Debt Policy

City of Salem Integrated Debt Policy Adopted by the Salem City Council on April 7, 1997, and revised February 2, 1998, and May 10, 1999.

Long Term Debt

Long term debt is defined as bonded indebtedness whose maturity is at least ten years from issue date.

1. Highest General Obligation Debt Strategy priority categories as identified in the City’s Capital Improvements Program (CIP) shall be financed first. There should be an annual review and evaluation of high, medium and low priorities. Over time, G.O. debt strategy priorities may have to be adjusted as various factors and issues are identified.
2. When developing funding strategies for categories of projects, the City should first use revenues unique to such projects, e.g., TIF funds for riverfront, gas tax for streets, water/sewer revenues for the City's water, sewer and closed channel storm drain maintenance.
3. A strategy to address G.O. bond funded priorities should relate to the City's declining General Obligation debt service, the financing of capital improvements caused by growth, and must stay within prudent debt limits.
4. Major new capital improvement projects and major rehabilitation projects would be funded with General Obligation Bonds if no other revenue source can be utilized. The debt service tax rate would be held at or below $2.42/thousand, the scheduling of the major projects and bond issues would coincide with retirement of existing General Obligation Debt.
5. The City shall endeavor to have general obligation debt at any one time outstanding which is not in excess of 3% of the City's real market valuation. This limitation is consistent with the State Statute’s limitations on the City. In the event of catastrophic emergency, the City may have outstanding direct, property tax supported general obligation debt in an amount exceeding 3% of its assessed valuation, but only in conformance with the provisions of ORS 287.004 and with the approval of the City’s voters . Overrides of the 3% limitation require a public vote under ORS 221.230(2) which states that cities can also hold emergency elections on any date. Not only will this prevent an undue expenditure of taxpayer funds, but it will strengthen the City's position with regard to the financial community, especially rating agencies and underwriters.
6. Every effort will be made to schedule even principal and interest payments for the repayment of debt so as to avoid fluctuations in debt service requirements and fluctuations in tax rates. Only in exceptional circumstances where it is to the taxpayers and the City's advantage will debt be scheduled on a non even repayment basis. A policy of full disclosure will be followed in all financial reports and official statements for debt.
7. Because debt financing involves long term commitments, the projects which are financed through debt financing must be ones which have a useful service life at least equal to the debt amortization period. Therefore, debt financing shall be used only for capital expenditures, and not for addressing maintenance items.

Additional Policies for Water/Sewer Utility Debt Financings

1. With regard to the City's water/sewer utility system, annual rate reviews will be conducted to ensure predictable and affordable changes to utility system rates.
2. The City will maintain rates to confirm that it meets bond coverage requirements to ensure that annual net revenues after operating costs are such as to be 125% of annual average debt service for parity debt and 100% of annual debt service for subordinate debt. This is consistent with the covenants of the City's Master Resolution for water/sewer utility rate supported debt.
3. The first option to consider for future water and sewer project financings, and to use in modeling future rate requirements, shall be 20-year maturity revenue bonds with repayment insurance and sureties to replace debt service reserves;
4. Staff will reevaluate the appropriate method of financing for each bond issue, considering all factors, and select in accordance with Council authorization the option that is the most economically favorable for the City; and,
5. The City’s Water-Wastewater Task Force is reviewing the debt management strategy for future water and sewer master plan projects starting with bonds to be issued in future Fiscal Years.
6. Exceptions to this strategy may be made by Council for projects that are mandated by judicial or regulatory bodies, or for emergency situations.

Short Term Debt

Short term debt shall be issued for a term of 10 years or less. Enterprise funds should support needed capital improvements on a pay-as-you-go basis to the greatest extent possible. In the event short term debt financing is required, Certificates of Participation, Lease-Purchases, Limited Tax Revenue Bonds or other debt instruments may be used as a short-term (1 to 10 years) method of borrowing for the financing of various municipal needs, such as fleet equipment, renovation or reconstruction of capital assets, specialized types of equipment purchases, communications, and data transmission systems.

Each proposal for a short term financing shall be evaluated on a case by case basis with findings presented to the City Council prior to authorizing a financing. Examples of issues to be addressed in the case by case analysis may include, but not necessarily be limited to the following:

1. The extent to which the proposed improvement(s) either (a) extends the useful life of the facility(s) by greater than five years or (b) adds to the long term value of the underlying asset by an amount equal to or in excess of the cost of the improvement. Improvements may be one project or a series of projects, when performed as a package, extend the useful life by the required minimum.
2. The extent to which a permanent, ongoing additional maintenance commitment is required in order to not lose the value and utility of the financed improvements during the time period in which the financing is outstanding.
3. The extent to which an improvement(s) provides a long term solution to a problem or effectively arrests deterioration which might lead to structural failure, beyond which the process should not have to be repeated if there is appropriate preventative maintenance.
4. The extent to which a primary pledge of the City’s General Fund will impact revenues available for ongoing annual appropriations for General Fund operations.
5. The extent to which a secondary pledge of the City’s general fund is required for such a financing and the extent to which the additional short term debt outstanding at any time does not have the potential to unduly burden the City’s General Fund.
6. The extent to which the financing requires the retention of debt service reserves (either funded from borrowing proceeds or cash funded).
7. The extent to which the financing requires the City to pledge to maintain revenues at levels sufficient to maintain usual and customary coverage ratios.
8. The extent to which financing spreads the cost of the improvements between present and future users.

Exceptions to the short term debt limitation may be authorized by Council in unusual or emergency situations.

Interim Debt

Interim debt shall be issued for a term of less than 5 years. This borrowing may be utilized for temporary funding of operational cash flow deficits pending receipt of anticipated revenues, or interim construction financing needs. Such borrowing may be in the form of: 1) a line-of credit at the City s depository, 2) anticipation notes or 3) internal borrowings. Repayment will occur over a period not to exceed the useful life of the underlying asset or in any case no longer than five years from the issuance date of such obligations. The City will determine and utilize the least costly method for interim borrowing.

Exceptions to the interim debt limitation may be authorized by Council in unusual or emergency situations.

Council Authorizations

All long, short and interim term debt shall require City Council authorization prior to issuance.

Explaining the Debt Policy

Declining General Obligation Debt Service

Assuming the City's present outstanding debt, including the recent City bond authorizations, the City is retiring much of its old General Obligation debt. If carefully timed, it is possible to issue debt without increasing the City's debt service levy rate beyond the rate of $2.42/thousand and at the same time keeping outstanding debt below the limit allowed to Cities by the State. The City Council's adoption of a debt policy into the CIP has given a framework for the financing of the CCPL. As with any well managed corporation, the City must continue to invest in itself in order to maintain its strength and viability.

How Rating Agencies View a Debt Policy

Underwriting and municipal credit rating institutions base their evaluation of the City upon its ability to ensure that new debt is incurred in a prudent manner, so as to maximize the credit worthiness of the City. This is particularly important if the City is to upgrade its present bond rating. Rating agencies have advised that one of the major criteria they use in evaluating credit worthiness is whether a local jurisdiction has the fiscal intestinal fortitude to adopt a formal debt policy which serves as a guideline for making decisions about how much new debt to incur or have outstanding at any given time. Generally, the criteria should relate to a conservative margin by which a City stays within state mandated debt limits. In effect, a local government should only borrow what it can afford and pay off that debt in a timely manner.