DEBT MANAGEMENT POLICY

Adopted July 13, 1999

PURPOSE

The Town of Berlin recognizes that the foundation of any well-managed debt program is a comprehensive debt policy. A debt policy sets forth the parameters for issuing debt and managing outstanding debt and provides guidance to the Town Council. The debt policy will establish standards regarding the timing and purposes for which debt may be issued, types and amounts of permissible debt, method of sale that may be used and structural features that may be incorporated. The standards constitute realistic goals that the Town can expect to meet, and will guide, but not bind, debt management decisions. The debt policy should recognize a binding commitment to full and timely repayment of all debt as an intrinsic requirement for entry into the capital markets. Adherence to a debt policy helps to ensure that a government maintains a sound debt position and that credit quality is protected. Advantages of a debt policy are as follows:

enhances the quality of decisions by imposing order and discipline, and promoting consistency and continuity in decision making,rationalizes the decision-making process,
identifies objectives for staff to implement, demonstrates a commitment to long-term financial planning objectives, and is regarded positively by the rating agencies in reviewing credit quality.

II. DEBT AFFORDABILITY MEASURES

The Finance Director, Town Accountant and the Town Treasurer will examine three statistical measures to determine debt capacity and compare these ratios to other towns, rating agency standards and the Town of Berlin’s historical ratios to determine debt affordability. In order to determine the Town's relative debt position, the committee uses the following measures.

1. Debt measured against the population on a per-capita basis.
2. General Fund bonded debt as a percentage of Assessed value.
3. General Fund debt service as a percent of total general fund expenditures.
4. Other measures the Town deems appropriate.

III. COMPREHENSIVE CAPITAL PLANNING

A. Planning

1. Plan of Development. The Planning Department is responsible for the comprehensive planning of growth, development and conservation in the Town. The department coordinates the preparation and revision of a Plan of Development that includes policies for land use and land conservation and multi-year development plans for transportation, public facilities, water, sewerage, parkland, housing, human services and environmental protection.

2. Planning and Zoning Commission. Adoption and implementation of the Plan of Development is the responsibility of the Planning and Zoning Commission, which reviews development in the Town for all private economic development as well as proposals for recreation and parks, transportation, water and sewer, solid waste, schools, libraries and fire stations.

3. Adequate public facilities. The Plan of Development guides where growth occurs, so that facilities can be constructed in a timely manner. Adequate public facilities legislation requires the testing of proposed developments for adequacy of schools and roads as a condition of subdivision or site development plan approval. The Town of Berlin adopts a 10-Year Plan of Development for its infrastructure, particularly roads, schools and water and sewer, to ensure development does not overburden the capacity of infrastructure and other public facilities.

4. Capital improvement plan. The Town of Berlin requires that staff prepare a five (5) year capital improvement program for consideration and adoption by the Town Council as part of the Town's budgetary process. Annually, the capital budget identifies revenue sources and capital expenditures for the coming fiscal year and the next succeeding four fiscal years. The plan is updated annually.

B. Funding of the Capital Improvement Program. Whenever possible, the Town will first attempt to fund capital projects with grants, enterprise fund proceeds or contributions, as part of its broader capital improvement plan. When such funds are insufficient, the Town will use dedicated revenues such as transfer of funds, development fees, and general fund revenues to fund projects. If these are not available, the Town will use bond financing. The Town is guided by four principles in selecting a funding source for capital improvements: equity, effectiveness, efficiency and timing.

1. Equity: Whenever appropriate the beneficiaries of a project or service will pay for it. For example, if a project is a general function of government that benefits the entire community, such as a school, police station or library, the project will be paid for with general tax revenues or financed with general obligation bonds. The Town will use its full faith and credit and issue general obligation bonds for projects benefiting specific users, such as water and sewer facilities, or the golf course. The revenues will be derived from user fees or charges and targeted taxes and assessments will be used to offset the general obligation debt service.

2. Effectiveness: In selecting a source or sources for financing projects, the Town will select one or more that effectively funds the total cost of the project. For example, funding a capital project or the debt service on a project, with a user fee that does not provide sufficient funds to pay for the project is not an effective means of funding the project.

3. Efficiency: If grants or current revenues are not available to fund a project, the Town will select a financing technique that provides for the lowest total cost consistent with acceptable risk factors and principles of equity and effectiveness. These methods currently consist of fixed-rate general obligation serial bonds or notes issued by the Town. The use of short-term notes will be used to finance less significant borrowing needs. These notes will be retired prior to permanent financing, resulting in savings due to lower interest rates and bond issuance costs. Paydowns during this period will allow the Town to reduce the amount of long term debt and the associated issuance costs.

4. Timing: The Town will consider annual cash flow requirements, interest earnings, the annual tax levy due date and periodic property revaluation schedules which shift the tax burden. Tax levy payments represent over 70%, and state grants represent 10-15%, of Town revenues. Since the Town of Berlin collects the majority of its taxes during the first month of the fiscal year, the scheduling of debt service payments during the last month of the fiscal year allows the Town t 1). Maintain adequate tax reserves for the provision of daily government operations, 2). Earn interest from the beginning of the fiscal year until the last month of the fiscal year, thereby decreasing the amount of taxes needed to be raised and; 3) Cause state grants to be received simultaneously with the expenses they reimburse, by recognizing that the State of Connecticut delays it’s grant payments to municipalities until the end of the fiscal year in order to maximize the amount of funds available to it.C. Maintenance, Replacement and Renewal. The Town intends to set aside sufficient current revenues to finance ongoing maintenance needs and to provide periodic replacement and renewal consistent with its philosophy of keeping its capital facilities and infrastructure systems in good repair, to maximize a capital asset's useful life and to avoid unnecessary borrowing. It is the Town's policy to develop master plans for  scheduling this maintenance.

D. Debt Authorization. No Town debt may be issued for the purpose of funding capital projects unless approved by the Town Council. The five-year plan however may be modified at the time a bond authorization is passed. The debt authorization shall comply with State statutes and the Town Charter.

IV. PLANNING AND STRUCTURE OF TOWN INDEBTEDNESS

A. Overview. The Town finances its capital needs in accordance with the Town Charter and State statutes. The Town plans long and short-term debt issuance to finance its capital program based on its cash flow needs, sources of revenue, capital construction periods, available financing instruments and market conditions. The Director of Finance oversees and coordinates the timing, issuance process and marketing of the Town's borrowing and capital funding activities required in support of the capital improvement plan. The Town finances its capital needs on a regular basis dictated by its capital spending pattern. Over the long-term this policy results in a consistently low average interest rate. The Town seeks refinancing opportunities to bring such interest rates closer to the average whenever market conditions present an opportunity to refinance long term debt at a savings.B. Financing Team. The Town employs outside financial advisors to assist it in developing a bond issuance strategy, preparing bond documents and marketing bonds to investors. The key players in the Town's financing transactions include its financial advisor, bond counsel, underwriter (for a negotiated sale) and Town representatives (the Director of Finance, Town Treasurer and the Town Accountant, among others). Other outside firms, such as those providing paying agent/registrar, trustee, credit enhancement, auditing, or printing services, are retained as required. The Finance Director will review the overall financing strategy of the Town annually and make recommendations to the Town Manager and Town Council.

C. Overlapping Debt. There are two fire districts within the Town’s boundaries; The Kensington Fire District and the Worthington Fire District. Also the Town is a member of the Mattabassett District, a regional water and sewage facility. The Town is responsible for 18.44% of the debt of the Mattabassett District. Debt of the two Fire Districts is paid for by taxes levied on property located within the boundaries of the respective Districts.D. Term of Debt Repayment. Borrowings by the Town mature over a term that does not exceed the economic life of the improvements that they finance. The Town consolidates its long-lived municipal improvements into the 5-Year Capital Improvement Plan and issues serial bonds and notes (with a term ranging from 4 to 20 years). The Town endeavors to retire debt in the shortest period of time which is fiscally prudent and will schedule new debt to coincide with the retirement of past debt to lessen the impact upon the mill rate.

The Town does not issue debt to finance improvements with a value of $500,000 or less or with a probable useful life less than four years. Instead the Town includes such short-lived improvements as part of its 5-Year Capital Improvement Plan and pays for them from each year’s operating budget. Discrete leases will be considered for short life capital needs that become technologically outdated, such as computers and copiers, if such leases provide cost savings.E. Borrowing Guidelines.

1. Bonds and notes. The debt service on bonds and notes paid each year shall not exceed 15% of the General Fund budget of the Town, excluding:

a. Tax anticipation notes and other indebtedness with a maturity of one year or less;

b. Bonds or other indebtedness of the Town payable from revenues for special taxing districts;

c. Self-supporting bonds or other debt.2. Short term notes for operations. The Town Council may authorize short-term notes to meet expenses incurred in the operation of the town government. The Town shall pledge its full faith and credit as security for those notes.

F. Bond Features. The Serial Bonds and Notes of the Town will be general obligations, and its full faith and credit and unlimited taxing power are irrevocably pledged to the punctual payment of principal of and interest on such bonds and notes when due and payable. Principal of bonds is payable in installments, the first of which is customarily  payable within two years of the date of issue, although general statutes authorize three years.

1. Par, discount or premium. The Town has customarily sold its bonds at par, with interest payable semiannually. It is authorized under the general statutes to sell bonds at a discount or premium in order meet the Town’s financing objectives

2. Debt service structure.Bond term.

Although the Town may finance its long-lived municipal improvements over a 20-year term, the Town generally structures the principal repayments on these bonds over a much shorter period. This rapid amortization results in the majority of the indebtedness being repaid within ten years. This policy minimizes the interest payments made over time, and causes the rating agencies to look more favorably on the Town’s debt structure. The Town will seek to continue this practice, unless general fund revenues are projected to be insufficient to provide adequately for debt service payments on necessary debt.3. Call provisions. The Town seeks to minimize the cost from optional redemption call provisions, consistent with its desire to obtain the lowest possible interest rates on its bonds. The Town’s bonds are generally subject to optional redemption. The Town seeks early calls at low or no premiums because such features have allowed it in the past to refinance debt for debt service savings when interest rates dropped. The Town and its financial advisor evaluate optional redemption provisions for each issue to assure that the Town does not pay unacceptably higher interest rates to obtain such advantageous calls.4. Interest rates. Historically the Town has issued fixed-rate debt to finance its capital needs, including short-term BANs to finance construction costs or short-lived assets that are repaid or refinanced in the near term.

