San Jose City Council
March 21, 2023

TO: HONORABLE MAYOR FROM: Julia H. Cooper

AND CITY COUNCIL

SUBJECT: STUDY SESSION: ELECTED DATE: March 13, 2023
OFFICIALS’ ROLES AND

RESPONSIBILITIES IN

MUNICIPAL BOND DISCLOSURE

Approved Date
3/14/2023

RECOMMENDATION

Accept the presentation “Elected Officials’ Roles and Responsibilities in Municipal Bond Disclosure”.

SUMMARY AND OUTCOME

Acceptance of the presentation will inform the City Council on their roles and responsibilities regarding municipal bond disclosure. Training for staff and governing boards complies with the Administration Disclosure Policies and Procedures
1 and advances the Debt Management Policy2
objectives.

BACKGROUND

The City Council Debt Management Policy 1-15 outlines the City policy commitment to full and complete disclosure of financial information and other information relevant to investors in the issuance of new debt and administration of existing debt. Additionally, the Policy requires City Council/City of San José Financing Authority/Successor Agency to the Redevelopment Agency review and approval of the Offering Document/Official Statement for bond issuances. The approving board is based on the issuer of the bonds. The Policy requires the Administration to develop and maintain detailed written policies and procedures which includes guidelines for regular training for City Council and key City staff. Finally, the Policy identifies the officials

1 Disclosure Policies and Procedures in City’s Administrative Policy Manual - CPM 7 Disclosures Policies and Procedures (sanjoseca.gov)
2 Debt Management Policy, Council Policy 1-15 -
https://www.sanjoseca.gov/home/showpublisheddocument/12869/636669975466830000; amendments to the Debt Management Policy are recommended as separate item on the March 21, 2023 Agenda.

COUNCIL AGENDA: 3/21/23
FILE: 23-404
ITEM: 3.3

HONORABLE MAYOR AND CITY COUNCIL
March 13, 2023
Subject: Elected Officials’ Roles and Responsibilities in Municipal Bond Disclosure

designated to communicate information concerning the City that may be material to investors – the City Manager and Director of Finance are the City’s sole designated officials.

The presentation at the March 21, 2023 City Council meeting is part of the regular training for the City Council. On March 15, 2023 a training is scheduled for City Senior Staff and individuals throughout the organization responsible for assisting the development and review of municipal bond disclosure document(s).

ANALYSIS

The Director of Finance, representatives from Jones Hall, bond and disclosure counsel for the City, and the City Attorney’s Office will present the materials and be available to answer questions.

The presentation outline is as follows:

• Introduction
• Overview of Municipal Bonds & Key Players
• Overview of Federal Securities Laws
 Key Laws
 SEC Perspective on Municipal Market
 Enforcement Actions
• Elected Officials’ Role in Municipal Bond Disclosure
• City Disclosure Policies and Procedures
• Conclusion
• City Council Discussion

Additional information on the City debt portfolio as of June 30, 2022 are in the Comprehensive Annual Debt Report posted on the Finance Department webpage. 3 EVALUATION AND FOLLOW-UP

Periodic training will be provided to the City Council regarding its roles and responsibilities in municipal bond disclosure; a refresh on the City Council roles and responsibilities is provided at the time of City Council approval of each municipal bond issuance.

3 FY 2022 Comprehensive Annual Debt Report -
https://www.sanjoseca.gov/home/showpublisheddocument/92714/638055795782970000

HONORABLE MAYOR AND CITY COUNCIL
March 13, 2023
Subject: Elected Officials’ Roles and Responsibilities in Municipal Bond Disclosure

COORDINATION

This memorandum was coordinated with the City Attorney’s Office.

PUBLIC OUTREACH

This memorandum along with the presentation materials will be posted on the City’s Council Agenda website for the March 21, 2023 City Council meeting.

COMMISSION RECOMMENDATION AND INPUT

No commission recommendation or input is associated with this action.

CEQA

Not a Project, File No. PP17 008, General Procedure and Policy Making resulting in no changes to the physical environment.

PUBLIC SUBSIDY REPORTING

This item does not include a public subsidy as defined in section 53083 or 53083.1 of the California Government Code or the City’s Open Government Resolution.

/s/
JULIA H. COOPER
Director of Finance

For questions, please contact Julia H. Cooper, Director of Finance, at (408) 535-7011.

