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A. Purpose: The Village of Heyworth hereby develops this Debt Management Policy to help ensure the Village's credit worthiness and to provide a functional tool and comprehensive guidelines for debt management and capital planning.
B. Goals And Objectives: It is the objective of the Village to maintain a fiscally sound debt position and maintain and improve the credit quality of the Village.
In following this policy, the Village shall pursue the following specific goals:
1. Avoid taking on debt whenever possible.
2. Maintain the highest credit rating to the extent possible for all debt at the time of issue so borrowing costs are minimized and access to credit is preserved.
3. Take all practical precautions to avoid any financial decision that will negatively impact current credit ratings on existing or future debt issues.
4. Adhere to the Capital Improvement Program (CIP) so as to plan for major capital infrastructure expenditures.
5. Reserve available funds for major capital projects per the CIP.
6. Maintain the ability to incur present and future debt at minimal interest rates in amounts needed for infrastructure and economic development without endangering the ability to finance essential services.
7. Effectively utilize debt capacity in relation to Village growth and the tax base or utility rate base to manage debt in line with available resources.
8. Establish reasonable debt level targets that recognize projected inflation and planned capital needs.
9. Consider market timing.
10. Determine the amortization (maturity) schedule that will best fit with the overall debt structure of the Village's general obligation debt and related tax levy at the time the new debt is issued. For issuance of revenue bonds, the amortization schedule that will best fit with the overall debt structure of the fund and its related rate structure will be considered. Consideration will be given to coordinating the length of the issue with the lives of assets, whenever practical, while considering repair and replacement costs of those assets to be incurred in future years as an offset to the useful lives, and the related length of time in the payout structure.
11. Consider the impact of such new debt on overlapping debt and the financing plans of the Village.
12. Seek opportunities to finance debt service for general obligation debt with revenues other than Property Taxes.
13. Consider opportunities such as refinancing or restructuring of general obligation debt which reduce existing debt service.
14. Assess financial alternatives to include new and innovative financing approaches, including whenever feasible, categorical grants, revolving loans or other State/Federal aid.
C. Legal Constraints: In the issuance and management of debt, the Village shall comply with the Illinois Compiled Statutes and all other legal requirements imposed by Federal, State and local rules and regulations, as applicable. The following section highlights the legal framework of the debt issuance process:
1. Illinois State Compiled Statutes: 30 Illinois Compiled Statutes 305/0.01, et seq.; the short title is the BOND AUTHORIZATION ACT.
2. Authority For Debt: The Village may, by Bond Ordinance, incur indebtedness or borrow money, and authorize the issue of negotiable obligations, including refunding bonds, for any capital improvement of property, land acquisition, or any other lawful purpose except current expenses, unless approved by the Village Board.
3. Debt Limitation: Under the Illinois Compiled Statutes, the Village's general obligation bonded debt issuances are subject to a legal limitation based on 8.625 percent of the equalized assessed value of real estate property.
As a non-home-rule Municipality, the Village is subject to the provisions of 65 Illinois Compiled Statutes 5/8-4-1 which provides that bonds may not be issued until the authority to issue these bonds has been approved by a majority of the voters. A general exception in section 65 Illinois Compiled Statutes 5/8-5-16 provides that non-home rule municipalities may issue general obligation bonds without referendum up to the total outstanding amount not to exceed one-half of one percent (1/2%) of equalized assessed value.
4. BINA Notification: Municipalities preparing to issue non- referendum general obligation bonds, including alternate bonds or limited bonds, must comply with the notice and hearing requirements of the Bond Issue Notification Act (BINA) per 30 Illinois Compiled Statutes 352/1 et seq.
