Agenda packet — Finance Committee, May 19, 2025 (part 2 of 2)

The Compost Facility’s primary and state mandated purpose is to process the City’s diverted yard waste, paper waste and food waste materials into a reusable soil amendment product (compost), thus keeping these materials from entering the landfill and lowering the City’s disposal rate. A secondary purpose of the facility is to then market and sell the finished compost to farmers, landscapers, and backyard gardeners, which in turn helps keep the facility sustainable. Compost is also donated to community gardens and landscape projects, parks, schools, churches, and has been used in City projects. Annually, the Facility receives approximately 50,000 tons of raw compostable waste materials and processes it into about 25,000 tons of compost.

On June 14, 2022, by Resolution No. 2022-276, Council approved new solid waste rates. The new rates took effect on July 1, 2022. A compost facility improvement fee was added to both residential rates and commercial rates. These fees are solely utilized for facility improvements.

On December 6, 2022, by Resolution No. 2022-466, Council approved an agreement with HDR Engineering, Inc. to conduct a Feasibility Study for the City’s Compost Facility. On October 24, 2023, by Resolution No. 2023-472, Council approved the proposed plan and recommendations from HDR Engineering to expand and improve the existing City of Modesto Compost Facility.

On May 7, 2024, by Resolution No. 2024-140, Council approved the First Amendment with HDR Engineering, Inc. for the Feasibility Study for the City of Modesto’s Compost Facility, increasing the Agreement amount by $96,062 to create surface improvements plans.

DISCUSSION:

The purpose of the Compost Facility Feasibility Study is to explore the viability of an improved and expanded Compost Facility that will help the City achieve SB 1383’s mandated organic waste diversion goals. Further, both the regional air district (San Joaquin Valley Air Pollution Control District Rule (SJVAPCD) 4566) and the Regional Water Board (General Waste Discharge Requirements for Composting Operations, Order WQ 2020-0012—DWQ) require improvements to the heavy equipment operations, working surfaces, and material processing operation to protect the air and groundwater quality, respectively. These two regulatory permitting agencies and the SB1383 legislation require the City to undertake substantial infrastructure, site electrifications, labor, and heavy equipment improvements to maintain the Compost Facility.

HDR Engineering, Inc. evaluated the facility’s ability to comply with California Department of Resources Recycling and Recovery (CalRecycle), SB 1383, San Joaquin Valley Air Pollution Control District, and the Regional Water Board Requirements and met with City staff to evaluate key considerations in the future of the facility. This Feasibility Study provided a detailed overview of the upgrades that need to be completed at the Facility to maintain compliance with state regulations. Because of the detailed nature of the study, HDR Consultants have a comprehensive understanding of the needs of the Facility and as such, rebidding this project at this stage would be detrimental. The City would incur the financial burden of bringing another team or vendor up to speed on the work that has already been completed to resume the project.

Not only is this not cost effective, this would also further extend the timeline of the project, impacting purchases of equipment, compliance with laws and regulations, and would impact the public service provided to residents.
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Second Amendment to the Agreement for the Feasibility Study for Compost with HDR Engineering Consultants

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Upon completing the compost feasibility study, HDR Engineering, Inc. developed a list of recommended improvements. The first project on the list is a Compost Surface Improvement project which will prevent water settlement and ponding, promote drainage to the pad’s valley gutter and drains, and will provide a permanent solution to the site’s compromised working surface. This project is currently in progress.

The second recommendation includes an analysis of the Facility’s electrification capacity and identify the need to increase power supply to the Facility to provide additional processing capabilities to process additional feedstock and to purchase new electric equipment to replace the diesel operated ones.

The following tasks have been identified to complete the Design of a new Transformer:

Task 1: Project Management
Project Management includes project oversight, execution, office administration, invoicing, coordinating work of the design team, and coordinating and reporting on the progress of the Project to the City.

Task 2: Estimate Future Power Requirements
HDR will prepare an estimate of the future power requirements of the Facility. The purpose of this task is to identify the future power requirements to bracket the range of power expected to be needed at the Facility. The future power requirements are envisioned to include the new electrified materials screening, grinding, blending infrastructure, future aeriated static pile aeration system, administrative offices, electrified on-site equipment, storm drainage pumping system and related features as identified in the previously prepared Study.

Task 3: Prepare Transformer Preliminary Design
Following completion and the City’s acceptance of the Future Power Requirements, HDR will prepare the Transformer Preliminary Design. The purpose of this task is to convert the list of future power requirements into a preliminary design to reach consensus of the scope of the transformer project design and subsequent construction. HDR will prepare a single Preliminary Design sheet showing the location and features at a conceptual level for discussion and the City’s input and concurrence.

Task 4: Prepare Transformer Construction Documents
HDR will prepare the Transformer Construction Documents. The purpose of this task is to develop the construction documents which will be used to procure the purchase and installation of the new transformer for the Facility. The design documents will include:
 One line diagram showing power from utility distribution, down to utility transformer and onto a main/meter switchboard.
 Utility transformer requirements for site install.
 Switchboard requirements for install.
 Conduits and conductors information for construction bid documents.  Specifications for contractor provided equipment.

HDR will prepare the Transformer Construction Documents which will include the following:

1. Design Sheets
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 Cover sheet legends and symbols.
 Civil Site and Grading Plan
 Horizontal Control Plan
 Civil Site Utility Plan
 Electrical Site Plan
 Electrical Single Line Diagram
 Details

2. Technical Specifications
 Technical specifications
 Bid Form
 Measurement and Payment
Task 5: Provide Bidding Support Assistance
HDR will provide bidding support during the bidding phase.

Modesto Municipal Code Section 8-3.203 generally requires all purchases, which meet or exceed $100,000 for material, equipment, or contractual services to be formally bid. However, exceptions to the formal bidding process are granted in MMC 8-3.204(d) “Where the Purchasing Manager, in his or her discretion, determines that a process other than the formal bid procedure set forth in Section 8-3.203 will result in a procurement for the City at the lowest possible cost commensurate with the desired quality. Such alternatives may include, but are not limited to, a "two-step" procurement process or a procurement based solely on a technical evaluation.”
FISCAL IMPACT:

On June 14, 2022, by Resolution No. 2022-427, Council approved the addition of Compost Facility Improvement fees to the residential and commercial solid waste rates. The anticipated cost to implement the recommendations of approximately $26,050,000 will be absorbed within the current Compost Facility Improvement (4896-56035) Fund. Due to the anticipated cost, this project will be completed in three different phases, over the next five to ten years, depending on available funds and on actual feedstock quantities. The first amendment increased the amount of the agreement by $96,062, The second amendment will increase the by $94,658, as shown below, for a revised total amount not to exceed $287,775.

Table 1. Cost estimate per tasks identified:

Task Description Cost Estimate
Task 1 – Project Management $ 10,064
Task 2 – Estimate of Future Power Requirements $ 16,013 Task 3 – Preliminary Transformer Design $ 20,559
Task 4 – Transformer Construction Documents $ 43,616
Task 5 – Bidding Support $ 4,406
Grand Total $ 94,658
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CEQA/NEPA REQUIREMENTS:

An Environmental review might be required due to the facility expansion and improvements.

CEQA process which is anticipated to be a Mitigated Negative Declaration to increase acreage from 30 to a minimum of 46 acres, and clarify feedstock types, specifically the variety of food waste sources.