Attachment – Elected Officials’ Role in Municipal Bond Disclosure Overview of Municipal Bonds and Securities Laws Presentation

ELECTED OFFICIALS’ ROLE IN

MUNICIPAL BOND DISCLOSURE

OVERVIEW OF MUNICIPAL BONDS AND SECURITIES LAWS
1 COUNCIL AGENDA: M ARCH 21, 2023
ITEM: 3.3
FILE: 23-404
Attachment

OVERVIEW
• Introduction
• Overview of Municipal Bonds & Key Players
• Overview of Federal Securities Laws
 Key Laws
 SEC Perspective on Municipal Market
 Enforcement Actions
• Elected Officials’ Role in Municipal Bond Disclosure
• City Disclosure Policies and Procedures
• Conclusion
• City Council Discussion
2 INTRODUCTION
• Presentation Participants
 Julia H. Cooper – D irector of Finance
 Rosa Tsongtaatarii – C hief Deputy City Attorney
 Katie Dobson – J ones Hall, Shareholder
 Juan Galvan – J ones Hall, Shareholder
3 OVERVIEW OF MUNICIPAL BONDS
• What are municipal bonds?
 Debt instrument, similar to a loan
 Investors in the municipal market lend
m
oney to government agency (issuer)
 Issuer promises to repay face value
(
principal) plus interest when the bond
matures or becomes due
4 OVERVIEW OF MUNICIPAL BONDS
• Money is used to build public capital projects, such as libraries, police s
tations, fire stations, airports, and wastewater systems • Generally, interest paid to bond owners on municipal bonds is tax- ex
empt if certain conditions are met and IRS rules are followed by the Issuer
5 6

BUILDING CITY HALL
City hires
Municipal Advisors
and Bond/Disclosure
Counsel
City selects
Underwriters
City develops Preliminary
Offering Statement (POS)
Overcrowded
old City Hall
City decides
to issue
bonds
Underwriter sells
Bonds to Investors
City uses
Bond Proceeds
A new City Hall!
City seeks rating from
Rating Agencies
Underwriter
posts POS
on EMMA
Primary
Market
Investors access
EMMA for updated
City information
Investors
trade Bonds
through
Brokers
13 City repays principal &
interest until Bonds
matureBrokers report
trades to EMMA
City makes
Continuing
Disclosures
SUCCESS!
City recommends Bond
Documents for City
Council approval

WHAT ISSUERS OF MUNICIPAL SECURITIES

SHOULD KNOW ABOUT FEDERAL SECURITIES LAWS
7 KEY LAWS — SECURITIES ACT OF 1933
• Often referred to as the “truth in securities” law, has two b
asic objectives:
 Increase Transparency: Requires disclosure of financial and other s
ignificant information concerning securities offered for public sale (i.e., requires registration of securities when first sold to the public)
 Deter Fraud: Prohibits deceit, misrepresentation and other fraud i
n the sale of securities (including municipal securities) Municipal securities are exempt from registration requirements of the 1933 Act but not anti-fraud provisions
8 KEY LAWS —
SECURITIES AND EXCHANGE ACT OF 1934
• Broadly regulates securities
• Anti-F raud provisions:
 Section 10(b): prohibits fraud in purchase or sale of securities  SEC Rule 10b-5: it is unlawful to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading 9 KEY LAWS —
SECURITIES AND EXCHANGE ACT OF 1934
Supreme Court Definition of "material":

A statement or omission is material if there is
a substantial likelihood (not a "possibility") that, under all the circumstances, the fact or omission would (not "could") have actual significance (must be important, not just "interesting") in the deliberations of the reasonable (not "any") investor Basic Inc. v. Levinson, 485 U.S. 224 (1998)
10 • Pursuant to rulemaking authority, Securities & Exchange C
ommission (SEC) has promulgated SEC Rule 15c2-12
• Regulates
 Initial (new issue) disclosure
 Continuing disclosure
• Applies only to certain “publicly offered” municipal
s
ecurities
KEY LAWS —
SECURITIES AND EXCHANGE ACT OF 1934
11 RULE 15C2-12: NEW ISSUE DISCLOSURE

