Works has provided parking enforcement in Downtown Modesto, including maintaining and monitoring seven (7) surface lots and three garages, while the MPD provides parking enforcement throughout the City. The divided responsibilities of parking enforcement have resulted in inconsistent enforcement leading to limited citation revenue and an expectation from the community that the City of Modesto does not consistently enforce parking. To provide consistent enforcement that incorporates all parking enforcement areas, in July 2026, the parking enforcement program will be consolidated and moved to the MPD.
The Finance Department Parking Citation Processing Division oversees the collection of fines from parking citations by processing notices for unpaid parking citations, providing citations information to the public, reviewing, and managing the Parking Violation Fine Schedule, assisting the public when contesting parking citations, and managing the adjudication process. The adjudication process allows a parking citation to be contested by an informal review process (First level), a formal hearing (Second level), and finally by appealing to Superior Court (Third level). The Finance Department has historically staffed two (2) full-time staff which includes a Parking Adjudication Program Coordinator and Senior Account Clerk.
In 2008, the Resolution 2007-54 authorized the purchase of a Parking Citation System for the Finance Department to T2, Systems, Inc., for citation issuance and management services. This software allows parking citations to be issued electronically using handheld devices, downloading issued citations and allowing notices to be issued for parking citations that have become delinquent and require further collection activity. This software also allows the Citation Processing Division to manage all Residential Parking Permit Zones, maintains the California Vehicle Code and Modesto Municipal Code violations schedule, handles all customer service both over the phone and in-person, and manages First, Second, and Third Level appeals as part of the adjudication process. An increase in parking enforcement is anticipated due to the completion of the expanded courthouse, pending arrival of the Altamont Corridor Express (ACE) train, and the potential for increased activity due to residential and business development. As a higher number of parking citations are issued, the Finance Department’s processing capacity will be impacted.
DISCUSSION:
Citation Processing Services:
On April 3, 2026, the City Manager authorized the Purchasing Manager to solicit the procurement for Parking Citation Processing and Collections.
City staff solicited and reviewed three (3) quotes including product demonstrations from Turbo Data Systems, Inc., Data Ticket, Inc., and T2 Systems, Inc. Two (2) of the vendors would require significant system integration efforts, resulting in higher overall costs. T2 Systems, Inc., which already support the Citation Processing Division, can deliver the collections and adjudication services at the lowest cost. Furthermore, T2 Systems, Inc., provides a comprehensive parking management platform capable of supporting future #6..
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enhancements such as event parking, License Plate Recognition (LPR), and permit management.
To reduce costs and to ensure timely processing of parking citations, staff recommend authorizing an Agreement with T2 Systems, Inc., for assistance with collections and adjudication services. T2, Systems, Inc., will be able to assist the City in several positive ways, including:
• Manually issued citations will be scanned and linked to the citation record. • Provide daily communication with the California Department of Motor Vehicles (CA DMV) for registration and license information
• Assist the registration lien collections program through the DMV • Payment processing for payments made online or over the phone using their Interactive Voice Response system to process phone payments • Bilingual Customer Service Call Center for customers via a toll-free phone number
• Mailing delinquent and first notices on behalf of the City • Manage and process initial review requests for First level appeal process As continuous improvements to the parking enforcement program are made to increase parking availability, these changes will allow the City to streamline the workflow, efficiently process payments and provide timely responses to customers.
In accordance with Modesto Municipal Code 8-3.204(a), “Exceptions to Formal Bidding Requirements,” Agreements for Professional Services are exempt from the bidding requirements of Modesto Municipal Code 8-3.203 if competitive quotations or proposals have been sought informally from at least three (3) qualified entities. The approval of the Parking Citation collections and adjudication services to T2 Systems, Inc. conforms to Modesto Municipal Code 8-3.204, subsection (a) as they provide professional services and at least three (3) informal proposals were obtained. Staff procured product demonstrations with three (3) vendors available to provide the collections and adjudication services. Of these three (3) vendors, two would have required extensive integration with higher costs involved. T2 Systems, Inc. is currently utilized by the Citation Processing Division and can perform these services at the lowest cost with no additional integration being required. Therefore, staff recommends the Parking Citation collections and adjudication services of this Agreement be awarded to T2, Systems, Inc., Indianapolis, IN, and should be exempt from the formal bidding procedures in accordance with Modesto Municipal Code 8-3.204(a) since T2, Systems, Inc., Indianapolis, IN, is the lowest cost option based on three (3) quotes for services, eliminating a need for thirdparty integration.
Staffing:
Reclassifying one (1) Parking Adjudication Program Coordinator to one (1) Account Technician II and eliminating one (1) Senior Account Technician, reducing staff to one (1) #6..
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Account Technician II. This change in staffing levels will be able to adequately support customer needs and the oversight of this new Agreement.
Reallocate one (1) Parking Enforcement Officer in Public Works Department to the Police Department and eliminate the Parking Enforcement of the Public Works Department. These changes will assist in providing adequate staffing for consistent enforcement.
Parking Citation Fine Schedule:
In February 2020, City Council approved Resolution 2020-070, authorizing the City Manager to approve the adjustment of the fine schedule for parking violations for the annual Consumer Price Index increase and when necessary to incorporate changes in the fees mandated by the State and/or County and collected by the City without further Council action. The fine schedule has not been increased since February 2020. The City Manager has approved an increase to be effective July 1, 2026, based on the West Region Consumer Price Index. The updated fine schedule has been provided as Exhibit B.
FISCAL IMPACT:
If approved, the City will enter a two-year contract with T2 Systems, Inc. with the option of three (3) one-year extensions. These costs will be funded by the General Fund through the Modesto Police Department (MPD) utilizing revenues collected by the Finance Department for citation issuance.
Annual Cost Account
Year One (1) $25,749 0100-19440-53300
Year Two (2) $22,948 0100-19440-53300
Year Three (3) $24,096 0100-19440-53300
Year Four (4) $25,758 0100-19440-53300
Year Five (5) $24,224 0100-19440-53300
Total $122,775
The contract with T2, Systems, Inc. along with the proposed staffing changes would impact the budget for the Citation Processing Division as follows for Fiscal Year 2026-27:
In-House
Processing
Proposed T2
Agreement
Difference
Salary and Benefits $281,933 $152,139 ($129,794)
Discretionary Expenses $145,045 $95,065 ($49,980)
T2 Systems, Inc Contract $0 $25,749 $25,749
Total $426,978 $272,953 ($154,025)
CEQA/NEPA REQUIREMENTS:
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This item does not constitute a “project” within the meaning of California Environmental Quality Act (CEQA) Guidelines Section 15378 and requires no environmental review.
RECOMMENDED COUNCIL ACTION:
Staff Recommendations:
Motion recommending an Agreement with T2, Systems, Inc., Indianapolis, IN, for Parking Citation Processing and Collections for a total amount not to exceed $122,775 over five (5) years and forwarding to Council for approval.
Motion recommending reclassifying one (1) Parking Adjudication Program Coordinator to one (1) Account Technician II, eliminating one (1) Senior Account Clerk, reallocating one (1) Parking Enforcement Officer from the Parking Services Division of the Public Works Department to the Parking Services Division of the Police Department, and eliminating the Parking Division of the Public Works Department and forwarding to Council for approval.
Motion recommending the amendment of the Fiscal Year 2026-27 Annual Operating General Fund budget to adjust the revenue and expenditures in the amount of $154,025 and forwarding to Council for approval.
Approved by:
DeAnna Christensen, Director of Finance
Joseph P. Lopez, City Manager
Attachments:
1. Agreement – Parking Citation Processing and Collections
2. T2, Systems, Inc., Statement of Work
4. Exhibit A – Parking Citation Fine Schedule
5. Financial Interest Disclosure
6. CA Levine Act
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Rev. October 5, 2023
T2 Master Customer Agreement
This Master Customer Agreement ("Agreement") is made by and between T2 Systems, Inc. (“T2C or T2 Systems”) each on behalf of itself and for the benefit of its respective Affiliates (as defined below) and City of Modesto ("Customer") as of the Effective Date set forth below.
By signing this Agreement, the parties acknowledge to have read, understand and agrees to be bound by the terms and conditions of this Agreement.
1. BACKGROUND. The Agreement establishes the overall contractual framework and the applicable terms and conditions. Under the Agreement, Customer may acquire or license Products and procure Services by entering into an Addenda. The following Addenda will be entered into by Customer and T2 Systems or one of its Affiliates and each will be incorporated in this Agreement herein. -Collection Services Addendum
In the event of any conflicts in the terms of the applicable Addenda and the Agreement, the terms of the Addenda shall control.
2. DEFINITIONS. In this Agreement:
(a) “Addenda” or “Addendum” means each document attached hereto and made part of the Agreement which may include a Quote, Order Form or Statement of Work, between Customer and T2 Systems or one of its Affiliates under this Agreement to place orders for Products and/or Services.
(b) "Affiliate" means, in respect of an entity, any entity which directly or indirectly controls, is controlled by, or is under common control with such entity. "Control" for purposes of this definition, means direct or indirect ownership or control of more than 50% of the voting interests of an entity. (c) "Confidential Information" means and includes any written or orally or visually disclosed information relating to the disclosing party's business identified as “confidential” or “proprietary” or which the receiving party should reasonably know is confidential or not generally known to the public, including, without limitation:
(i) all know-how, technology, Documentation and other proprietary information owned, licensed, used or developed by the disclosing party, including proprietary rights protected by trade secret and other intellectual property rights, and; (ii) all information relating to the disclosing party's business, the source code for the Software, the Services, and to all other aspects of the disclosing party's structure, personnel, operations, financial matters, marketing, commercial strategies, customer lists, Customer Data, contractual records, correspondence, products, programs, devices, #6..
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concepts, inventions, designs, methods, data, and items provided to the disclosing party by third parties subject to restrictions on use or disclosure. (d) "Customer Data" means the data provided to T2 Systems by Customer and Customer’s authorized end users who access or use Software as permitted in an Addendum. (e) "Documentation" means the documentation, help files, user manuals, handbooks and any other written or electronic material relating to the Products and Services provided by T2 Systems to its customers from time to time.
(f) "Effective Date" means the latest of the dates on which this Agreement is executed by Customer and T2 Systems as indicated in the signature block at the end of these terms and conditions. (g) “Hardware” means the T2 Systems hardware sold and provided by T2 Systems to Customer under an Addendum.
(h) “Products” means the T2 Systems products licensed or sold by T2 Systems to Customer under an Addendum including Software and Hardware.
(i) “Quote” or “Order Form” means the quote provided by T2 Systems to Customer related to the ordering of Products and/or Services as set forth in the applicable Addendum. Unless otherwise stated in the Quote, each Quote is incorporated and made part of the applicable Addendum. (j) "Representatives" means, in respect of a party, the directors, officers, employees, agents and contractors of such party.
(k) "Services" means the T2 Systems services provided by T2 Systems to Customer under an Addendum.
(l) “Software” means the T2 Systems Software access to which is licensed by T2 Systems to Customer under an Addendum.
All other terms defined in this Agreement shall have the meanings ascribed thereto.
3. TERM. This Agreement shall commence on the Effective Date and remain in full force and effect until terminated in accordance with its terms.
4. FEES AND PAYMENT.
(a) Customer agrees to pay to T2 Systems the fees plus all applicable taxes as set forth in the applicable Addendum.
(b) All fees are exclusive of all taxes, duties and levies of any kind, including any sales, use, excise, valueadded and other applicable taxes, withholdings, and governmental charges (collectively, “Taxes”).
Customer shall pay all applicable Taxes, other than taxes on T2 System’s income. If T2 Systems pays any such amounts on behalf of Customer, Customer shall reimburse T2 Systems upon presentation of proof of payment.
(c) If Customer claims an exemption from any such taxes, Customer shall provide to T2 Systems an appropriate exemption certificate. If Customer challenges the applicability of any tax, Customer shall nevertheless pay the same to T2 Systems and Customer may thereafter challenge the tax and seek a refund thereof. Customer agrees to indemnify and hold harmless T2 Systems from any cost, fee, penalty or expense (including counsel fees) in connection with any assertion by any taxing authority that T2 Systems has failed to collect and remit their sales or use tax on transactions hereunder or to pay any property taxes on the copies of the Software in Customer’s possession but shall have no such obligation to T2 Systems with respect to any amount paid by Customer to T2 Systems and not remitted to the relevant taxing authority. #6..
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(d) Material Adverse Change. In the event of a material adverse change, the Parties agree to renegotiate, in good faith, pricing of the applicable Addendum and/or Quote(s) within thirty (30) days of such material adverse change. For purposes of this Section 3.4, a “material adverse change” shall mean any event, occurrence, change in facts, conditions, or effect that has been or reasonably can be expected to be adverse to the Customer or the T2, and their respective businesses, operations, or financial conditions, including, but not limited to, a change in law that affects the Services or Deliverables. If the Parties cannot reach an agreement regarding renegotiated pricing within thirty (30) days of such material adverse change, T2 shall have the exclusive option to terminate this MSA and/or any Addendum hereunder upon thirty (30) days written notice
5. OWNERSHIP.
(a) Customer agrees that the Software, Documentation and Services are proprietary products and services of T2 Systems and that all right, title and interest in and to the Software, Documentation and Services, including all associated intellectual property and other proprietary rights, are and shall at all times remain with T2 Systems and its third party licensors. The Software contains trade secret and proprietary information owned by T2 Systems or its third party licensors and is protected by copyright laws and international trade provisions and other applicable law. Customer must treat the Software like any other copyrighted material and Customer may not copy or distribute the Software or the Documentation, electronically or otherwise, for any purpose. Any Software provided under an Addendum will be licensed not sold to Customer. (b) Customer agrees that any copies made of the Documentation, any other T2 Systems Confidential Information and any other material obtained from T2 Systems shall preserve unaltered patent, trademark, copyright, proprietary or confidentiality notices contained therein. (c) Each party recognizes and acknowledges the great value of the goodwill associated with the name and trademarks of the other party, and the identification of the proprietary party’s goods or services therewith. Each party agrees that it obtains no rights, title or interest of any kind in or to any of the trademarks, tradenames, logos, service marks or other markings belonging to the other party or its suppliers.
6. CONFIDENTIALITY.
(a) Each party agrees to hold all Confidential Information of the other party in strictest confidence, not to make use thereof other than for the performance of this Agreement, to disclose such Confidential Information only to its Representatives who are under an obligation of confidentiality with respect thereto and who require such information for the performance of their duties, and not to disclose such Confidential Information to any third parties, except with the disclosing party's prior written consent; provided, however, that the foregoing restrictions shall not apply to Confidential Information of the other party:
(i) that is now or hereafter in the public domain through no action or failure to act on the part of the receiving party or its Representatives;
(ii) that was received by or was available to the receiving party from a third party without any obligation of confidentiality to the disclosing party; (iii) that is independently developed by or for the receiving party by persons who have not had access to the Confidential Information of the disclosing party; or (iv) that is disclosed with the written consent of the disclosing party. (b) Each party may disclose the other party’s Confidential Information pursuant to the requirement of a governmental agency or is required by operation of law, regulation or court order, provided that, #6..
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whenever possible, prompt notice is given by the receiving party to the disclosing party prior to such disclosure so that the disclosing party may seek a protective order or other remedy. (c) Each party agrees to protect and safeguard Confidential Information of the other party from loss, theft, destruction and inadvertent disclosure using the same degree of care as it uses to protect its own Confidential Information, but in no event less than a reasonable standard of care. (d) Each party shall hold the other party's Confidential Information in trust for the other party and all right, title and interest in and to such Confidential Information shall remain with the disclosing party.
(e) Upon termination of the Agreement or an applicable Addendum, or otherwise upon the request of a disclosing party, the receiving party will promptly destroy all full and partial copies of the disclosing party's Confidential Information in its possession or control, or in the event of termination of an Addendum such information provided under the applicable terminated Addendum, and certify such destruction in writing; provided, however, that the receiving party may retain one (1) copy for its internal archival purposes only, which copy shall remain subject to the obligations of confidentiality set out in this Section 6.
7. CUSTOMER DATA.
(a) Customer shall be solely responsible for, and shall hold T2 Systems, its third party suppliers, and their respective Representatives harmless from any loss, damage or liability arising in connection with Customer’s inputs, selection and use of the Services, and all data (including Customer Data), reports, statements and other content transmitted, posted, received or created on the T2 System through Customer’s account, even if transmitted, posted, received or created by a third party. (b) The Software may create and store databases of personal information of Customer end-users and data relating to Customer on the computer system on which the Software is accessed or installed.
Customer agrees to take all steps which it deems are appropriate to provide adequate security for that information.
(c) The parties acknowledge that at all times Customer will remain the owner of Customer Data. Except as otherwise set forth herein or in the applicable Addenda, T2 Systems shall not at any time use Customer Data or disclose Customer’s Data to any third parties, except that T2 Systems may use Customer Data for the purpose of meeting its obligations under an Addendum and providing the Services, and may store, back-up and archive Customer Data. Customer represents and warrants that the Customer Data does not infringe or violate the intellectual property, proprietary or personal rights of any third party and Customer has the right to grant T2 Systems the right to use the Customer Data as set forth herein.
(d) T2 Systems will comply with all applicable laws governing the collection, access, use, disclosure of Customer Data. All Customer Data which is submitted by Customer to T2 Systems pursuant to this Agreement will be safeguarded by T2 Systems to the same extent that T2 Systems safeguards data relating to its own business; provided, however, if Customer Data is publicly available, is already in T2 System’s possession from a source other than Customer or otherwise known to it, or was rightfully obtained by T2 Systems from third parties, T2 Systems hall bear no responsibility for its disclosure, inadvertent or otherwise. T2 Systems has implemented and will maintain administrative, physical and technical safeguards to protect Customer Data from unauthorized access, acquisition or disclosure, destruction, alteration, accidental loss, misuse or damage that are no less rigorous than accepted industry practices. In the event of unauthorized access to Customer Data which has been verified by T2 Systems, T2 Systems shall promptly i) take action to stop the unauthorized access, and ii) notify Customer, provide Customer with relevant details of the unauthorized access and an explanation of steps that T2 Systems took or is taking to stop the unauthorized access. #6..
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(e) T2 Systems maintains Payment Card Industry (PCI) Level One compliance and upon request (no more than once annually), T2 Systems will provide Customer with a copy of its third-party audit certification demonstrating that appropriate information security standards to protect Customer Data are in place.