RECOMMENDED COMMITTEE ACTION:

Staff Recommendations:

Motion recommending the Second Amendment with HDR Engineering, Inc. for the Feasibility Study for Compost, increasing the Agreement amount by $94,658 to a revised total amount not to exceed $287,775 over the term of the Agreement and forwarding to Council for approval.

Approved by:

Bill Sandhu, Public Works Director
Joseph P. Lopez, City Manager
Attachments:

1. Second Amendment

2. First Amendment (with Exhibit A1)

3. Exhibit A2 - HDR Proposal

4. Exhibit B- Modesto 2025 Rate Sheet

5. Original Signed Agreement (with all Exhibits)

6. Bid Waiver
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1 SECOND AMENDMENT TO STANDARD AGREEMENT

FOR FEASIBILITY STUDY FOR COMPOST WITH HDR ENGINEERING

CONSULTANTS
This Second Amendment to the Standard Agreement for Feasibility Study for Compost (“Second Amendment”) is entered into between the CITY OF MODESTO, a municipal corporation of the State of California (hereinafter the “City”) and HDR ENGINEERING Inc., a Nebraska Corporation, (hereinafter “Consultant”) as of __________________________.

RECITALS
This Second Amendment is made with regard to the following recitals:

1. City and Consultant entered into the Standard Agreement for Feasibility Study for Compost on the 6th day of December 2022, (“the Original Agreement”).

2. City and Consultant approved the First Amendment to the Original Agreement expanding the SCOPE OF SERIVCES to include “Exhibit A1” and increasing the total amount not to exceed to $193,117.

3. City and Consultant desire to amend the Original Agreement to expand the SCOPE OF SERVICES to include “Exhibit A2” for Design of a New Transformer to Serve the City’s Compost Facility and add “Exhibit B” City of Modesto 2025 Rate Sheet.

4. City and Consultant desire to amend the Original Agreement to increase the compensation paid for services by $94,658.

NOW, THEREFORE, in consideration of the First Amendment, this Second Amendment, and the mutual promises, covenants, and stipulations contained in the Original Agreement for Feasibility Study for Compost, the parties agree as follows:
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2 1. Section 1 “SCOPE OF SERVICE” shall be amended to include “Exhibit A2” for Design of a New Transformer to Service the City’s Compost Facility.

2. Section 3 “COMPENSATION” shall be deleted in its entirety, and replaced with the following:

Consultant agrees to accept a sum, for a total not to exceed amount of $287,775 DOLLARS as full remuneration for performing all services and furnishing all staffing and materials called for in “Exhibit A”, Exhibit A1” and “Exhibit A2”, and for performance by Consultant of all of its duties and obligations under this Agreement.

The Compensation shall be paid pursuant in the manner and at the times set forth below:

The City shall pay Consultant on a time and materials basis for Consultant’s actual costs for all work called for in “Exhibit A”, “Exhibit A1” and “Exhibit A2” to this Agreement. Consultant shall submit monthly invoices to City which include detailed receipts for any out-of-pocket costs paid by Consultant in connection with work performed on this project. All work to be performed under this Agreement shall be billed at the rates set forth in “Exhibit B.”

3. Exhibit A2 and Exhibit B, as modified and amended by this Second Amendment, shall be included with the Agreement. All other provisions of the Original Agreement and First Amendment shall remain unchanged and in full force and effect. #9..
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3 IN WITNESS WHEREOF, the City of Modesto, a municipal corporation, has authorized the execution of this Second Amendment to the Original Agreement for Feasibility Study for Compost by its City Manager and attestation by its City Clerk under the authority of Resolution No. 2025-_____ on the ________ day of ___________, 2025, and HDR ENGINEERING Inc. has caused this Second Amendment to be duly executed as of the Effective Date.
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1 FIRST AMENDMENT TO AGREEMENT

FOR FEASIBILITY STUDY FOR COMPOST WITH HDR ENGINEERING

CONSULTANTS
This First Amendment to the Agreement for Feasibility Study for Compost (“ First Amendment”) is entered into between the CITY OF MODESTO, a municipal corporation of the State of California (hereinafter the “City”) and HDR ENGINEERING, a Nebraska Corporation, (hereinafter "Consultant") as of _______ day of _____________, 2024.

RECITALS
This First Amendment to the Agreement for Feasibility Study for Compost Service is made with regard to the following recitals:

A. The Consultant Agreement for Feasibility Study for Compost (No. 240991), hereinafter referred to as “Original Agreement” was entered into between City and Consultant on the 6th day of December 2022.

B. City and Consultant desire to amend the Original Agreement to expand the SCOPE OF SERVICES to include “Exhibit A1” for Compost Surface Improvements.

C. City and Consultant desire to amend the Original Agreement to increase the compensation paid for services by $96,062 for a revised total amount not to exceed $193,117 over the term of the Original Agreement.

NOW, THEREFORE, in consideration of this First Amendment, and the mutual promises, covenants, and stipulations contained in the Original Agreement, the parties agree as follows:

1. Section 1 “SCOPE OF SERVICES” shall be amended to include Exhibit “A1” for Compost Surface Improvement, attached hereto and incorporated herein.

DocuSign Envelope ID: E1966A06-AAED-4385-BD61-42B3C3C5A31C May 7th
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2 2. Section 3 “COMPENSATION” shall be deleted in its entity, and replaced with the following;
Consultant agrees to accept a sum, for a total not to exceed amount of $193,117 DOLLARS (One Hundred Ninety-Three Thousand and One Hundred and Seventeen Dollars) as full remuneration for performing all services and furnishing all staffing and materials called for in Exhibit “A”, Exhibit “A1”, and for performance by Consultant of all of its duties and obligations under this Agreement.

The Compensation shall be paid pursuant in the manner and at the times set forth below:

The City shall pay Consultant on a time and materials basis for Consultant’s Actually costs for all work called for in Exhibit “A” and Exhibit “A1” to this Agreement.

Consultant shall submit monthly invoices to City which include detailed tasks, hours worked, and billable rates for all work completed and detailed receipts for any out-ofpocket costs paid by Consultant in connection with work performed on this project.

3. Except as modified and amended by this First Amendment, all other provisions of the Original Agreement shall remain unchanged and in full force and effect.

IN WITNESS WHEREOF, the City of Modesto, a municipal corporation, has authorized the execution of this FIRST AMENDMENT to AGREEMENT for FEASIBILTY STUDY FOR COMPOST Services by its City Manager and attestation by its City Clerk on the ________ day of ___________, 2024, and HDR ENGINEERING, has caused this FIRST AMENDMENT to be duly executed as of the Effective Date.

DocuSign Envelope ID: E1966A06-AAED-4385-BD61-42B3C3C5A31C 7th May
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CITY OF MODESTO,
a municipal corporation
BY: ____________________________
JOSEPH P. LOPEZ, City Manager
ATTEST:
(Seal)
BY: ____________________________

DIANE NAYARES-PEREZ, CMC,
City Clerk
________________________________ BY: ____________________________ By _____________________________
Name Title
BY: ____________________________
By _____________________________
Name Title
APPROVED AS TO FORM:

BY: ____________________________
JOSE M. SANCHEZ, City Attorney
APPROVED AS TO FORM:

BY: ____________________________
MATTHEW BRALEY, ARM-PE, Risk Manager
Federal ID # ___________
DocuSign Envelope ID: E1966A06-AAED-4385-BD61-42B3C3C5A31C HDR Engineering Inc.