PRELIMINARY OFFICIAL STATEMENT(POS)
• Information concerning the terms of the securities
an
d financial information or operating data
material to an evaluation of the securities
• Prepared by the City with assistance of disclosure
c
ounsel and financing team participants
• Issuer’s responsibility to ensure accuracy and
completeness
• Approved by governing board of issuer – Ci ty
Council, City of San José Financing Authority,
Successor Agency
• Must be “de
emed final ” by the issuer – does not
contain any material misstatement or omission
12 RULE 15C2-12: NEW ISSUE DISCLOSURE

OFFICIAL STATEMENT(OS)
• Completed upon the sale of bonds
• Adds pricing-r elated information to
POS
• Delivered to underwriter within 7
bus
iness days after sale date
• Often, only change from POS is final
p
ricing information
• Between the distribution of POS
an
d preparation of OS, events may
occur that require updating the final OS
13 RULE 15C2-12: CONTINUING DISCLOSURE
• Annual report
 Updates to financial information and operating data of the type included in the OS as
specified in written agreement signed by issuer (e.g. Continuing Disclosure Certificate)
 Audited financial statements, when and if available
• Notice of Occurrence of Significant Events
 16 specified events, i ncluding:
* Principal and interest payment delinquencies
* Rating changes
* Unscheduled draws on debt service reserve funds
 See s lide 42 in additional information section of this presentation for complete list • Method of Filing
 Electronic Municipal Market Access (EMMA) website established by Municipal S
ecurities Rulemaking Board (MSRB)
14 RULE 15C2-12: CONTINUING DISCLOSURE
• Issuers are required to disclose compliance with their c
ontinuing disclosure obligations in official statements  Municipalities Continuing Disclosure Cooperation Initiative (
2014)
• Antifraud provisions apply to secondary market statements  Continuing disclosure reports
 Statements “ reasonably expected to reach investors and trading markets”
* Budget Messages
* Press releases
* Web site postings
15 SPEAKING TOTHE MARKET
• Disclosure should be factual and neutral
• Do not include adjectives or “sales” language
The City is the oldest and most beautiful city in the State of California, developing from a momentous Spanish pueblo established in 1777. Situated between the rolling Diablo and Santa Cruz mountain ranges, the City encompasses approximately 180 square miles at the south end of the iconic San Francisco Bay and is the county seat of Santa Clara County. home to some of Silicon Valley’s greatest minds. With an impressive 2018 estimated population of 1,051,316, the City is the third most populous city in the State and the tenth most populous in the United States. Visitors find many amenities in the City's revitalized downtown area including fine accommodations and world class restaurants and shops.
16 • Disclosure should be factual and neutral
• Do not include adjectives or “sales” language
The City is the oldest and most beautiful city in the State of California, developing from a momentous Spanish pueblo established in 1777. Situated between the rolling Diablo and Santa Cruz mountain ranges, the City encompasses approximately 180 square miles at the south end of the iconic San Francisco Bay and is the county seat of Santa Clara County, home to some of Silicon Valley’s greatest minds.With an impressive 2018 estimated population of 1,051,316, the City is the third most populous city in the State and the tenth most populous in the United States. Visitors find many amenities in the City's revitalized downtown area including fine accommodations and world class restaurants and shops.

SEC PERSPECTIVE ON MUNICIPAL MARKET
• Most actions brought under Securities Act of 1933
 Only requires negligence
I
ssuer or official knowingly misstated or omitted facts, or failed to discover facts that were available or could have been reasonably discovered
 No requirement that SEC prove intent to defraud
• Historical Enforcement Priorities
 Quality of financial disclosure
 Timeliness of financial disclosure
 Undisclosed potential tax violations
17 SEC ENFORCEMENT ACTIONS –

ORANGE COUNTY
18 SEC ENFORCEMENT ACTIONS –

ORANGE COUNTY
• Risky investment strategies to balance budget
• Failed to disclose investments
• County filed for bankruptcy protection in 1994
• SEC brought enforcement action in 1996 – d id NOT involve the failure to pay any bonds
19 SEC ENFORCEMENT ACTIONS –

