HomeMy WebLinkAbout02.17.2022 Finance Committee Agenda Packet oaf SARj SARATOGA CITY COUNCIL
FINANCE COMMITTEE
956 gC1FO February 17, 2022
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3:30 P.M. REGULAR MEETING
Teleconference/Public Participation Information to Mitigate the Spread of COVID-19
This meeting will be held entirely by teleconference. All members of the Committee and staff
will only participate via the Zoom platform using the process described below. The meeting is
being conducted pursuant to recent amendments to the teleconference rules required by the
Ralph M. Brown Act allowing teleconferencing during a proclaimed state of emergency when
local officials have recommended social distancing. The purpose of the amendments is to
provide the safest environment for the public, elected officials, and staff while allowing for
continued operation of the government and public participation during the COVID-19
pandemic.
Members of the public can view and participate in the meeting by:
1. Using the Zoom website https://us02web.zoom.us/*/82995814145 or App Webinar ID:
829 95814145 and raising their hand to speak on an agenda item when directed by the
Mayor.
2. Calling 1.669.900.6833 or 1.408.638.0968 and pressing *9 to raise their hand to speak
on an agenda item when directed by the Mayor.
The public will not be able to participate in the meeting in person.
Members of the public can send written comments prior to the meeting by commenting
online at www.saratoga.ca.us/fc prior to the start of the meeting. These emails will be
provided to the members of the Council and will become part of the official record of the
meeting.
CALL TO ORDER
ROLL CALL
ORAL COMMUNICATIONS ON NON-AGENDIZED ITEMS
Any member of the public may address the Committee about any matter not on the agenda
for this meeting for up to three (3) minutes. The law generally prohibits the Committee from
discussing or taking action on such items. The Committee may choose to place the topic on a
future agenda.
City Council Finance Committee Agenda - February 17, 2022
Page 1
AGENDA ITEMS
1. Finance Committee Minutes
Recommended Action:
Review and approve the minutes for the January 14, 2022 meeting.
Finance Committee Minutes
2. ARPA Funds
Recommended Action:
Receive staff report and US Department of Treasury- Overview of the Coronavirus State
and Local Fiscal Recovery Funds Final Rule
Staff Report
Attachment A- Coronavirus State and Local Fiscal Recovery Funds Overview of the Final
Rule
3. FY 2022-23 Operating and Capital Improvement Program Budget Process
Recommended Action:
Review and accept report
Staff Report
Attachment A- CIP Identified Projects
4. Financial Policies
Recommended Action:
Receive and review the report and attachments.
Staff Report
Attachment A- Fiscal Management Policies
Attachment B - Investment Policy
Attachment C - Debt Management Policy
Attachment D - Community Funded Infrastructure Projects
ADJOURNMENT
CERTIFICATE OF POSTING OF THE AGENDA, DISTRIBUTION OF THE AGENDA PACKET,
COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
I, Gina Scott, Administrative Analyst for the City of Saratoga, declare that the foregoing agenda
for the meeting of the City Council Finance Committee of the City of Saratoga was posted and
available for public review on February 14, 2022, at the City of Saratoga, 13777 Fruitvale Ave.,
Saratoga, CA 95070, and on the City's website at www.saratoga.ca.us.
Signed this 141" day of February 2022 at Saratoga, California.
Gina Scott, Administrative Analyst
City Council Finance Committee Agenda - February 17, 2022
Page 2
In accordance with the Ralph M. Brown Act, copies of the staff reports and other materials
provided to the Committee by City staff in connection with this agenda, copies of materials
distributed to the Committee concurrently with the posting of the agenda, and materials
distributed to the Committee by staff after the posting of the agenda are available on the City
website at www.saratoga.ca.us and are available for review in the office of the City Clerk at
13777 Fruitvale Avenue, Saratoga, California.
In compliance with the Americans with Disabilities Act and the Governor's Executive Order, if
you need assistance to participate in this meeting, please contact the City Clerk at
bavrit@saratoga.ca.us or calling 408.868.1216 as soon as possible before the meeting. The
City will use its best efforts to provide reasonable accommodations to provide as much
accessibility as possible while also maintaining public safety.
[28 CFR 35.102-35.104 ADA title 11]
City Council Finance Committee Agenda - February 17, 2022
Page 3
MINUTES
SARATOGA CITY COUNCIL FINANCE COMMITTEE
REGULAR MEETING
JANUARY 14, 2022
CALL TO ORDER
The meeting was called to order at 3:33 p.m. via Zoom.
ROLL CALL
Present: Mayor Tina Walia, Vice Mayor Kookie Fitzsimmons, Council Member Mary-Lynne
Bernald
Also Present: City ManagerJames Lindsay, Administrative Services Director Nick Pegueros, Interim
Administrative Services Director Sandra Dalida, Assistant City Manager Crystal
Bothelio, Administrative Analyst Gina Scott, Chavan &Associates Paul Pham
ORAL COMMUNICATIONS ON NON-AGENDIZED ITEMS
None
AGENDA ITEMS
1 . Finance Committee Minutes
Recommended Action:
Review and approve the minutes for the November 18, 2021 meeting.
FITZSIMMONS/WALIA MOVED TO APPROVE THE MINUTES FOR THE NOVEMBER 18, 2021
MEETING. MOTION PASSED. AYES: FITZSIMMONS, WALIA. NOES: NONE. ABSTAIN: NONE.
2. Summary Overview
• Annual Comprehensive Financial Report (ACFR)
• Single Audit
Recommended Action:
Receive verbal presentation by Chavan and Associates, LLC, the City's audit firm.
Paul Pham from Chavan and Associates provided an overview of the Annual Comprehensive
Report (ACFR) and Single Audit.
FITZSIMMONS/WALIA MOVED TO ACCEPT THE VERBAL PRESENTATION SUMMARY
OVERVIEW OF THE ANNUAL COMPREHENSIVE FINANCIAL REPORT(ACFR)AND THE SINGLE
AUDIT PROCESS. MOTION PASSED. AYES: FITZSIMMONS, WALIA. NOES: NONE. ABSTAIN:
NONE.
ADJOURNMENT
City Council Finance Committee Minutes -January 14, 2022
Page 1
The meeting was adjourned at 3:47 p.m.
Minutes respectfully submitted:
Gina Scott, Administrative Analyst
City of Saratoga
City Council Finance Committee Minutes -January 14, 2022
Page 2
SARATp�9 OFFICE OF THE CITY MANAGER
Memorandum
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To: City Council Finance Committee
From: James Lindsay, City Manager
Date: February 14, 2022
Subject: American Rescue Plan Act of 2021
BACKGROUND
In March 2011, the American Rescue Plan Act of 2021 (ARPA) was signed into law with $350
billion made available through the State and Local Fiscal Recovery Funds (SLFRF) to assist state
and local governments with pandemic related response and recovery efforts.
Saratoga's ARPA/SLFRF funding allocation is $7,213,239, which will be released in two
payments. The initial payment of$3,606,619 was received in July 2021 and the second payment
of$3,606,620 is scheduled to be released in June 2022.
The U.S. Treasury Department Final Rule released in January 2022 (Attachment A), clarified
ARPA/SLFRF allowable expenditure categories, reporting requirements, and compliance
guidance. Regulations indicate the following allowable categories:
• Support public health expenditures by funding COVID-19 mitigation efforts, medical
expenses,behavioral healthcare, and certain public health and safety staff.
• Address negative economic impacts caused by the public health emergency including
economic harms to workers, households, small businesses, impacted industries, and the
public sector.
• Invest in water, sewer, and broadband infrastructure making necessary investments to
improve access to clean drinking water, support vital wastewater and stormwater
infrastructure, and to expand access to broadband internet.
• Replace lost public sector revenue using this funding to provide government services to
the extent of the reduction in revenue experienced due to the pandemic.
• Provide premium pay for essential workers,offering additional support to those who have
borne and will bear the greatest health risks because of their service in critical
infrastructure sectors.
It is important to note that roadway improvements are not an allowable use of ARPA/SLFRF
funds.
DISCUSSION
I will be recommending the City Council appropriate the ARPA/SLFRF funding allocation to
improve the City's aging stormwater and sanitary sewer infrastructure for this item scheduled
for the March 2, 2022 regular City Council meeting. Of all the allowable categories of funding
uses, I believe those improvements will benefit the community the most and help reduce
maintenance expenses in the long term. The City does not have a dedicated funding source to
maintain and repair our storm drain system and much of our existing infrastructure does not
meet current standards required under the Clean Water Act and the City's National Pollutant
Discharge Elimination System Permit.
The first step towards committing the use of ARPA/SLFRF funds for stormwater and sanitary
sewer improvements is to create a series of new Capital Improvement Projects in the current
fiscal year. Staff is proposing the following new projects be created:
• Saratoga Village Water Quality Improvements ($6.1 million) - Improvements to the
City's storm drain collection and treatment systems in all Village Parking Districts to
improve the quality of water discharged to Saratoga Creek.
• Corporation Yard Storm Water Pollution Prevention Measures ($175,000)-
Installation of a new tractor wash area, improvements to the trash collection area
including new shelters and connections to the sanitary sewer system.
• Prospect Road Green Infrastructure ($375,000) - Remove concrete curb and gutter
along the frontage of Prospect Center. The curb and gutter will be replaced with bioswale
that will filtrate runoff water from Prospect Road.
• Sewer Laterals&Water Conservation Measures for Park Restrooms ($180,000) The
cost of maintaining the aging sewer laterals serving the City's is increasing and the lines
need to be replaced. There are also opportunities for further increase city water
conservation by upgrading the fixtures in the park restrooms.
Additionally, $300,000 in funding for the existing Storm Water Master Plan project can be
reallocated to use ARPA/SLFRF funds freeing up Capital Reserve Funds for future projects.
The City will also need to retain a compliance consultant to assist in the tracking and reporting
on the use of these federal funds. The compliance costs should not exceed $20,000 per year for
a total estimated cost of $80,000. The timeline established for ARPA/SLFRF funding and
expenditure terms is - obligations/encumbrances must be executed by December 31, 2024, and
all payments for obligations/encumbrances must be released by December 31, 2026.
Attachment A
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Coronavirus State & Local
Fiscal Recovery Funds:
Overview of the Final Rule
U.S. DEPARTMENT OF THE TREASURY
U.S. DEPARTMENT OF THE TREASURY
The Overview of the Final Rule provides a summary of major provisions of the final
rule for informational purposes and is intended as a brief,simplified user guide to the
final rule provisions.
The descriptions provided in this document summarize key provisions of the final rule
but are non-exhaustive, do not describe all terms and conditions associated with the use
of SURF, and do not describe all requirements that may apply to this funding. Any SURF
funds received are also subject to the terms and conditions of the agreement entered
into by Treasury and the respective jurisdiction, which incorporate the provisions of the
final rule and the guidance that implements this program.
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Contents
Introduction ..................................................................................................................................................4
Overviewof the Program..............................................................................................................................6
Replacing Lost Public Sector Revenue ..........................................................................................................9
Responding to Public Health and Economic Impacts of COVID-19.............................................................12
Responding to the Public Health Emergency..........................................................................................14
Responding to Negative Economic Impacts............................................................................................16
Assistance to Households ...................................................................................................................17
Assistance to Small Businesses...........................................................................................................21
Assistance to Nonprofits.....................................................................................................................23
Aidto Impacted Industries..................................................................................................................24
PublicSector Capacity.............................................................................................................................26
Public Safety, Public Health, and Human Services Staff.....................................................................26
Government Employment and Rehiring Public Sector Staff...............................................................27
Effective Service Delivery....................................................................................................................28
CapitalExpenditures...............................................................................................................................30
Framework for Eligible Uses Beyond those Enumerated .......................................................................32
PremiumPay...............................................................................................................................................35
Water& Sewer Infrastructure ....................................................................................................................37
Broadband Infrastructure...........................................................................................................................39
Restrictionson Use.....................................................................................................................................41
ProgramAdministration .............................................................................................................................43
Coronavirus State&Local Fiscal Recovery Funds:Overview of the Final Rule
U.S. Department of the Treasury 3
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Introduction
The Coronavirus State and Local Fiscal Recovery Funds (SLFRF), a part of the American Rescue Plan,
delivers$350 billion to state, local, and Tribal governments across the country to support their response
to and recovery from the COVID-19 public health emergency.The program ensures that governments
have the resources needed to:
• Fight the pandemic and support families and businesses struggling with its public health and
economic impacts,
• Maintain vital public services, even amid declines in revenue, and
• Build a strong, resilient, and equitable recovery by making investments that support long-term
growth and opportunity.
EARLY PROGRAM IMPLEMENTATION
In May 2021,Treasury published the Interim final rule (IFR) describing eligible and ineligible uses of
funds (as well as other program provisions), sought feedback from the public on these program rules,
and began to distribute funds. The IFR went immediately into effect in May, and since then,
governments have used SLFRF funds to meet their immediate pandemic response needs and begin
building a strong and equitable recovery, such as through providing vaccine incentives, development of
affordable housing, and construction of infrastructure to deliver safe and reliable water.
As governments began to deploy this funding in their communities,Treasury carefully considered the
feedback provided through its public comment process and other forums.Treasury received over 1,500
comments, participated in hundreds of meetings, and received correspondence from a wide range of
governments and other stakeholders.
KEY CHANGES AND CLARIFICATIONS IN THE FINAL RULE
The final rule delivers broader flexibility and greater simplicity in the program, responsive to feedback in
the comment process.Among other clarifications and changes,the final rule provides the features
below.
Replacing Lost Public Sector Revenue
The final rule offers a standard allowance for revenue loss of$10 million, allowing recipients to select
between a standard amount of revenue loss or complete a full revenue loss calculation. Recipients that
select the standard allowance may use that amount—in many cases their full award—for government
services, with streamlined reporting requirements.
Public Health and Economic Impacts
In addition to programs and services,the final rule clarifies that recipients can use funds for capital
expenditures that support an eligible COVID-19 public health or economic response. For example,
recipients may build certain affordable housing, childcare facilities, schools, hospitals, and other projects
consistent with final rule requirements.
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In addition,the final rule provides an expanded set of households and communities that are presumed
to be "impacted" and "disproportionately impacted" by the pandemic, thereby allowing recipients to
provide responses to a broad set of households and entities without requiring additional analysis.
Further,the final rule provides a broader set of uses available for these communities as part of COVID-
19 public health and economic response, including making affordable housing, childcare, early learning,
and services to address learning loss during the pandemic eligible in all impacted communities and
making certain community development and neighborhood revitalization activities eligible for
disproportionately impacted communities.
Further, the final rule allows for a broader set of uses to restore and support government employment,
including hiring above a recipient's pre-pandemic baseline, providing funds to employees that
experienced pay cuts or furloughs, avoiding layoffs, and providing retention incentives.
Premium Pay
The final rule delivers more streamlined options to provide premium pay, by broadening the share of
eligible workers who can receive premium pay without a written justification while maintaining a focus
on lower-income and frontline workers performing essential work.
Water, Sewer& Broadband Infrastructure
The final rule significantly broadens eligible broadband infrastructure investments to address challenges
with broadband access, affordability, and reliability, and adds additional eligible water and sewer
infrastructure investments, including a broader range of lead remediation and stormwater management
projects.
FINAL RULE EFFECTIVE DATE
The final rule takes effect on April 1, 2022. Until that time,the interim final rule remains in effect; funds
used consistently with the IFR while it is in effect are in compliance with the SLFRF program.
However, recipients can choose to take advantage of the final rule's flexibilities and simplifications now,
even ahead of the effective date.Treasury will not take action to enforce the interim final rule to the
extent that a use of funds is consistent with the terms of the final rule, regardless of when the SLFRF
funds were used. Recipients may consult the Statement Regarding Compliance with the Coronavirus
State and Local Fiscal Recovery Funds Interim Final Rule and Final Rule, which can be found on Treasury's
website,for more information on compliance with the interim final rule and the final rule.
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Overview of the Program
The Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program provides substantial flexibility
for each jurisdiction to meet local needs within the four separate eligible use categories.This Overview
of the Final Rule addresses the four eligible use categories ordered from the broadest and most flexible
to the most specific.
Recipients may use SLFRF funds to:
• Replace lost public sector revenue, using this funding to provide government services up to the
amount of revenue loss due to the pandemic.
• Recipients may determine their revenue loss by choosing between two options:
• A standard allowance of up to$10 million in aggregate, not to exceed their
award amount, during the program;
• Calculating their jurisdiction's specific revenue loss each year using Treasury's
formula,which compares actual revenue to a counterfactual trend.
• Recipients may use funds up to the amount of revenue loss for government services;
generally, services traditionally provided by recipient governments are government
services, unless Treasury has stated otherwise.
• Support the COVID-19 public health and economic response by addressing COVID-19 and its
impact on public health as well as addressing economic harms to households, small businesses,
nonprofits, impacted industries, and the public sector.
• Recipients can use funds for programs, services, or capital expenditures that respond to
the public health and negative economic impacts of the pandemic.
• To provide simple and clear eligible uses of funds,Treasury provides a list of
enumerated uses that recipients can provide to households, populations, or classes (i.e.,
groups)that experienced pandemic impacts.
• Public health eligible uses include COVID-19 mitigation and prevention, medical
expenses, behavioral healthcare, and preventing and responding to violence.
• Eligible uses to respond to negative economic impacts are organized by the type of
beneficiary: assistance to households, small businesses, and nonprofits.
• Each category includes assistance for"impacted" and "disproportionately
impacted" classes: impacted classes experienced the general, broad-based
impacts of the pandemic,while disproportionately impacted classes faced
meaningfully more severe impacts, often due to preexisting disparities.
• To simplify administration, the final rule presumes that some populations and
groups were impacted or disproportionately impacted and are eligible for
responsive services.
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U.S. DEPARTMENT OF THE TREASURY
• Eligible uses for assistance to impacted households include aid for re-
employment,job training,food, rent, mortgages, utilities, affordable housing
development, childcare, early education, addressing learning loss, and many
more uses.
• Eligible uses for assistance to impacted small businesses or nonprofits include
loans or grants to mitigate financial hardship,technical assistance for small
businesses, and many more uses.
• Recipients can also provide assistance to impacted industries like travel,tourism, and
hospitality that faced substantial pandemic impacts, or address impacts to the public
sector, for example by re-hiring public sector workers cut during the crisis.
• Recipients providing funds for enumerated uses to populations and groups that
Treasury has presumed eligible are clearly operating consistently with the final rule.
Recipients can also identify(1) other populations or groups, beyond those presumed
eligible,that experienced pandemic impacts or disproportionate impacts and (2) other
programs, services, or capital expenditures, beyond those enumerated,to respond to
those impacts.
• Provide premium pay for eligible workers performing essential work, offering additional
support to those who have and will bear the greatest health risks because of their service in
critical sectors.
• Recipients may provide premium pay to eligible workers—generally those working in-
person in key economic sectors—who are below a wage threshold or non-exempt from
the Fair Labor Standards Act overtime provisions, or if the recipient submits justification
that the premium pay is responsive to workers performing essential work.
• Invest in water, sewer,and broadband infrastructure, making necessary investments to
improve access to clean drinking water, to support vital wastewater and stormwater
infrastructure, and to expand affordable access to broadband internet.
• Recipients may fund a broad range of water and sewer projects, including those eligible
under the EPA's Clean Water State Revolving Fund, EPA's Drinking Water State
Revolving Fund, and certain additional projects, including a wide set of lead
remediation, stormwater infrastructure, and aid for private wells and septic units.
• Recipients may fund high-speed broadband infrastructure in areas of need that the
recipient identifies, such as areas without access to adequate speeds, affordable
options, or where connections are inconsistent or unreliable; completed projects must
participate in a low-income subsidy program.
While recipients have considerable flexibility to use funds to address the diverse needs of their
communities, some restrictions on use apply across all eligible use categories.These include:
• For states and territories: No offsets of a reduction in net tax revenue resulting from a change
in state or territory law.
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• For all recipients except for Tribal governments: No extraordinary contributions to a pension
fund for the purpose of reducing an accrued, unfunded liability.
• For all recipients: No payments for debt service and replenishments of rainy day funds; no
satisfaction of settlements and judgments; no uses that contravene or violate the American
Rescue Plan Act, Uniform Guidance conflicts of interest requirements, and other federal, state,
and local laws and regulations.
Under the SLFRF program,funds must be used for costs incurred on or after March 3, 2021. Further,
funds must be obligated by December 31, 2024, and expended by December 31, 2026. This time period,
during which recipients can expend SLFRF funds, is the "period of performance."
In addition to SLFRF,the American Rescue Plan includes other sources of funding for state and local
governments, including the Coronavirus Capital Projects Fund to fund critical capital investments
including broadband infrastructure;the Homeowner Assistance Fund to provide relief for our country's
most vulnerable homeowners; the Emergency Rental Assistance Program to assist households that are
unable to pay rent or utilities; and the State Small Business Credit Initiative to fund small business credit
expansion initiatives. Eligible recipients are encouraged to visit the Treasury website for more
information.
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Replacing Lost Public Sector Revenue
The Coronavirus State and Local Fiscal Recovery Funds provide needed fiscal relief for recipients that
have experienced revenue loss due to the onset of the COVID-19 public health emergency. Specifically,
SLFRF funding may be used to pay for"government services" in an amount equal to the revenue loss
experienced by the recipient due to the COVID-19 public health emergency.
Government services generally include any service traditionally provided by a government, including
construction of roads and other infrastructure, provision of public safety and other services, and health
and educational services. Funds spent under government services are subject to streamlined reporting
and compliance requirements.
In order to use funds under government services, recipients should first determine revenue loss.They
may,then, spend up to that amount on general government services.
DETERMINING REVENUE LOSS
Recipients have two options for how to determine their amount of revenue loss. Recipients must choose
one of the two options and cannot switch between these approaches after an election is made.
1. Recipients may elect a "standard allowance" of$10 million to spend on government services
through the period of performance.
Under this option, which is newly offered in the final rule Treasury presumes that up to$10
million in revenue has been lost due to the public health emergency and recipients are
permitted to use that amount (not to exceed the award amount) to fund "government services."
The standard allowance provides an estimate of revenue loss that is based on an extensive
analysis of average revenue loss across states and localities, and offers a simple,convenient way
to determine revenue loss, particularly for SLFRF's smallest recipients.
All recipients may elect to use this standard allowance instead of calculating lost revenue using
the formula below, including those with total allocations of$10 million or less. Electing the
standard allowance does not increase or decrease a recipient's total allocation.
2. Recipients may calculate their actual revenue loss according to the formula articulated in the
final rule.
Under this option, recipients calculate revenue loss at four distinct points in time, either at the
end of each calendar year(e.g., December 31 for years 2020, 2021, 2022, and 2023) or the end
of each fiscal year of the recipient. Under the flexibility provided in the final rule, recipients can
choose whether to use calendar or fiscal year dates but must be consistent throughout the
period of performance.Treasury has also provided several adjustments to the definition of
general revenue in the final rule.
To calculate revenue loss at each of these dates, recipients must follow a four-step process:
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a. Calculate revenues collected in the most recent full fiscal year prior to the public health
emergency(i.e., last full fiscal year before January 27, 2020), called the base year
revenue.
b. Estimate counterfactual revenue, which is equal to the following formula,where n is the
number of months elapsed since the end of the base year to the calculation date:
n
base year revenue x (1 + growth adjustment)
iz
The growth adjustment is the greater of either a standard growth rate-5.2 percent—or
the recipient's average annual revenue growth in the last full three fiscal years prior to
the COVID-19 public health emergency.
c. Identify actual revenue,which equals revenues collected over the twelve months
immediately preceding the calculation date.
Under the final rule, recipients must adjust actual revenue totals for the effect of tax
cuts and tax increases that are adopted after the date of adoption of the final rule
(January 6, 2022). Specifically, the estimated fiscal impact of tax cuts and tax increases
adopted after January 6, 2022, must be added or subtracted to the calculation of actual
revenue for purposes of calculation dates that occur on or after April 1, 2022.
Recipients may subtract from their calculation of actual revenue the effect of tax
increases enacted prior to the adoption of the final rule. Note that recipients that elect
to remove the effect of tax increases enacted before the adoption of the final rule must
also remove the effect of tax decreases enacted before the adoption of the final rule,
such that they are accurately removing the effect of tax policy changes on revenue.
d. Revenue loss for the calculation date is equal to counterfactual revenue minus actual
revenue(adjusted for tax changes) for the twelve-month period. If actual revenue
exceeds counterfactual revenue, the loss is set to zero for that twelve-month period.
Revenue loss for the period of performance is the sum of the revenue loss on for each
calculation date.
The supplementary information in the final rule provides an example of this calculation, which
recipients may find helpful, in the Revenue Loss section.
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SPENDING ON GOVERNMENT SERVICES
Recipients can use SLFRF funds on government services up to the revenue loss amount, whether that be
the standard allowance amount or the amount calculated using the above approach. Government
services generally include any service traditionally provided by a government, unless Treasury has
stated otherwise. Here are some common examples, although this list is not exhaustive:
✓ Construction of schools and hospitals ✓ Environmental remediation
✓ Road building and maintenance, and ✓ Provision of police, fire, and other public
other infrastructure safety services (including purchase of
✓ Health services fire trucks and police vehicles)
✓ General government administration,
staff, and administrative facilities
Government services is the most flexible eligible use category under the SLFRF program, and funds are
subject to streamlined reporting and compliance requirements. Recipients should be mindful that
certain restrictions,which are detailed further in the Restrictions on Use section and apply to all uses of
funds, apply to government services as well.
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Responding to Public Health and Economic Impacts of COVID-19
The Coronavirus State and Local Fiscal Recovery Funds provide resources for governments to meet the
public health and economic needs of those impacted by the pandemic in their communities, as well as
address longstanding health and economic disparities,which amplified the impact of the pandemic in
disproportionately impacted communities, resulting in more severe pandemic impacts.
The eligible use category to respond to public health and negative economic impacts is organized
around the types of assistance a recipient may provide and includes several sub-categories:
• public health,
• assistance to households,
• assistance to small businesses,
• assistance to nonprofits,
• aid to impacted industries, and
• public sector capacity.
In general,to identify eligible uses of funds in this category, recipients should (1) identify a COVID-19
public health or economic impact on an individual or class (i.e., a group) and (2) design a program that
responds to that impact. Responses should be related and reasonably proportional to the harm
identified and reasonably designed to benefit those impacted.
To provide simple, clear eligible uses of funds that meet this standard,Treasury provides a non-
exhaustive list of enumerated uses that respond to pandemic impacts. Treasury also presumes that
some populations experienced pandemic impacts and are eligible for responsive services. In other
words, recipients providing enumerated uses of funds to populations presumed eligible are clearly
operating consistently with the final rule.'
Recipients also have broad flexibility to (1) identify and respond to other pandemic impacts and (2)
serve other populations that experienced pandemic impacts, beyond the enumerated uses and
presumed eligible populations. Recipients can also identify groups or"classes" of beneficiaries that
experienced pandemic impacts and provide services to those classes.
1 However,please note that use of funds for enumerated uses may not be grossly disproportionate to the harm. Further,
recipients should consult the Capital Expenditures section for more information about pursuing a capital expenditure;please
note that enumerated capital expenditures are not presumed to be reasonably proportional responses to an identified harm
except as provided in the Capital Expenditures section.
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Step 1. Identify COVID-19 public health or 2. Design a response that addresses or
economic impact responds to the impact
Analysis . Can identify impact to a specific • Types of responses can include a
household, business or nonprofit or program,service, or capital
to a class of households, businesses, expenditure
or nonprofits (i.e., group)
• Response should be related and
Can also identify disproportionate reasonably proportional to the harm
impacts, or more severe impacts, to • Response should also be reasonably
a specific beneficiary or to a class designed to benefit impacted
individual or class
Simplifying Final Rule presumes certain • Final Rule provides non-exhaustive
Presumptions populations and classes are impacted list of enumerated eligible uses that
and disproportionately impacted respond to pandemic impacts and
disproportionate impacts
To assess eligibility of uses of funds, recipients should first determine the sub-category where their use
of funds may fit (e.g., public health, assistance to households, assistance to small businesses), based on
the entity that experienced the health or economic impact.'Then, recipients should refer to the relevant
section for more details on each sub-category.
While the same overall eligibility standard applies to all uses of funds to respond to the public health
and negative economic impacts of the pandemic, each sub-category has specific nuances on its
application. In addition:
• Recipients interested in using funds for capital expenditures (i.e., investments in property,
facilities, or equipment) should review the Capital Expenditures section in addition to the
eligible use sub-category.
• Recipients interested in other uses of funds, beyond the enumerated uses, should refer to the
section on "Framework for Eligible Uses Beyond Those Enumerated."
2 For example,a recipient interested in providing aid to unemployed individuals is addressing a negative economic impact
experienced by a household and should refer to the section on assistance to households.Recipients should also be aware of the
difference between"beneficiaries"and"sub-recipients."Beneficiaries are households,small businesses,or nonprofits that can
receive assistance based on impacts of the pandemic that they experienced.On the other hand,sub-recipients are
organizations that carry out eligible uses on behalf of a government,often through grants or contracts.Sub-recipients do not
need to have experienced a negative economic impact of the pandemic;rather,they are providing services to beneficiaries that
experienced an impact.
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RESPONDING TO THE PUBLIC HEALTH EMERGENCY
While the country has made tremendous progress in the fight against COVID-19, including a historic
vaccination campaign,the disease still poses a grave threat to Americans' health and the economy.
Providing state, local, and Tribal governments the resources needed to fight the COVID-19 pandemic is a
core goal of the Coronavirus State and Local Fiscal Recovery Funds, as well as addressing the other ways
that the pandemic has impacted public health.Treasury has identified several public health impacts of
the pandemic and enumerated uses of funds to respond to impacted populations.
• COVID-19 mitigation and prevention.The pandemic has broadly impacted Americans and recipients
can provide services to prevent and mitigate COVID-19 to the general public or to small businesses,
nonprofits, and impacted industries in general. Enumerated eligible uses include:
✓ Vaccination programs, including vaccine ✓ Support for prevention, mitigation, or
incentives and vaccine sites other services in congregate living
✓ Testing programs, equipment and sites facilities, public facilities, and schools
✓ Monitoring, contact tracing& public ✓ Support for prevention and mitigation
health surveillance (e.g., monitoring for strategies in small businesses, nonprofits,
variants) and impacted industries
✓ Public communication efforts ✓ Medical facilities generally dedicated to
✓ Public health data systems COVID-19 treatment and mitigation (e.g.,
✓ COVID-19 prevention and treatment ICUs, emergency rooms)
equipment, such as ventilators and ✓ Temporary medical facilities and other
ambulances measures to increase COVID-19 treatment
✓ Medical and PPE/protective supplies capacity
✓ Support for isolation or quarantine
✓ Emergency operations centers &
emergency response equipment(e.g.,
✓ Ventilation system installation and emergency response radio systems)
improvement
✓ Public telemedicine capabilities for COVID-
19 related treatment
COVID-19 threats to public health and
safety
✓ Transportation to reach vaccination or
testing sites, or other prevention and
mitigation services for vulnerable
populations
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• Medical expenses. Funds may be used for expenses to households, medical providers, or others that
incurred medical costs due to the pandemic, including:
✓ Unreimbursed expenses for medical care ✓ Emergency medical response expenses
for COVID-19 testing or treatment, such ✓ Treatment of long-term symptoms or effects
as uncompensated care costs for of COVID-19
medical providers or out-of-pocket costs
for individuals
✓ Paid family and medical leave for public
employees to enable compliance with
COVID-19 public health precautions
• Behavioral health care, such as mental health treatment,substance use treatment,and other
behavioral health services.Treasury recognizes that the pandemic has broadly impacted Americans'
behavioral health and recipients can provide these services to the general public to respond.
Enumerated eligible uses include:
✓ Prevention, outpatient treatment, ✓ Support for equitable access to reduce
inpatient treatment, crisis care, disparities in access to high-quality
diversion programs, outreach to treatment
individuals not yet engaged in ✓ Peer support groups, costs for residence in
treatment, harm reduction & long-term supportive housing or recovery housing, and
recovery support the 988 National Suicide Prevention Lifeline
✓ Enhanced behavioral health services in or other hotline services
schools ✓ Expansion of access to evidence-based
✓ Services for pregnant women or infants services for opioid use disorder prevention,
born with neonatal abstinence treatment, harm reduction, and recovery
syndrome ✓ Behavioral health facilities &equipment
• Preventing and responding to violence. Recognizing that violence—and especially gun violence—
has increased in some communities due to the pandemic, recipients may use funds to respond in
these communities through:
✓ Referrals to trauma recovery services for V In communities experiencing increased
victims of crime gun violence due to the pandemic:
✓ Community violence intervention . Law enforcement officers focused
programs, including: on advancing community policing
• Evidence-based practices like • Enforcement efforts to reduce gun
focused deterrence,with
wraparound services such as violence, including prosecution
• Technology&equipment to support
behavioral therapy,trauma
recovery,job training, education, law enforcement response
housing and relocation services, and
financial assistance
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RESPONDING TO NEGATIVE ECONOMIC IMPACTS
The pandemic caused severe economic damage and, while the economy is on track to a strong recovery,
much work remains to continue building a robust, resilient, and equitable economy in the wake of the
crisis and to ensure that the benefits of this recovery reach all Americans. While the pandemic impacted
millions of American households and businesses, some of its most severe impacts fell on low-income
and underserved communities, where pre-existing disparities amplified the impact of the pandemic and
where the most work remains to reach a full recovery.
The final rule recognizes that the pandemic caused broad-based impacts that affected many
communities, households, and small businesses across the country; for example, many workers faced
unemployment and many small businesses saw declines in revenue.The final rule describes these as
"impacted" households, communities,small businesses, and nonprofits.
