Financial Policies - Debt Service

Purpose

The City recognizes the foundation of a well-managed debt program is a comprehensive debt policy. A debt policy is an important tool to insure the appropriate use of the City’s resources to meet the commitment to provide services to a community and to maintain sound financial management practices. These policies are guidelines for general use and allow for extraordinary circumstances. The primary objectives of this policy are to:

• Demonstrate a commitment to long-term financial planning objectives

• Promote continuity and consistency in the decision-making process

• Provide guidance to decision makers regarding the timing and purpose for which debt may be issued

• Minimize interest expense and cost of issuance

• Maintain the highest credit rating possible

Debt Affordability Analysis

The following factors shall be considered when evaluating debt capacity:

• Statutory and constitutional limitations on the amount of debt that can be issued

• Requirements of bond covenants

• Revenue projections and reliability of revenue sources to repay debt

• Projections of the City’s financial performance, such as revenues and expenditures, net revenue available for debt service, and unreserved fund balance levels

• Measures of debt burden, such as net bonded debt per capita, net bonded debt as a percent of assessed value, and ratio of debt service to expenditures

Types of Debt

Debt financing shall be used by the City of Springfield to fund infrastructure improvements and acquire capital assets that cannot be acquired from either current revenues or fund balance. Debt financing shall include general obligation bonds, revenue bonds and other obligations permitted under Missouri law. The City will select a financing technique that provides for the lowest total cost consistent with acceptable risk factors and the principles of equity, effectiveness and efficiency.

The City intends to include in the annual operating budget a sufficient amount to fund ongoing maintenance needs and to provide for periodic replacement consistent with the philosophy of maintaining capital facilities and infrastructure to maximize the useful life. The repayment terms should not exceed the useful life of the improvement.

Capital Improvements Program (CIP)

The City’s Capital Improvements Program is a multi-year plan that prioritizes the City’s capital needs over a rolling six-year period. The process encourages citizen input to identify projects that are consistent with the community’s goals and needs. The identified needs are balanced with available funding. The major funding sources for capital projects are the capital improvements sales tax, transportation sales tax and property tax. Other essential funding sources are cost sharing agreements with other governmental agencies, public-private partnerships and grants. The City’s Capital Improvements Program balances pay-as-you-go funding with debt financing. The City Managers are currently working with the Leadership Team to re-engineer the data collection and report generating process in an attempt to develop a more valuable CIP report for all stakeholders, both internal and external.

Short-Term Borrowing

Short-term obligations, such as bond anticipation notes (BANS), may be used to finance projects for which the City ultimately plans to issue long-term debt. The BANS will provide interim financing, which will eventually be refunded with the proceeds of the long-term obligations. Interim financing may also be appropriate when long-term interest rates are expected to decline in the future.

General Obligation Bonds

Long-term general obligation bonds shall be issued to finance capital improvements for purposes set forth by the voters in bond elections. The City is committed to completing the specific projects approved in a referendum election. In accordance with the City Charter, all general obligation bonds will be sold competitively. The City’s full faith and taxing authority are irrevocably pledged to the timely payment of principal and interest of general obligation bonds.

Revenue Bonds

Revenue bonds are limited liability obligations. The security for the bond is a pledge of a specific revenue stream. While these obligations are not backed by the City’s full faith and credit, the City of Springfield recognizes the moral commitment made to bond holders and the importance of timely principal and interest payments on the City’s credit rating.

Public Benefit Corporations

The City has two non-profit public benefit corporations; the Public Building Corporation and the Center City Development Corporation. The corporations issue bonds for City facilities and infrastructure. The bonds are paid solely from lease payments made by the City to the corporations and are not obligations of the City; however, the City recognizes its moral commitment to make timely principal and interest payments.

Financing improvements through the public benefit corporations provides the City greater flexibility in implementing the projects within the Capital Improvement Program and provides an orderly matching of cash collections with expenditures.

Capital Interest

Capitalization of interest (using borrowed funds to pay interest on a debt obligation) provides a means of mitigating the immediate impact of new debt until the financed facilities are in full operation. This practice will be limited to interest on debt during construction and the start-up period for revenue generating facilities. Capitalized interest will generally be limited to four years or less. However, if there is a large-scale project, this period may be adjusted to reflect the needs of the project.