Sr. Vice President
47-0680568
Holly Kennedy
5/14/2024
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Revised 1/19/2024
Bid Waiver Approval Form
Supplier Name: Amount of Bid Waiver Request:

Supplier Contact: Supplier Phone No:

Are Federal Funds being utilized for portion of purchase? A bid waiver is required for any procurement commitment greater than $ 3,500 where a minimum of three bids are not obtained.

Justification for waiving the competitive bid requirements is limited to the following (provide detailed information in the comments section of form):

Reason for Bid Waiver - Check Box:

Sole Source - The item/service is unique in its specifications such that only one vendor is qualified to provide the good or service (Formal bidding exception under MMC 8-3.204(b))
OEM - Original Equipment Manufacturer / Distributor
Inflexible time constraints preclude the bidding process - Exigent or mergency circumstances (Formal bidding exception under MMC 8-3.204 (c)) The incumbent's cost, delivery and quality can be compared to a previous quote/bid obtained within the last six months, for the same or similar item/service (Total purchase must be less than $100,000)
Professional Services defined under MMC 8-3.103 (Formal bidding exception under MMC 8-3.204 (a)) – staff should make effort to solicit at least three informal proposals.

Single Bid/Proposal – More than one supplier could provide the goods or service, but only one supplier provided bid/proposal for solicitation.

Amendment – Extending agreement for no more than one year to allow the City to complete formal bidding process for new agreement (MMC 8-3.204 (e)).

Amendment – Amending the goods or services under the existing agreement to include similar types of goods and services (MMC 8-3.204 (f)) Requisition No: Department:

Project Description:

The purchase of any item utilizing any Federal Funding must comply with current applicable Circular Yes No
Public Works
Proposal for Permitting and Design for Compost Facility Surface Improvements HDR Engineering, Inc. 96062
Cindy Liles 408.386.1965
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Revised 1/19/2024
Other (requires detailed comments)

NEW TECHNOLOGY PURCHASES
Does the new technology meet the criteria to be reviewed by the Technology Steering and Alignment Committee (TSAC)? Yes ____ No ____
If yes, was it approved by this committee? Yes ____ No ____ Approval Name Signature Date
Requestor
Division Manager
Department Director
Chief Information Officeri
Buyer
Purchasing Manager
Director of Finance

i
Information technology (IT) purchases will require Chief Information Officer Signature Buyer Comments:

Comments:

Rosene Nguyen
Rosene Nguyen
2/6/2024
2/6/2024
Dianne Love (Feb 14, 2024 16:00 PST) Dianne Love Dianne Love Feb 14, 2024 DeAnna Christensen Feb 14, 2024
Held teams meeting with the department, Carol, myself and Dianne to determine the best way to process this project. It was decided that an Amendment to the existing agreement is the best option as the SOW is similar and expanding on current agreement.

Holly Gonzales Holly Gonzales 2/13/24
HDR Engineering conducted a compost falsifiability study. Compost surface improvement was on of the items listed in the study. The amendment to the contract provides a detailed proposal on how to conduct the permitting and design for the compost facility surface improvements. Currently the compost facility is under a Notice of Violation (NOV) with the water board. the NOV states that the compost facility has to improve the surface to prevent ponding of water that contributes to contaminating the ground water.

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hdrinc.com
3003 Oak Road, Suite 500, Walnut Creek, CA 94597-4541
(925) 465-2700
December 7, 2023
Rosene Nguyen
Integrated Waste Program Manager
City of Modesto
[email protected] Subject: Proposal for Permitting and Design for Compost Facility Surface Improvements
Dear Mrs. Nguyen,
HDR Engineering, Inc. (HDR) is pleased to present this proposal to support the City of Modesto (City) in updating their Waste Discharge Requirements (WDR) for Composting Operations Technical Report for the City’s Compost Facility (Facility) located at 7001 Jennings Road. This is one of the next steps that HDR recommendations for the City, as a result of the Facility Feasibility Study, to improve the Facility’s operations and comply with the WDR requirements. HDR has prepared this proposal based on our experience performing previous work on the Facility and similar projects.

HDR has recently completed the Compost Facility Feasibility Study for the City which included a list of recommendations to improve and expand the operations at the Facility.

The work included performing a feedstock assessment, site electrification analysis, permitting strategy, as well as completing a conceptual design of the surface improvements, and collecting vendor quotes for composting systems and equipment. This proposal is one of the next steps for improving the Facility.

Scope of Services
The following tasks have been identified to complete the above objectives:

Task 1 – Prepare Construction Grading Plans
The proposed surface improvements from the Compost Facility Feasibility Study will be used to prepare the construction grading plans. Prior to preparing the grading plans, a land survey will be conducted. HDR has partnered with Associated Engineering Group (AEG) located in the City of Modesto to perform this work. AEG performed the 2009 land survey for the Facility and is familiar with the property. AEG has provided a separate proposal which has been incorporated into this proposal and is included in Appendix A.

DocuSign Envelope ID: E1966A06-AAED-4385-BD61-42B3C3C5A31C EXHIBIT A1
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Once the results of the land survey are received, HDR will prepare a 60% design packet of the grading plans for City review and comment. Once comments are received from the City, HDR will finalize the 100% design plans for the Facility surface improvements. The design packet will be inclusive of supporting drainage calculations to be used in the Revised Technical Report.

The HDR team anticipates the design plans to be up to twelve (12) sheets for a complete submittal packet. Other than the survey, one (1) additional site visit is anticipated for up to two (2) HDR staff. The design lead will meet with the City virtually for up to three (3) meetings during the preparation of the plans, once after the survey data has been received, again after the 60% design packet has been prepared, and a final meeting to review the complete 100% design packet.

The final deliverable will be in PDF format for the City to submit to the appropriate department to obtain the necessary permits and approvals prior to construction. These PDFs will also be designed to be included in the future Request for Proposals (RFP) for the City to select a qualified contractor to perform the construction activities.

This task does not include major revisions to the construction grading plans post-review by the applicable permitting agencies. Minor revisions such as labeling and formatting are included.

Task 2 – Revise WDR Technical Report
During the Compost Facility Feasibility Study, HDR proposed surface improvements at the Facility to comply with WDR and prepared conceptual level design plans. These proposed surface improvements will be used to revise the Technical Report and prepare the construction level grading plans. The Technical Report will include the construction level grading plans and supporting drainage calculations. This assumes one (1) round of review and comments from the City prior to finalizing the Technical Report.

This assumes one (1) complete revised Report of Waste Discharge (ROWD) application package, inclusive of the application form if required by the Central Valley Regional Water Quality Control Board (CVRWQCB). HDR will lead the coordination with the CVRWQCB during their review process and assumes responding to one (1) round of comments through a revised ROWD application package. Coordination with CVRWQCB may include emails, phone calls, and virtual meetings not to exceed twenty (20) hours of HDR labor.

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If the CVRWQCB does not approve the current design, then HDR will prepare a proposal to revise the construction grading plans and associated drainage calculations. The ROWD revisions included in this proposal do not include changing the proposed design.

Task 3 – Request for Proposal Assistance
It is HDR’s understanding that the City will prepare and facilitate a Request for Proposals (RFP) to select a contractor to perform the proposed surface improvements at the Facility.

HDR will assist as needed in the RFP process for up to fifty (50) hours by key HDR staff.

Specifically, HDR will participate in a limited basis during the contractor RFP process to prepare a summary description of the scope and to answer questions from the contractors related to the design plans.

