California Debt Financing Guide - California State Treasurer

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CALIFORNIA DEBT FINANCING GUIDE

THE CALIFORNIA DEBT AND INVESTMENT ADVISORY COMMISSION

ORIGINALLY PUBLISHED: 2019 LAST REVISED: MARCH 2022

CDIAC No. 19.05

California Debt and Investment Advisory Commission

The California Debt and Investment Advisory Commission (CDIAC) provides information, education, and technical assistance on debt issuance and public fund investments to local public agencies and other public finance professionals. CDIAC was created to serve as the state's clearinghouse for public debt issuance information and to assist state and local agencies with the monitoring, issuance, and management of public debt.

COMMISSION MEMBERS FIONA MA, CPA, California State Treasurer and Chair GAVIN NEWSOM, Governor BETTY T. YEE, State Controller SABRINA CERVANTES, Assemblymember COTTIE PETRIE-NORRIS, Assemblymember PATRICIA BATES, Senator STEVEN BRADFORD, Senator SANDIE ARNOTT, Treasurer-Tax Collector, County of San Mateo LAKSHMI KOMMI, Director of Debt Management, City of San Diego

EXECUTIVE DIRECTOR

ROBERT BERRY

Additional information concerning this guide or CDIAC programs may be obtained by contacting CDIAC directly via phone (916) 653-3269, fax (916) 654-7440, e-mail (cdiac@treasurer.) or by visiting CDIAC's website: treasurer.cdiac.

All rights reserved. No part of the California Debt Financing Guide may be reproduced without written credit given to CDIAC. Permission to reprint with written credit given to CDIAC is hereby granted.

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Contents

PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvi

What Information Does the Guide Include? . . . . . . . . . . . . . . . . . . . . xvii How to Use the Guide? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xviii Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xviii Note to Our Readers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xix

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i-1

i.1 Understand Your Public Agency . . . . . . . . . . . . . . . . . . . . . . . i-3

i.1.1 Who Are You and What Do You Want To Be? . . . . . . . . . . . . i-4 i.1.2 What Is Mission Failure for Your Agency? . . . . . . . . . . . . . . i-4 i.1.3 What Is the Agency's Tolerance for Risk? . . . . . . . . . . . . . . i-5 i.1.4 Do Projects Conform to the Agency's Mission and Risk Tolerance? . . i-5

i.1.4.1 i.1.4.2

i.1.4.3

Strategic Planning . . . . . . . . . . . . . . . . . . . . . i-5

Capital Improvement Planning and Capital Improvement Budgeting . . . . . . . . . . . . . . i-5

Understand the Difference between Funding and Financing . . i-7

i.2 Decide Whether Debt Financing Is Appropriate For Your Agency . . . . . . i-7

i.2.1 Decision #1 - What is the right source of funding? . . . . . . . . . . i-8 i.2.2 Decision #2 ? What is the right source of financing? . . . . . . . . i-9

i.2.2.1 When should a public agency consider PAYGO? . . . . . i-11 i.2.2.2 When should a public agency consider debt? . . . . . . .i-12

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i.2.3 Decision #3 - Can the municipal market help the public agency meet its capital financing needs? . . . . . . . . . .i-13

i.3 Apply the Appropriate Analysis to the Decision to Use Debt Financing . . . . i-15

i.3.1 i.3.2

Understanding the Work Each Public Agency Must Commit to When Using Debt Financing . . . . . . . . . . . .i-15

Legal Responsibilities of Issuers of Municipal Securities . . . . . . i-15

i.3.2.1 Compliance with Municipal Securities Laws - Disclosure . . .i-16 i.3.2.2 Legal Responsibilities Under the IRS Tax Code . . . . . . i-17 i.3.2.3 Responsibilities of Elected and Appointed Officials . . . . i-18

i.3.3 Financial Responsibilities . . . . . . . . . . . . . . . . . . . . . .i-19 i.3.4 Organizational Responsibilities . . . . . . . . . . . . . . . . . . i-20

i.4 Lead the Process of Issuing Your Debt . . . . . . . . . . . . . . . . . . .i-21

i.4.1 Financing Team . . . . . . . . . . . . . . . . . . . . . . . . . . i-21

i.4.1.1 Pre-Issuance Phase . . . . . . . . . . . . . . . . . . . i-22 i.4.1.2 Issuance Phase . . . . . . . . . . . . . . . . . . . . . i-23 i.4.1.3 Post-Issuance Phase . . . . . . . . . . . . . . . . . . .i-24

i.4.2 Key Decisions Public Agencies Must Make when Selecting the Appropriate Debt Option . . . . . . . . . . . i-26

