modesto has received a request from TPC CS Holdings I, LLC, an Idaho Limited Liability Company, has requested the summary vacation of a 60-foot wide by 191.59 foot long (11,505.95 square feet) road located on their property located on APN 033-089-037; and WHEREAS, on November 22nd, 1976, by Resolution No. 76-1268, City Council approved the Final Maps of Scott Estates, and it was annexed into the City of Modesto; and
WHEREAS, the area was developed over the years, some of the road reservations areas were not utilized to build the roads.
WHEREAS, there are no city utilities or other easements in this area.
NOW, THEREFORE, BE IT RESOLVED by the Council of the City of Modesto that the existing 60 feet wide by approximately 192 feet long (11,505.95 square feet) road right-of-way located at APN 033-089-037, in the City of Modesto, which is more particularly described in Exhibit “A” attached hereto and incorporated herein by reference, is hereby summarily abandoned.
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6/25/2024/ESD/twells 2 2024-
BE IT FURTHER RESOLVED that the City Clerk is hereby directed to record a certified copy of this resolution in the Stanislaus County Recorder’s Office. From and after the date this resolution is recorded, said easements shall no longer constitute public easements.
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6/25/2024/ESD/twells 3 2024-
The foregoing resolution was introduced at a regular meeting of the Council of the City of Modesto held on the 25th day of June, 2024, by Councilmember ?, who moved its adoption, which motion being duly seconded by Councilmember ?, was upon roll call carried and the resolution adopted by the following vote:
AYES: Councilmembers:
NOES: Councilmembers:
ABSENT: Councilmembers:
ATTEST:
DIANE NAYARES-PEREZ,
CMC, City Clerk
APPROVED AS TO FORM:
BY:
JOSE M. SANCHEZ, City Attorney
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CITY OF MODESTO
COUNCIL AGENDA REPORT
DATE OF MEETING:
June 25, 2024
Date: June 5, 2024
TO: Mayor and City Council
THROUGH: Joseph P. Lopez, City Manager
FROM: Toby Wells, Director of Engineering Services/City Engineer SUBJECT: Accept Jennings Command Center and Hahn Lift Station Restroom Project as Complete
CONTACT: Peter Kambel, Senior Civil Engineer, [email protected], 209-577-5444 DESCRIPTION:
Consider accepting the Jennings Command Center and Hahn Lift Station Restroom Project as complete, releasing securities, releasing payments totaling $568,374 to Harris Builders, Inc., of Hilmar, CA, and authorizing the City Clerk to file a Notice of Completion. (Funding Source:
Wastewater Fund)
STRATEGIC PLAN ELEMENT:
The recommended action supports the 2020-2025 City of Modesto Strategic Plan Initiatives, Goal D: Provide safe, efficient, and reliable infrastructure through proactive community investment, maintenance, and sustainability efforts.
BACKGROUND:
The Command Center building at the Jennings Wastewater Treatment Plant (Jennings WWTP) was an upgrade to the Phase 1A Tertiary trailer currently in use. Operations and Maintenance (O&M) staff have been working out of a mobile trailer that was left over after the construction of the Phase 1A Treatment Facility was completed. This trailer houses critical Supervisory Control and Data Acquisition (SCADA) servers and terminals, business computers, and serves as a minor storage area for O&M supplies. The trailer was never intended to be permanent and has since become unsuitable for continued occupancy due to multiple factors including a deteriorating roof and floors and a failing air conditioning unit that is necessary to maintain the SCADA system.
Utilities Engineering and Wastewater O&M staff designed a replacement building that architecturally matches the existing buildings at the Phase 1A Facility and will provide Wastewater O&M staff a permanent replacement to the Phase 1A Tertiary trailer. #11..
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City Council, June 25, 2024
Accept Jennings Command Center and Hahn Lift Station Restroom Project as Complete
This project also provided funding for the construction of a new restroom at the Hahn Lift Station, which is located at 3200 Nightingale Drive.
DISCUSSION:
The project was advertised for bids on September 7, 2022. Bids were publicly opened on October 4, 2022, and pursuant to City Charter Section 1307, Harris Builders, Inc., of Hilmar, CA, was the lowest responsible bidder at 9.62% under the engineers estimate.
On December 13, 2022, by Resolution 2022-495, and Council awarded a contract to Harris Builders, Inc., in the amount of $542,277. The Contractor received the Notice to Proceed with a start date of March 6, 2023. All contract work was completed on January 9, 2024.
By accepting this project as complete, the City officially accepts the improvements made and authorizes the Notice of Completion to be filed. The City Clerk is authorized to complete all the necessary steps to file a Notice of Completion with the County Recorder, release securities, and authorize payments totaling $568,374. The work is covered by a one-year warranty for any issues that may arise.
Staff recommends the project for acceptance as the contractor has complied with all contract requirements for the project.
FISCAL IMPACT:
The total project costs were $813,228 which included design, construction, and construction administration costs. The total project amount originally budgeted was $881,619, which included $613,619 for the construction contract and contingency with Harris Builders, Inc.
The City’s “Change Order Approval Policy” enacted by Council Resolution No. 94-443 on July 19, 1994, and updated by Resolution No. 2019-326 on July 9, 2019, established a contract change order authority of ten percent (10%) for construction contracts of this dollar value. However, on December 13, 2022, by Resolution 2022-496, the change order budget was increased to fifteen percent (15%) due to multiple existing underground utility lines with unexpected conditions. There are four change orders resulting in an overall increase of $26,097 for change order work as listed on the attached change order log. A summary of the expenditures for the overall project is listed below.
101262 – UTL command Center & Restroom Jennings WWTP
Total
Construction Contract (Haris Builders, Inc.) $542,277
Construction Contingency 4.8% $26,097
Construction Admin - City Staff 27.5% $149,174
Engineering Design Administration 17.6% $95,680
Total Construction Expenditures $813,228
COMMITTEE RECOMMENDATION
On April 5, 2021, the Economic Development Committee reviewed and recommended a list of upcoming Capital Improvement projects for Council approval to award, which included this project.
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City Council, June 25, 2024
Accept Jennings Command Center and Hahn Lift Station Restroom Project as Complete
CEQA/NEPA REQUIREMENTS:
Environmental review has been provided through Statement of Exemption, EA/UTL No. 2022-01, Categorical Extensions Section 15301 (Ex. Facilities) Class1, (e-2).
RECOMMENDED COUNCIL ACTION:
Staff Recommendations:
Resolution accepting the Jennings Command Center and Hahn Lift Station Restroom Project as complete, releasing securities, releasing payments totaling $568,374 to Harris Builders, Inc., of Hilmar, CA., and authorizing the City Clerk to file a Notice of Completion.
Approved by:
_________________________________________
Toby Wells, Director of Engineering Services/
City Engineer
_________________________________________
Joseph P. Lopez, City Manager
Attachments:
1. Resolution
2. CCO Log
3. Project Suspension Forms (1)
4. Notice of Completion
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06/11/2024/ESD/PKambel 1 2024-
MODESTO CITY COUNCIL
RESOLUTION NO. 2024-XX
RESOLUTION ACCEPTING THE JENNINGS COMMAND CENTER AND
HAHN LIFT STATION RESTROOM PROJECT AS COMPLETE, RELEASING SECURITIES, RELEASING PAYMENTS TOTALING $568,374 TO HARRIS BUILDERS, INC., OF HILMAR, CA, AND AUTHORIZING THE CITY CLERK
TO FILE A NOTICE OF COMPLETION
WHEREAS, the Command Center building at the Jennings Wastewater Treatment Plant (Jennings WWTP) was an upgrade to the Phase 1A Tertiary trailer currently in use; and
WHEREAS, Operations and Maintenance (O&M) staff have been working out of a mobile trailer that was left over after the construction of the Phase 1A Treatment Facility was completed; and
WHEREAS, this trailer houses critical Supervisory Control and Data Acquisition (SCADA) servers and terminals, business computers, and serves as a minor storage area for O&M supplies; and
WHEREAS, the trailer was never intended to be permanent and has since become unsuitable for continued occupancy due to multiple factors including a deteriorating roof and floors and a failing air conditioning unit that is necessary to maintain the SCADA system; and
WHEREAS, Utilities Engineering and Wastewater O&M staff designed a replacement building that architecturally matches the existing buildings at the Phase 1A Facility and will provide Wastewater O&M staff a permanent replacement to the Phase 1A Tertiary trailer; and
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06/11/2024/ESD/PKambel 2 2024-
WHEREAS, this project also provided funding for the construction of a new restroom at the Hahn Lift Station, which is located at 3200 Nightingale Drive; and WHEREAS, the project was advertised for bids on September 7, 2022. Bids were publicly opened on October 4, 2022, pursuant to City Charter Section 1307, and Harris Builders, Inc., of Hilmar, CA was the lowest responsible bidder at 9.62% under the engineers estimate; and
WHEREAS, on December 13, 2022, by Resolution 2022-494, and Council awarded a contract to Harris Builders, Inc., in the amount of $542,277. The Contractor received the Notice to Proceed with a start date of March 6, 2023. All contract work was completed on January 9, 2024; and
WHEREAS, the total project costs were $813,228, which included design, construction, and construction administration costs. The total project amount originally budgeted was $881,619 which included $613,619 for the construction contract and contingency with Harris Builders, Inc.; and
WHEREAS, the City’s “Change Order Approval Policy” enacted by Council Resolution No. 94-443 on July 19, 1994, and updated by Resolution No. 2019-326 on July 9, 2019, established a contract change order authority of ten percent (10%) for construction contracts of this dollar value. However, on December 13, 2022, by Resolution 2022-496, the change order budget was increased to fifteen percent (15%) due to multiple existing underground utility lines with unexpected conditions; and WHEREAS, there were four change orders on this project with an overall increase of $626,097; and
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06/11/2024/ESD/PKambel 3 2024-
WHEREAS, by accepting this project as complete, the city officially accepts the improvements made and authorizes the Notice of Completion to be filed.
NOW, THEREFORE, BE IT RESOLVED by the Council of the City of Modesto hereby accepts the Jennings Command Center and Hahn Lift Station Restroom Project as complete, releasing securities, releasing payments totaling $568,374 to Harris Builders, Inc. of Hilmar, CA., and authorizing the City Clerk to file a Notice of Completion.
The foregoing resolution was introduced at a regular meeting of the Council of the City of Modesto held on the 25th day of June 2024, by Councilmember?, who moved its adoption, which motion being duly seconded by Councilmember ?, was upon roll call carried and the resolution adopted by the following vote:
AYES: Councilmembers:
NOES: Councilmembers:
ABSENT: Councilmembers:
ATTEST: ____________________________
DIANE NAYARES-PEREZ, CMC, City Clerk
(SEAL)
APPROVED AS TO FORM:
BY: ______________________________________
JOSE M. SANCHEZ, City Attorney
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28-FEB-2024
3/27/24
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Requested by
City of Modesto/City Clerk’s Office
Return to City of Modesto/City Clerk’s Office:
PO Box 642
Modesto CA 95353
NOTICE OF COMPLETION
NOTICE IS HEREBY GIVEN that on December 13, 2022, the City of Modesto, PO Box 642, Modesto, California 95353, a Municipal Corporation in the County of Stanislaus, State of California, awarded the contract to Harris Builders, Inc., of Hilmar, CA., for the project titled “Jennings Command Center and Hahn Lift Station Restroom Project” located at 7007 Jennings Road, Modesto, CA., and 3200 Nightengale Drive, Modesto, CA., and that on January 19, 2024, the said contract as a whole was actually completed by Harris Builders, Inc., and accepted by the Council of the City of Modesto at a regular meeting of the Council held on June 25, 2024.
CITY OF MODESTO
By
Diane Nayares-Perez, City Clerk
I certify under penalty of perjury that the foregoing is true and correct.
Date: By
Modesto, CA Diane Nayares-Perez, City Clerk
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CITY OF MODESTO
COUNCIL AGENDA REPORT
DATE OF MEETING:
June 25, 2024
Date: May 31, 2024
TO: Mayor and City Council
THROUGH: Joseph P. Lopez, City Manager
FROM: DeAnna Christensen, Director of Finance
SUBJECT: Debt Management Policy Updates
CONTACT: Calogero Maniscalco, Senior Financial Analyst
[email protected] 209-577-5219
DESCRIPTION:
Consider approving the updates to the City’s Debt Management Policy. (Funding Source: Not Applicable)
STRATEGIC PLAN ELEMENT:
This item supports the City of Modesto 2020-2025 Strategic Plan focus of Governance and Service Delivery under Goal H: Achieve Financial Sustainability.
BACKGROUND:
On August 2, 2006, the City Council adopted Resolution 2006-487 approving a Debt Management Policy (“Policy”) for the City of Modesto. The purpose of this Policy is to organize and formalize debt issuance-related policies and procedures for the City. The primary objectives of the City’s debt and financing-related activities are to maintain cost-effective access to the capital markets through prudent yet flexible policies; moderate debt principal and debt service payments through effective planning and project cash management; achieve the lowest cost of borrowing; and achieve the highest practical credit ratings.
DISCUSSION:
Per the Debt Management Policy XV, (C) – The City “shall conduct periodic reviews, at least annually, or more often as may be necessary, to determine that the City remains in compliance with all laws and regulations”. The policy was last updated and approved by Council on May 9, 2023.
Public Financial Management, Inc. (“PFM”), the City’s financial advisor, and Norton Rose Fulbright, the City’s bond counsel, have reviewed and proposed updates and changes to the Debt Management Policy. Changes this year are minor and are mostly formatting and grammatical in nature.
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City Council, June 25, 2024
Debt Management Policy Updates
A copy of the proposed Debt Management Policy is attached (Attachment 1), with revisions indicated/underlined. An additional copy is attached (Attachment 2), with the same revisions accepted and integrated in the body of the text (a “clean” copy of the updated Policy).
Changes to the Debt Management Policy are subject to approval by the City Council at a legally noticed public meeting.
FISCAL IMPACT:
There is no immediate fiscal impact associated with this particular action.
COMMITTEE RECOMMENDATION:
The Finance Committee approved the Debt Management Policy updates at their May 20, 2024, meeting and recommended forwarding to Council for approval.
RECOMMENDED COUNCIL ACTION:
Staff Recommendations:
Resolution approving the updates to the City’s Debt Management Policy.
Approved by:
DeAnna Christensen, Director of Finance
Joseph P. Lopez, City Manager
Attachments:
1. Resolution
2. Debt Management Policy (FY25 With Edits)
3. Debt Management Policy (FY25 Clean Copy)
4. Debt Management Policy Finance Committee Presentation #12..
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1 MODESTO CITY COUNCIL
RESOLUTION NO. 2024-XX
RESOLUTION APPROVING THE UPDATES TO THE CITY’S DEBT
MANAGEMENT POLICY
WHEREAS, pursuant to the City of Modesto Debt Management Policy, last adopted on May 2, 2023, the City of Modesto is required to periodically review and update its Debt Management Policy to address changes to the primary objectives related to the City’s debt and financing related activities, and WHEREAS, staff has identified the need to update the City’s Debt Management Policy in order to continue to maintain cost-effective access to the capital markets through prudent yet flexible policies; moderate principal and debt service payments through effective planning and project cash management; achieve the lowest cost of borrowing; and achieve the highest practical credit ratings.
NOW, THEREFORE, BE IT RESOLVED by the Council of the City of Modesto, that it hereby adopts the revised Debt Management Policy, attached as Exhibit A and incorporated herein by this reference.
BE IT FURTHER RESOLVED that City staff is hereby authorized and directed to proceed with any and all actions deemed necessary or advisable, following the adopted policy guidelines pursuant to this Resolution, in connection with the future issuances of the City Debt, for future consideration by this City Council. #12..
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2 The foregoing resolution was introduced at a regular meeting of the Council of the City of Modesto held on the 25th day of June, 2024 by Councilmember ?, who moved its adoption, which motion being duly seconded by Councilmember ?, was upon roll call carried and the resolution adopted by the following vote:
AYES: Councilmembers:
NOES: Councilmembers:
ABSENT: Councilmembers:
ATTEST: ______________________________
DIANE NAYARES-PEREZ, CMC,
City Clerk
(SEAL)
APPROVED AS TO FORM:
BY:
JOSE M. SANCHEZ, City Attorney
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1 I. INTRODUCTION
The purpose of this Policy is to organize and formalize debt issuance-related policies and procedures for the City of Modesto (the “City”) and to establish a systematic debt policy (the “Debt Policy” or the “Policy”). The debt policies and practices of the City are, in every case, subject to and limited by applicable provisions of state and federal law and prudent debt management principles.
II. DEBT POLICY OBJECTIVE
The primary objectives of the City’s debt and financing related activities are to maintain cost-effective access to the capital markets and other financing venues through prudent yet flexible policies:
Moderate principal and debt service payments through effective planning and projected cash management;
Achieve the lowest cost of borrowing; and
Achieve the highest practical credit ratings.
III. SCOPE AND DELEGATION OF CITY
This Debt Policy shall govern, except as otherwise covered by the City of Modesto Investment Policy and the City of Modesto Interest Rate Swap Policy, the issuance and management of all debt funded through the capital markets and private placements, including the selection and management of related financial and advisory services and products, and the investment of bond proceeds.
This Policy shall be reviewed and updated periodically as required. Any changes to the Policy are subject to approval by the City Council at a legally noticed and conducted public meeting.
Overall policy direction of this Debt Policy shall be provided by the City Council.
Responsibility for implementation of the Debt Policy, and day-to-day responsibility for structuring, implementing, and managing the City’s debt and finance program, shall lie with the Director of Finance. The City Council’s adoption of the City Annual Budget does not, in and of itself, constitute authorization for debt issuance for any reason. This Debt Policy requires that the City Council specifically authorize each debt financing. Each financing shall be presented to the City Council, subject to City Council agenda review and approval (debt financings
CITY OF MODESTO
CITY COUNCIL POLICY
LATEST REVISION DATE: April
202306/25/2024
POLICY NUMBER: 1.036
CITY DEPARTMENT: Finance
SUBJECT: Debt Management Policy
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2 cannot be approved on a consent calendar).
While adherence to this Policy is required in applicable circumstances, the City recognizes that changes in the capital markets, agency programs and other unforeseen circumstances may from time to time produce situations that are not covered by the Policy and will require modifications or exceptions to achieve policy goals. In these cases, management flexibility is appropriate, provided specific authorization from the City Council is obtained.
IV. ETHICS AND CONFLICTS OF INTEREST
Officers and employees of the City involved in the execution and management of the Debt Policy will not engage in any personal business activities that could conflict with proper and lawful execution and management of the Debt Policy, or which could impair their ability to make impartial decisions.
V. CAPITAL IMPROVEMENT PROGRAM INTEGRATION
The City’s multi-year Capital Improvement Program (“CIP”), which identifies the projects and the appropriate funding mechanisms to pay for them, shall be used in combination with the CIP Financial and Budget Policies and this Debt Policy to ensure the proper allocation and financing of eligible projects. The CIP and its related policies set priorities and strategies for allocating and tracking funding, while the Debt Policy provides policy direction and limitations for proposed financings. Debt issuance for capital projects shall not be recommended for City Council approval unless such issuance has been incorporated into the CIP.
VI. STANDARDS FOR USE OF DEBT FINANCING
The City’s Debt Policy will promote debt issuance only in those cases where public policy, equity and economic efficiency favor debt over cash (pay-as-you-go) financing. Long-term debt financing shall not be used to fund operating costs.
A. Credit Quality
Credit quality is an overriding consideration. All City debt management activities for new debt issuances will be conducted in a manner conducive to receiving the highest credit ratings possible consistent with the City’s debt management objectives, and to maintaining or improving the current credit ratings assigned to the City's outstanding debt by the major credit rating agencies.
B. Term of Financing
Debt can be used to provide funding for long-term capital projects. The debt repayment period should relate to the expected useful life for the facilities or equipment being financed, and should, as a general matter, be concurrent with the stream of benefits from these facilities. When the City finances capital projects by issuing bonds, the debt repayment period generally should not exceed the average useful life of the equipment, #12..
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3 software and/or facilities being acquired or constructed, but in no case will the financing exceed 120% of the useful life of the project being financed. Inherent in its long-term debt policies, the City recognizes that future taxpayers will benefit from the capital investment and that it is appropriate that they pay a share of the asset cost.
C. Debt Financing Mechanism
The City will evaluate the use of all financial alternatives available, including, but not limited to: long-term debt, short-term debt, commercial paper, tax revenue and grant anticipation notes, private placement and inter-fund borrowing. The City will utilize the most cost advantageous financing alternative available while limiting the City’s risk exposure.
D. Ongoing Debt Administration and Internal Controls
The City shall maintain all debt-related records for as long as the associated debt is outstanding plus a term of three years. At a minimum, this repository will include all official statements, bid documents, ordinances, indentures, records relating to the expenditure of proceeds and the use of the project, records related to the investment of the proceeds of the bonds and the sources of payment, all returns filed with the IRS, trustee reports, etc. for all City debt. To the extent that official transcripts incorporate these documents, possession of a transcript will suffice (transcripts may be hard copy, stored on CD-ROM or other forms of electronic record). The City will collect all available documentation for outstanding debt and will develop a standard procedure for archiving transcripts for any new debt. The City will establish internal controls to ensure compliance with the Debt Policy, all debt covenants and any applicable requirements of the State and Federal Government Codes.
E. Rebate Policy and System
The City will accurately account for all interest earnings in debt-related funds. These records will be designed to ensure that the City is in compliance with all debt covenants, and with State and Federal laws. The City will maximize the interest earnings on all funds within the investment parameters set forth in each respective indenture, and as permitted by the City Investment Policy, subject to applicable limitations. The City will develop a system of reporting interest earnings that relates to and complies with Internal Revenue Code rebate requirements, yield limits and arbitrage.
F. Minimum Reserve Requirements for Water and Wastewater Funds The Water and Wastewater Funds are to maintain a working capital reserve equal to not less than 25% of their operating expenses plus one annual debt service payment on any State Revolving Fund (“SRF”) loans. This reserve is meant to ensure that adequate cash is on hand to meet current obligations of the funds as well as respond to unanticipated demands, such as unplanned repairs or renovations of the systems. This reserve is consistent with reserves established by other utilities for similar purposes.
G. Minimum Debt Service Coverage Ratio for Water and Wastewater Funds The City will seek to maintain debt service coverage on its senior lien Water and Wastewater revenue bonds at a level not less than one and a half times (1.5x) the #12..
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4 maximum annual debt service for the aggregate outstanding senior lien bonds of the respective system, including the debt service for any new issuance, unless a different debt service coverage amount is allowed by existing bond covenants.
VII. DEBT FINANCING
A. Purpose of Debt
When the City determines that the use of debt is appropriate, the following criteria will be utilized to evaluate the type of debt to be issued:
1. New Money Financing
New money issues are financings that generate funding for capital projects, equipment or enterprise software systems. Eligible capital projects for allocation of City funds include the acquisition, construction or major rehabilitation of capital assets.
2. Refunding Financing
Refunding bonds are issued to retire all or a portion of an outstanding debt issue.
Refunding issuances can be used to achieve present-value savings on debt service or to restructure the payment schedule, type of debt instrument used, or covenants of existing debt. The City must analyze the refunding issue on a present-value basis to identify economic effects before approval, as is further described in Section X.
Refinancing Outstanding Debt below.
B. Type of Debt
When the City determines that the use of debt is appropriate, the following criteria will be utilized to evaluate the type of debt to be issued:
1. Long-Term Debt
The City may issue long-term debt when equipment, project, or software costs cannot be financed from current revenues. The proceeds derived from long-term borrowing will not be used to finance current operations or normal/current maintenance. Long-term debt will be structured such that the obligations generally do not exceed the average useful life of that which is being financed or the sunset date of any current, pledged revenues. And at no time will the financing exceed 120% of the expected average useful life of the asset being financed. Current Interest Bonds are bonds that pay interest periodically and principal at maturity. They may be used for both new money and refunding transactions. Bond features may be adjusted to accommodate the market conditions at the time of sale, including changing dollar amounts for principal maturities, offering discount and premium bond pricing, modifying call provisions, utilizing bond insurance, as well as determining whether and how to fund a debt service reserve fund.
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5 principal matures. Interest continues to accrue on the unpaid interest, therefore representing a more expensive funding option. In the case of zerocoupon bonds, principal and interest, at one coupon rate, is repaid at maturity. In the case of Capital Appreciation Bonds, the value of the bond accretes until maturity. These types of bonds should be used only when no other bond structure is available to address a certain structuring problem. If used, these bonds should mature no later than 20 years from issuance and should be callable.
Taxable Debt is debt whose interest payments are taxable for federal income tax purposes to bondholders. The City will consider the issuance of taxable debt when it is necessary for federal tax reasons or if these bonds would lower the overall cost of the financing or help the City achieve refunding savings that could not otherwise be achieved with the issuance of tax-exempt debt (e.g., advance refundings).
2. Short-Term Debt
Short-term borrowing may be utilized for the temporary funding of operational cash flow deficits or anticipated revenues, where anticipated revenues are defined as an assured revenue source with the anticipated amount based on conservative estimates, or until the structure of the take-out financing is finalized. The City will determine and utilize the least costly method for short-term borrowing. The City may issue short-term debt when there is a defined repayment source or amortization of principal, subject to the following policies:
Commercial Paper Notes may be issued as an alternative to fixed rate debt, particularly when the timing of funding requirements is uncertain. The City may maintain an ongoing commercial paper program to ensure flexibility and immediate access to capital funding when needed. The retirement of commercial paper notes is most commonly a result of the issuance of longterm bonds but they may also be retired with available cash. Grant Anticipation Notes (“GAN”) are short-term notes that are repaid with the proceeds of State or Federal grants of any type. The City shall generally issue GANs only when there is no other viable source of funding for the project.