Task 4 – Preparation of Construction SWPPP
HDR will prepare a conceptual Stormwater Pollution Prevention Plan (SWPPP) document pursuant to the California State Water Resources Control Board and Construction General Permit (CGP) requirements, which includes the SWPPP be written by a Qualified SWPPP Developer (QSD). The SWPPP will be prepared using the California Stormwater Quality Association (CASQA) construction SWPPP template. This assumes one (1) round of comments from the City during one (1) comment period. The SWPPP will be prepared to be provided as part of the bid package for the RFP process to select a contractor. The purpose of the conceptual construction SWPPP is to provide a SWPPP that will only require minor revisions by the selected contractor’s QSD. HDR will not be the projectspecific QSD certifying the SWPPP; the project-specific QSD will need to be identified and supplied by the selected contractor.

HDR is able to provide third-party oversight for the proposed construction activities, as they related to the construction SWPPP, however these services are not included in this proposal at this time.

Project Schedule
HDR anticipates that the ROWD application packet will be ready for submittal within four (4) months of receiving the Notice to Proceed (NTP). The land survey will be performed within one (1) month of receiving the NTP. After the results of the land survey are delivered, HDR anticipates approximately two (2) months to prepare the construction grading plans and supporting drainage calculations. These design plans and calculations will be incorporated into the Technical Report and a complete application packet will be DocuSign Envelope ID: E1966A06-AAED-4385-BD61-42B3C3C5A31C #9..
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prepared for submittal to the CVRWQCB. Tasks 3 and 4 will only commence after feedback from the CVRWQCB is received, or as directed by the City to proceed. It is anticipated that the CVRWQCB may take between four (4) to nine (9) months to review the ROWD package. The construction grading plans, Technical Report, RFP process, and construction SWPPP may be impacted depending on comments received.

Fee Estimate
HDR will furnish labor, equipment, and materials to assist the City of Modesto on a time and materials basis not to exceed $96,062 (see Table 1 below).

Staff rates will be consistent with the current contract terms. HDR will only expend efforts under these tasks as authorized by the City.

The people most involved in this project will be Cindy Liles, EIT and Maryan Kukharets, PE.

The project team will be supported on an as-needed basis by other technical resources within HDR. The 2024 activities described herein can commence immediately upon NTP from the City.

Table 1. Cost estimate per tasks identified
Task Description Cost Estimate
Task 1 – Prepare Construction Grading Plans 31,915
Task 2 – Revise WDR Technical Report 36,147
Task 3 – Request for Proposals Assistance 13,515
Task 4 – Preparation of Construction SWPPP 14,485
Grand Total $96,062
Exclusions
The scope of work and budget associated with this proposal assume the following:  Meetings with the City and vendors will be conducted virtually.  The proposed surface improvements in the Compost Facility Feasibility Study will be used to revise the Technical Report and prepare the construction level grading plans.

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 The City will obtain the necessary local approvals for construction of the proposed surface improvements, such as, but not limited to a grading permit.  The City will prepare the RFP for a contractor to perform the surface improvements proposed at the Facility and coordinate the selection of the contractor.  HDR will participate in a limited basis during the contractor RFP process to prepare a summary description of the scope and to answer questions from the contractors related to the design plans.  A QSD certified SWPPP for construction is not included in this proposal.  Construction Quality Assurance (CQA) services are not included in this proposal.  This proposal does not include major revisions to the construction grading plans post-review by the applicable permitting agencies. Minor revisions such as labeling and formatting are included.  Work is assumed to occur in the calendar year 2024.

HDR has qualified staff and is available to provide a separate proposal for these services excluded above.

HDR is excited about another opportunity to work with the City of Modesto. In the meantime, please feel free to contact us should you have questions.

Sincerely,
HDR Engineering, Inc.

Cindy Liles Holly Kennedy, PE
Project Manager Senior Vice President
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Appendix A
Appendix A:

Associated Engineering
Group Survey Proposal
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P3385_rev

AGREEMENT

PROFESSIONAL CONSULTING SERVICES
MODESTO COMPOST FACILITY – TOPOGRAPHIC SURVEY MODESTO, CALIFORNIA NOVEMBER 17, 2023

1. LOCATION The subject site is located at 7001 Jennings Road in Modesto, California, as illustrated in the attached exhibit depicting limits of area and is further identified as Stanislaus County Assessor’s Parcel No.: 22-01-02. 2. CLIENT
Cindy Liles
HDR Inc.
2365 Iron Point Road
Folsom, CA 95630-8709
(408) 386-1965
3. SCOPE OF SERVICES
This project, being the professional consulting services necessary for the topographic survey as shown on the attached exhibit to be done under the supervision of a license land surveyor for quality control purposes, shall include, but not be limited to, the following: A. FIELD AND AERIAL TOPOGRAPHIC SURVEY (limits of survey, see attached)

1. Perform field surveying for establishment of horizontal and vertical control at site, utilizing State Plane Coordinates (NAD83-SPC Zone CA-III) and North American Vertical Datum of 1988 (NAVD88). 2. Setup aerial flight crosses and tie in control for aerial topographic survey. 3. Perform detailed topographic survey of existing improved areas to include:
a. Horizontal location of planimetric features to include top and toe of slopes, roads, curbs, concrete drainage swales, concrete pads, containment areas, pavement, parking lot striping, planter areas, sidewalks, trench drains, bollards, grade breaks, surface visible utilities such as manholes, drain inlets, valves, fire hydrants, etc., buildings, building corners, fences, rails gates, walls, vegetation, trees, signs, and other visible features within the survey limits.
b. Surface utility locations along with subsurface alignment to include invert elevations for all gravity pipes, storm drain inlets and manholes. Measure and note all visible pipe sizes in the field.
4. Perform aerial survey of site for base mapping purposes of approximately 60 +/- acres. ITEM A.........................................................................$9,380 (Based on Prevailing Wage Rates)
B. TOPOGRAPHIC BASE MAPPING (limits of survey, see attached)

1. Perform base mapping to incorporate field data (task item A) and aerial topography into one overall base drawing to include the appropriate lines, symbols, and annotation to clearly depict the topographic data collected.

2. Prepare digital terrain model (DTM) at 1-foot contours on base drawing.

3. Prepare aerial and topographic survey base drawing at a scale to fit on a 24” x 36” sheet to be provided in PDF format with land surveyors seal and signature and AutoCAD Civil 3D v2018 format for client’s use. ITEM B .........................................................................$3,605

4. TOTAL FEE .....................................................................................................................................................$12,985
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Modesto Compost Facility
Modesto, California
November 17, 2023

Page 2 ends

5. COMPENSATION FOR SERVICES
A. Fees are due and payable in the amount and in accordance with the above referenced scope of services. Invoicing shall be on a monthly schedule and reflect that portion of the scope of services of which consultant has completed.All payments shall be due at receipt of the invoice unless otherwise specified in this agreement.

B. Should for any reason the due and payable portion of the above referenced scope of services fee schedule become delinquent, the Owner/Client agrees to pay a monthly late payment charge which will be the lesser of 1.5% per month or a monthly charge equal to the maximum legal amount which will be applied to any unpaid balance due commencing thirty (30) days after the date of original invoice.