8. INDEMNITY.
(a) T2 Systems Indemnification. Subject to the limitation of liability set out in Section 11, T2 Systems shall indemnify, defend and hold harmless Customer, its officers, directors or employees (“Indemnitees”) from and against any and all direct losses, damages, costs, expenses (including reasonable attorneys’ fees), (collectively “Losses”), to the extent that such Losses arise directly from any act(s) of gross negligence or willful misconduct by T2 Systems or any of its Representatives, giving rise to an accident or other occurrence resulting in bodily injury or death, to any person(s) arising out of or related to: (i) claims for loss or damage to tangible property, and (ii) claims asserted by third parties for loss or damage to tangible property; except to the extent that such Losses were not caused by T2 Systems .
(b) Intellectual Property Indemnification. Subject to the limitation of liability set out in Section 11, T2 Systems shall indemnify, defend (at its expense) and hold the Indemnitees harmless in respect of any damages awarded to a third party claimant related to a determination by a court that the operation or use of any Software, or any part thereof, infringes any third party’s copyright, trade mark or trade secret or any Hardware, or any part thereof, infringes any third-party’s copyright, patent, trademark or trade secret or set forth in a settlement agreement agreed to by T2 Systems.
T2 System’s obligations pursuant to this Section 8(b) shall not apply to any infringement caused by or resulting from Customer modifications or attempted modifications to any relevant system, combination of T2’s Product or Software with hardware or software not provided by T2 Systems, or from Customer’s failure to implement changes or updates furnished by T2 Systems to Customer during the term of this Agreement.
In the event that an injunction or order is obtained against the Customer’s use of any Product or Software or if, in T2 System’s opinion, any Product or Software is likely to become the subject of a claim of infringement or violation of any rights in connection with any rights as noted above, T2 Systems shall, at its expense and at its sole discretion:
(i) procure for the Customer the right to continue using the affected Product or Software; or (ii) modify or replace the affected Product or Software so that such Product or Software becomes non-infringing.
If neither Section 8(b)(i) nor Section 8(b)(ii) are commercially practicable, T2 Systems may, in its sole discretion remove the affected Product or Software from the Customer and refund to the Customer all amounts paid to T2 Systems by the Customer in respect of such Product, less a reasonable amount for depreciation. Notwithstanding the foregoing, T2 Systems shall have no obligation with respect to any claim of infringement that is based upon or arises out of (each of the following an "Excluded Claim"): (A) the use or combination of the Product or Software with any third-party or Customer hardware, software, products, data or other materials; (B) modification or alteration of the Product or Software by anyone other than T2 Systems; (C) Customer’s failure to implement any workaround that would have avoided the claim; (D) Customer’s use of the Product or Software in breach of or excess of the rights granted in this Agreement; (E) any third-party components; or (F) a business method or process that is inherent to Customer’s business. The remedies in and the indemnification rights of the Customer stated in this Section 8(b) are the exclusive remedies available to the Customer at law or in equity for indemnifiable claims. #6..
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(c) Customer Indemnification. Customer agrees to indemnify, defend and hold T2 Systems and its Representatives harmless from and against any and all liabilities, obligations, damages, claims, suits, proceedings, costs, fees and expenses, including reasonable attorneys’ fees and costs, arising out of the gross negligence or willful misconduct of Customer or any of its Affiliates, or breach of the Agreement by Customer, or any claim by Customer end user related to use of end user personally identifiable information.
(d) Defense. If a party is alleged to be obligated to indemnify the other party hereunder, the party alleged to be obligated to provide indemnification shall have the right to appoint counsel of its own choice and in all other respects control any litigation and/or settlement thereof, provided, however, that any such settlement shall not bind the non-indemnifying party or obligate it to pay any monies without its express prior written consent. The indemnified party shall cooperate in the defense of any indemnified claim. If one party is notified of any potential or actual claim or liability against the other party or named in any suit or proceeding of any kind that could give rise to an indemnification claim under this Agreement or otherwise subject the other party to a suit, proceeding or claim (or threat thereof), the notified party shall immediately inform the other party.
9. INSURANCE.
(a) During the Term of this Agreement, T2 Systems shall maintain, at its own expense, insurance which it deems reasonable and necessary for its business and the performance of its obligations hereunder. T2 Systems will, upon reasonable advanced notice, provide Customer with a copy of its certificate(s) of insurance.
(b) T2 Systems will maintain at its own expense the following insurance, with companies authorized to do insurance business in the any states where work is performed or eligible surplus lines insurers having an A.M. Best Rating of A-:VII or better, and in amounts not less than the following limits of coverage:
(i) Workers’ Compensation Insurance with statutory limits, and Employer’s Liability Insurance with limits of not less than $1,000,000:
(A) Employers Liability - Each Accident $1,000,000
(B) Employers Liability - Each Employee $1,000,000
(C) Employers Liability - Policy Limit $1,000,000
T2 Systems Workers’ Compensation policy will include states appropriate for T2 Systems employees and operations.
(ii) Commercial General Liability Insurance with limits of not less than:
(A) Each Occurrence Limit $1,000,000
(B) Personal & Advertising Injury $1,000,000
(C) General Aggregate $2,000,000
(D) Products - Completed Operations Aggregate $2,000,000 T2 System’s Commercial General Liability policy will be issued on a form that, subject to its terms, conditions and exclusions insures T2 System’s liability for damages on account of bodily injury (including death), property damage, and personal and advertising injury. (iii) Business Auto Liability Insurance covering, for liability purposes, all owned, non-owned or hired automobiles, with limits of not less than $1,000,000 combined single limit of liability per accident for Bodily Injury and Property Damage; #6..
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(iv) Customer shall be named as an additional insured under each policy, except for Workers Compensation and hired and non-owned auto liability policies. (c) The insurance coverage carried by T2 Systems as set forth herein shall not in any way expand T2 Systems liability or modify or affect the limitations of liability set forth in the Agreement or any Addenda.
10. EXCLUSION OF WARRANTIES.
(a) EXCEPT AS EXPRESSLY PROVIDED IN THE ADDENDUM APPLICABLE TO THE PRODUCTS AND/OR SERVICES OR AS OTHERWISE EXPRESSLY CONFIRMED IN WRITING BY T2 SYSTEMS, THE PRODUCTS AND SERVICES ARE PROVIDED "AS IS" WITHOUT WARRANTY OR REPRESENTATION OF ANY KIND.
WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, T2 SYSTEMS AND ITS THIRD PARTY
SUPPLIERS HEREBY DISCLAIM ALL OTHER REPRESENTATIONS, WARRANTIES AND CONDITIONS,
EXPRESS OR IMPLIED, WHETHER ARISING UNDER STATUTE, FROM A COURSE OF DEALING, USAGE,
CUSTOM OF THE TRADE OR OTHERWISE, REGARDING THE PRODUCTS OR SERVICES, THE
DOCUMENTATION, OR ANY OTHER PRODUCTS OR SERVICES PROVIDED OR FAILED TO BE PROVIDED
UNDER THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OR
CONDITION OF MERCHANTABLE QUALITY, MERCHANTABILITY, DURABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT, ACCESSIBILITY, PRIVACY OF FILES OR SECURITY. (b) T2 SYSTEMS DOES NOT WARRANT THAT ANY PRODUCTS OR SERVICES PROVIDED HEREUNDER WILL BE UNAFFECTED BY BUGS, VIRUSES, ERRORS OR OTHER PROGRAM LIMITATIONS, NOR DOES T2
SYSTEMS WARRANT THAT CUSTOMER'S USE THEREOF WILL BE UNINTERRUPTED, ERROR-FREE OR WILL MEET ALL OF THE CUSTOMER'S REQUIREMENTS. FURTHER, T2 SYSTEMS DOES NOT WARRANT
THAT ANY SOFTWARE WILL OPERATE ON ANY PARTICULAR CONFIGURATION OF SOFTWARE, OPERATING SYSTEM OR COMPUTER SYSTEM. ANY HARDWARE PURCHASED FROM SOURCES OUTSIDE OF T2 SYSTEMS WILL BE THE SOLE RESPONSIBILITY OF THE CUSTOMER. T2 SYSTEMS WILL
NOT BE RESPONSIBLE FOR THE FAILURE OF THE SOFTWARE TO PERFORM TO THE EXTENT THAT
SUCH FAILURE TO PERFORM IS DUE TO THE FAILURE OF A THIRD PARTY FUNCTION, SUCH AS
INTERNET AVAILABILITY REQUIRED FOR THE CONNECTION BETWEEN THE HARDWARE AND SOFTWARE OR THE WIRELESS NETWORK AVAILABILITY REQUIRED FOR THE T2 SYSTEMS SOFTWARE TO BE ABLE TO SEND AND RECEIVE DATA. IN NO EVENT SHALL T2 SYSTEMS BE LIABLE FOR THE
FAILURE OF THE SOFTWARE TO PERFORM IF SUCH FAILURE ARISES DUE TO THE COMBINATION OF THE SOFTWARE WITH THIRD PARTY HARDWARE OR SOFTWARE. T2 SYSTEMS SHALL NOT COVER REPAIR, LABOR OR REPLACEMENT OF PARTS THAT ARE BY NATURE EXPENDABLE. IN ADDITION, IF
APPLICABLE, THE WIRELESS DATA SERVICES ARE NOT GUARANTEED AGAINST EAVESDROPPERS, HACKERS, DENIAL OF SERVICE ATTACKS OR INTERCEPTORS AND NEITHER T2 SYSTEMS NOR THE
UNDERLYING WIRELESS DATA SERVICES CARRIER CAN GUARANTEE THE PRIVACY OR SECURITY OF WIRELESS TRANSMISSIONS.
(c) THIS LIMITED WARRANTY GIVES THE CUSTOMER SPECIFIC LEGAL RIGHTS. THE CUSTOMER MAY
HAVE OTHER RIGHTS, WHICH VARY FROM LOCATION TO LOCATION, DEPENDING UPON THE APPLICABLE LAW OF SUCH LOCATION.
11. LIMITATION OF LIABILITY AND DAMAGES.
(a) TO THE MAXIMUM EXTENT PERMITTED BY LAW: EXCEPT FOR CLAIMS FOR DEATH OR BODILY INJURY, T2 SYSTEMS , ITS THIRD PARTY SUPPLIERS’ AND THEIR RESPECTIVE REPRESENTATIVES’
TOTAL AGGREGATE LIABILITY ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT,
AND/OR ANY PRODUCTS OR SERVICES DELIVERED OR FAILED TO BE DELIVERED UNDER THIS
AGREEMENT, SHALL BE LIMITED TO THE ACTUAL DIRECT DAMAGES SUFFERED BY CUSTOMER, NOT
TO EXCEED THE AMOUNT ACTUALLY PAID BY CUSTOMER FOR THE PRODUCT OR SERVICE GIVING RISE TO THE CLAIM DURING THE SIX (6) MONTHS IMMEDIATELY PRECEDING THE CLAIM. #6..
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(b) IN NO EVENT WILL T2 SYSTEMS OR ITS THIRD PARTY SUPPLIERS BE LIABLE IN ANY WAY FOR ANY
INDIRECT, SPECIAL, CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY OR AGGRAVATED
DAMAGES OF ANY KIND WHATSOEVER, INCLUDING, BUT NOT LIMITED TO, DAMAGES FOR LOSS OF
USE, DATA, INCOME, BUSINESS, PROFIT, GOODWILL, ANTICIPATED REVENUE, FAILURE TO REALIZE
EXPECTED SAVINGS, OR OTHERWISE, HOWEVER CAUSED, WHETHER BASED ON CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, WARRANTY, STATUTORY RIGHTS OR ANY OTHER BASIS ARISING OUT OF CUSTOMER’S USE OF THE PRODUCTS, OR OTHERWISE ARISING PURSUANT TO THIS AGREEMENT.
(c) WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, DUE TO THE NATURE OF INTERNET AND WIRELESS TRANSMISSIONS, CUSTOMER AGREES THAT NEITHER T2 SYSTEMS NOR THE UNDERLYING
WIRELESS DATA SERVICES CARRIER SHALL BE LIABLE FOR ANY LOSS, COSTS OR DAMAGES OF ANY KIND ARISING OUT OF OR IN CONNECTION WITH: ANY LACK OF PRIVACY OR SECURITY OF WIRELESS TRANSMISSIONS; SERVICES INTEROPERABILITY, ACCESS OR INTERCONNECTIONS WITH THE T2 SYSTEMS SERVICES; SERVICE DEFECTS, SERVICE LEVELS, DELAYS OR INTERRUPTIONS; ANY INTERRUPTION OR ERROR IN ROUTING OR COMPLETING CALLS OR OTHER TRANSMISSIONS; LOST OR ALTERED MESSAGES OR TRANSMISSIONS; OR UNAUTHORIZED ACCESS TO OR THEFT, ALTERATION, LOSS OR DESTRUCTION OF CUSTOMER’S CONTENT, DATA, PROGRAMS CONFIDENTIAL INFORMATION OR SYSTEMS.
(d) NO ACTION, REGARDLESS OF FORM, ARISING OUT OF THIS AGREEMENT MAY BE BROUGHT BY CUSTOMER MORE THAN TWELVE (12) MONTHS AFTER THE FACTS GIVING RISE TO THE CAUSE OF
ACTION HAVE OCCURRED, REGARDLESS OF WHETHER THOSE FACTS BY THAT TIME ARE KNOWN TO, OR OUGHT REASONABLY TO HAVE BEEN DISCOVERED BY, CUSTOMER. (e) THE FOREGOING LIMITATIONS SHALL APPLY REGARDLESS OF THE CAUSE OF ACTION, WHETHER
ARISING UNDER CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY, OR OTHERWISE, AND REGARDLESS OF WHETHER T2 SYSTEMS, ITS THIRD PARTY SUPPLIERS AND/OR THEIR REPRESENTATIVES KNEW, OR SHOULD HAVE KNOWN ABOUT THE POSSIBILITY OF SUCH DAMAGES. (f) CUSTOMER AGREES THAT THE LIMITATIONS OF LIABILITY SET FORTH ABOVE ARE FUNDAMENTAL ELEMENTS OF THIS AGREEMENT, WITHOUT WHICH T2 SYSTEMS WOULD NOT HAVE ENTERED INTO
THIS AGREEMENT AND/OR AGREED TO PROVIDE THE PRODUCTS AND/OR SERVICES UNDER THE CURRENT TERMS (INCLUDING FEES).
(g) THIS SECTION SHALL APPLY TO ANY ACTION OR ARBITRATION HEREUNDER. BECAUSE THE LAWS OF
SOME LOCATIONS DO NOT ALLOW THE LIMITATION AND/OR EXCLUSION OF LIABILITY, THE ABOVE LIMITATION OR EXCLUSION MAY NOT APPLY TO ALL CUSTOMERS.
12. TERMINATION.
(a) Each Addendum may be terminated according to its terms and the terms of this Agreement. (b) In the event that there are no Addenda in effect, either party may terminate this Agreement without cause by written notice to the other party, which termination shall be effective as of the last day of the calendar month following the month in which notice of termination is received. (c) Either party may terminate this Agreement or any Addendum if the other party breaches any of its representations or warranties, or any other material obligation under this Agreement or the applicable Addendum, and fails to remedy such breach with thirty (30) days of receipt of notice from the non-breaching party. T2 Systems shall also have the right to suspend performance of all or any of the Services under an Addendum, without liability, pending the rectification of any breach by Customer.
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an application for relief under the provisions of any statute now or hereafter in force concerning bankrupt or insolvent debtors, or if a receiving order or receivership order is made against the other party, or any action whatsoever, legislative or otherwise be taken to effect the winding up, dissolution, suspension of operations or liquidation of the other party. Notwithstanding the foregoing, the Customer shall not be entitled to terminate this Agreement under this Section if T2 Systems, or its creditors, or some other party makes suitable provisions for the performance of its obligations hereunder.
(e) Without limiting any other remedies available under this Agreement, at law or in equity, in the event of the termination of this Agreement or any applicable Addendum for any reason:
(i) T2 System’s obligation to provide the affected Products and Services will terminate; (ii) All unpaid amounts due in respect of the terminated Services up to and including the effective date of termination shall, at T2 System’s option, become immediately due and payable;
(iii) Customer is not entitled to a refund for any affected Products and Services that are in process or not completed, including labor and any expenses T2 Systems may have incurred up to the effective date of termination;
(iv) Customer must destroy any copies of the Documentation in Customer's possession in any form and on any media, and certify to T2 Systems in writing that it has done so; (v) Sections 4, 5, 6, 7, 8, 9, 10, 11, 12(e), and 13 shall survive the expiration or termination of this Agreement until such time as the parties may agree to the release of the obligations contained therein.
(f) No Limitation of Remedies. Any termination of the Agreement shall not in any respect limit any of either party's rights or remedies either in law or in equity or relieve either party of any obligation incurred prior to the effective date of such termination.
13. DISPUTE RESOLUTION.
(a) Dispute Resolution. In the event of any dispute arising out of this Agreement (including all Addenda), the parties shall use commercially reasonable efforts to negotiate a settlement in good faith satisfactory to both parties. If they do not reach a solution within a period of sixty (60) days (or such other longer period as the parties may agree), then either party may, on written notice to the other party, refer the dispute for settlement by arbitration before a single arbitrator in accordance with the rules of the American Arbitration Association. The costs of the arbitrator will be borne equally by the parties, but they will otherwise bear their respective costs incurred in connection with the arbitration. The parties shall select the arbitrator promptly and use commercially reasonable efforts to conduct the arbitration hearing no later than three (3) months after the arbitrator is selected. The arbitrator may not award punitive or exemplary damages against either party or any other relief in excess of the limitations set forth herein. The judgment and award of the arbitrator will be final and binding on each party. Judgment upon the award may be entered in any court having jurisdiction, or application may be made to such court for judicial acceptance of the award and/or an order of enforcement as the case may be. (b) Injunctive Relief. Each party acknowledges and agrees that a breach of the obligations under Section 5 (“Ownership”) and Section 6 (“Confidentiality”) may cause irreparable harm and significant injury to the affected party that would not be adequately compensated by an award of money damages and, in addition to any other remedy available at law or in equity, and notwithstanding the provisions of Section 13(a), the affected party will be entitled to seek temporary and permanent injunctive relief from any court of competent jurisdiction to prevent breaches hereunder, without showing or proving any actual or threatened damage. #6..
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(c) Choice of Law. This Agreement and all Addenda are governed by the laws of the State of Indiana.
14. GENERAL PROVISIONS.
(a) Assignment. T2 Systems may assign its rights and obligations under this Agreement. Customer may not assign or transfer any of its rights or obligations under this Agreement to any person without the express prior written consent of T2 Systems.