5. Types Of Debt:
a. General Obligation Referendum Bonds: General obligation referendum approved bonds are secured by the Property Taxes levied for their discharge. The Village is authorized to issue these bonds if approved by the voters under 65 Illinois Compiled Statutes 5/8-4-1.
b. General Obligation Non-Referendum Bonds: General obligation non-referendum bonds (limited) are general obligation bonds that are issued without referendum. Limited bonds are secured by the Property Taxes levied for their discharge. The Village is currently authorized to issue general obligation non-referendum bonds up to a limit of one-half of one percent (1/2%) of the current equalized assessed valuation without voter approval under section 65 Illinois Compiled Statutes 5/8-5-16.
c. Alternate Revenue Source Bonds: General obligation alternate revenue source bonds are not subject to the legal debt limitations but are secured with pledged revenues other than general Property Taxes with a Property Tax levy pledged as a secondary security and issued in accordance with section 30 Illinois Compiled Statutes 350/15.
The Village may seek to finance the capital needs of governmental activities through the issuance of alternate revenue source debt obligations. These debt obligations are payable from various limited revenue sources including Enterprise Funds, Tax-Increment Financing Funds, and Business Development District Funds. Revenue sources pledged for Enterprise Funds include water and sewer revenues. The Village may only pledge up to twenty five percent (25%) of the annual revenue received for debt service and maintain a minimum debt service coverage ratio of one hundred twenty five percent (125%).
Prior to issuing alternate revenue source debt obligations, the Treasurer and Village Administrator, with assistance from an independent financial advisor as needed, will develop financial plans and projections showing the feasibility of the planned financing, required rates and charges needed to support the planned financing and the impact of the planned financing on rate payers, property owners and the other affected parties. On an annual basis, the Village will review the percent of revenue stream that is pledged for repayment of debt for compliance with Village limitations. If it is not feasible to issue an alternative revenue obligation, then a revenue-secured debt obligation should be considered.
d. Debt Certificates: Debt Certificates may be issued by the Village to evidence the payment obligation of the Village under an installment contract or lease. Debt certificates are counted in the legal debt limit but not subject to voter approval in accordance with 30 Illinois Compiled Statutes 350/17(b).
e. Lease/Installment Contracts: The Village may enter into long- term lease/installment obligations for the purchase of real or personal property. Lease/installment contracts are counted towards the legal debt limit in accordance with 30 Illinois Compiled Statutes 350/17(a).
D. Debt Issuance Practices:
1. Authority And Purposes Of The Issuance Of Debt: The laws of the State of Illinois authorize the issuance of debt by the Village. The Local Bond Laws confer upon municipalities the power and authority to contract debt, borrow money, and issue bonds for public improvement projects as therein defined. Under these provisions, the Village may contract debt to pay for the cost of acquiring, constructing, reconstructing, improving, extending, enlarging, and equipping such projects or to refund bonds.
2. Debt Issuances Types:
a. Short-Term Debt (3 Years Or Less): The Village may issue short-term debt which may include, but is not limited to, bond anticipation notes or variable rate demand notes and those instruments that allow the Village to meet cash flow requirements or provide increased flexibility in financing programs.
b. Long-Term Debt (More Than 3 Years): The Village may issue long-term debt which may include, but is not limited to, general obligation bonds, debt certificates, capital appreciation bonds, special assessment bonds, self-liquidating bonds and double- barreled bonds. The Village may also enter into long-term leases for public facilities, property, and equipment with a useful life greater than one year.
3. Structure Of Debt Issuances: The duration of a debt issue shall not exceed the economic or useful life of the improvement or asset that the issue is financing. Each new bond issue should be structured to be callable in ten (10) years. The Village shall design the financing schedule and repayment of debt so as to take best advantage of market conditions, and, as practical, to recapture or maximize its credit capacity for future use and moderate the impact to the taxpayer.
4. Sale Of Securities: When feasible and economical, debt issues should be sold through a competitive bidding process based upon the lowest offered true interest cost (TIC), unless the Village Board deems a negotiated sale the most advantageous to the Village. A sale may be more appropriate to be negotiated when the issue is predominantly a refunding issue or in other non-routine situations that require more flexibility than a competitive offer allows.
When cost beneficial, the Village may also privately place its debt. Since no underwriter participates in a private placement, it may result in lower costs of issuance. Private placement is sometimes an option for small issues.
5. Markets: The Village shall make use of domestic capital markets when the conditions best fit the Village's financing needs.
