Debt Management

1. Debt Management An issuer’s and an investor’s point of view

2. Market We Work In: General Fund Financings in a Bankruptcy World

3. A Word About Lease Financings • COPs / Lease Revenue Bonds were created to circumvent statutory limitations on debt issuance • Not considered “debt” because of judicially recognized exception to debt limit for leases • Obligation to budget and appropriate the lease payment so long as city has use/possession of an identified asset • Because the lease payments must be appropriated annually, they are not binding on future councils • Market perceives a difference among city-owned assets: essentiality

4. Credit Market Concerns Reflect the Inherent Structure of this “Debt” • No clear prioritization of debt repayment vs. other general fund expenditures • Possible unwillingness to repossess the leased asset • Possible inability to re-let the leased asset

5. Rating Agencies React • Moody’s recently increased its differential between a city’s GO bonds and its general fund obligations, because leases: • are highly exposed to city’s general finances • compete with other city funding priorities • For most cities, the result is a 2-notch differential • S&P has traditionally concluded on a 1-notch differential

6. Best of Times // Worst of Times • Best of Times: • Interest rates in general are extremely low • Worst of Times: • Relative to the general market, interest rates for general fund leases are higher • Wider spreads to MMD • Concerns about future downgrades

7. Investor Reaction • Several large institutional funds will no longer purchase lease-backed obligations • Insurance provides no value • For the most part, individual retail investors will not purchase lease transactions • Just too much risk • