October 3, 2023
Finance Department
DATE: October 3, 2023
TO: Mayor Martinez and Members of the City Council
FROM:
Nickie Mastay, Deputy City Manager – Internal Services
Andrea Miller, Director of Finance
Mubeen Qader, Deputy Director of Finance
Subject:
Annual Review and Adoption of the Resolutions to
approve the Financial Policies (Debt, Investment,
Pension Funding, and SWAP)
FINANCIAL IMPACT: The adoption of and adherence to financial policies can be measured by factors such as:
•Minimizing borrowing costs;
•Better management of the City's debt and investment
portfolios;
•Providing fiscal security during times of unforeseen
economic downturns; and
PREVIOUS COUNCIL
ACTION:
June 27, 2023, July 11, 2023
STATEMENT OF THE
ISSUE:
Annual review and revision of the Financial Policies
(Debt, Pension Funding, Investment, and SWAP)
RECOMMENDED ACTION:
REVIEW the City’s Debt, Pension Funding, Investment,
and Swap policies; and ADOPT resolutions to approve
the updated policies – Finance Department (Andrea
Miller 510-620-6790/ Mubeen Qadar 510-412-2077).
DISCUSSION:
Debt Policy
The foundation of any well-managed debt program is a comprehensive debt policy. A debt policy sets forth the parameters for issuing debt and managing the debt portfolio, AGENDA
REPORT
October 3, 2023
including post-issuance compliance. In the credit rating process, the rating agencies believe it is appropriate to place significant value on debt policies that have been adopted by cities.
The City's Debt Policy requires that annual commitments relating to General Fund debt not exceed ten percent (10%) of current General Fund revenues.
Pension Funding Policy
The State Auditor’s recommendation number 4 on retirement-related costs states:
“To ensure that Richmond is able to fund its retirement-related costs, city staff should, by June 2023, propose to the city council a specific policy regarding funding of its pension trust fund for this purpose. Staff should report to the city council on estimated long-term savings from increasing its direct payments to Cal PERS compared to investing the same amounts in its pension trust fund. Staff members should use this information to inform their recommendations related to funding targets for the pension trust fund and should consider recommending that the council increase the city's payments directly to CalPERS.” (California State Audit, 2021-806).
As part of the State Audit Corrective Action Plan implementation, the policy was originally presented to the City Council on June 27, 2023, where the City Council amended the policy before approving it during the City Council meeting. The City Council also directed City staff to bring back an analysis of fiscal impact of the two funding options: 1) contributing additional funds to the 115 Trust Account, and 2) additional discretionary payments to CalPERS. Per the City Council’s direction, NHA Advisors made a presentation to the City Council on July 11, 2023. Following the presentation, the City Council directed City staff to the bring back, on September 12, 2023, the original Pension Funding Policy proposal that was presented by City staff on June 27, 2023, for approval with the following funding guidelines:
1. The City shall continue to make annual Unfunded Actuarial Liabilty (UAL) prepayment to CalPERS in the beginning of each Fiscal Year, resulting in an estimate three percent discount compared to paying UAL monthly. The City shall place the prepayment savings into the Trust account.
2. The City shall place 10 percent of each year-end operating surplus (Total Actual Revenues minus Total Actual Expenditures, including Transfers In and Transfers Out) in the General Fund in excess of the City’s Minimum Reserve Policy into the Trust.
Investment Policy
The City of Richmond Investment Policy is an integral part of the Finance Department, setting standards and procedures regarding how the City's funds are invested. The Investment Policy is consistent with the guidelines of the California Municipal
October 3, 2023
Treasurers Association (CMTA) Certification Program. The policy addresses the 19 sections that the Association deems as critical elements, which are as follows:
1. Policy
2. Scope
3. Prudence
4. Objective
5. Delegation of Authority
6. Ethics and Conflicts of Interest
7. Authorized Financial Dealers and Institutions
8. Authorized and Suitable Investments
9. Review of Investment Portfolio
10. Investment Pools/Mutual Funds
11. Collateralization
12. Safekeeping and Custody
13. Diversification
14. Maximum Maturities
15. Internal Controls
16. Performance Standards
17. Reporting
18. Investment Policy Adoption
19. Glossary
The Investment Policy provides for the City to invest public funds in a manner which will provide the highest investment return, with maximum security, while meeting the daily cash flow demands of the City and conforming to all state and local statutes governing the investment of public funds. It further provides that the policy shall be reviewed annually and adopted by resolution of the City Council.
Swap Policy
As of April 20, 2021, the City adopted a guiding fiscal policy which prohibits the use of interest rate swaps when issuing debt (section VII Debt Management). Therefore, the Interest Rate Swap Policy in the paragraph below relates only to interest rate swap agreements entered into prior to April 20, 2021, and prohibits the City from that date forward from entering into swap agreements on currently held and future debt. The Policy does not prohibit the renegotiation of current swap agreement terms as long as the renegotiation does not involve entering into another swap agreement.
Since the scope of interest rate swaps is beyond that of the traditional fixed rate long term bonds covered by the Debt Policy, it is important for the City to maintain a policy that will provide guidance in selecting, implementing, and administering all swaps related to City bond issues. Standard & Poor's Rating Agency assigns Debt Derivative Profile (DDP) scores to individual swap transactions, with the lowest score of "1" equating to no risk and highest score of "4" meaning "high risk". By adhering to the guidelines established in its Swap Policy, the City has successfully achieved a DDP score of "1.5" (low risk) on all of its swap transactions.
October 3, 2023
Next Steps
City staff will continue to monitor industry best practices and propose revisions to these policies on an annual basis.
DOCUMENTS ATTACHED:
Attachment 1 – Resolution Adopting Debt Policy, Fiscal Year 2023-24 Attachment 2 – Debt Policy, Fiscal Year 2023-24
Attachment 3 – Resolution Adopting Pension Funding Policy Fiscal Year Y2022-23 & Fiscal Year 2023-24
Attachment 4 – Pension Funding Policy Fiscal Year 2022-23 & Fiscal Year 2023-24 Attachment 5 – Resolution Adopting Investment Policy, Fiscal Year 2023-24 Attachment 6 – Investment Policy, Fiscal Year 2023-24
Attachment 7 – Resolution Adopting Swap Policy, Fiscal Year 2023-24 Attachment 8 – Swap Policy, Fiscal Year 2023-24