6. Credit Enhancements: The Village may enter into agreements with commercial banks or other financial entities for the purpose of acquiring letters of credit, Municipal bond insurance, or other credit enhancements that will provide the Village with access to credit under terms and conditions as specified in such agreements when their use is judged cost effective or otherwise advantageous. Any such agreements shall be approved by the Village Board.
7. Methods Of Sale: All bonds shall be sold at a public sale via sealed proposal or live auction, except that bonds may be sold at a private sale in accordance with 30 Illinois Compiled Statutes 350/10. The Village may issue temporary notes by negotiated sale if the Bond Ordinance or subsequent resolution so provides.
a. Direct Debt, Including Bonds And Certificates: All direct debt obligations will mature within the period or average period of usefulness of the assets financed; and the debt will mature in installments, the first of which is payable not more than five (5) years from the date of the issue. Term debt may be allowable if recommended by the Village's financial advisor, in lieu of a fixed maturity schedule, and approved by the Village Board.
b. Financial Advisor: As a matter of independence, the financial advisor will not bid on nor underwrite any Village debt issues on which it is advising.
c. Negotiated Sales: The criteria used to select an underwriter in a negotiated sale should include the following:
(1) Overall experience;
(2) Marketing philosophy;
(4) Previous experience as managing a co-managing partner;
(5) Financial statements;
(6) Public finance team and resources;
(7) Underwriter's discount.
8. Credit Implications: When issuing new debt, the Village should strive to not exceed credit industry benchmarks where applicable. Therefore, the following factors should be considered in developing debt issuance plans:
a. Ratio Of Net Bonded Debt To Equalized Assessed Value: The formula for this computation is net bonded debt, which is the total outstanding debt from the General Fund, divided by the current equalized assessed value as determined by the Township Assessor(s). The Village should not exceed four percent (4%) of net bonded debt.
b. Net Bonded Debt Per Capita: The formula for this computation is net bonded debt divided by the current population as determined by the most recent census information available. The Village should not exceed two thousand dollars ($2,000.00) of net bonded debt per capita.
c. Ratio Of Net Bonded Debt To Personalized Income: The formula for this computation is net bonded debt divided by the current personal income as determined by the most recent census information available. The Village should not exceed four percent (4%) of net bonded debt to personalized income.
d. Ratio Of Annual Debt Service To General Fund Expenditures: The formula for this computation is annual general debt service expenditures from the General Fund divided by General Fund expenditures (excluding certain interfund transfers). The Village should not exceed ten percent (10%) of General Fund expenditures for annual debt service.
Total indebtedness including direct and overlapping debt will be analyzed in determining financial condition.
E. Debt Management:
1. Financial Disclosures: The Village shall prepare appropriate disclosures as required by the Securities and Exchange Commission, the Federal government, the State of Illinois, rating agencies, underwriters, investors, agencies, taxpayers, and other appropriate entities and persons to ensure compliance with applicable laws and regulations. The Treasurer will be responsible for coordinating the submission of the annual disclosure required in accordance with SEC Rule 15c2-12 to the Municipal Securities Rulemaking Board (MSRB) within one hundred eighty (180) days after the end of the fiscal year.
2. Review Of Financing Proposals: All capital financing proposals that involve a pledge of the Village's credit through the sale of securities, execution of loans or lease agreements and/or otherwise directly involve the lending or pledging of the Village's credit shall be referred to the Treasurer and Village Administrator who shall determine the financial feasibility, and the impact on existing debt of such proposal, and shall make recommendations accordingly to the Village Board.
3. Investment Of Bond Proceeds: The Village will invest bond proceeds in accordance with the Village's Investment Policy.
4. Establishing Financing Priorities: The Treasurer and Village Administrator shall administer and coordinate the Village's debt issuance program and activities, including timing of issuance, method of sale, structuring the issue, and marketing strategies. The Treasurer and Village Administrator, along with the Village's financial advisor, shall meet, as appropriate, with the Village Board regarding the status of the current year's program and to make specific recommendations.
5. Ratings Agency Relations: The Village shall endeavor to maintain effective relations with the rating agencies. The Village Administrator, Treasurer and the Village's financial advisors shall meet with, make presentations to, or otherwise communicate with the rating agencies in order to keep the agencies informed concerning the Village's capital plans, debt issuance program, and other appropriate financial information.