(b) Entire Agreement. Customer acknowledges that this Agreement including all Addenda, SOW’s, Quotes and other attachments referencing this Agreement, comprise the entire understanding and agreement between parties regarding the Products and Services to be provided hereunder and supersedes all prior written and oral agreements, purchase orders, proposals, representations, understandings, promises, descriptions or other communications between the parties regarding the same. If Customer submits an order form with contrary terms or conditions, such order form shall be considered only as confirmation of the order and shall in no way amend, prevail over, supplement, or supersede any of the provisions of this Agreement or any Addenda. (c) Piggyback Cooperative Purchasing. It is understood and agreed by Customer that a third party may purchase the goods and services specified herein in accordance with the terms and conditions of this Agreement for the purposes of piggyback purchasing. It is also mutually understood and agreed the third party will issue its own purchasing documents for the goods and services, be invoiced therefrom and make its own payments to T2 Systems in accordance with the terms of the contract established between the third party and T2 Systems. T2 Systems and the third party will agree separately on scope and pricing for the goods and services. Customer shall bear no responsibility or liability to any contractual agreement made between T2 Systems and any other third party. (d) Enurement. This Agreement shall be binding upon and enure to the benefit of T2 Systems, Customer and their respective successors and permitted assigns. (e) Force Majeure. Neither party shall be liable for delay or failure in performance (other than the making of payments) directly or indirectly resulting from acts beyond the control of such party, including, but not limited to acts of God, acts of war or terrorism, civil commotion, riot, fire, flood, pandemic or other disaster, acts of government, strike, work stoppages, lockout, power failures, inability to secure or delay in securing transportation, inability to obtain or delays in obtaining goods, materials, or qualified labor, or the inability to use or the failure of any third party telecommunications carrier or other services, which events or conditions prevent in whole or in part the performance by such party of its obligations hereunder or which renders the performance of such obligations so difficult or costly as to make performance commercially unreasonable. In such event, the party affected shall be excused from performance on a day-to-day basis to the extent of the delay, and the other party shall likewise be excused from the performance of its obligations on a day-to-day basis to the extent such party's obligations related to the performance are so delayed.
Where an Event of Force Majeure occurs, the party who is delayed or fails to perform shall give prompt notice to the other party. In the event such inability to perform shall continue longer than sixty (60) Days, the party which has received or which was entitled to receive notice may terminate the Agreement by notice to the other party without further liability, expense, or cost of any kind.
Force Majeure events do not include any failure as a result of political or social pressure, general economic or market factors, and/or fear of or threat of a Force Majeure Event or other circumstance.
(f) Tariff Surcharge
(i) Tariff Surcharge Implementation: If, after the Effective Date of this Agreement, any governmental authority enacts or imposes new or additional tariffs, import/export duties, surcharges, taxes, or similar fees (“Tariff Surcharges”) that increases the costs of goods, materials, and/or services provided for under this Agreement or any product specific #6..
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addendum, T2 shall have the right to pass through such costs to Customer. Tariff Surcharges shall be calculated as either (1) a percentage-based fee applied to the total cost of applicable good or services, or (2) a fixed fee per affected order, shipment, or service. The Tariff Surcharge shall remain in effect for as long as the applicable tariffs remain in place. If tariffs are reduced or eliminated, T2 will evaluate and adjust or remove the surcharge accordingly.
(ii) Adjustment of Tariffs: The Tariff Surcharge is subject to change in response to government-imposed tariff rate changes, exemptions, or other regulatory modifications.
T2 will provide 30 days' written notice of any surcharge adjustments. (iii) Transparency and Customer Acknowledgment: The Tariff Surcharge shall be separately itemized on Order Forms and shall not be considered part of the base price of goods or services. This surcharge is implemented solely to recover tariff-related costs and does not reflect an increase in profit margins. By entering into this agreement, the Customer acknowledges and agrees to the application of the Tariff Surcharge as outlined in this section and agrees to remit payment accordingly.
(g) Independent Contractors. The parties are independent contractors. Nothing herein shall be construed to create any legal partnership, joint venture, agency or any other relationship between the parties.
(h) Notices. All communications and notices provided for herein shall be in writing and shall be deemed to have been given when delivered personally to the recipient, by email, or by registered or certified mail with return receipt requested, postage prepaid, and addressed to the Customer at the address appearing on the Addenda or Quote(s), as applicable, or at such other address as either party may designate by notice to the other. T2 Systems, from time to time may send general communications and/or notices to all its customers and such notices shall be deemed to have been given when delivered by email.
(i) No Waiver. No delay or failure to take any action or exercise any rights under this Agreement shall constitute a waiver or consent unless expressly waived or consented to in writing. A waiver of any event does not apply to any other or subsequent event, even if in relation to the same subjectmatter. (j) Publicity. Except as expressly agreed in writing, neither party shall issue any press release, or otherwise publicly identify the other as a customer or supplier, in any marketing materials or otherwise, without the express prior authorization of the other party. (k) Severability. If any provision contained in this Agreement is found by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, it shall be deemed severed from this Agreement and the remaining provisions of this Agreement shall not be in any way affected or impaired thereby and shall continue in full force and effect. (l) Amendment. This Agreement may be modified or amended only if the amendment is made in writing and is signed by both parties.
(m) Counterparts. This Agreement and each Addenda may be executed by the parties in counterparts with the same effect as if they had signed the same document and all counterparts shall be construed together and shall constitute one and the same agreement. This Agreement and any Addenda may be executed by the parties and transmitted by electronic transmission, with the same effect as if the parties had delivered an executed original. (n) International. The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement or any Products or Services ordered or provided under this Agreement. #6..
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(o) Compliance with Laws. Each party agrees to comply with all applicable federal, state, provincial and local laws, regulations, and orders in fulfilling its obligations under the Agreement, including as applicable laws relating to anticorruption of public officials and anti-bribery laws and regulations and the Federal Fair Debt Collection Practices Act.
(p) Authorization. Both parties represent and warrant that they have the authority to bind their respective agency, institution, or company, and that they are authorized to sign this Agreement and any Addenda hereto.
(q) Captions. The captions and section headings included in this Agreement and any Addenda are for convenience only and shall not affect the scope, intent, meaning or function of any provision of this Agreement or the applicable Addenda.
IN WITNESS WHEREOF, the parties have executed this Agreement by a duly authorized representative thereof.
T2 SYSTEMS, INC.
Per: ________________________________
Name: Mindy Powers
Title: Head of Sales & Customer Experience
Date: _______________________________
CITY OF MODESTO
Per: ________________________________
Name: ______________________________
Title: ______________________________
Date: _______________________________
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Collection Services Addendum
THIS COLLECTION SERVICES ADDENDUM GOVERNS THE PROVISION AND USE OF COLLECTION SERVICES PURCHASED BY CITY OF MODESTO (“CUSTOMER”) FROM T2 SYSTEMS, INC. (“T2 SYSTEMS”).
1. BACKGROUND.
The parties have entered into a Master Customer Agreement (“Agreement”). This Addendum is incorporated into and subject to the terms of the Agreement and the terms of the Agreement are incorporated herein. To the extent of any conflict between the terms of this Addendum and the Agreement, the terms of the Addendum shall control. All terms defined in this Addendum shall have the meanings ascribed thereto. Capitalized terms used in this Addendum that are not otherwise defined in this Addendum have the meaning set forth in the Agreement.
Customer has authority pursuant to certain laws, ordinances and/or regulations to assess and collect fines and citations for violations of these laws, ordinances and/or regulations. Citation Collection Services, LLC “CCS” is an affiliate of T2 Systems, Inc., and is entitled to enter into this Addendum under the Agreement and is a duly licensed collection agency, and possesses the personnel, experience, expertise, and equipment to collect the fines and citations through an effective collection process and court action, if necessary. Customer and T2 Systems have mutually agreed that CCS will assist in the collection of, or actually collect, certain unpaid fines and citations (the “Accounts”) on behalf of T2 Systems. which Customer may refer to T2 Systems from time to time during the Term of this Addendum.
2. REFERRED ACCOUNTS.
(a) Referred Accounts. Pursuant to the terms and conditions of this Addendum, Customer shall provide to T2 Systems, from time to time, those Accounts which Customer desires T2 Systems to assist in the collection of (or actually collect) on behalf of Customer. All Accounts submitted to, and accepted by, T2 Systems shall be referred to as “Referred Accounts.”
(b) Collection of Referred Accounts. T2 Systems agrees to undertake the collection of each Referred Account in accordance with the level of service selected by Customer which shall be described in more detail in a Statement of Work (“SOW”) in the form attached hereto as Appendix A (collectively, the “Collection Services”).
(c) T2 Systems Collection Services. During the Term of this Addendum, T2 Systems agrees to employ such lawful means, methods, and procedures as in T2 System’s judgment, discretion and experience, it believes will best effect the collection of the Referred Accounts. T2 Systems may use outside contractors or vendors to perform certain portions of the Collection Services and/or gather information about Referred Accounts and the obligors thereon.
(d) Authority to Settle Referred Accounts. Customer hereby authorizes T2 Systems to collect, compromise, or settle each Referred Account. However, unless otherwise authorized by Customer in writing, any such settlement shall be in conformance with the minimum amounts as set forth on the applicable SOW related to the Referred Account in question.
(e) Transfer of Accounts. All Accounts will be forwarded to T2 Systems using the systems and procedures designed by T2 Systems. Upon request of T2 Systems, Customer will provide certified copies or originals of violation notices, tickets, citations, assessment letters, and any other documents necessary for use by T2 System in collection of the Referred Accounts. T2 Systems agrees to keep all such documents confidential #6..
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and to not use or disclose them (or the information contained therein) for any purpose other than the performance of the Collection Services.
(f) Exclusivity of Collection Services. Customer agrees that T2 Systems shall be the exclusive third-party collector of all Referred Accounts during the Term of this Addendum and during any applicable retention period set forth in Section 3. If Customer refers an Account to T2 Systems, which becomes a Referred Account, Customer may continue to exercise its collection efforts with respect to such Referred Account; provided, however, that T2 Systems shall be entitled to payment pursuant to the terms of this Addendum for all collections made against such Referred Account, irrespective of who makes such collection. (g) Rejected and Returned Accounts. T2 Systems may reject any Account or return any Referred Account to Customer at any time for any reason (or no reason) in its sole discretion. After an Account is rejected or a Referred Account is returned to Customer at T2 System’s request, T2 Systems shall not be entitled to any additional fees with respect thereto. T2 Systems will return to Customer such Referred Accounts which it determines, in its sole judgment and discretion, to be uncollectible. If Customer wishes to remove a Referred Account from T2 Systems (the “Returned Accounts”), Customer will notify T2 Systems in writing at least ten (10) days in advance (the “Return Notice”). Section 3 shall govern the collection on any Returned Accounts. Within thirty (30) days of the expiration of the one (1) year period set forth in Section 3 for Returned Accounts, T2 Systems agrees to return each such Returned Account to Customer.
3. TERM AND TERMINATION.
(a) Term. The initial term of this Addendum is three (3) years. This Addendum will automatically renew for additional one (1) year terms unless written notice is provided to the other party at least sixty (60) days prior to the expiration of the then-current term. The initial term and any renewal terms are collectively referred to as the “Term.”
(b) Termination. Either party may terminate this Addendum if the other party fails to perform any obligation hereunder which failure is not cured within fifteen (15) days after notice from the other party, except that T2 Systems may terminate this Addendum immediately for Customer’s failure to pay any amounts hereunder when due and payable. In the event T2 Systems elects to retain any Referred or Returned Account pursuant to the section below, the provisions of this Addendum applicable to such continuing collection efforts shall survive any termination or expiration of this Addendum until all rights and obligations hereunder are fully performed and/or satisfied with respect to such accounts. (c) Retention of Referred Accounts. Upon the expiration of this Addendum or earlier termination of this Addendum by T2 Systems due to a breach by Customer, T2 Systems shall have the right, at its sole discretion, to retain for collection, pursuant to the terms and conditions of this Addendum, any Referred Account upon which a partial payment has been made within the prior one (1) year period or which is subject to an agreed upon payment plan.
4. PAYMENT TERMS.
(a) Collection fees. During the term of this addendum and during any applicable retention period set forth in Section 3, T2 Systems shall be entitled to the fees, costs, and expenses set forth (in the SOW applicable referred account), regardless of whether collected by T2 Systems, Customer, or others. (b) Payments to and from Customer. Customer agrees that T2 Systems will deposit each check received from the Customer’s end customer on behalf of the Customer. T2 Systems shall remit each payment it collects on a Referred Account to Customer, minus T2 System’s fees and any other amounts owed to T2 System, on or before the twentieth (20th) day of each month following the month in which the amount was actually #6..
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collected. Invoices may be submitted to Customer by Citation Collection Services, LLC, which is an Affiliate of T2 Systems, Inc.
Customer shall remit, or cause to be remitted, all amounts owed T2 Systems under this Addendum, if any, within thirty (30) days of receipt of notice thereof from T2 Systems. A late fee of one percent (1%) per month shall be assessed on all past due amounts from Customer based upon the aggregate amount of all past due monies. T2 Systems shall also be entitled to reasonable attorney’s fees and other costs of collection incurred in attempting to collect past due amounts from Customer. (c) Direct Payments. Customer agrees to immediately notify T2 Systems of any payments on a Referred Account made directly to Customer, and T2 Systems will be entitled to the fees specified in this Addendum as if T2 Systems had actually collected the Referred Account. Any such amounts may be deducted from Customer’s next monthly payment from T2 Systems.
5. MISCELLANEOUS.
(a) Inspection Rights. Customer, its auditors, or any governmental agency or other party authorized to supervise, regulate or audit Customer, may examine T2 System’s records pertaining to the Referred Accounts during normal business hours and upon ten (10) days’ advance written notice; or with less notice if required of Customer by any such agency or other party or by law. #6..
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APPENDIX A
STATEMENT OF WORK
Note: Insert SOW here.
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Citation Processing
and Collections
Statement of Work
Copyright © 2025 T2 Systems, Inc.
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City of Modesto, CA
T2 Systems, Inc.
Last Modified: 2/25/26
CONTENTS
Citation Processing and Collections Statement of Work ........................................................ i Scope .................................................................................................................................... 3 Project Methodology ....................................................................................................... 3 Project Schedule ......................................................................................................... 3 Change Control........................................................................................................... 3 Assumptions, Constraints, and Risks ........................................................................ 3 System Configuration................................................... Error! Bookmark not defined.
Data Conversion ........................................................... Error! Bookmark not defined.
Software Included: ............................................................. Error! Bookmark not defined.
T2 Flex .......................................................................... Error! Bookmark not defined.
Enforcement Application.............................................. Error! Bookmark not defined.
Hardware Included: ........................................................... Error! Bookmark not defined.
Training ............................................................................. Error! Bookmark not defined.
On-going Citation Processing Services ........................................................................... 4 Data Entry from Handwritten Citations ................................................................... 4 Automated Citations issued by Enforcement Devices ............................................... 4 California DMV Communication................................................................................ 4 CA DMV Registration Holds/Releases ....................................................................... 4 Out of State DMV Communication ............................................................................ 4 Payment Processing.................................................................................................... 5 Bank Deposits............................................................................................................. 5 Bank Returned Checks............................................................................................... 5 Dismissals/Voids......................................................................................................... 6 Correspondence Processing ........................................................................................ 6 Appeal Process – Administrative Review Requests – First Level............................. 6 Appeal Process - Administrative Hearings – Second Level....................................... 7 Toll-Free Telephone Service ....................................................................................... 7 Reporting ....................................................................................................................... 7 Standard Reports........................................................................................................ 7 Surcharges .................................................................................................................. 8 Collection Customer Collections .................................................................................... 8 Customer Collection Services Details ........................................................................ 9 #6..
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City of Modesto, CA
T2 Systems, Inc.
Last Modified: 2/25/26
The Statement of Work and any Exhibits or Attachments hereto shall be governed by the terms and conditions of the Services Addendum dated _____________ between T2 Systems and City of Modesto, CA (CUSTOMER).
SCOPE
This Statement of Work (SOW) outlines the deliverables to be completed for the successful project implementation and on-going services for City of Modesto.
Deliverables not addressed in this SOW are out-of-scope, and therefore not included.
T2 will provide the following activities through Citation Collection Services, LLC (‘CCS’) a wholly owned subsidiary of T2.
Project Methodology
Each party shall designate a Project Manager who shall work together to facilitate an efficient delivery of the SOW. The T2 Project Manager will be responsible for project planning, scheduling, and issue/risk resolution.
The Customer’s Project Manager will be responsible for identifying and coordinating Customer resources necessary to meet the project schedule.
T2 will assign a dedicated Business Analyst (BA) dedicated to the project's success.
Time is of the essence and all parties must participate as required to meet the time limit.
Project Schedule
During the project kick-off meeting, the T2 Project Manager, with the Customer’s Project Manager, will determine the project schedule.
Change Control
Customers may request changes to this SOW or planned deliverables. Change requests may result in a change to the price, schedule and other terms and conditions contained herein.
Assumptions, Constraints, and Risks
Much of the CCS work will be performed remotely. Any requirements for project resources to come onsite may result in additional consulting fees and related travel expenses.
Data integrity problems are a risk that, if encountered, can delay project timing. Data integrity issues are often the result of problems with consistency in the data and its usage.
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City of Modesto, CA
T2 Systems, Inc.
Last Modified: 2/25/26
On-going Citation Processing Services
Data Entry from Handwritten Citations
◼ T2 will data enter all parking citations into Flex within forty‐eight (48) business hours of receipt from the Customer.
◼ The Customer will scan and email handwritten citations to T2 regularly. The Customer will store handwritten citations.
◼ The Customer can edit citations.
◼ The Customer will be notified of any issues regarding citation data entry. ◼ A copy of the manually issued citation will be scanned and linked to the citation record.
Automated Citations issued by Enforcement Devices
Citations issued by the mobile device will be imported into T2 Flex. If there is a loss in communication (Wi-Fi or cellular internet connection), citations will be downloaded once communication is restored.
California DMV Communication
◼ CA DMV Inquiry: T2 will provide daily communication for registered owner information.
◼ The registered owner information will be available to the Customer within the T2 Flex database.
◼ The Customer agrees to use the registered owner address information provided data only for the purpose of processing and collecting parking citations ◼ Errors that are returned by DMV during the R/O inquiry may be handled by T2 and processed accordingly.
CA DMV Registration Holds/Releases
◼ T2 will identify vehicle license plates that are eligible for hold/release. ◼ T2 will communicate holds and releases daily on weekends and holidays excluded. ◼ The hold/release status can be viewed directly from the citation record within Flex.
◼ T2 will provide reporting of the data to the Customer.
Out of State DMV Communication
◼ DMV (Out-Of-State) Inquiry: T2 will communicate weekly to obtain registered owner information.
◼ The registered owner information will be available to the Customer within T2 Flex.