i.4.2.1 Decision #1 - Choose the funding source . . . . . . . . i-26 i.4.2.2 Decision #2 - Choose a security package . . . . . . . . .i-27 i.4.2.3 Decision #3 - Select a term . . . . . . . . . . . . . . . .i-27 i.4.2.4 Decision #4 - Select an interest rate type . . . . . . . . i-28 i.4.2.5 Decision #5 - Understand what the

agency commits to do in the future . . . . . . . . . . . . i-29 i.4.2.6 Decision #6 - Decide whether the debt will be tax-exempt . . i-30 i.4.2.7 Decision #7 - Evaluate municipal market

opportunities to use debt financing . . . . . . . . . . . . i-30

i.4.3 i.4.4

i.4.5

Steps Public Agencies Must Take to Use Debt Financing . . . . . .i-31

Additional Legal Requirements - Internal Boards, Reporting to CDIAC, and Voter Approval . . . . . . . . . . . . . .i-34

Issuing Tax-Exempt Debt . . . . . . . . . . . . . . . . . . . . . i-35

i.4.5.1 Requirement #1 - The debt must be issued by a qualified issuer . . . . . . . . . . . . . . i-35

i.4.5.2 Requirement #2 - The debt must finance a qualifying project and satisfy ongoing requirements and limitations regarding the use of the project . . . . . . i-36

i.4.5.3 Requirement #3 - Manage the arbitrage rules . . . . . . .i-37

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i.4.5.4 Requirement #4 ? Adhere to procedural and other rules . . i-38

i.4.6 What Financing Options are Available? . . . . . . . . . . . . . . i-38

i.5 Manage Your Debt After It Is Issued . . . . . . . . . . . . . . . . . . . . .i-41

i.5.1 Managing Your Agency's Debt Financings . . . . . . . . . . . . . i-41

i.5.1.1 Debt Management Policies . . . . . . . . . . . . . . . i-42 i.5.1.2 Disclosure Policies . . . . . . . . . . . . . . . . . . . i-45 i.5.1.3 Investor Relations Policies . . . . . . . . . . . . . . . . i-46

i.5.2 California Review and Reporting Requirements on Bonds . . . . . i-47

i.5.2.1 Proposition 39 General Obligation Bonds . . . . . . . . .i-47 i.5.2.2 Marks- and Mello-Roos Bonds . . . . . . . . . . . . . . i-48 i.5.2.3 Conduit Issuer Reporting . . . . . . . . . . . . . . . . i-48 i.5.2.4 Grand Juries . . . . . . . . . . . . . . . . . . . . . . . i-48 i.5.2.5 Reports to the California Debt and

Investment Advisory Commission . . . . . . . . . . . . i-48

CHAPTER 1. LEGALLY INCURRING DEBT - STATE LAW RESTRICTIONS ON PUBLIC AGENCY DEBT AND REVENUES . . . . . . . . . . . 1-1

1.1 A Public Agency's Authority to Borrow . . . . . . . . . . . . . . . . . . . 1-2

1.1.1 1.1.2 1.1.3

Statutory Authority to Borrow . . . . . . . . . . . . . . . . . . . . 1-2 General Bond Statutes . . . . . . . . . . . . . . . . . . . . . . . 1-3 Borrowing Authority of Charter Cities . . . . . . . . . . . . . . . . 1-3

1.2 Constitutional Debt Limit . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4

1.2.1 1.2.2 1.2.3 1.2.4

Debt Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4 Purpose of Debt Limit . . . . . . . . . . . . . . . . . . . . . . . 1-4 Scope of Debt Limit - When Does the Debt Limit Apply? . . . . . . 1-5 Exceptions to the Debt Limit . . . . . . . . . . . . . . . . . . . . 1-6

1.2.4.1 Current Fiscal Year Exception . . . . . . . . . . . . . . 1-7 1.2.4.2 Annual Appropriation Exception . . . . . . . . . . . . . . 1-7 1.2.4.3 Lease Exception (the "Offner-Dean Lease Exception") . . . 1-8 1.2.4.4 Special Fund Exception . . . . . . . . . . . . . . . . . . 1-9 1.2.4.5 Contingent Obligation Exception . . . . . . . . . . . . 1-10 1.2.4.6 Obligations Imposed by Law Exception . . . . . . . . . 1-11

1.3 Common Strategies for Avoiding the Debt Limit . . . . . . . . . . . . . . 1-12

1.3.1 Lease Revenue Bonds and Certificates of Participation . . . . . . 1-12 1.3.2 Joint Powers Authorities . . . . . . . . . . . . . . . . . . . . . 1-12

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