At the same time,the pandemic caused disproportionate impacts, or more severe impacts, in certain
communities. For example, low-income and underserved communities have faced more severe health
and economic outcomes like higher rates of COVID-19 mortality and unemployment, often because pre-
existing disparities exacerbated the impact of the pandemic.The final rule describes these as
"disproportionately impacted" households, communities, small businesses, and nonprofits.
To simplify administration of the program,the final rule presumes that certain populations were
"impacted" and "disproportionately impacted" by the pandemic;these populations are presumed to be
eligible for services that respond to the impact they experienced.The final rule also enumerates a non-
exhaustive list of eligible uses that are recognized as responsive to the impacts or disproportionate
impacts of COVID-19. Recipients providing enumerated uses to populations presumed eligible are clearly
operating consistently with the final rule.
As discussed further in the section Framework for Eligible Uses Beyond Those Enumerated, recipients
can also identify other pandemic impacts, impacted or disproportionately impacted populations or
classes, and responses.
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Assistance to Households
Impacted Households and Communities
Treasury presumes the following households and communities are impacted by the pandemic:
✓ Low-or-moderate income households or ✓ When providing affordable housing programs:
communities households that qualify for the National Housing
✓ Households that experienced Trust Fund and Home Investment Partnerships
unemployment Program
✓ Households that experienced increased ✓ When providing services to address lost
food or housing insecurity instructional time in K-12 schools: any student
✓ Households that qualify for the Children's that lost access to in-person instruction for a
Health Insurance Program, Childcare significant period of time
Subsidies through the Child Care
Development Fund (CCDF) Program, or
Medicaid
Low-or moderate-income households and communities are those with (i) income at or below 300
percent of the Federal Poverty Guidelines for the size of the household based on the most recently
published poverty guidelines or(ii) income at or below 65 percent of the area median income for the
county and size of household based on the most recently published data. For the vast majority of
communities,the Federal Poverty Guidelines are higher than the area's median income and using the
Federal Poverty Guidelines would result in more households and communities being presumed eligible.
Treasury has provided an easy-to-use spreadsheet with Federal Poverty Guidelines and area median
income levels on its website.
Recipients can measure income for a specific household or the median income for the community,
depending on whether the response they plan to provide serves specific households or the general
community.The income thresholds vary by household size; recipients should generally use income
thresholds for the appropriate household size but can use a default household size of three when easier
for administration or when measuring income for a general community.
The income limit for 300 percent of the Federal Poverty Guidelines for a household of three is$65,880
per year.3 In other words, recipients can always presume that a household earning below this level, or a
community with median income below this level, is impacted by the pandemic and eligible for services
to respond. Additionally, by following the steps detailed in the section Framework for Eligible Uses
Beyond Those Enumerated, recipients may designate additional households as impacted or
disproportionately impacted beyond these presumptions, and may also pursue projects not listed below
in response to these impacts consistent with Treasury's standards.
3 For recipients in Alaska,the income limit for 300 percent of the Federal Poverty Guidelines for a household of three is$82,350
per year. For recipients in Hawaii,the income limit for 300 percent of the Federal Poverty Guidelines for a household of three is
$75,780 per year.
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Treasury recognizes the enumerated projects below,which have been expanded under the final rule, as
eligible to respond to impacts of the pandemic on households and communities:
✓ Food assistance &food banks ✓ Burials, home repair& home weatherization
✓ Emergency housing assistance: rental ✓ Programs, devices&equipment for internet
assistance, mortgage assistance, utility access and digital literacy, including subsidies
assistance, assistance paying delinquent for costs of access
property taxes, counseling and legal aid to ✓ Cash assistance
prevent eviction and homelessness & ✓ Paid sick, medical, and family leave programs
emergency programs or services for homeless ✓ Assistance in accessing and applying for
individuals, including temporary residences public benefits or services
for people experiencing homelessness ✓
Childcare and early learning services, home
✓ Health insurance coverage expansion visiting programs, services for child welfare-
✓ Benefits for surviving family members of involved families and foster youth &childcare
individuals who have died from COVID-19 facilities
✓ Assistance to individuals who want and are ✓ Assistance to address the impact of learning
available for work, including job training, loss for K-12 students (e.g., high-quality
public jobs programs and fairs, support for tutoring, differentiated instruction)
childcare and transportation to and from a V Programs or services to support long-term
jobsite or interview, incentives for newly- housing security: including development of
employed workers, subsidized employment, affordable housing and permanent
grants to hire underserved workers, supportive housing
assistance to unemployed individuals to start ✓
small businesses &development of job and Certain contributions to an Unemployment
workforce training centers Insurance Trust Fund4
✓ Financial services for the unbanked and
underbanked
4 Recipients may only use SLFRF funds for contributions to unemployment insurance trust funds and repayment of the principal
amount due on advances received under Title XII of the Social Security Act up to an amount equal to(i)the difference between
the balance in the recipient's unemployment insurance trust fund as of January 27,2020 and the balance of such account as of
May 17,2021,plus(ii)the principal amount outstanding as of May 17,2021 on any advances received under Title XII of the
Social Security Act between January 27,2020 and May 17,2021. Further,recipients may use SLFRF funds for the payment of
any interest due on such Title XII advances. Additionally,a recipient that deposits SLFRF funds into its unemployment insurance
trust fund to fully restore the pre-pandemic balance may not draw down that balance and deposit more SLFRF funds,back up
to the pre-pandemic balance.Recipients that deposit SLFRF funds into an unemployment insurance trust fund,or use SLFRF
funds to repay principal on Title XII advances, may not take action to reduce benefits available to unemployed workers by
changing the computation method governing regular unemployment compensation in a way that results in a reduction of
average weekly benefit amounts or the number of weeks of benefits payable(i.e.,maximum benefit entitlement).
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Disproportionately Impacted Households and Communities
Treasury presumes the following households and communities are disproportionately impacted by the
pandemic:
✓ Low-income households and communities ✓ Households receiving services provided by
✓ Households residing in Qualified Census Tribal governments
Tracts ✓ Households residing in the U.S. territories or
✓ Households that qualify for certain federal receiving services from these governments
benefits'
Low-income households and communities are those with (i) income at or below 185 percent of the
Federal Poverty Guidelines for the size of its household based on the most recently published poverty
guidelines or(ii) income at or below 40 percent of area median income for its county and size of
household based on the most recently published data. For the vast majority of communities,the Federal
Poverty Guidelines level is higher than the area median income level and using this level would result in
more households and communities being presumed eligible.Treasury has provided an easy-to-use
spreadsheet with Federal Poverty Guidelines and area median income levels on its website.
Recipients can measure income for a specific household or the median income for the community,
depending on whether the service they plan to provide serves specific households or the general
community.The income thresholds vary by household size; recipients should generally use income
thresholds for the appropriate household size but can use a default household size of three when easier
for administration or when measuring income for a general community.
The income limit for 185 percent of the Federal Poverty Guidelines for a household of three is$40,626
per year.' In other words, recipients can always presume that a household earning below this level, or a
community with median income below this level, is disproportionately impacted by the pandemic and
eligible for services to respond.
5 These programs are Temporary Assistance for Needy Families(TANF),Supplemental Nutrition Assistance Program(SNAP),
Free-and Reduced-Price Lunch(NSLP)and/or School Breakfast(SBP)programs, Medicare Part D Low-Income Subsidies,
Supplemental Security Income(SSI),Head Start and/or Early Head Start,Special Supplemental Nutrition Program for Women,
Infants,and Children(WIC),Section 8 Vouchers, Low-Income Home Energy Assistance Program(LIHEAP),and Pell Grants. For
services to address educational disparities,Treasury will recognize Title I eligible schools as disproportionately impacted and
responsive services that support the school generally or support the whole school as eligible.
6 For recipients in Alaska,the income limit for 185 percent of the Federal Poverty Guidelines for a household of three is$50,783
per year. For recipients in Hawaii,the income limit for 185 percent of the Federal Poverty Guidelines for a household of three is
$46,731 per year
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Treasury recognizes the enumerated projects below,which have been expanded under the final rule, as
eligible to respond to disproportionate impacts of the pandemic on households and communities:
✓ Pay for community health workers to help ✓ Improvements to vacant and abandoned
households access health &social services properties, including rehabilitation or
✓ Remediation of lead paint or other lead maintenance, renovation, removal and
hazards remediation of environmental contaminants,
✓ Primary care clinics, hospitals, integration of demolition or deconstruction,greening/vacant lot
health services into other settings, and other cleanup &conversion to affordable housing'
investments in medical equipment&facilities ✓ Services to address educational disparities,
designed to address health disparities including assistance to high-poverty school
✓ Housing vouchers& assistance relocating to districts &educational and evidence-based
neighborhoods with higher economic services to address student academic, social,
opportunity emotional, and mental health needs
✓ Investments in neighborhoods to promote V Schools and other educational equipment&
improved health outcomes facilities
7 Please see the final rule for further details and conditions applicable to this eligible use.This includes Treasury's presumption
that demolition of vacant or abandoned residential properties that results in a net reduction in occupiable housing units for
low-and moderate-income individuals in an area where the availability of such housing is lower than the need for such housing
is ineligible for support with SLFRF funds.
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Assistance to Small Businesses
Small businesses have faced widespread challenges due to the pandemic, including periods of
shutdown, declines in revenue, or increased costs.The final rule provides many tools for recipients to
respond to the impacts of the pandemic on small businesses, or disproportionate impacts on businesses
where pre-existing disparities like lack of access to capital compounded the pandemic's effects.
Small businesses eligible for assistance are those that experienced negative economic impacts or
disproportionate impacts of the pandemic and meet the definition of"small business," specifically:
1. Have no more than 500 employees, or if applicable,the size standard in number of employees
established by the Administrator of the Small Business Administration for the industry in which
the business concern or organization operates, and
2. Are a small business concern as defined in section 3 of the Small Business Act' (which includes,
among other requirements, that the business is independently owned and operated and is not
dominant in its field of operation).
Impacted Small Businesses
Recipients can identify small businesses impacted by the pandemic, and measures to respond, in many
ways; for example, recipients could consider:
✓ Decreased revenue or gross receipts ✓ Capacity to weather financial hardship
✓ Financial insecurity ✓ Challenges covering payroll, rent or
J Increased costs mortgage, and other operating costs
Assistance to small businesses that experienced negative economic impacts includes the following
enumerated uses:
J Loans or grants to mitigate financial ✓ Technical assistance, counseling, or other
hardship, such as by supporting payroll services to support business planning
and benefits, costs to retain employees,
and mortgage, rent, utility, and other
operating costs
Disproportionately Impacted Small Businesses
Treasury presumes that the following small businesses are disproportionately impacted by the
pandemic:
8 15 U.S.C.632.
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✓ Small businesses operating in Qualified ✓ Small businesses operating in the U.S.
Census Tracts territories
J Small businesses operated by Tribal
governments or on Tribal lands
Assistance to disproportionately impacted small businesses includes the following enumerated uses,
which have been expanded under the final rule:
✓ Rehabilitation of commercial properties, ✓ Support for microbusinesses, including
storefront improvements&fagade financial, childcare, and transportation costs
improvements
J Technical assistance, business incubators&
grants for start-up or expansion costs for
small businesses
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Assistance to Nonprofits
Nonprofits have faced significant challenges due to the pandemic's increased demand for services and
changing operational needs, as well as declines in revenue sources such as donations and fees.
Nonprofits eligible for assistance are those that experienced negative economic impacts or
disproportionate impacts of the pandemic and meet the definition of"nonprofit"—specifically those
that are 501(c)(3) or 501(c)(19) tax-exempt organizations.
Impacted Nonprofits
Recipients can identify nonprofits impacted by the pandemic, and measures to respond, in many ways;
for example, recipients could consider:
✓ Decreased revenue (e.g., from donations ✓ Capacity to weather financial hardship
and fees) ✓ Challenges covering payroll, rent or
✓ Financial insecurity mortgage, and other operating costs
✓ Increased costs (e.g., uncompensated
increases in service need)
Assistance to nonprofits that experienced negative economic impacts includes the following
enumerated uses:
✓ Loans or grants to mitigate financial ✓ Technical or in-kind assistance or other
hardship services that mitigate negative economic
impacts of the pandemic
Disproportionately Impacted Nonprofits
Treasury presumes that the following nonprofits are disproportionately impacted by the pandemic:
✓ Nonprofits operating in Qualified Census ✓ Nonprofits operating in the U.S.territories
Tracts
✓ Nonprofits operated by Tribal
governments or on Tribal lands
Recipients may identify appropriate responses that are related and reasonably proportional to
addressing these disproportionate impacts.
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Aid to Impacted Industries
Recipients may use SLFRF funding to provide aid to industries impacted by the COVID-19 pandemic.
Recipients should first designate an impacted industry and then provide aid to address the impacted
industry's negative economic impact.
This sub-category of eligible uses does not separately identify disproportionate impacts and
corresponding responsive services.
1. Designating an impacted industry.There are two main ways an industry can be designated as
"impacted."
1. If the industry is in the travel, tourism, or hospitality sectors (including Tribal development
districts),the industry is impacted.
2. If the industry is outside the travel,tourism, or hospitality sectors,the industry is impacted
if:
a. The industry experienced at least 8 percent employment loss from pre-pandemic
levels,'or
b. The industry is experiencing comparable or worse economic impacts as the national
tourism,travel, and hospitality industries as of the date of the final rule, based on
the totality of economic indicators or qualitative data (if quantitative data is
unavailable), and if the impacts were generally due to the COVID-19 public health
emergency.
Recipients have flexibility to define industries broadly or narrowly, but Treasury encourages
recipients to define narrow and discrete industries eligible for aid. State and territory recipients
also have flexibility to define the industries with greater geographic precision;for example, a
state may identify a particular industry in a certain region of a state as impacted.
2. Providing eligible aid to the impacted industry.Aid may only be provided to support
businesses, attractions, and Tribal development districts operating prior to the pandemic and
affected by required closures and other efforts to contain the pandemic. Further, aid should be
generally broadly available to all businesses within the impacted industry to avoid potential
conflicts of interest, and Treasury encourages aid to be first used for operational expenses, such
as payroll, before being used on other types of costs.
9 Specifically,a recipient should compare the percent change in the number of employees of the recipient's identified industry
and the national Leisure&Hospitality sector in the three months before the pandemic's most severe impacts began(a straight
three-month average of seasonally-adjusted employment data from December 2019,January 2020,and February 2020)with
the latest data as of the final rule(a straight three-month average of seasonally-adjusted employment data from September
2021,October 2021,and November 2021).For parity and simplicity,smaller recipients without employment data that measure
industries in their specific jurisdiction may use data available for a broader unit of government for this calculation(e.g.,a
county may use data from the state in which it is located;a city may use data for the county,if available,or state in which it is
located)solely for purposes of determining whether a particular industry is an impacted industry.
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Treasury recognizes the enumerated projects below as eligible responses to impacted
industries.
✓ Aid to mitigate financial hardship, such ✓ Technical assistance, counseling, or
as supporting payroll costs, lost pay and other services to support business
benefits for returning employees, planning
support of operations and maintenance ✓ COVID-19 mitigation and infection
of existing equipment and facilities prevention measures (see section Public
Health)
As with all eligible uses, recipients may pursue a project not listed above by undergoing the steps
outlined in the section Framework for Eligible Uses Beyond Those Enumerated.
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PUBLIC SECTOR CAPACITY
Recipients may use SLFRF funding to restore and bolster public sector capacity, which supports
government's ability to deliver critical COVID-19 services.There are three main categories of eligible
uses to bolster public sector capacity and workforce: Public Safety, Public Health, and Human Services
Staff; Government Employment and Rehiring Public Sector Staff; and Effective Service Delivery.
Public Safety, Public Health, and Human Services Staff
SLFRF funding may be used for payroll and covered benefits for public safety, public health, health care,
human services and similar employees of a recipient government,for the portion of the employee's
time spent responding to COVID-19. Recipients should follow the steps below.
1. Identify eligible public safety, public health,and human services staff. Public safety staff include:
✓ Police officers (including state police ✓ Correctional and detention officers
officers) ✓ Dispatchers and supervisor personnel
✓ Sheriffs and deputy sheriffs that directly support public safety staff
✓ Firefighters
✓ Emergency medical responders
Public health staff include:
✓ Employees involved in providing medical ✓ Employees of public health
and other physical or mental health departments directly engaged in
services to patients and supervisory public health matters and related
personnel, including medical staff supervisory personnel
assigned to schools, prisons, and other
such institutions
✓ Laboratory technicians, medical
examiners, morgue staff, and other
support services essential for patient
care
Human services staff include:
✓ Employees providing or administering ✓ Child, elder, or family care employees
social services and public benefits
✓ Child welfare services employees
2. Assess portion of time spent on COVID-19 response for eligible staff.
Recipients can use a variety of methods to assess the share of an employees'time spent responding
to COVID-19, including using reasonable estimates—such as estimating the share of time based on
discussions with staff and applying that share to all employees in that position.
For administrative convenience, recipients can consider public health and safety employees entirely
devoted to responding to COVID-19 (and their payroll and benefits fully covered by SLFRF) if the
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employee, or his or her operating unit or division, is "primarily dedicated" to responding to COVID-
19. Primarily dedicated means that more than half of the employee, unit, or division's time is
dedicated to responding to COVID-19.
Recipients must periodically reassess their determination and maintain records to support their
assessment, although recipients do not need to track staff hours.
3. Use SLFRF funding for payroll and covered benefits for the portion of eligible staff time spent on
COVID-19 response. SLFRF funding may be used for payroll and covered benefits for the portion of
the employees'time spent on COVID-19 response, as calculated above,through the period of
performance.
Government Employment and Rehiring Public Sector Staff
Under the increased flexibility of the final rule, SLFRF funding may be used to support a broader set of
uses to restore and support public sector employment. Eligible uses include hiring up to a pre-pandemic
baseline that is adjusted for historic underinvestment in the public sector, providing additional funds for
employees who experienced pay cuts or were furloughed, avoiding layoffs, providing worker retention
incentives, and paying for ancillary administrative costs related to hiring, support, and retention.
• Restoring pre-pandemic employment. Recipients have two options to restore pre-pandemic
employment, depending on the recipient's needs.
• If the recipient simply wants to hire back employees for pre-pandemic positions: Recipients
may use SLFRF funds to hire employees for the same positions that existed on January 27,
2020 but that were unfilled or eliminated as of March 3, 2021. Recipients may use SLFRF
funds to cover payroll and covered benefits for such positions through the period of
performance.
• If the recipient wants to hire above the pre-pandemic baseline and/or would like to have
flexibility in positions: Recipients may use SLFRF funds to pay for payroll and covered
benefits associated with the recipient increasing its number of budgeted FTEs up to 7.5
percent above its pre-pandemic baseline. Specifically, recipients should undergo the
following steps:
a. Identify the recipient's budgeted FTE level on January 27, 2020.This includes all
budgeted positions,filled and unfilled. This is called the pre-pandemic baseline.
b. Multiply the pre-pandemic baseline by 1.075.This is called the adjusted pre-
pandemic baseline.
c. Identify the recipient's budgeted FTE level on March 3, 2021, which is the beginning
of the period of performance for SLFRF funds. Recipients may, but are not required
to, exclude the number of FTEs dedicated to responding to the COVID-19 public
health emergency. This is called the actual number of FTEs.
d. Subtract the actual number of FTEs from the adjusted pre-pandemic baseline to
calculate the number of FTEs that can be covered by SLFRF funds. Recipients do not
have to hire for the same roles that existed pre-pandemic.
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Recipients may use SLFRF funds to cover payroll and covered benefits through the period of
performance;these employees must have begun their employment on or after March 3,
2021. Recipients may only use SLFRF funds for additional FTEs hired over the March 3, 2021
level (i.e.,the actual number of FTEs).
• Supporting and retaining public sector workers. Recipients can also use funds in other ways
that support the public sector workforce.10 These include:
o Providing additional funding for employees who experienced pay reductions or were
furloughed since the onset of the pandemic, up to the difference in the employee's pay,
taking into account unemployment benefits received.
o Maintaining current compensation levels to prevent layoffs. SLFRF funds may be used
to maintain current compensation levels, with adjustments for inflation, in order to
prevent layoffs that would otherwise be necessary.
o Providing worker retention incentives, including reasonable increases in
compensation to persuade employees to remain with the employer as compared to
other employment options. Retention incentives must be entirely additive to an
employee's regular compensation, narrowly tailored to need, and should not exceed
incentives traditionally offered by the recipient or compensation that alternative
employers may offer to compete for the employees.Treasury presumes that retention
incentives that are less than 25 percent of the rate of base pay for an individual
employee or 10 percent for a group or category of employees are reasonably
proportional to the need to retain employees, as long as other requirements are met.
• Covering administrative costs associated with administering the hiring,support,and retention
programs above.
Effective Service Delivery
SLFRF funding may be used to improve the efficacy of public health and economic programs through
tools like program evaluation, data, and outreach, as well as to address administrative needs caused or
exacerbated by the pandemic. Eligible uses include:
• Supporting program evaluation, data, and outreach through:
io Recipients should be able to substantiate that these uses of funds are substantially due to the public health emergency or its
negative economic impacts(e.g.,fiscal pressures on state and local budgets)and respond to its impacts.See the final rule for
details on these uses.
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✓ Program evaluation and evidence ✓ Community outreach and engagement
resources activities
✓ Data analysis resources to gather, ✓ Capacity building resources to support
assess, share, and use data using data and evidence, including
✓ Technology infrastructure to improve hiring staff, consultants, or technical
access to and the user experience of assistance support
government IT systems, as well as
technology improvements to increase
public access and delivery of
government programs and services
• Addressing administrative needs, including:
✓ Administrative costs for programs ✓ Address administrative needs caused
responding to the public health or exacerbated by the pandemic,
emergency and its economic impacts, including addressing backlogs caused
including non-SLFRF and non-federally by shutdowns, increased repair or
funded programs maintenance needs, and technology
infrastructure to adapt government
operations to the pandemic (e.g.,
video-conferencing software, data and
case management systems)
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CAPITAL EXPENDITURES
As described above,the final rule clarifies that recipients may use funds for programs, services, and
capital expenditures that respond to the public health and negative economic impacts of the pandemic.
Any use of funds in this category for a capital expenditure must comply with the capital expenditure
requirements, in addition to other standards for uses of funds.
Capital expenditures are subject to the same eligibility standard as other eligible uses to respond to the
pandemic's public health and economic impacts; specifically,they must be related and reasonably
proportional to the pandemic impact identified and reasonably designed to benefit the impacted
population or class.
For ease of administration,the final rule identifies enumerated types of capital expenditures that
Treasury has identified as responding to the pandemic's impacts;these are listed in the applicable sub-
category of eligible uses(e.g., public health, assistance to households, etc.). Recipients may also identify
other responsive capital expenditures. Similar to other eligible uses in the SLFRF program, no pre-
approval is required for capital expenditures.
To guide recipients' analysis of whether a capital expenditure meets the eligibility standard, recipients
(with the exception of Tribal governments) must complete and meet the requirements of a written
justification for capital expenditures equal to or greater than $1 million. For large-scale capital
expenditures,which have high costs and may require an extended length of time to complete, as well as
most capital expenditures for non-enumerated uses of funds,Treasury requires recipients to submit
their written justification as part of regular reporting. Specifically:
If a project has and the use is enumerated by Treasury and the use is beyond those
total capital as eligible,then enumerated by Treasury as eligible,
expenditures then
of
Less than $1 No Written Justification required No Written Justification required
million
Greater than or
equal to $1 Written Justification required but
million, but recipients are not required to submit as
less than $10 part of regular reporting to Treasury Written Justification required and
million recipients must submit as part of regular
Written Justification required and reporting to Treasury
$10 million or recipients must submit as part of regular
more
reporting to Treasury
A Written Justification includes:
• Description of the harm or need to be addressed. Recipients should provide a description of the
specific harm or need to be addressed and why the harm was exacerbated or caused by the
public health emergency. Recipients may provide quantitative information on the extent and the
type of harm, such as the number of individuals or entities affected.
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• Explanation of why a capital expenditure is appropriate. For example, recipients should include
an explanation of why existing equipment and facilities, or policy changes or additional funding
to pertinent programs or services,would be inadequate.
• Comparison of proposed capital project against at least two alternative capital expenditures and
demonstration of why the proposed capital expenditure is superior. Recipients should consider
the effectiveness of the capital expenditure in addressing the harm identified and the expected
total cost (including pre-development costs) against at least two alternative capital
expenditures.
Where relevant, recipients should consider the alternatives of improving existing capital assets already
owned or leasing other capital assets.
Treasury presumes that the following capital projects are generally ineligible:
x Construction of new correctional x Construction of convention centers,
facilities as a response to an increase in stadiums, or other large capital projects
rate of crime intended for general economic
X Construction of new congregate development or to aid impacted
facilities to decrease spread of COVID-19 industries
in the facility
In undertaking capital expenditures,Treasury encourages recipients to adhere to strong labor standards,
including project labor agreements and community benefits agreements that offer wages at or above
the prevailing rate and include local hire provisions.Treasury also encourages recipients to prioritize in
their procurements employers with high labor standards and to prioritize employers without recent
violations of federal and state labor and employment laws.
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FRAMEWORK FOR ELIGIBLE USES BEYOND THOSE ENUMERATED
As described above, recipients have broad flexibility to identify and respond to other pandemic impacts
and serve other populations that experienced pandemic impacts, beyond the enumerated uses and
presumed eligible populations. Recipients should undergo the following steps to decide whether their
project is eligible:
Step 1. Identify COVID-19 public health or 2. Design a response that addresses or
economic impact responds to the impact
Analysis 0 Can identify impact to a specific ' Types of responses can include a
household, business or nonprofit or to program, service, or capital
a class of households, businesses or expenditure
nonprofits (i.e., group)
• Response should be related and
• Can also identify disproportionate reasonably proportional to the harm
impacts, or more severe impacts, to a
• Response should also be reasonably
specific beneficiary or to a class designed to benefit impacted
individual or class
1. Identify a COVID-19 public health or negative economic impact on an individual or a class.
Recipients should identify an individual or class that is "impacted" or"disproportionately
impacted" by the COVID-19 public health emergency or its negative economic impacts as well as
the specific impact itself.
• "Impacted" entities are those impacted by the disease itself or the harmful
consequences of the economic disruptions resulting from or exacerbated by the COVID-
19 public health emergency. For example, an individual who lost their job or a small
business that saw lower revenue during a period of closure would both have
experienced impacts of the pandemic.
• "Disproportionately impacted" entities are those that experienced disproportionate
public health or economic outcomes from the pandemic;Treasury recognizes that pre-
existing disparities, in many cases, amplified the impacts of the pandemic, causing more
severe impacts in underserved communities. For example, a household living in a
neighborhood with limited access to medical care and healthy foods may have faced
health disparities before the pandemic, like a higher rate of chronic health conditions,
that contributed to more severe health outcomes during the COVID-19 pandemic.
The recipient may choose to identify these impacts at either the individual level or at a class
level. If the recipient is identifying impacts at the individual level,they should retain
documentation supporting the impact the individual experienced (e.g., documentation of lost
revenues from a small business). Such documentation can be streamlined in many cases (e.g.,
self-attestation that a household requires food assistance).
Recipients also have broad flexibility to identify a "class"—or a group of households, small
businesses, or nonprofits—that experienced an impact. In these cases, the recipients should
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first identify the class and the impact that it faced.Then, recipients only need to document that
the individuals served fall within that class; recipients do not need to document a specific impact
to each individual served. For example, a recipient could identify that restaurants in the
downtown area faced substantial declines in revenue due to decreased foot traffic from
workers; the recipient could develop a program to respond to the impact on that class and only
needs to document that the businesses being served are restaurants in the downtown area.
Recipients should keep the following considerations in mind when designating a class:
• There should be a relationship between the definition of the class and the proposed
response. Larger and less-specific classes are less likely to have experienced similar
harms,which may make it more difficult to design a response that appropriately
responds to those harms.
• Classes may be determined on a population basis or on a geographic basis, and the
response should be appropriately matched. For example, a response might be designed
to provide childcare to single parents, regardless of which neighborhood they live in, or
a response might provide a park to improve the health of a disproportionately impacted
neighborhood.
• Recipients may designate classes that experienced disproportionate impact, by
assessing the impacts of the pandemic and finding that some populations experienced
meaningfully more severe impacts than the general public.To determine these
disproportionate impacts, recipients:
o May designate classes based on academic research or government research
publications (such as the citations provided in the supplementary information in
the final rule),through analysis of their own data, or through analysis of other
existing data sources.
o May also consider qualitative research and sources to augment their analysis, or
when quantitative data is not readily available. Such sources might include
resident interviews or feedback from relevant state and local agencies, such as
public health departments or social services departments.
o Should consider the quality of the research, data, and applicability of analysis to
their determination in all cases.
• Some of the enumerated uses may also be appropriate responses to the impacts
experienced by other classes of beneficiaries. It is permissible for recipients to provide
these services to other classes, so long as the recipient determines that the response is
also appropriate for those groups.
• Recipients may designate a class based on income level, including at levels higher than
the final rule definition of"low-and moderate-income." For example, a recipient may
identify that households in their community with incomes above the final rule threshold
for low-income nevertheless experienced disproportionate impacts from the pandemic
and provide responsive services.
2. Design a response that addresses or responds to the impact. Programs, services, and other
interventions must be reasonably designed to benefit the individual or class that experienced
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the impact.They must also be related and reasonably proportional to the extent and type of
impact experienced. For example, uses that bear no relation or are grossly disproportionate to
the type or extent of the impact would not be eligible.
"Reasonably proportional" refers to the scale of the response compared to the scale of the
harm, as well as the targeting of the response to beneficiaries compared to the amount of harm
they experienced;for example, it may not be reasonably proportional for a cash assistance
program to provide a very small amount of aid to a group that experienced severe harm and a
much larger amount to a group that experienced relatively little harm. Recipients should
consider relevant factors about the harm identified and the response to evaluate whether the
response is reasonably proportional. For example, recipients may consider the size of the
population impacted and the severity,type, and duration of the impact. Recipients may also
consider the efficacy, cost, cost-effectiveness, and time to delivery of the response.
For disproportionately impacted communities, recipients may design interventions that address
broader pre-existing disparities that contributed to more severe health and economic outcomes
during the pandemic, such as disproportionate gaps in access to health care or pre-existing
disparities in educational outcomes that have been exacerbated by the pandemic.
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Premium Pay
The Coronavirus State and Local Fiscal Recovery Funds may be used to provide premium pay to eligible
workers performing essential work during the pandemic. Premium pay may be awarded to eligible
workers up to$13 per hour. Premium pay must be in addition to wages or remuneration (i.e.,
compensation)the eligible worker otherwise receives. Premium pay may not exceed $25,000 for any
single worker during the program.
Recipients should undergo the following steps to provide premium pay to eligible workers.
1. Identify an "eligible"worker. Eligible workers include workers "needed to maintain continuity
of operations of essential critical infrastructure sectors."These sectors and occupations are
eligible:
✓ Health care ✓ State, local, or Tribal government
✓ Emergency response workforce
✓ Sanitation, disinfection &cleaning ✓ Workers providing vital services to
✓ Maintenance Tribes
✓ Grocery stores, restaurants, food ✓ Educational, school nutrition, and other
production, and food delivery work required to operate a school
✓ Pharmacy facility
✓ Biomedical research ✓ Laundry
✓ Behavioral health ✓ Elections
✓ Medical testing and diagnostics ✓ Solid waste or hazardous materials
✓ Home and community-based health care management, response, and cleanup
or assistance with activities of daily living ✓ Work requiring physical interaction with
✓ Family or child care patients
✓ Social services ✓ Dental care
✓ Public health ✓ Transportation and warehousing
✓ Mortuary ✓ Hotel and commercial lodging facilities
✓ Critical clinical research, development, that are used for COVID-19 mitigation
and testing necessary for COVID-19 and containment
response
Beyond this list,the chief executive (or equivalent) of a recipient government may designate
additional non-public sectors as critical so long as doing so is necessary to protecting the health
and wellbeing of the residents of such jurisdictions.
2. Verify that the eligible worker performs "essential work," meaning work that:
• Is not performed while teleworking from a residence; and
• Involves either:
a. regular, in-person interactions with patients,the public, or coworkers of the
individual that is performing the work; or
b. regular physical handling of items that were handled by, or are to be handled by,
patients,the public, or coworkers of the individual that is performing the work.
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3. Confirm that the premium pay"responds to"workers performing essential work during the
COVID-19 public health emergency. Under the final rule,which broadened the share of eligible
workers who can receive premium pay without a written justification, recipients may meet this
requirement in one of three ways:
• Eligible worker receiving premium pay is earning(with the premium included) at or below
150 percent of their residing state or county's average annual wage for all occupations, as
defined by the Bureau of Labor Statistics' Occupational Employment and Wage Statistics,
whichever is higher, on an annual basis; or
• Eligible worker receiving premium pay is not exempt from the Fair Labor Standards Act
overtime provisions; or
• If a worker does not meet either of the above requirements,the recipient must submit
written justification to Treasury detailing how the premium pay is otherwise responsive to
workers performing essential work during the public health emergency.This may include a
description of the essential worker's duties, health, or financial risks faced due to COVID-19,
and why the recipient determined that the premium pay was responsive.Treasury
anticipates that recipients will easily be able to satisfy the justification requirement for
front-line workers, like nurses and hospital staff.
Premium pay may be awarded in installments or lump sums (e.g., monthly, quarterly, etc.)and may be
awarded to hourly, part-time, or salaried or non-hourly workers. Premium pay must be paid in addition
to wages already received and may be paid retrospectively.A recipient may not use SLFRF to merely
reimburse itself for premium pay or hazard pay already received by the worker, and premium pay may
not be paid to volunteers.
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Water & Sewer Infrastructure
The Coronavirus State and Local Fiscal Recovery Funds may be used to make necessary investments in
water and sewer infrastructure. State, local, and Tribal governments have a tremendous need to
address the consequences of deferred maintenance in drinking water systems and removal,
management, and treatment of sewage and stormwater, along with additional resiliency measures
needed to adapt to climate change.
Recipients may undertake the eligible projects below:
PROJECTS ELIGIBLE UNDER EPA'S CLEAN WATER STATE REVOLVING FUND(CWSRF)
Eligible projects under the CWSRF, and the final rule, include:
✓ Construction of publicly owned ✓ Development and implementation of a
treatment works conservation and management plan
✓ Projects pursuant to implementation under the CWA
of a nonpoint source pollution ✓ Watershed projects meeting the
management program established criteria set forth in the CWA
under the Clean Water Act (CWA) ✓ Energy consumption reduction for
✓ Decentralized wastewater treatment publicly owned treatment works
systems that treat municipal ✓ Reuse or recycling of wastewater,
wastewater or domestic sewage stormwater, or subsurface drainage
✓ Management and treatment of water
stormwater or subsurface drainage ✓ Security of publicly owned treatment
water works
✓ Water conservation, efficiency, or
reuse measures
Treasury encourages recipients to review the EPA handbook for the CWSRF for a full list of eligibilities.
PROJECTS ELIGIBLE UNDER EPA'S DRINKING WATER STATE REVOLVING FUND (DWSRF)
Eligible drinking water projects under the DWSRF, and the final rule, include:
✓ Facilities to improve drinking water ✓ Green infrastructure, including green
quality roofs, rainwater harvesting collection,
✓ Transmission and distribution, permeable pavement
including improvements of water ✓ Storage of drinking water, such as to
pressure or prevention of prevent contaminants or equalize
contamination in infrastructure and water demands
lead service line replacements ✓ Purchase of water systems and
✓ New sources to replace contaminated interconnection of systems
drinking water or increase drought ✓ New community water systems
resilience, including aquifer storage
and recovery system for water storage
Treasury encourages recipients to review the EPA handbook for the DWSRF for a full list of eligibilities.
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ADDITIONAL ELIGIBLE PROJECTS
With broadened eligibility under the final rule, SLFRF funds may be used to fund additional types of
projects— such as additional stormwater infrastructure, residential wells, lead remediation, and certain
rehabilitations of dams and reservoirs — beyond the CWSRF and DWSRF, if they are found to be
"necessary" according to the definition provided in the final rule and outlined below.
✓ Culvert repair, resizing, and removal, ✓ Broad set of lead remediation projects
replacement of storm sewers, and eligible under EPA grant programs
additional types of stormwater authorized by the Water
infrastructure Infrastructure Improvements for the
✓ Infrastructure to improve access to Nation (WIIN)Act, such as lead
safe drinking water for individual testing, installation of corrosion
served by residential wells, including control treatment, lead service line
testing initiatives, and replacement, as well as water quality
treatment/remediation strategies that testing, compliance monitoring, and
address contamination remediation activities, including
✓ Dam and reservoir rehabilitation if replacement of internal plumbing and
primary purpose of dam or reservoir is faucets and fixtures in schools and
for drinking water supply and project childcare facilities
is necessary for provision of drinking
water
A "necessary" investment in infrastructure must be:
(1) responsive to an identified need to achieve or maintain an adequate minimum level of service,
which may include a reasonable projection of increased need,whether due to population
growth or otherwise,
(2) a cost-effective means for meeting that need,taking into account available alternatives, and
(3) for investments in infrastructure that supply drinking water in order to meet projected
population growth, projected to be sustainable over its estimated useful life.
Please note that DWSRF and CWSRF-eligible projects are generally presumed to be necessary
investments. Additional eligible projects generally must be responsive to an identified need to achieve
or maintain an adequate minimum level of service. Recipients are only required to assess cost-
effectiveness of projects for the creation of new drinking water systems, dam and reservoir
rehabilitation projects, or projects for the extension of drinking water service to meet population
growth needs. Recipients should review the supplementary information to the final rule for more details
on requirements applicable to each type of investment.
APPLICABLE STANDARDS& REQUIREMENTS
Treasury encourages recipients to adhere to strong labor standards, including project labor agreements
and community benefits agreements that offer wages at or above the prevailing rate and include local
hire provisions.Treasury also encourages recipients to prioritize in their procurements employers with
high labor standards and to prioritize employers without recent violations of federal and state labor and
employment laws.
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Broadband Infrastructure
The Coronavirus State and Local Fiscal Recovery Funds may be used to make necessary investments in
broadband infrastructure,which has been shown to be critical for work, education, healthcare, and civic
participation during the public health emergency.The final rule broadens the set of eligible broadband
infrastructure investments that recipients may undertake.
Recipients may pursue investments in broadband infrastructure meeting technical standards detailed
below, as well as an expanded set of cybersecurity investments.
BROADBAND INFRASTRUCTURE INVESTMENTS
Recipients should adhere to the following requirements when designing a broadband infrastructure
project:
1. Identify an eligible area for investment. Recipients are encouraged to prioritize projects that
are designed to serve locations without access to reliable wireline 100/20 Mbps broadband
service (meaning service that reliably provides 100 Mbps download speed and 20 Mbps upload
speed through a wireline connection), but are broadly able to invest in projects designed to
provide service to locations with an identified need for additional broadband investment.
Recipients have broad flexibility to define need in their community. Examples of need could
include:
✓ Lack of access to a reliable high-speed ✓ Lack of affordable broadband
broadband connection ✓ Lack of reliable service
If recipients are considering deploying broadband to locations where there are existing and
enforceable federal or state funding commitments for reliable service of at least 100/20 Mbps,
recipients must ensure that SLFRF funds are designed to address an identified need for
additional broadband investment that is not met by existing federal or state funding
commitments. Recipients must also ensure that SLFRF funds will not be used for costs that will
be reimbursed by the other federal or state funding streams.
2. Design project to meet high-speed technical standards. Recipients are required to design
projects to, upon completion, reliably meet or exceed symmetrical 100 Mbps download and
upload speeds. In cases where it is not practicable, because of the excessive cost of the project
or geography or topography of the area to be served by the project, eligible projects may be
designed to reliably meet or exceed 100/20 Mbps and be scalable to a minimum of symmetrical
100 Mbps download and upload speeds.
Treasury encourages recipients to prioritize investments in fiber-optic infrastructure wherever
feasible and to focus on projects that will achieve last-mile connections. Further,Treasury
encourages recipients to prioritize support for broadband networks owned, operated by, or
affiliated with local governments, nonprofits, and co-operatives.
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3. Require enrollment in a low-income subsidy program. Recipients must require the service
provider for a broadband project that provides service to households to either:
✓ Participate in the FCC's Affordable ✓ Provide access to a broad-based
Connectivity Program (ACP) affordability program to low-income
consumers that provides benefits
commensurate to ACP
Treasury encourages broadband services to also include at least one low-cost option offered
without data usage caps at speeds sufficient for a household with multiple users to
simultaneously telework and engage in remote learning. Recipients are also encouraged to
consult with the community on affordability needs.
CYBERSECURITY INVESTMENTS
SLFRF may be used for modernization of cybersecurity for existing and new broadband infrastructure,
regardless of their speed delivery standards. This includes modernization of hardware and software.
APPLICABLE STANDARDS& REQUIREMENTS
Treasury encourages recipients to adhere to strong labor standards, including project labor agreements
and community benefits agreements that offer wages at or above the prevailing rate and include local
hire provisions.Treasury also encourages recipients to prioritize in their procurements employers with
high labor standards and to prioritize employers without recent violations of federal and state labor and
employment laws.
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Restrictions on Use
While recipients have considerable flexibility to use Coronavirus State and Local Fiscal Recovery Funds to
address the diverse needs of their communities, some restrictions on use of funds apply.
OFFSET A REDUCTION IN NET TAX REVENUE
• States and territories may not use this funding to directly or indirectly offset a reduction in net
tax revenue resulting from a change in law, regulation, or administrative interpretation
beginning on March 3, 2021,through the last day of the fiscal year in which the funds
provided have been spent. If a state or territory cuts taxes during this period, it must
demonstrate how it paid for the tax cuts from sources other than SLFRF, such as by enacting
policies to raise other sources of revenue, by cutting spending, or through higher revenue due to
economic growth. If the funds provided have been used to offset tax cuts,the amount used for
this purpose must be repaid to the Treasury.
DEPOSITS INTO PENSION FUNDS
• No recipients except Tribal governments may use this funding to make a deposit to a pension
fund. Treasury defines a "deposit" as an extraordinary contribution to a pension fund for the
purpose of reducing an accrued, unfunded liability. While pension deposits are prohibited,
recipients may use funds for routine payroll contributions connected to an eligible use of funds
(e.g.,for public health and safety staff). Examples of extraordinary payments include ones that:
X Reduce a liability incurred prior to the x Occur at the regular time for pension
start of the COVID-19 public health contributions but is larger than a regular
emergency and occur outside the payment would have been
recipient's regular timing for making the
payment
ADDITIONAL RESTRICTIONS AND REQUIREMENTS
Additional restrictions and requirements that apply across all eligible use categories include:
• No debt service or replenishing financial reserves. Since SLFRF funds are intended to be used
prospectively, recipients may not use SLFRF funds for debt service or replenishing financial
reserves (e.g., rainy day funds).
• No satisfaction of settlements and judgments. Satisfaction of any obligation arising under or
pursuant to a settlement agreement,judgment, consent decree, or judicially confirmed debt
restructuring in a judicial, administrative, or regulatory proceeding is itself not an eligible use.
However, if a settlement requires the recipient to provide services or incur other costs that are
an eligible use of SLFRF funds, SLFRF may be used for those costs.
• Additional general restrictions. SLFRF funds may not be used for a project that conflicts with or
contravenes the purpose of the American Rescue Plan Act statute (e.g., uses of funds that
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undermine COVID-19 mitigation practices in line with CDC guidance and recommendations) and
may not be used in violation of the Award Terms and Conditions or conflict of interest
requirements under the Uniform Guidance. Other applicable laws and regulations, outside of
SLFRF program requirements, may also apply (e.g., laws around procurement, contracting,
conflicts-of-interest, environmental standards, or civil rights).
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Program Administration
The Coronavirus State and Local Fiscal Recovery Funds final rule details a number of administrative
processes and requirements, including on distribution of funds,timeline for use of funds,transfer of
funds,treatment of loans, use of funds to meet non-federal match or cost-share requirements,
administrative expenses, reporting on use of funds, and remediation and recoupment of funds used for
ineligible purposes.This section provides a summary for the most frequently asked questions.
TIMELINE FOR USE OF FUNDS
Under the SLFRF,funds must be used for costs incurred on or after March 3, 2021. Further, costs must
be obligated by December 31, 2024, and expended by December 31, 2026.
TRANSFERS
Recipients may undertake projects on their own or through subrecipients,which carry out eligible uses
on behalf of a recipient, including pooling funds with other recipients or blending and braiding SLFRF
funds with other sources of funds. Localities may also transfer their funds to the state through section
603(c)(4), which will decrease the locality's award and increase the state award amounts.
LOANS
Recipients may generally use SLFRF funds to provide loans for uses that are otherwise eligible, although
there are special rules about how recipients should track program income depending on the length of
the loan. Recipients should consult the final rule if they seek to utilize these provisions.
NON-FEDERAL MATCH OR COST-SHARE REQUIREMENTS
Funds available under the "revenue loss" eligible use category(sections 602(c)(1)(C) and 603(c)(1)(C) of
the Social Security Act) generally may be used to meet the non-federal cost-share or matching
requirements of other federal programs. However, note that SLFRF funds may not be used as the non-
federal share for purposes of a state's Medicaid and CHIP programs because the Office of Management
and Budget has approved a waiver as requested by the Centers for Medicare & Medicaid Services
pursuant to 2 CFR 200.102 of the Uniform Guidance and related regulations.
SLFRF funds beyond those that are available under the revenue loss eligible use category may not be
used to meet the non-federal match or cost-share requirements of other federal programs, other than
as specifically provided for by statute. As an example,the Infrastructure Investment and Jobs Act
provides that SLFRF funds may be used to meet the non-federal match requirements of authorized
Bureau of Reclamation projects and certain broadband deployment projects. Recipients should consult
the final rule for further details if they seek to utilize SLFRF funds as a match for these projects.
ADMINISTRATIVE EXPENSES
SLFRF funds may be used for direct and indirect administrative expenses involved in administering the
program. For details on permissible direct and indirect administrative costs, recipients should refer to
Treasury's Compliance and Reporting Guidance. Costs incurred for the same purpose in like
circumstances must be treated consistently as either direct or indirect costs.
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REPORTING,COMPLIANCE& RECOUPMENT
Recipients are required to comply with Treasury's Compliance and Reporting Guidance, which includes
submitting mandatory periodic reports to Treasury.
Funds used in violation of the final rule are subject to remediation and recoupment. As outlined in the
final rule,Treasury may identify funds used in violation through reporting or other sources. Recipients
will be provided with an initial written notice of recoupment with an opportunity to submit a request for
reconsideration before Treasury provides a final notice of recoupment. If the recipient receives an initial
notice of recoupment and does not submit a request for reconsideration,the initial notice will be
deemed the final notice.Treasury may pursue other forms of remediation and monitoring in conjunction
with, or as an alternative to, recoupment.
Coronavirus State&Local Fiscal Recovery Funds:Overview of the Final Rule
U.S. Department of the Treasury 44
,Ky of SARgp ADMINISTRATIVE SERVICES
L D 9
Memorandum
VIA
To: City Council Finance Committee
From: Nick Pegueros, Administrative Services Director
Date: February 14, 2022
Subject: FY 2022-23 Operating and Capital Improvement Program Budget Process
BACKGROUND
The purpose of this memorandum is to transmit the FY 2022-23 budget development processes. Recent
staff transition in Administrative Services requires some minor modifications this year with no impact
on the overall timeframe for City Council consideration of the FY 2022-23 budget.
DISCUSSION
The City's award-winning budget outlines a budget process that greatly assists in public understanding
of the City's budget process. The following highlights several modifications from the previous year:
Operating Budget
The most significant modification to the public process is the annual retreat, typically held in late
January and originally scheduled for January 28, 2022. City staff traditionally transmits the mid-year
budget report and five-year financial forecast to kick off the budget process during this retreat. Both
reports will be provided in March. Additionally, City Council modified the purpose of the annual
retreat to continue their discussion of the Housing Element.
Capital Improvement Program (CIP)
Attachment A summarizes City Council and City staff nominated projects for Finance Committee
information. The City Council CIP study session is tentatively scheduled for April 6.
Master Fee Schedule (MFS)Updates
The annual MFS review is scheduled to begin in February. This year, it has the unique challenge of
assessing the impact of staggering increases in the consumers'price index (CPI) on the cost of City
services. The MFS timeline may require adjustment as the analysis progresses is expected to be
completed in March. City staff will transmit an update to the Finance Committee at their March 17
meeting.
Attachments
A. City Council and City staff nominated FY 2022-23 Capital Improvement Program projects
City of Saratoga
Capital Improvement Program Projects
As of 2/14/22
Park In Lieu Roadway Taxes
CIP Fund Fund and Fees Grants
1 Policy Funding:Contributions and Goals
Roadway Infrastructure Maintenance&Repairs (250,000)I
Retaining Wall Maintenance&Repairs (200,000); -
Parks,Trails,Grounds&Median Replacement (250,000): -
Roadway Safety and Traffic Calming (150,000): -
Public Art Infrastructure Projects (25,000); -
Hakone Improvements (25,000): - I
Annual Roadway Improvement Plan - - i (2,000,000)1
Subtotal Contributions&Goals (900,000) - (2,000,000);
2 Recommended Increases to Existing Projects I I I
Annual Roadway Improvement Plan (#9111-003) (615,635);
Saratoga Sunnyvale Rd Pathway Rehab Cox to Railroad(#9142-022) (100,000); -
Annual Infrastructure Maintenance&Repair(#9141-005) (100,000): -
Orchard Irrigation and Tree Replacement(#9221-002) - (30,000)
ADA Self-Assessment&Transition Plan(#9443-003) (175,000); -
Subtotal-Increase to Existing Projects (375,000) (30,000)1 (615,635)1
3 City Council Nominated Projects '
Joe's Trail Phases 2 and 3 - (396,000) (3,054,000)
Subtotal-City Council nominated projects - (396,000); (3,054,000);
4 Staff Nominated FY2021-22 Unfunded Projects
Herriman-Saratoga Avenue Signal (259,300); -
Subtotal-FY 2021-22 nominated projects (259,300); -
5 Staff Nominated Projects
Hakone Gardens Neighbor Wood Fence Replacement - (75,000);
Quarry Park Maintenance Building Utility Project - (35,000):
Villa Oaks Bridge Reconstruction and Erosion Control - (30,000);
El Quito Park Pickleball Courts - (125,000);
Village to Quarry Park Walkway-Phase 1 Hakone - (150,000):
Hakone Gardens to Quarry Park Trail Gap Closure-Phase I Design&A - (150,000);
Saratoga Village Clean Water Improvements - -
Citywide Storm Drain Master Plan
Corp yard SWPPP Compliance - -
Prospect Center Green Infrastructure
Park Sewer Laterals and Upgrades - -
Bridge Rehabilitation Project (400,000): -
Safe Routes to School Phase 1 Implementation Plan (200,000); -
Quito Road Sidewalk Rehabilitation Gap Closure Phase 2 (375,000); -
Traffic Signal Controller Upgrades (40,000) -
Annual Accessibility ADA Transition Plan Implementation (100,000); -
Subtotal-FY 2021-22 nominated projects (1,115,000); (565,000);
6 Grand total$(9,309,935) $ (2,649,300) $ (991,000) $ (2,615,635) $ (3,054,000)
°` SAR,gPa�� ADMINISTRATIVE SERVICES
Memorandum
1956
F0?1
To: City Council Finance Committee
From: Nick Pegueros, Administrative Services Director
Date: February 14, 2022
Subject: FY 2022-23 Financial Policies
BACKGROUND
The purpose of this memorandum is to transmit the City Council adopted FY 2021-22 financial policies
to facilitate consideration of any City staff or City Council modifications for FY 2022-23.
DISCUSSION
City staff anticipates returning to the Finance Committee at their March 17 meeting and then seeking
City Council consideration of recommended policy modifications in April. City staff will limit their
recommendations to those legally required or present an opportunity for operational efficiencies.
Attachments
A. Fiscal Management Policy Statements
B. Investment Policy
C. Debt Management Policy
D. Community Funded Infrastructure Projects
INTRODUCTION SECTION
FISCAL MANAGEMENT POLICY STATEMENTS
The City of Saratoga practices fiscal responsibility through conservative financial management, and cautious,
sustainable, and enforceable fiscal policies and internal controls to ensure prudent and efficient use of resources.
Policies and controls represent long-standing accounting, budgeting, debt, investment, and reserve principles and
practices,and are the foundation upon which the City prepares its Long-Term Financial Plan.
Saratoga's general fiscal management policy statements provide a summary overview of financial, operational, and
budgetary management, in one comprehensive centralized format to act as guidelines and to assist elected officials
and staff with understanding the City's financial practices for fiscal operations. Detail level fiscal policies are
administrative in nature and therefore not included in the budget document. However, fiscal policies that rise to
Council review and impact budgetary decision making are incorporated into the budget document for annual adoption
by Council. Currently this includes the Fund Balance Reserve Policy and the Capital Project Process Policy which
follows this section. Other Council defined policies will be added as directed.
The Summary Fiscal Management Policy Statements in this document are organized into the following categories:
• General Financial Principles • Investments
• Appropriations and Budgetary • Long-Term Debt
Control • Long-Term Financial Planning
• Auditing and Financial Reporting • Pension Funding
• Capital Improvement Planning • Revenues
• Development Related Financial • Risk Management
Policies • Treasury Management
• Expenditures and Purchasing • Trust&Agency Policies
• Fixed Assets and Infrastructure • User Fees
• Grants&Donations
• Internal Service Funds
GENERAL FINANCIAL PRINCIPLES
• The City shall ensure prudent financial practices are incorporated into operational procedures to ensure fiscal
integrity and safeguard the City's assets.
• The City's fiscal policies are structured to ensure fiscal responsibility,accountability,transparency,and efficient
use of resources. Fiscal policies are to be reviewed,updated,and refined as necessary,with general policy level
decisions brought to City Council for review and approval as Council Policies,and administrative and operational
level functions approved by the City Manager as Administrative Policies.
• Proposed revisions to the Fiscal Management Policy Statements and Council Policies are reviewed by the Finance
Committee and then provided to the entire City Council at the annual Council Retreat or Budget Study Session.
Council members are asked to provide comments or suggestions for revisions to the Administrative Services
Director with the final draft made available for review by the entire Council prior to adoption.
• The City's primary long-term financial goals seek to maintain the City's fiscal health,preserve essential services,
reduce financial risk, and support short and long-term administrative, financial, and operational goals in a
financially judicious manner. Long-term financial and infrastructure planning and the annual adoption of a
structurally balanced budget provides the foundation to these long-term financial goals. The City shall promote
and implement strong internal financial controls to manage risks and monitor the reliability and integrity of
financial transactions and operational activities.
CITY OF SARATOGA 9 FISCAL YEAR 2021/22 OPERATING&CAPITAL BUDGET
INTRODUCTION SECTION
• Financial information shall be provided in a relevant,thorough, and timely manner,to effectively communicate
the City's financial status to the Council,residents,employees,and all other interested parties.
• Financial stability goals and judicious responsiveness shall be the foundation upon which proactive and
advantageous financial decisions are made, and which guide the City's response to local, regional, and broader
economic changes through the years.
• The City shall undertake,adopt,and integrate new initiatives or programs in a cautious,well planned manner to
support the City's long-term ability to maintain essential services and infrastructure at the level and quality
required by its residents.
• The City Council's financial, operational, and community goals, objectives, and policies are incorporated into
and implemented with the development and adoption of the City's Operating and Capital Budgets.
• Efforts will be coordinated with other governmental agencies and joint power associations to achieve common
policy objectives, create beneficial opportunities and services for the community, share the cost of providing
governmental services,and support legislation favorable to cities at the state and federal level.
• The City shall develop and incorporate long-term financial planning tools to promote strategic analysis and
prioritization of financial resources in decision making.
• Replacement plans shall be maintained for fixed assets,such as vehicles,equipment,park infrastructure,building
fixtures and equipment,and technology infrastructure.
• Efficient major infrastructure funding requires comprehensive and long-term Master Plans. The City shall
endeavor to develop major infrastructure maintenance and replacement plans for roadways, bridges, retaining
walls,storm drains,streetlights,and similar infrastructure.
APPROPRIATIONS AND BUDGETARY CONTROL
• The City Council shall adopt an annual balanced operating budget and the first year of an integrated five-year
capital improvement plan budget by June 30'of each year,to be effective for the following fiscal year running
from July 1 st through June 30t''. Balanced budgets present budgeted sources in excess of budgeted uses. Budgeted
"Sources" include Revenues, Transfers In, and Appropriated Uses of Fund Balance. Budgeted"Uses" include
Expenditures and Transfers Out. Operating and Capital Budgets are to align with the City's long-term financial
goals.
• Each year,Finance&Administrative Services Department staff provides;a short recap of the prior-year budget;
a mid-year budget status report;and an updated five-year financial forecast to the City Council,typically at the
Annual Council Retreat(scheduled in late January or early February). This annual review assists Council with
formulating direction for long-range fiscal planning,Operating Budget development,and capital project funding
appropriations.
• Budgets are prepared on the same basis of accounting used for financial reporting: governmental fund types
(General,Special Revenue,and Debt Service)are budgeted according to the modified accrual basis of accounting;
proprietary funds(Internal Service Funds)and fiduciary funds(Custodial Funds)are budgeted under the accrual
basis of accounting.
• The Operating Budget is primarily funded with current year revenues. Dedicated fund balance reserves,such as
the Carryforward or Fiscal Stabilization Reserves represent prior-year savings designated for specific uses,which
may be used to fund current year operational expenses in accordance with their purpose,upon Council approval.
• Additionally,a minimal base amount of$500,000 remains in the Unassigned Fund Balance Reserve at year-end
to provide the first layer of fiscal protection for unanticipated operational shortfalls or unforeseen needs in the
following fiscal year.
• The Capital Budget is funded with both prior-year surplus funding and dedicated capital funding resources.
Dedicated funding sources include Gas Tax(HUTA)revenues,VTA Measure B funding,road impact assessment
CITY OF SARATOGA 9 FISCAL YEAR 2021/22 OPERATING&CAPITAL BUDGET
INTRODUCTION SECTION
revenues; project revenues and reimbursements; community benefit assessments; and federal, state, local, and
private grants.
• In practice,budgeted revenues are conservatively stated, and budgeted expenditures are funded at the full level
required to meet annual operational and capital improvement goals. With effectively managed revenue streams
and efficient use of resources, fiscal year-end operational budget surpluses are typically available to fund future
capital improvement projects and contribute to the City's fiscally responsible reserve accounts.
• The City Council maintains budgetary control at the fund level; any changes in total fund appropriations during
the fiscal year must be submitted to the City Council for review and Council majority approval. Operating Budget
appropriations lapse at the end of each fiscal year unless specifically carried forward by appropriation in the
following fiscal year's budget. Capital Budget appropriations are structured as a multi-year workplan;therefore,
project expenditure balances are automatically carried forward to the following fiscal year as part of the annual
budget adoption until funding is exhausted,modified,or the project is completed.
• The City's adopted budget shall comply with State law that limits annual budget expenditures to the appropriation
limit calculated in accordance with Article XIIIB of the Constitution of the State of California. Known as the
Gann Limit,the City Council adopt an annual resolution to this effect.
• The City Manager is authorized to implement the City's workplan as approved in the adopted budget. Within a
specific fund, the City Manager has the discretion to adjust appropriations between categories, departments,
programs, and projects as needed to effectively operate, provided the fund's total appropriation amount is not
changed. An example would be to backfill a vacant salaried position with a contract service,therefore shifting
budgeted funds from wage and benefit appropriations to an operating expense expenditure within the Operating
Expense appropriations. The City Manager also has the authority to withhold filling the position for a time if
conditions warrant a delay.
• Generally, recurring expenditures are funded with recurring revenues, or with revenues specifically designated
for operational use. One-time expenditures may be funded with one-time revenues or fund balances reserves.
Fund balance reserves are to be used for non-recurring one-time expenditures and capital projects.
• In compliance with Council's Fiscal Stewardship goal, fiscal stability and sustainability principles are
incorporated into budget planning. Appropriating adequate funds on an annual basis for the replacement and
maintenance of assets through Internal Service Funds, prioritizing infrastructure maintenance and repair in the
capital budget, and institutionalizing prudent payment strategies for long-term liabilities are foundational
strategies of fiscal stability and sustainability.
• The City Council appropriates $50,000 annually to a `Council Discretionary account' to provide Council with
funding for unplanned expenditures. Council direction and consensus approval is required to utilize these funds.
AUDITING AND FINANCIAL REPORTING
• California State statutes require an annual financial audit of the City's financial records and transactions by
independent Certified Public Accountants. The City shall comply with Generally Accepted Accounting
Principles (GAAP) and produce annual financial reports pursuant to Governmental Accounting,Auditing, and
Financial Reporting(GAAFR)guidelines. The independent auditor will issue an audit opinion to be included in
the City's Comprehensive Annual Financial Report(CAFR)testifying to the financial report's conformance with
accounting principles.
• Additional financial reports issued by the Auditor's may include: Singe Audit Report(annual report of federal
grant expenditures if in excess of the federal single audit limit is expended in a fiscal year), a Transportation
Development Act (TDA) report (annual report of TDA fund expenditures), an Appropriations Limit review
report(to establish tax revenue appropriation limit),and a Management report on the City's Internal Controls.
• The City shall submit the CAFR to the Governmental Finance Officers Association(GFOA)Financial Reporting
Program each year for review,and if in compliance with the program's requirements,apply to receive an award
for meeting GFOA's financial reporting standards.
CITY OF SARATOGA 9 FISCAL YEAR 2021/22 OPERATING&CAPITAL BUDGET '
INTRODUCTION SECTION
• Regularly scheduled external Financial Reports include the following:
• State required Annual Cities Report and Annual Streets Report completed in conjunction with the year-
end close.
• State required Annual Debt Transparency Report for any debt issued after January 21,2017.
• California Debt and Investment Advisory Commission's (CDIAC) Mello-Roos Community Facilities
District(CFD)Fiscal Status Report for CFD bond debt.
• Quarterly SMIP(Seismic Motion)fee reconciliation reports;CASp(ADA Accessibility)reconciliation
reports:and California Building Standard Commission(green building standards)reconciliation reports.
• Quarterly Use Tax Reports to remit uncollected sales tax to the State Board of Equalization.
• SB90 Mandated Cost reports for claims to comply with State regulated legislation.
• Annual UST Certification report to show fiscal responsibility for the City's underground storage tanks.
• Annual Possessory Interest Report submitted to the County's Assessor's Office to report City-owned
leased property.
• Regularly scheduled internal Financial Reports include the following:
• Weekly check registers and monthly Cash and Investment Treasurer Reports are submitted for review
and approval at City Council meetings.
• Quarterly financial reports provide a status update on General Fund revenues and expenditures for the
first,second,and third quarters.
• A mid-year budget status report is presented to City Council in February each year to provide a
comprehensive financial overview of the current year's budget and to propose recommended budget
adjustments as appropriate.
• A year-end financial recap is provided after the City's annual financial audit is completed.
CAPITAL IMPROVEMENT PLANNING
• The Capital Improvement Plan is an ongoing process through which the City identifies,prioritizes,and develops
a multi-year workplan for major capital expenditures and their associated funding sources, in the effort to
improve and maintain the City of Saratoga's roadways, parks, and facility infrastructure. Non-infrastructure
projects may also be included in the CIP under the Administrative&Technology programs if they are one-time,
operational efficiency,technology,or multi-faceted administrative projects.
• Generally, CIP improvements are major expenditures that have a multi-year life span and result in becoming
City assets. The City's standard definition of a Capital Improvement Plan project is for the construction,
acquisition,rehabilitation,or non-routine maintenance work that generally costs$25,000 or more,with a useful
life of at least 5 years at a fixed location. The City also includes projects under$25,000 if they include staged
or ongoing improvement projects,or if they are significant multi-year projects.
• Capital Planning is developed and prioritized through infrastructure and operational assessments of asset
maintenance plans, urgent mitigation needs to prevent structure or system failures, health and safety issues,
federal or state mandates,availability of city and external funding,efficiencies,impacts if project not completed,
business or community input/demand,and short-term vs long term cost of replacement considerations.
• The Capital Improvement Plan includes funded capital improvement projects,typically scheduled for completion
within the five year plan timeline,with cost estimates based on current year dollars. Project estimates are updated
as needed,due to price changes,design specifications,or project scope adjustments.
• Departmental staff research and prepare project proposals for review by Department Directors. Directors meet
with the City Manager to identify and collaborate on approved proposals. Additionally,City Council members
may propose projects during City Council meetings, for which if seconded, staff will research and prepare
project proposals. Finalized project proposals are brought to Council for review. Council then collectively
directs which project proposals are to be funded and included in the following year's Proposed Capital
Improvement Plan Budget in accordance with available funding. Council also determines what projects shall be
included on the Unfunded Project List for future consideration.
CITY OF SARATOGA 9 FISCAL YEAR 2021/22 OPERATING&CAPITAL BUDGET 1
INTRODUCTION SECTION
• The five-year Capital Improvement Plan (CIP) is updated annually in conjunction with the operating budget.
While the CIP reflects the current and changing needs of the community as well as enhancements to improve the
quality of the community, Council prioritizes the maintenance of City infrastructure to safeguard the public's
safety and reduce maintenance costs over the long-term. The first year of CIP funding is adopted annually to
authorize current year appropriations,which includes any remaining funds appropriated in the prior year's CIP.
• The CIP is categorized into programs by project type. The four programs include: Street Improvements,Park
&Trail Improvements,Facility Improvements,and Administrative&Technology Improvements.
• All projects within the CIP programs are appropriated,managed, and tracked as separate funding entities,with
each project's financial status reported on a monthly basis in the Treasurers Report.
• Project updates are recorded in the annual Capital Budget, with narrative, timeline, and financial summary
information updated with each published budget document.
• Capital improvements that specifically benefit a select group of users and/or are fee-for-service based are to be
financed through user fees, service charges,special assessments and taxes,or development impact fees.
• The City shall identify and dedicate capital improvement related funding directly to the CIP and to maximize the
use of grant funding for capital improvement projects.
• Grants,insurance,or other reimbursement funding is to be returned to the expenditure's funding source,unless
otherwise directed by Council. For instance, Hillside Reserve funded projects that receive insurance
reimbursement payments are to be returned to the Hillside Reserve,and grant reimbursements for projects funded
through the CIP Reserve are to be returned to the CIP Reserve when payment is received.
• After completion of the prior year's audit and the General Fund's priority funding requirements are met, the
remaining net operations are moved into the Capital Project Reserve at year end. Proposed uses for the Capital
Project Reserve fund is reviewed by Council,with preliminary allocation direction voted upon by Council at the
Budget Study Session in April. This direction is presented at the Proposed Budget Hearing in late May or early
June,with Final CIP funding direction determined by Council with Budget Adoption in June.