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City of Modesto, CA
T2 Systems, Inc.
Last Modified: 2/25/26
◼ The Customer agrees to use the registered owner address information provided data only to process and collect parking citations.
◼ Registered Owner changes: T2 and/or the Customer can make any necessary changes due to a bad address or change in the owner within T2 Flex.
Payment Processing
◼ T2 will provide a payment solution for parking citation payments made online. ◼ T2 will provide a payment gateway for online credit card payments into a T2 merchant account.
◼ Payment methods options include American Express, Discover, MasterCard, and Visa.
◼ A Credit Card Convenience Fee is charged to the person making the payment. ◼ Credit card payments are disbursed into the Customer’s account once a month.
Reporting of credit card payments is available to the Customer. ◼ T2 will process Mail Payments.
◼ T2 and the Customer will agree upon the bank account used for lockbox processing.
◼ Lockbox payments are processed within 24 to 48 hours of receipt, weekends, holidays, and exceptions excluded.
◼ T2 will retain an image archive and retrieval system for payments received daily.
◼ T2 will provide a daily report of payments.
◼ Payments made in person may be accepted by Customer staff and updated directly into T2 Flex.
◼ T2 will allow partial payments.
◼ A notice will be sent to the customer notifying them of a partial payment. ◼ T2 will provide the Customer with partial payment reports.
Bank Deposits
◼ Payments processed by T2 or the remittance process are deposited into an account established and maintained by the Customer or an account mutually agreed upon between the Customer and T2.
◼ Deposits are made on the same day using electronic depositing. ◼ The Customer is responsible for any bank fees or charges, custom post office box or courier services or fees requested as outlined in the Agreement.
Bank Returned Checks
◼ Charges or fees for bank returned items or NSF fees are established by the Customer. These fees may be included within Flex as part of the fees due. The Customer will assume responsibility for notification to T2 of any NSF checks deposited to Customer bank.
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City of Modesto, CA
T2 Systems, Inc.
Last Modified: 2/25/26
◼ T2 will follow-up on any reopened accounts and additional fees included to the citation/account as directed by the Customer.
Dismissals/Voids
Any cancellations, dismissals, voids, corrections and/or other relevant information pertaining to the citation(s) status taken by the Customer may be forwarded to T2 for processing or the Customer may update this information directly into T2 Flex.
Correspondence Processing
◼ T2 is responsible for generating, printing and mailing letters, notices and delinquent parking violation notices.
◼ Correspondence is approved by the Customer in advance of production. ◼ T2 will send the following notices on behalf of the Customer:
◼ Delinquent notice or 1st notice that meets the requirement set forth in CVC (California Vehicle Code) 40207. The Customer will approve the time limit for these letters.
◼ Appeal disposition letters.
◼ T2 will design and configure all correspondence templates during implementation. ◼ The Customer will approve what information is included within the letters.
Appeal Process – Administrative Review Requests – First Level ◼ T2 will manage and process initial review requests.
◼ T2 will provide the online Appeal Solution so citizens can submit their review request online.
◼ Appeal information is integrated into T2 Flex in real time and will be available to the Customer.
◼ Mailed written reviews envelope postmark dates will determine if the appeal is submitted on time.
◼ Written reviews for first level will be entered into T2 Flex within 24 to 48 hours excluding weekends and holidays.
◼ These citations will be placed on “administrative hold” by placing the citation on Appeal in T2 Flex.
◼ Designated Customer personnel will have access to the Customer’s T2 Flex database to finalize appeal decisions.
◼ The Customer will update and review data in T2 Flex in real time. ◼ T2 will provide the Customer reporting to show the appeal status, including open and closed reviews, through dashboard reporting or emailed reports. ◼ Review result letters may be sent out by T2 or the Customer. Results sent out by T2 are sent out within 24 to 48 hours (about 2 days) of the result and an electronic copy will be maintained in Flex.
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City of Modesto, CA
T2 Systems, Inc.
Last Modified: 2/25/26
Appeal Process - Administrative Hearings – Second Level ◼ T2 Systems will assist with the administration of the Customer’s administrative hearings.
◼ The online solution will provide access to submit administrative hearings online. ◼ The online solution will provide directions and documents required for indigent situations.
◼ Administrative hearings may be scheduled within T2 Flex and hearing schedules (dockets) reports are available.
Toll-Free Telephone Service
T2 will provide a Customer Service Call Center for consumers via a toll-free phone number. The call center includes courteous, professional agents who are specially trained on parking issues with inbound call scripts customized to your statuses and environment.
T2 will provide IVR (Interactive Voice Response) functionality including ◼ Allowing a caller to be transferred to our Customer Service Call Center. ◼ English and Spanish assistance
◼ Payments with a credit card are updated immediately and deposited into a T2 merchant account.
◼ A Credit Card Convenience Fee is charged to the person making the payment. ◼ Credit card payments are reconciled and disbursed monthly. Reporting of credit card payments is available to the Customer.
Reporting
T2 will provide daily, weekly, monthly, or ad hoc reporting depending on the customer's needs.
Reporting capabilities will include exporting to PDF or excel, automated scheduling to generate daily, monthly, and exported or emailed to users. Dashboard functionality with graphical displays is included for data analysis and as reporting options.
Standard Reports
Include the following from the list below:
◼ Citations – Status Summary
◼ Revenue and Deposit Reports
◼ Monthly Deposit Report
◼ Citation Statistics by Status Group
◼ Officer Detail Log Report
◼ Citation Issuance count
◼ Open Appeals
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City of Modesto, CA
T2 Systems, Inc.
Last Modified: 2/25/26
◼ Voided Citations
◼ DMV Reconciliation Report
◼ Citation Payments by Date Range
◼ Citation Payments Detail Report
◼ Collection Customer Detail Reports
◼ Accounts Assigned
◼ Cash Receipts Report
◼ Collection Activity
◼ Month to date/Year to date analysis
◼ This SOW does not account for customized reporting requests. Any customized requests would be addressed on a per request basis, with fees, if any, contingent on the volume of custom reports and complexity.
Surcharges
◼ It is the responsibility of the Customer to identify and outline all surcharges (fees) mandated by CVC 40200.3 and required for reporting purposes. ◼ T2 will provide a monthly Surcharge Disbursement Report based on the requirements outlined by the Customer.
◼ The Customer will assume distribution responsibility for disbursement of surcharges funds to the County.
◼ The Customer and T2 will mutually agree upon distribution methods to the County.
Collections
CCS will perform outbound collection procedures on individual debts including:
◼ Third party, FDCPA (Fair Debt Collection Practices Act) compliant letter services and outbound/inbound collection call center services
◼ State licensed
◼ Experienced staff
◼ Non-confrontational and professional approach that reflects positively on your organization
◼ Skip Tracing – access to a database with personal information ◼ Real time bankruptcy information to ensure that no FDCPA violation is committed when pursuing an individual who has petitioned for bankruptcy, verify the legitimacy of the bankruptcy status, and improve collection efficiency and results
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City of Modesto, CA
T2 Systems, Inc.
Last Modified: 2/25/26
Collection Services Details
◼ CCS will assume responsibility for all citations the Customer has identified and escalated to a collection status for open citations aged 36 months (about 3 years) and not in an appeal disposition. The backlog will be transferred upon the start of this project.
◼ Citations that meet the criteria of delinquent collections will be pursued using T2’s collections process; however, this process does not include the the Franchise Tax Board (FTB) Intercept Program. The City of Modesto participates in the FTB program independently,
◼ With CCS’s assistance, the Customer will transfer the citations (a soft transfer with the balance remaining in the T2 Flex solution) to collections. Prior to transfer, the contingency fee of 25% per citation will be added to each citation.
Payments can be made at the Customer or CCS. Once collected at CCS, CCS will remit back to the Customer the amount paid less than the 25% per citation fee. If collected by the Customer, 25% of the payment amount will also be charged to the Customer for CCS collection services on accounts.
◼ CCS is authorized to collect on the citations’ balance using collection bestpractices. This can include additional letter notifications and outbound calling.
These collection best-practices are already included in the fee quoted. ◼ T2/CCS will provide a query to export the citation data to be escalated to CCS for collections. The Customer will generate this file weekly. In advance of generating this file, the data will be matched with current Registered Owner information. ◼ CCS limits the number of citations that can have a fee waived per month. Six (6) citations per month can have their service fees waived. ◼ In the event the Customer needs to recall a citation that has already been escalated for collection, the Customer will notify CCS via email at [email protected] to limit unauthorized recalls, the Customer has named the following two (2) individuals as authorized persons on the Customer’s behalf to complete the recall. All other requests will be denied. Once the initial letter has been sent, the Customer can use one of their six (6) citation waivers per month to remove the service fee.
◼ CCS will send one (1) PL-95 collection letter per citation. Assuming the citation holder does not pay from the PL-95, CCS will begin collection best practice procedures.
◼ CCS will provide a daily payment file to import into the Customer’s T2 Flex database made through CCS. The file will contain the citation number, payment date and citation amount. The file will be imported via the T2 Flex Task Scheduler using the Citation Payments Received task.
◼ CCS will obtain from the Customer a daily payment import file of payments received at the Customer. It will contain the citation number, payment date and citation amount. It will be imported into the collection's software. ◼ CCS will provide the Customer with a monthly reconciliation report on the 3rd Friday of each month. The report will provide statistics on citations collected, #6..
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City of Modesto, CA
T2 Systems, Inc.
Last Modified: 2/25/26
dollar amount collected, and associated fees. Also, an electronic check will be issued in the total amount collected, net of fees.
◼ CCS will assess fees to the parker for insufficient funds. A flat $20.00 fee would be assessed to the citation holder for insufficient funds. CCS will retain this fee for bank services.
◼ CCS will provide a Project Manager responsible for project planning, scheduling, and status reporting. In addition, the Project Manager will act as the project’s single point of contact with regards to change management and issue/risk control.
This Statement of Work applies exclusively to CCS products and services. Any products or services not expressly identified herein are not governed by this SOW.
City of Modesto, California
Signature:
Print Name:
Title:
Date:
T2 Systems, Inc.
Signature:
Print Name:
Title:
Date:
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EXHIBIT A
AGENCY SURVEY OF PARKING VIOLATION FINES
MODESTO
MUNICIPAL
CODE
PARKING VIOLATION DESCRIPTION
CITY OF MODESTO
CURRENT FINE
AMOUNT*
CPI INCREASE OF
2.5%
CITY OF MODESTO
NEW FINE AMOUNT
(WITH CPI INCREASE)
AVERAGE AGENCY
BASE FINE
AMOUNT**
3-2.809 Removal of Enforcement Markings $ 71.00 $ 72.42 $ 72.00 $ 58.00 3-2.810 Obstructing Intersections and Crosswalks $ 55.00 $ 56.10 $ 56.00 $ 60.00 3-2.811 Blocking Roadway Prohibited (Angle Parking) $ 55.00 $ 56.10 $ 56.00 $ 45.00 3-2.812(a) Leaving Unattended Vehicle $ 51.00 $ 52.02 $ 52.00 $ 39.00 3-2.1002 (a)
Use of Streets for Storage of Vehicles Prohibited (72 Hour Parking) $ 108.00 $ 110.16 $ 110.00 $ 72.00
3-2.1003 Parking for Certain Purposes Prohibited (b) $ 56.00 $ 57.12 $ 57.00 $ 44.00 3-2.1004
Standing for Loading Only in Alleys (passengers 3 min and materials 20 min) $ 56.00 $ 57.12 $ 57.00 $ 45.00
3-2.1005(a) Parallel Parking Parked Wrong Way $ 57.00 $ 58.14 $ 58.00 $ 47.00 3-.2.1005(b) Parallel Parking (18) inches $ 54.00 $ 55.08 $ 55.00 $ 46.00 3-2.1005(c) Angle Parking (18) inches $ 54.00 $ 55.08 $ 55.00 $ 47.00 3-2.1006 Parking of Commercial Vehicles in Residential Districts $ 127.00 $ 129.54 $ 130.00 $ 148.00 3-2.1007 Stopping or Parking Prohibited (Signs Required) $ 61.00 $ 62.22 $ 62.00 $ 54.00 3-2.1008(b) Emergency Temporary - Posted Parking Restrictions $ 57.00 $ 58.14 $ 58.00 $ 54.00 3-2.1009 No Parking on Traffic Counters $ 58.00 $ 59.16 $ 59.00 $ 45.00 3-2.1010
Driving or Parking on Parks, Playgrounds and City Property (a,b) $ 58.00 $ 59.16 $ 59.00 $ 54.00
3-2.1010(c) Parked on Sidewalk $ 63.00 $ 64.26 $ 64.00 $ 49.00 3-2.1011(a) Parked On Private Property without Consent Prohibited $ 70.00 $ 71.40 $ 71.00 $ 52.00 3-2.1017 Parked in Fire Lane $ 90.00 $ 91.80 $ 92.00 $ 82.00 3-2.1101
(1), (2), (3),(4) Curb Markings - Zone Parking-Red, Yellow, White, Green $ 57.00 $ 58.14 $ 58.00 $ 46.00
3-2.1101.5 No Stopping /Parking Blue Zone $ 368.00 $ 375.36 $ 375.00 $ 365.00 3-2.1104 Stopping, Standing for Loading or Unloading Only $ 62.00 $ 63.24 $ 63.00 $ 46.00 #6..
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EXHIBIT A
AGENCY SURVEY OF PARKING VIOLATION FINES
3-2.1105 Stopping, Standing or Parking of Vehicles in Roadway $ 61.00 $ 62.22 $ 62.00 $ 45.00 3-2.1201 Parking Restricted or Prohibited $ 60.00 $ 61.20 $ 61.00 $ 48.00
MODESTO
MUNICIPAL
CODE
PARKING VIOLATION DESCRIPTION
CITY OF MODESTO
TOTAL FINE
AMOUNT
CPI INCREASE OF
2.5%
CITY OF MODESTO
CURRENT FINE
AMOUNT WITH CPI
INCREASE
AVERAGE AGENCY
BASE FINE
AMOUNT
3-2.1202 Overtime Parking Time Limited $ 52.00 $ 53.04 $ 53.00 $ 38.00 3-2.1203
Parking Prohibited at Certain Times on Certain Streets (Signs Required) deleted the letters $ 56.00 $ 57.12 $ 57.00 $ 47.00 3-2.1204 Parked Out of Space (on-street) $ 57.00 $ 58.14 $ 58.00 $ 43.00 3-2.1205 Vision Obstruction-Parking Prohibited (Signs Required) $ 71.00 $ 72.42 $ 72.00 $ 50.00 3-2.1206 Roadway Stopping or Parking Prohibited $ 70.00 $ 71.40 $ 71.00 $ 47.00 3-2.1301 Truck Routes (a,b) $ 96.00 $ 97.92 $ 98.00 $ 47.00 3-2.1503
Method of Parking - Parked Backed into Metered Stall (onstreet) $ 51.00 $ 52.02 $ 52.00 $ 45.00 3-2.1504 Overtime Parking in Meter Zone (a,b) $ 53.00 $ 54.06 $ 54.00 $ 44.00 3-2.1511 Parking Commercial Veh In Meter Zone $ 71.00 $ 72.42 $ 72.00 $ 66.00 3-2.1605 Obedience to Signs Posted (a,b,c) $ 51.00 $ 52.02 $ 52.00 $ 47.00 3-2.1607 City Reserved Parking - Off Street Parking Lots $ 52.00 $ 53.04 $ 53.00 $ 49.00 3-2.1608 Parked Out of Space (off-street) $ 57.00 $ 58.14 $ 58.00 $ 46.00 3-2.1904 No Residential Parking Permit (a) $ 61.00 $ 62.22 $ 62.00 $ 48.00 3-2.1904 Residential Parking Permit Misuse (c,d, e) $ 500.00 $ 510.00 $ 510.00 $ 134.00 3-2.2006 Oversized Vehicles - Parking Prohibited $ 83.00 $ 84.66 $ 85.00 $ 65.00 3-2.2007 Trailers-Parking Prohibited (a) Unhitched (b) $ 137.00 $ 139.74 $ 140.00 $ 122.00 3-2.2008 Oversized Vehicles w/o Permit $ 129.00 $ 131.58 $ 132.00 $ 102.00 *includes State and County mandatory surcharges
**does not include State and County mandatory surcharges #6..
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EXHIBIT A
AGENCY SURVEY OF PARKING VIOLATION FINES
CALIFORNIA
VEHICLE
CODE
PARKING VIOLATION DESCRIPTION
CITY OF MODESTO
TOTAL FINE
AMOUNT
CPI INCREASE OF
2.5%
CITY OF MODESTO
CURRENT FINE
AMOUNT WITH CPI
INCREASE
AVERAGE AGENCY
BASE FINE
AMOUNT
22500 (e) Blocking Driveway $ 67.00 $ 68.34 $ 68.00 $ 46.00 22500 (l) Lowered Curb Wheelchair Access $ 345.00 $ 351.90 $ 352.00 $ 290.00 22500 (a) Parking within an Intersection $ 198.00 $ 201.96 $ 202.00 $ 48.00 22500 (i) Parked in Bus Zone $ 263.00 $ 268.26 $ 268.00 $ 109.00 21116 (a) Parked on Levee or Canal $ 61.00 $ 62.22 $ 62.00 $ 41.00 22500 (h) Double Parked $ 51.00 $ 52.02 $ 52.00 $ 49.00 22511.1 (a-b) Parked in Charging Electric Vehicle Space $ 126.00 $ 128.52 $ 129.00 $ - 22514 (a) Fire Hydrant $ 80.00 $ 81.60 $ 82.00 $ 61.00
22507.8 (a-c) Violation of Disabled Parking Provisions $ 370.00 $ 377.40 $ 377.00 $ 338.00 22522
Parked Near Sidewalk Access Ramp for Disabled (sign or paint required) $ 350.00 $ 357.00 $ 357.00 $ 336.00
21211 (b) Bike Lane $ 73.00 $ 74.46 $ 74.00 $ 78.00
*includes State and County mandatory surcharges
**does not include State and County mandatory surcharges #6..
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CITY OF MODESTO
COMMITTEE AGENDA REPORT
DATE OF MEETING:
May 18, 2026
Date: April 18, 2026
TO: Finance Committee
David Wright, Chair
Nick Bavaro, Vice-Chair
Rosa Escutia-Braaton, Committee 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 2025-2026 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 costeffective 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 18, 2026
Debt Management Policy Updates
• In the Terms and Conditions of Bonds section, language was added to expand on the permissible uses of bond proceeds and the suitability of investing proceeds.
• In the Credit Enhancements section, language was added to highlight the benefits of investing bond proceeds.
• In the Refinancing Outstanding Debt section, language was added to clarify the approach to establishing the 3% savings threshold.