Bond Anticipation Notes (“BAN”) are short-term notes issued prior to the issuance of long-term debt. BANs are most commonly retired, or taken-out, with long-term debt. BANs will be issued only when there is no better alternative to reduce the overall cost of a financing program. Tax and Revenue Anticipation Notes (“TRAN”) shall be issued only to address a timing mismatch between operating revenues and operating expenditures and the sizing of the issue shall fully conform to Internal Revenue Code requirements and limitations.
Lines of Credit shall be considered as an alternative to other short-term borrowing options. The lines of credit shall be structured to limit concerns as to Internal Revenue Code compliance.
Other short-term debt may also be considered and utilized when appropriate #12..
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6 such as a Direct Purchase Loan from a bank or Floating Rate Notes.
3. Variable Rate Debt
To maintain a predictable debt service burden, the City may give preference to debt that carries a fixed interest rate. An alternative to the use of fixed rate debt is floating or variable rate debt. It may be appropriate to issue short-term or long-term variable rate debt to diversify the City’s debt portfolio, reduce interest costs, provide interim funding for capital projects and improve the match of assets to liabilities. Variable rate debt typically has a lower cost of borrowing than fixed rate financing and shorter interest rate reset periods in the range of 1 to 35 days. Under no circumstances will the City issue variable rate debt solely for the purpose of earning arbitrage. The City, however, may consider variable rate debt in certain instances.
A) Variable Rate Debt Capacity. The City will maintain a conservative level of outstanding variable rate debt in consideration of general rating agency guidelines recommending a maximum of 20% variable rate exposure, in addition to maintaining adequate safeguards against risk and managing the variable revenue stream, both as described below:
(1) Adequate Safeguards Against Risk. Financing structure and budgetary safeguards are in place to prevent adverse impacts from interest rate shifts; such structures could include, but are not limited to, interest rate swaps, interest rate caps and the matching of assets and liabilities. See Section VII. B. 4. Financial Derivative Products below. See also the Interest Rate Swap Policy addendum. (2) Variable Revenue Stream. The revenue stream for repayment is variable, and is anticipated to move in the same direction as market-generated variable interest rates, or the dedication of revenues allows capacity for variability. (3) As a Component to Synthetic Fixed Rate Debt. Variable rate bonds may be used in conjunction with a financial strategy which results in synthetic fixed rate debt. Prior to using synthetic fixed rate debt, the City shall certify that the expected interest cost is at least 10 basis points (0.10%) lower than traditional fixed rate debt (including any ongoing fees in such calculation) as well as giving due consideration to other risks associated with such a structure that may raise the ultimate costs of a synthetic fixed rate structure. See Section VII. B. 4.
Financial Derivative Products below. See also the Interest Rate Swap Policy addendum.
4. Financial Derivative Products
Financial Derivative Products will be considered appropriate in the issuance or management of debt only in instances where it has been demonstrated that the derivative product will either provide a hedge that is expected to reduce the risk of fluctuations in expense or revenue, or alternatively where the derivative product is expected to reduce total project cost. The City shall maintain an Interest Rate Swap Policy (see attached) governing the use of derivative products. For derivatives other than interest rate swaps, the City will undertake an analysis of early termination costs and other conditional terms given certain financing and marketing #12..
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7 assumptions. Such analysis will document the risks and benefits associated with the use of a particular derivative product. Derivative products will only be utilized with prior approval from the City Council.
VIII. TERMS AND CONDITIONS OF BONDS
The City shall establish all terms and conditions relating to the issuance of bonds, and will control, manage, and invest all bond proceeds. Unless otherwise authorized by the City, the following shall serve as bond requirements.
A. Term
All capital improvements financed through the issuance of debt will be financed for a period generally not to exceed the average useful life of that which is being financed. At no time will the financing exceed 120% of the expected average useful life of the assets being financed, and in no event should the final maturity exceed the lesser of thirty (30) years or when the revenue source is projected to sunset.
B. Capitalized Interest
The nature of the City’s revenue stream is such that funds are generally continuously available and the use of capitalized interest should not normally be necessary. However, certain types of financings may require the use of capitalized interest from the issuance date until the City has constructive use/benefit of the financed project. Unless otherwise required, the City will avoid the use of capitalized interest to obviate unnecessarily increasing the bond size. Interest shall not be funded (capitalized) beyond three (3) years or a shorter period when based upon project needs or if further restricted by statute.
Interest earnings may, at the City's discretion, be applied to extend the term of capitalized interest but in no event beyond 3 years, or less, if restricted by law.
C. Lien Levels
Senior and Junior Liens for each revenue source will be utilized in a manner that will maximize the most critical constraint, typically either cost or capacity, thus allowing for the most beneficial use of the revenue source securing the bond. Projects chosen for priority financing, based on funding availability and proposed timing, will generally be financed on the most senior lien of the relevant credit.
D. Debt Service Coverage
For any new debt issuance secured by Water or Wastewater revenues, the City will seek to maintain pledged net revenues at a level no less than one and a half times (1.50x) the Maximum Annual Debt Service for the aggregate outstanding senior lien bonds, including the debt service for the new issuance, unless a different debt service coverage amount is allowed by existing bond covenants. For other types of debt incurred by the City, the City will determine the appropriate minimum debt service coverage levels based upon the nature of the pledged revenues, rating considerations, and other relevant factors.
E. Debt Service Structure
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8 Debt issuance shall be planned to achieve relatively rapid repayment of debt while still matching debt service to the useful life of facilities. The City will amortize its debt within each lien to achieve overall level debt service or may utilize more accelerated repayment schedules after giving consideration to bonding capacity constraints. The City shall avoid the use of bullet or balloon maturities except in those instances where these maturities achieve one of the City’s stated goals, such as minimizing annual debt service or leveling annual existing debt service, among others.
F. Call Provisions
In general, the City’s securities will include a call feature, which is no later than ten (10) years from the date of delivery of the bonds. The City will avoid the sale of non-callable bonds absent careful evaluation by the City with respect to the value of the call option. If the City were to issue taxable bonds, the City will carefully consider the financial impacts of a 10-year call, a make-whole call, or non-callable debt.
G. Original Issue Discount & Deep Discount Bonds
An original issue discount and deep discount bonds will be permitted only if the City determines that such discount results in a lower true interest cost on the bonds and that the use of an original issue discount or deep discount bonds will not materially reduce the value of the bonds’ call provisions nor adversely affect the project identified by the bond documents.
H. Maximum Repayment Ratio
The maximum repayment ratio, defined as total future debt service payments divided by the principal amount of the bonds issued, shall be no more than three to one (3:1) for each series of bonds.
IX. CREDIT ENHANCEMENTS
The City will consider the use of credit enhancement on a case-by-case basis, evaluating the economic benefit versus cost for each case. Only when a clearly demonstrable savings can be shown shall enhancement be considered. The City will consider each of the following enhancements as alternatives by evaluating the cost and benefit of such enhancement. As noted below, the use of credit enhancements may result in additional continuing disclosure requirements described below (see Section XV. F. Continuing Disclosure below).
A. Bond Insurance
The City may purchase bond insurance when such purchase is deemed prudent and advantageous. The predominant determination shall be based on such insurance being less costly than the present value of the difference in the interest on insured bonds versus uninsured bonds.
B. Debt Service Reserves
When required, a reserve fund equal to the lesser of 10% of the original principal amount of the bonds, maximum annual debt service, or 125% of average annual debt service, and #12..
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9 if permitted, 10% of par value of bonds outstanding, (the “Reserve Requirement”) shall be funded from the proceeds of each series of bonds, subject to federal tax regulations and in accordance with the requirements of credit enhancement providers and/or rating agencies.
The City may purchase a reserve equivalent (e.g., a reserve fund surety policy) when such purchase is deemed prudent and advantageous. Such equivalents shall be evaluated in comparison to cash funding of reserves on a net present value basis, while also taking into account the creditworthiness of the surety provider and market acceptance.
C. Letters of Credit
The City may enter into a letter of credit agreement when such an agreement is required by the market (e.g., in the case of variable rate demand bonds) or is deemed prudent and advantageous. Only those financial institutions with long-term ratings greater than or equal to that of the City, and minimum short-term ratings of P-1, A-1, F1, by Moody’s Investors Service, S&P Global Ratings and Fitch Ratings, respectively, may participate in City letter of credit agreements unless there are no other practicable options for the City.
X. REFINANCING OUTSTANDING DEBT
The City shall have the responsibility to analyze outstanding bond issues for refunding opportunities that may be presented by underwriting and/or municipal advisory firms. The City will consider the following issues when analyzing possible refunding opportunities:
A. Debt Service Savings
The City has established a minimum net present value savings threshold goal of 3% of the refunded bond principal, unless there are other compelling reasons for defeasance. The present value savings will be net of all costs related to the refinancing. If the debt to be refinanced is not currently callable (i.e., in the case of forward delivery refundings, advance refundings, etc.) the City will make a comparison to the projected savings it could achieve if it waited until the debt becomes eligible for a current refunding. The decision to defease debt that is not currently callable or to take savings on an upfront or deferred basis must be explicitly approved by the City Council.
B. Restructuring
The City will refund debt when in its best interest to do so. Refundings will include restructuring to meet unanticipated revenue expectations, terminate swaps, achieve cost savings, mitigate irregular debt service payments, release reserve funds or remove unduly restrictive bond covenants.
C. Term of Refunding Issues
The City will refund bonds within the term of the originally issued debt. However, the City may consider maturity extension, when necessary to achieve a desired outcome, provided that such extension is legally permissible. The City may also consider shortening the term of the originally issued debt to realize greater savings. The remaining useful life of the financed facility and the concept of intergenerational equity should guide this decision.
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10 D. Escrow Structuring
The City shall utilize the least costly permitted securities available in structuring refunding escrows. The City will examine the viability of an economic versus legal defeasance on a net present value basis. Generally, the City should look to purchase State and Local Government Series (“SLGS”) securities from the federal treasury when structuring refunding escrows. The City may review the purchase of Open Market Securities (“OMS”) to fund a refunding escrow. In such a case, a certificate from a thirdparty agent, who is not a broker-dealer, is required stating that the securities were procured through an arms-length, competitive bid process (in the case of OMS), that such securities were more cost effective than SLGS, and that the price paid for the securities was reasonable within federal guidelines. Under no circumstances shall an underwriter, agent, municipal advisor or financial advisor sell escrow securities to the City from its own account.
E. Arbitrage
The City shall take all necessary steps to optimize refunding escrows and to avoid negative arbitrage. Any resulting positive arbitrage will be rebated as necessary according to federal guidelines.
XI. METHODS OF ISSUANCE
The City will determine, on a case-by-case basis, whether to sell its bonds competitively or through negotiation. The City shall evaluate the comparative costs of each method of issuance on a net present value basis, using the City’s investment rate as the appropriate measure of the discount rate. It should be noted, however, that cost may be only one of a number of factors considered in determining the most advantageous method of sale.
A. Competitive Sale
In a competitive sale, the City’s bonds shall be awarded to the bidder providing the lowest true interest cost as long as the bid adheres to the requirements set forth in the official notice of sale. Conditions under which a competitive sale would be preferred are as follows:
Bond prices are stable and/or demand is strong.
Market timing and interest rate sensitivity are not critical to the pricing. There are no complex explanations required during marketing regarding issuer’s projects, media coverage, political structure, political support, and funding or credit quality. The bond type and structure are conventional.
Bond insurance is not needed, is included or pre-qualified (available). Significant transaction size, generally larger than $10 million. The City (or the issuing City enterprise) has strong credit ratings. The City (or the issuing City enterprise) is well known to investors.
B. Negotiated Sale
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11 The City recognizes that some securities are best sold through negotiation. Conditions under which a negotiated sale would be preferred are as follows:
Interest rates are volatile.
Demand is weak or supply of competing bonds is high.
Market timing is important, such as for refundings.
The City (or the issuing City enterprise) has lower or weakening credit rating. The issuing City enterprise is not well known to investors. Sale and marketing of the bonds will require complex explanations about the issuer’s projects, media coverage, political structure, political support, funding, or credit quality.
The bond type and/or structural features are non-standard, such as for a forward delivery bond sale, issuance of taxable or variable rate bonds, or where there is the use of derivative products.
Bond insurance is not available or not offered.
Early structuring, investor outreach and other market participation by underwriters are desired.
The par amount for the transaction is small (generally under $10 million) or significantly larger than normal (generally over $100 million). Demand for the bonds by retail investors is expected to be high. Participation from Disadvantaged Business Enterprise (“DBE”) firms is required or desired.
C. Private Placement
From time to time the City may elect to privately place its debt. Such placement shall be considered if this method is demonstrated to result in a cost savings to the City or other benefits relative to other methods of debt issuance. As noted below, private placements may require compliance with disclosure requirements (see Section XV. F. Continuing Disclosure below).
D. Feasibility Analysis
Issuance of revenue bonds may be accompanied by a finding that demonstrates the projected revenue stream’s ability to meet future debt service payments.
XII. MARKET RELATIONSHIPS
A. Rating Agencies and Investors
The Director of Finance shall be responsible for maintaining the City’s relationships with Moody’s Investors Service, S&P Global Ratings, Fitch Ratings and any other major rating agency. The City may, from time to time, choose to seek ratings from only one or two of these agencies as circumstances dictate. In addition to general communication, the Director of Finance shall meet with credit analysts prior to each rated competitive or negotiated sale and/or offer conference calls with agency analysts in connection with the #12..
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12 planned sale as needed.
B. Other Jurisdictions/Conduit Financing
From time to time, the City may issue bonds on behalf of other public entities. While the City will make every effort to facilitate the desires of these entities, the Director of Finance will ensure that the highest quality financings are done and that the City is insulated from all manageable risks. The City may issue bonds through another issuing entity such as a Joint Powers Authority (“JPA”). The City may issue debt in this manner if it would result in the least costly method to issue debt (e.g. reduced costs of issuance).
The City will evaluate the timing of such issuance.
C. Fees
When appropriate, the City will charge an administrative fee equal to direct costs to reimburse its administrative costs incurred in debt issuance and ongoing reporting costs.
XIII. CONSULTANTS
Periodically, the City may create an approved pool of qualified financing team members, such as municipal advisors or underwriters.
A. Selection of Financing Team Members
The Director of Finance will make recommendations to the City Manager for all financing team members, with the City Council providing final approval.
B. Municipal Advisor
The City shall utilize a municipal advisor to assist in its debt issuance and debt administration processes as prudent. The municipal advisor must be registered as a Municipal Advisor with the Securities and Exchange Commission (“SEC”) and Municipal Securities Rulemaking Board (“MSRB”). Selection of the City’s municipal advisor(s) shall be based on, but not limited to, the following criteria:
Prior knowledge and experience with the City.
Experience in providing consulting services to complex issuers. Knowledge and experience in structuring and analyzing complex issues. Experience and reputation of assigned personnel.
Fees and expenses.
Municipal advisory services provided to the City shall include, but shall not be limited to the following:
Evaluation of risks and opportunities associated with debt issuance. Monitoring market conditions and opportunities.
Evaluation of proposals submitted to the City by investment banking firms. Structuring and pricing of debt.
Preparation of request for proposals for other financial services such as trustee and #12..
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13 paying agent services, printing, credit facilities, remarketing agent services, etc. Advice, assistance and preparation for presentations with rating agencies, credit providers and investors.
Assisting in preparation of official statements and other financing documents. Be available for other projects whenever needed.
The City also expects that its municipal advisor will provide the City with objective advice and analysis, maintain the confidentiality of City financial plans, and be free from any conflicts of interest.
C. Bond Counsel
City debt will include a written opinion by legal counsel affirming that the City is authorized to issue the proposed debt, that the City has met all constitutional and statutory requirements necessary for issuance, and a determination of the proposed debt’s federal income tax status. The approving opinion and other documents relating to the issuance of debt will be prepared by counsel with extensive experience in public finance and tax issues. The counsel will be selected by the City Attorney and subject to City Council approval.
The services of bond counsel may include, but are not limited to:
Rendering a legal opinion with respect to authorization and valid issuance of debt obligations including whether the interest paid on the debt is tax exempt under federal and State of California law;
Preparing all necessary legal documents in connection with authorization, sale, issuance and delivery of bonds and other obligations;
Unless this task is assigned to disclosure counsel, as selected by the City separately from bond counsel, preparing the preliminary and final official statements and commercial paper memoranda;
Participating in discussions with potential investors, insurers and credit rating agencies, if requested;
Providing continuing advice, as requested, on the proper use and administration of bond proceeds under applicable laws and the indenture, particularly arbitrage tracking and rebate requirements;
D. Disclosure Counsel
The City may utilize a separate firm to serve as disclosure counsel as it deems necessary.
If cost effective, bond counsel may also serve as disclosure counsel.
XIV. UNDERWRITER SELECTION
A. Senior Manager Selection
The City shall have the right to select a senior manager for a proposed negotiated sale.
The criteria shall include but not be limited to the following:
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14 The firm’s ability and experience in managing similar and/or complex transactions.
Demonstrated ability to structure debt issues efficiently and effectively. Prior knowledge and experience with the City.
The firm’s willingness to risk capital and demonstration of such. The firm’s ability to reach a wide network of investors. The firm’s ability to sell bonds at the lowest market interest rates. Quality and experience of personnel assigned to the City’s engagement. Financing and marketing plans presented.
B. Co-Manager Selection
Co-managers may be selected on the same basis as the senior manager. In addition to their qualifications, co-managers appointed to specific transactions will be a function of transaction size and the necessity to ensure maximum distribution of the City’s bonds.
C. Selling Groups
The City may establish selling groups in certain transactions. To the extent that selling groups are used, the City may make appointments to selling groups from within an existing pre-qualified pool of underwriters or through another process, as the transaction dictates.
D. Underwriter’s Counsel
In any negotiated sale of City debt in which legal counsel is required to represent the underwriter, the lead underwriter will make the appointment subject to the City’s right to object to any such appointment.
E. Underwriter’s Discount
The City will evaluate the proposed underwriter’s discount against comparable issues in the market. If there are multiple underwriters in the transaction, the City will determine the allocation of fees with respect to the takedown and management fee (if any). The determination of the size and allocation of the management fee will be based upon participation in the structuring phase of the transaction. Generally, the City will not pay for risk in its underwriter’s discount. All fees and allocation of the management fee will be determined prior to the sale date; a cap on management fee, expenses and underwriter’s counsel will be established and communicated to all parties by the City.
The senior manager shall submit an itemized list of expenses charged to members of the underwriting group. Any additional expenses must be substantiated.
F. Evaluation of Financing Team Performance
The City will evaluate each bond sale after its completion to assess the following: costs of issuance including underwriters’ compensation, pricing of the bonds in terms of the overall interest cost and on a maturity-by-maturity basis, and the distribution of bonds and sales credits. Following each sale, the municipal advisor shall provide a post-sale evaluation on the results of the sale to the City Council. #12..
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15 G. Syndicate Policies
For each negotiated transaction, the Director of Finance will review and approve syndicate policies that will describe the designation policies governing the upcoming sale.
The Director of Finance shall ensure receipt of each member’s acknowledgement of the syndicate policies for the upcoming sale prior to the sale date.
H. Designation Policies
To encourage the pre-marketing efforts of each member of the underwriting team, orders for the City’s bonds will be net designated, unless otherwise expressly stated. The City shall require the senior manager to:
Equitably allocate bonds to other managers and the selling group. Comply with MSRB regulations governing the priority of orders, compliance with retail order requirements and allocations.
Within 10 working days after the sale date, submit to the Director of Finance a detail of orders, allocations and other relevant information pertaining to the City’s sale.
I. Disclosure by Financing Team Members
All financing team members will be required to provide full and complete disclosure relative to agreements with other financing team members and outside parties. The extent of disclosure may vary depending on the nature of the transaction and for underwriters and municipal advisors shall, at a minimum, comply with applicable SEC and MSRB requirements. For firms acting as the City’s bond counsel, disclosure counsel, or municipal advisor, no agreements shall be permitted which could compromise the firm’s ability to provide independent advice which is solely in the City’s best interests or which could reasonably be perceived as a prohibited conflict of interest. All other conflicts must be disclosed to the City in accordance with applicable regulatory requirements. For legal counsel such conflicts disclosure shall, at a minimum, comply with applicable conflicts disclosure requirements for attorneys in the state.
XV. POST-ISSUANCE COMPLIANCE
A. General
In conjunction with the issuance of a tax-advantaged obligation, bond counsel issues an opinion that is in part based on the reasonable expectation that the issuer will comply with federal tax law requirements to preserve the tax-advantaged status of the obligation. The issuer agrees to comply with these requirements through representations it makes in the tax compliance certificate. The purpose of this Post-Issuance Compliance section is to establish policies and procedures in connection with the issuance of obligations, so as to (a) maximize the likelihood that the City satisfies all applicable post-issuance requirements of federal income tax law needed to preserve the tax exempt status of bonds, (b) ensure that the City will take any appropriate remedial actions on a timely basis if a future event occurs that could affect the tax-exempt status of bonds, and (c) maximize the #12..
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16 likelihood that the City complies with applicable federal securities laws, including any contractual obligations arising thereunder. The City reserves the right to use its discretion as necessary and appropriate to make exceptions or request additional provisions as circumstances warrant. The City also reserves the right to change these policies and procedures from time to time.
Issuers and borrowers are also required to disclose, on a periodic basis, financial information and certain other information that may impact their ability to service their debt. This ongoing reporting requirement is known as continuing disclosure. The requirements of continuing disclosures are directly applicable to underwriters and are set forth in Securities and Exchange Commission (“SEC”) Rule 15c2-12. The issuer makes representations in its official statements and other bond documents regarding its intent to comply as a matter of contract with the requirements of Rule 15c2-12.
B. Designation of Post-Issuance Compliance Officer
The City has established a Disclosure Working Group (“DWG”) consisting of the City’s Manager and Director of Finance. The DWG will establish appropriate written policies and procedures, which this document provides, and periodic training regarding continuing disclosure obligations to effect compliance with the federal securities laws. In connection with each primary offering subject to Rule 15c2-12, as well as annually and periodically when necessary in connection with its continuing disclosure filings required by contractual undertakings delivered in accordance with Rule 15c2-12, the DWG will notify its dissemination agent and others, as and when appropriate when developments and events affect the City that may give rise to a contractual obligation to provide additional disclosure or that may provide an opportunity for voluntary disclosure.
The Director of Finance, or his or her designee, shall be the Post-Issuance Compliance Officer (the “Compliance Officer”) for the City’s debt issuances (the “Bonds”). The Compliance Officer, if City staff, may designate such other personnel as may be necessary to assist in determining continuing compliance with all relevant law and regulations applicable to the continued favorable tax treatment of such indebtedness, and to comply with the record-keeping responsibilities outlined herein. At such time as the initial Compliance Officer is replaced or a new Compliance Officer is designated, the departing Compliance Officer will ensure that such successor is fully briefed as to the status of the City’s outstanding indebtedness and the location of records relating to such indebtedness, and that such successor receives training and consultation(s) with bond or disclosure counsel as to his or her duties as Compliance Officer under this Debt Policy.
C. External Advisors
The City shall consult with bond counsel and other legal counsel and advisors, as needed, so long as any Bonds remain outstanding, to identify requirements and to establish procedures necessary or appropriate so that tax-exempt interest on the Bonds will continue to be excludable from gross income for federal income tax purposes. Those requirements and procedures shall include future compliance with applicable private activity bond tests, arbitrage rebate requirements and all other applicable post-issuance requirements of federal tax law throughout (and in some cases beyond) the term of bonds. #12..
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17 The Compliance Officer shall conduct periodic reviews, at least annually, or more often as may be necessary, to determine that the City remains in compliance with all laws and regulations, including, without limitation, the matters set forth herein. The Compliance Officer annual review shall include matters that relate to the tax status of the Bonds, continuing compliance with covenants that relate to the tax status of the Bonds, and any new matters or public finance developments that relate to the tax status of the Bonds or continuing compliance with such requirements. The City may consult with bond counsel in conducting its review and may engage expert advisors (each a “Rebate Analyst”) to assist in the calculation of arbitrage rebate payable in respect of the investment of Bond proceeds in the manner more fully set forth in the Tax Certificate.
D. Uses and Investments of Funds and Accounts
Various funds and accounts are established as security for the Bonds. The Compliance Officer shall prepare regular, periodic statements regarding the investments and transactions involving bond proceeds, which shall comprise part of the records required to be kept. The Compliance Officer will also review the disbursement of bond proceeds from Trustee records or City records, as applicable, to ensure that bond proceeds are expended in accordance with their intended purpose. The Compliance Officer shall report to the Finance Director (if the officer is a designee of the Finance Director) and the City Manager any expenditure which violates the provisions of any ballot measure, authorizing resolution, or trust document. If any Debt Service Fund ever contains any balance after the principal payment of the Bonds is made each year, except for a reasonable carryover amount which is less than the greater of the earnings on the Debt Service Fund for the immediately preceding year ending on such principal payment date (a “Bond Year”), or 1/12 of the principal and interest payments on the Bonds for the immediately preceding Bond Year, then the Compliance Officer will contact bond counsel to ensure that such facts will not cause the Bonds to become arbitrage bonds, to formulate a plan to remediate such condition, if necessary, and to determine an allowable use for such excess moneys and/or to determine if any yield restrictions apply. If any Debt Service Reserve Fund is ever funded (i) in an amount more or less than the required balance but declining in future years as detailed in the Tax Certificate), or (ii) is invested at a yield that is higher than the yield of the Bonds, then the Compliance Officer will contact bond counsel to ensure that such facts will not cause the Bonds to become arbitrage bonds, to formulate a plan to remediate such condition and/or to determine if any yield restrictions apply. Generally, if the Debt Service Reserve Fund ever contains a higher balance than required (either through the accrual of interest, investment gains, maturity of securities, or reduction in the Reserve Requirement) then the excess moneys should be dealt with as directed by the documents and approved by bond counsel. If any Construction Fund ever is invested at a yield higher than the yield of the Bonds or if moneys in the Construction Fund are not fully expended by three years after the original delivery date of the Bonds, then the Compliance Officer will contact bond counsel to ensure that such facts will not cause the Bonds to become arbitrage bonds, to formulate a plan for the investment and application of the remaining unexpended Bond Proceeds, which plan may include the redemption or defeasance of Bonds, and/or to determine if any yield restrictions apply.