• Council has designated the following capital projects as fundamental to maintaining City infrastructure on an
ongoing basis,and shall therefore have priority status for available Capital Improvement Reserve funding: The
below funding allocations are guidelines to be reviewed by Council for budget direction each fiscal year:
* $250,000—Roadway Infrastructure Maintenance&Repairs(for Sidewalk,Storm Drains,Curb&Gutter,
and Bridge Maintenance)
* $200,000—Retaining Wall Maintenance&Repairs
* $250,000—Parks,Trails,Grounds&Median Replacement Funding
* $150,000—Roadway Safety and Traffic Calming
$ 25,000—Public Art Infrastructure Projects
$ 25,000—Hakone Improvements
• The Roadway Maintenance and Repair (RM&R) CIP project is the primary CIP project funded in support of
Council's goal to maintain Saratoga city streets at an average 70 PCI rating. On occasion,separate street specific
resurfacing projects are established that also contribute toward this goal. In FY 2016/17,Council established a
$2 million minimum annual funding goal. Funding comes primarily from dedicated Gas Tax Revenue and from
Vehicle Impact Fees assessed on the Solid Waste Services contract provider. This CIP project encompass
roadway repairs,resurfacing, and rehabilitation projects,traffic light, curb and gutter, and other miscellaneous
repairs,striping and signage,and assorted street materials and supplies.
DEVELOPMENT RELATED FINANCIAL POLICIES
• Most planning and building services are provided for business and individual benefit rather than for the general
community's benefit. As such, the Community Development Department planning application and building
permit fees are established at rates to recover the full cost of the service provided. However,a number of services
CITY OF SARATOGA 9 FISCAL YEAR 2021/22 OPERATING&CAPITAL BUDGET
INTRODUCTION SECTION
provided by the department are not fee based(code compliance,event permits,etc.),hence the department is not
full-cost recovery based overall.
• The Williamson Act, also known as the California Land Conservation Act, was passed by the California
Legislature in 1965 to encourage rural & agricultural land-owners to keep their land undeveloped. When land-
owners enter into a contract under the act,they benefit from lower property taxes,which are based on the property's
current use,rather than paying market value-based tax rates. In exchange,the property is to remain undeveloped
and continue to function in the same manner for the duration of the contract. Contracts are valid for 10 years and
are automatically renewed unless the farmer or rancher cancels it. The City does not limit the number of
Williamson Act contracts entered into each year.
• The Mills Act is State-sponsored legislation granting local governments the authority to enter into an agreement
with property owners to allow reduced property tax payments in return for the restoration and continued
maintenance of their historic property. The property must be privately owned and on a local, state, or national
register of historic places. After the initial 10-year contract expires, the contract may extend one year annually
unless either party elects to non-renew.
Since the agreement reduces the property tax assessment,the City receives a smaller share of property tax revenue
in comparison to a property that is assessed at market value. Per State law, the County Assessor is required to
recalculate each individual property's tax assessment each year, based upon a variety of stated market factors.
This results in reductions that are specific to each property,with some benefiting more than others. The City will
allow approval of up to three Mills Act Contracts per year.
EXPENDITURES AND PURCHASING
• All expenditures shall be in accordance with the City's purchasing policy, travel policy, credit card policy,
contract policy and public contract code,state or federal law,or any other applicable guidelines or regulations.
• Expenditures are managed at the program level. Program managers are to ensure expenditures do not exceed the
budgeted workplan and must take immediate action if at any time during the fiscal year an operating deficit is
projected at year-end. Corrective actions may include expenditure reductions, service reductions, or with
Council approval,budget adjustments to increase the program budget.
• The City's current purchasing policy establishes purchasing authority levels, purchasing procedures, and
procedural requirements,for the procurement of supplies,equipment,and services,in conformance with Federal
and State codes and regulations,and City Ordinance No.2-45.
• Public Work projects governed by the State's Public Contract Code are excluded from provisions of the City's
purchasing policy.
• Guidelines established by the City's Purchasing Policy directs the City's departments to purchase the best value
obtainable, securing the maximum benefit for funds expended, while providing all qualified vendors an equal
opportunity to do business with the City.
• Services and supplies purchases that exceed $5,000 require written quotes and must be approved by the
Purchasing Officer or designee,typically through the Purchase Order process. Documentation is to be retained
by the department in accordance with the Record Retention Policy and schedule.
• Services,supplies,and fixed asset purchases exceeding$25,000 must be authorized by the City Council,unless
purchase is specifically identified as approved in the adopted budget or excluded under the Purchasing Policy.
• City departments shall conduct quarterly program and capital project reviews to determine if projected operating
revenues and expenditures meet budgeted expectations. If an operating deficit is projected to occur at year-end,
the departments shall evaluate and implement corrective actions as needed and notify Council before services
will be impacted.
CITY OF SARATOGA 9 FISCAL YEAR 2021/22 OPERATING&CAPITAL BUDGET
INTRODUCTION SECTION
FIXED ASSETS AND INFRASTRUCTURE
• Tangible assets with a cost equal to or greater than$10,000 and a useful life of more than one year are considered
fixed assets and added to the capitalization schedules. Repairs and maintenance of infrastructure assets will
generally not be subject to capitalization unless the expense extends the useful life of the asset.
• The City will sustain a long-range fiscal perspective through the use of a five-year Capital Improvement Plan
designed to maintain the quality of City infrastructure, and through Internal Service Fund programs to both
maintain and replace operational infrastructure, such as City buildings, fixtures, and equipment, vehicles and
public works equipment,and technology related equipment on an ongoing basis.
• A Capital Asset system will be maintained to identify all City assets, their condition, historical and estimated
replacement costs, and useful life. Asset information is retained to provide information for preparation of
financial statements in accordance with GAAP and compliance with GASB 34 requirements.
• Infrastructure management systems are to be developed and maintained to provide long-term financial and
operational planning. These shall include various roadway system management programs, storm drain system
management plans,bridge replacements,street signal system replacements,and all other infrastructure categories
that require significant financial resources to fund eventual replacement needs.
• Information Technology software,hardware,and auxiliary equipment and system assets are tracked and funded
through the Operating Budget's Internal Service Replacement Fund, whereas annual appropriations in the
Information Technology Services program budget funds most ongoing license,maintenance,and security costs.
GRANTS&DONATIONS
• The City recognizes the value of grants and donations to extend pre-existing services, introduce new initiatives,
add artistic and cultural infrastructure, implement technological advances, and subsidize programmatic staffing
for public safety,recreational activities,development support, social services,homeland security,and economic
efforts.
• City will seek to obtain and effectively administer federal, state, local, foundation,business, and private grants
that support the City's priorities and provide a benefit to the City, with grant requirements taken into
consideration.
• City staff shall notify City Manager of grant proposals prior to submitting a grant application. If approved to
pursue,requesting department's staff are responsible for all aspects of the grant process,including preparing and
submitting grant proposals, preparing staff reports, ordinances and resolutions if needed, developing grant
implementation plans, managing the grant program,preparing and submitting reports to grantors, and properly
closing out grant projects. Staff shall work with Finance staff to track grant funding and expenses,and to generate
grant payment requests.
• The acceptance of grant funding will be assessed for both immediate and long-term costs and benefits to the City.
For example,a grant to construct infrastructure would incur future ongoing maintenance costs. These costs shall
be disclosed with the grant application and/or pre-award notice.
• All accepted grants and donations are to have assigned staff,known as the Grant/Donation Administrator,who is
responsible for grant/donation oversight to ensure rigorous adherence to the grant or donation's related activity,
ensure accountability for financial and ethical administration,and is consistent with the City's strategic priorities.
• Infrastructure addition or improvement grants in excess of$10,000 shall be brought to the Council for review and
approval.
• Operating Services grants, such as funding for health and safety programs that primarily utilize staff or contract
service,or pay for material and supplies to accomplish the grant objectives may be approved by the City Manager
up to the City Manager's current purchasing limit of$25,000.
• The City Council's Public Art Policy establishes public art grant and donation authorization approval levels.
CITY OF SARATOGA 9 FISCAL YEAR 2021/22 OPERATING&CAPITAL BUDGET
INTRODUCTION SECTION
• Donations may be accepted in accordance with the City of Saratoga Donation Policy most recently approved by
the City Council. Under the current policy,unrestricted donations of$5,000 or less may be accepted or declined
by the City Manager. Restricted donations of$500 or less may be accepted or declined by the City Manager.
Unrestricted donations of more than $5,000 and restricted donations of more than $500 must be brought to the
City Council for consideration. The City Manager may choose to request City Council consideration of any
donation,regardless of value.
INTERNAL SERVICE FUNDS
• Internal Services Funds are established to both equitably allocate operating costs to departments for support and
maintenance services,and to stabilize and spread the City's replacement and operational costs over fiscal years
for the purpose of providing an accurate and balanced long-range fiscal perspective of the use of services and
assets.
• Vehicles, Equipment, and Building asset replacement and maintenance types of Internal Service Funds are
structured to provide a consistent level of funding for asset and equipment replacement,and to ensure sufficient
funding is available for the regular maintenance,repair,and replacement of the City's vehicles,equipment,and
building fixtures in an ongoing manner.
• Technology and Office Equipment replacement and maintenance Internal Service Funds are structured to provide
a consistent level of funding for the replacement of assets and projects, and to appropriately distribute support
and maintenance costs to City departments.
• The Liability and Workers Compensation Insurance Internal Service Funds shall maintain adequate reserves to
pay all valid self-insured claims and insurance deductibles,including those incurred but not reported,in order to
keep the insurance funds actuarially sound. Additionally, funding is used to maintain required safety related
documents,such as the City's ADA Transition Plan,and the Industrial Injury Prevention Plan(IIPP).
• Each Internal Service Fund will set recovery charges at rates sufficient to meet all operating expenses,
depreciation,and fund balance reserve policy objectives.
INVESTMENTS
• The City maintains a detail-level Council approved Investment Policy that outlines the goals of fiscal security
and investment risk levels allowed to achieve the City's stated security restrictions and investment objectives.
The Investment Policy is brought to Council for review and adoption each year,just prior to the beginning of the
fiscal year.
• The policy shall comply with the State's California Debt and Investment Advisory Commission (CDIAC)
guidelines for the practice of public finance.
• Fund Reserves and excess operational funding reside in the State managed Local Agency Investment Fund(LAIF)
unless expressly approved by the City Council's Finance Committee to invest in other vehicles approved in the
City's Investment Policy.
• The City's Finance&Administrative Services Department shall oversee Treasury functions and submit a monthly
Treasurer's Report to report on City funds,investments,and interest earnings.
LONG-TERM DEBT
• The City maintains a Council approved Debt Policy to provide clear direction on debt issuance. Existing debt
shall comply with all legal and reporting requirements to ensure the City is in compliance with State regulations,
GASB guidelines,and transparency efforts.
• The City shall seek to maintain a high credit rating through sound financial practices as a foundational financial
objective,in order to obtain the lowest possible borrowing cost,and maintain financial responsibility.
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• The City does not incur debt for operational purposes or capital improvements as a standard practice. Under
extraordinary circumstances,the City may seek voter approval for General Obligation(GO)Bond Debt for city-
wide major infrastructure rehabilitation,or through Community Facility District Bonds for specific community
desired infrastructure improvements.
• Long-term Financing Debt is typically incurred for capital improvements or special projects that cannot be
financed from current or dedicated revenues,or for large liabilities resulting in significant financial impacts. In
principle,long-term debt is used only if the debt service requirements do not negatively impact the City's ability
to meet future operating,capital,and cash reserve policy requirements.
• Through City Council approval,the City may function as a bonding conduit for special districts. This may occur
when a neighborhood or distinct area is seeking to improve private or cooperatively owned infrastructure, such
as private roads or water system cooperatives. A special district may also be established to improve publicly
owned infrastructure,such as a neighborhood park or a parking lot.
• For special district debt offerings,the City shall require full liability protection and cost recovery as necessary
to protect the City and mitigate the cost associated with such actions.
• The term for repayment of long-term financing shall not exceed the expected useful life of the project or extend
beyond functionally appropriate payment terms. Additionally, financing payment terms must be established at
a manageable funding level or reasonable assessment level.
• The City shall monitor all forms of debt in conjunction with budget development throughout the year and will
report concerns and remedies to the City Council if needed.
• The City will ensure compliance with bond covenants,providing financial information to reporting parties as
required under the terms of the contract or State law.
• The City will comply with Government Code Section 43605 limitations on debt,which limits general obligation
indebtedness to an aggregate 15%of the assessed value of all real and personal property of the City.
LONG-TERM FINANCIAL PLANNING
• City policy is to develop, build upon, and incorporate long-term financial planning processes into a
comprehensive plan that provides Council,staff,and the public with the resources to understand issues impacting
the City's financial condition,and the tools with which to make informed decisions.
• The City's Long-Term Financial Plan(LTFP)shall include various analyses and documents that support financial
planning efforts, including a financial forecast and analysis, fiscal policies, revenue descriptions and trend
analysis,an annual pension review,the City's Strategic Plan,the Capital Improvement Plan and funding analysis,
Information Technology Strategic Plan,and numerous asset and infrastructure master plans. While the financial
trend analysis and forecast is the foundation of the LTFP, the entirety of the various documents provide a
comprehensive outlook on many operational fronts.
• Long-Term Financial Planning is an ongoing event that begins at the Council Retreat to review Strategic Plan
goals and the current financial situation at the mid-year point, and as the starting point for the following years
budget process. Trends,critical or concerning issues,policy changes,new initiatives and priorities,new resource
requirements,and potential impacts and opportunities are reviewed in conjunction with financial projections for
the future. Direction is compiled into the following year's budgets,and plans are updated throughout the year,as
needed.
• Council shall review a General Fund revenue, expenditure,and financial position forecast of at least five-years,
to garner a longer-term perspective of current fiscal expectations and fairly-reliable projected fiscal impacts in
the effort to anticipate or mitigate operational changes for the near future. Because funds other than the General
Fund are both specific and limited in nature,they are not currently included in the annual review. However,staff
shall assess the funds and incorporate any items of concern into the forecast discussion.
• Revenues shall be described, documented, and properly classified with historical trend analysis and known
upcoming impacts built into forecast projections. Projections should be conservative,with those revenues of a
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more volatile nature projected with a greater conservative weight than those known to be consistent and
dependable. Additional factors, such as unsustainable growth, shall also be identified and folded into the
projections with caution.
• Expenditures are classified by category in summary but forecast by individual programs application in detail.
This methodology allows for greater specificity and accuracy in workplan expectations,while providing a broader
view of trends. These trends are utilized for longer perspectives in the forecast analysis,strategic planning,asset
management,capital prioritization and funding decisions,and funding gap analyses within the LTFP.
• A Reserve Analysis is conducted to review and recommends appropriate levels of reserves per the needs of the
reserve purpose,the priority of the reserve over other needs,and compliance with GFOA recommendations and
legal requirements.
PENSION FUNDING
• In the pursuit of prudent fiscal practices and long-term financial sustainability, the City seeks to mitigate the
overall cost of pension benefits, and prior year liabilities. Several strategies are utilized,which includes lower
tier pension benefits,lump sum prepayments,and accelerated payments.
• The City has three Miscellaneous Employee Pension Plan tiers:
♦ Tier I for employees hired prior to May 12,2012
♦ Tier II for employees hired on/after May 12,2012,and"Classic"employees hired on/after January 1,2013
♦ Tier III/PEPRA,for employees entering into the Ca1PERS pension plan system on/after January 1,2013
Tier I provides a 2%at 55 pension benefit. Tier II provides a 2%at 60 pension benefit. Tier III/PEPRA provides
a 2%at 62 pension benefit.
• In FY 2014/15,with Ca1PERS change to their pension funding methodology,Council paid off a large portion of
the UAL liability and then established an alternative to Ca1PERS 30-year repayment policy to contribute an annual
amount approximately equal to double the minimum Annual Required Contribution(ARC)due at the five-year
mark. The intent was to lower the overall cost of the liability,but also to shorten the payment period to 15 years
and maintain fiscal stability by establishing a set payment amount. Detailed information is provided in the
Financial Summaries Staffing Information section.
• Council also established a practice to pay Tier II and Tier III UAL amounts in full each year,to eliminate future
unfunded liabilities for the growing segments of employees. This amount is minimal each year as the actuarial
determined rates are in line with current actuarial factors,until actuarial factors are modified.
• The City's goal is to fund pension liabilities near or at 100%to reduce unfunded liability payments to minimal
payments each year. Currently,Tier II and III unfunded accrued liability payments are minimal,if any,and paid
in full each year in alignment with this policy,however the Tier I pension unfunded accrued liability is understood
to be a long-term goal.
• A review of the City's Unfunded Accrued Liability and Ca1PERS annual actuarial report will be brought to the
Finance Committee for review and analysis each year, along with Ca1PERS Pension liability projection tools as
they become available.
• In addition to the City's policy to reduce the Tier I UAL through additional discretionary payments each year,a
115 Trust may be established to prefund future year's Ca1PERS liability payments as an alternative to depositing
UAL payment funds directly with CalPERS . A 115 Trust is used to hold dedicated reserve funding in a higher
investment-return vehicle,while also setting aside the funds that are designated for recession planning. Council
direction determines when to use these funds,either as part of the annual budget adoption process,or during the
course of the fiscal year,if needed.
RECESSION PREPARATIONS
• The City shall incorporate preparations for the inevitable future recession in its fiscal and operational practices.
This includes prudent and cautious assessment of expansions in ongoing services, diligence in maintaining cost
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recovery for user services, aggressive funding of fund balance reserves to healthy levels in strong economies,
conservative budgeting practices, fiscal frugality, alignment of one-time funding sources and uses, and a
continued practice of long-term financial planning.
• Education of City finances is vital to knowledgeable financial decision making. Finance staff remain available
to all Council Members for one-on-one training sessions and to answer specific finance and budget questions
throughout their tenure on the Council,either spontaneously or scheduled,in person,by phone,or email.
• Council's identification of priority operational services, and Council Priorities as a whole are defined in the
Strategic Plan,which is adopted as part of the overall budget plan each year. The Strategic Plan helps to drive
long-term planning and operations and provides guidance in recession decision making when needed.
• Recession fiscal decisions will ultimately be specific to the unique time period,recessionary causes,and economic
environment,but a basic assumption is that recessions will impact the City's main revenue category of Property
Tax. Fortunately,this impact is delayed due to the nature of tax assessments occurring before severe impacts are
felt, and the subsequent distribution of funding, providing the City time to prepare. More immediate impacts
come from development-related services fees, Sales Tax, and Hotel Tax revenue reductions. The advantage of
having impacts hit City finances in phases allows for preliminary mitigation steps,and time to plan if more severe
mitigation steps are needed. However,this delay also plays out in reverse as a time lag occurs before the City's
finances return to normal. Hence,recession impacts will last a minimum of two years if minor, and(typically)
three to five years if more severe.
• Overall, financial resources funded during good economic periods are recommended for initial recessionary
reductions, such as 1)the delay or reduction of funding for Internal Service Fund operations,2)use of one-time
revenue resources,such as an unexpected payment or excessive net operation funding held for future use,and 3)
the reduction of expenditures included in the budget each year that are not essential to providing services, such
as staff conferences or optional consultant and contract services.
REVENUES
• General Revenue funding such as taxes, intergovernmental revenues, and interest provide the funding for
services conducted for city-wide benefit, such as public safety, infrastructure maintenance, and city
administration. Services provided upon request,such as for planning services and building permits,are financed
through user fees,service charges,and assessments directly linked to the level of services provided.
• To provide the Saratoga community with services and to maintain infrastructure, the City conducts ongoing
reviews of operations to assess revenue leakage. If applicable, assessments or charges are assessed, and user
fees are implemented for cost recovery.
• Designated and legally restricted tax and revenue funding sources will be accounted for in the appropriate funds.
General taxes and revenues not allocated by law or contractual agreement to other funds are accounted for in the
General Fund. Funds dedicated for specific capital improvements are accounted for in the appropriate Capital
Improvement Plan fund, within a designated project. An example is VTA Measure B Sales Tax deposited
directly to the Annual Roadway Improvement Project in the Street CIP Fund.
• Categories of Revenues include Taxes,Intergovernmental,Fees/Licenses/Permits,Charge for Services,Interest
Income, Rental Income, Other Sources such as grants, donations, sales of copies or maps, and over/short
adjustments,Internal Service Fund charges,and Capital Improvement Revenues.
• While a diversification of revenue funding is desired,the City only pursues additional funding streams that are
in alignment with the City's overall goal to support and protect the Saratoga community. The City does not enter
into profit-making enterprises that service select user groups, but rather seeks to engage in cost-recovery
activities or taxpayer-funded services that maintain or enhance the Saratoga community as a whole.
• Over the last decade,Property Tax revenue increased at a much faster pace than other tax revenues,due to rapidly
increasing housing prices and the State's agreement to bring the allocation percentage up to the full 7%minimum
rate,offset by the City's 17.4 ERAF calculation rather than the County's 47.7%ERAF rate. As a result,Property
Tax now makes up about 80% of all tax revenues,with Sales Tax, Franchise Fees, Transient Occupancy Tax,
Business License Tax,and Construction Tax making up the remainder. By itself,Property Tax comprises about
CITY OF SARATOGA 9 FISCAL YEAR 2021/22 OPERATING&CAPITAL BUDGET
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one-half of Total Operating Revenue,meaning there is a significant dependency on this one revenue category.
Hence,the City tracks Property Tax revenue closely and makes revenue and expenditure budgetary projections
and adjustments in line with anticipated fluctuations. With revenue growth expected to increase slowly now that
full allocation has been attained,City expenditure budgets will mirror this restrained growth.
• The City follows a vigilant policy of collecting local taxes and revenues due to the City through persistent follow-
up procedures. Efficiency of collections is paramount,and external resources are used as needed. An example
of this practice is the City's Business License audit engagement where a consultant is utilized to both educate
and ensure companies doing businesses within Saratoga are paying their business license tax.
RISK MANAGEMENT POLICY
• The City is insured for up to $30 million of general liability, auto, and property damage claims through a Bay
Area Joint Powers Association insurance cooperative(PLAN JPA). Claim coverage consists of up to$5 million
from the JPA,and$25 million from an excess insurance provider. The City is self-insured for the first$25,000
for general liability and auto claims;property damage up to$5,000 and third party auto claims up to$10,000.
• Workers Compensation claims are insured for the first$250,000 of coverage through the City's participation in
a Workers Compensation risk pool. After the $250,000 limit is met, an excess insurance coverage policy is
activated. The excess coverage provides an employer liability limit of$5 million per occurrence,and workers'
comp per occurrence limit of$100 million. Workers'Compensation claims are managed by the PLAN JPA as a
third-party administrator(TPA).
• The City's role in managing both Risk Management and Workers Comp programs is preventative in nature,
which is accomplished through careful monitoring of losses,working closely with the third-party administrator,
participating in training,proactively addressing infrastructure maintenance and potential risks,and by designing
and implementing safety programs to minimize risk and reduce losses.
• Claims against the City are submitted to the City's pooled liability JPA administrator in a timely matter. Adverse
claims in which City property is damaged, are also pursued for restitution. Repair cost for damages, and staff
time for attending to the accident/incident, cleanup, and repair time is billed to the other party. The JPA
Administrator follows up on these matters also.
TREASURY MANAGEMENT
• The City's Investment Policy shall be brought to the Finance Committee and City Council for review,discussion,
direction, and adoption on an annual basis. California Government Code Section 53600 and City of Saratoga
Municipal Code Section 2-20.035 require the City Council to annually review and approve the City's Investment
Policy.
• It is the policy of the City of Saratoga to invest public funds in a manner which will provide the maximum security
with the highest investment return,while meeting the daily cash flow demands of the City and conforming to all
state and local statutes governing the investment of funds.
• Finance staff shall exercise due diligence to comply with the Investment Policy. The City currently practices
conservative and cautious investment practices by limiting its investments to the State's Local Agency Investment
Fund (LAIF). Certificates of Deposits and high-grade investment vehicles may also be utilized under the
Investment Policy,however the Finance Committee will provide oversight,review,and direction on any decisions
to move a portion of the City's available funds into these other permitted investments. The Administrative Services
Department's Finance Division shall prepare a monthly report to the City Council that has sufficient detail to
present the financial condition of the City at month end, the cash and investments balance by fund, and fund
balances by fund type.
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TRUST&AGENCY FUNDS
• The City may serve as a Fiscal Agent for an agency organization only if the purpose of the agency is related to
City operations and is in the best interest of the City.
• A legal agreement governing the Trust or Agency relationship is approved by the City Council.
• The Trust or Agency organization remains a separate entity from the City and shall not represent itself as a
component of the City.
• As the Fiscal Agent, the City may hold funds provided by the agency organization in a separate and clearly
designated fund. The fund may earn interest at the City's investment rate.
• Depending on the level of services provided to the agency organization,the City may charge for the cost of any
and all fiscal services provided.
• Depending on the agreement,the City may purchase goods or services on behalf of the agency organization,and/
or disburse funds as directed and permitted by the agency's by-laws and purpose. However,the City is not liable
for any of the agency organization's debts,liabilities,or actions.
USER FEES
• The City allows for discretion in the use of general taxes to meet the cost of services that provide a larger public
benefit, such as code enforcement,and to recover the full or partial cost of services that largely or solely benefit
individuals, such as a building permit.
• In some cases, fees are established with a goal to discourage the use of a service, such as a false alarm fee that
results in the dispatch of a public safety officer. The fee may be structured to accelerate with usage but allows
for a level of leniency initially for this service with the understanding that cost recovery goals are not met.
• A master schedule of User Fees is reviewed and presented to Council on an annual basis to allow for the
adjustment of discretionary service and rental fees. If an adjustment is needed, a request to increase or decrease
the fee is brought to Council as a Public Hearing and becomes effective 60 days (or later if stated) following
approval of the fee adjustment. Typically, fee adjustments are brought to Council in late April for a July 15t
effective date,however a stand-alone fee adjustment may be brought to Council at any time throughout the year.
• The City's overall goal is to establish user charges and fees at levels that fully recover the direct and indirect
activity cost of providing a service or product. However,market rates and charges levied by other municipalities
(of similar size)for like services are taken into consideration when establishing rates,fees,and charges. As some
services have partial cost recovery objectives,cost recovery ratios will vary in accordance with policy objectives.
CITY OF SARATOGA 9 FISCAL YEAR 2021/22 OPERATING&CAPITAL BUDGET �'
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CITY OF SARATOGA 9 FISCAL YEAR 2021/22 OPERATING&CAPITAL BUDGET 1
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FUND BALANCE RESERVE POLICIES
Prudent financial management dictates that the City reserve a portion of its funds for future use to maintain fiscal
stability;ensure the continued orderly operation of government and provision of services to residents;and to mitigate
current and future risks.
As a general budget precept,the City Council decides when and whether to appropriate available funds to and from a
reserve account. Use of reserve funds must be authorized by either specific direction in the annual budget, or by a
separate City Council action—unless specifically directed by policy. Responsible fiscal stewardship also requires
adequate reserves be maintained for all known liabilities and established City Council and community directed
initiatives.
In the following Fund Balance/Reserve Policy guidelines,the descriptions include identification of the fund type and
classification,the purpose of the reserve,minimum and maximum funding goals if appropriate,appropriate utilization
of the reserve and by what authority,and the procedure for funding the reserve initially;on an ongoing basis,or after
utilization.
FUND BALANCE AND NET POSITION
In 2009,Governmental Accounting Standards Board("GASB")Statement No.54 revised fund balance classifications
for"Governmental Funds" into five specific classifications of fund balance with the intent to identify the extent to
which a specific fund balance reserve is available for appropriation and therefore spendable, or whether the fund
balance reserve is constrained by special restrictions. Government Funds for which these new rules apply include:
General Fund, Special Revenue Funds,Capital Project Funds,and Debt Service Funds.
For "Non-Governmental Funds" equity classifications are classified as "Net Position" with sub-classifications of
Restricted or Unrestricted Net Position. A third component of a Non-Governmental Fund's equity is"Net Investment
in Capital Assets,"which for Saratoga refers to the non-monetary portion of equity such as vehicles and equipment,
net of depreciation. Non-Governmental Fund types include Proprietary Funds(Enterprise and Internal Service Funds)
and Fiduciary Funds.
GOVERNMENTAL FUND TYPE RESERVE CLASSIFICATIONS
The Governmental Reserve classifications are defined as follows,which includes the applicable reserves that fall into
the classification.
Non-Spendable Fund Balance
Represents resources that are inherently non-spendable from the vantage point of the current period. The City does
not presently hold Non-Spendable Reserve funds.
Restricted Fund Balance
Represents fund balance that is subject to external enforceable legal restrictions. The City maintains the following
restricted fund balances under this designation:
• General Fund: Environmental Services Fund Balance Reserve
• Special Revenue Funds: Landscape&Lighting Assessment Districts Fund Balances
• Debt Services Fund: Library General Obligation Bond Debt Service Fund
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• Capital Project Funds
a) Park in Lieu Funds
b) Highway User Tax Allocation Fund(Gas Tax)
c) Capital Project Grant Funds
Committed Fund Balance
Represents fund balance constrained by limitations the government imposes upon itself at its highest level of decision
making and remains binding unless removed in the same manner. The City maintains the following fund balances
under this designation:
• General Fund: Hillside Stability Reserve
• General Fund: Facility Replacement Reserve
• Capital Improvement Plan Funds: Capital Improvement Project Fund Balance Reserve
Assigned Fund Balance
Represents fund balance identified by Council for an intended use;however as no legal obligations exist,the funds
may be re-designated and utilized for another purpose if Council chooses. The City maintains the following General
Fund reserves under this designation:
• General Fund: Future Capital&Efficiency Project Reserve
• General Fund: Carryforward Reserve
Unassigned Fund Balance
Represents funding which may be held for specific types of uses or operational funding/stabilization purposes,but is
not yet directed to a specific purpose. Only General Fund reserves can be designated under the"Unassigned"fund
balance classification. Other fund types are by nature structured for specific purposes,hence the fund balances are
therefore considered"assigned"for that purpose.
• General Fund: Working Capital Reserve
• General Fund: Fiscal Stabilization Reserve
• General Fund: Other Unassigned Fund Balance Reserve
Fund Balance Ratios
To ensure the City maintains available working cash flow and emergency funding at all times,the collective total of
the General Fund's Assigned and Unassigned Reserves shall be sustained at a minimum of 20% of General Fund
expenditure appropriations,net of transfers out.
GENERAL FUND YEAR-END ALLOCATIONS
After the City's financial records are finalized and audited, with legal obligations and liability reserves funded,
revenues in excess of expenditures are closed out to the Other Unassigned Fund Balance Reserve. A base amount of
funding, as set by budget policy, is to remain in the Other Unassigned Fund Balance Reserve, with the remainder
distributed in the following order:
1. Repayment of Fund Balance Reserve loans-back to established levels(e.g. borrowing from/usage of the Fiscal
Stabilization or Hillside Stability Reserves).
• For the Hillside Stability Reserve,loan repayment shall be repaid with year-end net operations if funding in
excess of the next year's priority Capital Improvement Project is available. At a minimum,reimbursements
shall be made in annual contributions of$100,000 until reserve balance reaches the$1 million reserve goal.
• Fiscal Stabilization loan repayments shall be made as directed by Council.
2. Annual contribution shall be made to Facilities Replacement Reserve and Fiscal Stabilization Reserve as
directed by Council.
3. Remaining funds are allocated to the Future Capital Improvement and Cost Efficiency Projects Reserve.
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GENERAL FUND RESERVES
Environmental Services Reserve
Under the Restricted Fund Balance classification,the Environmental Services Reserve represents revenues collected
under a prior funding structure for environmental purposes,and is therefore restricted for use in funding environmental
program costs such as clean water programs, street sweeping, and storm drain cleaning services. Per policy, the
Environmental Service Reserve is being utilized through annual budget appropriations of$50,000.
The Environmental Services Reserve originated from a one-time funding structural change and therefore will not be
replenished when depleted.
Hillside Stability Reserve
Under the Committed Fund Balance classification, a Hillside Stability Reserve of$1 million is set aside to provide
funding for unanticipated or unforeseen emergency or extraordinary costs related to hillside degradation,inclusive of
slide prevention and mitigation, slide repair, and associated drainage and roadwork to must be commenced prior to
the next fiscal year's CIP Project funding availability.
Use of the reserve requires an analysis be prepared and presented to Council for approval,or in the event of a landslide
requiring immediate emergency work,the Public Works Director may direct use of up to 10%of the reserve to make
emergency repairs and mitigate further damage until Council takes action. Reserve funding is to be used for
emergency work which exceeds operational funding provided for in the Operations Budget. Upon use,refunding of
the reserve shall be provided from year-end net operations,in full if funding is available,or at minimum in the amount
of$100,000 each fiscal year until the$1,000,000 reserve cap is reached.
Facility Replacement Reserve
The Facility Replacement Reserve is established to accrue funding for the major rehabilitation or replacement of City
Facilities (buildings/structures). Eligible uses of this reserve include both direct funding of public facility
improvements,and the servicing of related debt. Small facility building replacements,major facility renovations,and
down payment contributions toward a large facility replacement in conjunction with bond measure funding are
examples of intended Facility Replacement Reserve uses.
An initial contribution of$300,000 was established in FY 2012/13 with Council's recommendation to continue
funding at this level,as a priority use of year-end net operations funding. Effective FY 2016/17,Council's direction
is to increase the annual year-end contribution amount to$500,000,as funding is available. Council has set a goal to
fund the Facility Replacement Reserve to a level equal to 1/3 of the City's insured value over the next 20 years (by
FY 2036/37)as a fiscally responsible practice to maintain city infrastructure In principle, Saratoga does not pursue
bond money to fund capital improvements,however, replacing high cost facility infrastructure requires a long-term
funding plan that may or may not be attainable through annual contributions. Therefore, the Facility Replacement
Reserve demonstrates both the City's good faith funding effort and financial stewardship for future bond measures if
needed,as well as accumulating funding for a down payment on replacement infrastructure to minimize bond funding
needs.