• In the Methods of Issuance section, language was added to clarify the appropriateness of Private Placement debt
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.
CEQA/NEPA REQUIREMENTS:
This item does not constitute a “project” within the meaning of California Environmental Quality Act (CEQA) Guidelines Section 15378 and requires no environmental review.
RECOMMENDED COMMITTEE ACTION:
Staff Recommendations:
Motion accepting the updates to the City’s Debt Management Policy and forwarding to Council for approval.
Approved by:
DeAnna Christensen, Director of Finance
Joseph P. Lopez, City Manager
Attachments:
1. Debt Management Policy (FY27 With Edits)
2. Debt Management Policy (FY27 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.
Responsibility for implementation of the Debt Policy, and day-to-day responsibility for structuring,
CITY OF MODESTO
CITY COUNCIL POLICY
LATEST REVISION DATE: May 20, 2024
June 10, 2025
POLICY NUMBER: 1.036
CITY DEPARTMENT: Finance
SUBJECT: Debt Management Policy
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2 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.
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 #7..
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3 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 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 #7..
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4 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 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 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, #7..
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5 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 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).
2. Short-Term Debt
Short-term borrowing may be utilized for the temporary funding of operational cash flow deficits or anticipated revenues, where anticipated revenues are defined as an assured revenue source with the anticipated amount based on conservative estimates, or until the structure of the take-out financing is finalized. The City will determine and utilize the least costly method for short-term borrowing. The City may issue short-term debt when there is a defined repayment source or amortization of principal, subject to the following policies:
Commercial Paper Notes may be issued as an alternative to fixed rate debt, particularly when the timing of funding requirements is uncertain. The City may maintain an ongoing commercial paper program to ensure flexibility and immediate access to capital funding when needed. The retirement of commercial paper notes is most commonly a result of the issuance of long-term bonds but they may also be retired with available cash.
Grant Anticipation Notes (“GAN”) are short-term notes that are repaid with the proceeds of State or Federal grants of any type. The City shall generally issue GANs only when there is no other viable source of funding for the project. Bond Anticipation Notes (“BAN”) are short-term notes issued prior to the issuance of long-term debt. BANs are most commonly retired, or taken-out, with long-term debt.
BANs will be issued only when there is no better alternative to reduce the overall cost of a financing program.
Tax and Revenue Anticipation Notes (“TRAN”) shall be issued only to address a timing mismatch between operating revenues and operating expenditures and the sizing of the issue shall fully conform to Internal Revenue Code requirements and limitations.
Lines of Credit shall be considered as an alternative to other short-term borrowing options. The lines of credit shall be structured to limit concerns as to Internal Revenue Code compliance.
Other short-term debt may also be considered and utilized when appropriate such as a #7..
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6 Direct Purchase Loan from a bank or Floating Rate Notes.
3. Variable Rate Debt
To maintain a predictable debt service burden, the City may give preference to debt that carries a fixed interest rate. An alternative to the use of fixed rate debt is floating or variable rate debt. It may be appropriate to issue short-term or long-term variable rate debt to diversify the City’s debt portfolio, reduce interest costs, provide interim funding for capital projects and improve the match of assets to liabilities. Variable rate debt typically has a lower cost of borrowing than fixed rate financing and shorter interest rate reset periods in the range of 1 to 35 days. Under no circumstances will the City issue variable rate debt solely for the purpose of earning arbitrage. The City, however, may consider variable rate debt in certain instances.
A) Variable Rate Debt Capacity. The City will maintain a conservative level of outstanding variable rate debt in consideration of general rating agency guidelines recommending a maximum of 20% variable rate exposure, in addition to maintaining adequate safeguards against risk and managing the variable revenue stream, both as described below:
(1) Adequate Safeguards Against Risk. Financing structure and budgetary safeguards are in place to prevent adverse impacts from interest rate shifts; such structures could include, but are not limited to, interest rate swaps, interest rate caps and the matching of assets and liabilities. See Section VII. B. 4. Financial Derivative Products below. See also the Interest Rate Swap Policy addendum.
(2) Variable Revenue Stream. The revenue stream for repayment is variable, and is anticipated to move in the same direction as market-generated variable interest rates, or the dedication of revenues allows capacity for variability. (3) As a Component to Synthetic Fixed Rate Debt. Variable rate bonds may be used in conjunction with a financial strategy which results in synthetic fixed rate debt. Prior to using synthetic fixed rate debt, the City shall certify that the expected interest cost is at least 10 basis points (0.10%) lower than traditional fixed rate debt (including any ongoing fees in such calculation) as well as giving due consideration to other risks associated with such a structure that may raise the ultimate costs of a synthetic fixed rate structure. See Section VII. B. 4. Financial Derivative Products below. See also the Interest Rate Swap Policy addendum.
4. Financial Derivative Products
Financial Derivative Products will be considered appropriate in the issuance or management of debt only in instances where it has been demonstrated that the derivative product will either provide a hedge that is expected to reduce the risk of fluctuations in expense or revenue, or alternatively where the derivative product is expected to reduce total project cost.
The City shall maintain an Interest Rate Swap Policy (see attached) governing the use of derivative products. For derivatives other than interest rate swaps, the City will undertake an analysis of early termination costs and other conditional terms given certain financing and marketing 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.
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. The City will strive to invest proceeds in a capitalized interest account in order to minimize the “negative carry” on such bond proceeds. Interest earnings may, at the City's discretion, be applied to extend the term of capitalized interest but in no event beyond 3 years, or less, if restricted by law.
C. Lien Levels
Senior and Junior Liens for each revenue source will be utilized in a manner that will maximize the most critical constraint, typically either cost or capacity, thus allowing for the most beneficial use of the revenue source securing the bond. Projects chosen for priority financing, based on funding availability and proposed timing, will generally be financed on the most senior lien of the relevant credit. 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 #7..
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8 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.
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.
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.
I. Bond Proceeds Investment
If bond proceeds are expected to be unutilized for a period of time the City will consider investing the proceeds to minimize the “negative carry” on the debt. Interest cost on debt is unavoidable but it can be offset in part with interest earnings thereby reducing the “negative carry” of debt.
The City will consider investing bond proceeds and reviewing opportunities to earn interest income to offset interest cost, to the extent permitted by arbitrage and rebate rules. A project fund funded with bond proceeds may be strategically invested to match the draw schedule. While such investment is typically yield restricted, positive arbitrage may be retained under certain circumstances if spend-down rules are met. If a capitalized interest account is funded with bond proceeds, it too may be invested. The City may even “net fund” it which will lower the amount of debt required to fund the account.
Lastly the City may also invest any reserve funds such as the debt service reserve fund and interest income may be used to offset a portion of the debt service payment.
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 Commented [SH1]: Might read better if this is the first paragraph under the new caption.
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9 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 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. Lastly, the reserve may be invested and the income utilized to offset annual debt service costs.
C. Letters of Credit
The City may enter into a letter of credit agreement when such an agreement is required by the market (e.g., in the case of variable rate demand bonds) or is deemed prudent and advantageous.
Only those financial institutions with long-term ratings greater than or equal to that of the City, and minimum short-term ratings of P-1, A-1, F1, by Moody’s Investors Service, S&P Global Ratings and Fitch Ratings, respectively, may participate in City letter of credit agreements unless there are no other practicable options for the City.
X. REFINANCING OUTSTANDING DEBT
The City shall have the responsibility to analyze outstanding bond issues for refunding opportunities that may be presented by underwriting and/or municipal advisory firms. The City will consider the following issues when analyzing possible refunding opportunities:
A. Debt Service Savings
The City has established a minimum net present value savings threshold goal of 3% of the refunded bond principal, unless there are other compelling reasons for defeasance. The 3% savings threshold generally applies to the aggregate the . The City should also evaluate savings on a maturity-by-maturity basis in order to inform the refunding decision. 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 #7..
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10 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 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.
E. Arbitrage
The City shall take all necessary steps to optimize refunding escrows and to avoid negative arbitrage. Any resulting positive arbitrage will be rebated as necessary according to federal guidelines.
XI. METHODS OF ISSUANCE
The City will determine, on a case-by-case basis, whether to sell its bonds competitively or through negotiation. The City shall evaluate the comparative costs of each method of issuance on a net present value basis, using the City’s investment rate as the appropriate measure of the discount rate. It should be noted, however, that cost may be only one of a number of factors considered in determining the most advantageous method of sale.
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11 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). 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.
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 either cannot be obtained or would likely be below-investment grade. Private placements may also be useful for time-sensitive funding needs as the process is more expedient #7..
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12 compared to a market sale. 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 its administrative costs incurred in debt issuance and ongoing reporting costs.
XIII. CONSULTANTS
Periodically, the City may create an approved pool of qualified financing team members, such as municipal advisors or underwriters.
A. Selection of Financing Team Members
The Director of Finance will make recommendations to the City Manager for all financing team members, with the City Council providing final approval.
B. Municipal Advisor
The City shall utilize a municipal advisor to assist in its debt issuance and debt administration processes as prudent. The municipal advisor must be registered as a Municipal Advisor with the Securities and Exchange Commission (“SEC”) and Municipal Securities Rulemaking Board (“MSRB”). Selection of the City’s municipal advisor(s) shall be based on, but not limited to, the #7..
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13 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:
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;
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14 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 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 #7..
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15 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.
Within 10 working days after the sale date, submit to the Director of Finance a detail of orders, allocations and other relevant information pertaining to the City’s sale.
I. Disclosure by Financing Team Members
All financing team members will be required to provide full and complete disclosure relative to agreements with other financing team members and outside parties. The extent of disclosure may vary depending on the nature of the transaction and for underwriters and municipal advisors shall, at a minimum, comply with applicable SEC and MSRB requirements. For firms acting as the City’s bond counsel, disclosure counsel, or municipal advisor, no agreements shall be permitted which could compromise the firm’s ability to provide independent advice which is solely in the City’s best interests or which could reasonably be perceived as a prohibited conflict of interest. All other conflicts must be disclosed to the City in accordance with applicable regulatory #7..
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16 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 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 #7..
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17 designated, the departing Compliance Officer will ensure that such successor is fully briefed as to the status of the City’s outstanding indebtedness and the location of records relating to such indebtedness, and that such successor receives training and consultation(s) with bond or disclosure counsel as to his or her duties as Compliance Officer under this Debt Policy.
C. External Advisors
The City shall consult with bond counsel and other legal counsel and advisors, as needed, so long as any Bonds remain outstanding, to identify requirements and to establish procedures necessary or appropriate so that tax-exempt interest on the Bonds will continue to be excludable from gross income for federal income tax purposes. Those requirements and procedures shall include future compliance with applicable private activity bond tests, arbitrage rebate requirements and all other applicable post-issuance requirements of federal tax law throughout (and in some cases beyond) the term of bonds. The Compliance Officer shall conduct periodic reviews, at least annually, or more often as may be necessary, to determine that the City remains in compliance with all laws and regulations, including, without limitation, the matters set forth herein. The Compliance Officer annual review shall include matters that relate to the tax status of the Bonds, continuing compliance with covenants that relate to the tax status of the Bonds, and any new matters or public finance developments that relate to the tax status of the Bonds or continuing compliance with such requirements. The City may consult with bond counsel in conducting its review and may engage expert advisors (each a “Rebate Analyst”) to assist in the calculation of arbitrage rebate payable in respect of the investment of Bond proceeds in the manner more fully set forth in the Tax Certificate.
D. Uses and Investments of Funds and Accounts
Various funds and accounts are established as security for the Bonds. The Compliance Officer shall prepare regular, periodic statements regarding the investments and transactions involving bond proceeds, which shall comprise part of the records required to be kept. The Compliance Officer will also review the disbursement of bond proceeds from Trustee records or City records, as applicable, to ensure that bond proceeds are expended in accordance with their intended purpose. The Compliance Officer shall report to the Finance Director (if the officer is a designee of the Finance Director) and the City Manager any expenditure which violates the provisions of any ballot measure, authorizing resolution, or trust document. If any Debt Service Fund ever contains any balance after the principal payment of the Bonds is made each year, except for a reasonable carryover amount which is less than the greater of the earnings on the Debt Service Fund for the immediately preceding year ending on such principal payment date (a “Bond Year”), or 1/12 of the principal and interest payments on the Bonds for the immediately preceding Bond Year, then the Compliance Officer will contact bond counsel to ensure that such facts will not cause the Bonds to become arbitrage bonds, to formulate a plan to remediate such condition, if necessary, and to determine an allowable use for such excess moneys and/or to determine if any yield restrictions apply. If any Debt Service Reserve Fund is ever funded (i) in an amount more or less than the required balance but declining in future years as detailed in the Tax Certificate, or (ii) is invested at a yield that is higher than the yield of the Bonds, then the Compliance Officer will contact bond counsel to ensure that such facts will not cause the Bonds to become arbitrage bonds, to formulate a plan to remediate such condition and/or to determine if any yield restrictions apply. Generally, if the Debt Service Reserve Fund ever contains a higher balance than required (either through the accrual of interest, investment gains, maturity of securities, or reduction in the Reserve #7..
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18 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 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.
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19 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 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. #7..
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20 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 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 #7..
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21 the limitations of such reliance. Coordination between the DWG and City officials will occur before the release of any public statements about any financial condition of the City.
J. Training for Employees and Issuer Officials
For City officials, compliance with federal securities law should be considered as important as compliance with local public meetings and records laws. To further this goal, the Compliance Officer shall call a meeting for an annual review or, if necessary, an interim review, of the continuing disclosure policies of the City, which all members of the DWG and additional invited officials and employees are expected to attend. The Compliance Officer shall be responsible for keeping a record of attendance. Furthermore, the members of the DWG and such invited officials and employees are expected to attend training sessions, at least annually, called by the Compliance Officer. Applicable policies and procedures will be updated by the City to reflect required changes on an as-needed basis.
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22 GLOSSARY
Arbitrage- The difference between the interest paid on the tax-exempt securities and the interest earned by investing the security proceeds in higher-yielding securities. IRS regulations govern arbitrage on the proceeds from issuance of municipal securities.
Balloon Maturity- A later maturity within an issue of bonds that contains a disproportionately large percentage of the principal amount of the original issue.
Bond Allocation Policies- Outline as to how an investor’s order is filled when a maturity in an underwriting syndicate is oversubscribed. The senior managing underwriter and issuer decide how the bonds will be allocated among the syndicate. There are three primary classifications of orders, which form the designation policy. The highest priority is given to Net Designated orders; the next priority is given to Group Net orders and Member orders are given the lowest priority (unless the Member orders are retail orders in which case it would be given the highest priority).
Bullet Maturity- Maturity for which there are no sinking fund payments prior to the stated maturity date.
Call Provisions- The terms of the bond contract giving the issuer the right to redeem all or a portion of an outstanding issue of bonds prior to their stated dates of maturity at a specific price, usually at or above par.
Capitalized Interest- A portion of the proceeds of an issue that is set aside to pay interest on the securities for a specific period of time. Interest is commonly capitalized for the construction period of the project.
Commercial Paper- Very short-term, unsecured promissory notes issued in either registered or bearer form, and usually backed by a line of credit with a bank.
Competitive Sale- A sale of securities by an issuer in which underwriters or syndicates of underwriters submit sealed bids to purchase the securities in contrast to a negotiated sale.
Continuing Disclosure- The principle that accurate and complete information material to the transaction which potential investors would be likely to consider material in making investment decisions with respect to the securities be made available on an ongoing basis.
Credit Enhancement- Credit support purchased by the issuer to raise the credit rating of the issue. The most common credit enhancements consist of bond insurance, direct or standby letters of credit, and lines of credit.
Debt Service Reserve Fund- The fund in which moneys are placed which may be 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 #7..
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23 value.
Derivatives- A financial product whose value is derived from some underlying asset value.
Designation Policies- Concerning a negotiated sale of bonds, the rules regarding how the takedown (sales commission) is allocated among the underwriters for each order put in for the bonds.
Direct Purchase Loan- A source of financing where the loan is purchased by a financial institution instead of being offered to the general public for purchase. The loan can bear interest at a fixed rate or on a variable rate tied to market index (i.e. the Secured Overnight Financing Rate (“SOFR”) or Securities Industry and Financial Markets Association (“SIFMA”) Index). This form of financing does not require a remarketing agent to set the variable rate. As such, a Direct Purchase Loan can be used to replace traditional forms of variable-rate debt.
Escrow- A fund established to hold moneys pledged and to be used to pay debt service on an outstanding issue.
Expenses- Compensates senior managers for out-of-pocket expenses including: underwriters counsel, DTC charges, travel, syndicate expenses, dealer fees, overtime expenses, communication expenses, computer time and postage.
Floating Rate Notes (“FRN”)- A note with a variable interest rate sold either in the public market or directly to financial institutions. The adjustments to the interest rate are typically tied to a certain index like SOFR or SIFMA and are made periodically. The rate would continue to reset in the same manner through maturity. The 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.
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 #7..
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24 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. #7..
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25 1. City of Modesto Philosophy Regarding Use of Interest Rate Swaps A. Introduction Interest rate exchange agreements or interest rate swaps (“Swaps”) and related financial instruments and derivatives may be appropriate interest rate management tools in certain circumstances. Properly used, Swaps can increase the City of Modesto’s (the “City”) financial flexibility and provide opportunities for interest rate savings. This policy (“Swap Policy”) shall be followed in conjunction with the City’s related debt issuance-related policies and procedures (the “Debt Policy”).
Swaps are appropriate to use when they achieve a specific financial objective consistent with the City’s overall Swap Policy and Debt Policy. Swaps may be used, for example, to lock-in a current market fixed rate or create additional variable rate exposure. Swaps may be used to produce interest rate savings or alter the pattern of debt service payments.
Swaps may be used to cap, limit or hedge variable rate payments. Options granting the right to commence or cancel an underlying Swap are permitted to the extent the Swap itself is otherwise consistent with this Swap Policy.
The authorized Swaps contemplated in this Swap Policy are intended to reduce the amount or duration of interest rate risk, or produce a lower cost of borrowing when used in combination with the issuance of bonds.
B. Rationales for Utilizing Interest Rate Swaps
The use of Swaps and related financial instruments should balance the City’s primary objectives of reducing the cost of capital, minimizing the City’s exposure to interest rate volatility, and gaining flexibility in structuring and managing its debt portfolio over time with the risks associated with these tools and instruments. Examples of how the City’s debt management objectives can be achieved through the use of Swaps and other financial instruments are described below: Reduce borrowing costs at the time of issuance Create synthetic fixed rate debt through a floating-to-fixed Swap. Actively manage interest rate risk Lock-in current market rates through (forward starting) floating-to-fixed Swap. Balance financial risk Purchase of an interest rate cap.