E. Rebate Reporting
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18 The use of bond proceeds and their investments must be monitored to ensure compliance with arbitrage restrictions. The City will cause arbitrage rebate calculations to be completed, or cause to be completed by an experienced firm the City has retained for this purpose related to any bond issues, with any positive rebate paid every five years and as otherwise required by applicable provisions of the Internal Revenue Code and regulations.
Therefore, the Director of Finance shall ensure that proceeds and investments are tracked in a manner that facilitates accurate, complete calculation, and timely rebates, if necessary.
F. Continuing Disclosure
Appointment. Unless otherwise provided in any Continuing Disclosure Agreement executed in connection with Bonds pursuant to SEC Rule 15c2-12 (the “Continuing Disclosure Agreement”), the Compliance Officer shall also be the Dissemination Agent under such Continuing Disclosure Agreement. The Compliance Officer shall be responsible for and take all reasonable steps to ensure compliance with said Continuing Disclosure Agreement and shall monitor the operations of the Issuer for occurrence of any listed event (as set forth therein). For any Bonds for which it is designated to serve in such capacity, should the Compliance Officer no longer serve as Dissemination Agent, the City shall select an internal or external Dissemination Agent.
Responsibilities. The Dissemination Agent is responsible for the following (the “Continuing Disclosure Policies”):
Serving as a “point person” for personnel to communicate issues or information that should be or may need to be included in any Continuing Disclosure Agreement;
Identifying the officers and employees of the City who are most likely to first obtain knowledge of the occurrence of events that would require event filings; Monitoring compliance by the City with the Continuing Disclosure Policies, including timely dissemination of the annual report and event filings as described below;
Recommending changes to the Continuing Disclosure Policies to the City as necessary or appropriate;
Following up with others to make sure that assigned tasks have been completed on a timely basis and making sure that the continuing disclosure annual report is filed on a timely basis; and
Maintaining records documenting the City’s compliance with the Continuing Disclosure Policies and the Continuing Disclosure Agreement.
Filing Requirements. The City is required to file an annual report with the MSRB’s Electronic Municipal Market Access (“EMMA”) system each year. Such annual reports are required to include certain updated financial and operating information and audited financial statements. The Dissemination Agent will establish or cause to be established a calendar reminder of the city’s continuing disclosure obligations on July 1 each year. The #12..
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19 City is also required to file notices of certain events with the MSRB’s EMMAElectronic Municipal Market Access system. Upon the identification of the occurrence of a material event, the Dissemination Agent shall, in consultation with bond counsel, prepare, or caused to be prepared, a draft of the necessary notice (including compiling any materials or documents to be included with such notice) and shall notify such parties of the date by which such notice is to be filed. If it is not clear if the occurrence of an event constitutes an event that requires notification, then the Dissemination Agent shall consult with bond counsel to determine whether the City is required to file a notice concerning such event.
For any public debt issues (subject to contractual obligations under SEC Rule 15c2-12) issued on or after February 27, 2019, the City is required to commit to make additional disclosure with respect to private loans or financing leases (not sold through an official statement) or derivatives or credit support agreements (collectively “financial obligations”). The additional events will need to be provided to the City’s Dissemination Agent, for further filing with EMMA, within ten (10) business days of their occurrence:
Incurrence of a financial obligation of the City (and any obligated person, where applicable), if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the City (and any obligated person, where applicable), any of which affect security holders, if material;
Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the City (and any obligated person, where applicable), any of which reflect financial difficulties.
In addition, the Dissemination Agent will be responsible for providing notice, in a timely manner, of a failure to provide any of the City’s required annual financial information by the date specified in the continuing disclosure undertaking. The inability to make timely filings must be disclosed and is a negative reflection. While there is reliance on timely audit and preparation of the City’s annual report, the Director of Finance will ensure the City’s timely filing of its annual report on EMMA as soon as it is available.
G. Voluntary Disclosure Requirements
In addition to preparing annual reports and event notices, the City may wish to keep investors informed by providing information that is not required to be provided under Rule 15c2-12 or its continuing disclosure undertakings. Examples of such types of information are investments, interim financial information, capital improvement plans, fund balance policies, etc. and financial forecasts. Because providing this information is voluntary, the Compliance Officer will monitor for events which may materially affect the financial condition or operations of the City, so that a determination can be made if the event should be disclosed. The below list is comprised of events and financial disclosure which the MSRB has suggested issuers may wish to voluntarily disclose. Some of these are not applicable to the City’s public debt issues and financial obligations, but the City may wish to consider providing some of these to the City’s Dissemination Agent for further filing with EMMA:
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20 Amendment to continuing disclosure undertaking;
Change in obligated person (i.e., a person guaranteeing or supporting City debt);:
Notice to investors pursuant to bond documents;
Certain communications from the Internal Revenue Service; Secondary market purchases;
Capital or other financing plan;
Litigation/enforcement action;
Change of tender agent, remarketing agent, or other on-going party; Change in fiscal year/timing of annual disclosure or accounting standard; Interim/additional financial information/operating data, budget; Investment/debt/financial policy changes;
Information provided to rating agency, credit/liquidity provider or other third party; and
Consultant reports.
Also, if the City maintains an Investor Relations website, or routinely posts City information packages, including interim financial information, capital improvement plans, etc. on its website, the City’s Compliance Officer should review and, in some cases, the Compliance Officer should reissue the posted material with an explanatory note (e.g., the interim financial information is presented on a cash, as opposed to accrual basis).
Currently, the City is not required to file interim financial information. In the future, if such filings are required in continuing disclosure undertakings, the City’s Compliance Officer will notify the Dissemination Agent for assistance when these filings become necessary.
H. Coordinating Continuing Disclosure with Primary Disclosure It is expected that the DWG will be responsible for collecting and reviewing information set forth in official statements prepared in connection with new bond offerings. Any Management’s Discussion and Analysis (“MD&A”) from the prior year’s audited financial statements will be reviewed to ensure that the unaudited information which was provided in that portion of the financial statements is updated to include added public debt and material financial obligations. Coordination with the City’s auditors will be essential, as well as careful review of the long-term debt notes in the financial statements and the checking of all bond ratings before each EMMA filing is made. Measures should be taken to assure information publicly available to investors is accurate. Further coordination between the DWG and the City’s website manager is essential before posting any financial information.
I. Website Disclosure
It is expected that the Compliance Officer will be responsible for monitoring website content and reviewing the information set forth on such website. Appropriate disclaimer language on the website will be considered in order to educate the viewer that specific information intended for investors can be found on the City’s EMMA page as well as the #12..
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21 investor’s acknowledgement of the limitations of such reliance. Coordination between the DWG and City officials will occur before the release of any public statements about any financial condition of the City.
J. Training for Employees and Issuer Officials
For City officials, compliance with federal securities law should be considered as important as compliance with local public meetings and records laws. To further this goal, the Compliance Officer shall call a meeting for an annual review or, if necessary, an interim review, of the continuing disclosure policies of the City, which all members of the DWG and additional invited officials and employees are expected to attend. The Compliance Officer shall be responsible for keeping a record of attendance. Furthermore, the members of the DWG and such invited officials and employees are expected to attend training sessions, at least annually, called by the Compliance Officer. Applicable policies and procedures will be updated by the City to reflect required changes on an as-needed basis.
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22 GLOSSARY
Arbitrage- The difference between the interest paid on the tax-exempt securities and the interest earned by investing the security proceeds in higher-yielding securities.
IRS regulations govern arbitrage on the proceeds from issuance of municipal securities.
Balloon Maturity- A later maturity within an issue of bonds that contains a disproportionately large percentage of the principal amount of the original issue.
Bond Allocation Policies- Outline as to how an investor’s order is filled when a maturity in an underwriting syndicate is oversubscribed. The senior managing underwriter and issuer decide how the bonds will be allocated among the syndicate.
There are three primary classifications of orders, which form the designation policy.
The highest priority is given to Net Designated orders; the next priority is given to Group Net orders and Member orders are given the lowest priority (unless the Member orders are retail orders in which case it would be given the highest priority).
Bullet Maturity- Maturity for which there are no sinking fund payments prior to the stated maturity date.
Call Provisions- The terms of the bond contract giving the issuer the right to redeem all or a portion of an outstanding issue of bonds prior to their stated dates of maturity at a specific price, usually at or above par.
Capitalized Interest- A portion of the proceeds of an issue that is set aside to pay interest on the securities for a specific period of time. Interest is commonly capitalized for the construction period of the project.
Commercial Paper- Very short-term, unsecured promissory notes issued in either registered or bearer form, and usually backed by a line of credit with a bank.
Competitive Sale- A sale of securities by an issuer in which underwriters or syndicates of underwriters submit sealed bids to purchase the securities in contrast to a negotiated sale.
Continuing Disclosure- The principle that accurate and complete information material to the transaction which potential investors would be likely to consider material in making investment decisions with respect to the securities be made available on an ongoing basis.
Credit Enhancement- Credit support purchased by the issuer to raise the credit rating of the issue. The most common credit enhancements consist of bond insurance, direct or standby letters of credit, and lines of credit.
Debt Service Reserve Fund- The fund in which moneys are placed which may be #12..
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23 used to pay debt service if pledged revenues are insufficient to satisfy the debt service requirements.
Deep Discount Bonds- Bonds that are priced for sale at a substantial discount from their face or par value.
Derivatives- A financial product whose value is derived from some underlying asset value.
Designation Policies- Concerning a negotiated sale of bonds, the rules regarding how the takedown (sales commission) is allocated among the underwriters for each order put in for the bonds.
Direct Purchase Loan- A source of financing where the loan is purchased by a financial institution instead of being offered to the general public for purchase. The loan can bear interest at a fixed rate or on a variable rate tied to market index (i.e. the Secured Overnight Financing Rate (“SOFR”) or Securities Industry and Financial Markets Association (“SIFMA”) Index). This form of financing does not require a remarketing agent to set the variable rate. As such, a Direct Purchase Loan can be used to replace traditional forms of variable-rate debt.
Escrow- A fund established to hold moneys pledged and to be used to pay debt service on an outstanding issue.
Expenses- Compensates senior managers for out-of-pocket expenses including:
underwriters counsel, DTC charges, travel, syndicate expenses, dealer fees, overtime expenses, communication expenses, computer time and postage.
Floating Rate Notes (“FRN”)- A note with a variable interest rate sold either in the public market or directly to financial institutions. The adjustments to the interest rate are typically tied to a certain index like SOFR or SIFMA and are made periodically.
The rate would continue to reset in the same manner through maturity. The SOFRbased floating rate note market typically does not require bank support and as a result, offers issuers an alternative to traditional floating rate debt.
Grant Anticipation Notes (“GAN”)- Short term notes issued by the government unit, usually for capital projects, which are paid from the proceeds of State or Federal grants of any type.
Letters of Credit- A bank credit facility wherein the bank agrees to lend a specified amount of funds for a limited term.
Management Fee- The fixed percentage of the gross underwriter’s spread which is usually only paid to the managing underwriter for the structuring phase of a transaction.
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24 Members- Underwriters in a syndicate other than the senior underwriter.
Moody’s Median- Key financial, debt, economic and tax base statistics with median values for each statistic presented. Moody’s uses audits for both rated and unrated agencies to ensure that the medians presented are representative of all agencies.
Negotiated Sale- A method of sale in which the issuer chooses one underwriter to negotiate terms pursuant to which such underwriter will purchase and market the bonds.
Original Issue Discount- The amount by which the original par amount of an issue exceeds its public offering price at the time it is originally offered to an investor.
Pay-As-You-Go- An issuer elects to finance a project with existing cash flow as opposed to issuing debt obligations.
Present Value- The current value of a future cash flow when discounted to the present at a specific annual rate.
Private Placement- The original placement of an issue with one or more investors or financial institutions as opposed to being publicly offered or sold.
Rebate- A requirement imposed by the Tax Reform Act of 1986 whereby the issuer of the bonds must pay the IRS an amount equal to its profit earned from investment of bond proceeds at a yield above the bond yield calculated pursuant to the IRS code together with all income earned on the accumulated profit pending payment.
Tax and Revenue Anticipation Notes (“TRAN”)- Short-term notes issued by a government unit, usually for capital projects, which are paid from the proceeds of sales tax or other revenue sources.
Selling Groups- The group of securities dealers who participate in an offering not as underwriters but rather as those who receive securities less the selling concession from the managing underwriter for distribution at the public offering price.
Syndicate Policies- The contractual obligations placed on the underwriting group relating to distribution, price limitations and market transactions.
Underwriter- A dealer that purchases new issues of municipal securities from the Issuer and resells them to investors.
Underwriter’s Discount- The difference between the price at which the Underwriter buys bonds from the Issuer and the price at which they are reoffered to investors.
Variable Rate Debt- An interest rate on a security which changes at intervals according to an index or a formula or other standard of measurement as stated in the bond contract.
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25 1. City of Modesto Philosophy Regarding Use of Interest Rate Swaps A. Introduction
Interest rate exchange agreements or interest rate swaps (“Swaps”) and related financial instruments and derivatives may be appropriate interest rate management tools in certain circumstances. Properly used, Swaps can increase the City of Modesto’s (the “City”) financial flexibility and provide opportunities for interest rate savings. This policy (“Swap Policy”) shall be followed in conjunction with the City’s related debt issuance-related policies and procedures (the “Debt Policy”).
Swaps are appropriate to use when they achieve a specific financial objective consistent with the City’s overall Swap Policy and Debt Policy. Swaps may be used, for example, to lock-in a current market fixed rate or create additional variable rate exposure. Swaps may be used to produce interest rate savings or alter the pattern of debt service payments.
Swaps may be used to cap, limit or hedge variable rate payments. Options granting the right to commence or cancel an underlying Swap are permitted to the extent the Swap itself is otherwise consistent with this Swap Policy.
The authorized Swaps contemplated in this Swap Policy are intended to reduce the amount or duration of interest rate risk, or produce a lower cost of borrowing when used in combination with the issuance of bonds.
B. Rationales for Utilizing Interest Rate Swaps
The use of Swaps and related financial instruments should balance the City’s primary objectives of reducing the cost of capital, minimizing the City’s exposure to interest rate volatility, and gaining flexibility in structuring and managing its debt portfolio over time with the risks associated with these tools and instruments. Examples of how the City’s debt management objectives can be achieved through the use of Swaps and other financial instruments are described below:
Reduce borrowing costs at the time of issuance
Create synthetic fixed rate debt through a floating-to-fixed Swap. Actively manage interest rate risk
Lock-in current market rates through (forward starting) floating-to-fixed Swap. Balance financial risk
Purchase of an interest rate cap.
CITY OF MODESTO
CITY COUNCIL POLICY
Latest Revision Date: April
202306/25/2024
ADDENDUM: Interest Rate Swap Policy
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26 Achieve appropriate asset/liability match
Create variable rate exposure through fixed-to-floating Swap.
Under no circumstances will Swaps be used for speculative purposes, e.g., to realize trading gains.
2. Authority for Entering into Swap Agreements
The purpose of this Swap Policy is to integrate the use of Swaps into the City’s overall Debt Policy, and other funds of the City where particular debt strategies, both long-term and shortterm, factor into these decisions. Swaps will not be used for speculation. The City Manager, in conjunction with the Director of Finance, shall be responsible for determining if and when it is in the City’s overall best financial interests to enter into a Swap or related financial instruments covered by this Swap Policy.
The City shall comply with all applicable laws. The City must receive an opinion acceptable to the financial market from a nationally recognized law firm that the swap contract is a legal, valid, and binding obligation of the City and that entering into such a contract complies with applicable provisions of the City Charter and State statutes.
3. Permitted Instruments
The City may utilize financial instruments that (i) lower its interest expense, (ii) manage its financial risk or (iii) improve its financial condition.
The City shall not use financial instruments that (i) create substantial leverage or financial risk, (ii) lack adequate liquidity to terminate at market, (iii) provide insufficient price transparency to allow reasonable valuation on an ongoing basis, or (iv) are primarily speculative in nature.
The use of Swaps and other hedging products should produce a result not otherwise available in the cash market (i.e., lack of advance refunding, non-callable debt), or provide a higher level of net savings compared to conventional financing methods.
The City may expressly utilize the following financial instruments, after identifying the financial objective(s) to be realized and assessing the attendant risks:
Current or forward starting floating-to-fixed rate swaps Designed to reduce a fixed interest rate below that which would otherwise be available through the use of traditional fixed rate debt. Current or forward starting fixed-to-floating rate swaps Designed to create additional variable interest rate exposure. Rate Locks
Cash-settled forward contracts based on indices such as the MMD™ 1 “AAA”
1. MMD™ is a trademark of Municipal Market Data, a Thompson Financial company. #12..
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27 scale or the Bloomberg Valuation Service (“BVAL”) AAA Muni Callable Curve. Interest Rate Caps, Floors or Collars
Financial contracts that limit exposure to interest rate volatility. Options on Variable Rate Indices
Indices could include the Securities Industry and Financial Markets Association (“SIFMA”) Index2, Secured Overnight Financing Rate (“SOFR”)3, etc. Options on Swaps (“Swaptions”)
Methods used to control the commencement or cancellation of interest rate swaps. Basis Swaps
Floating-to-floating rate swaps using different variable-rate indices, such as a swap from the SIFMA Index to a percentage of SOFR.
4. Swap Risk Analysis
The City shall require for each proposed financing an evaluation of all financial products with respect to the unique risks that they bear. A specific determination must be made that the proposed or expected benefits exceed the identified risks by an adequate margin over those available in the traditional cash market. At a minimum, the City shall perform an evaluation of the risks and what steps have been taken to mitigate any risks. The City shall retain a municipal/swap advisor to assist in assessing these risks. Questions that may arise include the following:
Market or Interest Rate Risk
Does the transaction hedge (i.e., decrease or eliminate) or increase interest rate volatility?
Tax Risk
How is the transaction or its benefits affected by a future change in federal income tax policy?
Termination Risk
Under what circumstances might the transaction be terminated? At what value? Risk of Uncommitted Funding (Put Risk)
Does the transaction create additional financing dependent upon third-party participation (such as requiring a letter of credit, grant or other anticipation funding, etc.)?
Rollover Risk
Is the term of the Swap shorter than the term of the underlying hedged debt or financial instrument? Does the City anticipate entering into another Swap when the first Swap terminates?
Legal Risk
Is the transaction expressly legally authorized?
Counterparty Risk
What is the creditworthiness of the counterparty?
2. The SIFMA Index is an index of more than 500 high-grade, tax-exempt, weekly reset Variable Rate Demand Obligation issues.
3. SOFR is a taxable rate which is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, published daily by the Federal Reserve Bank.
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28 Rating Agency Risk
Is the proposed transaction consistent with the City’s current ratings and ratings objectives?
Basis Risk
Is it anticipated that the projected Swap payments the City will receive closely match the debt service payments it will make?
Index Risk
Does the transaction include provisions acceptable to the City regarding any change in indices used to calculate payments or obligations? Subsequent Business Conditions
Does the transaction or its benefits depend upon the continuation, or realization, of specific industry business conditions (e.g., unusual demand for state-specific variable rate debt)?
Operational Risk
Does the City have adequate systems, policies, and practices in place to monitor and manage the transaction over its term?
5. Swap Procurement and Execution
A. Procurement
The City will not have a fixed policy with respect to the procurement of Swaps and other financial instruments authorized by this Swap Policy. On a product-by-product basis, the City will have the authority to negotiate or competitively bid the procurement of financial instruments that have customized or specific attributes designed on its behalf. The Director of Finance will be responsible for determining the method of procurement for Swaps and related financial instruments. A municipal/swap advisor shall be retained to assist the Director of Finance in evaluating the proposed pricing of Swaps or related financial instruments.
B. Swap Execution
The Director of Finance may recommend the use of financial derivative products if they:
1. Provide a specific benefit not otherwise available;
2. Produce greater expected interest rate savings than cash market alternatives;
3. Do not create substantial leverage or financial risk;
4. Result in an improved capital structure or better asset/liability match; and
5. Reasonably pass the Swap Risk Analysis required by Section 4. Swap Risk Analysis of this Swap Policy.
C. Credit Rating Designations
For purposes of this Swap Policy, references to credit ratings will be based on those ratings issued by Moody’s Investors Service, and/or S&P Global Ratings, and/or Fitch Ratings. The credit ratings will reflect the designations assigned by each of these rating agencies utilized for comparable credit and will be listed for each rating agency utilized in the order shown in the preceding sentence.
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29 6. Swap Documentation
The City will use a standard International Swap and Derivatives Association, Inc. (“ISDA”) Master Agreement, including the Counterparty Schedule to the Master Agreement and a Credit Support Annex (utilizing such versions thereof as the Director of Finance shall determine), as supplemented and amended in accordance with the recommendations of the City’s financial/swap advisor and legal counsel. Each Swap entered into by the City shall include payment, term, security, collateral, default, remedy, termination and other terms, conditions and provisions as the Director of Finance may deem necessary or desirable.
A. Terms and Notional Amount of Swap Agreement
The City shall determine the appropriate term for Swaps on a case-by-case basis. The slope of the swap curve, the marginal change in swap rates from time to time along the swap curve, and the impact that the term of the Swap will have on the City’s overall financial (e.g., interest rate, market value, counterparty, etc.) exposure shall be considered in determining the appropriate term of any Swap agreement. In connection with the issuance or carrying of bonds, the term of the Swap agreement between the City and qualified swap counterparty shall not extend beyond the final maturity date of existing City debt, or in the case of a refunding transaction, beyond the final maturity of the refunding bonds. At no time shall the total net notional amount of all Swaps, excluding any offsetting Swaps, exceed the total amount of outstanding applicable bonds. Variable rate debt exposure created through the use of Swaps will be consistent with the limitations set forth in the City’s adopted Debt Policy. Terms and conditions of any Swap shall be negotiated by the Director of Finance in the best interests of the City subject to the applicable legal provisions and this Swap Policy. The Swap agreements entered into between the City and each counterparty shall include payment, term, security collateral, default, remedy, termination, and other terms, conditions and provisions as the Director of Finance, in consultation with City legal counsel and its swap advisor, deems necessary or desirable.
Subject to the provisions contained herein, the City’s swap documentation and terms should include the following:
The City will be able to terminate the swap without cause subject to market termination costs.
The swap counterparty will only be able to terminate the swap if the City’s credit ratings fall below a certain pre-determined threshold and/or the City’s failsure to perform, as required by the swap contract.
Governing law for Swaps will be New York, but should reflect California authorization provisions.
The specified indebtedness related to credit events in the Master Agreement should be narrowly drafted and refer only to specific debt of the issuing fund. Eligible collateral should be limited to Treasuries, Federal Agencies and any other securities which, in the City’s sole discretion, shall be deemed reasonable and creditworthy.
Collateral thresholds should be set on a sliding scale reflective of credit ratings. #12..
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30 Termination value should be set by “market quotation” methodology. Whenever possible use a Credit Support Annex to document swap termination value collateralization procedures.
Ratings downgrade triggers.
7. Policy on Swap Counterparties
The City shall only do business with highly rated counterparties, and will structure swap agreements to protect itself from credit deterioration. All Swap transactions shall contain provisions granting the City the right to optionally terminate a swap agreement at-market at any time over the term of the agreement.
A. Qualified Swap Counterparties
The City should not have an immutable credit standard. However, the City shall attempt to do business with highly rated counterparties the long-term ratings of which at the date of execution are at least “Aa” or “AA” by one or more Nationally Recognized Statistical Ratings Organizations (“NRSRO”) and no less than “A2” or “A” by one or more NRSRO.
For lower rated counterparties, the City should seek credit enhancement in the form of:
1. Contingent swap counterparty providing support;
2. Collateral;
3. Ratings downgrade triggers; and,
4. Minimum rating threshold of “Baa3/BBB-/BBB-,” below which provisions will allow an assignment or trigger an additional termination event, with the counterparty as the affected party (i.e., the counterparty would pay market-based transaction costs).
In addition, the counterparty must have a demonstrated record of successfully executing swap transactions as well as creating and implementing innovative ideas in the swap market. The City shall be authorized to enter into interest rate swap transactions only with qualified swap counterparties.
8. Limitations on Counterparty Exposure
In order to diversify the City’s counterparty credit risk, and to limit the City’s credit exposure to any one counterparty, limits will be established for each counterparty based upon both the credit rating of the counterparty as well as the relative level of risk associated with each existing and proposed swap transaction. The guidelines shown in the following table provide general termination exposure guidelines with respect to whether the City should enter into an additional transaction with an existing counterparty. The City may make exceptions to the guidelines at any time to the extent that the execution of a swap achieves one or more of the goals outlined in these guidelines or provides other benefits to the City. In general, the maximum net termination exposure to any single counterparty should be set so that it does not exceed a prudent level as measured against the gross revenues, available assets or other financial resources of the City.