ORANGE COUNTY
SEC found Supervisors failed to take “steps appropriate under the circumstances” to assure that the County's financial situation was being adequately disclosed to potential investors
 “[A] P
ublic official who approves issuance of securities and related disclosure documents may not authorize disclosure that the public official knows to be materially false or misleading”
 “[A] Public official may not authorize disclosure while recklessly d
isregarding facts that indicate that there is a risk that the disclosure may be misleading”
20 SEC ENFORCEMENT ACTIONS – SAN DIEGO
21 SEC ENFORCEMENT ACTIONS – SAN DIEGO
• San Diego issued $260 million through 5 bond issues in 2002 a
nd 2003
• SEC alleged City officials had engaged in securities fraud for f
ailing to disclose material information
 Inadequately disclosed large unfunded liabilities for pensions and r
etiree health care
 Officials falsely certified there were no material misstatements  Did not hire auditors with the skills and resources necessary to a
dequately audit City’s financials in connection with its securities offerings
22 • Adopt disclosure policies and procedures
• Provide appropriate training to everyone involved in the d
isclosure process (e.g. City Council and staff)
• Focus on big picture issues facing the local agency
• Disclose the good with the bad
• Hire auditors with the skills and resources necessary to ad
equately audit local agency’s financials in connection with its securities offerings
* Excerpted from “Lessons Learned from San Diego”, Linda Chatman Thomsen, Director, Division of Enforcement, SEC, December 11, 2007
SEC ENFORCEMENT ACTIONS –
LESSONS LEARNED FROM SAN DIEGO*
23 Orange County
• Elected Treasurer: SEC cease and desist order; 6 years in jail, $100,000 fine
• Assistant Treasurer: SEC cease and desist order; 3
years in jail; $10,000 fine
San Diego
• Four officials (Ci ty Manager, Deputy City Manager,
Auditor & Comptroller, City Treasurer) consented to
entry of judgment and paid civil penalties ranging from $5,000 to $25,000.

SEC ENFORCEMENT ACTIONS –

PERSONAL LIABILITY
24 Since 2010, SEC has stepped up enforcement against municipal issuers and officials
 Civil Fines Imposed on Issuers from $20,000 to
$1 M
illion (Miami)
 Civil Fines Against Officials from $10,000 to $50,000  Barring Officials to work on future bonds
 SEC Public Finance Abuse Unit expanded efforts in FY 2022 with one of m
ost significant developments – increased focus on municipal issuers  Previous two years most of enforcement activity focused largely financial a
dvisors and underwriters
 These actions involved municipal issuers and their employees, and in most c
ases their financial advisor as well
SEC ENFORCEMENT ACTIONS –

PERSONAL LIABILITY
25 ELECTED OFFICIALS’ ROLE IN

MUNICIPAL BOND DISCLOSURE
26 RESPONSIBILITY OF ELECTED OFFICIALS
• Review the primary disclosure document for information on key topics:
 Purpose of the bonds
 Sources of repayment
 Risks that the sources of repayment may be insufficient to repay the bonds  Discussion of any other events or information that could affect the d
eliberations of a reasonable investor
• After such review of the document the following additional elements s
hould be considered:
 Have identified material risks and events been brought to the attention of st
aff, bond counsel and other professionals?
 Have such risks and events been disclosed, and if not, what is the rationale f
or the non-disclosure?
27 RESPONSIBILITY OF ELECTED OFFICIALS
If any Councilmember or Authority Board member has
any personal knowledge that any of the material
information in the Official Statement is or may be
false or misleading, the Councilmember/Authority
Board member must raise these issues prior to
approval of the distribution of the document.
28 DISCLOSURE BEST PRACTICES AND
CITY OF SAN JOSÉ’S

APPLICATION OF BEST PRACTICES
29 • City Council adoption of Debt Management Policy* outlining d
isclosure practices and procedures
• City Administrative Disclosure Policies and Procedures** • Policies and Procedures:
 Designates o nly the City Manager and Director of Finance as having the responsibility for “speaking to the market” on behalf of the City  Establish Internal Controls and Systems
 Identify “disclosure documents” - i nformation reasonably expected to reach investors/trading markets
 Require staff brainstorming sessions to discuss “big picture” * Debt Management Policy – Council Policy 1-15 https://www.sanjoseca.gov/home/showpublisheddocument/12869/636669975466830000 ** Disclosure Policies and Procedures, Section 7 https://www.sanjoseca.gov/home/showpublisheddocument/61169/637292207533100000

DISCLOSURE POLICIES & PROCEDURES
30 DISCLOSURE POLICIES & PROCEDURES

KEY REQUIREMENTS
• Transmit the POS to legislative body ear ly enough to provide legislative body sufficient time to review and
ask questions
• Disclose bad news
• Provide practical training to officials and employees f
rom City Council/board members to staff members
31 • San José team takes seriously the responsibility of full and co
mplete disclosure
 Engage subject matter experts throughout the organization • Historically seasoned and experienced finance management team
 Evolving process over last 20+ years
 Policies and procedures help ensure compliance with applicable s
ecurities laws