CITY OF MODESTO
CITY COUNCIL POLICY
Latest Revision Date: April 2023
ADDENDUM: Interest Rate Swap Policy
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26 Achieve appropriate asset/liability match
Create variable rate exposure through fixed-to-floating Swap.
Under no circumstances will Swaps be used for speculative purposes, e.g., to realize trading gains.
2. Authority for Entering into Swap Agreements
The purpose of this Swap Policy is to integrate the use of Swaps into the City’s overall Debt Policy, and other funds of the City where particular debt strategies, both long-term and shortterm, factor into these decisions. Swaps will not be used for speculation. The City Manager, in conjunction with the Director of Finance, shall be responsible for determining if and when it is in the City’s overall best financial interests to enter into a Swap or related financial instruments covered by this Swap Policy.
The City shall comply with all applicable laws. The City must receive an opinion acceptable to the financial market from a nationally recognized law firm that the swap contract is a legal, valid, and binding obligation of the City and that entering into such a contract complies with applicable provisions of the City Charter and State statutes.
3. Permitted Instruments
The City may utilize financial instruments that (i) lower its interest expense, (ii) manage its financial risk or (iii) improve its financial condition.
The City shall not use financial instruments that (i) create substantial leverage or financial risk, (ii) lack adequate liquidity to terminate at market, (iii) provide insufficient price transparency to allow reasonable valuation on an ongoing basis, or (iv) are primarily speculative in nature.
The use of Swaps and other hedging products should produce a result not otherwise available in the cash market (i.e., lack of advance refunding, non-callable debt), or provide a higher level of net savings compared to conventional financing methods.
The City may expressly utilize the following financial instruments, after identifying the financial objective(s) to be realized and assessing the attendant risks:
Current or forward starting floating-to-fixed rate swaps Designed to reduce a fixed interest rate below that which would otherwise be available through the use of traditional fixed rate debt. Current or forward starting fixed-to-floating rate swaps Designed to create additional variable interest rate exposure. Rate Locks
Cash-settled forward contracts based on indices such as the MMD™ 1“AAA”
1. MMD™ is a trademark of Municipal Market Data, a Thompson Financial company. #7..
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27 scale or the Bloomberg Valuation Service (“BVAL”) AAA Muni Callable Curve. Interest Rate Caps, Floors or Collars
Financial contracts that limit exposure to interest rate volatility. Options on Variable Rate Indices
Indices could include the Securities Industry and Financial Markets Association (“SIFMA”) Index2, Secured Overnight Financing Rate (“SOFR”)3, etc. Options on Swaps (“Swaptions”)
Methods used to control the commencement or cancellation of interest rate swaps. Basis Swaps
Floating-to-floating rate swaps using different variable-rate indices, such as a swap from the SIFMA Index to a percentage of SOFR.
4. Swap Risk Analysis
The City shall require for each proposed financing an evaluation of all financial products with respect to the unique risks that they bear. A specific determination must be made that the proposed or expected benefits exceed the identified risks by an adequate margin over those available in the traditional cash market. At a minimum, the City shall perform an evaluation of the risks and what steps have been taken to mitigate any risks. The City shall retain a municipal/swap advisor to assist in assessing these risks. Questions that may arise include the following:
Market or Interest Rate Risk
Does the transaction hedge (i.e., decrease or eliminate) or increase interest rate volatility?
Tax Risk
How is the transaction or its benefits affected by a future change in federal income tax policy?
Termination Risk
Under what circumstances might the transaction be terminated? At what value? Risk of Uncommitted Funding (Put Risk)
Does the transaction create additional financing dependent upon third-party participation (such as requiring a letter of credit, grant or other anticipation funding, etc.)?
Rollover Risk
Is the term of the Swap shorter than the term of the underlying hedged debt or financial instrument? Does the City anticipate entering into another Swap when the first Swap terminates?
Legal Risk
Is the transaction expressly legally authorized?
Counterparty Risk
What is the creditworthiness of the counterparty?
2. The SIFMA Index is an index of more than 500 high-grade, tax-exempt, weekly reset Variable Rate Demand Obligation issues.
3. SOFR is a taxable rate which is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, published daily by the Federal Reserve Bank.
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28 Rating Agency Risk
Is the proposed transaction consistent with the City’s current ratings and ratings objectives?
Basis Risk
Is it anticipated that the projected Swap payments the City will receive closely match the debt service payments it will make?
Index Risk
Does the transaction include provisions acceptable to the City regarding any change in indices used to calculate payments or obligations? Subsequent Business Conditions
Does the transaction or its benefits depend upon the continuation, or realization, of specific industry business conditions (e.g., unusual demand for state-specific variable rate debt)?
Operational Risk
Does the City have adequate systems, policies, and practices in place to monitor and manage the transaction over its term?
5. Swap Procurement and Execution
A. Procurement
The City will not have a fixed policy with respect to the procurement of Swaps and other financial instruments authorized by this Swap Policy. On a product-by-product basis, the City will have the authority to negotiate or competitively bid the procurement of financial instruments that have customized or specific attributes designed on its behalf. The Director of Finance will be responsible for determining the method of procurement for Swaps and related financial instruments. A municipal/swap advisor shall be retained to assist the Director of Finance in evaluating the proposed pricing of Swaps or related financial instruments.
B. Swap Execution
The Director of Finance may recommend the use of financial derivative products if they:
1. Provide a specific benefit not otherwise available;
2. Produce greater expected interest rate savings than cash market alternatives;
3. Do not create substantial leverage or financial risk;
4. Result in an improved capital structure or better asset/liability match; and
5. Reasonably pass the Swap Risk Analysis required by Section 4. Swap Risk Analysis of this Swap Policy.
C. Credit Rating Designations
For purposes of this Swap Policy, references to credit ratings will be based on those ratings issued by Moody’s Investors Service, and/or S&P Global Ratings, and/or Fitch Ratings. The credit ratings will reflect the designations assigned by each of these rating agencies utilized for comparable credit and will be listed for each rating agency utilized in the order shown in the preceding sentence.
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29 6. Swap Documentation
The City will use a standard International Swap and Derivatives Association, Inc. (“ISDA”) Master Agreement, including the Counterparty Schedule to the Master Agreement and a Credit Support Annex (utilizing such versions thereof as the Director of Finance shall determine), as supplemented and amended in accordance with the recommendations of the City’s financial/swap advisor and legal counsel. Each Swap entered into by the City shall include payment, term, security, collateral, default, remedy, termination and other terms, conditions and provisions as the Director of Finance may deem necessary or desirable.
A. Terms and Notional Amount of Swap Agreement
The City shall determine the appropriate term for Swaps on a case-by-case basis. The slope of the swap curve, the marginal change in swap rates from time to time along the swap curve, and the impact that the term of the Swap will have on the City’s overall financial (e.g., interest rate, market value, counterparty, etc.) exposure shall be considered in determining the appropriate term of any Swap agreement. In connection with the issuance or carrying of bonds, the term of the Swap agreement between the City and qualified swap counterparty shall not extend beyond the final maturity date of existing City debt, or in the case of a refunding transaction, beyond the final maturity of the refunding bonds. At no time shall the total net notional amount of all Swaps, excluding any offsetting Swaps, exceed the total amount of outstanding applicable bonds. Variable rate debt exposure created through the use of Swaps will be consistent with the limitations set forth in the City’s adopted Debt Policy. Terms and conditions of any Swap shall be negotiated by the Director of Finance in the best interests of the City subject to the applicable legal provisions and this Swap Policy. The Swap agreements entered into between the City and each counterparty shall include payment, term, security collateral, default, remedy, termination, and other terms, conditions and provisions as the Director of Finance, in consultation with City legal counsel and its swap advisor, deems necessary or desirable.
Subject to the provisions contained herein, the City’s swap documentation and terms should include the following:
The City will be able to terminate the swap without cause subject to market termination costs.
The swap counterparty will only be able to terminate the swap if the City’s credit ratings fall below a certain pre-determined threshold and/or the City fails to perform, as required by the swap contract.
Governing law for Swaps will be New York, but should reflect California authorization provisions.
The specified indebtedness related to credit events in the Master Agreement should be narrowly drafted and refer only to specific debt of the issuing fund. Eligible collateral should be limited to Treasuries, Federal Agencies and any other securities which, in the City’s sole discretion, shall be deemed reasonable and creditworthy.
Collateral thresholds should be set on a sliding scale reflective of credit ratings. #7..
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30 Termination value should be set by “market quotation” methodology. Whenever possible use a Credit Support Annex to document swap termination value collateralization procedures.
Ratings downgrade triggers.
7. Policy on Swap Counterparties
The City shall only do business with highly rated counterparties, and will structure swap agreements to protect itself from credit deterioration. All Swap transactions shall contain provisions granting the City the right to optionally terminate a swap agreement at-market at any time over the term of the agreement.
A. Qualified Swap Counterparties
The City should not have an immutable credit standard. However, the City shall attempt to do business with highly rated counterparties the long-term ratings of which at the date of execution are at least “Aa” or “AA” by one or more Nationally Recognized Statistical Ratings Organizations (“NRSRO”) and no less than “A2” or “A” by one or more NRSRO.
For lower rated counterparties, the City should seek credit enhancement in the form of:
1. Contingent swap counterparty providing support;
2. Collateral;
3. Ratings downgrade triggers; and,
4. Minimum rating threshold of “Baa3/BBB-/BBB-,” below which provisions will allow an assignment or trigger an additional termination event, with the counterparty as the affected party (i.e., the counterparty would pay market-based transaction costs).
In addition, the counterparty must have a demonstrated record of successfully executing swap transactions as well as creating and implementing innovative ideas in the swap market. The City shall be authorized to enter into interest rate swap transactions only with qualified swap counterparties.
8. Limitations on Counterparty Exposure
In order to diversify the City’s counterparty credit risk, and to limit the City’s credit exposure to any one counterparty, limits will be established for each counterparty based upon both the credit rating of the counterparty as well as the relative level of risk associated with each existing and proposed swap transaction. The guidelines shown in the following table provide general termination exposure guidelines with respect to whether the City should enter into an additional transaction with an existing counterparty. The City may make exceptions to the guidelines at any time to the extent that the execution of a swap achieves one or more of the goals outlined in these guidelines or provides other benefits to the City. In general, the maximum net termination exposure to any single counterparty should be set so that it does not exceed a prudent level as measured against the gross revenues, available assets or other financial resources of the City.
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31 For example, if the City has two Swaps with one counterparty, and if the first Swap’s market value is positive $10 million and the second Swap’s market value is negative $20 million, then the City’s total net exposure to the counterparty is negative $10 million.
Such guidelines will also not mandate or otherwise force automatic termination by the City or the counterparty. Maximum net termination exposure is not intended to impose retroactively any terms and conditions on existing transactions. Such provisions will only act as guidelines in making a determination as to whether or not a proposed transaction should be executed given certain levels of existing and projected net termination exposure to a specific counterparty. Collateral posting guidelines are described in the collateral section below. The calculation of net termination exposure per counterparty will take into consideration multiple transactions, some of which may offset the overall exposure to the City.
Under this approach, the City will set limits on individual counterparty exposure based on existing as well as new or proposed transactions. The sum of the current market value and the projected exposure shall constitute the maximum net termination exposure. For outstanding transactions, current exposure will be based on the market value as of a recently completed swap valuation report provided by the City’s swap advisor. Projected exposure shall be calculated based on the swap’s potential termination value taking into account possible adverse changes in interest rates as implied by historical or projected measures of potential rate changes applied over the remaining term of the swap. For purposes of this calculation, the City shall include all existing and projected transactions of an individual counterparty and all transactions will be analyzed in aggregate such that the maximum exposure will be additive.
The exposure thresholds, which will be reviewed periodically by the City to ensure that they remain appropriate, will also be tied to long-term credit ratings of the counterparties and whether or not collateral has been posted as shown in the table below. If a counterparty has more than one rating, the lowest rating will govern for purposes of the calculating the level of exposure. If contingent swap counterparty or swap insurance is used to provide financial support for the primary counterparty, the rating of the support entity shall be used. A summary table is provided below:
Credit Ratings
Maximum
Collateralized Net
Termination Value
Maximum
Uncollateralized
Net Termination Value
Maximum Net
Termination
Exposure
AAA N/A $30.0 million N/A
AA Category $30.0 million $20.0 million $30.0 million
A Category $20.0 million $10.0 million $20.0 million
Below A Category $10.0 million $5.0 million $15.0 million If the exposure limit is exceeded by counterparty, the City shall conduct a review of the exposure limit per counterparty. The City, in consultation with its bond counsel and swap advisor, shall explore remedial strategies to mitigate this exposure. #7..
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32 9. Benefit Expectation
Financial transactions, using Swaps or other derivative products, intended to produce the effect of a synthetic advance refunding, must generate at least 25% greater savings than the benefit threshold then in effect for fixed-rate bonds as determined by the City’s Director of Finance. (See Debt Management Policy Section X.A. Debt Service Savings). The higher savings target reflects the greater complexity and higher risk of derivative financial instruments.
In calculating the prospective savings against the target for implementing a fixed-to-variable swap, the cost of remarketing, in addition to the cost of credit and liquidity fees must be added to the variable rate representing the ten-year average of comparable variable rate securities.
10. Termination Provisions
All swap transactions shall contain provisions granting the City the right to optionally terminate a swap agreement at market at any time over the term of the agreement, but shall NOT grant this right to the counterparty. In general, exercising the right to terminate an agreement produces a benefit to the City, either through the receipt of a payment from a termination, or if the termination payment is made by the City, in conjunction with a conversion to a more beneficial (desirable) City debt obligation, as determined by the City.
11. Collateral
As part of any swap agreement, the City shall require collateralization or other credit enhancements to secure any or all swap payment obligations. As appropriate, the City, in consultation with its bond counsel and swap advisor, may require collateral or other credit enhancements to be posted by each swap counterparty under the following circumstances:
Each counterparty to the City may be required to post collateral if the highest credit rating of the counterparty or parent falls below the “Aa/AA” category. Additional collateral for further decreases in credit ratings of each counterparty shall be posted by each counterparty in accordance with the provisions contained in the collateral support agreement to each counterparty with the City.
Collateral shall be deposited with a third-party trustee, or as mutually agreed upon between the City and the counterparty.
A list of acceptable securities that may be posted as collateral and the valuation of such collateral will be determined and mutually agreed upon during negotiation of the swap agreement with each swap counterparty.
The market value of the collateral shall be determined on at least a weekly basis. The City shall determine the reasonable threshold limits for the initial deposit and for increments of collateral posting thereafter.
The City shall determine on a case-by-case basis whether other forms of credit enhancement, such as swap insurance, are more beneficial in lieu of the posting of additional collateral.
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33 The City shall evaluate the performance of the swap relative to the rate on the bonds. The City shall compute the effective cost of borrowing inclusive of all fees and costs associated with the underlying financing.
12. Conformance with Dodd-Frank
It is the intent of the City to conform this Swap Policy to the requirements relating to legislation and regulations for over-the-counter derivatives transactions under Title VII of the Wall Street Transparency and Accountability Act of 2010, as supplemented and amended from time to time (herein collectively referred to as “Dodd-Frank”). Pursuant to such intent, it is the policy of the City that: (i) each swap advisor engaged or to be engaged by the City will function as the designated Qualified Investment Representative of the City, sometimes referred to as the “Designated QIR”; (ii) each swap advisor agrees to meet and meets the requirements specified in Commodity Futures Trading Commission Regulation 23.450(b)(1) or any successor regulation thereto (herein referred to as the “Representative Regulation”) (iii) each swap advisor provides a written certification to the City to the effect that such swap advisor agrees to meet and meets the requirements specified in the Representative Regulation; and (iv) the City relies on the advice of its swap advisor with respect to transactions authorized pursuant to this Swap Policy and not rely on recommendations, if any, presented by any counterparty with respect to transactions authorized pursuant to this Swap Policy.
13. Monitoring and Reporting
At least once per year, normally as part of the City’s Annual Comprehensive Financial Report (“Annual Report”), or as requested by the City Council, the Director of Finance shall prepare information describing the various Swaps and financial arrangements entered into by the City pursuant to this Swap Policy that are in effect as of the date of the report’s publication. The report shall include the following information:
1. A summary of key terms of the agreements, including notional amounts, interest rates, maturity and method of procurement.
2. The mark-to-market value of each agreement.
3. The full name, description, and credit ratings of each counterparty or the applicable guarantor.
4. The amounts that were required to be paid and received and any amounts that were actually paid and received.
5. A listing of any credit enhancement, liquidity facility, or reserves and an accounting of all costs and expenses associated with the credit enhancement, liquidity facility, or reserves.
6. The aggregate mark-to-market value and potential termination value for each swap by counterparty.
7. A discussion of other risks associated with each transaction.
At the end of each fiscal year, the Director of Finance shall provide to the City Council all information required for financial reporting under Government Accounting Standards Board #7..
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34 (“GASB”) requirements as well as any other reporting or disclosure requirements. The City shall adhere to California Government Code Section 5922 and applicable GASB guidelines for reporting and disclosure guidelines for derivative products. #7..
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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.
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: June 10, 2025
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).
While adherence to this Policy is required in applicable circumstances, the City recognizes that changes in the capital markets, agency programs and other unforeseen circumstances may from time to time produce situations that are not covered by the Policy and will require modifications or exceptions to achieve policy goals. In these cases, management flexibility is appropriate, provided specific authorization from the City Council is obtained.
IV. ETHICS AND CONFLICTS OF INTEREST
Officers and employees of the City involved in the execution and management of the Debt Policy will not engage in any personal business activities that could conflict with proper and lawful execution and management of the Debt Policy, or which could impair their ability to make impartial decisions.
V. CAPITAL IMPROVEMENT PROGRAM INTEGRATION
The City’s multi-year Capital Improvement Program (“CIP”), which identifies the projects and the appropriate funding mechanisms to pay for them, shall be used in combination with the CIP Financial and Budget Policies and this Debt Policy to ensure the proper allocation and financing of eligible projects. The CIP and its related policies set priorities and strategies for allocating and tracking funding, while the Debt Policy provides policy direction and limitations for proposed financings. Debt issuance for capital projects shall not be recommended for City Council approval unless such issuance has been incorporated into the CIP.
VI. STANDARDS FOR USE OF DEBT FINANCING
The City’s Debt Policy will promote debt issuance only in those cases where public policy, equity and economic efficiency favor debt over cash (pay-as-you-go) financing. Long-term debt financing shall not be used to fund operating costs.
A. Credit Quality
Credit quality is an overriding consideration. All City debt management activities for new debt issuances will be conducted in a manner conducive to receiving the highest credit ratings possible consistent with the City’s debt management objectives, and to maintaining or improving the current credit ratings assigned to the City's outstanding debt by the major credit rating agencies.