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31 For example, if the City has two Swaps with one counterparty, and if the first Swap’s market value is positive $10 million and the second Swap’s market value is negative $20 million, then the City’s total net exposure to the counterparty is negative $10 million.
Such guidelines will also not mandate or otherwise force automatic termination by the City or the counterparty. Maximum net termination exposure is not intended to impose retroactively any terms and conditions on existing transactions. Such provisions will only act as guidelines in making a determination as to whether or not a proposed transaction should be executed given certain levels of existing and projected net termination exposure to a specific counterparty. Collateral posting guidelines are described in the collateral section below. The calculation of net termination exposure per counterparty will take into consideration multiple transactions, some of which may offset the overall exposure to the City.
Under this approach, the City will set limits on individual counterparty exposure based on existing as well as new or proposed transactions. The sum of the current market value and the projected exposure shall constitute the maximum net termination exposure. For outstanding transactions, current exposure will be based on the market value as of a recently completed swap valuation report provided by the City’s swap advisor. Projected exposure shall be calculated based on the swap’s potential termination value taking into account possible adverse changes in interest rates as implied by historical or projected measures of potential rate changes applied over the remaining term of the swap. For purposes of this calculation, the City shall include all existing and projected transactions of an individual counterparty and all transactions will be analyzed in aggregate such that the maximum exposure will be additive.
The exposure thresholds, which will be reviewed periodically by the City to ensure that they remain appropriate, will also be tied to long-term credit ratings of the counterparties and whether or not collateral has been posted as shown in the table below. If a counterparty has more than one rating, the lowest rating will govern for purposes of the calculating the level of exposure. If contingent swap counterparty or swap insurance is used to provide financial support for the primary counterparty, the rating of the support entity shall be used. A summary table is provided below:
Credit Ratings
Maximum
Collateralized Net
Termination Value
Maximum
Uncollateralized
Net Termination Value
Maximum Net
Termination
Exposure
AAA N/A $30.0 million N/A
AA Category $30.0 million $20.0 million $30.0 million
A Category $20.0 million $10.0 million $20.0 million
Below A Category $10.0 million $5.0 million $15.0 million If the exposure limit is exceeded by counterparty, the City shall conduct a review of the exposure limit per counterparty. The City, in consultation with its bond counsel and swap advisor, shall explore remedial strategies to mitigate this exposure. #12..
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32 9. Benefit Expectation
Financial transactions, using Swaps or other derivative products, intended to produce the effect of a synthetic advance refunding, must generate at least 25% greater savings than the benefit threshold then in effect for fixed-rate bonds as determined by the City’s Director of Finance. (See Debt Management Policy Section X.A. Debt Service Savings). The higher savings target reflects the greater complexity and higher risk of derivative financial instruments.
In calculating the prospective savings against the target for implementing a fixed-to-variable swap, the cost of remarketing, in addition to the cost of credit and liquidity fees must be added to the variable rate representing the ten-year average of comparable variable rate securities.
10. Termination Provisions
All swap transactions shall contain provisions granting the City the right to optionally terminate a swap agreement at market at any time over the term of the agreement, but shall NOT grant this right to the counterparty. In general, exercising the right to terminate an agreement produces a benefit to the City, either through the receipt of a payment from a termination, or if the termination payment is made by the City, in conjunction with a conversion to a more beneficial (desirable) City debt obligation, as determined by the City.
11. Collateral
As part of any swap agreement, the City shall require collateralization or other credit enhancements to secure any or all swap payment obligations. As appropriate, the City, in consultation with its bond counsel and swap advisor, may require collateral or other credit enhancements to be posted by each swap counterparty under the following circumstances:
Each counterparty to the City may be required to post collateral if the highest credit rating of the counterparty or parent falls below the “Aa/AA” category. Additional collateral for further decreases in credit ratings of each counterparty shall be posted by each counterparty in accordance with the provisions contained in the collateral support agreement to each counterparty with the City.
Collateral shall be deposited with a third-party trustee, or as mutually agreed upon between the City and the counterparty.
A list of acceptable securities that may be posted as collateral and the valuation of such collateral will be determined and mutually agreed upon during negotiation of the swap agreement with each swap counterparty.
The market value of the collateral shall be determined on at least a weekly basis. The City shall determine the reasonable threshold limits for the initial deposit and for increments of collateral posting thereafter.
The City shall determine on a case-by-case basis whether other forms of credit enhancement, such as swap insurance, are more beneficial in lieu of the posting of additional collateral.
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33 The City shall An evaluateion of the performance of the swap relative to the rate on the bonds.
The City shall A computeation of the effective cost of borrowing inclusive of all fees and costs associated with the underlying financing.
12. Conformance with Dodd-Frank
It is the intent of the City to conform this Swap Policy to the requirements relating to legislation and regulations for over-the-counter derivatives transactions under Title VII of the Wall Street Transparency and Accountability Act of 2010, as supplemented and amended from time to time (herein collectively referred to as “Dodd-Frank”). Pursuant to such intent, it is the policy of the City that: (i) each swap advisor engaged or to be engaged by the City will function as the designated qQualified iInvestment rRepresentative of the City, sometimes referred to as the “Designated QIR”; (ii) each swap advisor agrees to meet and meets the requirements specified in Commodity Futures Trading Commission Regulation
23.450(b)(1) or any successor regulation thereto (herein referred to as the “Representative Regulation”) (iii) each swap advisor provides a written certification to the City to the effect that such swap advisor agrees to meet and meets the requirements specified in the Representative Regulation; and (iv) the City reliesy on the advice of its swap advisor with respect to transactions authorized pursuant to this Swap Policy and not rely on recommendations, if any, presented by any counterparty with respect to transactions authorized pursuant to this Swap Policy.
13. Monitoring and Reporting
At least once per year, normally as part of the City’s Annual Comprehensive Financial Report (“Annual Report”), or as requested by the City Council, the Director of Finance shall prepare information describing the various Swaps and financial arrangements entered into by the City pursuant to this Swap Policy that are in effect as of the date of the report’s publication. The report shall include the following information:
1. A summary of key terms of the agreements, including notional amounts, interest rates, maturity and method of procurement.
2. The mark-to-market value of each agreement.
3. The full name, description, and credit ratings of each counterparty or the applicable guarantor.
4. The amounts that were required to be paid and received and any amounts that were actually paid and received.
5. A listing of any credit enhancement, liquidity facility, or reserves and an accounting of all costs and expenses associated with the credit enhancement, liquidity facility, or reserves.
6. The aggregate mark-to-market value and potential termination value for each swap by counterparty.
7. A discussion of other risks associated with each transaction.
At the end of each fiscal year, the Director of Finance shall provide to the City Council all #12..
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34 information required for financial reporting under Government Accounting Standards Board (“GASB”) requirements as well as any other reporting or disclosure requirements. The City shall adhere to California Government Code Section 5922 and applicable GASB guidelines for reporting and disclosure guidelines for derivative products. #12..
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1 I. INTRODUCTION
The purpose of this Policy is to organize and formalize debt issuance-related policies and procedures for the City of Modesto (the “City”) and to establish a systematic debt policy (the “Debt Policy” or the “Policy”). The debt policies and practices of the City are, in every case, subject to and limited by applicable provisions of state and federal law and prudent debt management principles.
II. DEBT POLICY OBJECTIVE
The primary objectives of the City’s debt and financing related activities are to maintain cost-effective access to the capital markets and other financing venues through prudent yet flexible policies:
Moderate principal and debt service payments through effective planning and projected cash management;
Achieve the lowest cost of borrowing; and
Achieve the highest practical credit ratings.
III. SCOPE AND DELEGATION OF CITY
This Debt Policy shall govern, except as otherwise covered by the City of Modesto Investment Policy and the City of Modesto Interest Rate Swap Policy, the issuance and management of all debt funded through the capital markets and private placements, including the selection and management of related financial and advisory services and products, and the investment of bond proceeds.
This Policy shall be reviewed and updated periodically as required. Any changes to the Policy are subject to approval by the City Council at a legally noticed and conducted public meeting.
Overall policy direction of this Debt Policy shall be provided by the City Council.
Responsibility for implementation of the Debt Policy, and day-to-day responsibility for structuring, implementing, and managing the City’s debt and finance program, shall lie with the Director of Finance. The City Council’s adoption of the City Annual Budget does not, in and of itself, constitute authorization for debt issuance for any reason. This Debt Policy requires that the City Council specifically authorize each debt financing. Each financing shall be presented to the City Council, subject to City Council agenda review and approval (debt financings cannot be approved on a consent calendar).
CITY OF MODESTO
CITY COUNCIL POLICY
LATEST REVISION DATE: 06/25/2024
POLICY NUMBER: 1.036
CITY DEPARTMENT: Finance
SUBJECT: Debt Management Policy
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2 While adherence to this Policy is required in applicable circumstances, the City recognizes that changes in the capital markets, agency programs and other unforeseen circumstances may from time to time produce situations that are not covered by the Policy and will require modifications or exceptions to achieve policy goals. In these cases, management flexibility is appropriate, provided specific authorization from the City Council is obtained.
IV. ETHICS AND CONFLICTS OF INTEREST
Officers and employees of the City involved in the execution and management of the Debt Policy will not engage in any personal business activities that could conflict with proper and lawful execution and management of the Debt Policy, or which could impair their ability to make impartial decisions.
V. CAPITAL IMPROVEMENT PROGRAM INTEGRATION
The City’s multi-year Capital Improvement Program (“CIP”), which identifies the projects and the appropriate funding mechanisms to pay for them, shall be used in combination with the CIP Financial and Budget Policies and this Debt Policy to ensure the proper allocation and financing of eligible projects. The CIP and its related policies set priorities and strategies for allocating and tracking funding, while the Debt Policy provides policy direction and limitations for proposed financings. Debt issuance for capital projects shall not be recommended for City Council approval unless such issuance has been incorporated into the CIP.
VI. STANDARDS FOR USE OF DEBT FINANCING
The City’s Debt Policy will promote debt issuance only in those cases where public policy, equity and economic efficiency favor debt over cash (pay-as-you-go) financing. Long-term debt financing shall not be used to fund operating costs.
A. Credit Quality
Credit quality is an overriding consideration. All City debt management activities for new debt issuances will be conducted in a manner conducive to receiving the highest credit ratings possible consistent with the City’s debt management objectives, and to maintaining or improving the current credit ratings assigned to the City's outstanding debt by the major credit rating agencies.
B. Term of Financing
Debt can be used to provide funding for long-term capital projects. The debt repayment period should relate to the expected useful life for the facilities or equipment being financed, and should, as a general matter, be concurrent with the stream of benefits from these facilities. When the City finances capital projects by issuing bonds, the debt repayment period generally should not exceed the average useful life of the equipment, software and/or facilities being acquired or constructed, but in no case will the financing #12..
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3 exceed 120% of the useful life of the project being financed. Inherent in its long-term debt policies, the City recognizes that future taxpayers will benefit from the capital investment and that it is appropriate that they pay a share of the asset cost.
C. Debt Financing Mechanism
The City will evaluate the use of all financial alternatives available, including, but not limited to: long-term debt, short-term debt, commercial paper, tax revenue and grant anticipation notes, private placement and inter-fund borrowing. The City will utilize the most cost advantageous financing alternative available while limiting the City’s risk exposure.
D. Ongoing Debt Administration and Internal Controls
The City shall maintain all debt-related records for as long as the associated debt is outstanding plus a term of three years. At a minimum, this repository will include all official statements, bid documents, ordinances, indentures, records relating to the expenditure of proceeds and the use of the project, records related to the investment of the proceeds of the bonds and the sources of payment, all returns filed with the IRS, trustee reports, etc. for all City debt. To the extent that official transcripts incorporate these documents, possession of a transcript will suffice (transcripts may be hard copy, stored on CD-ROM or other forms of electronic record). The City will collect all available documentation for outstanding debt and will develop a standard procedure for archiving transcripts for any new debt. The City will establish internal controls to ensure compliance with the Debt Policy, all debt covenants and any applicable requirements of the State and Federal Government Codes.
E. Rebate Policy and System
The City will accurately account for all interest earnings in debt-related funds. These records will be designed to ensure that the City is in compliance with all debt covenants, and with State and Federal laws. The City will maximize the interest earnings on all funds within the investment parameters set forth in each respective indenture, and as permitted by the City Investment Policy, subject to applicable limitations. The City will develop a system of reporting interest earnings that relates to and complies with Internal Revenue Code rebate requirements, yield limits and arbitrage.
F. Minimum Reserve Requirements for Water and Wastewater Funds The Water and Wastewater Funds are to maintain a working capital reserve equal to not less than 25% of their operating expenses plus one annual debt service payment on any State Revolving Fund (“SRF”) loans. This reserve is meant to ensure that adequate cash is on hand to meet current obligations of the funds as well as respond to unanticipated demands, such as unplanned repairs or renovations of the systems. This reserve is consistent with reserves established by other utilities for similar purposes.
G. Minimum Debt Service Coverage Ratio for Water and Wastewater Funds The City will seek to maintain debt service coverage on its senior lien Water and Wastewater revenue bonds at a level not less than one and a half times (1.5x) the maximum annual debt service for the aggregate outstanding senior lien bonds of the #12..
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4 respective system, including the debt service for any new issuance, unless a different debt service coverage amount is allowed by existing bond covenants.
VII. DEBT FINANCING
A. Purpose of Debt
When the City determines that the use of debt is appropriate, the following criteria will be utilized to evaluate the type of debt to be issued:
1. New Money Financing
New money issues are financings that generate funding for capital projects, equipment or enterprise software systems. Eligible capital projects for allocation of City funds include the acquisition, construction or major rehabilitation of capital assets.
2. Refunding Financing
Refunding bonds are issued to retire all or a portion of an outstanding debt issue.
Refunding issuances can be used to achieve present-value savings on debt service or to restructure the payment schedule, type of debt instrument used, or covenants of existing debt. The City must analyze the refunding issue on a present-value basis to identify economic effects before approval, as is further described in Section X.
Refinancing Outstanding Debt below.
B. Type of Debt
When the City determines that the use of debt is appropriate, the following criteria will be utilized to evaluate the type of debt to be issued:
1. Long-Term Debt
The City may issue long-term debt when equipment, project, or software costs cannot be financed from current revenues. The proceeds derived from long-term borrowing will not be used to finance current operations or normal/current maintenance. Long-term debt will be structured such that the obligations generally do not exceed the average useful life of that which is being financed or the sunset date of any current, pledged revenues. And at no time will the financing exceed 120% of the expected average useful life of the asset being financed. Current Interest Bonds are bonds that pay interest periodically and principal at maturity. They may be used for both new money and refunding transactions. Bond features may be adjusted to accommodate the market conditions at the time of sale, including changing dollar amounts for principal maturities, offering discount and premium bond pricing, modifying call provisions, utilizing bond insurance, as well as determining whether and how to fund a debt service reserve fund.
Zero Coupon and Capital Appreciation Bonds pay interest only when principal matures. Interest continues to accrue on the unpaid interest, #12..
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5 therefore representing a more expensive funding option. In the case of zerocoupon bonds, principal and interest, at one coupon rate, is repaid at maturity. In the case of Capital Appreciation Bonds, the value of the bond accretes until maturity. These types of bonds should be used only when no other bond structure is available to address a certain structuring problem. If used, these bonds should mature no later than 20 years from issuance and should be callable.
Taxable Debt is debt whose interest payments are taxable for federal income tax purposes to bondholders. The City will consider the issuance of taxable debt when it is necessary for federal tax reasons or if these bonds would lower the overall cost of the financing or help the City achieve refunding savings that could not otherwise be achieved with the issuance of tax-exempt debt (e.g., advance refundings).
2. Short-Term Debt
Short-term borrowing may be utilized for the temporary funding of operational cash flow deficits or anticipated revenues, where anticipated revenues are defined as an assured revenue source with the anticipated amount based on conservative estimates, or until the structure of the take-out financing is finalized. The City will determine and utilize the least costly method for short-term borrowing. The City may issue short-term debt when there is a defined repayment source or amortization of principal, subject to the following policies:
Commercial Paper Notes may be issued as an alternative to fixed rate debt, particularly when the timing of funding requirements is uncertain. The City may maintain an ongoing commercial paper program to ensure flexibility and immediate access to capital funding when needed. The retirement of commercial paper notes is most commonly a result of the issuance of longterm bonds but they may also be retired with available cash. Grant Anticipation Notes (“GAN”) are short-term notes that are repaid with the proceeds of State or Federal grants of any type. The City shall generally issue GANs only when there is no other viable source of funding for the project.
Bond Anticipation Notes (“BAN”) are short-term notes issued prior to the issuance of long-term debt. BANs are most commonly retired, or taken-out, with long-term debt. BANs will be issued only when there is no better alternative to reduce the overall cost of a financing program. Tax and Revenue Anticipation Notes (“TRAN”) shall be issued only to address a timing mismatch between operating revenues and operating expenditures and the sizing of the issue shall fully conform to Internal Revenue Code requirements and limitations.
Lines of Credit shall be considered as an alternative to other short-term borrowing options. The lines of credit shall be structured to limit concerns as to Internal Revenue Code compliance.
Other short-term debt may also be considered and utilized when appropriate such as a Direct Purchase Loan from a bank or Floating Rate Notes. #12..
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6 3. Variable Rate Debt
To maintain a predictable debt service burden, the City may give preference to debt that carries a fixed interest rate. An alternative to the use of fixed rate debt is floating or variable rate debt. It may be appropriate to issue short-term or long-term variable rate debt to diversify the City’s debt portfolio, reduce interest costs, provide interim funding for capital projects and improve the match of assets to liabilities. Variable rate debt typically has a lower cost of borrowing than fixed rate financing and shorter interest rate reset periods in the range of 1 to 35 days. Under no circumstances will the City issue variable rate debt solely for the purpose of earning arbitrage. The City, however, may consider variable rate debt in certain instances.
A) Variable Rate Debt Capacity. The City will maintain a conservative level of outstanding variable rate debt in consideration of general rating agency guidelines recommending a maximum of 20% variable rate exposure, in addition to maintaining adequate safeguards against risk and managing the variable revenue stream, both as described below:
(1) Adequate Safeguards Against Risk. Financing structure and budgetary safeguards are in place to prevent adverse impacts from interest rate shifts; such structures could include, but are not limited to, interest rate swaps, interest rate caps and the matching of assets and liabilities. See Section VII. B. 4. Financial Derivative Products below. See also the Interest Rate Swap Policy addendum. (2) Variable Revenue Stream. The revenue stream for repayment is variable, and is anticipated to move in the same direction as market-generated variable interest rates, or the dedication of revenues allows capacity for variability. (3) As a Component to Synthetic Fixed Rate Debt. Variable rate bonds may be used in conjunction with a financial strategy which results in synthetic fixed rate debt. Prior to using synthetic fixed rate debt, the City shall certify that the expected interest cost is at least 10 basis points (0.10%) lower than traditional fixed rate debt (including any ongoing fees in such calculation) as well as giving due consideration to other risks associated with such a structure that may raise the ultimate costs of a synthetic fixed rate structure. See Section VII. B. 4.
Financial Derivative Products below. See also the Interest Rate Swap Policy addendum.
4. Financial Derivative Products
Financial Derivative Products will be considered appropriate in the issuance or management of debt only in instances where it has been demonstrated that the derivative product will either provide a hedge that is expected to reduce the risk of fluctuations in expense or revenue, or alternatively where the derivative product is expected to reduce total project cost. The City shall maintain an Interest Rate Swap Policy (see attached) governing the use of derivative products. For derivatives other than interest rate swaps, the City will undertake an analysis of early termination costs and other conditional terms given certain financing and marketing assumptions. Such analysis will document the risks and benefits associated with the #12..
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7 use of a particular derivative product. Derivative products will only be utilized with prior approval from the City Council.
VIII. TERMS AND CONDITIONS OF BONDS
The City shall establish all terms and conditions relating to the issuance of bonds, and will control, manage, and invest all bond proceeds. Unless otherwise authorized by the City, the following shall serve as bond requirements.
A. Term
All capital improvements financed through the issuance of debt will be financed for a period generally not to exceed the average useful life of that which is being financed. At no time will the financing exceed 120% of the expected average useful life of the assets being financed, and in no event should the final maturity exceed the lesser of thirty (30) years or when the revenue source is projected to sunset.
B. Capitalized Interest
The nature of the City’s revenue stream is such that funds are generally continuously available and the use of capitalized interest should not normally be necessary. However, certain types of financings may require the use of capitalized interest from the issuance date until the City has constructive use/benefit of the financed project. Unless otherwise required, the City will avoid the use of capitalized interest to obviate unnecessarily increasing the bond size. Interest shall not be funded (capitalized) beyond three (3) years or a shorter period when based upon project needs or if further restricted by statute.
Interest earnings may, at the City's discretion, be applied to extend the term of capitalized interest but in no event beyond 3 years, or less, if restricted by law.
C. Lien Levels
Senior and Junior Liens for each revenue source will be utilized in a manner that will maximize the most critical constraint, typically either cost or capacity, thus allowing for the most beneficial use of the revenue source securing the bond. Projects chosen for priority financing, based on funding availability and proposed timing, will generally be financed on the most senior lien of the relevant credit.
D. Debt Service Coverage
For any new debt issuance secured by Water or Wastewater revenues, the City will seek to maintain pledged net revenues at a level no less than one and a half times (1.50x) the Maximum Annual Debt Service for the aggregate outstanding senior lien bonds, including the debt service for the new issuance, unless a different debt service coverage amount is allowed by existing bond covenants. For other types of debt incurred by the City, the City will determine the appropriate minimum debt service coverage levels based upon the nature of the pledged revenues, rating considerations, and other relevant factors.
E. Debt Service Structure
Debt issuance shall be planned to achieve relatively rapid repayment of debt while still #12..
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8 matching debt service to the useful life of facilities. The City will amortize its debt within each lien to achieve overall level debt service or may utilize more accelerated repayment schedules after giving consideration to bonding capacity constraints. The City shall avoid the use of bullet or balloon maturities except in those instances where these maturities achieve one of the City’s stated goals, such as minimizing annual debt service or leveling annual existing debt service, among others.
F. Call Provisions
In general, the City’s securities will include a call feature, which is no later than ten (10) years from the date of delivery of the bonds. The City will avoid the sale of non-callable bonds absent careful evaluation by the City with respect to the value of the call option. If the City were to issue taxable bonds, the City will carefully consider the financial impacts of a 10-year call, a make-whole call, or non-callable debt.
G. Original Issue Discount & Deep Discount Bonds
An original issue discount and deep discount bonds will be permitted only if the City determines that such discount results in a lower true interest cost on the bonds and that the use of an original issue discount or deep discount bonds will not materially reduce the value of the bonds’ call provisions nor adversely affect the project identified by the bond documents.
H. Maximum Repayment Ratio
The maximum repayment ratio, defined as total future debt service payments divided by the principal amount of the bonds issued, shall be no more than three to one (3:1) for each series of bonds.
IX. CREDIT ENHANCEMENTS
The City will consider the use of credit enhancement on a case-by-case basis, evaluating the economic benefit versus cost for each case. Only when a clearly demonstrable savings can be shown shall enhancement be considered. The City will consider each of the following enhancements as alternatives by evaluating the cost and benefit of such enhancement. As noted below, the use of credit enhancements may result in additional continuing disclosure requirements described below (see Section XV. F. Continuing Disclosure below).
A. Bond Insurance
The City may purchase bond insurance when such purchase is deemed prudent and advantageous. The predominant determination shall be based on such insurance being less costly than the present value of the difference in the interest on insured bonds versus uninsured bonds.
B. Debt Service Reserves
When required, a reserve fund equal to the lesser of 10% of the original principal amount of the bonds, maximum annual debt service, or 125% of average annual debt service, and if permitted, 10% of par value of bonds outstanding, (the “Reserve Requirement”) shall be #12..
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9 funded from the proceeds of each series of bonds, subject to federal tax regulations and in accordance with the requirements of credit enhancement providers and/or rating agencies.
The City may purchase a reserve equivalent (e.g., a reserve fund surety policy) when such purchase is deemed prudent and advantageous. Such equivalents shall be evaluated in comparison to cash funding of reserves on a net present value basis, while also taking into account the creditworthiness of the surety provider and market acceptance.
C. Letters of Credit
The City may enter into a letter of credit agreement when such an agreement is required by the market (e.g., in the case of variable rate demand bonds) or is deemed prudent and advantageous. Only those financial institutions with long-term ratings greater than or equal to that of the City, and minimum short-term ratings of P-1, A-1, F1, by Moody’s Investors Service, S&P Global Ratings and Fitch Ratings, respectively, may participate in City letter of credit agreements unless there are no other practicable options for the City.
X. REFINANCING OUTSTANDING DEBT
The City shall have the responsibility to analyze outstanding bond issues for refunding opportunities that may be presented by underwriting and/or municipal advisory firms. The City will consider the following issues when analyzing possible refunding opportunities:
A. Debt Service Savings
The City has established a minimum net present value savings threshold goal of 3% of the refunded bond principal, unless there are other compelling reasons for defeasance. The present value savings will be net of all costs related to the refinancing. If the debt to be refinanced is not currently callable (i.e., in the case of forward delivery refundings, advance refundings, etc.) the City will make a comparison to the projected savings it could achieve if it waited until the debt becomes eligible for a current refunding. The decision to defease debt that is not currently callable or to take savings on an upfront or deferred basis must be explicitly approved by the City Council.
B. Restructuring
The City will refund debt when in its best interest to do so. Refundings will include restructuring to meet unanticipated revenue expectations, terminate swaps, achieve cost savings, mitigate irregular debt service payments, release reserve funds or remove unduly restrictive bond covenants.