6. Investment Community Relations: The Village shall endeavor to maintain a positive relationship with the investment community. The Treasurer, Village Administrator and the Village's financial advisor shall, as necessary, prepare reports and other forms of communications regarding the Village's indebtedness, as well as its future financing plans. This includes information presented to the press and other media.
7. Refunding Policy: The Village shall consider refunding outstanding debt when legally permissible and financially advantageous. A net present value debt service savings of at least three percent (3%) or greater must be achieved.
8. Investment Of Borrowed Proceeds: The Village acknowledges its ongoing fiduciary responsibilities to actively manage the proceeds of debt issued for public purposes in a manner that is consistent with Illinois Statutes that govern the investment of public funds, and consistent with the permitted securities covenants of related bond documents executed by the Village. The management of public funds shall enable the Village to respond to changes in markets or changes in payment or construction schedules so as to: a) optimize returns, b) insure liquidity, and c) minimize risk.
9. Federal Arbitrage Rebate Requirement: In the event the Village invests bond proceeds that qualify as arbitrage, the Village shall maintain or cause to be maintained an appropriate system of accounting to calculate bond investment arbitrage earnings in accordance with the Tax Reform Act of 1986, as amended or supplemented, and applicable United States Treasury regulations related thereto. Such amounts shall be computed annually and transferred from the Bond Construction Fund (i.e., interest earnings revenue account) to the Debt Service Fund escrow account, or other appropriate accounts, for eventual payment to the United States Treasury.
In order to avoid arbitrage earnings on bond proceeds, Village staff shall recommend issuance of debt based upon the cash flow needs of the capital improvement project in which contracts for construction or other goods and services can reasonably be expected to be awarded during the calendar year. Consideration shall be given to the feasibility of obtaining rights-of-way, engineering services, or other matters which may affect the completion of the project in a timely manner, before a recommendation to issue debt is made.
10. Policy Updates: The Treasurer and Village Administrator shall review this policy on an annual basis and update as needed.
F. Conduit Financing: Under Federal and State Statutes, the Village Board has the authority to issue tax-exempt bonds for non-profit organizations organized under Internal Revenue Code 501(c)(3), and economic development revenue bonds, also known as private activity bonds, under the Tax Reform Act of 1986. These tax-exempt bonds shall be collectively referred to as conduit financings. The Village has no liability or responsibility for repayment of the debt authorized under these statutes. Prior to issuing this type of financing, the Treasurer and Village Administrator will update, if appropriate, the Village Debt Management Policy to include specific guidelines related to the issuance and administration of conduit financing.
G. Tax-Increment Financing Debt: Tax increment financing (TIF) debt is excluded from this policy as it is governed by specific TIF redevelopment agreements.
H. Policy Violations: The Village administration shall maintain governance practices that encourage ethical behavior. Any transactions related to the debt management practices that indicate the intentional non-compliance of the policy or a possibility of fraud shall be reported, either verbally or in writing, to the Village Administrator and/or Chief of Police.
I. Glossary Of Terms:
AD VALOREM TAX: A direct tax based "according to value" of property.
ADVANCED REFUNDING BONDS: Bonds issued to refund an outstanding bond issue prior to the date on which the outstanding bonds become due or callable. Proceeds of the advanced refunding bonds are deposited in escrow with a fiduciary, invested in United States Treasury bonds or other authorized securities, and used to redeem the underlying bonds at maturity or call date.
AMORTIZATION: The process of paying the principal amount of an issue of bonds by periodic payments either directly to bondholders or to a sinking fund for the benefit of bondholders.
ARBITRAGE: Usually refers to the difference between the interest paid on the tax-exempt securities and the interest earned by investing the proceeds in higher yielding taxable securities. Internal Revenue Service regulations govern arbitrage (reference IRS Reg. 1.103-13 though 1.103-15).
ARBITRAGE BONDS: Bonds which are deemed by the IRS to violate Federal arbitrage regulations. The interest on such bonds becomes taxable and the bondholders must include this interest as part of gross income for Federal Income Tax purposes (IRS Reg. 1.103-13 through 1.103-15).