6. STANDARD PROVISIONS OF AGREEMENT
Client has read and understands all the standard provisions of the agreement set forth and included herewith and agrees all standard provisions of agreement are a part of this agreement and are binding on Client. In witness whereof, the parties hereto have accepted, made, and executed this Agreement upon the terms, conditions, and provisions above stated.The agreement may be withdrawn by Associated Engineering Group, Inc. if not accepted within 30 days from the date of authorized signature below. CONSULTANT: (Authorization) OWNER/CLIENT: (Acceptance of Agreement) ASSOCIATED ENGINEERING GROUP, INC. HDR Inc.
_________________________Date: __________ _________________________Date: _________ Jim Freitas President
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Bid Waiver Approval Form HDR Amendment
Final Audit Report 2024-02-15
Created: 2024-02-13
By: Juana Lynch ([email protected])
Status: Signed
Transaction ID: CBJCHBCAABAAPJ1a-wvucf6TvBnzqDfCuwVF1gMbLrW5 "Bid Waiver Approval Form HDR Amendment" History
Document created by Juana Lynch ([email protected]) 2024-02-13 - 9:16:31 PM GMT
Document emailed to [email protected] for signature
2024-02-13 - 9:17:55 PM GMT
Email viewed by [email protected]
2024-02-14 - 11:59:00 PM GMT
Signer [email protected] entered name at signing as Dianne Love 2024-02-14 - 11:59:59 PM GMT
Document e-signed by Dianne Love ([email protected]) Signature Date: 2024-02-15 - 0:00:01 AM GMT - Time Source: server Document emailed to DeAnna Christensen ([email protected]) for signature 2024-02-15 - 0:00:02 AM GMT
Email viewed by DeAnna Christensen ([email protected]) 2024-02-15 - 0:04:36 AM GMT
Document e-signed by DeAnna Christensen ([email protected]) Signature Date: 2024-02-15 - 0:12:05 AM GMT - Time Source: server Agreement completed. 2024-02-15 - 0:12:05 AM GMT
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hdrinc.com
2365 Iron Point Road, Suite 300, Folsom, CA 95630-8709
(916) 817-4700
March 4, 2025
Rosene Nguyen
Public Works | Integrated Waste Program Manager
City of Modesto
209.577.5453
[email protected]
Subject: Proposal for Design of a new Transformer to serve the City’s Compost Facility Dear Rosene,
HDR Engineering, Inc. (HDR) is pleased to present this proposal to support the City of Modesto (City) in updating their Compost facility with the design of a new electrical transformer to provide power to the City’s Compost Facility (Facility) located at 7001 Jennings Road. These improvements are a part of the next steps the Facility needs to serve the City’s current and future needs. HDR has prepared this proposal based on our experience performing previous work on the Facility and similar projects. HDR has recently completed the Compost Facility Feasibility Study (Study) for the City, which included a list of recommendations to improve and expand the operations at the Facility. The Study included an analysis of the Facility’s electrification capacity and identified the need to increase power supply to the Facility to provide additional processing capabilities to process additional feedstock. This proposal is one of the next steps for improving the Facility.

Scope of Services
The following tasks have been identified to fulfill the above objectives:

Task 1 – Project Management
Task 1.1 Project Management
Project Management includes project oversight, execution, office administration, invoicing, coordinating work of the design team, and coordinating and reporting on the progress of the Project to the City. We will monitor project progress, assign labor resources, review work products, respond to City requests and concerns, and maintain communications with City staff regarding the work schedule and budget.

Monthly invoices will include progress reports, and each report will summarize the work accomplished during the billing period, the work forecast anticipated for the following month, and a summary of the spent and remaining amounts. Preparation of Critical Path Scheduling for the duration of the Project prior to construction will be performed under this task. Scheduling will be performed using Microsoft Project. The HDR Team will schedule a Project kick-off meeting and technical review meetings to facilitate dialogue between project team members and to review submittals at subsequent phases of the work.
 Facilitate a bi-weekly virtual meeting during the first six months of the Project to keep the City staff appraised of the Project’s progress
 Schedule a pre-design meeting with City staff to discuss and investigate options and available alternatives for facility settings, equipment, and construction logistics #9..
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2 Assumptions for Task 1:
 HDR will facilitate a virtual bi-weekly status meeting to report on the progress of the Project. These meetings may change over the duration of the project to less frequent meetings such as monthly
 It is assumed that the City will identify and provide its core team members to the Project Management team for attendance at regular Project update meetings, review submittals, and provide responses to the design team
Deliverables for Task 1:
 Monthly Progress Reports
 Meeting Agendas and Meetings Minutes
 Microsoft Project-based Critical Path Schedule will be transmitted electronically to a PDF format monthly for the estimated eight months of the project duration Task 2 – Estimate Future Power Requirements
HDR will prepare an estimate of the future power requirements of the Facility. The purpose of this task is to identify the future power requirements to bracket the range of power expected to be needed at the Facility. The future power requirements are envisioned to include the new electrified materials screening, grinding, blending infrastructure, future aeriated static pile aeration system, administrative offices, electrified on-site equipment, storm drainage pumping system and related features as identified in the previously prepared Study. HDR will transmit a draft of the Estimated Future Power Requirements Technical Memo for the City’s consideration.

HDR will schedule and facilitate a virtual meeting to discuss the draft TM and its contents.

Following the city’s review and input, HDR will finalize the Estimated Future Power TM.

Assumptions for Task 2:
 This is conceptual level planning exercise and will rely on conceptual level estimates of the likely range of power demands
 No design services are included in this task
 The City will participate in review of the draft TM and offer input/comments using a consolidated response to HDR
Deliverables for Task 2:
 Draft Estimated Future Power Requirements TM
 Meeting Agendas and Meetings Minutes
 Final TM
Task 3 – Prepare Transformer Preliminary Design
Following completion and the City’s acceptance of the Future Power Requirements, HDR will prepare the Transformer Preliminary Design. The purpose of this task is to convert the list of future power requirements into a preliminary design to reach consensus of the scope of the transformer project design and subsequent construction.

HDR will prepare a single Preliminary Design sheet showing the location and features at a conceptual level for discussion and city’s input and concurrence. HDR will transmit a draft of the Preliminary Design for the City’s review and consideration. HDR will schedule and facilitate a virtual meeting to discuss the draft Preliminary Design TM and its contents. Following the city’s review and input, HDR will finalize the Estimated Future Power TM. #9..
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3 Assumptions for Task 3:
 This is planning level exercise and is intended to communicate the general features envisioned to be developed
 The City will participate in review of the draft Preliminary design documents and offer input/comments using a consolidated response to HDR
Deliverables for Task 3:
 Draft Preliminary Design
 Meeting Agendas and Meetings Minutes
 Final Preliminary Design
Task 4 – Prepare Transformer Construction Documents
Following completion and the City’s acceptance of the Future Power Requirements and subsequent Preliminary Design, HDR will prepare the Transformer Construction Documents.

The purpose of this task is to develop the construction documents which will be used to procure the purchase and installation of the new transformer for the Facility.

The design documents will include:
 One line diagram showing power from utility distribution, down to utility transformer and onto a main/meter switchboard.
 Utility transformer requirements for site install.
 Switchboard requirements for install.
 Conduits and conductors information for construction bid documents.  Specifications for contractor provided equipment.

HDR will prepare the Transformer Construction Documents which will include the following:

TECHNICAL SPECIFICATIONS
 Technical specifications
 Bid Form
 Measurement and Payment
HDR will facilitate a Request for Proposals (RFP) to select a contractor to perform the proposed surface improvements at the Facility. HDR will assist as needed in the RFP process for up to fifty (50) hours by key HDR staff. Specifically, HDR will participate in a limited basis during the contractor RFP process to prepare a summary description of the scope and to answer questions from the contractors related to the design plans.
#9..
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4 This scope assumes one (1) round of comments from the City during one (1) comment period.