B. Term of Financing
Debt can be used to provide funding for long-term capital projects. The debt repayment period should relate to the expected useful life for the facilities or equipment being financed, and should, as a general matter, be concurrent with the stream of benefits from these facilities. When the City finances capital projects by issuing bonds, the debt repayment period generally should not exceed the average useful life of the equipment, software and/or facilities being acquired or constructed, #7..
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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.
D. Ongoing Debt Administration and Internal Controls
The City shall maintain all debt-related records for as long as the associated debt is outstanding plus a term of three years. At a minimum, this repository will include all official statements, bid documents, ordinances, indentures, records relating to the expenditure of proceeds and the use of the project, records related to the investment of the proceeds of the bonds and the sources of payment, all returns filed with the IRS, trustee reports, etc. for all City debt. To the extent that official transcripts incorporate these documents, possession of a transcript will suffice (transcripts may be hard copy, stored on CD-ROM or other forms of electronic record). The City will collect all available documentation for outstanding debt and will develop a standard procedure for archiving transcripts for any new debt. The City will establish internal controls to ensure compliance with the Debt Policy, all debt covenants and any applicable requirements of the State and Federal Government Codes.
E. Rebate Policy and System
The City will accurately account for all interest earnings in debt-related funds. These records will be designed to ensure that the City is in compliance with all debt covenants, and with State and Federal laws. The City will maximize the interest earnings on all funds within the investment parameters set forth in each respective indenture, and as permitted by the City Investment Policy, subject to applicable limitations. The City will develop a system of reporting interest earnings that relates to and complies with Internal Revenue Code rebate requirements, yield limits and arbitrage.
F. Minimum Reserve Requirements for Water and Wastewater Funds The Water and Wastewater Funds are to maintain a working capital reserve equal to not less than 25% of their operating expenses plus one annual debt service payment on any State Revolving Fund (“SRF”) loans. This reserve is meant to ensure that adequate cash is on hand to meet current obligations of the funds as well as respond to unanticipated demands, such as unplanned repairs or renovations of the systems. This reserve is consistent with reserves established by other utilities for similar purposes.
G. Minimum Debt Service Coverage Ratio for Water and Wastewater Funds The City will seek to maintain debt service coverage on its senior lien Water and Wastewater revenue bonds at a level not less than one and a half times (1.5x) the maximum annual debt service for the aggregate outstanding senior lien bonds of the respective system, including the debt service #7..
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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.
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 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 #7..
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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).
2. Short-Term Debt
Short-term borrowing may be utilized for the temporary funding of operational cash flow deficits or anticipated revenues, where anticipated revenues are defined as an assured revenue source with the anticipated amount based on conservative estimates, or until the structure of the take-out financing is finalized. The City will determine and utilize the least costly method for short-term borrowing. The City may issue short-term debt when there is a defined repayment source or amortization of principal, subject to the following policies:
Commercial Paper Notes may be issued as an alternative to fixed rate debt, particularly when the timing of funding requirements is uncertain. The City may maintain an ongoing commercial paper program to ensure flexibility and immediate access to capital funding when needed. The retirement of commercial paper notes is most commonly a result of the issuance of long-term bonds but they may also be retired with available cash.
Grant Anticipation Notes (“GAN”) are short-term notes that are repaid with the proceeds of State or Federal grants of any type. The City shall generally issue GANs only when there is no other viable source of funding for the project. Bond Anticipation Notes (“BAN”) are short-term notes issued prior to the issuance of long-term debt. BANs are most commonly retired, or taken-out, with long-term debt.
BANs will be issued only when there is no better alternative to reduce the overall cost of a financing program.
Tax and Revenue Anticipation Notes (“TRAN”) shall be issued only to address a timing mismatch between operating revenues and operating expenditures and the sizing of the issue shall fully conform to Internal Revenue Code requirements and limitations.
Lines of Credit shall be considered as an alternative to other short-term borrowing options. The lines of credit shall be structured to limit concerns as to Internal Revenue Code compliance.
Other short-term debt may also be considered and utilized when appropriate such as a Direct Purchase Loan from a bank or Floating Rate Notes. #7..
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6 3. Variable Rate Debt
To maintain a predictable debt service burden, the City may give preference to debt that carries a fixed interest rate. An alternative to the use of fixed rate debt is floating or variable rate debt. It may be appropriate to issue short-term or long-term variable rate debt to diversify the City’s debt portfolio, reduce interest costs, provide interim funding for capital projects and improve the match of assets to liabilities. Variable rate debt typically has a lower cost of borrowing than fixed rate financing and shorter interest rate reset periods in the range of 1 to 35 days. Under no circumstances will the City issue variable rate debt solely for the purpose of earning arbitrage. The City, however, may consider variable rate debt in certain instances.
A) Variable Rate Debt Capacity. The City will maintain a conservative level of outstanding variable rate debt in consideration of general rating agency guidelines recommending a maximum of 20% variable rate exposure, in addition to maintaining adequate safeguards against risk and managing the variable revenue stream, both as described below:
(1) Adequate Safeguards Against Risk. Financing structure and budgetary safeguards are in place to prevent adverse impacts from interest rate shifts; such structures could include, but are not limited to, interest rate swaps, interest rate caps and the matching of assets and liabilities. See Section VII. B. 4. Financial Derivative Products below. See also the Interest Rate Swap Policy addendum.
(2) Variable Revenue Stream. The revenue stream for repayment is variable and is anticipated to move in the same direction as market-generated variable interest rates, or the dedication of revenues allows capacity for variability. (3) As a Component to Synthetic Fixed Rate Debt. Variable rate bonds may be used in conjunction with a financial strategy which results in synthetic fixed rate debt. Prior to using synthetic fixed rate debt, the City shall certify that the expected interest cost is at least 10 basis points (0.10%) lower than traditional fixed rate debt (including any ongoing fees in such calculation) as well as giving due consideration to other risks associated with such a structure that may raise the ultimate costs of a synthetic fixed rate structure. See Section VII. B. 4. Financial Derivative Products below. See also the Interest Rate Swap Policy addendum.
4. Financial Derivative Products
Financial Derivative Products will be considered appropriate in the issuance or management of debt only in instances where it has been demonstrated that the derivative product will either provide a hedge that is expected to reduce the risk of fluctuations in expense or revenue, or alternatively where the derivative product is expected to reduce total project cost.
The City shall maintain an Interest Rate Swap Policy (see attached) governing the use of derivative products. For derivatives other than interest rate swaps, the City will undertake an analysis of early termination costs and other conditional terms given certain financing and marketing assumptions. Such analysis will document the risks and benefits associated with the 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.
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. The City will strive to invest proceeds in a capitalized interest account in order to minimize the “negative carry” on such bond proceeds. Interest earnings may, at the City's discretion, be applied to extend the term of capitalized interest but in no event beyond 3 years, or less, if restricted by law.
C. Lien Levels
Senior and Junior Liens for each revenue source will be utilized in a manner that will maximize the most critical constraint, typically either cost or capacity, thus allowing for the most beneficial use of the revenue source securing the bond. Projects chosen for priority financing, based on funding availability and proposed timing, will generally be financed on the most senior lien of the relevant credit. 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 #7..
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8 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.
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.
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.
I. Bond Proceeds Investment
If bond proceeds are expected to be unutilized for a period of time the City will consider investing the proceeds to minimize the “negative carry” on the debt. Interest cost on debt is unavoidable but it can be offset in part with interest earnings thereby reducing the “negative carry” of debt.
The City will consider investing bond proceeds and reviewing opportunities to earn interest income to offset interest cost, to the extent permitted by arbitrage and rebate rules. A project fund funded with bond proceeds may be strategically invested to match the draw schedule. While such investment is typically yield restricted, positive arbitrage may be retained under certain circumstances if spend-down rules are met. If a capitalized interest account is funded with bond proceeds, it too may be invested. The City may even “net fund” it which will lower the amount of debt required to fund the account.
Lastly the City may also invest any reserve funds such as the debt service reserve fund and interest income may be used to offset a portion of the debt service payment.
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 #7..
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9 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 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. Lastly, the reserve may be invested and the income utilized to offset annual debt service costs.
C. Letters of Credit
The City may enter into a letter of credit agreement when such an agreement is required by the market (e.g., in the case of variable rate demand bonds) or is deemed prudent and advantageous.
Only those financial institutions with long-term ratings greater than or equal to that of the City, and minimum short-term ratings of P-1, A-1, F1, by Moody’s Investors Service, S&P Global Ratings and Fitch Ratings, respectively, may participate in City letter of credit agreements unless there are no other practicable options for the City.
X. REFINANCING OUTSTANDING DEBT
The City shall have the responsibility to analyze outstanding bond issues for refunding opportunities that may be presented by underwriting and/or municipal advisory firms. The City will consider the following issues when analyzing possible refunding opportunities:
A. Debt Service Savings
The City has established a minimum net present value savings threshold goal of 3% of the refunded bond principal, unless there are other compelling reasons for defeasance. The 3% savings threshold generally applies to the aggregate. The City should also evaluate savings on a maturityby-maturity basis in order to inform the refunding decision. 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 #7..
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10 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 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.
E. Arbitrage
The City shall take all necessary steps to optimize refunding escrows and to avoid negative arbitrage. Any resulting positive arbitrage will be rebated as necessary according to federal guidelines.
XI. METHODS OF ISSUANCE
The City will determine, on a case-by-case basis, whether to sell its bonds competitively or through negotiation. The City shall evaluate the comparative costs of each method of issuance on a net present value basis, using the City’s investment rate as the appropriate measure of the discount rate. It should be noted, however, that cost may be only one of a number of factors considered in determining the most advantageous method of sale.
A. Competitive Sale
In a competitive sale, the City’s bonds shall be awarded to the bidder providing the lowest true #7..
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11 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). 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.
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 either cannot be obtained or would likely be below-investment grade. Private placements may also be useful for time-sensitive funding needs as the process is more expedient compared to a market sale. As noted below, private placements may require compliance with disclosure requirements (see Section XV. F. Continuing Disclosure below). #7..
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12 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 its administrative costs incurred in debt issuance and ongoing reporting costs.
XIII. CONSULTANTS
Periodically, the City may create an approved pool of qualified financing team members, such as municipal advisors or underwriters.
A. Selection of Financing Team Members
The Director of Finance will make recommendations to the City Manager for all financing team members, with the City Council providing final approval.
B. Municipal Advisor
The City shall utilize a municipal advisor to assist in its debt issuance and debt administration processes as prudent. The municipal advisor must be registered as a Municipal Advisor with the Securities and Exchange Commission (“SEC”) and Municipal Securities Rulemaking Board (“MSRB”). Selection of the City’s municipal advisor(s) shall be based on, but not limited to, the following criteria:
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13 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:
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 #7..
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14 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 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. #7..
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15 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.
Within 10 working days after the sale date, submit to the Director of Finance a detail of orders, allocations and other relevant information pertaining to the City’s sale.
I. Disclosure by Financing Team Members
All financing team members will be required to provide full and complete disclosure relative to agreements with other financing team members and outside parties. The extent of disclosure may vary depending on the nature of the transaction and for underwriters and municipal advisors shall, at a minimum, comply with applicable SEC and MSRB requirements. For firms acting as the City’s bond counsel, disclosure counsel, or municipal advisor, no agreements shall be permitted which could compromise the firm’s ability to provide independent advice which is solely in the City’s best interests, or which could reasonably be perceived as a prohibited conflict of interest.
All other conflicts must be disclosed to the City in accordance with applicable regulatory requirements. For legal counsel such conflicts disclosure shall, at a minimum, comply with #7..
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16 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 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 #7..
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17 the status of the City’s outstanding indebtedness and the location of records relating to such indebtedness, and that such successor receives training and consultation(s) with bond or disclosure counsel as to his or her duties as Compliance Officer under this Debt Policy.
C. External Advisors
The City shall consult with bond counsel and other legal counsel and advisors, as needed, so long as any Bonds remain outstanding, to identify requirements and to establish procedures necessary or appropriate so that tax-exempt interest on the Bonds will continue to be excludable from gross income for federal income tax purposes. Those requirements and procedures shall include future compliance with applicable private activity bond tests, arbitrage rebate requirements and all other applicable post-issuance requirements of federal tax law throughout (and in some cases beyond) the term of bonds. The Compliance Officer shall conduct periodic reviews, at least annually, or more often as may be necessary, to determine that the City remains in compliance with all laws and regulations, including, without limitation, the matters set forth herein. The Compliance Officer annual review shall include matters that relate to the tax status of the Bonds, continuing compliance with covenants that relate to the tax status of the Bonds, and any new matters or public finance developments that relate to the tax status of the Bonds or continuing compliance with such requirements. The City may consult with bond counsel in conducting its review and may engage expert advisors (each a “Rebate Analyst”) to assist in the calculation of arbitrage rebate payable in respect of the investment of Bond proceeds in the manner more fully set forth in the Tax Certificate.
D. Uses and Investments of Funds and Accounts
Various funds and accounts are established as security for the Bonds. The Compliance Officer shall prepare regular, periodic statements regarding the investments and transactions involving bond proceeds, which shall comprise part of the records required to be kept. The Compliance Officer will also review the disbursement of bond proceeds from Trustee records or City records, as applicable, to ensure that bond proceeds are expended in accordance with their intended purpose. The Compliance Officer shall report to the Finance Director (if the officer is a designee of the Finance Director) and the City Manager any expenditure which violates the provisions of any ballot measure, authorizing resolution, or trust document. If any Debt Service Fund ever contains any balance after the principal payment of the Bonds is made each year, except for a reasonable carryover amount which is less than the greater of the earnings on the Debt Service Fund for the immediately preceding year ending on such principal payment date (a “Bond Year”), or 1/12 of the principal and interest payments on the Bonds for the immediately preceding Bond Year, then the Compliance Officer will contact bond counsel to ensure that such facts will not cause the Bonds to become arbitrage bonds, to formulate a plan to remediate such condition, if necessary, and to determine an allowable use for such excess moneys and/or to determine if any yield restrictions apply. If any Debt Service Reserve Fund is ever funded (i) in an amount more or less than the required balance but declining in future years as detailed in the Tax Certificate, or (ii) is invested at a yield that is higher than the yield of the Bonds, then the Compliance Officer will contact bond counsel to ensure that such facts will not cause the Bonds to become arbitrage bonds, to formulate a plan to remediate such condition and/or to determine if any yield restrictions apply. Generally, if the Debt Service Reserve Fund ever contains a higher balance than required (either through the accrual of interest, investment gains, maturity of securities, or reduction in the Reserve Requirement) then the excess moneys should be dealt with as directed by the documents and #7..
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18 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 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.
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19 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 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 #7..
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20 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 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 #7..
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21 before the release of any public statements about any financial condition of the City.
J. Training for Employees and Issuer Officials
For City officials, compliance with federal securities law should be considered as important as compliance with local public meetings and records laws. To further this goal, the Compliance Officer shall call a meeting for an annual review or, if necessary, an interim review, of the continuing disclosure policies of the City, which all members of the DWG and additional invited officials and employees are expected to attend. The Compliance Officer shall be responsible for keeping a record of attendance. Furthermore, the members of the DWG and such invited officials and employees are expected to attend training sessions, at least annually, called by the Compliance Officer. Applicable policies and procedures will be updated by the City to reflect required changes on an as-needed basis.
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22 GLOSSARY
Arbitrage- The difference between the interest paid on the tax-exempt securities and the interest earned by investing the security proceeds in higher-yielding securities. IRS regulations govern arbitrage on the proceeds from issuance of municipal securities.
Balloon Maturity- A later maturity within an issue of bonds that contains a disproportionately large percentage of the principal amount of the original issue.
Bond Allocation Policies- Outline as to how an investor’s order is filled when a maturity in an underwriting syndicate is oversubscribed. The senior managing underwriter and issuer decide how the bonds will be allocated among the syndicate. There are three primary classifications of orders, which form the designation policy. The highest priority is given to Net Designated orders; the next priority is given to Group Net orders and Member orders are given the lowest priority (unless the Member orders are retail orders in which case it would be given the highest priority).
Bullet Maturity- Maturity for which there are no sinking fund payments prior to the stated maturity date.
Call Provisions- The terms of the bond contract giving the issuer the right to redeem all or a portion of an outstanding issue of bonds prior to their stated dates of maturity at a specific price, usually at or above par.
Capitalized Interest- A portion of the proceeds of an issue that is set aside to pay interest on the securities for a specific period of time. Interest is commonly capitalized for the construction period of the project.
Commercial Paper- Very short-term, unsecured promissory notes issued in either registered or bearer form, and usually backed by a line of credit with a bank.
Competitive Sale- A sale of securities by an issuer in which underwriters or syndicates of underwriters submit sealed bids to purchase the securities in contrast to a negotiated sale.
Continuing Disclosure- The principle that accurate and complete information material to the transaction which potential investors would be likely to consider material in making investment decisions with respect to the securities be made available on an ongoing basis.
Credit Enhancement- Credit support purchased by the issuer to raise the credit rating of the issue. The most common credit enhancements consist of bond insurance, direct or standby letters of credit, and lines of credit.
Debt Service Reserve Fund- The fund in which moneys are placed which may be 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 #7..
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23 value.
Derivatives- A financial product whose value is derived from some underlying asset value.
Designation Policies- Concerning a negotiated sale of bonds, the rules regarding how the takedown (sales commission) is allocated among the underwriters for each order put in for the bonds.
Direct Purchase Loan- A source of financing where the loan is purchased by a financial institution instead of being offered to the general public for purchase. The loan can bear interest at a fixed rate or on a variable rate tied to market index (i.e. the Secured Overnight Financing Rate (“SOFR”) or Securities Industry and Financial Markets Association (“SIFMA”) Index). This form of financing does not require a remarketing agent to set the variable rate. As such, a Direct Purchase Loan can be used to replace traditional forms of variable-rate debt.
Escrow- A fund established to hold moneys pledged and to be used to pay debt service on an outstanding issue.
Expenses- Compensates senior managers for out-of-pocket expenses including underwriters counsel, DTC charges, travel, syndicate expenses, dealer fees, overtime expenses, communication expenses, computer time and postage.
Floating Rate Notes (“FRN”)- A note with a variable interest rate sold either in the public market or directly to financial institutions. The adjustments to the interest rate are typically tied to a certain index like SOFR or SIFMA and are made periodically. The rate would continue to reset in the same manner through maturity. The 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.
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 #7..
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24 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. #7..
