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3. FinancialLimits: <br />a. Bond issues may require a special debt levy. The city hereby adopts a policy to <br />limit the amount of the city's property tax levy dedicated to debt service (principal <br />and interest plus 5% for G.O. bonds ) to less than 20% of the total tax levy. <br />Unlike rating agencies, the city's definition of tax levy does not include special <br />assessments, tax abatements, or tax increments. <br />b. Pure revenue bond debt for the city shall be used primarily as lease revenue bonds, <br />supported by taxes. The city may use revenue bonds for enterprise, electric and <br />water utility operations, but only if debt service coverage achieves investment grade <br />rating from the city's rating agencies. <br />B. Use of Variable Rate Debt and Derivatives <br />I. 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 and will only be used for debt <br />repaid from non - property tax sources (specific revenues. <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; or to align <br />with a specific revenue stream. <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 />Financial Management Policies Page 11 <br />