The design documents will be prepared to be provided as part of the bid package for the RFP process to select a contractor.

Assumptions for Task 4:
 This task relies on the completion of the Transformer Preliminary Design documents in task 3 above
 The City will participate in review of the draft TM and offer input/comments using a consolidated response to HDR
Deliverables for Task 4:
 Draft Transformer Design Documents
 Meeting Agendas and Meetings Minutes
 Final Transformer Design Documents
Task 5 – Provide Bidding Support Assistance
HDR will provide bidding support during the bidding phase. HDR anticipates responding to Requests for Information and related topics up to 8 hours of senior Engineer time.

Assumptions for Task 5:
 HDR will assist the City who will issue the Request for Bidding  HDR will respond to Requests for Information for up to 8 hours of Senior Engineering time Deliverables for Task 5:
 Responses to Request for Information
Task 6 – Provide Engineering Services During Construction (not included in this proposal)
HDR is able to provide third-party oversight for the proposed construction activities, as they related to the construction SWPPP, however these services are not included in this proposal at this time.

Project Schedule
HDR anticipates that the preparation of these services as follows: preparation of the estimate of future Power demands (Task 2) within three weeks of receiving the Notice to Proceed (NTP).

The Transformer Preliminary Design (Task 3) will be performed within one (1) month of receiving the city’s acceptance of the Future Power Requirements. After the results of the Transformer Preliminary Design is accepted by the city, HDR anticipates approximately two (2) months to prepare the Transformer Construction Documents (Task 4).

Fee Estimate
HDR will furnish labor, equipment, and materials to assist the City of Modesto on a time and materials basis not to exceed $94,658 (see Table 1 below).

Staff rates will be consistent with the current contract terms. HDR will only expend efforts under these tasks as authorized by the City. Charlie O’Neill will be the Project Manager for this work. #9..
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5 The project team will be supported on an as-needed basis by other technical resources within HDR. The 2025 activities described herein can commence immediately upon NTP from the City.

Work is assumed to occur in the calendar year 2025 and should work go into 2026, escalation will be applied to rates on January 1st. The values below include the expectation that 25% of the work occurs in 2026.

Table 1. Cost estimate per tasks identified
Task Description Cost Estimate
Task 1 – Project Management 10,064
Task 2 – Estimate of Future Power Requirements 16,013
Task 3 – Preliminary Transformer Design 20,559
Task 4 – Transformer Construction Documents 43,616
Task 5 – Bidding Support 4,406
Grand Total 94,658
This proposal is valid for one hundred twenty (120) workdays from the date of submission.

Thereafter, it may be subject to change.

Exclusions
The scope of work and budget associated with this proposal assume the following:
 Meetings with the City and vendors will be conducted virtually  The City will obtain the necessary local approvals for construction of the proposed surface improvements, such as, but not limited to permits
 The City will prepare the boiler plate (City’s administrative components/RFP) for a contractor to perform the Transformer improvements proposed at the Facility and coordinate the selection of the contractor
 HDR will participate in a limited basis during the contractor RFP process to prepare a summary description of the scope and to answer questions from the contractors related to the design plans
 Construction Quality Assurance (CQA) services are not included in this proposal  This proposal does not include major revisions to the construction grading plans postreview by the applicable permitting agencies HDR has qualified staff and is available to provide a separate proposal for these services excluded above. HDR is excited about another opportunity to work with the City of Modesto. In the meantime, please feel free to contact us should you have questions.

Sincerely,
HDR Engineering, Inc.

Charlie O’Neill Holly Kennedy, PE
Project Manager Senior Vice President
#9..
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City of Modesto 2025 Rate Sheet
Employee Type Min Max
Project Manager $226.00 $265.00
Tech and QC $399.00 $425.00
Engineer/Planner VI $357.00 $378.00
Engineer/Planner V $314.00 $336.00
Engineer/Planner IV $275.00 $293.00
Engineer/Planner III $234.00 $256.00
Engineer/Planner II $191.00 $213.00
Engineer/Planner I $145.00 $169.00
CAD $130.00 $165.00
Project Accountant $120.00 $155.00
Project Coordinator $125.00 $165.00
*On average, an annual escalation of 5% will be applied on January 1st. *Subconsultant invoices will be billed with a 5% markup. *Expenses will be billed at cost.
"Exhibit B" #9..
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Public Works
Proposal for Design of a new Transformer to serve the City's Compost Facility HDR Engineering, Inc. $94,658.00
Cindy Liles 408-386-1965
#9..
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Sarah Jennings
Rosene Nguyen
Bill Sandhu
Holly Gonzales
Dianne Love
DeAnna Christensen
HDR created the feasibility plan for the compost facility. On October 24, 2023, by Resolution No. 2023-472, Council approved the proposed plan and recommendations from HDR Engineering to expand and improve the existing City of Modesto Compost Facility. In the plan HDR started some preliminary work on the site electrification. The preliminary work provided load calculation, TID fees, and recommendation. The proposed amendment expands their scope of work to design the transformer and the switch board.

The goal is for the site to be electric. We are in need to purchase equipment but are unable to do so right now since we don’t have high voltage electricity at the site. Going out to bid will delay the process by at least 7 months. Time is of the essence as we have a grinder that is out of service and need to purchase a new compost screen. These pieces of equipment are critical to daily operations at the facility and are needed to process incoming material. A 7 month delay would result in the facility exceeding permit limits and a violation could be issued.

Amendment to include Design of Transformer and the Switch Board, since HDR completed the Feasibility study and is familiar with the work needed to meet the long term goal for the site electrification they would be the best fit to proceed with as bidding out this portion of the work would delay the project by at least 7 months which may result in a violation. #9..
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hdrinc.com
2365 Iron Point Road, Suite 300, Folsom, CA 95630-8709
(916) 817-4700
March 4, 2025
Rosene Nguyen
Public Works | Integrated Waste Program Manager
City of Modesto
209.577.5453
[email protected] Subject: Proposal for Design of a new Transformer to serve the City’s Compost Facility Dear Rosene,
HDR Engineering, Inc. (HDR) is pleased to present this proposal to support the City of Modesto (City) in updating their Compost facility with the design of a new electrical transformer to provide power to the City’s Compost Facility (Facility) located at 7001 Jennings Road. These improvements are a part of the next steps the Facility needs to serve the City’s current and future needs. HDR has prepared this proposal based on our experience performing previous work on the Facility and similar projects. HDR has recently completed the Compost Facility Feasibility Study (Study) for the City, which included a list of recommendations to improve and expand the operations at the Facility. The Study included an analysis of the Facility’s electrification capacity and identified the need to increase power supply to the Facility to provide additional processing capabilities to process additional feedstock. This proposal is one of the next steps for improving the Facility.