C. Term of Refunding Issues
The City will refund bonds within the term of the originally issued debt. However, the City may consider maturity extension, when necessary to achieve a desired outcome, provided that such extension is legally permissible. The City may also consider shortening the term of the originally issued debt to realize greater savings. The remaining useful life of the financed facility and the concept of intergenerational equity should guide this decision.
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10 D. Escrow Structuring
The City shall utilize the least costly permitted securities available in structuring refunding escrows. The City will examine the viability of an economic versus legal defeasance on a net present value basis. Generally, the City should look to purchase State and Local Government Series (“SLGS”) securities from the federal treasury when structuring refunding escrows. The City may review the purchase of Open Market Securities (“OMS”) to fund a refunding escrow. In such a case, a certificate from a thirdparty agent, who is not a broker-dealer, is required stating that the securities were procured through an arms-length, competitive bid process (in the case of OMS), that such securities were more cost effective than SLGS, and that the price paid for the securities was reasonable within federal guidelines. Under no circumstances shall an underwriter, agent, municipal advisor or financial advisor sell escrow securities to the City from its own account.
E. Arbitrage
The City shall take all necessary steps to optimize refunding escrows and to avoid negative arbitrage. Any resulting positive arbitrage will be rebated as necessary according to federal guidelines.
XI. METHODS OF ISSUANCE
The City will determine, on a case-by-case basis, whether to sell its bonds competitively or through negotiation. The City shall evaluate the comparative costs of each method of issuance on a net present value basis, using the City’s investment rate as the appropriate measure of the discount rate. It should be noted, however, that cost may be only one of a number of factors considered in determining the most advantageous method of sale.
A. Competitive Sale
In a competitive sale, the City’s bonds shall be awarded to the bidder providing the lowest true interest cost as long as the bid adheres to the requirements set forth in the official notice of sale. Conditions under which a competitive sale would be preferred are as follows:
Bond prices are stable and/or demand is strong.
Market timing and interest rate sensitivity are not critical to the pricing. There are no complex explanations required during marketing regarding issuer’s projects, media coverage, political structure, political support, and funding or credit quality. The bond type and structure are conventional.
Bond insurance is not needed, is included or pre-qualified (available). Significant transaction size, generally larger than $10 million. The City (or the issuing City enterprise) has strong credit ratings. The City (or the issuing City enterprise) is well known to investors.
B. Negotiated Sale
The City recognizes that some securities are best sold through negotiation. Conditions #12..
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11 under which a negotiated sale would be preferred are as follows:
Interest rates are volatile.
Demand is weak or supply of competing bonds is high.
Market timing is important, such as for refundings.
The City (or the issuing City enterprise) has lower or weakening credit rating. The issuing City enterprise is not well known to investors. Sale and marketing of the bonds will require complex explanations about the issuer’s projects, media coverage, political structure, political support, funding, or credit quality.
The bond type and/or structural features are non-standard, such as for a forward delivery bond sale, issuance of taxable or variable rate bonds, or where there is the use of derivative products.
Bond insurance is not available or not offered.
Early structuring, investor outreach and other market participation by underwriters are desired.
The par amount for the transaction is small (generally under $10 million) or significantly larger than normal (generally over $100 million). Demand for the bonds by retail investors is expected to be high. Participation from Disadvantaged Business Enterprise (“DBE”) firms is required or desired.
C. Private Placement
From time to time the City may elect to privately place its debt. Such placement shall be considered if this method is demonstrated to result in a cost savings to the City or other benefits relative to other methods of debt issuance. As noted below, private placements may require compliance with disclosure requirements (see Section XV. F. Continuing Disclosure below).
D. Feasibility Analysis
Issuance of revenue bonds may be accompanied by a finding that demonstrates the projected revenue stream’s ability to meet future debt service payments.
XII. MARKET RELATIONSHIPS
A. Rating Agencies and Investors
The Director of Finance shall be responsible for maintaining the City’s relationships with Moody’s Investors Service, S&P Global Ratings, Fitch Ratings and any other major rating agency. The City may, from time to time, choose to seek ratings from only one or two of these agencies as circumstances dictate. In addition to general communication, the Director of Finance shall meet with credit analysts prior to each rated competitive or negotiated sale and/or offer conference calls with agency analysts in connection with the planned sale as needed.
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12 B. Other Jurisdictions/Conduit Financing
From time to time, the City may issue bonds on behalf of other public entities. While the City will make every effort to facilitate the desires of these entities, the Director of Finance will ensure that the highest quality financings are done and that the City is insulated from all manageable risks. The City may issue bonds through another issuing entity such as a Joint Powers Authority (“JPA”). The City may issue debt in this manner if it would result in the least costly method to issue debt (e.g. reduced costs of issuance).
The City will evaluate the timing of such issuance.
C. Fees
When appropriate, the City will charge an administrative fee equal to direct costs to reimburse its administrative costs incurred in debt issuance and ongoing reporting costs.
XIII. CONSULTANTS
Periodically, the City may create an approved pool of qualified financing team members, such as municipal advisors or underwriters.
A. Selection of Financing Team Members
The Director of Finance will make recommendations to the City Manager for all financing team members, with the City Council providing final approval.
B. Municipal Advisor
The City shall utilize a municipal advisor to assist in its debt issuance and debt administration processes as prudent. The municipal advisor must be registered as a Municipal Advisor with the Securities and Exchange Commission (“SEC”) and Municipal Securities Rulemaking Board (“MSRB”). Selection of the City’s municipal advisor(s) shall be based on, but not limited to, the following criteria:
Prior knowledge and experience with the City.
Experience in providing consulting services to complex issuers. Knowledge and experience in structuring and analyzing complex issues. Experience and reputation of assigned personnel.
Fees and expenses.
Municipal advisory services provided to the City shall include, but shall not be limited to the following:
Evaluation of risks and opportunities associated with debt issuance. Monitoring market conditions and opportunities.
Evaluation of proposals submitted to the City by investment banking firms. Structuring and pricing of debt.
Preparation of request for proposals for other financial services such as trustee and paying agent services, printing, credit facilities, remarketing agent services, etc. #12..
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13 Advice, assistance and preparation for presentations with rating agencies, credit providers and investors.
Assisting in preparation of official statements and other financing documents. Be available for other projects whenever needed.
The City also expects that its municipal advisor will provide the City with objective advice and analysis, maintain the confidentiality of City financial plans, and be free from any conflicts of interest.
C. Bond Counsel
City debt will include a written opinion by legal counsel affirming that the City is authorized to issue the proposed debt, that the City has met all constitutional and statutory requirements necessary for issuance, and a determination of the proposed debt’s federal income tax status. The approving opinion and other documents relating to the issuance of debt will be prepared by counsel with extensive experience in public finance and tax issues. The counsel will be selected by the City Attorney and subject to City Council approval.
The services of bond counsel may include, but are not limited to:
Rendering a legal opinion with respect to authorization and valid issuance of debt obligations including whether the interest paid on the debt is tax exempt under federal and State of California law;
Preparing all necessary legal documents in connection with authorization, sale, issuance and delivery of bonds and other obligations;
Unless this task is assigned to disclosure counsel, as selected by the City separately from bond counsel, preparing the preliminary and final official statements and commercial paper memoranda;
Participating in discussions with potential investors, insurers and credit rating agencies, if requested;
Providing continuing advice, as requested, on the proper use and administration of bond proceeds under applicable laws and the indenture, particularly arbitrage tracking and rebate requirements;
D. Disclosure Counsel
The City may utilize a separate firm to serve as disclosure counsel as it deems necessary.
If cost effective, bond counsel may also serve as disclosure counsel.
XIV. UNDERWRITER SELECTION
A. Senior Manager Selection
The City shall have the right to select a senior manager for a proposed negotiated sale.
The criteria shall include but not be limited to the following:
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14 The firm’s ability and experience in managing similar and/or complex transactions.
Demonstrated ability to structure debt issues efficiently and effectively. Prior knowledge and experience with the City.
The firm’s willingness to risk capital and demonstration of such. The firm’s ability to reach a wide network of investors. The firm’s ability to sell bonds at the lowest market interest rates. Quality and experience of personnel assigned to the City’s engagement. Financing and marketing plans presented.
B. Co-Manager Selection
Co-managers may be selected on the same basis as the senior manager. In addition to their qualifications, co-managers appointed to specific transactions will be a function of transaction size and the necessity to ensure maximum distribution of the City’s bonds.
C. Selling Groups
The City may establish selling groups in certain transactions. To the extent that selling groups are used, the City may make appointments to selling groups from within an existing pre-qualified pool of underwriters or through another process, as the transaction dictates.
D. Underwriter’s Counsel
In any negotiated sale of City debt in which legal counsel is required to represent the underwriter, the lead underwriter will make the appointment subject to the City’s right to object to any such appointment.
E. Underwriter’s Discount
The City will evaluate the proposed underwriter’s discount against comparable issues in the market. If there are multiple underwriters in the transaction, the City will determine the allocation of fees with respect to the takedown and management fee (if any). The determination of the size and allocation of the management fee will be based upon participation in the structuring phase of the transaction. Generally, the City will not pay for risk in its underwriter’s discount. All fees and allocation of the management fee will be determined prior to the sale date; a cap on management fee, expenses and underwriter’s counsel will be established and communicated to all parties by the City.
The senior manager shall submit an itemized list of expenses charged to members of the underwriting group. Any additional expenses must be substantiated.
F. Evaluation of Financing Team Performance
The City will evaluate each bond sale after its completion to assess the following: costs of issuance including underwriters’ compensation, pricing of the bonds in terms of the overall interest cost and on a maturity-by-maturity basis, and the distribution of bonds and sales credits. Following each sale, the municipal advisor shall provide a post-sale evaluation on the results of the sale to the City Council. #12..
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15 G. Syndicate Policies
For each negotiated transaction, the Director of Finance will review and approve syndicate policies that will describe the designation policies governing the upcoming sale.
The Director of Finance shall ensure receipt of each member’s acknowledgement of the syndicate policies for the upcoming sale prior to the sale date.
H. Designation Policies
To encourage the pre-marketing efforts of each member of the underwriting team, orders for the City’s bonds will be net designated, unless otherwise expressly stated. The City shall require the senior manager to:
Equitably allocate bonds to other managers and the selling group. Comply with MSRB regulations governing the priority of orders, compliance with retail order requirements and allocations.
Within 10 working days after the sale date, submit to the Director of Finance a detail of orders, allocations and other relevant information pertaining to the City’s sale.
I. Disclosure by Financing Team Members
All financing team members will be required to provide full and complete disclosure relative to agreements with other financing team members and outside parties. The extent of disclosure may vary depending on the nature of the transaction and for underwriters and municipal advisors shall, at a minimum, comply with applicable SEC and MSRB requirements. For firms acting as the City’s bond counsel, disclosure counsel, or municipal advisor, no agreements shall be permitted which could compromise the firm’s ability to provide independent advice which is solely in the City’s best interests or which could reasonably be perceived as a prohibited conflict of interest. All other conflicts must be disclosed to the City in accordance with applicable regulatory requirements. For legal counsel such conflicts disclosure shall, at a minimum, comply with applicable conflicts disclosure requirements for attorneys in the state.
XV. POST-ISSUANCE COMPLIANCE
A. General
In conjunction with the issuance of a tax-advantaged obligation, bond counsel issues an opinion that is in part based on the reasonable expectation that the issuer will comply with federal tax law requirements to preserve the tax-advantaged status of the obligation. The issuer agrees to comply with these requirements through representations it makes in the tax compliance certificate. The purpose of this Post-Issuance Compliance section is to establish policies and procedures in connection with the issuance of obligations, so as to (a) maximize the likelihood that the City satisfies all applicable post-issuance requirements of federal income tax law needed to preserve the tax exempt status of bonds, (b) ensure that the City will take any appropriate remedial actions on a timely basis if a future event occurs that could affect the tax-exempt status of bonds, and (c) maximize the likelihood that the City complies with applicable federal securities laws, including any #12..
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16 contractual obligations arising thereunder. The City reserves the right to use its discretion as necessary and appropriate to make exceptions or request additional provisions as circumstances warrant. The City also reserves the right to change these policies and procedures from time to time.
Issuers and borrowers are also required to disclose, on a periodic basis, financial information and certain other information that may impact their ability to service their debt. This ongoing reporting requirement is known as continuing disclosure. The requirements of continuing disclosures are directly applicable to underwriters and are set forth in Securities and Exchange Commission (“SEC”) Rule 15c2-12. The issuer makes representations in its official statements and other bond documents regarding its intent to comply as a matter of contract with the requirements of Rule 15c2-12.
B. Designation of Post-Issuance Compliance Officer
The City has established a Disclosure Working Group (“DWG”) consisting of the City’s Manager and Director of Finance. The DWG will establish appropriate written policies and procedures, which this document provides, and periodic training regarding continuing disclosure obligations to effect compliance with the federal securities laws. In connection with each primary offering subject to Rule 15c2-12, as well as annually and periodically when necessary in connection with its continuing disclosure filings required by contractual undertakings delivered in accordance with Rule 15c2-12, the DWG will notify its dissemination agent and others, as and when appropriate when developments and events affect the City that may give rise to a contractual obligation to provide additional disclosure or that may provide an opportunity for voluntary disclosure.
The Director of Finance, or his or her designee, shall be the Post-Issuance Compliance Officer (the “Compliance Officer”) for the City’s debt issuances (the “Bonds”). The Compliance Officer, if City staff, may designate such other personnel as may be necessary to assist in determining continuing compliance with all relevant law and regulations applicable to the continued favorable tax treatment of such indebtedness, and to comply with the record-keeping responsibilities outlined herein. At such time as the initial Compliance Officer is replaced or a new Compliance Officer is designated, the departing Compliance Officer will ensure that such successor is fully briefed as to the status of the City’s outstanding indebtedness and the location of records relating to such indebtedness, and that such successor receives training and consultation(s) with bond or disclosure counsel as to his or her duties as Compliance Officer under this Debt Policy.
C. External Advisors
The City shall consult with bond counsel and other legal counsel and advisors, as needed, so long as any Bonds remain outstanding, to identify requirements and to establish procedures necessary or appropriate so that tax-exempt interest on the Bonds will continue to be excludable from gross income for federal income tax purposes. Those requirements and procedures shall include future compliance with applicable private activity bond tests, arbitrage rebate requirements and all other applicable post-issuance requirements of federal tax law throughout (and in some cases beyond) the term of bonds.
The Compliance Officer shall conduct periodic reviews, at least annually, or more often #12..
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17 as may be necessary, to determine that the City remains in compliance with all laws and regulations, including, without limitation, the matters set forth herein. The Compliance Officer annual review shall include matters that relate to the tax status of the Bonds, continuing compliance with covenants that relate to the tax status of the Bonds, and any new matters or public finance developments that relate to the tax status of the Bonds or continuing compliance with such requirements. The City may consult with bond counsel in conducting its review and may engage expert advisors (each a “Rebate Analyst”) to assist in the calculation of arbitrage rebate payable in respect of the investment of Bond proceeds in the manner more fully set forth in the Tax Certificate.
D. Uses and Investments of Funds and Accounts
Various funds and accounts are established as security for the Bonds. The Compliance Officer shall prepare regular, periodic statements regarding the investments and transactions involving bond proceeds, which shall comprise part of the records required to be kept. The Compliance Officer will also review the disbursement of bond proceeds from Trustee records or City records, as applicable, to ensure that bond proceeds are expended in accordance with their intended purpose. The Compliance Officer shall report to the Finance Director (if the officer is a designee of the Finance Director) and the City Manager any expenditure which violates the provisions of any ballot measure, authorizing resolution, or trust document. If any Debt Service Fund ever contains any balance after the principal payment of the Bonds is made each year, except for a reasonable carryover amount which is less than the greater of the earnings on the Debt Service Fund for the immediately preceding year ending on such principal payment date (a “Bond Year”), or 1/12 of the principal and interest payments on the Bonds for the immediately preceding Bond Year, then the Compliance Officer will contact bond counsel to ensure that such facts will not cause the Bonds to become arbitrage bonds, to formulate a plan to remediate such condition, if necessary, and to determine an allowable use for such excess moneys and/or to determine if any yield restrictions apply. If any Debt Service Reserve Fund is ever funded (i) in an amount more or less than the required balance but declining in future years as detailed in the Tax Certificate, or (ii) is invested at a yield that is higher than the yield of the Bonds, then the Compliance Officer will contact bond counsel to ensure that such facts will not cause the Bonds to become arbitrage bonds, to formulate a plan to remediate such condition and/or to determine if any yield restrictions apply. Generally, if the Debt Service Reserve Fund ever contains a higher balance than required (either through the accrual of interest, investment gains, maturity of securities, or reduction in the Reserve Requirement) then the excess moneys should be dealt with as directed by the documents and approved by bond counsel. If any Construction Fund ever is invested at a yield higher than the yield of the Bonds or if moneys in the Construction Fund are not fully expended by three years after the original delivery date of the Bonds, then the Compliance Officer will contact bond counsel to ensure that such facts will not cause the Bonds to become arbitrage bonds, to formulate a plan for the investment and application of the remaining unexpended Bond Proceeds, which plan may include the redemption or defeasance of Bonds, and/or to determine if any yield restrictions apply.
E. Rebate Reporting
The use of bond proceeds and their investments must be monitored to ensure compliance #12..
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18 with arbitrage restrictions. The City will cause arbitrage rebate calculations to be completed, or cause to be completed by an experienced firm the City has retained for this purpose related to any bond issues, with any positive rebate paid every five years and as otherwise required by applicable provisions of the Internal Revenue Code and regulations.
Therefore, the Director of Finance shall ensure that proceeds and investments are tracked in a manner that facilitates accurate, complete calculation, and timely rebates, if necessary.
F. Continuing Disclosure
Appointment. Unless otherwise provided in any Continuing Disclosure Agreement executed in connection with Bonds pursuant to SEC Rule 15c2-12 (the “Continuing Disclosure Agreement”), the Compliance Officer shall also be the Dissemination Agent under such Continuing Disclosure Agreement. The Compliance Officer shall be responsible for and take all reasonable steps to ensure compliance with said Continuing Disclosure Agreement and shall monitor the operations of the Issuer for occurrence of any listed event (as set forth therein). For any Bonds for which it is designated to serve in such capacity, should the Compliance Officer no longer serve as Dissemination Agent, the City shall select an internal or external Dissemination Agent.
Responsibilities. The Dissemination Agent is responsible for the following (the “Continuing Disclosure Policies”):
Serving as a “point person” for personnel to communicate issues or information that should be or may need to be included in any Continuing Disclosure Agreement;
Identifying the officers and employees of the City who are most likely to first obtain knowledge of the occurrence of events that would require event filings; Monitoring compliance by the City with the Continuing Disclosure Policies, including timely dissemination of the annual report and event filings as described below;
Recommending changes to the Continuing Disclosure Policies to the City as necessary or appropriate;
Following up with others to make sure that assigned tasks have been completed on a timely basis and making sure that the continuing disclosure annual report is filed on a timely basis; and
Maintaining records documenting the City’s compliance with the Continuing Disclosure Policies and the Continuing Disclosure Agreement.
Filing Requirements. The City is required to file an annual report with the MSRB’s Electronic Municipal Market Access (“EMMA”) system each year. Such annual reports are required to include certain updated financial and operating information and audited financial statements. The Dissemination Agent will establish or cause to be established a calendar reminder of the city’s continuing disclosure obligations on July 1 each year. The City is also required to file notices of certain events with the MSRB’s EMMA system. #12..
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19 Upon the identification of the occurrence of a material event, the Dissemination Agent shall, in consultation with bond counsel, prepare, or cause to be prepared, a draft of the necessary notice (including compiling any materials or documents to be included with such notice) and shall notify such parties of the date by which such notice is to be filed. If it is not clear if the occurrence of an event constitutes an event that requires notification, then the Dissemination Agent shall consult with bond counsel to determine whether the City is required to file a notice concerning such event.
For any public debt issues (subject to contractual obligations under SEC Rule 15c2-12) issued on or after February 27, 2019, the City is required to commit to make additional disclosure with respect to private loans or financing leases (not sold through an official statement) or derivatives or credit support agreements (collectively “financial obligations”). The additional events will need to be provided to the City’s Dissemination Agent, for further filing with EMMA, within ten (10) business days of their occurrence:
Incurrence of a financial obligation of the City (and any obligated person, where applicable), if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the City (and any obligated person, where applicable), any of which affect security holders, if material;
Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the City (and any obligated person, where applicable), any of which reflect financial difficulties.
In addition, the Dissemination Agent will be responsible for providing notice, in a timely manner, of a failure to provide any of the City’s required annual financial information by the date specified in the continuing disclosure undertaking. The inability to make timely filings must be disclosed and is a negative reflection. While there is reliance on timely audit and preparation of the City’s annual report, the Director of Finance will ensure the City’s timely filing of its annual report on EMMA as soon as it is available.
G. Voluntary Disclosure Requirements
In addition to preparing annual reports and event notices, the City may wish to keep investors informed by providing information that is not required to be provided under Rule 15c2-12 or its continuing disclosure undertakings. Examples of such types of information are investments, interim financial information, capital improvement plans, fund balance policies, etc. and financial forecasts. Because providing this information is voluntary, the Compliance Officer will monitor for events which may materially affect the financial condition or operations of the City, so that a determination can be made if the event should be disclosed. The below list is comprised of events and financial disclosure which the MSRB has suggested issuers may wish to voluntarily disclose. Some of these are not applicable to the City’s public debt issues and financial obligations, but the City may wish to consider providing some of these to the City’s Dissemination Agent for further filing with EMMA:
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20 Amendment to continuing disclosure undertaking;
Change in obligated person (i.e., a person guaranteeing or supporting City debt); Notice to investors pursuant to bond documents;
Certain communications from the Internal Revenue Service; Secondary market purchases;
Capital or other financing plan;
Litigation/enforcement action;
Change of tender agent, remarketing agent, or other ongoing party; Change in fiscal year/timing of annual disclosure or accounting standard; Interim/additional financial information/operating data, budget; Investment/debt/financial policy changes;
Information provided to rating agency, credit/liquidity provider or other third party; and
Consultant reports.
Also, if the City maintains an Investor Relations website, or routinely posts City information packages, including interim financial information, capital improvement plans, etc. on its website, the City’s Compliance Officer should review and, in some cases, the Compliance Officer should reissue the posted material with an explanatory note (e.g., the interim financial information is presented on a cash, as opposed to accrual basis).
Currently, the City is not required to file interim financial information. In the future, if such filings are required in continuing disclosure undertakings, the City’s Compliance Officer will notify the Dissemination Agent for assistance when these filings become necessary.
H. Coordinating Continuing Disclosure with Primary Disclosure It is expected that the DWG will be responsible for collecting and reviewing information set forth in official statements prepared in connection with new bond offerings. Any Management’s Discussion and Analysis (“MD&A”) from the prior year’s audited financial statements will be reviewed to ensure that the unaudited information which was provided in that portion of the financial statements is updated to include added public debt and material financial obligations. Coordination with the City’s auditors will be essential, as well as careful review of the long-term debt notes in the financial statements and the checking of all bond ratings before each EMMA filing is made. Measures should be taken to assure information publicly available to investors is accurate. Further coordination between the DWG and the City’s website manager is essential before posting any financial information.
I. Website Disclosure
It is expected that the Compliance Officer will be responsible for monitoring website content and reviewing the information set forth on such website. Appropriate disclaimer language on the website will be considered in order to educate the viewer that specific information intended for investors can be found on the City’s EMMA page as well as the #12..
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21 investor’s acknowledgement of the limitations of such reliance. Coordination between the DWG and City officials will occur before the release of any public statements about any financial condition of the City.
J. Training for Employees and Issuer Officials
For City officials, compliance with federal securities law should be considered as important as compliance with local public meetings and records laws. To further this goal, the Compliance Officer shall call a meeting for an annual review or, if necessary, an interim review, of the continuing disclosure policies of the City, which all members of the DWG and additional invited officials and employees are expected to attend. The Compliance Officer shall be responsible for keeping a record of attendance. Furthermore, the members of the DWG and such invited officials and employees are expected to attend training sessions, at least annually, called by the Compliance Officer. Applicable policies and procedures will be updated by the City to reflect required changes on an as-needed basis.
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22 GLOSSARY
Arbitrage- The difference between the interest paid on the tax-exempt securities and the interest earned by investing the security proceeds in higher-yielding securities.
IRS regulations govern arbitrage on the proceeds from issuance of municipal securities.
Balloon Maturity- A later maturity within an issue of bonds that contains a disproportionately large percentage of the principal amount of the original issue.
Bond Allocation Policies- Outline as to how an investor’s order is filled when a maturity in an underwriting syndicate is oversubscribed. The senior managing underwriter and issuer decide how the bonds will be allocated among the syndicate.
There are three primary classifications of orders, which form the designation policy.
The highest priority is given to Net Designated orders; the next priority is given to Group Net orders and Member orders are given the lowest priority (unless the Member orders are retail orders in which case it would be given the highest priority).
Bullet Maturity- Maturity for which there are no sinking fund payments prior to the stated maturity date.
Call Provisions- The terms of the bond contract giving the issuer the right to redeem all or a portion of an outstanding issue of bonds prior to their stated dates of maturity at a specific price, usually at or above par.
Capitalized Interest- A portion of the proceeds of an issue that is set aside to pay interest on the securities for a specific period of time. Interest is commonly capitalized for the construction period of the project.
Commercial Paper- Very short-term, unsecured promissory notes issued in either registered or bearer form, and usually backed by a line of credit with a bank.