A facility's insured value represents the initial cost of the facility decreased each year over the facility's estimated
lifespan. Therefore, insured value represents the remaining life of the facility's purchase cost—it does not represent
the current cost to replace a facility. The City recognizes insured value is not sufficient to fund facility replacements,
therefore annual contributions will continue as an ongoing funding obligation even after the 1/3 reserve goal is met.
Changes in annual contributions and the reserve goal amount shall be determined by Council during the budget
process,in line with changes in the City's economic situation. Utilization of the reserve shall be brought to Council
for discussion and consideration as needed.
Future Capital&Efficiency Projects Reserve
Under the Assigned Fund Balance classification,the Reserve for Future Capital Improvement&Efficiency Projects
shall reserve funding for as yet undefined capital and efficiency improvement projects. Reserve funding is derived
from General Fund accumulated net operations(as available)and is therefore considered a"one-time funding source".
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Funds are held in this reserve until Council reviews funding requests and approves a use or transfer to a capital project
fund.
Use of the reserve funding is at the Council's discretion,but typically occurs in conjunction with the annual budget
adoption after Council conducts a comprehensive review of capital and efficiency improvement needs. Reserve
replenishment is dependent upon net operational savings in subsequent fiscal years.
Carryforward Reserve
Under the Assigned Fund Balance classification,the Reserve for Carryforwards represents funding held at the end of
each fiscal year for critical unexpended operating budget appropriations to be purchased in the following fiscal year,
and any remaining Council Contingency funding. The reserve is reconciled at the end of each fiscal year to both
release prior year carryforward funding and reserve current year carryforward funding into the following budget year.
Staff determines the year-end reserve amount after all fiscal year payments are finalized; the reserve amount is
conceptually appropriated by Council each year in the budget adoption resolution.
Working Capital Reserves
In accordance with the City's cautious and conservative fiscal philosophy, the City's general prevailing financial
policy holds that the City should fund daily operations with current resources in order to avoid use of short-term
borrowing for cash flow management.
To support this policy a Working Capital Reserve is maintained that meets cash flow requirements,and in turn,ensures
the continuance of services to the public while also preserving the City's credit worthiness. To provide adequate
working capital in the case of extreme circumstances, the City shall maintain, in combination with the Fiscal
Stabilization Reserve, a minimum operational reserve of 60 days of the following year's General Fund budgeted
expenditures(net of internal service charges and transfers out),up to a maximum operational reserve amount equal to
90 days of the following year's General Fund budgeted expenditures (again, net of internal service charges and
transfers out). This reserve falls under the Unassigned Fund Balance classification.
Effective FY 2016/17,the Working Capital Reserve is maintained at$1 million(reduced from$2 million), and the
Fiscal Stabilization Reserve in maintained at $2.5 million (increased from $1.5 million). At this time a Working
Capital Reserve of$1 million is sufficient for cash flow needs, however, the funding level will be assessed on an
annual basis to ensure $1 million is sufficient for cash flow needs. The $1 million funding shift to the Fiscal
Stabilization Reserve reflects a more realistic reserve usage structure—the Working Capital Reserve's purpose is to
ensure sufficient operating cash;the reserve has no defined fund uses,repayment terms,or authorization requirements.
On the other hand,the Fiscal Stabilization Reserve's purpose is defined and may be called upon for critical uses in the
future. The overall 60-day General Fund operational reserve minimum requirements shall continue to be met.
Fiscal Stabilization Reserve
Under the Unassigned Fund Balance classification,the Fiscal Stabilization Reserve represents a funding set-aside to
provide temporary financing for budget stabilization caused by fiscal downturns, unanticipated extraordinary
expenditures related to a natural disaster or calamity,or from an unexpected liability or funding decrease created by a
legislative action. Effective July 1, 2016, the Fiscal Stabilization Reserve funding level increased by a $1 million
transfer from the Working Capital Reserve,up to$2.5 million. As of FY 2018/19,the Development Services Reserve
of$650,000 was integrated into the Fiscal Stabilization Reserve to reflect the Council's desire to review citywide
operational priorities and needs as a whole rather than segmented sections. This brought the Fiscal Stabilization
Reserve up to$3,150 million;approximately 15%of the General Fund's budgeted operations. Together,these funding
shifts provide a focused but flexible reserve funding purpose and utilization structure.
Fiscal stabilization uses are defined and restricted to 1)revenue declines lasting more than one year and equal to more
than 5%of either property tax,the combined total of other taxes,or General Fund revenues in total;2)an unanticipated
extraordinary operational increase of more than 5%such as from a natural disaster;or 3)an unexpected Federal,State,
County or Ca1PERS funding change.
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Council may utilize funding at budget adoption,by adoption of a budget adjustment resolution during the course of
the year, or after a Federal, State, or locally declared emergency. In the event a locally declared emergency takes
place, the City Manager has the authority to spend funds until such time as the City Council takes action. Reserve
appropriations are to be replenished from year-end net operations, as available, on a priority basis. The Fiscal
Stabilization Reserve funding level will be assessed on an annual basis and may direct staff to increase the reserve
fund through the budget adoption or through a budget adjustment to ensure this funding level is sufficient in light of
operational reserve requirements and utilization needs.
The General Fund budget continues to increase each fiscal year,the overall 60 day General Fund operational reserve
minimum requirement level is close to the current total of Working Capital and Fiscal Stabilization Reserve Fund
total. To assist the Fiscal Stabilization and Working Capital Reserves remain at minimum requirement level,$100,000
shall be allocated annually into the Fiscal Stabilization Reserve from Net Operations as part of the General Fund Year
End Close,effective FY 2021/22. This allocation shall only occur if General Fund Net Operations exceed a minimum
of$1,000,000 to ensure adequate funding is available for other necessary allocations.
Compensated Absences Reserve
Under the Unassigned Fund Balance classification, the Compensated Absences Reserve is established to smooth
expenditure fluctuations resulting from the payout of accrued leave to employees at service separation and distribution
payouts. Reserve funding equal to one-third of the compensated absences liability is established at year-end. Reserve
funding in excess of one-third of the liability is to be returned to the General Fund's Other Unassigned Reserve.
Use of the reserve occurs when total annual compensated absences payouts exceed budgeted salary funds. Large
payouts decrease the compensated absences liability at year-end, thereby supporting the practice of utilizing the
reserve if needed. Year-end reconciling allocations to and from the reserve are approved though Council's budget
resolution adoption each fiscal year,with the liability and resulting reserve amounts determined as part of the year-
end close process.
Other Unassigned Reserve
The `Other Unassigned Reserve' represents accumulated net operations not yet allocated to other fund balance
reserves,and by definition,fall into the Unassigned Fund Balance classification.
General Fund vs Other Fund Reserves
Other Fund's accumulated net operations are typically accounted for in an undefined reserve account in the fund—
and typically titled `Fund Balance Reserve' meaning they do not have reserve categories. This difference is because
other funds are structured for specific uses or commitments,hence the fund balance already has a directed function
and fund balance is therefore committed for that purpose.Whereas the General Fund is used for multiple and various
operational purposes thereby requiring a distinction of purpose for each reserve.
SPECIAL REVENUE FUND RESERVES
Landscape&Lighting and Storm Water Assessment Zone Funds
Assessment Zone Funds are Special Revenue Funds,which is a type of governmental fund. As a governmental fund,
the Landscape & Lighting and Storm Water Assessment Zone Funds comply with GASB 54 fund balance
classifications,and by nature of the fund's purpose,fund balance reserves are classified as restricted reserves.
Special Revenue Funds account for and report the proceeds of specific revenue sources that are restricted or committed
to specified purposes(other than for debt service or capital projects.) For Saratoga,Assessment Zone Special Revenue
Funds are established to account for each individual assessment zone financial assets separately; thereby each fund
has its own separate fund balance reserve.
Each zone's Fund Balance Reserve should be sufficient to provide working capital to cover operational expenses
through the first half of assessment receipts in February,therefore equitable to approximately one-half of a district's
annual expenditure budget. The second half of receipts are received in late May or early June. Some districts may
include capital improvement projects in addition to ongoing regular maintenance. This requires accumulating fund
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balance over the years to generate sufficient resources for the improvement projects. As each zone's situation is
different,a maximum fund balance shall be determined by the Public Works Director.
Requests for use of the reserve for special projects are approved by Council through budget adoption or by a Council
approved budget adjustment resolution throughout the year. Reserves are replenished from the Fund's net operations
in subsequent years.
DEBT SERVICE FUND RESERVES
Library General Obligation(GO)Bond Debt Fund
The Library General Obligation(GO)Bond Debt Fund is a Debt Service Fund established to account for the financial
resources accumulated for principal,interest,and cost of issuance expenditures associated with the Library Bond Debt.
As Debt Service Funds are a governmental fund type, the fund reserves fall under the GASB 54 fund balance
classifications. Debt Service Fund reserves are classified as a Restricted Reserve with the funding only spent for
specific purposes as stipulated by the bond covenants.
The Library GO Bond Debt Fund ensures receipts are tracked separately, and that funding is available for the GO
Bond debt service requirements. At a minimum, the year-end fund balance reserve shall be sufficient to provide
working capital to cover the semi-annual principal and interest debt payment due on August 11'as the GO Bond tax
receipts are received after the 11 debt payment is due. December receipts provide for the February payment. In
addition, as bond assessments are collected as a percentage of property values, reserves should provide sufficient
funding to compensate for tax fluctuations. The fund's reserve maximum is set at no more than one-year of budgeted
annual expenditures.
The reserve balance is increased(or reduced)through establishing assessment rates at more(or less)than the semi-
annual payments and bond services require. Therefore,use or replenishment of the reserve is approved by Council
through budget adoption, and implemented through an increased or reduced assessment rate as a result of the fund's
net operations.
Arrowhead Community Facility District Bond Debt Fund
In 2016,the City agreed to act as the fiduciary agent for the Arrowhead Community Facility District's bond issuance
to fund the community's water system infrastructure. The bond was issued in December 2018,and participants in the
bond issuance began assessment payments in FY 2018/19. The annual debt service assessment pays for the cost of
the bond's principal and interest payments, and the associated administrative costs. Fund reserves are comprised of
assessments collected less bond costs. Assessments are established as dollar amounts rather than percentage rates,so
the CFD Bond Debt Reserve does not generate unexpected excess fund balance as does the GO Bond Debt Fund.
CAPITAL IMPROVEMENT PROJECT FUND RESERVES
Overview
Capital Improvement Project(CIP)Funds account for the acquisition and maintenance of major capital assets other
than those financed through special assessments or enterprise funds. Capital Project Funds area type of governmental
fund and therefore comply with GASB 54 fund balance classifications. Because Council has directed the fund's
appropriated funding be spent on specific capital improvement projects,the Capital Project Fund Balance Reserve is
classified as Committed Fund Balance.
Budgeted capital improvement project funding is determined by the scope of work approved by Council,and remains
assigned for that use until completed or reassigned by Council. Fund Balance amounts represent the total remaining
funds in the individual projects at year-end. As Fund Balance amounts are determined by the amount of project
completion at year-end,setting a minimum or maximum amount is not applicable. Fund Balance is automatically re-
appropriated to budgeted capital projects in the following fiscal year for the improvement work to be completed.
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Street Improvement Projects Funds
Street Improvement Project Funds provide for a safe and functional roadway and pedestrian street system. Each Street
Improvement Fund(CIP Street Fund,CIP Grant Fund,and Gas Tax Fund)has multiple projects which roll up into the
overall fund balances,but remain designated for use by project.
The CIP Street Fund receives annual funding from designated fees,reimbursements,contributions,and transfers from
other funds. The CIP Grant Fund receives federal,state,and local grants which vary in source and amount from year-
to-year. On occasion, a private grant may be received. Typically,CIP Grant Funds have a negative fund balance as
project work is conducted before reimbursement is received. Gas Tax Funds represent annual Highway User Tax and
Transportation Congestion Relief revenue allocations that are to be accounted for separately and are subject to State
audits.
Park&Trail Improvement Project Funds
Park&Trail Improvement Project Funds provide for capital improvements to the City's neighborhood and city parks
and plaza,the sport fields,bike and pedestrian trails, and open space areas throughout the City. Each of the Park&
Trail Improvement Funds(CIP Park&Trail Fund,CIP Tree Fund,and the CIP Park&Trail Grant Fund)have multiple
projects which roll up into the overall fund balances,but remain designated for use by project.
The CIP Park&Trail Fund receives annual funding from Park-In-Lieu fees,occasional subventions,reimbursements
and contributions, and transfers in from other funds. The Tree Fund receives revenue from tree fines and transfers
from other funds upon Council direction. The CIP Grant Fund receives federal, state, local and occasional private
grants which vary in source and amount from year-to-year. Typically,CIP Grant Funds have a negative fund balance
as project work is conducted beforehand and then reimbursed from expenditure invoices.
Year-end fund balance represents the remaining unexpended project funds (net of any negative CIP Grant Fund
Balance)which are subsequently re-appropriated by Council into the following budget year through budget adoption.
Facility Improvement Project Funds
Facility Improvement Project Funds provide for capital maintenance and improvements of City-owned buildings and
structures throughout the City. Each of the Facility Improvement Funds(CIP Facilities Fund and the Facility Grant
Fund)have multiple projects which roll up into the overall fund balances,but remain designated for use by project.
The CIP Facilities Fund receives annual funding from a General Fund transfer,from Theater Ticket Surcharge Fees,
and from reimbursements and contributions. The Facility Grant Fund receives revenue from grants that vary in amount
from year-to-year. Typically,CIP Grant Funds have a negative fund balance as project work is conducted beforehand
and then reimbursed from expenditure invoices.
Year-end fund balance represents the remaining unexpended project funds (net of any negative CIP Grant Fund
Balance)which are subsequently re-appropriated by Council into the following budget year through budget adoption.
Administrative&Technology Improvement Funds
Administrative & Technology Improvement Project Funds provide for major capital expenditures to improve or
enhance administrative, operational, and technology-based systems and processes. Each of the Administrative &
Technology Improvement Funds (CIP Admin&Tech Improvement Fund and the Admin&Tech Grant Fund)have
multiple projects which roll up into the overall fund balances but remain designated for use by individual project.
The CIP Administrative&Technology Improvement Fund typically receives funding from a General Fund transfer.
Administrative and technology improvement focused grants are limited, and typically limited to the Community
Development function for housing elements or development processes. If grants are received,projects typically have
a negative fund balance as project work is conducted beforehand and then reimbursed from expenditure invoices.
Year-end fund balance represents the remaining unexpended project funds (net of any negative CIP Grant Fund
Balance)which are subsequently re-appropriated by Council into the following budget year through budget adoption.
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INTERNAL SERVICE FUND RESERVES
Overview
Internal Service Funds are established to provide centralized cost centers for shared expenses and services in order to
efficiently track costs and manage resources. Costs are then allocated back to operational programs based on usage
to determine cost of service.
The City's Internal Service Funds include the two insurance funds: Risk Management and Workers Compensation,
four service/support funds: Office Support, IT Services, Vehicle & Equipment Maintenance, and Building
Maintenance Funds,and three equipment replacement funds: the Vehicle&Equipment Replacement Fund,the Office
Technology Equipment Replacement Fund, and the Building FF&E(Furniture,Fixture,&Equipment)Replacement
Fund.
Internal Service Funds are similar to the separate checking or savings accounts a person may use for different purposes.
And,as each fund is accounted for as a separate entity,operational revenues less expenditures result in either a positive
or negative net operations,with their own fund balance to offset operational losses if needed. At year end,each fund's
net balance is represented as the"Fund Balance Reserve".
The intent of the Internal Service Funds Reserves is to hold appropriate levels of reserves to support cash flow
throughout the fiscal year and to minimize interfund loans. Some of the Internal Service Funds do not accumulate
funds in excess of expected ongoing operational costs,but for the replacement funds,the purpose is to accumulate a
rolling balance to fund future replacement costs as needed. Individual fund reserve levels are explained in more detail
in the following fund sections.
Internal Service Funds are a type of Proprietary Fund; therefore GASB 54 fund balance classification (for
Governmental Fund types)does not apply. Instead,Internal Service Fund's financial statement reports are presented
similar to private-sector businesses and use "Restricted" and "Unrestricted Net Position" to define net operational
balances(equity/fund balance reserves).
Unrestricted Net Position allows reserve funding to be used(with Council approval)within the general scope of the
fund's purpose. Restricted Net Position reserves are limited to a specific use,narrower than the stated purpose of the
fund. For example,grant funding provided for a defined use,as in remaining funds from a Risk Management Training
Grant within the Liability/Risk Management Fund,must be used for qualified training purposes. Most Internal Service
Funds reserves are held in the Unrestricted Net Position category.
Liability/Risk Management Reserve Fund
The Liability/Risk Management Fund's Unrestricted Net Position Reserve supports cash flow needs and minimizes
interfund loans. Appropriate levels are maintained through service chargebacks to the programs,based on operational
risk factors. Most claims are covered under the insurance risk pool JPA. The City is self-insured up to$25,000 per
General Liability and City Vehicle Auto Liability occurrence, and up to $5,000 for Property Damage and 31 Party
Auto Liability. Non-covered claims are paid fully by the City.
The Liability/Risk Management program receives funding from allocations charged to departments, from grant
funding,and from claim reimbursements. On occasion,the City is obligated to pay a claim settlement. While some
funds are budgeted for miscellaneous claim expenses each year, large claims may need to utilize reserves. For this
reason,the Fund Balance Reserve goal is set at about 100%of annual budget to both fund operational activity and for
claim funding as needed. At year-end,unspent funding flows into Unrestricted Net Position or Restricted Net Position
for specific purposes. Requests for use of reserve balance are approved by Council through budget adoption or by a
Council approved budget adjustment resolution during the year. If claim payments do utilize reserve funds,the reserve
is replenished from the Fund's net operations in subsequent years.
Workers Compensation Fund
The Workers Compensation Fund's Unrestricted Net Position Reserve supports cash flow needs and minimizes
interfund loans. Appropriate levels are maintained through service chargebacks to the programs,based on operational
risk factors. The purpose of the Workers' Compensation program is to provide insurance benefit coverage for
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employee work-related illness and/or injuries through its membership in a shared risk pool. The risk pool provides
self-insurance coverage up to$250,000,and excess insurance provides coverage over this amount up to$10 million.
The Workers Compensation program receives funding from allocations charged to departments, from grant funding,
and from claim reimbursements. At year end,unspent funding flows into Unrestricted Net Position,or Restricted Net
Position for grant funding. Requests for use of the reserve balance are approved by Council through budget adoption
or by a Council approved budget adjustment resolution during the year, such as for an unexpected large claim
settlement. The reserve is replenished from the Fund's net operations in subsequent years.
Office Services Fund
The Office Services program provides a centralized cost center for administrative office support expenses, including
multifunctional copy machine leases, postage machines, various other office machines and associated maintenance
and repair services, as well as postage, paper, and copier supplies. For efficiency, shared office support costs are
managed collectively and charged back to departmental programs on a use-basis allocation. Accumulated net
operations are held in the Office Services Fund for working capital cash flow.
The reserve is funded from the allocations charged to covered departments. At year-end,unspent funding flows into
Unrestricted Net Position. Requests for use of excess reserve balance are approved by Council through budget
adoption or by a Council approved budget adjustment resolution during the year. Reserves are maintained at
approximately the 50%of budget level,however on occasion, excess Reserve funds are used for the replacement of
assets such as the mailing machine. The reserve is replenished from the Fund's net operations in subsequent years.
Information Technology Services Fund
Information Technology Services provide for the delivery of technology-based services throughout the City's
operations, including maintenance of the City's information systems and infrastructure, program implementation,
streaming video,internet,landline,and wireless communications systems,cloud-based technology,and support of all
existing information technology as well as new technology initiatives. For technology oversight, security, and
efficiency, information technology costs are managed collectively and charged back to departmental programs on a
service-based allocation to fund the program.
Funding for the program comes from these allocations charged to departments. At year-end,unspent funding flows
into Unrestricted Net Position. Accumulated net operations are held in the Information Technology Services Fund
for working capital cash flow. Requests for use of the reserve are approved by Council through budget adoption or
by a Council approved budget adjustment resolution during the year. The reserve is replenished from the Fund's net
operations in subsequent years.
Vehicle&Equipment Maintenance Fund
The Vehicle&Equipment Maintenance program provides for the fuel,maintenance,and servicing of the City's fleet
and major equipment to ensure all vehicles and equipment comply with manufacturer's recommendations and safety
requirements.
To fund the program,vehicle& equipment replacement costs are charged back to the departmental programs based
on assigned usage. Accumulated net operations are held in the Vehicle&Equipment Maintenance Fund for working
capital cash flow. At year-end,unspent funding flows into Unrestricted Net Position. Requests for use of the reserve
are approved by Council through budget adoption or by a Council approved budget adjustment resolution during the
year. The reserve is replenished from the Fund's net operations in subsequent years.
Facility Maintenance Fund
The Building Maintenance program provides for the custodial, maintenance, and non-major repairs and building
improvement services for all facilities at the Civic Center, Prospect Center, and Museum Park. Additionally, the
program supports the maintenance and repair needs for the tenants of City leased buildings as defined in the lease
agreements. To fund the program,total costs are allocated back to departmental programs primarily based on building
space usage. General and public use is allocated to the Non-Departmental program.
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Accumulated net operations are held in the Building Maintenance Fund for working capital cash flow. Funding comes
from the allocations charged to covered departments. At year-end, unspent funding flows into Unrestricted Net
Position. Requests for use of the reserve are approved by Council through budget adoption or by establishing
chargeback funding levels higher or lower than budgeted expenditures. The reserve is replenished from the Fund's
net operations in subsequent years.
Vehicle&Equipment Replacement Reserve
The Vehicle and Equipment Replacement Fund Balance Reserve accounts for accumulated funding over an asset's
lifespan,to be used for the replacement of the vehicle or equipment at the end of its useful life. Initial purchases are
paid for through a department's operational budget. If the purchased item is for ongoing use,the Vehicle&Equipment
Replacement program appropriates an annual allocation for the replacement of the vehicles and equipment based on
the asset's cost and years of life. Final determination for replacement of the asset is determined through an analysis
of whether the cost of maintenance equals or exceeds the cost of replacing the asset.
The reserve is funded from allocations charged to departments and represents accumulated funding, less amounts
expended for asset replacement. At year-end,unspent funding is held in Unrestricted Net Position. The reserve is to
be maintained at a level sufficient to provide replacement funding of vehicles and equipment in accordance with
replacement schedules.
Requests for use of the reserve are approved by Council through budget adoption or by a Council approved budget
adjustment resolution throughout the year. The reserve is replenished from the Fund's net operations in subsequent
years.
Office Technology Equipment Replacement Fund
The Office Technology Equipment Replacement Fund accounts for accumulated funding over an asset's lifespan to
be used for the replacement of office technology-based equipment such as desktop computers and monitors, laptops
and tablets,network infrastructure,and various other related equipment. Replacement costs are charged back to the
departments based on assigned equipment costs. Initial purchases are paid for through a department's operational
budget. If the purchased item is for ongoing use,the Office Equipment Replacement program appropriates an annual
allocation for the replacement of the equipment based on the asset's cost and years of life.
The reserve represents accumulated funding,less amounts expended for replacements. The reserve shall be funded to
provide replacement funding in accordance with replacement schedules. Funding for the reserve comes from the
allocations charged to covered departments. Requests for use of the reserve are approved by Council through budget
adoption or by a Council approved budget adjustment resolution during the year. The reserve is replenished from the
Fund's net operations in subsequent years.
Facility Furniture,Fixtures&Equipment(FFE)Replacement Fund
The Facility FF&E Fund accumulates funding over an asset's lifespan to be used for the replacement of furniture—
such as tables,chairs,and cubicle partitions;for fixtures-such as kitchen appliances, sound equipment,lighting, for
equipment-such as HVAC units,boilers,and generators;and for facility infrastructure —such as roof,door,window,
and floor/carpeting replacement.
Initial purchases for new assets may be paid for through the Operating Budget or through the Capital Budget. Annual
replacement charges are charged-back to the supported department programs with full replacement funding to be
accumulated over the asset's estimated lifetime. Final determination for replacement of the asset is determined
through an analysis of whether the cost of maintenance equals or exceeds the cost of replacing the asset. The reserve
is intended to be maintained at a level sufficient to provide replacement funding in accordance with replacement
schedules.
Requests for use of the accumulated reserve funding are approved by Council through budget adoption, or if an
unplanned situation occurs,by a Council approved budget adjustment resolution during the fiscal year. The reserve
is replenished by replacement charge allocations in subsequent years.
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INTRODUCTION SECTION
TRUST&AGENCY FUND RESERVES
Overview
Trust and Agency Funds are created to assist City-related agencies with fund management needs. Trust Funds hold
another entity's funds and ensure the proper management of their money. Agency Funds are established to receive
and disburse another entity's money,as directed by the associated entity.
The City does not currently have any Trust Funds but has one Agency Fund: the West Valley Clean Water Program.
Because Agency Funds manage their own money,the City of Saratoga does not develop Reserve Policies for Agency
Funds.
SUMMARY
Fund Balance Reserve Use
Council may utilize reserve funding at budget adoption or by adoption of a budget adjustment resolution during the
course of the year if necessary. Reserve funding is replenished from year-end net operations, or if the fund has a
negative net operation,then Reserve funds would offset the net operation loss with the close of the fiscal year.
CITY OF SARATOGA 9 FISCAL YEAR 2021/22 OPERATING&CAPITAL BUDGET
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CITY OF SARATOGA 9 FISCAL YEAR 2021/22 OPERATING&CAPITAL BUDGET
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CIP PROJECT PROCESS POLICY
This procedural policy defines how a project moves through the CIP Budget Funding process: from the initial project
idea,through project development,to the Council's CIP Project Review and CIP Budget Study Session meetings,and
if successful,into the Capital Budget as a funded project.
The CIP project development stage of the policy takes different tracks, depending upon whether the project idea is
staff driven or Council nominated. These two paths are discussed separately below,until the tracks converge for CIP
Project Review Meeting.
STAFF PROJECT DEVELOPMENT
1. CIP Project Initiation
As a function of staff s day-to-day work, infrastructure improvements, large-scale repairs, and ongoing
maintenance and replacement projects are identified as potential capital improvements. These are often highly-
visible and tangible public assets such as street repaving, retaining walls, or park and trail improvements.
However,many essential CIP projects are less noticeable, including storm drain repairs, electrical or irrigation
upgrades,or ADA enhancements. Other projects are intangible administrative or technology improvements and
in most cases invisible to the general public,such as code updates/revisions,software and process improvements,
or economic vitality programs.
Staff discusses CIP project ideas with the appropriate Director or City Manager for feedback and refinement.
Ultimately, projects need clearly defined boundaries to identify project requirements, specifications, and
resources. While this is not always feasible in the initial stages of project development,the understanding that a
project will eventually require a clear and specific scope will encourage better preparation for discussing the
project idea and moving it through the approval process. After receiving initial approval, staff moves into the
idea development stage.
2. Idea Development
To move the idea forward,staff will analyze and articulate the project's scope,political impacts,priority factors,
resource requirements,and any other relevant considerations.
a. Project Scope—Scope may include the description,project size and location parameters,project purpose,
and goals or deliverables,such as products,services or results. Project justifications and assumptions should
support the project's purpose and defmition,and may include cost-benefit analysis,risk assessments,funding
availability,or even community desirability factors.
The scope should clearly state if a project is to be funded and/or completed in phases rather than as a singular
body of work. If a phased project, information regarding future phases and total costs should be included.
For instance,a design project should include information on the intended project's construction phases and
total estimated cost.
If the project is ongoing infrastructure maintenance such as a roof replacement,or a program project such as
a General Plan element update,this too should also be clearly noted. In the scope description,constraints or
restrictions may help to identify project limitations. And in some cases,project scope may be clarified by
exclusions—statements about what the project will not accomplish or produce.
Project Scope defines a commitment to produce a body of work or end-product with the resources provided
under the stated assumptions. The written scope helps to manage expectations and provide clarity to the
involved parties, reduce confusion and failure, prevent scope creep, and provide transparency to the
community.
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b. Political Considerations - Knowledge of historical information, which attests to the necessity of
Council/staff communication is of vital importance in project development. Determine whether this project
has come up for consideration before,or why was it not completed previously. Have circumstances changed?
Or are there lessons to be learned from a past project proposal?
Another consideration includes knowing whether a project might be controversial. Is there a segment of the
community strongly opposed to, or strongly supportive of this specific project? Will this project prompt
demand for further funding or resources? Have similar projects been completed in another part of the city?
Determine why this project should be considered a priority over others, and whether the project's cost or
benefits would be supported by the community.
c. Priority Factors-Project priority is an important consideration in the CIP approval decision. Ultimately,
Council wants to support those projects that are of higher priority than others since there will never be enough
money or resources to do every project. Decision criteria may include factors such as:
• Health and Safety Issues
• Imminent failure of structure/system
• Short-term cost of repair vs. long-term cost of replacement
• Availability of external or dedicated funding
• Efficiencies
• Federal or State mandates
• Business or community support
• Impacts if project not undertaken
The severity of a priority criteria is considered in the decision making process. For instance, a project that
falls under the "Imminent Failure of Structure/System" criteria is assessed to determine whether there are
safety issues,or if immediate repairs would provide significant replacement or maintenance savings. Another
consideration would occur with Federal or State mandated projects. There may be little impact as to whether
the mandate is met,or there may be severe fines or risk of lawsuits for lack of timely completion. As a result,
project priority is based on the overall assessment of the collective circumstances; many factors contribute
to priority decisions and Council cannot rely upon a clear hierarchical order upon which to base their
decisions.
d. Project Resources - In the City's project development discussions, resources typically refer to financial
funding. However,resources may also refer to staff time,equipment and materials,community/stakeholder
participation or support,space requirements,information technology services,or some other type of support
or contribution needed for a project to be successful.
Funding plays a critical role in project development. In many cases, lower priority projects are approved
ahead of higher priority projects simply because there is designated funding available for the lower priority
projects. The ability to leverage designated funding with grant funding for a project proposal greatly
increases the likelihood a proposed project will be approved. Overall, a project funded solely by Capital
Project Reserve money needs to be more competitive due to funding limitations and the number of projects
competing for the same pot of funds.
An additional component of project resource considerations are the unstated resources (identified above)
required in project construction or implementation. For instance,staff time is limited,and time spent working
on one project prevents staff time being spent on another project. Project timing and staff time requirements
are therefore an important component of the number and types of project brought to Council for review.
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e. Other Considerations-Numerous other factors not mentioned above are also taken into consideration when
assessing a project idea. For example:
a. Can the City afford the ongoing operating budget increases to maintain or implement the project?
b. Or,does the project provide operational efficiencies or cost savings?
c. Are there environmental concerns?
d. Does it enhance the community's art,education,or cultural resources?
e. What impacts are there if the project requires development be staged in phases?
f. Are there risk management concerns,or legal liability issues?
g. Is there strong community interest in this project?
h. Does the project contribute toward economic vitality?
Each project will differ,meaning analysis is specific to the circumstances,and diligent research and thought
should be put into developing project scope and justification.
In summary,the goal of idea development is to identify,quantify,and assess a project comprehensively. This
effort is intended to ensure that a proposed project is well thought-out, developed, and articulated thereby
enabling the City Manager and Council to make educated and rational decisions.
3. City Manager Approval
Staffs proposed projects ultimately go to the City Manager. If approved for consideration, Staff will prepare
written narratives with project scope,justification, fiscal impacts,cost estimates,timelines,etc. as necessary for
Council Retreat assessment package and Finance Staff will add the project to the Proposed CIP Project List.
CITY COUNCIL PROJECT DEVELOPMENT
Council Members are often the recipients of residents' suggestions and requests for capital improvements.
Depending on the topic, Council Members can take these opportunities to: 1) educate the residents on why a
project may not be feasible; or 2) provide residents with information on how to contact City staff with their
requests to determine feasibility;or 3)Council may support the project suggestion and decide to act as a proponent
for the project by guiding it through the Capital Project Nomination process:
1. Nomination
To move a project idea onto the CIP Candidate List,a Council Member is to propose the idea to fellow Council
Members at the end of a City Council Meeting during the Council Items session and request that it be put on the
CIP Candidate List for review during the next upcoming CIP budget cycle.
2. Idea Concurrence
A second Council Member must concur with the request to move the project idea onto the Capital Project
Candidate List.
3. Follow-up
A nomination to the Proposed Capital Project List is to be recorded in the City Council minutes and acted upon
as a follow-up item. City Manager will clarify/verify understanding of project scope and then assign staff to
complete Proposed CIP Project requirements, including preparation of project scope narrative and justification,
fiscal impacts,cost estimates,timelines,etc.
Council nominated projects are automatically included as a proposed CIP project in the CIP Project Review
package.
CITY OF SARATOGA 9 FISCAL YEAR 2021/22 OPERATING&CAPITAL BUDGET
INTRODUCTION SECTION
CIP PROJECT REVIEW AND APPROVAL
1. CIP Project Review Package
In preparation for the annual Capital Project Review, Finance Staff will consolidate Proposed CIP projects
information, along with proposed changes to current CIP projects, and the current year's CIP Unfunded Project
List into a presentation and CIP Project Review package for Council. The CIP Project Review meeting provides
Council with a forum to have an in-depth discussion on funding availability, assess project scopes, evaluate
priority criteria and resources,and examine impacts of other considerations for CIP projects at one time. The CIP
Review package will include:
• Available funding
• Current year CIP projects
• Proposed changes to existing projects
• The current CIP Unfunded List
• Proposed changes to projects on the CIP Unfunded List
• Proposed new CIP projects
• Proposed additions to the CIP Unfunded List
2. Capital Project Review Meeting
The City Council's review of current and proposed funded and unfunded Capital Projects is held annually,
typically at the Council Retreat as part of the budget development cycle initiation. In addition to reviewing the
Capital Project Review package, the Council may request a currently funded capital project be reviewed to
determine if the project should continue in the following fiscal year.If consensus direction is given,staff will add
the currently funded project into the Review package for discussion at the follow-up CIP Budget Prioritization
Meeting.
