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B. Use of Variable Rate Debt and Derivatives <br /> 1. Variable Rate Debt. The city shall use variable rate debt only if total principal and <br /> interest of the debt constitutes less than 20% of the city's total debt payments and only <br /> if circumstances dictate the need for a short call date. <br /> 2. Derivatives. The city will not use derivative based debt. <br /> C. Debt Structuring Practices <br /> 1. Term: State law limits general obligation debt to 30 years in most circumstances. The <br /> city shall not exceed 25 years in term of debt. <br /> 2. Term for Equipment: The city has a goal of paying for all capital equipment with a <br /> useful life of five years or less from cash reserves or annual operating budgets. State <br /> law does allow cities to issue debt (known as equipment certificates or capital notes) <br /> with a term of ten years or the useful life of the equipment if it is at least 10 years. The <br /> city would prefer,within the bounds of levy limits, to fund capital equipment on a pay- <br /> as-you-go basis. Capital equipment with a useful life greater than five years may be <br /> financed with debt,but the bond term should not exceed ten years. <br /> 3. The city's collective debt goal shall be to amortize at least 50% of its principal within <br /> 10 years. <br /> 4. The city shall usually issue debt with level principal and interest payments. <br /> 5. The city shall have a call date (pre-payment date) of no longer than 10 years on longer <br /> term debt and 6 to 8 years on shorter-term debt. <br /> D. Debt Issuance Practices <br /> 1. Rating Agencies: The city utilizes a rating agency for all of its debt issuance of more <br /> than$1M or longer than 3 years in term. <br /> 2. Method of Sale: The city shall use competitive bidding for all of its debt unless the <br /> debt is so specialized in its nature that it will not attract more than 2 bids. <br /> 3. Refunding: <br /> a. Advance refunding bonds shall not be utilized unless present value savings of 4% <br /> to 5% of refunded principal is achieved and unless the call date is within 4 years. <br /> The state law minimum is 3% of refunded principal. Bonds shall not be advance <br /> refunded if there is a reasonable chance that revenues will be sufficient to pre-pay <br /> the debt at the call date. <br /> b. Current refunding bonds shall be utilized when present value savings of 3% of <br /> refunded principal is achieved or in concert with other bond issues to save costs of <br /> issuance. <br /> c. Special assessment or revenue debt will not be refunded unless the Finance <br /> Director determines that special assessments or other sufficient revenues will not <br /> be collected soon enough to pay off the debt fully at that call date. <br /> 4. Professional Services. The city shall use an outside bond attorney and an independent <br /> financial advisor to structure the sale. <br /> E. Debt Management Practices <br /> 1. Investment of bond proceeds. The city shall invest bond proceeds in a capital project <br /> fund. <br /> Financial Management Policies Page 12 <br />