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25 1. City of Modesto Philosophy Regarding Use of Interest Rate Swaps A. Introduction
Interest rate exchange agreements or interest rate swaps (“Swaps”) and related financial instruments and derivatives may be appropriate interest rate management tools in certain circumstances. Properly used, Swaps can increase the City of Modesto’s (the “City”) financial flexibility and provide opportunities for interest rate savings. This policy (“Swap Policy”) shall be followed in conjunction with the City’s related debt issuance-related policies and procedures (the “Debt Policy”).
Swaps are appropriate to use when they achieve a specific financial objective consistent with the City’s overall Swap Policy and Debt Policy. Swaps may be used, for example, to lock-in a current market fixed rate or create additional variable rate exposure. Swaps may be used to produce interest rate savings or alter the pattern of debt service payments.
Swaps may be used to cap, limit or hedge variable rate payments. Options granting the right to commence or cancel an underlying Swap are permitted to the extent the Swap itself is otherwise consistent with this Swap Policy.
The authorized Swaps contemplated in this Swap Policy are intended to reduce the amount or duration of interest rate risk or produce a lower cost of borrowing when used in combination with the issuance of bonds.
B. Rationales for Utilizing Interest Rate Swaps
The use of Swaps and related financial instruments should balance the City’s primary objectives of reducing the cost of capital, minimizing the City’s exposure to interest rate volatility, and gaining flexibility in structuring and managing its debt portfolio over time with the risks associated with these tools and instruments. Examples of how the City’s debt management objectives can be achieved through the use of Swaps and other financial instruments are described below:
Reduce borrowing costs at the time of issuance
Create synthetic fixed rate debt through a floating-to-fixed Swap. Actively manage interest rate risk
Lock-in current market rates through (forward starting) floating-to-fixed Swap. Balance financial risk
Purchase of an interest rate cap.
CITY OF MODESTO
CITY COUNCIL POLICY
Latest Revision Date: April 2023
ADDENDUM: Interest Rate Swap Policy
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26 Achieve appropriate asset/liability match
Create variable rate exposure through fixed-to-floating Swap.
Under no circumstances will Swaps be used for speculative purposes, e.g., to realize trading gains.
2. Authority for Entering into Swap Agreements
The purpose of this Swap Policy is to integrate the use of Swaps into the City’s overall Debt Policy, and other funds of the City where particular debt strategies, both long-term and shortterm, factor into these decisions. Swaps will not be used for speculation. The City Manager, in conjunction with the Director of Finance, shall be responsible for determining if and when it is in the City’s overall best financial interests to enter into a Swap or related financial instruments covered by this Swap Policy.
The City shall comply with all applicable laws. The City must receive an opinion acceptable to the financial market from a nationally recognized law firm that the swap contract is a legal, valid, and binding obligation of the City and that entering into such a contract complies with applicable provisions of the City Charter and State statutes.
3. Permitted Instruments
The City may utilize financial instruments that (i) lower its interest expense, (ii) manage its financial risk or (iii) improve its financial condition.
The City shall not use financial instruments that (i) create substantial leverage or financial risk, (ii) lack adequate liquidity to terminate at market, (iii) provide insufficient price transparency to allow reasonable valuation on an ongoing basis, or (iv) are primarily speculative in nature.
The use of Swaps and other hedging products should produce a result not otherwise available in the cash market (i.e., lack of advance refunding, non-callable debt), or provide a higher level of net savings compared to conventional financing methods.
The City may expressly utilize the following financial instruments, after identifying the financial objective(s) to be realized and assessing the attendant risks:
Current or forward starting floating-to-fixed rate swaps Designed to reduce a fixed interest rate below that which would otherwise be available through the use of traditional fixed rate debt. Current or forward starting fixed-to-floating rate swaps Designed to create additional variable interest rate exposure. Rate Locks
Cash-settled forward contracts based on indices such as the MMD™ 1“AAA”
1. MMD™ is a trademark of Municipal Market Data, a Thompson Financial company. #7..
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27 scale or the Bloomberg Valuation Service (“BVAL”) AAA Muni Callable Curve. Interest Rate Caps, Floors or Collars
Financial contracts that limit exposure to interest rate volatility. Options on Variable Rate Indices
Indices could include the Securities Industry and Financial Markets Association (“SIFMA”) Index2, Secured Overnight Financing Rate (“SOFR”)3, etc. Options on Swaps (“Swaptions”)
Methods used to control the commencement or cancellation of interest rate swaps. Basis Swaps
Floating-to-floating rate swaps using different variable-rate indices, such as a swap from the SIFMA Index to a percentage of SOFR.
4. Swap Risk Analysis
The City shall require for each proposed financing an evaluation of all financial products with respect to the unique risks that they bear. A specific determination must be made that the proposed or expected benefits exceed the identified risks by an adequate margin over those available in the traditional cash market. At a minimum, the City shall perform an evaluation of the risks and what steps have been taken to mitigate any risks. The City shall retain a municipal/swap advisor to assist in assessing these risks. Questions that may arise include the following:
Market or Interest Rate Risk
Does the transaction hedge (i.e., decrease or eliminate) or increase interest rate volatility?
Tax Risk
How is the transaction or its benefits affected by a future change in federal income tax policy?
Termination Risk
Under what circumstances might the transaction be terminated? At what value? Risk of Uncommitted Funding (Put Risk)
Does the transaction create additional financing dependent upon third-party participation (such as requiring a letter of credit, grant or other anticipation funding, etc.)?
Rollover Risk
Is the term of the Swap shorter than the term of the underlying hedged debt or financial instrument? Does the City anticipate entering into another Swap when the first Swap terminates?
Legal Risk
Is the transaction expressly legally authorized?
Counterparty Risk
What is the creditworthiness of the counterparty?
2. The SIFMA Index is an index of more than 500 high-grade, tax-exempt, weekly reset Variable Rate Demand Obligation issues.
3. SOFR is a taxable rate which is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, published daily by the Federal Reserve Bank.
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28 Rating Agency Risk
Is the proposed transaction consistent with the City’s current ratings and ratings objectives?
Basis Risk
Is it anticipated that the projected Swap payments the City will receive closely match the debt service payments it will make?
Index Risk
Does the transaction include provisions acceptable to the City regarding any change in indices used to calculate payments or obligations? Subsequent Business Conditions
Does the transaction or its benefits depend upon the continuation, or realization, of specific industry business conditions (e.g., unusual demand for state-specific variable rate debt)?
Operational Risk
Does the City have adequate systems, policies, and practices in place to monitor and manage the transaction over its term?
5. Swap Procurement and Execution
A. Procurement
The City will not have a fixed policy with respect to the procurement of Swaps and other financial instruments authorized by this Swap Policy. On a product-by-product basis, the City will have the authority to negotiate or competitively bid the procurement of financial instruments that have customized or specific attributes designed on its behalf. The Director of Finance will be responsible for determining the method of procurement for Swaps and related financial instruments. A municipal/swap advisor shall be retained to assist the Director of Finance in evaluating the proposed pricing of Swaps or related financial instruments.
B. Swap Execution
The Director of Finance may recommend the use of financial derivative products if they:
1. Provide a specific benefit not otherwise available;
2. Produce greater expected interest rate savings than cash market alternatives;
3. Do not create substantial leverage or financial risk;
4. Result in an improved capital structure or better asset/liability match; and
5. Reasonably pass the Swap Risk Analysis required by Section 4. Swap Risk Analysis of this Swap Policy.
C. Credit Rating Designations
For purposes of this Swap Policy, references to credit ratings will be based on those ratings issued by Moody’s Investors Service, and/or S&P Global Ratings, and/or Fitch Ratings. The credit ratings will reflect the designations assigned by each of these rating agencies utilized for comparable credit and will be listed for each rating agency utilized in the order shown in the preceding sentence.
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29 6. Swap Documentation
The City will use a standard International Swap and Derivatives Association, Inc. (“ISDA”) Master Agreement, including the Counterparty Schedule to the Master Agreement and a Credit Support Annex (utilizing such versions thereof as the Director of Finance shall determine), as supplemented and amended in accordance with the recommendations of the City’s financial/swap advisor and legal counsel. Each Swap entered into by the City shall include payment, term, security, collateral, default, remedy, termination and other terms, conditions and provisions as the Director of Finance may deem necessary or desirable.
A. Terms and Notional Amount of Swap Agreement
The City shall determine the appropriate term for Swaps on a case-by-case basis. The slope of the swap curve, the marginal change in swap rates from time to time along the swap curve, and the impact that the term of the Swap will have on the City’s overall financial (e.g., interest rate, market value, counterparty, etc.) exposure shall be considered in determining the appropriate term of any Swap agreement. In connection with the issuance or carrying of bonds, the term of the Swap agreement between the City and qualified swap counterparty shall not extend beyond the final maturity date of existing City debt, or in the case of a refunding transaction, beyond the final maturity of the refunding bonds. At no time shall the total net notional amount of all Swaps, excluding any offsetting Swaps, exceed the total amount of outstanding applicable bonds. Variable rate debt exposure created through the use of Swaps will be consistent with the limitations set forth in the City’s adopted Debt Policy. Terms and conditions of any Swap shall be negotiated by the Director of Finance in the best interests of the City subject to the applicable legal provisions and this Swap Policy. The Swap agreements entered into between the City and each counterparty shall include payment, term, security collateral, default, remedy, termination, and other terms, conditions and provisions as the Director of Finance, in consultation with City legal counsel and its swap advisor, deems necessary or desirable.
Subject to the provisions contained herein, the City’s swap documentation and terms should include the following:
The City will be able to terminate the swap without cause subject to market termination costs.
The swap counterparty will only be able to terminate the swap if the City’s credit ratings fall below a certain pre-determined threshold and/or the City fails to perform, as required by the swap contract.
Governing law for Swaps will be New York, but should reflect California authorization provisions.
The specified indebtedness related to credit events in the Master Agreement should be narrowly drafted and refer only to specific debt of the issuing fund. Eligible collateral should be limited to Treasuries, Federal Agencies and any other securities which, in the City’s sole discretion, shall be deemed reasonable and creditworthy.
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30 Termination value should be set by “market quotation” methodology. Whenever possible use a Credit Support Annex to document swap termination value collateralization procedures.
Ratings downgrade triggers.
7. Policy on Swap Counterparties
The City shall only do business with highly rated counterparties, and will structure swap agreements to protect itself from credit deterioration. All Swap transactions shall contain provisions granting the City the right to optionally terminate a swap agreement at-market at any time over the term of the agreement.
A. Qualified Swap Counterparties
The City should not have an immutable credit standard. However, the City shall attempt to do business with highly rated counterparties the long-term ratings of which at the date of execution are at least “Aa” or “AA” by one or more Nationally Recognized Statistical Ratings Organizations (“NRSRO”) and no less than “A2” or “A” by one or more NRSRO.
For lower rated counterparties, the City should seek credit enhancement in the form of:
1. Contingent swap counterparty providing support;
2. Collateral;
3. Ratings downgrade triggers; and,
4. Minimum rating threshold of “Baa3/BBB-/BBB-,” below which provisions will allow an assignment or trigger an additional termination event, with the counterparty as the affected party (i.e., the counterparty would pay market-based transaction costs).
In addition, the counterparty must have a demonstrated record of successfully executing swap transactions as well as creating and implementing innovative ideas in the swap market. The City shall be authorized to enter into interest rate swap transactions only with qualified swap counterparties.
8. Limitations on Counterparty Exposure
In order to diversify the City’s counterparty credit risk, and to limit the City’s credit exposure to any one counterparty, limits will be established for each counterparty based upon both the credit rating of the counterparty as well as the relative level of risk associated with each existing and proposed swap transaction. The guidelines shown in the following table provide general termination exposure guidelines with respect to whether the City should enter into an additional transaction with an existing counterparty. The City may make exceptions to the guidelines at any time to the extent that the execution of a swap achieves one or more of the goals outlined in these guidelines or provides other benefits to the City. In general, the maximum net termination exposure to any single counterparty should be set so that it does not exceed a prudent level as measured against the gross revenues, available assets or other financial resources of the City.
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31 For example, if the City has two Swaps with one counterparty, and if the first Swap’s market value is positive $10 million and the second Swap’s market value is negative $20 million, then the City’s total net exposure to the counterparty is negative $10 million.
Such guidelines will also not mandate or otherwise force automatic termination by the City or the counterparty. Maximum net termination exposure is not intended to impose retroactively any terms and conditions on existing transactions. Such provisions will only act as guidelines in making a determination as to whether or not a proposed transaction should be executed given certain levels of existing and projected net termination exposure to a specific counterparty. Collateral posting guidelines are described in the collateral section below. The calculation of net termination exposure per counterparty will take into consideration multiple transactions, some of which may offset the overall exposure to the City.
Under this approach, the City will set limits on individual counterparty exposure based on existing as well as new or proposed transactions. The sum of the current market value and the projected exposure shall constitute the maximum net termination exposure. For outstanding transactions, current exposure will be based on the market value as of a recently completed swap valuation report provided by the City’s swap advisor. Projected exposure shall be calculated based on the swap’s potential termination value taking into account possible adverse changes in interest rates as implied by historical or projected measures of potential rate changes applied over the remaining term of the swap. For purposes of this calculation, the City shall include all existing and projected transactions of an individual counterparty and all transactions will be analyzed in aggregate such that the maximum exposure will be additive.
The exposure thresholds, which will be reviewed periodically by the City to ensure that they remain appropriate, will also be tied to long-term credit ratings of the counterparties and whether or not collateral has been posted as shown in the table below. If a counterparty has more than one rating, the lowest rating will govern for purposes of the calculating the level of exposure. If contingent swap counterparty or swap insurance is used to provide financial support for the primary counterparty, the rating of the support entity shall be used. A summary table is provided below:
Credit Ratings
Maximum
Collateralized Net
Termination Value
Maximum
Uncollateralized
Net Termination Value
Maximum Net
Termination
Exposure
AAA N/A $30.0 million N/A
AA Category $30.0 million $20.0 million $30.0 million
A Category $20.0 million $10.0 million $20.0 million
Below A Category $10.0 million $5.0 million $15.0 million If the exposure limit is exceeded by counterparty, the City shall conduct a review of the exposure limit per counterparty. The City, in consultation with its bond counsel and swap advisor, shall explore remedial strategies to mitigate this exposure. #7..
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32 9. Benefit Expectation
Financial transactions, using Swaps or other derivative products, intended to produce the effect of a synthetic advance refunding, must generate at least 25% greater savings than the benefit threshold then in effect for fixed-rate bonds as determined by the City’s Director of Finance. (See Debt Management Policy Section X.A. Debt Service Savings). The higher savings target reflects the greater complexity and higher risk of derivative financial instruments.
In calculating the prospective savings against the target for implementing a fixed-to-variable swap, the cost of remarketing, in addition to the cost of credit and liquidity fees must be added to the variable rate representing the ten-year average of comparable variable rate securities.
10. Termination Provisions
All swap transactions shall contain provisions granting the City the right to optionally terminate a swap agreement at market at any time over the term of the agreement but shall NOT grant this right to the counterparty. In general, exercising the right to terminate an agreement produces a benefit to the City, either through the receipt of a payment from a termination, or if the termination payment is made by the City, in conjunction with a conversion to a more beneficial (desirable) City debt obligation, as determined by the City.
11. Collateral
As part of any swap agreement, the City shall require collateralization or other credit enhancements to secure any or all swap payment obligations. As appropriate, the City, in consultation with its bond counsel and swap advisor, may require collateral or other credit enhancements to be posted by each swap counterparty under the following circumstances:
Each counterparty to the City may be required to post collateral if the highest credit rating of the counterparty or parent falls below the “Aa/AA” category. Additional collateral for further decreases in credit ratings of each counterparty shall be posted by each counterparty in accordance with the provisions contained in the collateral support agreement to each counterparty with the City.
Collateral shall be deposited with a third-party trustee, or as mutually agreed upon between the City and the counterparty.
A list of acceptable securities that may be posted as collateral and the valuation of such collateral will be determined and mutually agreed upon during negotiation of the swap agreement with each swap counterparty.
The market value of the collateral shall be determined on at least a weekly basis. The City shall determine the reasonable threshold limits for the initial deposit and for increments of collateral posting thereafter.
The City shall determine on a case-by-case basis whether other forms of credit enhancement, such as swap insurance, are more beneficial in lieu of the posting of additional collateral.
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33 The City shall evaluate the performance of the swap relative to the rate on the bonds. The City shall compute the effective cost of borrowing inclusive of all fees and costs associated with the underlying financing.
12. Conformance with Dodd-Frank
It is the intent of the City to conform this Swap Policy to the requirements relating to legislation and regulations for over-the-counter derivatives transactions under Title VII of the Wall Street Transparency and Accountability Act of 2010, as supplemented and amended from time to time (herein collectively referred to as “Dodd-Frank”). Pursuant to such intent, it is the policy of the City that: (i) each swap advisor engaged or to be engaged by the City will function as the designated Qualified Investment Representative of the City, sometimes referred to as the “Designated QIR”; (ii) each swap advisor agrees to meet and meets the requirements specified in Commodity Futures Trading Commission Regulation 23.450(b)(1) or any successor regulation thereto (herein referred to as the “Representative Regulation”) (iii) each swap advisor provides a written certification to the City to the effect that such swap advisor agrees to meet and meets the requirements specified in the Representative Regulation; and (iv) the City relies on the advice of its swap advisor with respect to transactions authorized pursuant to this Swap Policy and not rely on recommendations, if any, presented by any counterparty with respect to transactions authorized pursuant to this Swap Policy.
13. Monitoring and Reporting
At least once per year, normally as part of the City’s Annual Comprehensive Financial Report (“Annual Report”), or as requested by the City Council, the Director of Finance shall prepare information describing the various Swaps and financial arrangements entered into by the City pursuant to this Swap Policy that are in effect as of the date of the report’s publication. The report shall include the following information:
1. A summary of key terms of the agreements, including notional amounts, interest rates, maturity and method of procurement.
2. The mark-to-market value of each agreement.
3. The full name, description, and credit ratings of each counterparty or the applicable guarantor.
4. The amounts that were required to be paid and received and any amounts that were actually paid and received.
5. A listing of any credit enhancement, liquidity facility, or reserves and an accounting of all costs and expenses associated with the credit enhancement, liquidity facility, or reserves.
6. The aggregate mark-to-market value and potential termination value for each swap by counterparty.
7. A discussion of other risks associated with each transaction.
At the end of each fiscal year, the Director of Finance shall provide to the City Council all information required for financial reporting under Government Accounting Standards Board #7..
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34 (“GASB”) requirements as well as any other reporting or disclosure requirements. The City shall adhere to California Government Code Section 5922 and applicable GASB guidelines for reporting and disclosure guidelines for derivative products. #7..
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