In reviewing Capital Projects, Council may request revisions to a project's scope, funding,or other component.
However,changes that redefine a proposed project must be Council's consensus direction.
At the conclusion of the CIP Project Review meeting,Council may retain the CIP Project Review Binder although
the documents will also be available on the City's website.
3. CIP Budget Study Session
The CIP Budget Study Session agenda is to:
• Remind Council of the upcoming fiscal year's Capital Project funding availability.
• Recap the Proposed CIP Projects Review Meeting proposals and associated priority issues.
• Inform Council of any changes or modifications since the CIP Project Review Meetings.
• Answer questions Council may have on proposed projects.
• Reach consensus on the Proposed CIP Funding Scenario and CIP Unfunded List.
Council will conduct a final assessment and provide consensus direction to staff for CIP Project funding to be
included in the upcoming Proposed Budget Hearing to be held in May, and modifications to the CIP Unfunded
Project List,if any.
NOTE: Rejected project ideas maybe brought back in following years for another attempt to become an approved
project,but must go through the project development process again.
CITY OF SARATOGA 9 FISCAL YEAR 2021/22 OPERATING&CAPITAL BUDGET
INTRODUCTION SECTION
CIP PROJECT FUNDING
1. Proposed Budget Hearing
Staff will incorporate Council's direction from the CIP Budget Study Session into the Proposed Capital Budget
brought to the City Council Budget Public Hearing that occurs in late May or early June. Council to provide any
final comments or direction for budget adoption.
2. Budget Adoption
The Operating and Capital Budgets are brought to Council in June with all final direction incorporated into the
final summaries. Council is asked to adopt the budget at this time,with budget funding effective on July 1st,the
start of the next fiscal year.
3. Funding Process Follow-up
Approved CIP projects that do not receive funding allocations are assigned to the CIP Unfunded List. The CIP
Unfunded List has a life span of one budget cycle meaning the budget adoption keeps the Unfunded CIP Project
for consideration as a potential project in the following fiscal year CIP project discussions.
CITY OF SARATOGA 9 FISCAL YEAR 2021/22 OPERATING&CAPITAL BUDGET
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Memorandum
DATE: May 20, 2021
TO: Finance Committee
FROM: Dennis Jaw, Finance Manager
SUBJECT: Fiscal Year 2021/22 Investment Policy Update
Last year, at the June 17, 2020 Council Meeting, the City Council approved the
standard Investment Policy for FY 2020/21. The FY 2021/22 version presented to
the Finance Committee is the same policy, with a minor change in the glossary which
will be discussed during the meeting.
Staff recommends continuing the currently adopted investment policy for fiscal year
2021/22. However, the Committee can recommend changes before it is brought
before the City Council on June 16, 2021.
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Attachment A
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POLICY TITLE: INVESTMENT POLICY - for Fiscal Year 2021$/221
REGULATORY COMPLIANCE: California Government Code Section - 53600 et seq.,
City of Saratoga Municipal Code Section - 2-20.035,
City of Saratoga Investment Policy - Section XVI
POLICY EFFECTIVE DATE: July 1, 2021G
AMENDMENTS: Annual adoption
CITY COUNCIL APPROVAL. June 167, 20210
I. POLICY:
It is the policy of the City of Saratoga to invest public funds in a manner which
will provide the maximum security with the highest investment return, while
meeting the daily cash flow demands of the City and conforming to all state
and local statutes governing the investment of public funds.
II. SCOPE:
This investment policy applies to all financial assets of the City of Saratoga.
These funds are accounted for in the City of Saratoga's Comprehensive Annual
Financial Report and include:
A. Funds
1. General Fund
2. Special Revenue Funds
3. Internal Service Funds
4. Capital Project Funds
5. Debt Service Funds
6. Trust and Agency Funds
7. Any new fund, unless specifically exempted
B. Exceptions
1. Deferred Compensation Plans - Investments are directed by the individual
plan participants.
2. Debt Service Funds held by trustees - Investments are placed in
accordance with bond indenture provisions.
3. Notes and Loans - Investments are authorized by separate agreements
approved by City Council.
III. PRUDENCE
Investments shall be made with judgment and care, under circumstances then
prevailing, with prudence, discretion and intelligence not for speculation, but for
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investments, considering the probable safety of capital as well as the probable
income to be derived.
A. The standard of prudence to be used by investment officials shall be applied
in the context of managing an overall portfolio. Investment officers acting in
accordance with written procedures and this investment policy and exercising
due diligence shall be relieved of personal responsibility for an individual
security's credit risk or market price changes, provided deviations from
expectations are reported in a timely fashion and appropriate action is taken
to control adverse developments.
IV. OBJECTIVES
The primary objectives, in priority order, of the City of Saratoga's investment
activities shall be:
A. Safety
Safety of principal is the foremost objective of the investment program.
Investments of the City of Saratoga shall be undertaken in a manner that
seeks to ensure the preservation of capital in the overall portfolio. The
objectives will be to mitigate credit risk and market risk.
1. Credit risk, defined as the risk of loss due to failure of the issuer of a
security, shall be mitigated by investing only in investment grade
securities and by diversifying the investment portfolio so that potential
losses on individual securities will have a minimal impact on the portfolio.
2. Market risk, defined as market value fluctuations due to overall changes
in the general level of interest rates, shall be mitigated by limiting the
average maturity of the City's investment portfolio to two years and the
maximum maturity of any one security to five years, and by structuring
the portfolio based on cash flow analysis so as to avoid the need to sell
securities prior to maturity.
B. Liquidity
The City of Saratoga's investment portfolio will remain sufficiently liquid to
enable the City of Saratoga to meet all operating requirements, which might
be reasonably anticipated.
C. Return on Investments
The City of Saratoga's investment portfolio shall be designed with the
objective of attaining a rate of return throughout budgetary and economic
cycles, commensurate with the City of Saratoga's investment risk constraints
and the cash flow characteristics of the portfolio.
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V. DELEGATION OF AUTHORITY
Authority to manage the City of Saratoga's investment program is derived from
the following: California Government Code Section 53600 et seq. and Saratoga
Municipal Code Section 2-20.035. Management responsibility for the investment
program is hereby delegated to the City Manager who shall be responsible for
supervising all treasury activities of the Administrative Services Director and who
shall establish written procedures for the operation of the investment program
consistent with this investment policy. Procedures should include reference to:
safekeeping, delivery vs. payment, investment accounting, wire transfer
agreements, banking service contracts and collateral/depository agreements.
Such procedures shall include explicit delegations of authority to persons
responsible for investment transactions. No person may engage in investment
transactions except as provided under the terms of this policy and the procedures
established by the City Manager. The City Manager shall be responsible for all
transactions undertaken and shall establish a system of controls to regulate the
activities of subordinate officials.
VI. ETHICS AND CONFLICTS OF INTEREST
Officers and employees involved in the investment process shall refrain from
personal business activity that could conflict with proper execution of the
investment program, or which could impair their ability to make impartial
investment decisions. These officers and employees involved in the investment
process shall disclose to the City Manager any material financial interests in
financial institutions that conduct business with the City. Employees and
investment officials shall refrain from undertaking personal investment
transactions with individuals who conduct business on behalf of the City of
Saratoga.
VII. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
The City Manager will maintain a list of financial institutions authorized to provide
investment services to the City. In addition, a list will also be maintained of
approved security broker/dealers selected by credit worthiness and who are
authorized to provide investment services in the State of California. These may
include "primary" dealers or regional dealers that qualify under Securities &
Exchange Commission Rule 15C3-1 (uniform net capital rule). No public deposit
shall be made except in a qualified public depository as established by state laws.
All financial institutions and broker/dealers who desire to become qualified
bidders for investment transactions must supply the City Manager with the
following: personal interview, firm description and audited financial statements,
proof of National Association of Securities Dealers (NASD) certification, proof of
State of California registration, completed broker/dealer questionnaire and
certification of having read the City of Saratoga's investment policy and
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applicable depository contracts. An annual review of the financial condition and
registrations of qualified bidders will be conducted by the City Manager.
A current audited financial statement is required to be on file for each financial
institution and broker/dealer with which the City of Saratoga invests prior to any
transaction.
VIII. AUTHORIZED AND SUITABLE INVESTMENTS
The City of Saratoga is empowered by Government Code Section 53601, and
further limited by this investment policy, to invest in the following types of
securities:
Term to
Type Guarantee Limits Maturity
LAIF State Fund $40,000,000 On Demand
U.S. Treasury Bills U.S. No Limit 1 Year
Treasury
U.S. Treasury Notes U.S. No Limit 5 Years
Treasury
U.S. Govt. Agency Issues Federal No Limit 5 Years
(e.g. FNMA, GNMA) Agencies
Certificates of Deposit FDIC/FSLIC 20% portfolio per 3 Years
(California Bank or Savings and institution; 30%
& Loan Companies) Collateral total portfolio
Negotiable Certificates of Issuing 200Io portfolio per 5 Years
Deposit Institution institution; 30%
total portfolio
Investment Grade Public 200Io portfolio per 5 Years
Obligations of California, or Entity institution; 30%
Local Governments, or total portfolio
Public Agencies
Money Market Mutual Fund 10% portfolio per On Demand
Funds institution; 20%
total portfolio
Passbook Savings Account Issuing Minimum necessary On Demand
and Demand Deposit Bank for current cash flow
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The City shall not engage in leveraged investing, such as margin accounts, or
any form of borrowing for the purpose of investing.
The City shall not invest in instruments whose principal and interest could be at
risk contrary to Section IV.A of this policy. Examples of these instruments are
options and future contracts. Additionally, the City shall not invest in
"derivatives".
See Glossary for description of above securities.
IX. COLLATERALIZATION
Collateralization will be required on certificates of deposit and other deposit-type
securities. In order to anticipate market changes and provide a level of security
for all funds, the collateraIization level will be 110% of market value of principal
and accrued interest, in accordance with California Government Code Section
53651 and 53652.
The City of Saratoga chooses to limit collateral to those listed in Section VIII.
Collateral will always be held by an independent third party with whom the entity
has a current custodial agreement. A clearly marked evidence of ownership
(safekeeping receipt) must be supplied to the City of Saratoga and retained.
The right of collateral substitution may be granted.
X. SAFEKEEPING AND CUSTODY
All security transactions entered into by the City of Saratoga shall be conducted
on a delivery-versus-payment (DVP) basis. Securities will be held by a third -
party custodian, in the City of Saratoga's name and control, designated by the
City Manager and evidenced by safekeeping receipts.
XI. DIVERSIFICATION
The City of Saratoga will diversify its investments by security type and institution.
Limits are provided for in Section VIII. With the exception of U.S. Treasury
securities and authorized pools, no more than 30% of the City of Saratoga's total
investment portfolio will be invested in a single security type or 20% with a single
financial institution.
XII. MAXIMUM MATURITIES
To the extent possible, the City of Saratoga will attempt to match its investments
with anticipated cash flow requirements. Unless matched to a specific cash flow,
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the City of Saratoga will not directly invest in securities maturing more than five
(5) years from the date of purchase. However, the City of Saratoga may
collateralize its certificates of deposits using longer-dated investments not to
exceed ten (1 D) years to maturity.
Debt reserve funds may be invested in securities exceeding five (5) years if the
maturities of such investments coincide as nearly as practicable with the
expected use of the funds.
The City of Saratoga will retain a general operating reserve adopted annually by
the City Council. The amount of active deposits and inactive investments with
maturity of one year or less shall always be equal to or greater than the required
general operating reserve. The report discussed in Section XV shall demonstrate
this policy is in effect.
XIII. INTERNAL CONTROL
The City of Saratoga is responsible for establishing and maintaining an internal
control structure designed to ensure that the assets of the City are protected
from loss, theft or misuse. The internal control structure shall be designed to
provide reasonable assurance that these objectives are met. The concept of
reasonable assurance recognizes that (1 the cost of a control should not exceed
the benefits likely to be derived, and (2 the valuation of costs and benefits
requires estimates and judgments by the City Manager and staff.
Accordingly, the City shall establish an annual process of independent review by
an external auditor. This review will provide internal control by assuring
compliance with policies and procedures. The internal controls shall address the
following points:
■ Control of collusion.
• Separation of transaction authority from accounting and recordkeeping.
• Custodial safekeeping.
• Avoidance of physical delivery of securities.
• Clear delegation of authority to subordinate staff members.
• Written confirmation of transactions for investments and wire transfers.
• Development of a wire transfer agreement with the lead bank and third-
party custodian.
XIV. PERFORMANCE STANDARDS
The investment portfolio shall be designed with the objective of obtaining a
reasonable rate of return throughout budgetary and economic cycles,
commensurate with investment risk constraints and cash flow needs.
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A. Market Yield (Benchmark)
The City's investment strategy is passive. Given this strategy, the benchmark
used by the City of Saratoga to determine whether market yields are being
achieved shall be the one-year U.S. Treasury Bill.
XV. REPORTING
The City Manager is charged with the responsibility of including a market report
on investment activity and returns in the City of Saratoga's Cash and Investment
Report. The report will be in compliance with California Government Code
Section 53646.
XVI. INVESTMENT POLICY ADOPTION
The City of Saratoga's Investment Policy shall be reviewed and adopted by
the City Council annually.
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GLOSSARY
Asset Allocation
Refers to the division of holdings in a portfolio by asset class. A common strategy is
to hold assets that perform or react differently with the objective to limit or reduce risk.
Benchmark
A point of reference that serves as a standard for performance to be measured against.
Broker
A person or entity registered with the National Association of Security Dealers and
provides investment services and/or execution of services in exchange for
compensation.
Comprehensive Annual Financial Report(£
The City's annual financial statements and footnotes, along with an executive summary,
financial outlook, statistical information, and other financial information.
Certificates of Deposit
Commonly called time deposit certificates or time deposit open accounts. These are
nonnegotiable.
Collateralization
Process by which a borrower pledges securities, property or other deposits for the
purpose of securing the repayment of a loan and/or security. Also refers to securities
pledged by a bank to secure deposits of public monies.
Custodian
A bank or other financial institution that keeps custody of stock certificates and other
assets,
Dealer
Someone who acts as a principal in all transactions, including buying and selling from
his/her own account.
Delivery vs. Payment
The preferred method of delivering securities, with an exchange of money for the
securities.
Demand Deposits
A deposit of monies which are payable by the bank upon demand of the depositor.
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Derivative
Securities that are based on, or derived from, some underlying asset, reference date,
or index.
Dividend
A share of the income divided up amongst shareholders of a company.
FDIC
Federal Depository Insurance Corporation
FSLIC
Federal Savings and Loans Insurance Corporation
Index
A tool used to statistically measure the progress of a group of assets that share
characteristics. This can include a group of stocks, a group of bonds, or a group of
other assets.
Internal Rate of Return (IRR)
The discount rate at which the present value of future cash flows of an investment
equals the cost of the investment. It is determined when the net present value of the
cash outflows (the cost of the investment) and the cash inflows (returns on the
investment) equal zero, the rate of discount being used is the IRR
Liquidity
An asset that can easily and rapidly be converted into cash without significant loss of
value.
Local Agency Investment Fund (LAIF)
The LAIF was established by the State of California to enable treasurers to place funds
in a pool for investments. There is a limitation of $30 million per agency subject to a
maximum of ten (10) total transactions per month. The City uses this fund when
market interest rates are declining as well as for short-term investments and liquidity.
Money market mutual funds
Mutual funds that invest in short term securities and strive to maintain a share price
of $1.
Negotiable certificates of deposit
A bank deposit issued in negotiable form (i.e., one that can be bought or sold in the
open market).
Passive Investment Strategy
An approach to managing the investment portfolio, which entails a "buy and hold"
strategy in which investments are generally held until they mature.
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Portfolio
Combined holding of more than one stock, bond, commodity, cash equivalent or other
asset. The purpose of a portfolio is to reduce risk through diversification.
Primary Dealer
A group of government securities dealers that submit daily reports of market activity
and security positions held to the Federal Reserve Bank of New York and are subject
to its oversight.
Rate of Return
The total income received over a period of time, including interest income, accretion
of discount, amortization of premium, and change of market value; usually expressed
as a percentage or in decimal format.
Regional Dealer
A dealer who is not a primary dealer, and therefore not monitored by the Federal
Reserve, but is registered with the Securities and Exchange Commission.
Safekeeping
Offers storage and protection of assets provided by an institution serving as an agent
U.S. Treasury Bills
Commonly referred to as T-Bills these are short-term marketable securities sold as
obligations of the U.S. Government. They are offered in three-month, six-month and
one-year maturities. T-Bills do not accrue interest but are sold at a discount to pay face
value at maturity.
U.S. Treasury Notes
These are marketable, interest-bearing securities sold as obligations of the U.S.
Government with original maturities of one to ten years. Interest is paid semi-annually,
U.S. Government Agency Issues
Include securities, which fall into this category. Issues, which are unconditionally,
backed by the full faith and credit of the United States, e.g. Small Business
Administration Loans.
Yield
The yield refers to the interest on a bond or the dividends paid on a stock or mutual
fund. Yield also includes expected capital gain or loss.
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Memorandum
DATE: May 20, 2021
TO: Finance Committee
FROM: Dennis Jaw, Finance Manager
SUBJECT: Fiscal Year 2021/22 Gann Appropriation Limit
To comply with Proposition 4, commonly known as the Gann Spending Limitation
Initiative, the City Council adopts an annual resolution establishing an appropriations
limit for the following fiscal year using population and per capita personal income
data provided by the State of California's Department of Finance. Each year's limit
is based on the amount of tax proceeds that were authorized to be spent in fiscal
year 1978/79, with inflationary adjustments made annually to reflect increases in
population and the cost of living.
The California Department of Finance issues a letter with the annual percentage
change in California's per capita personal income and the percentage change in
population in both the City and the County to jurisdictions on or about May 1st each
year. Either the City or County's population factor may be used in the appropriation
calculation together with the California per capita Personal Income change factor.
As shown in the schedule below, the County's percentage increase in population
change is combined with the State's change in per capita income to determine the
City's appropriation factor. The current year's appropriation limit is then increased
by this appropriation factor to calculate the Gann Appropriation Limit for the following
fiscal year. The calculation for the FY 2021/22 limit is as follows:
FY 2021/22 Calculation
Increase in California 2020/21 2021/22
County Per Capita Appropriation Appropriation Appropriation
Population Income❑ Factor Li mi t Li mi t
0.9944 X L0573 = 1.0514 X 5 48,202,474 $ 50,679,074
Summary
The Gann Appropriation Limit establishes the maximum amount of tax revenue
proceeds the City may appropriate in the following fiscal year. The City's proposed
budget for FY 2021/22 anticipates $18,138,300 in Gann designated tax revenues,
which is $32,540,774 less than the appropriation limit of $50,679,074; therefore, the
City's budgeted appropriation is in compliance.
Staff will bring a resolution to adopt this limit on the June 16, 2021 City Council
meeting.
18
Attachment A
APPROPRIATION LIMIT FACTORS
For Beginning County City California Ending %
YF Appropriation Population Population Per Capita Appropriation Limit
June 30 Limit Factor Factor Income a Limit Increase
2013 31,907,666 1.0124 1.0070 1.0377 33,521,156 5.06%
2014 33,521,156 1.0157 1.0129 1.0512 35,790,667 6.77%
2015 35,790,667 1.0150 1.0066 0.9977 36,243,974 1.27❑/a
2016 36,243,974 1.0113 1.0000 1.0382 38,053,696 4.99❑/0
2017 38,053,696 1.0126 1.0053 1.0537 40,602,404 6.70%
2018 40,602,404 1.0081 1.0023 1.0369 42,441,648 4.53❑/0
2019 42,441,649 1.0099 1.0052 1.0367 44,434,849 4.70%
2020 44,434,849 1.0033 1.0003 1.0385 46,297,871 4.19%
2021 46,297.871 1.0037 1.0009 1.0373 48,202,474 4.11%
2022 48,202,474 0.9944 0.9901 1.0573 50,679,074 5.14❑/a
FY 2021/22 Calculation
❑/a Increase in California 202012I 2021122
County Per Capita Appropriation Appropriation Appropriation
Population Income❑ Factor Limit Limit
0.9944 X 1.0573 = 1.0514 X $ 48,202,474 = $ 50,679,074
Percentage ofAppropriation
2021/22 2021/22 Percentage
Tax Appropriation of
Revenues Linut Limit
18,138,300 1 $ 50,679,074 = 36%
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RESOLUTION NO. 17-046
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SARATOGA
TO ADOPT A DEBT MANAGEMENT POLICY
WHEREAS,the City Council's goal of Fiscal Stewardship is to ensure the City remains
financially healthy, stable, and sustains essential services; and,
WHEREAS,the City Council adopts financial policies to provide guidance and direction
on the use and administration of fiscal resources; and,
WHEREAS,State Government Code section 8855 as amended by Senate Bill 1029
(September 2016)requires a Debt Policy with comprehensive debt management direction on the
issuance and use of debt be adopted by agencies prior to the issuance of new debt; and,
WHEREAS,the City Council wishes to comply with laws and regulations related to the
use of fiscal resources; and,
WHEREAS, the City Council intends to issue debt in the future; and,
NOW THEREFORE BE IT RESOLVED,that the City Council of the City of Saratoga hereby
adopts the Debt Management Policy as shown in Attachment 1.
The above and foregoing resolution was passed and adopted at a regular meeting of the Saratoga
City Council held on the 5t' day of July 2017 by the following vote:
AYES: Mayor Emily Lo,Vice Mayor Mary-Lynne Bernald, Council Members E. Manny
Cappello, Howard A. Miller, Rishi Kumar
NOES:
ABSENT:
ABSTAIN:
:L
Emily Lo, Mayor
ATTEST:
DATE:
Cryahl Bothelio, City Clerk
Attachment 1
CITY of-
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POLICY TITLE: Debt Management Policy
COUNCIL ADOPTION DATE: July 5, 2017
❑RIGINAL RESOLUTION NO.: 2017-XXX
REGULATORY COMPLIANCE: State Government Code Section 8855-8859, as amended
by SB 1029 on September 12, 2016
POLICY EFFECTIVE DATE: July 5, 2017
AMENDMENTS: NIA
(Date Adopted& Resolution No.)
POLICY CONTENT
I. DEBT MANAGEMENT POLICY
A. Scope and Objectives
B. Statutory Requirements
C. Responsibility
D. Transparency
II. DEBT FINANCING CONSIDERATIONS
A. Debt Philosophy
B. Purpose and Analysis
C. Methods of Financing
D. Debt Categories
E. Debt Restrictions and Policy Limits
III.TYPES OF LONG-TERM DEBT FINANCING
A. General Obligations Bond Debt
B. Assessment Bonds
C. Revenue Bonds
D. Mello-Roos Bonds
E. Marks-Roos Bonds
F. Conduit Bonds
G. Certificates of Participation
H. Tax and Revenue Anticipation Notes
IV. BOND DEBT STRUCTURE CONSIDERATIONS
A. Bond attributes
V. DEBT ISSUANCE
A. Guidelines on Issuing Debt
B, Credit Objectives
C. Methods of Sale
D. Initial Disclosure Requirements
E. Refunding of Debt
Z:�Admin services city of Saratoga Policies\aebt Management Policy\Debt Management Policy-7.5.2017.dotx June 27,2017
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VI. DEBT MANAGEMENT
A. Investment of Bond Proceeds
B. Use of Proceeds
C. Arbitrage Compliance
D. Ongoing Disclosure Requirements
E. Compliance with Other Bond Covenants
F. Retention
G. Investor Relations
H. Annual Financial Statement Audit
VII. SB 1029: DEBT ISSUANCE REPORTING REQUIREMENTS
A. Background
B. Proposed Debt Issuance
C. Report of Final Sale
D. Annual Transparency Report
GLOSSARY: MUNICIPAL SECURITIES TERMINOLOGY
2:�Admin 5ervices\City of Saratoga Policies\Deht Management Policy\Debt Management Policy-7.5.2017.docx June 27,2017
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I. DEBT MANAGEMENT POLICY
A. SCOPE AND OBJECTIVES
This Debt Management Policy sets forth debt management goals for the City of Saratoga,
establishes general parameters for consideration of debt financing, and provides guidance
for the issuance, management, and continued administration of debt. This policy applies
to debt issued directly by the City, and debt issued on behalf of the City by its Public
Financing Authority.
The primary objectives of this policy are to improve the quality of debt related decisions
through providing an overview of common types of debt the Council may consider, the
debt issuance process, and practices required for the management of a debt portfolio.
Overall, this policy serves as a public commitment by City Council to:
• Articulate debt policy goals.
• Provide guidelines on debt issuance decisions, implementation, and maintenance.
• Promote sound financial management on the use of debt, including an understanding
of the different types of borrowing.
• Establish maximum limits on the amount of debt outstanding and the amount of annual
debt service the City will consider.
• Minimize debt service and issuance costs.
• Maintain a high credit rating and credit availability to maximize future debt capacity.
• Demonstrate a commitment to long-term financial planning, including a multi-year
capital plan and five-year General Fund operational forecast.
• Provide for public accountability and transparency related to the issuance of debt
through clear disclosure in budget and financial reporting documents, and annual debt
reports.
• Minimize legal risks by complying with all financial disclosure, reporting, and debt
issuance laws while planning debt transactions, executing them, and throughout the
life of the debt transaction.
■ Ensure full and timely repayment of debt.
B. STATUTORY REQUIREMENTS
The State Legislature created the California Debt and Investment Advisory Commission
(CDIAC) in 1981 to, among other things, oversee state and local debt authorization and
issuance. To meet its statutory mandate, the CDIAC establishes guidelines, policies, and
procedures to be followed, including reporting forms and deadlines.
In compliance with CDIAC direction, this Debt Policy shall:
• Require a stated purpose for which debt proceeds may be used.
■ Identify the types of debt that may be issued.
■ Require debt have an integral relationship to the City's goals and objectives, budget
and/or capital improvement program.
■ Identify the methods of sale permitted.
■ Identify permissible debt structure factors, such as maximum term limits,
amortization requirements, redemption policies, credit tools, and other debt
limitations.
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• Require internal control procedures over funds to ensure debt proceeds are
directed to the intended use
• Establish debt issuance authorization and compliance requirements.
C. RESPONSIBILITY
On an annual basis, this Debt Management policy: shall be reviewed and modified as
necessary by the Finance & Administrative Services Director; brought to the Finance
Committee for review; and brought to the City Council for approval.
The City Manager or designee shall be responsible for enforcing this policy, and may issue
supplemental procedures and memoranda that details specific directions for clarification
purposes, as needed.
D. TRANSPARENCY
The decision to incur new indebtedness should be fully transparent and incorporated into
the adopted Operating and Capital Improvement Program budget document, with full
explanation and disclosure of the debt purpose, funding source, and payment obligations.
Annual debt service payments shall be included in the adopted Operating Budget over the
life of the financing obligation.
II. DEBT FINANCING CONSIDERATIONS
A. DEBT PHILOSOPHY
The City's fiscal management philosophy calls for conservative and cautious practices to
ensure prudent and efficient use of resources to: maintain the City's fiscal health; preserve
essential services, reduce financial risk, and support short and long-term administrative,
financial, and operational goals through responsible, sustainable, and enforceable fiscal
policies and internal controls.
This Debt Management Policy is designed to align with the City's conservative and cautious
fiscal practices. The following statements summarize Council's debt philosophy:
The City minimizes the use of debt funding, limiting long-term debt financing to capital
improvements or special projects that cannot be financed from current or dedicated
revenues. Large liabilities that result in significant financial impacts may also be
considered for long-term debt financing if prompt repayment is vital to the City's well-
being. In principle, long-term debt is to be used only if the debt service requirements
do not negatively impact the City's ability to meet future operating, capital, and cash
reserve policy requirements.
■ The City does not incur debt for operations, or for capital improvements except under
extraordinary circumstances and with citizen support. Under these circumstances the
City will seek voter approval for debt to undertake major infrastructure rehabilitation.
• Through City Council approval, the City may function as a bonding conduit for special
assessment districts. This may occur when a neighborhood is seeking to improve
private or cooperatively owned infrastructure, such as private roads or water system
cooperatives. The City shall require full liability protection and cost recovery as
necessary to protect the City and mitigate the cost associated with such actions.
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■ The term for repayment of long-term financing shall: not exceed the expected useful
life of the project; include financing payment terms at a manageable level; and, does
not extend beyond functionally appropriate payment terms.
• The City will monitor all forms of debt in conjunction with budget development
throughout the year, and will promptly report concerns and remedies if necessary to
the City Council.
• The City will ensure compliance with bond covenants, and provide financial information
to reporting parties as required.
B. PURPOSE AND ANALYSIS
The general purpose for debt financing must fall into one of the following categories:
1. New Money Financing - New money debt is to generate additional funding to be
available for expenditure on capital projects. These funds may be used for the
acquisition, construction or major rehabilitation of capital assets.
2. Refunding - Refunding bonds are issued to retire all or a portion of an outstanding
bond issue. Most typically this is done to refinance debt at a lower interest rate to
reduce debt service. Alternatively, some refundings are to restructure the repayment
schedule of the debt, to change the type of debt instruments being used, or to retire
an indenture in order to remove undesirable covenants.
3. Reimbursement Bonds - A tax-exempt bond for which the proceeds are allocated to
prior expenditures originally paid from sources other than bond proceeds.
A proposed debt financing request must fully and clearly state the purpose, funding use,
debt type, and the reasons debt financing is being requested, including a critical analysis
on whether debt financing is beneficial for the project and the City. The analysis is to
include a detailed consideration of available alternatives, debt funding sources, and
whether the debt conforms to the City's long-term financial planning objectives.
As a checklist, the analysis of proposed debt should:
• Confirm that the capital project, infrastructure improvement, or asset is eligible for
short- or long-term financing.
■ Assure the total cost of the capital project, infrastructure improvement, or asset
includes contingency funding and financing costs.
• Review available financing options, cost effectiveness, and cost-benefit factors.
• Identify and assess alternative bond structures.
• Identify the source and reliability of a revenue stream to fund annual debt service.
• Appraise the municipal bond market, including economic and interest rate trends, and
appropriateness of market timing.
C. METHODS OF FINANCING
Under the City's fiscal management philosophy, the City manages its cash in a manner
that ensures ongoing operational expenses are met, thereby preventing the need for
borrowing. Capital funding is viewed under the same available funding philosophy,
meaning the City subscribes to acquiring funds through grants and accumulated net
operational savings for one-time cash flow funding, as a general rule. Debt obligations
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are to be considered only after giving due consideration to all available funding sources,
including available cash reserves, available current revenues, future revenue sources,
potential grants, and all other financing sources legally available to be used for such
purposes.
1. Cash Funding
The City funds a significant portion of capital improvements on a "pay-as-you-go"
basis. City generated capital improvement funding is typically accumulated from
excess operational revenues [aka Net Operations], that is directed into a Capital
Project Reserve at year end. This reserve funding is then distributed to capital
improvement projects by Council as part of the annual budget process. As part of a
"pay as you go" strategy, the City may accumulate capital improvement funding for
several years, or contribute a portion of the project cost and look for grant funding to
supplement the cost of the project.
2. Interfund Borrowing
The City may borrow internally from other funds with surplus cash, in lieu of issuing
bonded debt. Purposes warranting the use of this type of borrowing could include
short-term cash flow imbalances due to grant terms, interim financing pending the
issuance of bonds, or long-term financing in lieu of bonds for principal amounts under
$5 million. The City funds from which the money is borrowed may, at Council's
discretion, be repaid with interest based upon the earning rate of the City's investment
pool or other designated market rate. The Finance & Administrative Services Director
shall exercise due diligence to ensure that it is financially prudent for the Fund making
the loan.
Interfund loans will be evaluated on a case by case basis. Any borrowing between two
City funds which exceeds the City Manager's authority for services requires a
repayment schedule approved by City Council and may include an interest rate based
on the market at the time the loan was taken out. The purpose of interfund borrowing
is to finance high priority needs and to reduce costs of interest, debt issuance and/or
administration.
3. Bank Loans/Lines of Credit
Although the City does not typically utilize lines of credit or short-term anticipation
notes for the financing of capital projects, temporary financing instruments may be
evaluated as a financing option.
4. Other Loans
The City will evaluate other loan programs under specialized circumstances, including
but not limited to State or Federal loans, loans from other governmental agencies,
private loans, and non-profit foundations.
S. Bond Financing
The City may issue bond types that are allowed under federal and state law including,
but not limited to: general obligation bonds; certificates of participation; revenue
bonds; assessment district bonds; and special tax bonds.
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Conduit bond financing, where the City issues debt that is borne by another party,
does not constitute a general obligation of the City. However, the same level of due
diligence and transparency prior to bond issuance is required. The City will consider
requests for conduit financing on a case by case basis.
6. Non-Profit or Joint Powers Authority (JPA) Co-op
In addition to long and short-term financing instruments, the City may also consider
joint arrangements with other governmental agencies when a project serves the public
interest beyond City boundaries.
D. DEBT CATEGORIES
As part of debt financing considerations, the following debt-term categories are defined
and identified as appropriate for specific purposes:
1. Short-term Debt
Some cities in California utilize short-term loans for short-term liquidity needs. As a
practice short-term instruments are not utilized by the City of Saratoga however,
short-term borrowing is permissible if necessary under exigent circumstances. This
could include large unexpected working capital cash needs after a catastrophic event,
or the need for an interim method of financing until long term borrowing or grant funds
have been secured. The City Council may choose to authorize the use of short-term
instruments if future revenue will be sufficient to repay the debt within a maximum 18
months short-term debt timeframe requirement.