G. Other Obligations Classified as Debt.

Vested vacation benefits. Vacation benefits are earned by Town employees in one fiscal year and are available for use in the subsequent fiscal year. The benefits are vested. The Town records vested vacation benefits as earned in accordance with generally accepted accounting principles. In the Governmental Funds, the total amount of vacation benefits is recorded as a liability in the Long-Term Debt Account Group. The amount of vested vacation benefits is not included in measures used to evaluate the Town's debt affordability.

V. BOND ANTICIPATION NOTES

Construction Financing. The Town issues fixed rate bond anticipation notes, known as BANs, when their use is judged to be prudent and advantageous. The Town may elect to use BANs to provide interim construction financing for its capital improvement program as a method of managing its available cash. BANs may be sold in either a competitive or negotiated sale. The dollar amount of construction financing is the estimated construction cost of capital projects during a two-year period. The Town will strive to make a paydown of at least 5% each year and may renew these BANs up to four years after issuance.

VI. CREDIT OR LIQUIDITY ENHANCEMENT

The Town may seek to use credit or liquidity enhancement when such enhancement proves to be cost-effective or to improve or establish a credit rating on BANs or Bond issues. Selection of enhancement providers is subject to a competitive bid process or at the option of the underwriter. The competitive bid process will be developed by the underwriter and financial advisor and approved by the majority of Town’s Financing Team (Mayor, Town Manager, Finance Director and Town Treasurer) at the time of sale. More frequently, however, those who bid on the Town’s bonds will purchase bond insurance themselves, and include its cost in the interest rates charged to the Town. The Town sells its bonds to the bidder offering the lowest interest cost to the Town, whether or not the bidder pays for bond insurance.VII.

METHOD OF SALE

The Town, with the advice of the Financial Advisor and Bond Counsel will select a method of sale that is the most appropriate in light of financial, market, transaction-specific and issuer-related conditions, and explain the rationale for its decision.

A. Competitive Sales. Debt obligations are generally issued through a competitive sale. The Town and its financial advisor will set the terms of the sale to encourage as many bidders as possible. By maximizing bidding, the Town seeks to obtain the lowest possible interest rates on its bonds and notes.

 B. Negotiated Sales. When certain conditions favorable for a competitive sale do not exist and when a negotiated sale will provide significant benefits to the Town that would not be achieved through a competitive sale, the Town may elect to sell its debt obligations through a private or negotiated sale, upon approval by the Town Council. Such determination may be made on an issue-by-issue basis for a series of issues or for part or all of a specific financing program. The underwriting team is selected through a competitive process, but the ultimate decision will be based upon the team’s qualifications.VIII.

REFINANCING OF OUTSTANDING DEBT

The Town may undertake refinancings of outstanding debt under the following circumstances:

A. Debt Service Savings. The Town may refinance outstanding long-term debt when such refinancing allows the Town to realize significant debt service savings without lengthening the term of refinance debt.

B. Refunding and Defeasance. Defeasance is irrevocably pledging to use money held in escrow solely to pay debt service on specific bonds. The amount deposited to escrow, together with interest earnings, must be sufficient to pay the principal and interest on the outstanding bonds to which the escrow account is pledged. The Town may defease its outstanding debt either by placing general fund moneys in escrow or by issuing new bonds at a lower interest rate than outstanding bonds, and placing the proceeds from the new bonds in escrow to defease the higher cost old bonds.

IX. CREDIT RATINGS

A. Rating Agency Relationships. The Director of Finance is responsible for maintaining relationships with the rating agencies that assign ratings to the Town’s various debt obligations. This effort includes providing periodic updates on the Town’s general financial condition along with coordinating meetings and presentations in conjunction with a new debt issuance.B. Quality of Ratings. The Town requests ratings prior to the sale of securities from two of the three major rating agencies for municipal bond issues: Moody's Investors Service, Standard & Poor's Corporation and Fitch Investors Service. The Town may provide a written and/or oral presentation to the rating agencies to help each credit analyst make an informed evaluation. The Town will make every reasonable effort to maintain its high quality credit ratings.

X. MANAGEMENT PRACTICES

The Town has instituted sound management practices and will continue to follow practices that will reflect positively on it in the rating process. Among these are the Town development of and adherence to long-term financial and capital improvement plans, management of expense growth in line with revenues and maintenance of an adequate level of operating reserves. The Town will comply with the standards of the Government Finance Officers Association for financial reporting and budget presentation and the disclosure requirements of the Securities and Exchange
Commission and arbitrage and rebate restrictions imposed by the Internal Revenue Service.

XI. POLICY REVIEW

The Town will review this policy from time to time.