Scope of Services
The following tasks have been identified to fulfill the above objectives:

Monthly invoices will include progress reports, and each report will summarize the work accomplished during the billing period, the work forecast anticipated for the following month, and a summary of the spent and remaining amounts. Preparation of Critical Path Scheduling for the duration of the Project prior to construction will be performed under this task. Scheduling will be performed using Microsoft Project. The HDR Team will schedule a Project kick-off meeting and technical review meetings to facilitate dialogue between project team members and to review submittals at subsequent phases of the work.  Facilitate a bi-weekly virtual meeting during the first six months of the Project to keep the City staff appraised of the Project’s progress  Schedule a pre-design meeting with City staff to discuss and investigate options and available alternatives for facility settings, equipment, and construction logistics #9..
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2 Assumptions for Task 1:  HDR will facilitate a virtual bi-weekly status meeting to report on the progress of the Project. These meetings may change over the duration of the project to less frequent meetings such as monthly  It is assumed that the City will identify and provide its core team members to the Project Management team for attendance at regular Project update meetings, review submittals, and provide responses to the design team
Deliverables for Task 1:  Monthly Progress Reports  Meeting Agendas and Meetings Minutes  Microsoft Project-based Critical Path Schedule will be transmitted electronically to a PDF format monthly for the estimated eight months of the project duration Task 2 – Estimate Future Power Requirements
HDR will prepare an estimate of the future power requirements of the Facility. The purpose of this task is to identify the future power requirements to bracket the range of power expected to be needed at the Facility. The future power requirements are envisioned to include the new electrified materials screening, grinding, blending infrastructure, future aeriated static pile aeration system, administrative offices, electrified on-site equipment, storm drainage pumping system and related features as identified in the previously prepared Study. HDR will transmit a draft of the Estimated Future Power Requirements Technical Memo for the City’s consideration.

HDR will schedule and facilitate a virtual meeting to discuss the draft TM and its contents.

Following the city’s review and input, HDR will finalize the Estimated Future Power TM.

Assumptions for Task 2:  This is conceptual level planning exercise and will rely on conceptual level estimates of the likely range of power demands  No design services are included in this task  The City will participate in review of the draft TM and offer input/comments using a consolidated response to HDR
Deliverables for Task 2:  Draft Estimated Future Power Requirements TM  Meeting Agendas and Meetings Minutes  Final TM Task 3 – Prepare Transformer Preliminary Design
Following completion and the City’s acceptance of the Future Power Requirements, HDR will prepare the Transformer Preliminary Design. The purpose of this task is to convert the list of future power requirements into a preliminary design to reach consensus of the scope of the transformer project design and subsequent construction.

HDR will prepare a single Preliminary Design sheet showing the location and features at a conceptual level for discussion and city’s input and concurrence. HDR will transmit a draft of the Preliminary Design for the City’s review and consideration. HDR will schedule and facilitate a virtual meeting to discuss the draft Preliminary Design TM and its contents. Following the city’s review and input, HDR will finalize the Estimated Future Power TM. #9..
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3 Assumptions for Task 3:  This is planning level exercise and is intended to communicate the general features envisioned to be developed  The City will participate in review of the draft Preliminary design documents and offer input/comments using a consolidated response to HDR
Deliverables for Task 3:  Draft Preliminary Design  Meeting Agendas and Meetings Minutes  Final Preliminary Design Task 4 – Prepare Transformer Construction Documents
Following completion and the City’s acceptance of the Future Power Requirements and subsequent Preliminary Design, HDR will prepare the Transformer Construction Documents.

The purpose of this task is to develop the construction documents which will be used to procure the purchase and installation of the new transformer for the Facility.

The design documents will include:  One line diagram showing power from utility distribution, down to utility transformer and onto a main/meter switchboard.  Utility transformer requirements for site install.  Switchboard requirements for install.  Conduits and conductors information for construction bid documents.  Specifications for contractor provided equipment.

HDR will prepare the Transformer Construction Documents which will include the following:

DESIGN SHEETS  Cover sheet legends and symbols  Civil Site and Grading Plan  Horizontal Control Plan  Civil Site Utility Plan  Electrical Site Plan  Electrical Single Line Diagram  Details TECHNICAL SPECIFICATIONS  Technical specifications  Bid Form  Measurement and Payment HDR will facilitate a Request for Proposals (RFP) to select a contractor to perform the proposed surface improvements at the Facility. HDR will assist as needed in the RFP process for up to fifty (50) hours by key HDR staff. Specifically, HDR will participate in a limited basis during the contractor RFP process to prepare a summary description of the scope and to answer questions from the contractors related to the design plans.
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4 This scope assumes one (1) round of comments from the City during one (1) comment period.

The design documents will be prepared to be provided as part of the bid package for the RFP process to select a contractor.

Assumptions for Task 4:  This task relies on the completion of the Transformer Preliminary Design documents in task 3 above  The City will participate in review of the draft TM and offer input/comments using a consolidated response to HDR
Deliverables for Task 4:  Draft Transformer Design Documents  Meeting Agendas and Meetings Minutes  Final Transformer Design Documents Task 5 – Provide Bidding Support Assistance
HDR will provide bidding support during the bidding phase. HDR anticipates responding to Requests for Information and related topics up to 8 hours of senior Engineer time.

Assumptions for Task 5:  HDR will assist the City who will issue the Request for Bidding  HDR will respond to Requests for Information for up to 8 hours of Senior Engineering time Deliverables for Task 5:  Responses to Request for Information Task 6 – Provide Engineering Services During Construction (not included in this proposal)
HDR is able to provide third-party oversight for the proposed construction activities, as they related to the construction SWPPP, however these services are not included in this proposal at this time.

Fee Estimate
HDR will furnish labor, equipment, and materials to assist the City of Modesto on a time and materials basis not to exceed $94,658 (see Table 1 below).

Staff rates will be consistent with the current contract terms. HDR will only expend efforts under these tasks as authorized by the City. Charlie O’Neill will be the Project Manager for this work. #9..
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5 The project team will be supported on an as-needed basis by other technical resources within HDR. The 2025 activities described herein can commence immediately upon NTP from the City.

Thereafter, it may be subject to change.

Exclusions
The scope of work and budget associated with this proposal assume the following:  Meetings with the City and vendors will be conducted virtually  The City will obtain the necessary local approvals for construction of the proposed surface improvements, such as, but not limited to permits
 The City will prepare the boiler plate (City’s administrative components/RFP) for a contractor to perform the Transformer improvements proposed at the Facility and coordinate the selection of the contractor  HDR will participate in a limited basis during the contractor RFP process to prepare a summary description of the scope and to answer questions from the contractors related to the design plans
 Construction Quality Assurance (CQA) services are not included in this proposal  This proposal does not include major revisions to the construction grading plans postreview by the applicable permitting agencies HDR has qualified staff and is available to provide a separate proposal for these services excluded above. HDR is excited about another opportunity to work with the City of Modesto. In the meantime, please feel free to contact us should you have questions.

Sincerely,
HDR Engineering, Inc.

Charlie O’Neill Holly Kennedy, PE
Project Manager Senior Vice President
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CITY OF MODESTO

COMMITTEE AGENDA REPORT
DATE OF MEETING:

May 19, 2025
Date: April 30, 2025
TO: Finance Committee
Rosa Escutia-Braaton, Chair
David Wright, Vice-Chair
Nick Bavaro, Member
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 the updates to the City’s Debt Management Policy and forwarding to Council for approval. (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:

This Policy is to be reviewed and updated annually as required. Public Financial Management, Inc. (PFM), the City’s municipal advisor, and Norton Rose Fulbright, the City’s bond counsel, have reviewed and proposed updates and changes to the Debt Management Policy. The recommended changes are discussed below, and incorporated in the attached Policy documents:
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Finance Committee, May 19, 2025
Debt Management Policy Updates

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 In the Debt Policy Objective section, language was added to clarify the objectives of issuing debt.
 In the Debt Financing section, language was added to include Interim Financing as a purpose of issuing debt.
 In the Terms and Conditions of Bonds section, language was added to clarify that different lien levels would be used for different types of debt, and to allow for extra consideration in evaluation the coupon structure; language was removed to clarify that the City only issues debt with a call feature that is under ten (10) years.  In the Credit Enhancements section, language was added to clarify that bond insurance can be purchased for specific maturities and doesn’t need to be issued on an entire debt.
 In the Refinancing Outstanding Debt section, language was added to require Council approval for debt restructures.
 In the Methods of Issuance section, clarifications were made to which considerations are used to determine the most advantageous methods of sale.  In the Market Relationships section, language was added to reflect the current practice of complying with requests from rating agencies.
 In the Underwriter Selection section, language was added to clarify the City’s objective when agreeing to fees associated with a bond issuance.
 Other changes are minor and are mostly formatting and grammatical in nature.