ASSESSED VALUE: An annual determination of the just or fair market value of property for purposes of ad valorem taxation.
BASIS POINT: 1/100 of one percent (0.01%).
BOND: Written evidence of the issuer's obligation to repay a specified principal amount on a date certain, together with interest at a stated rate, or according to a formula for determining that rate.
BOND ANTICIPATION NOTES (BANS): Short-term interest-bearing notes issued by a government in anticipation of bonds to be issued at a later date. The notes are retired from proceeds of the bond issue to which they are related.
BOND COUNSEL: An attorney retained by the Village to render a legal opinion whether the Village is authorized to issue the proposed bonds, has met all legal requirements necessary for issuance, and whether interest on the bonds is, or is not, exempt from Federal and State income taxation.
BOND INVESTMENT ARBITRAGE EARNINGS: The difference between the interest expense paid by the bond debt issuer and the earnings from the invested proceeds.
BONDED DEBT: The portion of an issuers total indebtedness represented by outstanding bonds payable from the General Funds of the Village.
CALLABLE BOND: A bond which permits or requires the issuer to redeem the obligation before the stated maturity date at a specified price, the call price, usually at or above par value.
CAPITAL APPRECIATION BONDS (CAB): A long-term security on which the investment return is reinvested at a stated compound rate until maturity. The investor receives a single payment at maturity representing both the principal and investment return.
CERTIFICATES OF PARTICIPATION: Documents, in fully registered form, that act like bonds. However, security for the certificates is the government's intent to make annual appropriations during the term of a lease agreement. No pledge of full faith and credit of the government is made. Consequently, the obligation of the government to make basic rental payments does not constitute an indebtedness of the government.
COMMERCIAL PAPER: Very short-term, unsecured promissory notes issued in either registered or bearer form, and usually backed by a line of credit with a bank.
COUPON RATE: The annual rate of interest payable on a coupon bond (a bearer bond or bond registered as to principal only, carrying coupons evidencing future interest payments), expressed as a percentage of the principal amount.
DEBT LIMIT: The maximum amount of debt which an issuer is permitted in incur under constitutional, statutory or charter provision.
DEBT SERVICE: The amount of money necessary to pay interest on an outstanding debt, the serial maturities of principal for serial bonds, and the required contributions to an amortization or sinking fund for term bonds.
DEMAND NOTES (VARIABLE RATE): A short-term security which is subject to a frequently available put option feature under which the holder may put the security back to the issuer after giving specified notice. Many of these securities are floating or variable rate, with the put option exercisable on dates on which the floating rate changes.
DIRECT DEBT OR GROSS BONDED DEBT: The sum of the total bonded debt pledged against the General Fund and any unfunded debt of the issuer.
DOUBLE-BARRELED BONDS (COMBINATION BONDS): A bond which is payable from the revenues of a governmental enterprise and are also backed by the full faith and credit of the governmental unit.
ENTERPRISE FUNDS: Funds that are financed and operated in a manner similar to private business in that goods and services provided are financed primarily through user charges.
GENERAL OBLIGATION BOND: A bond for whose payment the full faith and credit of the issuer has been pledged. More commonly, but not necessarily, general obligation bonds are payable from ad valorem Property Taxes and other General Fund revenues.
LEASE PURCHASE AGREEMENT (CAPITAL LEASE): A contractual agreement whereby the government borrows funds from a financial institution or a vendor to pay for capital acquisition. The title to the asset(s) normally belongs to the government with the lessor acquiring security interest or appropriate lien therein.
LETTER OF CREDIT: A commitment, usually made by a commercial bank, to honor demands for payment of a debt upon compliance with conditions and/or the occurrence of certain events specified under the terms of the commitment.
LEVEL DEBT SERVICE: An arrangement of serial maturities in which the amount of principal maturing increases at approximately the same rate as the amount of interest declines.
LONG-TERM DEBT: Long-term debt is defined as any debt incurred whose final maturity is more than three (3) years.
MATURITY: The date upon which the principal of a Municipal bond becomes due and payable to bondholders.