Competitive Sale- A sale of securities by an issuer in which underwriters or syndicates of underwriters submit sealed bids to purchase the securities in contrast to a negotiated sale.
Continuing Disclosure- The principle that accurate and complete information material to the transaction which potential investors would be likely to consider material in making investment decisions with respect to the securities be made available on an ongoing basis.
Credit Enhancement- Credit support purchased by the issuer to raise the credit rating of the issue. The most common credit enhancements consist of bond insurance, direct or standby letters of credit, and lines of credit.
Debt Service Reserve Fund- The fund in which moneys are placed which may be #12..
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23 used to pay debt service if pledged revenues are insufficient to satisfy the debt service requirements.
Deep Discount Bonds- Bonds that are priced for sale at a substantial discount from their face or par value.
Derivatives- A financial product whose value is derived from some underlying asset value.
Designation Policies- Concerning a negotiated sale of bonds, the rules regarding how the takedown (sales commission) is allocated among the underwriters for each order put in for the bonds.
Direct Purchase Loan- A source of financing where the loan is purchased by a financial institution instead of being offered to the general public for purchase. The loan can bear interest at a fixed rate or on a variable rate tied to market index (i.e. the Secured Overnight Financing Rate (“SOFR”) or Securities Industry and Financial Markets Association (“SIFMA”) Index). This form of financing does not require a remarketing agent to set the variable rate. As such, a Direct Purchase Loan can be used to replace traditional forms of variable-rate debt.
Escrow- A fund established to hold moneys pledged and to be used to pay debt service on an outstanding issue.
Expenses- Compensates senior managers for out-of-pocket expenses including:
underwriters counsel, DTC charges, travel, syndicate expenses, dealer fees, overtime expenses, communication expenses, computer time and postage.
Floating Rate Notes (“FRN”)- A note with a variable interest rate sold either in the public market or directly to financial institutions. The adjustments to the interest rate are typically tied to a certain index like SOFR or SIFMA and are made periodically.
The rate would continue to reset in the same manner through maturity. The SOFRbased floating rate note market typically does not require bank support and as a result, offers issuers an alternative to traditional floating rate debt.
Grant Anticipation Notes (“GAN”)- Short term notes issued by the government unit, usually for capital projects, which are paid from the proceeds of State or Federal grants of any type.
Letters of Credit- A bank credit facility wherein the bank agrees to lend a specified amount of funds for a limited term.
Management Fee- The fixed percentage of the gross underwriter’s spread which is usually only paid to the managing underwriter for the structuring phase of a transaction.
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24 Members- Underwriters in a syndicate other than the senior underwriter.
Moody’s Median- Key financial, debt, economic and tax base statistics with median values for each statistic presented. Moody’s uses audits for both rated and unrated agencies to ensure that the medians presented are representative of all agencies.
Negotiated Sale- A method of sale in which the issuer chooses one underwriter to negotiate terms pursuant to which such underwriter will purchase and market the bonds.
Original Issue Discount- The amount by which the original par amount of an issue exceeds its public offering price at the time it is originally offered to an investor.
Pay-As-You-Go- An issuer elects to finance a project with existing cash flow as opposed to issuing debt obligations.
Present Value- The current value of a future cash flow when discounted to the present at a specific annual rate.
Private Placement- The original placement of an issue with one or more investors or financial institutions as opposed to being publicly offered or sold.
Rebate- A requirement imposed by the Tax Reform Act of 1986 whereby the issuer of the bonds must pay the IRS an amount equal to its profit earned from investment of bond proceeds at a yield above the bond yield calculated pursuant to the IRS code together with all income earned on the accumulated profit pending payment.
Tax and Revenue Anticipation Notes (“TRAN”)- Short-term notes issued by a government unit, usually for capital projects, which are paid from the proceeds of sales tax or other revenue sources.
Selling Groups- The group of securities dealers who participate in an offering not as underwriters but rather as those who receive securities less the selling concession from the managing underwriter for distribution at the public offering price.
Syndicate Policies- The contractual obligations placed on the underwriting group relating to distribution, price limitations and market transactions.
Underwriter- A dealer that purchases new issues of municipal securities from the Issuer and resells them to investors.
Underwriter’s Discount- The difference between the price at which the Underwriter buys bonds from the Issuer and the price at which they are reoffered to investors.
Variable Rate Debt- An interest rate on a security which changes at intervals according to an index or a formula or other standard of measurement as stated in the bond contract.
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25 1. City of Modesto Philosophy Regarding Use of Interest Rate Swaps A. Introduction
Interest rate exchange agreements or interest rate swaps (“Swaps”) and related financial instruments and derivatives may be appropriate interest rate management tools in certain circumstances. Properly used, Swaps can increase the City of Modesto’s (the “City”) financial flexibility and provide opportunities for interest rate savings. This policy (“Swap Policy”) shall be followed in conjunction with the City’s related debt issuance-related policies and procedures (the “Debt Policy”).
Swaps are appropriate to use when they achieve a specific financial objective consistent with the City’s overall Swap Policy and Debt Policy. Swaps may be used, for example, to lock-in a current market fixed rate or create additional variable rate exposure. Swaps may be used to produce interest rate savings or alter the pattern of debt service payments.
Swaps may be used to cap, limit or hedge variable rate payments. Options granting the right to commence or cancel an underlying Swap are permitted to the extent the Swap itself is otherwise consistent with this Swap Policy.
The authorized Swaps contemplated in this Swap Policy are intended to reduce the amount or duration of interest rate risk, or produce a lower cost of borrowing when used in combination with the issuance of bonds.
B. Rationales for Utilizing Interest Rate Swaps
The use of Swaps and related financial instruments should balance the City’s primary objectives of reducing the cost of capital, minimizing the City’s exposure to interest rate volatility, and gaining flexibility in structuring and managing its debt portfolio over time with the risks associated with these tools and instruments. Examples of how the City’s debt management objectives can be achieved through the use of Swaps and other financial instruments are described below:
Reduce borrowing costs at the time of issuance
Create synthetic fixed rate debt through a floating-to-fixed Swap. Actively manage interest rate risk
Lock-in current market rates through (forward starting) floating-to-fixed Swap. Balance financial risk
Purchase of an interest rate cap.
CITY OF MODESTO
CITY COUNCIL POLICY
Latest Revision Date: 06/25/2024
ADDENDUM: Interest Rate Swap Policy
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26 Achieve appropriate asset/liability match
Create variable rate exposure through fixed-to-floating Swap.
Under no circumstances will Swaps be used for speculative purposes, e.g., to realize trading gains.
2. Authority for Entering into Swap Agreements
The purpose of this Swap Policy is to integrate the use of Swaps into the City’s overall Debt Policy, and other funds of the City where particular debt strategies, both long-term and shortterm, factor into these decisions. Swaps will not be used for speculation. The City Manager, in conjunction with the Director of Finance, shall be responsible for determining if and when it is in the City’s overall best financial interests to enter into a Swap or related financial instruments covered by this Swap Policy.
The City shall comply with all applicable laws. The City must receive an opinion acceptable to the financial market from a nationally recognized law firm that the swap contract is a legal, valid, and binding obligation of the City and that entering into such a contract complies with applicable provisions of the City Charter and State statutes.
3. Permitted Instruments
The City may utilize financial instruments that (i) lower its interest expense, (ii) manage its financial risk or (iii) improve its financial condition.
The City shall not use financial instruments that (i) create substantial leverage or financial risk, (ii) lack adequate liquidity to terminate at market, (iii) provide insufficient price transparency to allow reasonable valuation on an ongoing basis, or (iv) are primarily speculative in nature.
The use of Swaps and other hedging products should produce a result not otherwise available in the cash market (i.e., lack of advance refunding, non-callable debt), or provide a higher level of net savings compared to conventional financing methods.
The City may expressly utilize the following financial instruments, after identifying the financial objective(s) to be realized and assessing the attendant risks:
Current or forward starting floating-to-fixed rate swaps Designed to reduce a fixed interest rate below that which would otherwise be available through the use of traditional fixed rate debt. Current or forward starting fixed-to-floating rate swaps Designed to create additional variable interest rate exposure. Rate Locks
Cash-settled forward contracts based on indices such as the MMD™ 1 “AAA”
1. MMD™ is a trademark of Municipal Market Data, a Thompson Financial company. #12..
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27 scale or the Bloomberg Valuation Service (“BVAL”) AAA Muni Callable Curve. Interest Rate Caps, Floors or Collars
Financial contracts that limit exposure to interest rate volatility. Options on Variable Rate Indices
Indices could include the Securities Industry and Financial Markets Association (“SIFMA”) Index2, Secured Overnight Financing Rate (“SOFR”)3, etc. Options on Swaps (“Swaptions”)
Methods used to control the commencement or cancellation of interest rate swaps. Basis Swaps
Floating-to-floating rate swaps using different variable-rate indices, such as a swap from the SIFMA Index to a percentage of SOFR.
4. Swap Risk Analysis
The City shall require for each proposed financing an evaluation of all financial products with respect to the unique risks that they bear. A specific determination must be made that the proposed or expected benefits exceed the identified risks by an adequate margin over those available in the traditional cash market. At a minimum, the City shall perform an evaluation of the risks and what steps have been taken to mitigate any risks. The City shall retain a municipal/swap advisor to assist in assessing these risks. Questions that may arise include the following:
Market or Interest Rate Risk
Does the transaction hedge (i.e., decrease or eliminate) or increase interest rate volatility?
Tax Risk
How is the transaction or its benefits affected by a future change in federal income tax policy?
Termination Risk
Under what circumstances might the transaction be terminated? At what value? Risk of Uncommitted Funding (Put Risk)
Does the transaction create additional financing dependent upon third-party participation (such as requiring a letter of credit, grant or other anticipation funding, etc.)?
Rollover Risk
Is the term of the Swap shorter than the term of the underlying hedged debt or financial instrument? Does the City anticipate entering into another Swap when the first Swap terminates?
Legal Risk
Is the transaction expressly legally authorized?
Counterparty Risk
What is the creditworthiness of the counterparty?
2. The SIFMA Index is an index of more than 500 high-grade, tax-exempt, weekly reset Variable Rate Demand Obligation issues.
3. SOFR is a taxable rate which is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, published daily by the Federal Reserve Bank.
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28 Rating Agency Risk
Is the proposed transaction consistent with the City’s current ratings and ratings objectives?
Basis Risk
Is it anticipated that the projected Swap payments the City will receive closely match the debt service payments it will make?
Index Risk
Does the transaction include provisions acceptable to the City regarding any change in indices used to calculate payments or obligations? Subsequent Business Conditions
Does the transaction or its benefits depend upon the continuation, or realization, of specific industry business conditions (e.g., unusual demand for state-specific variable rate debt)?
Operational Risk
Does the City have adequate systems, policies, and practices in place to monitor and manage the transaction over its term?
5. Swap Procurement and Execution
A. Procurement
The City will not have a fixed policy with respect to the procurement of Swaps and other financial instruments authorized by this Swap Policy. On a product-by-product basis, the City will have the authority to negotiate or competitively bid the procurement of financial instruments that have customized or specific attributes designed on its behalf. The Director of Finance will be responsible for determining the method of procurement for Swaps and related financial instruments. A municipal/swap advisor shall be retained to assist the Director of Finance in evaluating the proposed pricing of Swaps or related financial instruments.
B. Swap Execution
The Director of Finance may recommend the use of financial derivative products if they:
1. Provide a specific benefit not otherwise available;
2. Produce greater expected interest rate savings than cash market alternatives;
3. Do not create substantial leverage or financial risk;
4. Result in an improved capital structure or better asset/liability match; and
5. Reasonably pass the Swap Risk Analysis required by Section 4. Swap Risk Analysis of this Swap Policy.
C. Credit Rating Designations
For purposes of this Swap Policy, references to credit ratings will be based on those ratings issued by Moody’s Investors Service, and/or S&P Global Ratings, and/or Fitch Ratings. The credit ratings will reflect the designations assigned by each of these rating agencies utilized for comparable credit and will be listed for each rating agency utilized in the order shown in the preceding sentence.
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29 6. Swap Documentation
The City will use a standard International Swap and Derivatives Association, Inc. (“ISDA”) Master Agreement, including the Counterparty Schedule to the Master Agreement and a Credit Support Annex (utilizing such versions thereof as the Director of Finance shall determine), as supplemented and amended in accordance with the recommendations of the City’s financial/swap advisor and legal counsel. Each Swap entered into by the City shall include payment, term, security, collateral, default, remedy, termination and other terms, conditions and provisions as the Director of Finance may deem necessary or desirable.
A. Terms and Notional Amount of Swap Agreement
The City shall determine the appropriate term for Swaps on a case-by-case basis. The slope of the swap curve, the marginal change in swap rates from time to time along the swap curve, and the impact that the term of the Swap will have on the City’s overall financial (e.g., interest rate, market value, counterparty, etc.) exposure shall be considered in determining the appropriate term of any Swap agreement. In connection with the issuance or carrying of bonds, the term of the Swap agreement between the City and qualified swap counterparty shall not extend beyond the final maturity date of existing City debt, or in the case of a refunding transaction, beyond the final maturity of the refunding bonds. At no time shall the total net notional amount of all Swaps, excluding any offsetting Swaps, exceed the total amount of outstanding applicable bonds. Variable rate debt exposure created through the use of Swaps will be consistent with the limitations set forth in the City’s adopted Debt Policy. Terms and conditions of any Swap shall be negotiated by the Director of Finance in the best interests of the City subject to the applicable legal provisions and this Swap Policy. The Swap agreements entered into between the City and each counterparty shall include payment, term, security collateral, default, remedy, termination, and other terms, conditions and provisions as the Director of Finance, in consultation with City legal counsel and its swap advisor, deems necessary or desirable.
Subject to the provisions contained herein, the City’s swap documentation and terms should include the following:
The City will be able to terminate the swap without cause subject to market termination costs.
The swap counterparty will only be able to terminate the swap if the City’s credit ratings fall below a certain pre-determined threshold and/or the City fails to perform, as required by the swap contract.
Governing law for Swaps will be New York, but should reflect California authorization provisions.
The specified indebtedness related to credit events in the Master Agreement should be narrowly drafted and refer only to specific debt of the issuing fund. Eligible collateral should be limited to Treasuries, Federal Agencies and any other securities which, in the City’s sole discretion, shall be deemed reasonable and creditworthy.
Collateral thresholds should be set on a sliding scale reflective of credit ratings. #12..
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30 Termination value should be set by “market quotation” methodology. Whenever possible use a Credit Support Annex to document swap termination value collateralization procedures.
Ratings downgrade triggers.
7. Policy on Swap Counterparties
The City shall only do business with highly rated counterparties, and will structure swap agreements to protect itself from credit deterioration. All Swap transactions shall contain provisions granting the City the right to optionally terminate a swap agreement at-market at any time over the term of the agreement.
A. Qualified Swap Counterparties
The City should not have an immutable credit standard. However, the City shall attempt to do business with highly rated counterparties the long-term ratings of which at the date of execution are at least “Aa” or “AA” by one or more Nationally Recognized Statistical Ratings Organizations (“NRSRO”) and no less than “A2” or “A” by one or more NRSRO.
For lower rated counterparties, the City should seek credit enhancement in the form of:
1. Contingent swap counterparty providing support;
2. Collateral;
3. Ratings downgrade triggers; and,
4. Minimum rating threshold of “Baa3/BBB-/BBB-,” below which provisions will allow an assignment or trigger an additional termination event, with the counterparty as the affected party (i.e., the counterparty would pay market-based transaction costs).
In addition, the counterparty must have a demonstrated record of successfully executing swap transactions as well as creating and implementing innovative ideas in the swap market. The City shall be authorized to enter into interest rate swap transactions only with qualified swap counterparties.
8. Limitations on Counterparty Exposure
In order to diversify the City’s counterparty credit risk, and to limit the City’s credit exposure to any one counterparty, limits will be established for each counterparty based upon both the credit rating of the counterparty as well as the relative level of risk associated with each existing and proposed swap transaction. The guidelines shown in the following table provide general termination exposure guidelines with respect to whether the City should enter into an additional transaction with an existing counterparty. The City may make exceptions to the guidelines at any time to the extent that the execution of a swap achieves one or more of the goals outlined in these guidelines or provides other benefits to the City. In general, the maximum net termination exposure to any single counterparty should be set so that it does not exceed a prudent level as measured against the gross revenues, available assets or other financial resources of the City.
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31 For example, if the City has two Swaps with one counterparty, and if the first Swap’s market value is positive $10 million and the second Swap’s market value is negative $20 million, then the City’s total net exposure to the counterparty is negative $10 million.
Such guidelines will also not mandate or otherwise force automatic termination by the City or the counterparty. Maximum net termination exposure is not intended to impose retroactively any terms and conditions on existing transactions. Such provisions will only act as guidelines in making a determination as to whether or not a proposed transaction should be executed given certain levels of existing and projected net termination exposure to a specific counterparty. Collateral posting guidelines are described in the collateral section below. The calculation of net termination exposure per counterparty will take into consideration multiple transactions, some of which may offset the overall exposure to the City.
Under this approach, the City will set limits on individual counterparty exposure based on existing as well as new or proposed transactions. The sum of the current market value and the projected exposure shall constitute the maximum net termination exposure. For outstanding transactions, current exposure will be based on the market value as of a recently completed swap valuation report provided by the City’s swap advisor. Projected exposure shall be calculated based on the swap’s potential termination value taking into account possible adverse changes in interest rates as implied by historical or projected measures of potential rate changes applied over the remaining term of the swap. For purposes of this calculation, the City shall include all existing and projected transactions of an individual counterparty and all transactions will be analyzed in aggregate such that the maximum exposure will be additive.
The exposure thresholds, which will be reviewed periodically by the City to ensure that they remain appropriate, will also be tied to long-term credit ratings of the counterparties and whether or not collateral has been posted as shown in the table below. If a counterparty has more than one rating, the lowest rating will govern for purposes of the calculating the level of exposure. If contingent swap counterparty or swap insurance is used to provide financial support for the primary counterparty, the rating of the support entity shall be used. A summary table is provided below:
Credit Ratings
Maximum
Collateralized Net
Termination Value
Maximum
Uncollateralized
Net Termination Value
Maximum Net
Termination
Exposure
AAA N/A $30.0 million N/A
AA Category $30.0 million $20.0 million $30.0 million
A Category $20.0 million $10.0 million $20.0 million
Below A Category $10.0 million $5.0 million $15.0 million If the exposure limit is exceeded by counterparty, the City shall conduct a review of the exposure limit per counterparty. The City, in consultation with its bond counsel and swap advisor, shall explore remedial strategies to mitigate this exposure. #12..
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32 9. Benefit Expectation
Financial transactions, using Swaps or other derivative products, intended to produce the effect of a synthetic advance refunding, must generate at least 25% greater savings than the benefit threshold then in effect for fixed-rate bonds as determined by the City’s Director of Finance. (See Debt Management Policy Section X.A. Debt Service Savings). The higher savings target reflects the greater complexity and higher risk of derivative financial instruments.
In calculating the prospective savings against the target for implementing a fixed-to-variable swap, the cost of remarketing, in addition to the cost of credit and liquidity fees must be added to the variable rate representing the ten-year average of comparable variable rate securities.
10. Termination Provisions
All swap transactions shall contain provisions granting the City the right to optionally terminate a swap agreement at market at any time over the term of the agreement, but shall NOT grant this right to the counterparty. In general, exercising the right to terminate an agreement produces a benefit to the City, either through the receipt of a payment from a termination, or if the termination payment is made by the City, in conjunction with a conversion to a more beneficial (desirable) City debt obligation, as determined by the City.
11. Collateral
As part of any swap agreement, the City shall require collateralization or other credit enhancements to secure any or all swap payment obligations. As appropriate, the City, in consultation with its bond counsel and swap advisor, may require collateral or other credit enhancements to be posted by each swap counterparty under the following circumstances:
Each counterparty to the City may be required to post collateral if the highest credit rating of the counterparty or parent falls below the “Aa/AA” category. Additional collateral for further decreases in credit ratings of each counterparty shall be posted by each counterparty in accordance with the provisions contained in the collateral support agreement to each counterparty with the City.
Collateral shall be deposited with a third-party trustee, or as mutually agreed upon between the City and the counterparty.
A list of acceptable securities that may be posted as collateral and the valuation of such collateral will be determined and mutually agreed upon during negotiation of the swap agreement with each swap counterparty.
The market value of the collateral shall be determined on at least a weekly basis. The City shall determine the reasonable threshold limits for the initial deposit and for increments of collateral posting thereafter.
The City shall determine on a case-by-case basis whether other forms of credit enhancement, such as swap insurance, are more beneficial in lieu of the posting of additional collateral.
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33 The City shall evaluate the performance of the swap relative to the rate on the bonds. The City shall compute the effective cost of borrowing inclusive of all fees and costs associated with the underlying financing.
12. Conformance with Dodd-Frank
It is the intent of the City to conform this Swap Policy to the requirements relating to legislation and regulations for over-the-counter derivatives transactions under Title VII of the Wall Street Transparency and Accountability Act of 2010, as supplemented and amended from time to time (herein collectively referred to as “Dodd-Frank”). Pursuant to such intent, it is the policy of the City that: (i) each swap advisor engaged or to be engaged by the City will function as the designated Qualified Investment Representative of the City, sometimes referred to as the “Designated QIR”; (ii) each swap advisor agrees to meet and meets the requirements specified in Commodity Futures Trading Commission Regulation 23.450(b)(1) or any successor regulation thereto (herein referred to as the “Representative Regulation”) (iii) each swap advisor provides a written certification to the City to the effect that such swap advisor agrees to meet and meets the requirements specified in the Representative Regulation; and (iv) the City relies on the advice of its swap advisor with respect to transactions authorized pursuant to this Swap Policy and not rely on recommendations, if any, presented by any counterparty with respect to transactions authorized pursuant to this Swap Policy.
13. Monitoring and Reporting
At least once per year, normally as part of the City’s Annual Comprehensive Financial Report (“Annual Report”), or as requested by the City Council, the Director of Finance shall prepare information describing the various Swaps and financial arrangements entered into by the City pursuant to this Swap Policy that are in effect as of the date of the report’s publication. The report shall include the following information:
1. A summary of key terms of the agreements, including notional amounts, interest rates, maturity and method of procurement.
2. The mark-to-market value of each agreement.
3. The full name, description, and credit ratings of each counterparty or the applicable guarantor.
4. The amounts that were required to be paid and received and any amounts that were actually paid and received.
5. A listing of any credit enhancement, liquidity facility, or reserves and an accounting of all costs and expenses associated with the credit enhancement, liquidity facility, or reserves.
6. The aggregate mark-to-market value and potential termination value for each swap by counterparty.
7. A discussion of other risks associated with each transaction.
At the end of each fiscal year, the Director of Finance shall provide to the City Council all information required for financial reporting under Government Accounting Standards Board #12..
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34 (“GASB”) requirements as well as any other reporting or disclosure requirements. The City shall adhere to California Government Code Section 5922 and applicable GASB guidelines for reporting and disclosure guidelines for derivative products. #12..
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DEBT MANAGEMENT POLICY
– ANNUAL UPDATES
Finance Committee, May 20, 2024
DeAnna Christensen, Director of Finance
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● The purpose of this Policy is to organize and formalize debt issuancerelated policies and procedures for the City. ● The primary objectives of the City’s debt and financing-related activities are to maintain cost-effective access to the capital markets through the following:
○ Prudent yet flexible policies.
○ Moderate debt principal and debt service payments through effective planning and project cash management.
○ Achieve the lowest cost of borrowing.
○ Achieve the highest practical credit ratings.
BACKGROUND
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● As part of the City Debt Management policy, City staff review any policy updates in coordination with the City’s financial advisors, Public Financial Management and bond counsel, Norton Rose ● As part of our annual review, the primary changes were focused on formatting and grammatical changes, but no changes of content were made during this annual review
BACKGROUND
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● This policy captures the minimum reserve requirements for our utility funds which is 25% of operating expenses
● The utility debt coverage ratio of 1.5 is defined for both utilities but the City targets above 2.0 to maintain strong credit ratings
● The policy outlines different debt financing options defined by state and federal law
● When exploring refinancing options, the City must establish a minimum net present value savings threshold of 3% of the refunded bond principal which is actively under review for the City’s debt portfolio
INFORMATIONAL UPDATES
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● Motion accepting the updates to the City’s Debt Management Policy and forwarding to Council for approval
STAFF RECOMMENDATION
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QUESTIONS?
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CITY OF MODESTO
COUNCIL AGENDA REPORT
DATE OF MEETING:
June 25, 2024
Date: May 31, 2024
TO: Mayor and City Council
THROUGH: Joseph P. Lopez, City Manager
FROM: DeAnna Christensen, Director of Finance
SUBJECT: Investment Policy Updates
CONTACT: Calogero Maniscalco, Senior Financial Analyst
[email protected], 209-577-5219
DESCRIPTION:
Consider approving the updates to the City’s Investment Policy. (Funding Source: Not Applicable) STRATEGIC PLAN ELEMENT:
This item supports the City of Modesto 2020-2025 Strategic Plan focus of Governance and Service Delivery under Goal H: Achieve Financial Sustainability.
BACKGROUND:
The Finance Department deposits and invests funds in accordance with the principles of sound treasury management and applicable laws. Local agencies are no longer required to submit a quarterly investment report or Investment Policy to their legislative body for review and approval on an annual basis. City staff believes it is important to keep the City Council informed on all of the City’s investment activity and therefore will continue to present monthly investment reports to Council. The Finance Department will also continue to present the City’s Investment Policy to Council for review and approval on a yearly basis.