2. Intermediate-Term Debt Lease/Purchase Debt
Typically, intermediate term debt is used for Lease-Purchase financing where fixed
assets/equipment have limited useful lives due to rapidly evolving technology or
changing needs, making the purchase of an asset/equipment unfavorable. Examples
of appropriate uses include leasing electric vehicles or multi-function devices,
(formerly known as copiers), for which technology is improving both quality and
functionality significantly before the useful life is over, or when long-term maintenance
costs on purchased assets increase total cost significantly. These types of leases are
allowed over a repayment term not to exceed 10 years.
3. Long-Term Municipal Bond Debt
City philosophy establishes the preference to fund capital projects with available cash
or grant funding, to the extent possible and practical. As part of infrastructure funding
strategy, the City will first look for available grant funding for capital improvement
projects, then to current dedicated revenues, capital project reserves, and current year
operational funding. As a result, large projects are often completed in phases.
However, the City will consider the use of long-term municipal bond financing to fund
major infrastructure needs under the following circumstances:
a) A capital project is immediately required to meet or relieve capacity needs and
current resources are insufficient or unavailable.
b) A capital project is mandated by state or federal requirements, and current
resources are insufficient or unavailable.
c) The capital project lends itself to debt financing rather than funding over an
extended time period, based on cost and the expected useful life of the asset.
d) Other financing options have been explored and are not viable for the timely or
economic acquisition or completion of the major capital project or asset.
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E. DEBT RESTRICTIONS AND POLICY LIMITS
Existing debt adversely affects an entity's credit rating. This in effect means an entity's
debt capacity is limited by cost as the risk/price of borrowing increases with more debt.
Therefore, it follows that only the highest-priority projects should be considered for debt
financing, as funds borrowed and funds committed for debt service of currently financed
projects would not be available for future projects or operational uses.
Through this policy, the City Council limits debt financing by the following legal limits,
financial limits, operational guidelines, and public policy:
1. Legal/Statutory Limits
Legal restrictions may be determined by State constitution or law, local charter
ordinances, or bond referenda approved by voters. At the highest level, California
Government Code section 43605 states:
A city shall not incur an indebtedness for public improvements which
exceeds in the aggregate 15 percent of the assessed value of all real and
personal property in the city. Within the meaning of this section,
"indebtedness" means bonded indebtedness of the city payable from the
proceeds of taxes levied upon taxable property in the city.
This provision, however, was enacted when assessed valuation was based upon 25
percent of market value. Effective with the 1981/82 fiscal year, property parcels are
now assessed at 100 percent of market value, based on the most recent ownership
change for that parcel, and adjusted upward annually by a maximum of +2 percent.
To reflect the intent of the debt limit in Section 43605, the stated 15 percent of
assessed level would be adjusted to one-fourth of that level, or 3.75 percent of the
assessed value of all real and personal property of the City.
In addition, special assessment debt, revenue bond debt, and certificates of
participation debt are excluded from the debt limit calculation as State debt limit
guidelines pertains primarily to General Obligation Debt.
Following the City's cautious and conservative financial practices, the City chooses to
limit General Obligation Bond Debt to 1.0 percent of the City's assessed valuation -
far lower than the State's maximum debt limit of 3.75 percent. Further, cumulative
annual debt service payments for all bond issues supported by the General Fund are
limited to a maximum of 10 percent of annual General Fund Revenue.
As a public policy check, taxpayer surveys and subsequent election results will
establish the actual threshold residents would approve. This policy establishes
maximum debt limit guidelines for financial management purposes.
2. Financial Limits
a) In line with the maximum 1.0 percent of assessed valuation maximum debt policy,
General Obligation debt financing assessments are further restricted so as not to
exceed the lower of either:
• $5,000 debt per capita
Total annual maximum debt service assessment on $10,000 per $1 million of
assessed value
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b) The City will not obligate the General Fund to secure long-term financing unless
the community will benefit as a result of the improvement and estimated future
revenues from the project or funding resources are sufficient to repay the debt
obligation.
c) Short term debt shall not exceed 10 percent of the General Fund's annual budgeted
revenue at any point in time.
d) Long-term financing can be marketed with investment grade credit ratings, and
the City can maintain its high credit ratings.
3. Operational Restrictions
a) Long-term bond debt is restricted to major capital infrastructure projects identified
in the adopted Capital Improvement Plan. Project costs include planning, design,
construction and land acquisition, as well as related fixtures and equipment.
b) Bond debt funding shall not be used for ongoing operating expenses or liabilities
such as infrastructure maintenance or for pension obligation bonds (POBs) to fund
unfunded pension liabilities.
c) Variable rate bonds may cause debt service payment fluctuations and uncertainty
in cash flows. Based on the City's conservative financial management philosophy,
variable rate bonds are not suitable for capital infrastructure funding, and therefore
not allowed as a debt financing tool.
d) To be eligible for debt funding, short term financed assets must have a minimum
useful life of one year, intermediate-debt for five years, and for long-term debt, an
asset must have a minimum useful life of twenty years.
4. Lang-Term Debt Public Policy Limits
The following policies further enforce the City's fiscally conservative philosophy. Each
must be considered under the circumstances and in relation to the other parameters.
a) Long-term financing shall be considered for major infrastructure projects where
the burden of payment rests more directly on select taxpayers or beneficiaries,
such as for special assessment projects, project revenue bonds, or economic
development projects, and exceeds a minimum bond indebtedness of $1 million.
b) General obligation bond debt may be considered for large public infrastructure
projects where project costs exceeds the minimum bond indebtedness of $5
million, a significant proportion of City residents would benefit from the debt
financing purpose, and public opinion surveys indicate a favorable vote of approval.
c) The life of the project or asset to be financed is 10 years or longer, and the
financing term exceeds the useful life of the project or asset.
III. TYPES OF LONG-TERM BOND DEBT FINANCING
The following describes common types of long-term debt instruments that may be considered
to meet financing objectives.
A. GENERAL OBLIGATION BOND DEBT
General Obligation (G.O.) bonds are the traditional form of debt financing for large capital
projects such as the acquisition, construction, or remodeling of buildings. As voter
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authorization is required for a City to issue G.O. bonds, and funded by the City's ad
valorem taxing authority, this debt represents the most secure type of City debt.
Therefore, when voters approve a G.O. Bond, they are simultaneously approving a tax
levy on their real or personal property to cover the debt service payments, In California,
local agency G.D. bonds must be approved at an election by at least 2/3 of the voters
(school bonds require a 5511/o majority). Saratoga residents passed a 30 year G.O. band
issue in 2001 to remodel the City's Library building.
While G.O. bonds are typically the least expensive long-term debt available, there are a
number of drawbacks: delays due to voter approval requirements; the possibility voters
d❑ not approve the bond issuance and project; and state or agency debt limit restraints.
B. ASSESSMENT BONDS
Special assessment debt is a type of land-secured municipal bond used to fund a
development or community project for a specific third party entity, The debt is repaid
from taxes assessed on the district's property owners who benefit from the improvements
financed by the bonds.
The issuance of these bonds is subject to a two-thirds (2/3) approval of the land-owners
voting in the election. Voters are limited to the property owners within the designated
area defined as a "community benefit" or"special assessment" district that receives the
benefit of the project. For example, if a special assessment bond is issued to pay for the
initial roadway or for repairs on a private street, the local government would levy a special
assessment tax on the property owners designated as belonging to that special district
on that private street. The special tax assessments are then used to retire the interest
and principal payments on the bond debt.
C. REVENUE BONDS
Revenue bond long-term debt is issued by municipality, state, or public agencies, typically
to build, acquire, or improve a revenue-generating asset or service. In turn, debt service
is commonly repaid by the revenue generated by the project or service funded by the
bond proceeds, with the intent that the beneficiaries pay for a fair share of the costs.
Revenue bonds are designed to be self-supporting through user fees or special earmarked
receipts. The general taxing power of the jurisdiction is not pledged.
Enterprise Revenue Bonds are repaid by the earnings from the operations of a revenue-
producing enterprise; Special Revenue Bonds are repaid from special taxes/assessments,
and Lease Revenue Bonds from contract leases or rental agreements.
Investors consider Revenue Bonds less secure than general obligation bonds as the debt
service revenue comes from user fees of the capital asset that is being funded, with the
local entity responsible for establishing and collecting sufficient revenues to retire the debt
through fees or rates. As a result, borrowing costs are typically higher than those on
general obligation bonds.
D. MELLO-ROOS BONDS
The Mello-Roos Community Facilities Act of 1982 authorizes a public entity to form a
Community Facilities District (CFD), also known as a Mello-Roos district. Once formed,
the district can finance facilities and provide services. Upon approval by at least two-
thirds of the registered voters or landowners within the district, the district may issue
bonds secured by a levy of special taxes (not ad valorem). The security of the bonds is
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provided by properties within the district. The special taxes are not assessments, and
there is no requirement that the special tax be apportioned on the basis of benefit to the
property. The public entity is not liable for the repayment of these bonds, but acts as an
agent for the property owners/bondholders in collecting and forwarding the special
assessments.
E. MARKS-'ROOS BONDS
The Marks-Roos Local Bond Pooling Act of 1985 provides Joint Powers Authorities (]PAS)
with broad powers to issue bonds for a wide variety of purposes. As the name of the Act
implies, the law was originally enacted to facilitate local bond pooling efforts, which
allowed local agencies to achieve lower costs of issuance through spreading fixed costs
across a number of small issues. Debt repayment would be dependent on the type of
bonds issued.
F. CONDUIT BONDS
The City may issue conduit bonds for related agencies provided the improvements to be
financed have a general public purpose (e.g. infrastructure, economic development,
housing, health facilities, etc.) consistent with the City's overall operating and capital
plans. Principal and interest is to be paid from project revenues or specific taxes.
Conduit debt bonds are not included in the City's debt burden because they are secured
solely by revenues of the private or non-profit party. Principal and interest on conduit
bonds is paid solely from the net revenues of the project. Issuance of these bonds does
not constitute a general obligation of the City.
The City will obtain a clear opinion that it will not be liable for the payment of principal
and interest in the event of default by the conduit borrower by independent bond counsel.
If no such opinion can be obtained, the conduit borrower will purchase insurance or a
letter of credit in the City's name to protect taxpayers in the event of default.
The City will require a commitment from all institutions that borrow money under the
City's name to agree to provide the market with continuing disclosure information.
G. CERTIFICATES OF PARTICIPATION
Certificates of Participation (COPS) are a widely used type of lease-purchase financing
mechanism where a public entity seeking to acquire an asset enters into an agreement to
pay a fixed amount annually to a third party, that are considered installments toward the
purchase of the asset. The agreement allows the lessor to assign the rights to the lease
payments to investors via certificates of participation. Each certificate signifies that the
investor owns a proportional interest in the lease payments to be made by the
governmental entity.
The participants in a lease-purchase agreement are (1) the government entity lessee, (2)
the lessor, which may be a private firm, vendor, or another governmental entity, and (3)
investors.
Under a capital lease or Certificate of Participation issue, the City is obligated to annually
budget for the rentals that are due and payable during each fiscal year; as such, payments
cannot be accelerated. Because of this, capital leases are not considered an indebtedness
of the City under State statutes. However from a credit or accounting perspective, all or
most of this type of debt may be considered an obligation of the City. For instance, under
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governmental accounting principles, a minimal buy-out payment at the end of the lease
term indicates the lease is in true form a purchase, and shall be accounted for as such
throughout the issuance term.
H. SHORT-TERM ANTICIPATION NOTE FINANCING
Revenue Anticipation Notes (RANs), Tax Anticipation Notes (TANs), Tax and Revenue
Anticipation Notes (TRANS), Grant Anticipation Notes (GANs), and Bond Anticipation Notes
(BANS) are all types of short-term borrowings issued by municipalities to finance cash flow
deficits that occur due to irregular receipt of tax and/or revenues to fund working capital
requirements for operating expenses, or to provide interim bridge financing for bond or
grant financed capital projects.
Typically, the issuers (ones owing the debt) are required to repay all principal and interest
with current fiscal year revenues, but no longer than 18 months; to borrow no more than
the projected cash-flow deficit; and to provide detailed cash flow projections and
comprehensive documentation.
IV. BOND DEBT STRUCTURE CONSIDERATIONS
A. BOND ATTRIBUTES
1. Interest Rates
a) Fixed Interest Rate Bonds - A bond with interest rates established or"fixed" at the
time the bond is issued. Unlike a typical mortgage fixed interest rate, bond fixed
interest rates may vary slightly from year to year over the term of the bond. These
fluctuations are a factor of structuring the bonds to attain the lowest possible total
cost while maintaining a high level of attractiveness for bond buyers. Bonds are
typically designed to pay a higher interest rate for those bonds held for longer
terms, than those maturing in the near term. This higher rate is associated with a
higher risk in long-term economic projections.
b) Variable Interest Rate Bonds - A bond with floating coupon payments that are
adjusted at specific intervals. Generally, the current Money Market Rate is used to
set interest rates, plus or minus a set percentage. As a result, coupon payments
change over time. Investment risk is offset by lower initial interest rates, but the
long term costs are uncertain, as rates may increase significantly.
c) Interest Only Bonds - A long-term debt structure that delays the repayment of
principal for a set time period in order to offer lower front-end payments. This
type of debt incurs a greater cost over the term of the bond as the full amount of
the debt is carried for a longer time period.
Under this policy and in alignment with the City's conservative and cautious fiscal
policies, the City limits permissible debt structures to Fixed Interest Rate Bonds, with
debt amortized on a fairly level basis over the life of the debt.
2. Debt Service
Under Fixed Interest Rate Bonds, the amortization of the debt, and to the extent
possible, the anticipated debt service payments will closely match cash flows.
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To maintain funding consistency, the City will structure debt with fairly level debt
service payments over the life of the debt. This may be accomplished with varying
principal payment amounts to offset interest rate increases or decreases on that year's
bond maturities.
Debt Service with unlevel payments may be considered or necessary when one or
more of the following exist:
• Natural disasters or extraordinary unanticipated external factors make payment
on the debt in the early years prohibitive.
• Unlevel structuring is beneficial to the City's aggregate overall debt payment
schedule.
■ Such structuring would more closely match project revenues.
3. Bond Maturity
Factors that drive bond maturity dates include the size of the bond, asset life span,
purpose, debt service requirements, interest rates, and economic conditions.
Additionally, financial standards drive bond maturity terms. The City chooses to follow
the current standards, where the maximum term for bond issuances exceeding $50
million is not to exceed 40 years, and bond issuances under $50 million is not to exceed
30 years.
4. Tax Exempt Status
One of the biggest advantages of investing in municipal debt is that the interest is
usually exempt from federal taxes and most state and local taxes (if the investor lives
in the state or municipality issuing the debt). Generally speaking, this exemption
means that investors in high federal tax brackets benefit from tax free investment
earnings. Because of this relationship, there is usually stronger demand for municipal
debt in high-tax states. Accordingly, City bonds shall be tax-exempt, unless the
constraints imposed justify the increased cost of a taxable transaction.
5. Sizing
The Bond Issue amount shall include all construction costs, including acquisition of land,
preliminary assessments, planning, design, building costs, construction loan interest,
as well as bond issuance costs. Bond issue size shall also consider purpose, debt service
requirements, interest rates, economic conditions, and other pertinent factors.
6. Call features
In general, fixed rate, tax-exempt bonds will be issued with a provision that allows the
City to call outstanding bonds 10-years after the bond delivery date at par (i.e., no call
premium). Shorter and continuous calls may be considered to increase program
flexibility based on market conditions at the time of pricing.
7. Credit Enhancements
In the event the highest credit rating is not assigned, the interest rate cost of the bond
issuance increases. The City shall consider the use of bond insurance or other credit
enhancements if a significant savings is produced through Its use, or when necessary
for marketing reasons.
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V. DEBT ISSUANCE
A. GUIDELINES ON ISSUING DEBT
1. Authorization of Debt
All long-term financing transactions shall be approved by the City Council in a public
hearing at a regularly scheduled, noticed meeting. The City Council shall comply with
all public hearing requirements applicable to the specific type of bond being approved.
CDIAC direction shall guide debt issuance, operational procedures and management,
internal controls, and debt reporting.
2. Debt Issuance Decision Factors
Many factors influence the financing decision. In deciding how to proceed, the following
should be considered in the analysis:
• Interest rates, loan terms, and the issuance costs of debt financing versus the
benefit to be gained from the financing.
■ Public support for the project.
• Costs and public impacts from not proceeding with the project.
■ The possibility that political controversy or litigation may arise from the bond
issuance.
■ Operational impacts to the organization and community.
3. Debt Issuance Consultants
Debt Issuance is a complex financial and legal process, and requires a working group
of experienced professionals to successfully complete a debt issuance. It is common
for agencies to hire outside consultant to work with staff as a Financing Team to guide
the bond issuance process. The outside consultants consist of the following:
• Financial Advisor
The Financial Advisor (FA) is a professional consultant or investment firm retained
to advise and assist the issuer in formulating and/or executing a debt-financing
plan. The FA is typically the primary consultant for a bond issue and is retained
prior to planning a transaction.
• Bond Counsel
Bond Counsel refers to the attorney/legal firm hired to provide a legal opinion
delivered with the bonds confirming that the bonds are valid and binding obligations
of the issuer, and that interest on the bonds is tax-exempt (if applicable) from
federal and state income taxes.
• Underwriter
An Underwriter is a firm that purchases bonds directly from a bond issuer and resells
them to investors. Underwriters are intermediaries between issuers and investors,
providing the conveyance link in the marketplace by purchasing whole bond issues,
and then reselling in desired lots to investors.
• Underwriter's Counsel(optional)
Underwriter's counsel is customarily selected by the underwriter to represent the
underwriter and its interests in a negotiated sale. Normally, the underwriter does
not retain counsel for competitive sales. Underwriter's counsel will customarily
review, from the underwriter's perspective, the documents prepared by bond
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counsel, and will negotiate matters relating to those documents on behalf of the
underwriter.
• Special Financing District Consultants (optional)
Special Financing District (SFDs) consultants are involved in the formation of special
tax, fee, and assessment districts. They represent property owner's interests in
the funding of infrastructure or service improvements. SFDs provide fees, rates,
and other types of financial assessments and calculations to tax and administer the
districts.
4. Selecting and Managing Debt Issuance Consultants
The City's selection of financial bond advisors will contribute to the effectiveness of a
bond issuance, and impact the final outcome.
The City will conduct a request for proposal/qualifications process to select such
consultants. Applications will be reviewed to assess the professional qualifications and
experience of consultants as it relates to the particular bond issue or other financing
under consideration. The consultants should have documented experience in providing
their specialized services, for financings of similar size, types, and structures of issues.
B. CREDIT OBJECTIVES
A debt issuance credit rating is a public and independent opinion on the creditworthiness
of a bond issuer to make timely payments of principal and interest on a bond debt. A
credit rating agency will assign its rating to a particular debt issue and to all the
outstanding debt issued under the same security or credit pledge.
One or more credit rating agencies may be engaged to provide a credit rating. Having a
bond issuance rated is advisable as institutional investors are often restricted from
purchasing unrated debt or debt below a certain rating threshold, thereby credit ratings
broaden the investor base. Additionally, if a high rating is obtained, the risk is lowered,
and with lower risk - the cost of debt decreases. On the other hand, the issuance of
additional debt is not recommended if the additional debt burden causes less favorable
ratios and measurements to reduce the City's Prime Grade bond rating. Accordingly,
favorable credit ratings provide a material benefit to the cost of borrowing.
1. Credit Rating
Credit Ratings are a reflection of the general fiscal soundness of the City and the
capabilities of its management. Typically, the higher the credit ratings are, the lower
the interest cost is on the City's debt issues. To enhance creditworthiness, the City is
committed to prudent financial management, systematic capital planning, and long-
term financial planning. The City recognizes that external economic, natural, or other
events may, from time to time, affect the creditworthiness of its debt.
The most familiar nationally recognized bond rating agencies are Standard and Poor's,
Moody's Investors Service, and Fitch Ratings. When issuing a credit rating, rating
agencies consider various factors including but not limited to:
• City's ability to repay debt;
• City's fiscal status;
• City's general management capabilities;
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0 Economic conditions that may impact the stability and reliability of debt repayment
sources;
• City's general reserve levels;
■ City's debt history and current debt structure;
■ Project being financed;
■ Covenants and conditions in the governing legal documents.
Bond Ratings
Typically, a rating from at least one nationally recognized rating agency on new and
refunded issues being sold in the public market is advisable to open the issuance up to a
broader market. The Financing Team will determine whether a credit rating should be
obtained, and request a rating if appropriate. When applying for a rating on an issue, a
formal presentation of the City's finances and developments within the City may need to
be prepared for presentation to the rating agency.
Rating Agency Communication
The City shall maintain positive working relationships with the top rating agencies that
assign ratings to the various debt obligations. This effort would include providing the
rating agencies with financial documents and statements, as well as any additional
information requested.
The City's current long-term G.C. Bond Prime Grade rating of`AAA'from Standard & Poor's
is Standard & Poor's highest attainable rating as shown in the chart below. Comparable
investment grade ratings from other credit rating agencies are shown for reference:
Standard
Bond Rating Descripton &Poors Moody's Fitch
Prime Grade AAA Aaa AAA
High Grade AA+ Aa 1 AA+
AA Aa2 AA
AA- Aaa AA-
Upper Medium Grade A+ Al A+
A A2 A
A- A3 A-
Lower Medium Grade BBB+ Baal BBB+
BBB Baa2 BBB
BBB- Baa3 BBB-
2. Credit Rating Considerations:
The following should be considered in advance of obtaining credit rating services for
future bond issuances:
a) Cost of credit rating - Evaluate the potential economic benefit from a credit rating
in the form of lower bond yields compared to the cost of obtaining and maintaining
the rating.
b) Size of issuance - In general, a debt issue with lower bond par amounts may not
benefit from a credit rating as much as ones with a larger bond par amount. While
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credit rating fees often vary with issue size, ratings are generally more cost
effective for larger size transactions.
c) Frequency of issuance - In general, the more frequently an issuer plans to issue
debt, the greater the potential benefit will be from obtaining a credit rating. A
more frequent debt issuer may benefit from expanding its investor base in order
to successfully finance a large debt program, and a credit rating may help attract
a greater number of investors to a particular debt issue.
d) Method ofsale - A debt issue sold in a public offering (via negotiated or competitive
sale) may benefit from obtaining a credit rating, while a rating may not be required
or necessary for a private placement or direct purchase.
e) Administrative workload - Administrative duties are required to obtain a credit
rating and maintain the rating throughout the life of the bonds. Once a rating is
requested, the formal credit rating process itself may take as long as 4-6 weeks to
complete. The process may include in-person meetings, calls with rating analysts
and project site visits, which does not include the time and resources an issuer
must commit in advance to prepare for the rating process.
f) Information gathering - A substantial amount of information must be provided to
the rating agency, which may include: (1) history of issuer; (2) management and
governance structure; (3) multi-year budget documents; (4) financial policies and
procedures; (5) bond documents and (6) audited financial statements.
g) Multiple credit ratings - Issuers should consult with members of their financing
team, particularly their municipal advisor (if one is retained) and their underwriters
(if sold through a negotiated sale) on the potential economic benefits, as well as
the potential costs and administrative workload of obtaining one or more credit
ratings for a particular debt issue. Some institutional investors require a minimum
of two ratings.
3. Managing the Credit Relationship
If the City decides to move forward and obtain a credit rating, the following should be
addressed:
a) Preparation - Review the selected credit rating agency methodologies and the City's
likely rating under them before requesting a rating. City management shall be
prepared to address the specific criteria in meetings with the rating agencies.
b) Financial Analysis - The Credit Analyst will review the Comprehensive Annual
Financial Report in detail. The CAFR report should reflect and articulate the well
thought out financial planning and management of the City's budget planning,
financial management, and operational strategies. Financial policies shall be
comprehensive and available for review. Financial reports shall demonstrate the
financial stability of the City through standardization of activities and cash reserves,
and strong financial ratios on its balance sheets.
c) Disclosure of non-public information - During the rating process, issuers may be
asked to provide non-public information such as internal revenue forecasts,
projections or other forward-looking statements. Issuers should consult with their
counsel before disclosing non-public information and request that such information,
if provided, remain confidential.
d) Consistent Message - City management shall take a systematic and comprehensive
approach to manage the City's relationships with the credit rating firm as they
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develop their opinions. City management shall be responsive to these requests in
a timely manner with accurate and comprehensive information, and ensure the
provided documents consistently convey key messages to the rating agency.
e) Review - City Management should be prepared to review draft rating opinions prior
to publication and submit any comments on a timely basis.
f) Follow-up - Once a credit rating is assigned, City staff are to supply annual reports
if requested, as well as keep the credit rating agency informed of any subsequent
material events that may impact its creditworthiness or ability to make timely
payments of interest and principal. The City is directly responsible for managing
the rating agency relationship throughout the term of the bonds and should not
delegate this responsibility to any other party (e.g., municipal advisor,
underwriters).
C. METHODS OF SALE
1. Competitive vs Negotiated Sale
Bond issues should be sold using the method of sale that is most likely to achieve the
lowest cost of borrowing while taking into account both short-range and long-range
implications. Differences in bond structure, security, size, credit ratings, and market
conditions will produce different results.
Competitive Sales - A competitive bond sale is when bonds are offered to multiple
underwriters/investors, who then submit sealed bids to purchase the bonds. The bonds
are awarded based on lowest "True Interest Cost". Competitive sales are recommended
for simple financings with a strong underlying credit rating.
Negotiated Sales- A sale of securities to investors through an underwriter, or the private
placement of the securities with a financial institution or other investment broker. The
negotiated sales process provides control over the financing structure and issuance timing.
If the negotiated sale option is utilized, City staff would work with the Financial Advisor or
Bond Consultant to negotiate the best possible interest rates for the City. Negotiated
sales are recommended for unusual financing terms, periods of market volatility and
weaker credit quality. A thorough evaluation of market conditions should be made to
ensure reasonable final pricing and underwriting spread.
As circumstances can vary significantly over time and situation, there is no clear policy
recommendation on whether to proceed with a negotiated sale or a competitive sale.
2. Private Placements
A bond issue that is structured specifically for one purchaser. Private placements are
typically carried out when extraneous circumstances preclude public offerings, such as
for small issuances of conduit debt, when capital requirements are too small to bear
the cost of a public debt issuance, or when debt obligations would have a short
amortization schedule. Staff, in conjunction with qualified legal counsel and municipal
advisors, shall evaluate the cost-effectiveness of alternative financing methods before
the City conducts a private placement of debt. A private placement is considered to
be a negotiated sale.
D. INITIAL DISCLOSURE REQUIREMENTS
The City and Financing Team shall comply with all disclosure responsibilities for a bond
issuance. Under the guidance of Counsel, the City's underwriter shall distribute a
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Preliminary Official Statement and final Official Statement as required for a bond issuance.
If Private Placement bonds are used, a "Private Placement Memorandum"should be posted
and submitted to the City Council for transparency and documentation.
The Financing Team shall be responsible for obtaining material information to prepare the
Official Statement or memorandum. In doing so, the Financing Team shall confirm that
the Initial Disclosure document accurately states all material information relating to the
decision to buy or sell the subject bonds, and that all information in the Official Statement
or Memorandum has been critically reviewed by an appropriate person.
In connection with an initial offering of securities, the City and other members of the
Financing Team will:
• Identify material information that should be disclosed in the statement;
• Identify other persons that may have material information (contributors);
• Review and approve the Official Statement or Memorandum;
• Ensure the City's compliance, and that of its related entities, with federal and state
securities laws.
E. REFUNDING OF DEBT
Bond refundings refers to the retirement of all, or a portion of, an outstanding bond issue.
Most commonly, refundings are used to achieve borrowing cost savings, but may also be
issued to remove or revise burdensome bond covenants, to change the type of instruments
being used, or to restructure a bond in order to revise debt service payments.
I. Issuance Considerations
When issuing bonds, future refunding opportunities are to be considered and preserved if
reasonable through optional redemption provisions. The typical optional call on a tax
exempt bond is 10 years from the date of issuance. Earlier call dates may result in
somewhat higher costs, and should be evaluated for cost to benefit. On taxable bonds,
call structures vary and all options should be evaluated.
2. Bond Refundings
Refunded bonds are classified as either current or advance refundings. A current
refunding is one in which the outstanding (refunded) bonds are redeemed within 90 days
from the date the refunding bonds are issued. In an advance refunding, the refunded
bonds remain outstanding for a period of more than 90 days from the date the refunding
bonds are issued.
Under federal tax law, a tax-exempt advance refunding may occur only once over the life
of the bonds. Taxable bonds may be subject to different restrictions or tax law. However,
the methodology for determining when a refunding might be appropriate may be applied
to all types of bonds.
3. Bond Coupons
Future refunding opportunities also depend on the coupons - not the yields - on the bonds
to be refunded. Bonds with relatively high coupons (e.g. 5%) are more likely to be
refunded than bonds with lower coupons. The municipal advisor or others in their finance
team may provide direction to determine market preferences at the time of issuance and
whether a higher or lower coupon (premium or discount bonds) provide the best economic
conditions to ensure future refunding opportunities.
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4. Opportunity Monitoring
Bonds are to be monitored to identify and monitor potential refunding opportunities. For
Saratoga, with limited bond issuances, this review is to take place in conjunction with the
annual review of this policy. Any bond issuance that may be nearing advantageous
refunding status shall be monitored and evaluated more closely throughout the year.
S. Refunding Guidelines
Decision guidelines to determine when to refund outstanding bonds include:
Net Present Value Savings - A minimum net present value (NPV) savings of 2% or
a minimum of $500,000 are to be achieved to undertake a refunding, with further
consideration given to whether the call would be for an advance or current refunding.
Higher savings could be required for advance refundings, or for refundings with longer
periods from the call date to maturity on a situation by situation assessment. Current
refundings may warrant lower savings thresholds than are set for advance refundings.
Negative Arbitrage Efficiency - In a proposed advance refunding, negative
arbitrage is how much of potential debt service savings are lost in funding the escrow
to the call date. Negative arbitrage is typically in the form of a penalty paid prior to a
stated call date, and is to be considered in the NPV savings calculation before a
refunding is undertaken.
Rate Efficiency/Sensitivity Analysis - Advance refundings are pursued to obtain
lower interest rates than would be available at the call date. This requires that a rate
sensitivity analysis be conducted to determine how much the interest rates have to
rise by the call date to produce savings matching those that could be achieved with an
advance refunding. This analysis could result in simply waiting until the call date to
refund the bonds.
Refunding Efficiency - The call feature included in municipal bonds has an economic
value, and involve complex calculations that should be requested from the bond
advisors. Considerations on the value added should be included in the bond issuance
analysis.
6. Refunding execution
At the outset of a bond refunding process, the City should follow the same procedures
as for initial bond issuances. This is key as bond refunding may have special
considerations such as call/defeasance notices or escrow account requirements that
must be addressed in the process.
VI. DEBT MANAGEMENT
A. INVESTMENT OF BOND PROCEEDS
Bond proceeds and reserve funds shall be invested in accordance with each issue's
indenture or trust agreement. All unexpended funds held by the City will be held in secure
investment securities, in compliance with the City's Investment Policy, which sets
objectives of safety, liquidity and then yield. The City shall be responsible for recording
all investments and transactions relating to the proceeds and providing monthly
statements regarding the investments and transactions upon demand.
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B. USE OF BOND PROCEEDS
To ensure bond proceeds are spent for their intended purposes, the Finance &
Administrative Services Director shall be responsible for authorizing and reviewing
expenditures for each bond issue to determine that bond proceeds were in fact spent in
the manner detailed in the bond documents on the date of issuance.
All projects being funded with bond proceeds shall be designated as such and included in
the City's annual Capital Improvement Program as approved or amended by the City
Council. The City shall maintain books and records of information showing how bond
proceeds are spent, including the following:
• Requisitions from the project fund;
• Bond records relating to other funds and accounts;
• Verifiable information showing payments to third parties.
• An accounting of all bond proceeds spent on approved capital project.
C. ARBITRAGE COMPLIANCE
The City shall follow a policy of full compliance with all the arbitrage and rebate
requirements of the federal tax code and Internal Revenue Service regulations. The City
shall engage qualified third parties for the preparation of arbitrage and rebate calculations.
All necessary rebates will be filed and paid when due.
D. ONGOING DISCLOSURE REQUIREMENTS
The City shall comply with all Continuing Disclosure requirements for each bond issue.
This includes identifying material information that should be disclosed, preparing annual
disclosure reports, and providing ongoing disclosure information to the Municipal
Securities Rulemaking Board's (MSRB's) Electronic Municipal Market Access (EMMA)
system, the central depository designated by the Securities and Exchange Commission for
ongoing disclosure by municipal issuers.
In addition to annual reports, Securities and Exchange Commission Rule 15c2-
12(b)(5)(i)(C)-(D) obligates the City to disclose, in a timely manner to the MSRB, notice
of certain specified events with respect to the City's securities, including the following:
1. Principal and interest payment delinquencies;
Z. Non-payment related defaults;
3. Unscheduled draws on debt service reserves reflecting financial difficulties;
4. Unscheduled draws on credit enhancements reflecting financial difficulties;
5. Substitution of credit or liquidity providers, or their failure to perform;
5. Adverse tax opinions; the issuance by the Internal Revenue Service of proposed or
final determinations of taxability, notices of proposed issue (IRS Form 5701-TEB) or
other material notices or determinations with respect to the tax status of the security,
or other material events affecting the tax status of security;
7. Modifications to rights of securities holders, if material;
8. Bond calls, if material, and tender offers,
9. Defeasances;
10. Release, substitution, or sale of property securing repayment of the securities, if
material;
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1t. Rating changes;
12. Bankruptcy, insolvency, receivership or similar events of the obligated person;
13.Consummation of a merger, consolidation, or acquisition or sale of substantially all of
the assets of the obligated person (other than in the ordinary course of business), the
entry into a definitive agreement to undertake such an action, or the termination of a
definitive agreement relating to any such actions, other than pursuant to its terms, if
material;
14.Appointment of a successor or additional trustee or the change of name of a trustee if
material;
15. Failure of any person specified in SEC Rule 15c2-12(b)(5)(i)(A) to provide required
annual financial information on or before the date specified in the written contract or
agreement.