MINI-BONDS: A small denomination bond directly marketed to the public.
NET BONDED DEBT: The total outstanding debt from the General Fund, divided by the current equalized assessed value as determined by the Township Assessor(s).
NET INTEREST COST (NIC): The traditional method of calculating bids for new issues of Municipal securities. The total dollar amount of interest over the life of the bonds is adjusted by the amount of premium or discount bid, and then reduced to an average annual rate. The other method is known as the true interest cost (see definition of true interest cost).
NET OVERALL DEBT: Net direct debt plus the issuer's applicable share of the net direct debt of all overlapping jurisdictions.
OFFERING CIRCULAR: Usually a preliminary and final document prepared to describe or disclose to investors and dealers' information about an issue of securities expected to be offered in the primary market. As a part of the offering circular, an official statement should be prepared by the Village describing the debt and other pertinent financial and demographic data used to market the bonds to potential buyers.
OTHER CONTRACTUAL DEBT: Purchase contracts and other contractual debt other than bonds and notes. Other contractual debt does not affect annual debt limitation and is not a part of indebtedness within the meaning of any constitution or statutory debt limitation or restriction.
OVERLAPPING DEBT: The issuer's proportionate share of the debt of other local governmental units which either overlap or underlie it.
PAR VALUE OR FACE AMOUNT: In the case of bonds, the amount of principal which must be paid at maturity.
PARITY BONDS: Two (2) or more issues of bonds which have the same priority of claim or lien against pledged revenues or the issuer's full faith and credit pledge.
PRINCIPAL: The face amount or par value of a bond or issue of bonds payable on stated dates of maturity.
PRIVATE ACTIVITY BONDS: One of two (2) categories of bonds established under the Tax Reform Act of 1986, both of whom are subject to certain tests and State volume caps to preserve tax exemption.
RATINGS: Evaluations of the credit quality of notes and bonds, usually made by independent rating services, which generally measure the probability of the timely repayment of principal and interest on Municipal bonds.
REFUNDING BONDS: Bonds issued to retire bonds already outstanding.
REGISTERED BOND: A bond listed with the registrar as to ownership, which cannot be sold or exchanged without a change of registration.
RESERVE FUND: A fund which may be used to pay debt service if the sources of the pledged revenues do not generate sufficient funds to satisfy the debt service requirements.
SELF-SUPPORTING OR SELF-LIQUIDATING DEBT: Debt that is to be repaid from proceeds derived exclusively from the enterprise activity for which the debt was issued.
SHORT-TERM DEBT: Short-term debt is defined as any debt incurred whose final maturity is three (3) years or less.
SPREAD: The income earned by the underwriting syndicate as a result of differences in the price paid to the issuer for a new issue of Municipal bonds, and the prices at which the bonds are sold to the investing public, usually expressed in points or fractions thereof.
TAX-EXEMPT BONDS: For Municipal bonds issued by the Village tax-exempt means interest on the bonds are not included in gross income for Federal Income Tax purposes; the bonds are not items of tax preference for purposes of the Federal, alternative minimum Income Tax imposed on individuals and corporations; and the bonds are exempt from taxation by the State of Illinois.
TAX INCREMENT BONDS: Bonds secured by the incremental Property Tax revenues generated from a redevelopment project area.
TERM BONDS: Bonds coming due in a single maturity.
TOTAL OVERALL DEBT: Net direct debt plus the issuer's applicable share of the direct debt of all overlapping jurisdictions.
TRUE INTEREST COST (TIC) (Also Known As CANADIAN INTEREST COST): A rate which, when used to discount each amount of debt service payable in a bond issue, will produce a present value precisely equal to the amount of money received by the issuer in exchange for the bonds. The TIC method considers the time value of money while the net interest cost (NIC) method does not.
YIELD TO MATURITY: The rate of return to the investor earned from payments of principal and interest, with interest compounded semiannually and assuming that interest paid is reinvested at the same rate.
ZERO COUPON BOND: A bond which pays no interest, but is issued at a deep discount from par, appreciating to its full value at maturity. (Ord. 2018-22, 4-19-2018)