DISCUSSION:
PFM Asset Management LLC (“PFMAM”), the City’s investment advisor, provides investment management, research and supervision of the City’s Managed Funds. PFMAM completed their annual review of the City’s Investment Policy and is recommending changes to the Policy to be consistent with changes in the sections of the California Government Code 53560 et seq. (the “Code”) that govern the investment of public funds, and to better align Policy language with Code language. PFMAM’s recommended changes are discussed below, and incorporated in the attached Policy documents:
In the Policy’s Mortgage and asset-back securities section, language was updated to more clearly explain the limitations that apply to these securities. #13..
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City Council, June 25, 2024
Investment Policy Updates
In the Policy Review section, language was revised to state that the policy need only be brought to City Council for approval when changes are made to the policy, and not on an annual basis.
A copy of the proposed Investment Policy is attached (Attachment 1), with revisions indicated/underlined. An additional copy is attached (Attachment 2), with the same revisions accepted and integrated in the body of the text (a “clean” copy of the updated Policy).
Changes to the Policy are subject to approval by the City Council at a legally noticed public meeting.
FISCAL IMPACT:
There is no direct fiscal impact associated with this action.
COMMITTEE RECOMENTATION:
The Finance Committee approved the Investment Policy updates at their May 20, 2024, meeting and recommended forwarding to Council for approval.
RECOMMENDED COUNCIL ACTION:
Staff Recommendations:
Resolution approving the updates to the City’s Investment Policy.
Approved by:
DeAnna Christensen, Director of Finance
Joseph P. Lopez, City Manager
Attachments:
1. Resolution
2. Investment Policy (FY25 With Edits)
3. Investment Policy (FY25 Clean Copy)
4. Investment Policy Finance Committee Presentation
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1 MODESTO CITY COUNCIL
RESOLUTION NO. 2024-XX
RESOLUTION APPROVING THE UPDATES TO THE CITY’S INVESTMENT POLICY
WHEREAS, pursuant to the City of Modesto Investment Policy, last adopted on May 2, 2023 the Investment Policy shall be reviewed at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity and yield, and its relevance to current law and financial and economic trends, and WHEREAS, staff has identified the need to update the City’s Investment Policy in order to continue to effectively invest funds in accordance with the principles of sound treasury management and applicable laws, and
WHEREAS, the City desires to adopt the Investment Policy.
NOW, THEREFORE, BE IT RESOLVED by the Council of the City of Modesto, that it hereby approves the updates to the City’s Investment Policy as outlined in Exhibit A, incorporated herein by this reference.
BE IT FURTHER RESOLVED that City staff is hereby authorized and directed to proceed with any and all actions deemed necessary or advisable, following the adopted policy guidelines pursuant to this Resolution, in connection with the future investments of funds, for future consideration by this City Council. #13..
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2 The foregoing resolution was introduced at a regular meeting of the Council of the City of Modesto held on the 25th day of June, 2024 by Councilmember ?, who moved its adoption, which motion being duly seconded by Councilmember ?, was upon roll call carried and the resolution adopted by the following vote:
AYES: Councilmembers:
NOES: Councilmembers:
ABSENT: Councilmembers:
ATTEST: _____________________________
DIANE NAYARES-PEREZ, CMC,
City Clerk
(SEAL)
APPROVED AS TO FORM:
BY:
JOSE M. SANCHEZ, City Attorney
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1 CITY OF MODESTO
CITY COUNCIL POLICY
LATEST REVISION DATE:
04/17/2023
06/25/2024
POLICY NUMBER: 1.019
CITY DEPARTMENT: Finance
SUBJECT: Investment Policy
PURPOSE:
The purpose of this document is to identify various policies and procedures that enhance opportunities for a prudent and systematic investment policy and to organize and formalize investment-related activities.
SCOPE:
The Investment Policy applies to all funds and investment activities of the City except the investment of bond proceeds, which are governed by the appropriate bond documents, and any pension or other post-employment benefit funds held in a trust.
BACKGROUND:
Under Section 2-3.401 of the Municipal Code, it is the function of the Finance Department to deposit and invest funds in accordance with sound treasury management. As a charter city, Modesto operates its pooled idle cash investment under the “prudent investor” rule which states that:
“When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with the care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency.”
The City is also governed by Sections 53600 et seq. of the California Government Code. This affords the City a broad spectrum of investment opportunities, so long as the investment is deemed prudent and allowable under current legislation of the State of California and the charter of the City of Modesto.
On an annual basis, the Finance Director/Treasurer will render to the City Council the statement of investment policy. The report will be considered, with any changes, by the City Council at a public meeting.
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2 ETHICS AND CONFLICTS OF INTEREST
Officers and employees involved in the investment process will refrain from personal business activities that could conflict with proper execution of the investment program, or which could impair their ability to make impartial decisions.
INVESTMENT REPORT
The Finance Director/Treasurer shall provide the City Council with a monthly report of investment transactions. The report shall contain the following:
1. The type of investment, issuer, purchase date, date of maturity, credit rating, overall portfolio yield based on cost, total par and dollar amount invested on all securities, investments and monies.
2. The weighted average maturity of the portfolio.
3. A description of any funds, investments or programs that are under management of contracted parties, including lending programs. Funds and investments held by contracted parties shall be reported at market value and the source of valuation shall be reported.
4. The market value as of the date of the report, and the source of the valuation.
5. A statement of compliance with the investment policy or manner in which the portfolio is not in compliance.
6. A statement denoting the City’s ability to meet its expenditure requirements for the next six months or provide an explanation as to why sufficient money shall, or may, not be available.
INVESTMENT CRITERIA
Public funds are invested in the following manner in order of priority:
1. Safety of Principal
The duty of the Finance Director/Treasurer is to protect, preserve and maintain cash and investments on behalf of the citizens of the community. To guard against loss of principal, only prudent and safe investments will be considered.
2. Liquidity
The receipt of revenues and maturities of investments should be scheduled so that adequate cash will be available to meet disbursements. An adequate portion of the portfolio should be maintained in liquid short-term instruments which can be readily converted to cash if necessary.
3. Return on Investment
The investment portfolio of the City shall be designed with the objective of attaining a market rate of return on its investments consistent with the constraints imposed by its safety objective and cash flow considerations. Return becomes a consideration only after the basic requirements of safety and liquidity have been met.
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3 SAFEKEEPING AND CUSTODY
All security transactions entered into by the City shall be conducted on a delivery-versus payment basis. Securities will be held by third party custodian designated by the Finance Director/Treasurer and evidenced by safekeeping receipts.
The only exception to the foregoing are Local Agency Investment Pools, Certificates of Deposit, and money market funds since the purchased securities are not deliverable. In all cases, purchased securities shall be held in the City’s name.
AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
The Finance Director/Treasurer will maintain a list of financial dealers and institutions qualified and authorized to transact business with the City.
The purchase by the City of any investment other than those purchased directly from the issuer, will be purchased either from an institution licensed by the State as a broker-dealer, as defined in Section 25004 of the Corporations Code, which is a member of the Financial Industry Regulatory Authority (FINRA), or a member of a federally regulated securities exchange, a national or state chartered bank, a federal or state association (as defined by Section 5102 of the Financial Code), or a brokerage firm designated as a Primary Government Dealer by the Federal Reserve Bank.
The Finance Director/Treasurer will investigate all institutions that wish to do business with the City, to determine if they are adequately capitalized, make markets in securities appropriate for the City’s needs, and agree to abide by the conditions set forth in the City’s Investment Policy and any other guidelines that may be provided. This will be done annually by having the financial institutions:
1. Provide written notification that they have read, and will abide by, the City’s Investment Policy.
2. Submit their most recent audited Financial Statement within 120 days of the institution’s fiscal year end.
If the City has an investment advisor, the investment advisor may use its own list of authorized broker/dealers to conduct transactions on behalf of the City.
Purchase and sale of securities will be made on the basis of competitive bids and offers with a minimum of three quotes being obtained.
PERFORMANCE STANDARDS
The investment portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow needs. The City will measure the portfolio’s performance against a market benchmark that is commensurate with the City’s investment risk constraints and the cash flow characteristics of the portfolio.
AUTHORIZED INVESTMENTS
Credit criteria and maximum percentages listed in this section refer to the credit of the issuing organization at the time the security is purchased. The City may from time to time be invested in a #13..
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4 security whose rating is downgraded subsequent to the date of purchase. In the event a rating drops below the minimum allowed rating category for that given investment type, the investment advisor shall notify the Finance Director and/or Designee and recommend a plan of action. The City will limit investments in any one non-government issuer, except investment pools, to no more than 5% regardless of security type. A security purchased in accordance with this section shall not have a forward settlement date exceeding 45 days from the time of investment. Commencing with Section 53600 of Article 1, Chapter 4 of the Government Code of the State of California, surplus money may be invested in the following:
INVESTMENT INSTRUMENT SUMMARY
Security Type
Maximum
Maturity
Min Credit
Quality
Authorized
Investment
Limit
Per Issuer
Limit
A. City Issued Bonds 5 Years None None None
B. US Treasury Notes/ Bills 5 Years None None None
C. State of California Securities 5 Years “A” None None D. California Municipal Securities 5 Years “A” None None E. Other 49 State Municipal Securities 5 Years “A” None None F. Federal Agencies 5 Years None None None
G. Banker’s Acceptance (BA) 180 days “A-1” 40% 5%
H. Commercial Paper 270 days “A-1”/ “A” 40% 5%
I. Certificates of Deposit 1 Year FDIC Insured or
Collateralized 20% 5%
J. Negotiable Certificates of Deposit 5 Years “A” 30% 5% K. Repurchase Agreements 90 Days None None 20%
L. Reverse Repurchase Agreements 92 Days None 20% 5%
M. Medium Term Notes (MTN) 5 Years “A” 30% 5%
N. Money Market Fund None “AAAm” 20% 10%
O. LAIF None None None None
P. Mortgage and Asset-Backed
Securities 5 Year “AA” 20% 5%
Q. CAMP None None None None
R. Supranationals 5 Years “AA” 30% 5%
A. City of Modesto bonds. Bonds issued by the City.
B. U.S. Treasury securities. United States Treasury notes, bonds, bills or certificates of indebtedness or those for which the faith and credit of the United States are pledged for the principal and interest.
C. State of California securities. Registered State of California warrants, treasury notes or bonds, provided that the securities are rated in a rating category of “A” or its equivalent or higher by a nationally recognized statistical rating agency.
D. California municipal securities. Bonds, notes, warrants or other evidence of indebtedness of any local agency within California provided that the securities are rated in a rating category of “A” or its equivalent or higher by a nationally recognized statistical rating agency.
E. Other 49 State municipal securities. Registered treasury notes or bonds of any of the other 49 states in addition to California, including bonds payable solely out of the revenues from a #13..
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5 revenue-producing property owned, controlled, or operated by a state, or by a department, board, agency, or authority of any of these states that are rated in a rating category of “A” or its equivalent or higher by a nationally recognized statistical rating agency.
F. Federal Agency securities. Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States governmentsponsored enterprises.
G. Bankers’ Acceptances. Bankers' Acceptances issued by domestic or foreign banks, which are eligible for purchase by the Federal Reserve System, the short-term paper of which is rated in the highest category by a nationally recognized statistical rating agency.
Purchases of Bankers’ Acceptances may not exceed 180 days maturity or 40 percent of the City's surplus money.
H. Commercial Paper. Commercial paper of "prime" quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical rating organization. The entity that, issues the commercial paper shall meet all of the following conditions in either paragraph (1) or paragraph (2):
(1) The entity meets the following criteria: (a) is organized and operating within the United States as a general corporation. (b) Has total assets in excess of $500 million. (c) Has debt other than commercial paper, if any, that is rated in a rating category of “A” or its equivalent or higher by a nationally recognized statistical-rating organization (NRSRO). (2) The entity meets the following criteria: (a) is organized within the United States as a special purpose corporation, trust, or limited liability company. (b) Has program wide credit enhancements including, but not limited to, over collateralization, letters of credit, or surety bond, (c) Has commercial paper that is rated “A-1” or its equivalent or higher by an NRSRO.
Effective until January 1, 2026, investments in commercial paper are limited to a maximum of 40 percent of the City’s portfolio. After January 1, 2026, investments in commercial paper are limited to a maximum of 25 percent of the portfolio. The maximum investment maturity is restricted to 270 days.
I. Certificates of Deposit. FDIC insured or fully collateralized time certificates of deposit in financial institutions located in California. Eligible investments are restricted to those issuing institutions that have been in business at least five years. The maximum term for deposits shall be one year. Investments in certificates of deposit are further limited to 20 percent of surplus funds. All time deposits must be collateralized in accordance with California Government Code section 53561. The City, at its discretion, may waive the collateralization requirements for any portion of the deposit that is covered by federal insurance.
J. Negotiable Certificates of Deposit. Negotiable certificates of deposit issued by a nationallyor state-chartered bank, a savings association or a federal association, a state or federal credit union, or by a federally-licensed or state-licensed branch of a foreign bank; provided that the senior debt obligations of the issuing institution are rated in a rating category of “A” or its #13..
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6 equivalent or better by a NRSRO. Investments in negotiable certificates of deposit are limited to 30 percent of the portfolio.
K. Repurchase Agreements. Repurchase Agreements used solely as short-term investments not to exceed 90 days.
The following collateral restrictions will be observed: Only U.S. Treasury securities or Federal Agency securities as described in 1 and 2 will be acceptable collateral. All securities underlying Repurchase Agreements must be delivered to the City's custodian bank versus payment or be handled under a tri-party repurchase agreement. The total of all collateral for each Repurchase Agreement must equal or exceed, on the basis of market value plus accrued interest, 102 percent of the total dollar value of the money invested by the City for the term of the investment. For any Repurchase Agreement with a term of more than one day, the value of the underlying securities must be reviewed on a regular basis.
Market value must be calculated each time there is a substitution of collateral.
The City or its trustee shall have a perfected first security interest under the Uniform Commercial Code in all securities subject to Repurchase Agreement.
The City may enter into Repurchase Agreements with (1) primary dealers in U.S. Government securities who are eligible to transact business with, and who report to, the Federal Reserve Bank of New York, and (2) California and non-California banking institutions having assets in excess of $1 billion and in the highest short-term rating category as provided by Moody's Investors Service, Inc. or Standard & Poor's Corporation.
The City will have specific written agreements with each firm with which it enters into Repurchase Agreements.
L. Reverse Repurchase Agreements. The City may invest in reverse repurchase agreements only with "primary dealers" with which the City has entered into a master repurchase agreement contract. The City may invest in reverse repurchase agreements with the following conditions:
The City may only use reverse repurchase agreements to (1) cover a temporary cash shortage, or (2) augment earnings. Reverse repurchase agreements may not be used to leverage the portfolio.
In addition, if a reverse repurchase agreement is authorized, it may be utilized only if the security to be sold on reverse repurchase agreement has been owned and fully paid for by the City for a minimum of 30 days prior to the sale; the total of all reverse repurchase agreements on investments owned by the City does not exceed 20 percent of the portfolio; and the agreement does not exceed a term of 92 days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of the security using a reverse repurchase agreement and the final maturity date of the same security. The proceeds of the reverse repurchase agreement may not be invested in securities whose maturity exceeds the term of the Reverse Repurchase Agreement.
M. Medium-term corporate notes. Medium-term corporate notes defined as all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository #13..
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7 institutions licensed by the U.S. or any state and operating within the U.S. Medium-term notes shall be rated in a rating category “A” or its equivalent or better by a nationally recognized rating service. Purchase of medium-term corporate notes may not exceed 30 percent of the City's investment portfolio.
N. Money market funds. Shares of beneficial interest issued by diversified management companies that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (money market funds). Money market funds may not exceed 20 percent of the City’s investment portfolio and shall have attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs.
O. State of California Local Agency Investment Fund (LAIF). The maximum amount invested in LAIF must not exceed the amount permitted by the State Treasurer.
P. Mortgage and asset-backed securities. A mortgage passthrough security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable-backed bond.
Securities eligible for investment under this subdivision shall be rated in a rating category of “AA” or its equivalent or better by an NRSRO and have a maximum remaining maturity of five years or less. Purchases of mortgage and asset-backed securities should not exceed 20 percent of the City’s investment portfolio.Any mortgage pass-through security, collateralized mortgage obligation, mortgage- backed or other pay-through bond, equipment lease-back certificate, consumer receivable pass- through certificate, or consumer receivable-backed bond. For securities eligible for investment not issued or guaranteed by federal agencies and government sponsored enterprises, the following limitations apply:
A. The security must be rated, by a nationally recognized rating service, in one of the two highest rating categories (i.e. rating category of “AA” or its equivalent or higher) and have a maximum remaining maturity of five years or less.
B. Purchase of securities authorized by this paragraph shall not exceed 20 percent of the Group's surplus funds that may be invested pursuant to this section.
P.Q. California Asset Management Program (CAMP).
Q.R. Supranationals. United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), or Inter-American Development Bank (IADB), with a maximum remaining maturity of five years or less, and eligible for purchase and sale within the United States. Investments under this subdivision shall be rated in a rating category of “AA”, its equivalent, or better by at least one NRSRO. Purchases of supranational securities should not exceed 30 percent of the City’s investment portfolio.
INVESTMENT POOLS/MUTUAL FUNDS
A thorough investigation of pools and funds is required prior to investing, and on a continual basis. #13..
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8 MAXIMUM MATURITY
Investment maturities shall be based on a review of cash flow forecasts. Maturities will be scheduled so as to permit the City to meet all projected obligations.
Maximum maturity of an authorized investment is limited to five years. For purposes of compliance with this Policy, an investment’s term or remaining maturity shall be measured from the settlement date to final maturity.
Proceeds of sales or funds set aside for the repayment of any notes (e.g., Tax and Revenue Anticipation Notes) shall not be invested for a term that exceeds the term of the notes.
INELIGIBLE INVESTMENTS
Any security type or structure not specifically approved by this policy is hereby specifically prohibited. Security types which are thereby prohibited include, but are not limited to:
Investment in inverse floaters, range notes, or interest only strips that are derived from a pool of mortgages is prohibited.
RESTRICTIONS SET BY THE FINANCE DIRECTOR/TREASURER
A. Prior approval of the Finance Director/Treasurer is required for the following transactions, unless the City utilizes the services of an investment advisor registered with the Securities and Exchange Commission in a fiduciary relationship as outlined in this policy.
Sale of securities
Swaps and trades
Purchase of collateralized mortgage obligations (CMO)
Purchase of mortgage-backed obligations
Purchase of corporate notes
Purchase transaction in excess of $3 million
B. The following investments are not deemed appropriate for the City and will not be utilized:
Futures and options
Small Business Administration notes
COLLATERALIZATION
Collateralization will be required on two types of investments: certificates of deposit and repurchase (and reverse repurchase) agreements. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 102% of market value of principal and accrued interest for repurchase agreements. All time deposits must be collateralized in accordance with California Government Code section 53561.
INTERNAL CONTROLS
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9 structure designed to ensure that the assets of the City are protected from loss, theft, fraud and misuse.
AUTHORIZED INVESTMENT PERSONNEL
Pursuant to the Government Code, the City Council delegates the authority to invest or to reinvest funds, or to sell or exchange securities so purchased, to the Finance Director/Treasurer for a oneyear period. The Finance Director/Treasurer is charged with the responsibility for carrying out the policies of the City Council and shall assume full responsibility for investment transactions until the delegation of authority is revoked or expires.
Idle cash management and investment transactions are the responsibility of the Finance Department, which is under the control of the Finance Director/Treasurer. The Finance Director/Treasurer may designate an individual(s) [“Designee”] to be responsible for the daily management of the City’s portfolio of treasury investments. The Designee may also be directed to monitor and forecast the City’s cash flows, and prepare periodic investment reports that are submitted to the City Council. The Accounting Division of the Finance Department monitors all treasury transactions and prepares accounting records of all investment transactions as to type of investment, amount, yield, and maturity. No other person has authority to make investment transactions without the written authority of the Finance Director/Treasurer. Pursuant to Government Code chapter 53600, all persons investing monies are trustees and therefore fiduciaries subject to the prudent investor standard. Financial market security transactions will be executed by delivery versus payment and the securities will be held by a third party custodian.
Subject to required procurement procedures, the City may engage the support services of outside professionals in regard to its financial program, so long as it can be demonstrated or anticipated that these services produce a net financial advantage or necessary financial protection of the City’s resources.
POLICY REVIEW
The investment policy shall be adopted by resolution of the City Council on, at minimum, an annual basis. when there are any changes to policy, This investment policy shall be reviewed at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity and yield, and its relevance to current law and financial and economic trends. Any amendments to the policy shall be forwarded to City Council for approval.
This policy and the internal controls related to the investment of City funds will be reviewed by the City’s independent external auditors as part of their annual audit of the City’s financial statements. #13..
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10 APPENDIX A - GLOSSARY
Bankers Acceptances (BAs)
Bankers Acceptance is a time bill of exchange drawn on and accepted by a commercial bank to1 finance the exchange of goods. When a bank “accepts” such a bill, the time draft becomes, in effect, a predated certified check payable to the bearer at some future specified date. Little risk is involved for the investor because the commercial bank assumes primary liability once the draft is accepted.
California Asset Management Program (CAMP)
CAMP is a Joint Powers Authority (“JPA”) designed to assist public agencies with their investment needs through the use of the Cash Reserve Portfolio (“Pool”), which is rated “AAAm” by Standard & Poor’s, its highest rating category. The Pool seeks to attain a high level of current income consistent with the preservation of principal.
Certificates of Deposit (CDS)
A certificate of deposit is issued against funds deposited in a commercial bank for a definite period of time and earning a specified rate of return. They are issued in two forms, negotiable and nonnegotiable:
A negotiable certificate of deposit may be sold by one holder to another prior to maturity.
This is possible because the issuing bank agrees to pay the amount of the deposit, plus earned interest, to the Bearer of the certificate at maturity.
A non-negotiable certificate of deposit is collateralized and is not a money market instrument since it cannot be traded in the secondary market. It is issued on a fixed maturity basis and often pays a higher interest rate than is permissible on other savings or time deposit accounts.
Collateralized Mortgage Obligation (CMO)
A CMO is a pool of mortgages sold as a single investment with interest paid monthly, quarterly, or semi-annually. Mortgage securities pay a higher rate than U.S. Treasury securities due to risk of prepayment and default.
Commercial Paper (CP)
This is a short-term promissory note issued by a corporation to raise working capital. The interest rates tend to be higher than other investments of similar liquidity.
Derivatives
A financial instrument with a value derived from the value of one or more underlying assets or indexes of asset values. The term “derivative products” refers to instruments or features such as collateralized mortgage obligations (CMOs), interest-only (IOs) and principal-only (POs), forwards, futures, currency and interest rate swaps, options, floaters/inverse floaters, and caps/floors/collars.
Federal Agency Securities
Certain agencies created by Congress and sponsored by the federal government issue debt that is considered to be of prime quality and have a very high standing in the bond market. The major federal agencies are described as follows:
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11 Federal National Mortgage Association (FNMA, “Fannie Mae”) provides funds to the mortgage market primarily by purchasing loans from local lenders.
Federal Home Loan Mortgage Corporation (FHLMC, “Freddie Mac”) purchases conventional mortgages and sells mortgage-backed securities.
Student Loan Marketing Association (SLMA, “Sallie Mae”) facilitates that flow of private capital into various federally-guaranteed student loan programs maintained through banks, S&Ls, educational institutions and other participating lenders.
Federal Farm Credit System (FFCB) sells securities to provide mortgage loans and shortterm and intermediate-term credit to farmers, ranchers, and agricultural cooperatives.
Federal Home Loan Bank (FHLB) acts as a credit reserve system for the thrift industry to stabilize the flow of funds to member savings and loan and savings banks.
Futures
Exchange traded contracts specifying a future date of delivery or receipt of a specific product (physical commodity or financial instrument). Futures are used by business as a hedge against unfavorable price changes, and by speculators who hope to profit from such changes.
Local Agency Investment Fund (LAIF)
State of California LAIF is designed to provide a convenient and safe means of investing temporarily idle monies by the State Treasurer. LAJF provides high liquidity and generally pays higher yields than can be realized by individual local agencies (for similar maturities) due to economies of scale.
Medium-Term Notes
Issued by corporations (in the form of secured or unsecured debt) for the purpose of raising working capital and purchasing capital assets.
Options
A right to buy (call) or sell (put) a fixed amount of a given stock at a specified price within a limited period of time. The purchaser hopes that the stock’s price will go up (if he bought a call) or down (if he bought a put) by an amount sufficient to provide a profit when he sells the option. If the price is static or moves in the opposite direction, the price paid for the option is lost entirely.
Repurchase Agreement
As authorized in Government Code Section 5360i (1), these investment vehicles are (generally short-term) agreements between the local agency and seller for the purchase of Government securities to be resold at a specific date and for a specific amount.
Reverse Repurchase Agreement
This transaction is the opposite of a repurchase agreement. The dealer buys securities with a contractual agreement to sell them back at a prearranged date. The local agency pays the dealer interest for the use of the funds. The money “borrowed” on a “reverse repo” can be reinvested in higher yielding instruments.
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12 Supranational entities
Entities formed by two or more central governments with the purpose of promoting economic development for the member countries. Supranational institutions finance their activities by issuing debt, such as supranational bonds. Examples of supranational institutions include the European Investment Bank and the World Bank. Similarly to the government bonds, the bonds issued by these institutions are considered direct obligations of the issuing nations and have a high credit rating.