SUMMARY
32 33

COUNCIL DISCUSSION
34 ADDITIONAL INFORMATION

KEY PLAYERS IN BOND TRANSACTIONS
• Bond owner – owner of the bond
 Individuals (aka “mom and pop” or retail investors, including very w
ealthy individuals)
 Institutions such as banks, insurance companies, mutual funds and c
orporations
 Generally entitled to receive regular interest payments and return of
principal when bond matures
35 KEY PLAYERS IN BOND TRANSACTIONS
• City Staff – contributors to disclosure
 City Manager for global view of affairs of the City
 City Attorney for litigation risks
 Director of Finance
 Budget Director
 Most City departments review and contribute to disclosure * Staff typically has the most current and relevant information * Input is critical to the disclosure process
36 • Municipal Advisor – advises issuer on structure,
marketing and sale of bonds
 Has fiduciary obligations to the issuer
 Assists issuer with hiring other members of financing team, d
etermining need for dissemination agent or other consultant  Assists issuer with projected financial information and impact of pl
anned future financings
 Reviews POS/OS, but does not have affirmative due diligence obl
igation under federal securities laws

KEY PLAYERS IN BOND TRANSACTIONS
37 • Bond Counsel – hired by the issuer to prepare legal documents, provide legal advice to the issuer and deliver legal opinions:
 Bonds are valid and binding obligations of issuer
 In case of tax- exempt bonds, bonds are exempt from federal and state income taxes
• Disclosure Counsel – hired by the issuer to assist with the preparation of the official statement and provide advice to the issuer regarding compliance with Federal securities laws

KEY PLAYERS IN BOND TRANSACTIONS
38 • Trustee – financial institution acts in a fiduciary capacity for the benefit of the bond owners including enforcement of the terms of the bonds
• Underwriter/Purchaser – purchases the bonds from the
issuer for resale to investors – has no fiduciary responsibility to the issuer, but has due diligence obligation under federal securities law; hires legal counsel to represent the underwriters interest

KEY PLAYERS IN BOND TRANSACTIONS
39 KEY ACRONYMS
Acronym Definition
ACFR Annual Comprehensive Financial Report
EMMA Electronic Municipal Market Access, municipal
disclosure website sponsored by MSRB
MSRB Municipal Securities Rulemaking Board
OS Official Statement
POS Preliminary Official Statement
SEC Securities & Exchange Commission
40 • Municipalities Continuing Disclosure Cooperation (MCDC) Initiative a
nnounced in 2014 with goal of encouraging self reporting of disclosure violations by issuers, obligated persons and underwriters • Participants in MCDC Initiative were offered standardized settlement te
rms
• Settlement terms for issuers and obligated persons included:
 Cease and desist proceeding with no admission or denial of findings  Establishing continuing disclosure compliance policies and training  No payment of a civil penalty
• Initiative did not cover individuals and they remained exposed to po
tential SEC enforcement
SEC ENFORCEMENT ACTIONS —

MUNICIPALITIES CONTINUING DISCLOSURE COOPERATION
41 RULE 15C2-12 – LISTED EVENTS
42 Always Require Notification Require Notification If Material Issuance by the Internal Revenue Service of proposed or final determination of taxability or of a Notice of Proposed Issue (IRS Form 5701 TEB)
Unless described in the left-hand column, adverse tax opinions or other material notices or determinations by the Internal Revenue Service with respect to the tax status of the securities or other material events affecting the tax status of the securities Principal and interest payment delinquencies Modifications to rights of holders of the securities Unscheduled draws on debt service reserves and credit enhancements reflecting financial difficulties Optional, unscheduled or contingent Bond calls Substitution of credit or liquidity providers,
or their failure to perform Release, substitution or sale of property securing repayment of the securities Bond calls and tender offers Non-payment related defaults Defeasances
The consummation of a merger, consolidation or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms
Rating Changes Appointment of a successor or additional trustee or the change of name of a trustee
Bankruptcy,
insolvency, receivership or similar event of the obligated person Incurrence of a financial obligation or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a
financial obligation of the District, any of which affect bond holders Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the issuer, any of which reflect financial difficulties