Credit Enhancement

Credit enhancements such as bond insurance, letters of credit, and surety bonds guarantee timely payment of principal and interest. The use of credit enhancement results in a higher rating, thereby lowering the cost of the debt. Credit enhancement will be used when more than the cost of the credit enhancement reduces the net debt service on the bonds.

Premiums

The City’s bonds may be sold at a discount or premium in order to market bonds more effectively, achieve interest savings, or meet other financing objectives.

Refunding of Existing Debt

Periodic reviews of all outstanding debt are undertaken to determine refunding opportunities. Refunding is considered when the analysis indicates the potential for present value savings of approximately 5% of the principal being refunded. Refunding will also be considered when there is a need to modify covenants essential to operations and management.

The City may choose to refund outstanding indebtedness when existing bond covenants or other financial structures impinge on prudent and sound financial management. Savings requirements for current or advance refunding may be waived by the City Manager upon finding that such a restructuring is in the City’s overall best financial interest.

Conduit Financings

Conduit financings are securities issued by a government agency to finance a project of a third party such as a non-profit organization or other private entity. The City may sponsor conduit financings for activities such as economic development that have a general public purpose and are consistent with the City’s overall policy objectives. Unless a compelling public policy rationally exists, such conduit financings will not in any way pledge the City’s faith and credit.

Bond Counsel

The City will retain outside bond counsel for all debt issues. All obligations issued by the City will include a written opinion as to the legality and tax-exempt status of the obligation. The City will seek the advice of bond counsel on all other types of financing and any questions involving federal tax issues or arbitrage law.

Financial Advisor

The City may retain the services of a financial advisor. The financial advisor may assist on the structuring of the obligations to be issued, inform the City of available options and advise the City on the timing and marketability of the obligations.

Investment of Bond Proceeds

Investment of bond proceeds shall be consistent with those authorized by state law and City investment policy. Interest earned on bond proceeds may be used for the financed project.

Rating Agency Relations

The City seeks to maintain the highest credit rating possible for all categories of debt that can be obtained without compromising the delivery of basic city services and achievement of City policy objectives. Full disclosure of operations will be made to bond rating agencies. The City staff, with the assistance of a financial advisor and bond counsel, will prepare the necessary materials for presentation to the rating agencies. City staff will maintain open communications with the rating agencies, informing them of major financial events in the City. The Comprehensive Annual Financial Report shall be distributed to the rating agencies after it has been accepted by City Council.

Moody’s Investors Service has assigned a rating of Aa1 on the City’s outstanding general obligation bonds. This rating was affirmed in March 2023. Municipal issuers with an Aa rating demonstrate very strong creditworthiness relative to other U.S. municipal or tax-exempt issuers. The City’s rating on leasehold revenue/annual appropriation bonds is one notch below the general obligation rating. This small distinction reflects the essentiality of the bonded projects as well as the risk of annual appropriation.

Continuing Disclosure

The City is committed to meeting secondary disclosure requirements on a timely and comprehensive basis. Official statements and Comprehensive Annual Financial Reports will meet the continuing disclosure standards set by Municipal Standards Rule Making Board (MSRB), the Government Accounting Standards Board (GASB), the Securities and Exchange Commission (SEC) and Generally Accepted Accounting Practices (GAAP). The Department of Finance shall be responsible for providing ongoing disclosure information to established national repositories and for compliance with disclosure standards set by state and national regulatory bodies.

Arbitrage

Federal arbitrage legislation is intended to discourage entities from issuing tax-exempt obligations unnecessarily. In compliance with the spirit of the legislation, the City will issue obligations as close to the time the contracts are expected to be awarded as possible. Because of the complexity of arbitrage rebate regulations and the severity of non-compliance penalties, the Finance Department shall contract for arbitrage rebate services. The City’s bond counsel shall review in advance any arbitrage rebate payments and forms sent to the Internal Revenue Service.

Legal Debt Margin

The constitution of the State of Missouri limits the amount of general obligation and special assessment debt a municipality may issue to 30% of the assessed value of property. In 2022, assessed value in the City of Springfield was $3,258,858,000. Springfield’s outstanding debt may not exceed $977,657,000. The outstanding debt subject to limitation, are general obligation bonds, which were voter approved and are backed by the City’s full faith and credit. The City is not in danger of exceeding the legal debt margin. As the following analysis shows, the City of Springfield’s current debt load is 0.05% of the state-dictated maximum.