U.S. Treasury Securities
The highest quality, most liquid debt investments available in the fixed income market-place, unconditionally backed by the “full faith and credit” of the U.S. Government. Treasury bills are short-term instruments (maturity of three months to one year); Treasury notes and bonds are currently issued with maturities of two to ten years.
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1 CITY OF MODESTO
CITY COUNCIL POLICY
LATEST REVISION DATE: 06/25/2024
POLICY NUMBER: 1.019
CITY DEPARTMENT: Finance
SUBJECT: Investment Policy
PURPOSE:
The purpose of this document is to identify various policies and procedures that enhance opportunities for a prudent and systematic investment policy and to organize and formalize investment-related activities.
SCOPE:
The Investment Policy applies to all funds and investment activities of the City except the investment of bond proceeds, which are governed by the appropriate bond documents, and any pension or other post-employment benefit funds held in a trust.
BACKGROUND:
Under Section 2-3.401 of the Municipal Code, it is the function of the Finance Department to deposit and invest funds in accordance with sound treasury management. As a charter city, Modesto operates its pooled idle cash investment under the “prudent investor” rule which states that:
“When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with the care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency.”
The City is also governed by Sections 53600 et seq. of the California Government Code. This affords the City a broad spectrum of investment opportunities, so long as the investment is deemed prudent and allowable under current legislation of the State of California and the charter of the City of Modesto.
On an annual basis, the Finance Director/Treasurer will render to the City Council the statement of investment policy. The report will be considered, with any changes, by the City Council at a public meeting.
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2 ETHICS AND CONFLICTS OF INTEREST
Officers and employees involved in the investment process will refrain from personal business activities that could conflict with proper execution of the investment program, or which could impair their ability to make impartial decisions.
INVESTMENT REPORT
The Finance Director/Treasurer shall provide the City Council with a monthly report of investment transactions. The report shall contain the following:
1. The type of investment, issuer, purchase date, date of maturity, credit rating, overall portfolio yield based on cost, total par and dollar amount invested on all securities, investments and monies.
2. The weighted average maturity of the portfolio.
3. A description of any funds, investments or programs that are under management of contracted parties, including lending programs. Funds and investments held by contracted parties shall be reported at market value and the source of valuation shall be reported.
4. The market value as of the date of the report, and the source of the valuation.
5. A statement of compliance with the investment policy or manner in which the portfolio is not in compliance.
6. A statement denoting the City’s ability to meet its expenditure requirements for the next six months or provide an explanation as to why sufficient money shall, or may, not be available.
INVESTMENT CRITERIA
Public funds are invested in the following manner in order of priority:
1. Safety of Principal
The duty of the Finance Director/Treasurer is to protect, preserve and maintain cash and investments on behalf of the citizens of the community. To guard against loss of principal, only prudent and safe investments will be considered.
2. Liquidity
The receipt of revenues and maturities of investments should be scheduled so that adequate cash will be available to meet disbursements. An adequate portion of the portfolio should be maintained in liquid short-term instruments which can be readily converted to cash if necessary.
3. Return on Investment
The investment portfolio of the City shall be designed with the objective of attaining a market rate of return on its investments consistent with the constraints imposed by its safety objective and cash flow considerations. Return becomes a consideration only after the basic requirements of safety and liquidity have been met.
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3 SAFEKEEPING AND CUSTODY
All security transactions entered into by the City shall be conducted on a delivery-versus payment basis. Securities will be held by third party custodian designated by the Finance Director/Treasurer and evidenced by safekeeping receipts.
The only exception to the foregoing are Local Agency Investment Pools, Certificates of Deposit, and money market funds since the purchased securities are not deliverable. In all cases, purchased securities shall be held in the City’s name.
AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
The Finance Director/Treasurer will maintain a list of financial dealers and institutions qualified and authorized to transact business with the City.
The purchase by the City of any investment other than those purchased directly from the issuer, will be purchased either from an institution licensed by the State as a broker-dealer, as defined in Section 25004 of the Corporations Code, which is a member of the Financial Industry Regulatory Authority (FINRA), or a member of a federally regulated securities exchange, a national or state chartered bank, a federal or state association (as defined by Section 5102 of the Financial Code), or a brokerage firm designated as a Primary Government Dealer by the Federal Reserve Bank.
The Finance Director/Treasurer will investigate all institutions that wish to do business with the City, to determine if they are adequately capitalized, make markets in securities appropriate for the City’s needs, and agree to abide by the conditions set forth in the City’s Investment Policy and any other guidelines that may be provided. This will be done annually by having the financial institutions:
1. Provide written notification that they have read, and will abide by, the City’s Investment Policy.
2. Submit their most recent audited Financial Statement within 120 days of the institution’s fiscal year end.
If the City has an investment advisor, the investment advisor may use its own list of authorized broker/dealers to conduct transactions on behalf of the City.
Purchase and sale of securities will be made on the basis of competitive bids and offers with a minimum of three quotes being obtained.
PERFORMANCE STANDARDS
The investment portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow needs. The City will measure the portfolio’s performance against a market benchmark that is commensurate with the City’s investment risk constraints and the cash flow characteristics of the portfolio.
AUTHORIZED INVESTMENTS
Credit criteria and maximum percentages listed in this section refer to the credit of the issuing organization at the time the security is purchased. The City may from time to time be invested in a #13..
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4 security whose rating is downgraded subsequent to the date of purchase. In the event a rating drops below the minimum allowed rating category for that given investment type, the investment advisor shall notify the Finance Director and/or Designee and recommend a plan of action. The City will limit investments in any one non-government issuer, except investment pools, to no more than 5% regardless of security type. A security purchased in accordance with this section shall not have a forward settlement date exceeding 45 days from the time of investment. Commencing with Section 53600 of Article 1, Chapter 4 of the Government Code of the State of California, surplus money may be invested in the following:
INVESTMENT INSTRUMENT SUMMARY
Security Type
Maximum
Maturity
Min Credit
Quality
Authorized
Investment
Limit
Per Issuer
Limit
A. City Issued Bonds 5 Years None None None
B. US Treasury Notes/ Bills 5 Years None None None
C. State of California Securities 5 Years “A” None None D. California Municipal Securities 5 Years “A” None None E. Other 49 State Municipal Securities 5 Years “A” None None F. Federal Agencies 5 Years None None None
G. Banker’s Acceptance (BA) 180 days “A-1” 40% 5%
H. Commercial Paper 270 days “A-1”/ “A” 40% 5%
I. Certificates of Deposit 1 Year FDIC Insured or
Collateralized 20% 5%
J. Negotiable Certificates of Deposit 5 Years “A” 30% 5% K. Repurchase Agreements 90 Days None None 20%
L. Reverse Repurchase Agreements 92 Days None 20% 5%
M. Medium Term Notes (MTN) 5 Years “A” 30% 5%
N. Money Market Fund None “AAAm” 20% 10%
O. LAIF None None None None
P. Mortgage and Asset-Backed
Securities 5 Year “AA” 20% 5%
Q. CAMP None None None None
R. Supranationals 5 Years “AA” 30% 5%
A. City of Modesto bonds. Bonds issued by the City.
B. U.S. Treasury securities. United States Treasury notes, bonds, bills or certificates of indebtedness or those for which the faith and credit of the United States are pledged for the principal and interest.
C. State of California securities. Registered State of California warrants, treasury notes or bonds, provided that the securities are rated in a rating category of “A” or its equivalent or higher by a nationally recognized statistical rating agency.
D. California municipal securities. Bonds, notes, warrants or other evidence of indebtedness of any local agency within California provided that the securities are rated in a rating category of “A” or its equivalent or higher by a nationally recognized statistical rating agency.
E. Other 49 State municipal securities. Registered treasury notes or bonds of any of the other 49 states in addition to California, including bonds payable solely out of the revenues from a #13..
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5 revenue-producing property owned, controlled, or operated by a state, or by a department, board, agency, or authority of any of these states that are rated in a rating category of “A” or its equivalent or higher by a nationally recognized statistical rating agency.
F. Federal Agency securities. Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States governmentsponsored enterprises.
G. Bankers’ Acceptances. Bankers' Acceptances issued by domestic or foreign banks, which are eligible for purchase by the Federal Reserve System, the short-term paper of which is rated in the highest category by a nationally recognized statistical rating agency.
Purchases of Bankers’ Acceptances may not exceed 180 days maturity or 40 percent of the City's surplus money.
H. Commercial Paper. Commercial paper of "prime" quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical rating organization. The entity that, issues the commercial paper shall meet all of the following conditions in either paragraph (1) or paragraph (2):
(1) The entity meets the following criteria: (a) is organized and operating within the United States as a general corporation. (b) Has total assets in excess of $500 million. (c) Has debt other than commercial paper, if any, that is rated in a rating category of “A” or its equivalent or higher by a nationally recognized statistical-rating organization (NRSRO). (2) The entity meets the following criteria: (a) is organized within the United States as a special purpose corporation, trust, or limited liability company. (b) Has program wide credit enhancements including, but not limited to, over collateralization, letters of credit, or surety bond, (c) Has commercial paper that is rated “A-1” or its equivalent or higher by an NRSRO.
Effective until January 1, 2026, investments in commercial paper are limited to a maximum of 40 percent of the City’s portfolio. After January 1, 2026, investments in commercial paper are limited to a maximum of 25 percent of the portfolio. The maximum investment maturity is restricted to 270 days.
I. Certificates of Deposit. FDIC insured or fully collateralized time certificates of deposit in financial institutions located in California. Eligible investments are restricted to those issuing institutions that have been in business at least five years. The maximum term for deposits shall be one year. Investments in certificates of deposit are further limited to 20 percent of surplus funds. All time deposits must be collateralized in accordance with California Government Code section 53561. The City, at its discretion, may waive the collateralization requirements for any portion of the deposit that is covered by federal insurance.
J. Negotiable Certificates of Deposit. Negotiable certificates of deposit issued by a nationallyor state-chartered bank, a savings association or a federal association, a state or federal credit union, or by a federally-licensed or state-licensed branch of a foreign bank; provided that the senior debt obligations of the issuing institution are rated in a rating category of “A” or its #13..
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6 equivalent or better by a NRSRO. Investments in negotiable certificates of deposit are limited to 30 percent of the portfolio.
K. Repurchase Agreements. Repurchase Agreements used solely as short-term investments not to exceed 90 days.
The following collateral restrictions will be observed: Only U.S. Treasury securities or Federal Agency securities as described in 1 and 2 will be acceptable collateral. All securities underlying Repurchase Agreements must be delivered to the City's custodian bank versus payment or be handled under a tri-party repurchase agreement. The total of all collateral for each Repurchase Agreement must equal or exceed, on the basis of market value plus accrued interest, 102 percent of the total dollar value of the money invested by the City for the term of the investment. For any Repurchase Agreement with a term of more than one day, the value of the underlying securities must be reviewed on a regular basis.
Market value must be calculated each time there is a substitution of collateral.
The City or its trustee shall have a perfected first security interest under the Uniform Commercial Code in all securities subject to Repurchase Agreement.
The City may enter into Repurchase Agreements with (1) primary dealers in U.S. Government securities who are eligible to transact business with, and who report to, the Federal Reserve Bank of New York, and (2) California and non-California banking institutions having assets in excess of $1 billion and in the highest short-term rating category as provided by Moody's Investors Service, Inc. or Standard & Poor's Corporation.
The City will have specific written agreements with each firm with which it enters into Repurchase Agreements.
L. Reverse Repurchase Agreements. The City may invest in reverse repurchase agreements only with "primary dealers" with which the City has entered into a master repurchase agreement contract. The City may invest in reverse repurchase agreements with the following conditions:
The City may only use reverse repurchase agreements to (1) cover a temporary cash shortage, or (2) augment earnings. Reverse repurchase agreements may not be used to leverage the portfolio.
In addition, if a reverse repurchase agreement is authorized, it may be utilized only if the security to be sold on reverse repurchase agreement has been owned and fully paid for by the City for a minimum of 30 days prior to the sale; the total of all reverse repurchase agreements on investments owned by the City does not exceed 20 percent of the portfolio; and the agreement does not exceed a term of 92 days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of the security using a reverse repurchase agreement and the final maturity date of the same security. The proceeds of the reverse repurchase agreement may not be invested in securities whose maturity exceeds the term of the Reverse Repurchase Agreement.
M. Medium-term corporate notes. Medium-term corporate notes defined as all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository #13..
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7 institutions licensed by the U.S. or any state and operating within the U.S. Medium-term notes shall be rated in a rating category “A” or its equivalent or better by a nationally recognized rating service. Purchase of medium-term corporate notes may not exceed 30 percent of the City's investment portfolio.
N. Money market funds. Shares of beneficial interest issued by diversified management companies that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (money market funds). Money market funds may not exceed 20 percent of the City’s investment portfolio and shall have attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs.
O. State of California Local Agency Investment Fund (LAIF). The maximum amount invested in LAIF must not exceed the amount permitted by the State Treasurer.
P. Mortgage and asset-backed securities. Any mortgage pass-through security, collateralized mortgage obligation, mortgage- backed or other pay-through bond, equipment lease-back certificate, consumer receivable pass- through certificate, or consumer receivable-backed bond. For securities eligible for investment not issued or guaranteed by federal agencies and government sponsored enterprises, the following limitations apply:
A. The security must be rated, by a nationally recognized rating service, in one of the two highest rating categories (i.e. rating category of “AA” or its equivalent or higher) and have a maximum remaining maturity of five years or less.
B. Purchase of securities authorized by this paragraph shall not exceed 20 percent of the Group's surplus funds that may be invested pursuant to this section.
Q. California Asset Management Program (CAMP).
R. Supranationals. United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), or Inter-American Development Bank (IADB), with a maximum remaining maturity of five years or less, and eligible for purchase and sale within the United States. Investments under this subdivision shall be rated in a rating category of “AA”, its equivalent, or better by at least one NRSRO. Purchases of supranational securities should not exceed 30 percent of the City’s investment portfolio.
INVESTMENT POOLS/MUTUAL FUNDS
A thorough investigation of pools and funds is required prior to investing, and on a continual basis.
MAXIMUM MATURITY
Investment maturities shall be based on a review of cash flow forecasts. Maturities will be scheduled so as to permit the City to meet all projected obligations.
Maximum maturity of an authorized investment is limited to five years. For purposes of compliance with this Policy, an investment’s term or remaining maturity shall be measured from the settlement #13..
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8 date to final maturity.
Proceeds of sales or funds set aside for the repayment of any notes (e.g., Tax and Revenue Anticipation Notes) shall not be invested for a term that exceeds the term of the notes.
INELIGIBLE INVESTMENTS
Any security type or structure not specifically approved by this policy is hereby specifically prohibited. Security types which are thereby prohibited include, but are not limited to:
Investment in inverse floaters, range notes, or interest only strips that are derived from a pool of mortgages is prohibited.
RESTRICTIONS SET BY THE FINANCE DIRECTOR/TREASURER
A. Prior approval of the Finance Director/Treasurer is required for the following transactions, unless the City utilizes the services of an investment advisor registered with the Securities and Exchange Commission in a fiduciary relationship as outlined in this policy.
Sale of securities
Swaps and trades
Purchase of collateralized mortgage obligations (CMO)
Purchase of mortgage-backed obligations
Purchase of corporate notes
Purchase transaction in excess of $3 million
B. The following investments are not deemed appropriate for the City and will not be utilized:
Futures and options
Small Business Administration notes
COLLATERALIZATION
Collateralization will be required on two types of investments: certificates of deposit and repurchase (and reverse repurchase) agreements. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 102% of market value of principal and accrued interest for repurchase agreements. All time deposits must be collateralized in accordance with California Government Code section 53561.
INTERNAL CONTROLS
The Finance Director/Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected from loss, theft, fraud and misuse.
AUTHORIZED INVESTMENT PERSONNEL
Pursuant to the Government Code, the City Council delegates the authority to invest or to reinvest funds, or to sell or exchange securities so purchased, to the Finance Director/Treasurer for a one- #13..
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9 year period. The Finance Director/Treasurer is charged with the responsibility for carrying out the policies of the City Council and shall assume full responsibility for investment transactions until the delegation of authority is revoked or expires.
Idle cash management and investment transactions are the responsibility of the Finance Department, which is under the control of the Finance Director/Treasurer. The Finance Director/Treasurer may designate an individual(s) [“Designee”] to be responsible for the daily management of the City’s portfolio of treasury investments. The Designee may also be directed to monitor and forecast the City’s cash flows, and prepare periodic investment reports that are submitted to the City Council. The Accounting Division of the Finance Department monitors all treasury transactions and prepares accounting records of all investment transactions as to type of investment, amount, yield, and maturity. No other person has authority to make investment transactions without the written authority of the Finance Director/Treasurer. Pursuant to Government Code chapter 53600, all persons investing monies are trustees and therefore fiduciaries subject to the prudent investor standard. Financial market security transactions will be executed by delivery versus payment and the securities will be held by a third party custodian.
Subject to required procurement procedures, the City may engage the support services of outside professionals in regard to its financial program, so long as it can be demonstrated or anticipated that these services produce a net financial advantage or necessary financial protection of the City’s resources.
POLICY REVIEW
The investment policy shall be adopted by resolution of the City Council when there are any changes to policy, to ensure its consistency with the overall objectives of preservation of principal, liquidity and yield, and its relevance to current law and financial and economic trends. Any amendments to the policy shall be forwarded to City Council for approval.
This policy and the internal controls related to the investment of City funds will be reviewed by the City’s independent external auditors as part of their annual audit of the City’s financial statements. #13..
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10 APPENDIX A - GLOSSARY
Bankers Acceptances (BAs)
Bankers Acceptance is a time bill of exchange drawn on and accepted by a commercial bank to1 finance the exchange of goods. When a bank “accepts” such a bill, the time draft becomes, in effect, a predated certified check payable to the bearer at some future specified date. Little risk is involved for the investor because the commercial bank assumes primary liability once the draft is accepted.
California Asset Management Program (CAMP)
CAMP is a Joint Powers Authority (“JPA”) designed to assist public agencies with their investment needs through the use of the Cash Reserve Portfolio (“Pool”), which is rated “AAAm” by Standard & Poor’s, its highest rating category. The Pool seeks to attain a high level of current income consistent with the preservation of principal.
Certificates of Deposit (CDS)
A certificate of deposit is issued against funds deposited in a commercial bank for a definite period of time and earning a specified rate of return. They are issued in two forms, negotiable and nonnegotiable:
A negotiable certificate of deposit may be sold by one holder to another prior to maturity.
This is possible because the issuing bank agrees to pay the amount of the deposit, plus earned interest, to the Bearer of the certificate at maturity.
A non-negotiable certificate of deposit is collateralized and is not a money market instrument since it cannot be traded in the secondary market. It is issued on a fixed maturity basis and often pays a higher interest rate than is permissible on other savings or time deposit accounts.
Collateralized Mortgage Obligation (CMO)
A CMO is a pool of mortgages sold as a single investment with interest paid monthly, quarterly, or semi-annually. Mortgage securities pay a higher rate than U.S. Treasury securities due to risk of prepayment and default.
Commercial Paper (CP)
This is a short-term promissory note issued by a corporation to raise working capital. The interest rates tend to be higher than other investments of similar liquidity.
Derivatives
A financial instrument with a value derived from the value of one or more underlying assets or indexes of asset values. The term “derivative products” refers to instruments or features such as collateralized mortgage obligations (CMOs), interest-only (IOs) and principal-only (POs), forwards, futures, currency and interest rate swaps, options, floaters/inverse floaters, and caps/floors/collars.
Federal Agency Securities
Certain agencies created by Congress and sponsored by the federal government issue debt that is considered to be of prime quality and have a very high standing in the bond market. The major federal agencies are described as follows:
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11 Federal National Mortgage Association (FNMA, “Fannie Mae”) provides funds to the mortgage market primarily by purchasing loans from local lenders.
Federal Home Loan Mortgage Corporation (FHLMC, “Freddie Mac”) purchases conventional mortgages and sells mortgage-backed securities.
Student Loan Marketing Association (SLMA, “Sallie Mae”) facilitates that flow of private capital into various federally-guaranteed student loan programs maintained through banks, S&Ls, educational institutions and other participating lenders.
Federal Farm Credit System (FFCB) sells securities to provide mortgage loans and shortterm and intermediate-term credit to farmers, ranchers, and agricultural cooperatives.
Federal Home Loan Bank (FHLB) acts as a credit reserve system for the thrift industry to stabilize the flow of funds to member savings and loan and savings banks.
Futures
Exchange traded contracts specifying a future date of delivery or receipt of a specific product (physical commodity or financial instrument). Futures are used by business as a hedge against unfavorable price changes, and by speculators who hope to profit from such changes.
Local Agency Investment Fund (LAIF)
State of California LAIF is designed to provide a convenient and safe means of investing temporarily idle monies by the State Treasurer. LAJF provides high liquidity and generally pays higher yields than can be realized by individual local agencies (for similar maturities) due to economies of scale.
Medium-Term Notes
Issued by corporations (in the form of secured or unsecured debt) for the purpose of raising working capital and purchasing capital assets.
Options
A right to buy (call) or sell (put) a fixed amount of a given stock at a specified price within a limited period of time. The purchaser hopes that the stock’s price will go up (if he bought a call) or down (if he bought a put) by an amount sufficient to provide a profit when he sells the option. If the price is static or moves in the opposite direction, the price paid for the option is lost entirely.
Repurchase Agreement
As authorized in Government Code Section 5360i (1), these investment vehicles are (generally short-term) agreements between the local agency and seller for the purchase of Government securities to be resold at a specific date and for a specific amount.
Reverse Repurchase Agreement
This transaction is the opposite of a repurchase agreement. The dealer buys securities with a contractual agreement to sell them back at a prearranged date. The local agency pays the dealer interest for the use of the funds. The money “borrowed” on a “reverse repo” can be reinvested in higher yielding instruments.
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12 Supranational entities
Entities formed by two or more central governments with the purpose of promoting economic development for the member countries. Supranational institutions finance their activities by issuing debt, such as supranational bonds. Examples of supranational institutions include the European Investment Bank and the World Bank. Similarly to the government bonds, the bonds issued by these institutions are considered direct obligations of the issuing nations and have a high credit rating.
U.S. Treasury Securities
The highest quality, most liquid debt investments available in the fixed income market-place, unconditionally backed by the “full faith and credit” of the U.S. Government. Treasury bills are short-term instruments (maturity of three months to one year); Treasury notes and bonds are currently issued with maturities of two to ten years.
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INVESTMENT POLICY –
ANNUAL UPDATES
Finance Committee, May 20, 2023
DeAnna Christensen, Director of Finance
Monique Spyke, PFM Asset Management LLC
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● The Finance Department deposits and invests funds in accordance with the principles of sound treasury management and applicable laws. ● City staff recommends updates to the City’s Investment Policy to Council for review and approval on an annual basis.
● PFM Asset Management LLC (“PFM”), the City’s investment advisor, provides investment management, research, and supervision of the City’s managed funds. ● PFM reviews the Policy annually and provides recommended changes in coordination with the City so the Policy is consistent with the California Government Code that governs the investment of public funds, and to better align Policy language with Code language.
Background
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● The language was updated to explain limitations which apply to these type of securities which include:
○ The security must be rated, by a nationally recognized rating service, in one of the two highest rating categories (i.e. rating category of “AA” or its equivalent or higher) and have a maximum remaining maturity of five years or less ○ Purchase of securities authorized by this paragraph shall not exceed 20 percent of the Group's surplus funds that may be invested pursuant to this section
Mortgage and Asset-Back Securities
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● Language was updated under Policy Review to only provide the Investment Policy to Council if recommended changes will be made ● City staff will still conduct annual reviews of the policy in coordination with the City’s investment advisors, PFM Asset Management
● If no changes are being made to the Policy, the policy will not be presented to Council
Other Recommended Updates
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5 ● Motion accepting the updates to the City’s Investment Policy and forwarding to Council for approval.
Staff Recommendations
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Monique Spyke
PFM Asset Management LLC
Managing Director
Email - [email protected]
Phone - (415) 393-7259
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QUESTIONS?
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CITY OF MODESTO
COUNCIL AGENDA REPORT
DATE OF MEETING:
June 25, 2024
Date: May 31, 2024
TO: Mayor and City Council
THROUGH: Joseph P. Lopez, City Manager
FROM: DeAnna Christensen, Director of Finance
SUBJECT: Monthly Investment Report – April 2024
CONTACT: Calogero Maniscalco, Senior Financial Analyst
[email protected], 209-577-5219
DESCRIPTION:
Consider accepting the Monthly Investment Report for April 2024. (Funding Source: Various Funds)
STRATEGIC PLAN ELEMENT:
This item supports the City of Modesto 2020-2025 Strategic Plan focus of Governance and Service Delivery under Goal H: Achieve Financial Sustainability.
BACKGROUND:
The City’s Finance Department submits a monthly investment report to Council and the City Manager. Attached are the December investment reports (see attachment list below) generated by Public Financial Management, the City’s investment advisor. Investments in the portfolio (attachment 4) are for the City of Modesto, Modesto Public Financing Authority, Community Facilities Districts, Tuolumne River Regional Park, Successor Agency to the Redevelopment Agency, and the Modesto-Ceres Fire Protection Agency Joint Powers Authority.
DISCUSSION:
It is the function of the Finance Department to deposit and invest funds in accordance with sound treasury management and to safeguard the principal and maintain the liquidity needs of the City. The purpose of the Monthly Investment Report is to keep the City Council and City Manager informed of the City’s investment portfolio. As shown in Attachment 2, on April 30, 2024, the City had a closing market value of $477,484,307 in its investment portfolio. #14..
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City Council, June 25, 2024
Monthly Investment Report – April 2024