The Finance & Administrative Services Director may file notice with the MSRB of specified
events listed in the Continuing Disclosure Certificates without prior review and approval
of the Disclosure Review Group if the City is contractually obligated to file and the
Disclosure Document contains no discretionary content.
If any member of the Disclosure Review Group concludes that an event may have
occurred, the Finance &Administrative Services Director shall be contacted and shall notify
the Disclosure Review Group to discuss the potential event.
E. COMPLIANCE WITH OTHER BOND COVENANTS
In addition to financial disclosure and arbitrage, the City is also responsible for verifying
compliance with all undertakings, covenants, and agreements of each bond issuance on
an ongoing basis. This typically includes ensuring:
• Annual appropriation of revenues to meet debt service payments;
• Taxes/fees are levied and collected where applicable;
• Timely transfer of debt service payments to the trustee;
• Compliance with insurance requirements;
• Compliance with rate covenants.
The City shall comply with all covenants and conditions contained in governing law and
any legal documents entered into at the time of the bond offering. City staff will coordinate
verification and monitoring of covenant compliance.
F. RETENTION
Documents and records will be maintained by the City's Finance Department for the term
of the bonds (including refunded bonds, if any), and as defined by the City's Record
Retention Policy for inactive bonds. Relevant documents and records will include sufficient
documentation to support the requirements relating to the tax-exempt status, including
the following:
• Bond transcripts, official statement and other offering documents.
• All documents relating to capital expenditures financed by bond proceeds. Such
documents will include construction contracts, purchase orders, invoices and payment
records. Such documents will include documents relating to costs reimbursed with
bond proceeds.
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• Records will be maintained identifying the assets or portion of assets that are financed
with bond proceeds.
• All contracts and arrangements involving private use of the bond financed assets.
• All reports relating to the allocation of bond proceeds and private use of bond financed
assets.
• All records of investments, investment agreements, arbitrage reports, return filings
with the IRS and underlying documents, trustee statements, rating correspondence,
and continuing disclosure.
G. INVESTOR RELATIONS
The City posts its annual financial report as well as other financial reports on the City's
website for the benefit of Saratoga's residents and interested parties. Similarly,
information with the intention of reaching the investing public, including bondholders,
rating analysts, investment advisors, or any other members of the investment
community shall be filed on the EMMA system.
H. ANNUAL FINANCIAL STATEMENT AUDIT
It is the City's policy to hire an auditing firm that has the technical skills and resources
to properly perform an annual audit of the City's financial statements. More specifically,
the firm shall be a recognized expert in the accounting rules applicable to the City and
shall have the resources necessary to review the City's financial statements on a timely
basis.
VII. SB 1029: DEBT ISSUANCE REPORTING REQUIREMENTS
A. BACKGROUND
SB 1029, signed into law September 12, 2016, mandates the tracking of state and local
government borrowing and spending of bond proceeds - in the effort to increase
transparency and improve public knowledge. State and local government debt issuers are
required to report specified information about proposed debt issuances to the California
Debt and Investment Advisory Commission (CDIAC) no later than 30 days prior to the
sale of debt, and to report on the debt issuance's status on an annual basis thereafter.
The information gathered will populate the online website Debt Watch, a transparency tool
designed to enable taxpayers and the media to access debt data on California's 4,200 local
government agencies.
B. PROPOSED DEBT ISSUANCE
To comply with code section 8855(i) the Finance & Administrative Services Director shall
submit an annual report for any proposed debt that includes:
1. A certification by the issuer that it has adopted debt polices in compliance with the
stated requirements.
2. That the proposed debt issuance is consistent with these debt policies.
This report is filed through the California State Treasurer's website. Detailed information
on the debt issuer, financing participants, type of sale, type of debt instrument, source of
repayment, and purpose of financing is required. A Report Fee equal to 2.5 basis points
($250 per million of debt issuance), not to exceed $5,000 may be assessed on the
submittal.
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C. REPORT OF FINAL SALE
To comply with code section 8855(j), the Finance &Administrative Services Director shall
submit a Report of Final Sale within 21 days after the issuance of debt. The online form
is prepopulated from the online Proposed Debt Issuance form and allows modification to
the Proposed Debt report information at this time if necessary. Additional information on
the debt issue is required, and must be submitted even if the settlement date with final
numbers has not yet occurred.
Further, once debt is issued, the City is obligated to submit annual Debt Transparency
Reports.
D. ANNUAL TRANSPARENCY REPORT
To comply with code section 8855(k) the Finance & Administrative Services Director shall
submit an annual report within seven months of the close of the reporting period, or
January 31St. Annual Transparency Reports must be submitted to CDIAC each year, until
the debt is no longer outstanding, or the bond proceeds have been fully spent — whichever
is later. These Annual Transparency Reports will evolve over time, but are expected to
include:
1) Debt authorized during the reporting period, to include:
a. Debt authorized at the beginning of the reporting period.
b. Debt authorized and issued during the reporting period.
c. Debt authorized but not issued at the end of the reporting period.
d. Debt authority that has lapsed during the reporting period.
2) Debt outstanding during the reporting period, to include:
a. Principal balance at the beginning of the reporting period.
b. Principal paid during the reporting period.
c. Principal outstanding at the end of the reporting period.
3) The use of proceeds of issued debt during the reporting period, to include:
a. Debt proceeds available at the beginning of the reporting period.
b. Proceeds spent during the reporting and the purposes for which it was spent.
c. Debt proceeds remaining at the end of the reporting period.
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GLOSSARY: MUNICIPAL SECURITIES TERMINOLGY
Ad Valorem Tax: A tax calculated "according to the value"of property. Such a tax is based
on the assessed valuation of real property and a valuation of tangible personal property.
Advance Refunding: Refunding bonds that are issued more than 96 days prior to the date
upon which the refunded bonds will be redeemed. Proceeds of the advance refunding bonds
are placed into an escrow account with a fiduciary and used to pay interest and principal on
the refunded bonds and then used to redeem the refunded bonds at their maturity or call
date.
Arbitrage: The gain that may be obtained by borrowing funds at a lower (often tax-exempt)
rate and investing the proceeds at higher (often taxable) rates. The ability to earn arbitrage
by issuing tax-exempt securities has been severely curtailed by the Tax Reform Act of 1986,
as amended.
Assessed Valuation: The appraised worth of property as set by a taxing authority through
assessments for purposes of ad valorem taxation.
Assessment District Bonds: Bonds issued for public improvements benefiting property
within assessment districts created pursuant to the Improvement Act of 1911 and the
Municipal Improvement Act of 1913.
Bond: A security that represents an obligation to pay a specified amount of money on a
specific date in the future, typically with periodic interest payments.
Bond Anticipation Notes (BANS): Short-term notes issued usually for capital projects
and paid from the proceeds of the issuance of long-term bonds. Provide interim financing in
anticipation of bond issuance.
Bond Counsel: An attorney retained by the issuer to give a legal opinion concerning the
validity of securities. The bond counsel's opinion usually addresses the subject of tax
exemption. Bond counsel may prepare or review and advise the issuer regarding authorizing
resolutions, trust indentures and litigation.
Bond Insurance: A type of credit enhancement whereby an insurance company indemnifies
an investor against default by the issuer. In the event of failure by the issuer to pay principal
and interest in full and on time, investors may call upon the insurance company to do so.
Once issued, the municipal bond insurance policy is generally irrevocable. The insurance
company receives its premium when the policy is issued.
Bond Resolution: Resolution adopted by the City Council authorizing the issuance of bonds,
approving the Notice of Sale and the Official Statement.
Book-Entry: Bonds that are issued in fully registered form but without certificates of
ownership.
Call Option: The right to redeem a bond prior to its stated maturity, either on a given date
or continuously. The call option is also referred to as the optional redemption provision. Often
a "call premium" is added to the call option as compensation to the holders of the earliest
bonds called.
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Capital Appreciation Bond: A municipal security on which the investment return on an
initial principal amount is reinvested at a stated compounded rate until maturity, at which
time the investor receives a single payment representing both the initial principal amount and
the total investment return.
CAFR: Acronym for Comprehensive Annual Financial Report. This is the City's annual
financial report that contains an introductory discussion, audited financial statements with
clarifying financial notes, supplementary schedules, and statistical data schedules.
Certificates of Participation: A financial instrument representing a proportionate interest
in payments such as lease payments by one party (such as a city acting as a lessee) to
another party (often a trustee).
Commercial Paper: Short-term debt instrument. The debt is usually issued at a discount,
reflecting prevailing market interest rates.
Competitive Sale: A sale of bonds in which an underwriter or syndicate of underwriters
submit sealed bids to purchase the bonds. Bids are awarded on a true interest cost basis
("TIC"), providing that other bidding requirements are satisfied. Competitive sales are
recommended for simple financings with a strong underlying credit rating. This type of sale
is in contrast to a Negotiated Sale.
Conduit Financing: The issuance of securities by a governmental entity to finance a project
that will primarily benefit a third party. The security for this type of financing is the credit of
the third party. Usually such securities do not constitute general obligations of the issuer
since the private entity is liable for generating the pledged revenues for repayment.
Continuing Disclosure: The requirement by the Securities and Exchange Commission for
most issuers of municipal debt to provide current financial information to the Municipal
Securities Rulemaking Board for access by the general marketplace.
Coupon Rate: The interest rate on specific maturities of a bond issue. While the term
"coupon" is derived from the days when virtually all municipal bonds were in bearer form with
coupons attached, the term is still frequently used to refer to the interest rate on different
maturities of bonds in registered form.
Credit Rating Aciency: A company that rates the relative credit quality of a bond issue and
assigns a letter rating. These rating agencies include Moody's Investors Service, Standard &
Poor's, and Fitch Ratings.
CUSIP Number: The term CUSIP is an acronym for the Committee on Uniform Securities
Identification Procedures. An identification number is assigned to each maturity of an issue.
The CUSIP numbers are intended to help facilitate the identification and clearance of municipal
securities.
Debt Limit: The maximum amount of debt that is legally permitted by a jurisdiction's charter,
constitution, or statutes.
Debt Service: The amount necessary to pay principal and interest requirements on
outstanding bonds for a given year or series of years.
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Default: The failure to pay principal or interest in full or on time and, in some cases, the
failure to comply with non-payment obligations after notice and the opportunity to cure.
Defeasance: Providing for the payment of principal, premium (if any) and interest on debt
through the call date or scheduled principal maturity in accordance with the terms of the debt.
A legal defeasance usually involves establishing an irrevocable escrow funded with only cash
and U.S, Government obligations.
Derivative: A financial instrument which derives its own value from the value of another
instrument, usually an underlying asset such as a stock, bond, or an underlying reference
such as an interest rate index.
Disclosure Counsel: An attorney retained to provide advice on issuer disclosure obligations,
to prepare the official statement and to prepare the continuing disclosure undertaking.
Discount: The difference between a bond's par value and the price for which it is sold when
the latter is less than par.
Enterprise Activity: A revenue generating project or business. The project often provides
funds necessary to pay debt service on securities issued to finance the facility. Common
examples include water and sewer treatment facilities and utility facilities.
Financial Advisor: A consultant who provides the issuer with advice on the structure of the
bond issue, timing, terms and related matters for a new bond issue.
Financinu Team: The working group of City staff and outside consultants necessary to
complete a debt issuance.
Grant Anticipation Notes (GANs): Short-term notes usually issued for capital projects, in
anticipation of receiving grant revenue at a future date. Proceeds allow the municipality to
manage the periods of cash shortfalls between expenditure payments and receipt of grant
reimbursement revenues.
General Obligation Bond: A bond secured by an unlimited property tax pledge. Requires
a two-thirds vote by the electorate. GO bonds usually achieve lower rates of interest than
other financing instruments since they are considered to be a lower risk.
Indenture: A contract between the issuer and the trustee stipulating the characteristics of
the financial instrument, the issuer's obligation to pay debt service, and the remedies
available to the trustee in the event of default.
Issuance Costs: The costs incurred by the bond issuer during the planning and sale of
securities. These costs include but are not limited to financial advisory, bond counsel,
disclosure counsel, printing, advertising costs, rating agencies fees, and other expenses
incurred in the marketing of an issue.
Lease: An obligation wherein a lessee agrees to make payments to a lesser in exchange for
the use of certain property. The term may refer to a capital lease or to an operating lease.
Lease Revenue Bonds: Bonds that are secured by an obligation of one party to make annual
lease payments to another.
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Letter of Credit: An unconditional pledge of the bank's credit which is used to guarantee
payment of principal and interest on debt in the event insufficient funds are available to meet
a debt service obligation. Letters of credit are most often employed when the stated interest
on the City's securities is variable.
Line of Credit: A contract with a financial institution, usually a bank, that establishes a
maximum loan balance that the bank will permit the borrower to maintain. The borrower can
draw down on the line at any time, as long as the maximum set in the agreement is not
exceeded.
Mortgage Revenue Bonds: Bonds issued for the purpose of providing single-family
mortgage financing or acquisition and construction funds for multi-family housing projects.
The bonds are secured by the mortgage repayments and project revenue. See Conduit
Financing.
Municipal Securities Rulemakinn Board (MSRB): A self-regulating organization
established on September 5, 1975 upon the appointment of a 15-member board by the
Securities and Exchange Agreement. The MSRB, comprised of representatives from
investment banking firms, dealer bank representatives, and public representatives, is
entrusted with the responsibility of writing rules of conduct for the municipal securities
market.
Necotiated Sale: A sale of securities in which the terms of the sale are determined through
negotiation between the issuer and the purchaser, typically an underwriter, without
competitive bidding. The negotiated sales process provides control over the financing
structure and issuance timing. Negotiated sales are recommended for unusual financing
terms, periods of market volatility and weaker credit quality. A thorough evaluation of market
conditions will be performed to ensure reasonable final pricing and underwriting spread.
Net Interest Cost {NIC): A method of computing the interest expense to the issuer of
bonds, which may serve as the basis of award in a competitive sale of a new issue of municipal
securities. NIC takes into account any premium or discount applicable to the issue, as well as
the dollar amount of coupon interest payable over the life of the issue. NIC does not take into
account the time value of money (as would be done in other calculation methods, such as the
"true interest cost" (TIC) method). The term "net interest cost" refers to the overall rate of
interest to be paid by the issuer over the life of the bonds.
Official Statement (Prospectus1: A document published by the issuer in connection with
a primary offering of securities that discloses material information on a new security issue
including the purposes of the Issue, how the securities will be repaid, and the financial,
economic and social characteristics of the security for the bonds, Investors may use this
information to evaluate the credit quality of the securities.
Original Issue Discount Bonds: Bonds sold at a substantial discount from their par value
at the time of the original sale.
Par Value: The face value or principal amount of a security.
Pension Obligation Bonds (POBs): Financing instruments used to pay some or all of the
unfunded pension liability of a pension plan. POBs are issued as taxable instruments over a
30-40 year term or by matching the term with the amortization period of the outstanding
unfunded actuarial accrued liability,
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Preliminary Official Statement: A version of the Official Statement prepared by or for an
issuer of municipal securities for potential customers prior to the availability of the final official
Statement. Under SEC Rule 15c2-12, the difference between a Preliminary Official Statement
and a final Official Statement is that the final official Statement includes"pricing information,"
i.e., offering price(s), interest rate(s), selling compensation, aggregate principal amount,
principal amount per maturity, delivery dates, any other terms or provisions required by an
issuer of such securities to be specified in a competitive bid, ratings, other terms of the
securities depending on such matters, and the identity of the underwriter(s).
Premium: The excess of the price at which a bond is sold over its face value.
Present Value: The value of a future amount or stream of revenues or expenditures.
Pricing Consultant: The Pricing Consultant provides a fairness letter to the City or its agent
regarding the pricing of a new issue of municipal securities.
Private Activity Bonds: A bond where bond proceeds are used for private purposes. If
deemed a private activity bond, the interest is not tax exempt unless the use of the proceeds
meets certain requirements of the Internal Revenue Code.
Private Placement: A bond issue that is structured specifically for one purchaser. Private
placements are typically carried out when extraneous circumstances preclude public offerings.
A private placement is considered to be a negotiated sale.
Refunding: A procedure whereby an issuer refinances an outstanding debt issue by issuing
a new debt issue.
Related Entities: Those independent agencies, joint power authorities, special districts,
component units, or other entities created by the City Council or by State law for which the
City Council serves as the governing or legislative body in his or her official capacity, or for
which the City has agreed to provide initial or continuing disclosure in connections with the
issuance of securities.
Revenue Anticipation Notes [RANs]: Short-term notes issued in anticipation of receiving
revenue at a future date. Proceeds allow the municipality to manage the periods of cash
shortfalls resulting from a mismatch between the timing of revenues and timing of
expenditures.
Rule 10b5: Rule adopted by the Securities and Exchange Commission that requires the
disclosure of all material facts and prohibits the omission of facts necessary to make
statements not misleading.
Rule 15c2-12: Rule adopted by the Securities and Exchange Commission setting forth
certain obligations of (i) underwriters to receive, review and disseminate official statements
prepared by issuers of most primary offerings of municipal securities, (ii) underwriters to
obtain continuing disclosure agreements from issuers and other obligated persons to provide
ongoing annual financial information on a continuing basis, and (iii) broker-dealers to have
access to such continuing disclosure in order to make recommendations of municipal
securities in the secondary market,
Reserve Fund: A fund established by the indenture of a bond issue into which money is
deposited for payment of debt service in case of a shortfall in current revenues.
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Revenue Bond: A bond which is payable from a specific source of revenue and to which the
full faith and credit of an issuer is not pledged. Revenue bonds are payable from identified
sources of revenue, and do not permit the bondholders to compel a jurisdiction to pay debt
service from any other source. Pledged revenues often are derived from the operation of an
enterprise.
Secondary Market: The market in which bonds are sold after their initial sale in the new
issue market.
Serial Bonds: Bonds of an issue that mature in consecutive years or other intervals and are
not subject to mandatory sinking fund provisions.
Special Tax Bonds: Bonds issued to fund eligible public improvements and paid with special
taxes levied in a community facilities district formed under the Mello-Roos Community
Facilities Act of 1982, as amended. The City's policy on Community Facilities Districts and
Special Tax Bonds is further outlined in City Council Resolution 2009-103.
Tax Anticipation Notes (TANs): Short-term notes issued in anticipation of receiving tax
receipts at a future date. Proceeds allow the municipality to manage the periods of cash
shortfalls resulting from a mismatch between the timing of revenues and timing of
expenditures.
Tax and Revenue Anticipation Notes (TRANS): Short-term notes issued in anticipation
of receiving tax receipts and revenues at a future date. Proceeds allow the municipality to
manage the periods of cash shortfalls resulting from a mismatch between timing of revenues
and timing of expenditures.
Term Bonds: Bonds that come due in a single maturity whereby the issuer may agree to
make periodic payments into a sinking fund for mandatory redemption of term bonds before
maturity or for payment at maturity.
True Interest Cost [TIC]: Under this method of computing the interest expense to the
issuer of bonds, true interest cost is defined as the rate necessary to discount the amounts
payable on the respective principal and interest payment dates to the purchase price received
for the new issue of bonds. Interest is assumed to be compounded semi-annually. TIC
computations produce a figure slightly different from the "net interest cost" (NIC) method
because TIC considers the time value of money while NIC does not.
Trustee: A bank retained by the issuer as custodian of bond proceeds and official
representative of bondholders. The trustee ensures compliance with the indenture. In many
cases, the trustee also acts as paying agent and is responsible for transmitting payments of
interest and principal to the bondholders.
Underwriter: A broker-dealer that purchases a new issue of municipal securities from the
issuer for resale in a primary offering. The bonds may be purchased either through a
negotiated sale with the issuer or through a competitive sale.
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CITY COUNCIL POLICY
POLICY TITLE: District Formation and Bond Issuance Policy for
Community-Funded Infrastructure Projects
REGULATORY COMPLIANCE: Applicable statutes under California Government Code,
Title 5, Division 2, Part 1, Chapters 2.5-2.9 [53311-
53398.8]
POLICY EFFECTIVE DATE: September 16, 2020
AMENDMENTS: N/A
POLICY CONTENT:
I. POLICY SCOPE & OBJECTIVE
A. Scope
B. Objective
II. BACKGROUND
A. Project Initiation
B. Project Cost
C. Timeline
D. Definition
III. COMMUNITY COORDINATION
A. Initiation
B. Project Parameters
C. Communication
D. Community Vote
IV. COMMUNITY APPLICATION
A. Formal Request
B. District Formation Application
V. DISTRICT FORMATION PROCESS
A. Initial Meeting
B. Process Begins
C. Structural Decisions
D. Obtain Consultants
E. Engineering
F. City Council Authorization
G. Election
H. City Council Approval
VI. BOND ISSUANCE
A. Bond Issuance Options
B. Cash Payment Option
C. Ongoing Bond Issuance Costs
D. Indenture Considerations
E. Bond Funds
F. Improvement Project
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CITY COUNCIL POLICY
I. POLICY SCOPE AND OBJECTIVES
A. Scope - This policy outlines the process to establish a legal community-based entity
for the purpose of financing the construction or acquisition of infrastructure
improvements. This policy identifies both the Community's and the City's roles and
responsibilities, and the process to create an established special tax district. Districts
are commonly formed as Community Facilities Districts (CFD) for the purpose of
issuing a bond to provide the funding needed for the infrastructure improvement.
B. Objective - This policy process is generic in nature in order to provide informational
guidance to staff, and for community members interested in pulling a community
together to form an agreement, under various special tax district formations. City Staff
will meet with community members interested in facilitating a community
improvement project to provide guidance on the process as provided in this policy.
II. BACKGROUND
A. Project Initiation - Community-funded improvement projects are initiated by a
neighborhood that sees a need for a community-wide improvement, such as upgrading
a private roadway, undergrounding line-based infrastructure, or replacing a small
private water system for acceptance into the local water system utility.
B. Project Cost - While neighborhood improvements can be undertaken as private
projects without the City's involvement, large-scale infrastructure improvements are
often cost-prohibitive or may require ongoing maintenance. In these situations,
neighborhoods look to the City for assistance to manage the improvement process.
Improvement-project requestors should be aware that the entire cost of the project
will be funded by the community, inclusive of City staff time and legal fees.
Due to the cost involved with a district formation and bond issuance, City policy hereby
establishes a minimum project improvement cost of $1 million. Participants are
required to pay formation costs and pre-bond issuance costs before the City will begin
the process.
City staff will provide estimated cost information for official requests; participants
should expect this will require a minimum of $50,000 for district formation costs,
additional funding for engineer work if needed, and any pre-bond issuance costs that
are not paid for as part of the bond issuance. Altogether, these costs could total
$150,000 prior to the bond issuance and its associated costs.
C. Timeline - Community-funded improvement projects incorporate many steps with
some statutorily required notification and/or waiting periods. The speed of the
community's cohesive decision-making and community leadership is the first variable
in the timeline that determines the speed of the process. Once the Community has
agreement on project and funding choices, they can move forward with a request to
the City. The City Council's CFD formation and bond authorization process will typically
take between four and six months. During this time, the community should ensure
that they have finalized engineering or construction plans and determined project costs
through professional estimates. Following City Council approval, the project's funding
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timeline is determined by the community's funding choices and actions. The project
construction timeline begins after the funding is in place.
D. Definition - A Community Facilities District (CFD) is a special tax district based on
State law first adopted in 1911 to establish assessment districts, and the subsequent
updates and new statues that have modified the technical and legal procedures for this
process. A CFD is a legal entity that can issue debt for the planning, design,
acquisition, construction, and/or operations of facilities, within an identified area.
Property owners within the district boundaries vote to both establish the District itself,
and to authorize a maximum special tax to be levied on taxable property within the
district boundaries. Revenues received from the special tax can only be used for the
purposes defined at the time of CFD formation or approval, inclusive of debt service
payments and associated bond expenses.
Special Tax liens are recorded against the title of properties within the district.
California Civil Code Section 1102.6 requires that the Special Tax lien be disclosed to
a buyer when the property is subsequently sold. Any outstanding Special Tax lien is
assumed with the purchase for the life of the CFD.
III. COMMUNITY COORDINATION
A. Initiation - A district formation is initiated by interested residents in a community,
through meeting with their neighbors to:
1. Discuss the need for an infrastructure improvement
2. Determine the improvement project scope and the proposed district's boundaries
3. Hold community-wide meetings to choose leaders willing to guide the improvement
project on the community's behalf, act as the main contacts for the project, and
communicate with the entire community group during the process
B. Project Parameters - Community leaders discuss and refine improvement project
parameters to:
1. Articulate a clearly defined improvement project in writing
2. Identify community boundaries and property ownership information
3. Determine implementation and improvement project funding methodology
4. Obtain expert advice on desired infrastructure project and/or engineering plans
5. Identify project urgency, project contingencies, and a realistic timeline
6. Determine anticipated project costs
C. Communication - Community Leaders:
1. Ensure project information and feedback is disseminated back to entire community,
including total funding requirements, per member cost, possible funding options,
and community concerns and responses.
a. Project funding option discussions to include:
■ Community association to self-fund project
■ City-established district with annual assessments (funded over time)
■ City-established district with bond issuance (immediate funds)
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2. Discuss and inform community of District formation and bond issuance process,
and pre-funding requirements to move forward:
■ District formation costs of approximately $50,000
■ Pre-bond issuance costs of approximately $50,000
■ Engineering Plans (this cost varies and can be conducted after bond issuance,
but if done after, the bond sizing would be less certain, require a larger
contingency, and the project timeline extended prior to beginning construction)
• Potential for added legal fee costs if community members do not move forward
as a united group
3. Discuss bond issuance costs - both initial and ongoing costs.
4. Discuss improvement project costs, contingencies, alternatives, etc.
5. Discuss the method and allocation of tax assessments to property owners.
6. Discuss option to allow property owners to pay their share in cash prior to bond
issuance to eliminate participation in bond issuance.
D. Community Vote - A preliminary vote of all community members should be taken to
gauge majority opinion on moving forward with district formation and bond issuance.
While the City highly recommends 100% approval of district formation and bond
issuance, if the community is at least 2/3 in favor of establishing a district and funding
City involvement, the community leadership may then contact the City's Public Works
Director to begin the process.
IV. COMMUNITY APPLICATION
A. Formal Request - A community group's formal request to the City to form a
Community Facility District (CFD) or similar assessment district for the purpose of
financing community infrastructure through the issuance of special tax bonds requires
a packet of information be submitted to City. The City will then consider such requests
in the context of State law and City Policy. Information to be provided includes:
B. District Formation Application - To request the City begin the district formation
process, the community must provide:
1. A petition signed by at least 2/3 of homeowners (1 vote per property) requesting
the City to proceed with the district formation process.
2. Documentation authorizing who they have elected as Community leaders to act on
the community's behalf to proceed with the request.
3. A clearly defined scope of work describing the improvement project.
4. Project cost estimates at a minimum, or preferably more refined estimates from a
draft engineering plan.
5. Information to explain the need and/or urgency of the project, project funding
maximum authorization, options, and the proposed method of cost allocation.
6. Defined district boundaries (must be entirely within city limits) for the proposed
Special Tax District, with addresses and property owner contact information.
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7. A signed acknowledgement that the community is aware a $50,000 deposit is
required to begin the district formation process, and that the use of the deposit
funds shall in no way be construed as requiring the City to issue bonds or to provide
reimbursement of the proceeds expended if the district formation and/or bond
issuance process is not successful.
8. A signed Funding and Indemnification agreement (provided by the City)
acknowledging the community group understands they are liable to protect the
City against lawsuits associated with district formation and project funding, and
will be required to provide commercial general liability insurance for this purpose.
The agreement also requires the community group to submit additional funding if
needed to complete the district formation process. (Deposit to be provided at initial
City Meeting, prior to the start of the district formation work. The City's Risk
Manager will provide project specific insurance requirements.)
V. DISTRICT FORMATION PROCESS
A. Initial Meeting - City staff to meet with community leaders to review:
1. Completeness of their Request for District Formation application.
2. District formation options and community preferences.
3. District formation costs for attorneys, staff time, consultants, election costs, etc.
4. Engineering design/plan preparation options.
■ The Community may retain an engineer to design/prepare cost estimate for
improvement, or ask the City to do so on their behalf. Engineering plans are
recommended to ensure proper financing/bond-sizing.
5. City's funding and indemnification requirements. The City requires the community
to submit payment from a community group account. Individual payments will not
be accepted.
6. Steps and timeline in the district formation and bond issuance process.
B. Process Begins - Once the agreement is signed, funded, and proof of insurance is
received, the City will assemble a team of district formation consultants.
C. Structural Decisions - To bring the district formation and bond issuance requests to
the City Council, the community leaders and the City must finalize and clearly define
a number of decision points:
■ District formation boundaries.
■ Limited purpose of the CFD (clearly defined project).
■ The rate and method of the special tax assessments.
This information will also be used for the ballot measure that goes to the electorate to
authorize the district formation and bond issuance election.
D. Obtain Consultants - For critical guidance in how bond issues and assessments are
structured and ultimately the success in the approval and issuance of a bond measure,
the City will contract with consultants to assist with preparing the documents for
Council approval. Financial Advisors and/or Underwriters provide expertise in the bond
market and bond issuance requirements, and Special Tax Consultants provide
expertise in the structure of bond assessment and special tax allocation calculations.
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E. Engineering - At this point, the community will have decided whether to fund the
engineering design and cost estimate work themselves, or to wait until the bond is
issued so that the expense can be paid from bond funds. If the community wants the
City to hire an engineering firm to complete the design process and cost estimate work
prior to bond issuance, an additional funding deposit is required.
F. City Council Authorization - Once the district formation, project details, tax
assessments, and bond issuance particulars are finalized, staff will bring two
resolutions and a petition to the City Council meeting for approval:
1. Resolution of intent to establish a Community Facilities District and to authorize
the levy of Special Taxes
2. Resolution to incur bonded indebtedness of the proposed Community Facilities
District
3. Petition to create a Community Facilities District (hold an election)
G. Election - If Council approves the district and bond issuance resolutions, a special
election will be held for the community. If the community votes to approve the district
formation and bond issuance by at least 2/3 of the voters, the process will continue.
If not, staff will refund any remaining deposit back to the community group.
H. City Council Approval- If the community voted in favor of becoming a CFD and the
issuance of a bond to fund the improvement project, staff will bring a resolution back
to the City Council to: approve the formation of the CFD; levy a special tax, and;
establish an appropriation limit for the district. The City Council will hold a public
hearing for this purpose and consider community input. If City Council approves the
resolution, the bond issuance process begins.
VI. BOND ISSUANCE
A. Bond Issuance Options - Community leaders will have become acquainted with the
bond issuance process in the initial meetings with the Financial Advisor and/or
Underwriters. The bond consultants will update the CFD leaders with current market
information, trends, and any other pertinent information, such as the difference in a
private sale vs public sale. The CFD leaders will provide the City and consultants with
their decision(s).
1. Publicly offered bonds are rated in conjunction with the City's high investment
grade rating, thereby lowering the risk for bond issuers and attracting more buyers.
Generally, the competitive process will take longer to complete due to additional
steps to prepare the bond for market, the time on the marketplace to gather
interest and to set a purchase date. This results in higher bond issuance expenses,
but lower interest costs as the buyers compete against each other.
2. Private bonds can be issued by qualified buyers who agree to hold the bonds to
maturity, or sell to another qualified buyer under those same terms. Underwriters
generally have relationships with qualified buyers and find those interested parties,
negotiate the deal, and wrap up the details in a matter of days. This eliminates
both time and bond issuance costs. Typically, interest rates are higher in private
sales, so CFD participants would have to decide on this option.
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B. Cash Payment Option — Property owners will have the opportunity to forgo
participating in the bond issuance if they choose to contribute their share of the
improvement project costs prior to the bond issuance. The Special Tax consultant will
work out the contribution amounts and payment due date.
C. Ongoing Bond Issuance Costs — Bondholders will be responsible for the bond
issuance and annual costs associated with administering tax collection, debt service
payments, and regulatory reporting. As these fees are borne only by those members
who remain bondholders, the smaller the group becomes, the fewer property owners
to share the cost burden.
D. Indenture considerations — The bond indenture basically acts as the official rules in
a bond issuance. The bond bank must follow whatever is set out in the indenture, so
it is essential that funding distribution of excess funds, and the process for how
subsequent bond payoffs are handled are all spelled out in precise detail.
E. Bond Funds - When a bond is issued, the proceeds will go into separate accounts to
represent funding allowed for uses such as:
1. Cost of Issuance — this account holds the funds due to pay off bond issuance
consultants, such as bond attorneys, underwriters, debt issuance fees, etc.
2. Project Improvement Funds— this account holds the funds issued for the project
improvement costs. The City will submit requests for payment to the contractors
and other related improvement costs. The bond bank will pay the vendors directly.
Once the project is completed, the bond indenture will call out how remaining funds
are treated, either to be applied to pay down principal at the next bond call, or to
use to reduce debt service for the bond holders.
3. Reserve — this account holds a set percentage of funds for security as required by
the issuer to ensure the debt service is paid if a borrower does not fulfill their
obligation. A participant's share is utilized in the buyout of their debt service if the
debt is paid off after issuance. Any remaining reserve funds are used for the final
debt service payment(s).
F. Improvement Project — Once the improvement project is complete, a notice of
completion shall be sent to the bond bank. This will allow for the final steps to proceed
as described in the indenture.
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