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.

RECOMMENDED COMMITTEE ACTION:

Staff Recommendations:

Motion recommending the updates to the City’s Debt Management Policy and forwarding to Council for approval.
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Finance Committee, May 19, 2025
Debt Management Policy Updates

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Approved by:

DeAnna Christensen, Director of Finance
Joseph P. Lopez, City Manager
Attachments:

1. Debt Management Policy (FY26 With Edits)

2. Debt Management Policy (FY26 Clean Copy)
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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.

Financial objectives include:
• 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.

Other objectives include:
• Establishing clear criteria for decision making with regards to debt issuance, debt structuring and debt management
• Foster consistency in debt management practices over time with staff and Council turnover • Ensure industry best practices are adopted and maintained 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.

CITY OF MODESTO

CITY COUNCIL POLICY
LATEST REVISION DATE: May 20, 2024
POLICY NUMBER: 1.036
CITY DEPARTMENT: Finance
SUBJECT: Debt Management Policy
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2 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).

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.
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3 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 exceed 120% of the useful life of the project being financed. Inherent in its long-term debt policies, the City recognizes that future taxpayers and/or ratepayers 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 #10..
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4 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 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 land and building acquisition, construction, capital improvements 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.

3. Interim Financing
Interim financing in the form of commercial paper, revolving line of credit, or short-term debt may be issued to bridge cashflow needs. It is used to defer the issuance of more expensive long-term debt or provide interim funds while waiting for reimbursement from other sources such as grants.

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 #10..
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5 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, 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 maymaintain 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 #10..
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6 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.

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 #10..
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7 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 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 #10..
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8 priority financing, based on funding availability and proposed timing, will generally be financed on the most senior lien of the relevant credit. The City may use lower liens for specific needs such as interim financing or commercial paper.

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 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, including taxable debt, will include a call feature, which is no later than ten (10) years from the date of delivery of the bonds. In addition to par call, the City may also consider including a make-whole-call option. 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. When evaluating the coupon structure for a bond issuance, the City should factor in investor preference, the yield-to-call, the yield-to-maturity and the potential to refund the bonds for debt service savings in the future.

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
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9 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. Bond insurance may be purchased for the entire amount of an issue or for specific maturities based on a recommendation from the financial advisor or senior underwriter.

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:

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. The decision to restructure debt must be expressly described in the staff report presented to the City Councilexplicitly approved by the City Council.

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.

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 #10..
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11 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 tTransaction size is modest, generally larger than $10 million but lower than $100 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 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.
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12 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. Private placements may be well-suited for weaker credits where a rating cannot be obtained. 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 and bond covenants.

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. The Director of Finance shall monitor and comply with periodic data requests from rating analysts for their rating surveillance process.

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 itsadministrative 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
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13 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 and related negotiations. • Preparation of request for proposals for other financial services such as trustee and paying agent services, printing, credit facilities, remarketing agent services, and related negations 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:
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14 • 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:
• 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 #10..
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15 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 with input from the municipal advisor or pricing advisor. The City will strive to reasonably minimize the underwriter’s takedown by means of a competitive selection process like an RFP. The goal of low takedowns should be balanced with adequately incentivizing the banks to market/sell the bonds or underwrite without rate adjustments, if required. 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.

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.
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16 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 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 #10..
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17 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.

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 #10..
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18 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 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 #10..
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19 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.

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:
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20 • 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:
• 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.
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21 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 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 #10..
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23 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.

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 #10..
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24 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.

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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25 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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26 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 2023
ADDENDUM: Interest Rate Swap Policy
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27 • 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. #10..
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28 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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29 • 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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30 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. #10..
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31 • 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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32 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. #10..
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33 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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34 • 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 #10..
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35 (“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. #10..
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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.

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.

CITY OF MODESTO

CITY COUNCIL POLICY
LATEST REVISION DATE: May 20, 2024
POLICY NUMBER: 1.036
CITY DEPARTMENT: Finance
SUBJECT: Debt Management Policy
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2 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).

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, #10..
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3 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 and/or ratepayers 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.

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 respective system, including the debt service #10..
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4 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 land and building acquisition, construction, capital improvements 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 #10..
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5 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, therefore representing a more expensive funding option. In the case of zero-coupon 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).

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. #10..
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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 structurescould 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.

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 use of a particular derivative product. Derivative products will only be utilized with prior approval from the City Council.
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7 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.

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. The City may use lower liens for specific needs such as interim financing or commercial paper.

E. Debt Service Structure
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, #10..
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8 such as minimizing annual debt service or leveling annual existing debt service, among others.

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. When evaluating the coupon structure for a bond issuance, the City should factor in investor preference, the yield-tocall, the yield-to-maturity and the potential to refund the bonds for debt service savings in the future.

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. Bond insurance may be purchased for the entire amount of an issue or for specific maturities based on a recommendation from the financial advisor or senior underwriter.

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 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 #10..
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9 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.

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.

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 expressly described in the staff report presented to 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. The decision to restructure debt must be expressly described in the staff report presented to the City Council
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.

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 #10..
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10 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 third-party 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.

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.

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). • Transaction size is modest, generally larger than $10 million but lower than $100 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 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.
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11 • 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 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 cost savings to the City or other benefits relative to other methods of debt issuance. Private placements may be well-suited for weaker credits where a rating cannot be obtained. 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 and bond covenants.

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.

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:
• 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. #10..
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14 • 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.

The goal of low takedowns should be balanced with adequately incentivizing the banks to market/sell the bonds or underwrite without rate adjustments, if required. 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.

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 #10..
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15 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.

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 #10..
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16 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.

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 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.
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17 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.

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 #10..
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18 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. 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 #10..
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19 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.

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:
• 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 #10..
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20 presented on a cash, as opposed to accrual basis).

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.

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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21 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.

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.

Debt Service Reserve Fund- The fund in which moneys are placed which may be 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 #10..
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22 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.

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 SOFR-based 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.

Members- Underwriters in a syndicate other than the senior underwriter.

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 #10..
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23 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.

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.

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. #10..
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24 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”).

CITY OF MODESTO

CITY COUNCIL POLICY
Latest Revision Date: April 2023
ADDENDUM: Interest Rate Swap Policy
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25 • 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.

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.

1. MMD™ is a trademark of Municipal Market Data, a Thompson Financial company. #10..
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26 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.

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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27 • 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?

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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28 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.

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. #10..
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29 • 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.

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,

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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30 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.

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. #10..
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31 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.

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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32 • 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.

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.

Finance CommitteeMay 19, 2025

Finance Committee
May 19, 2025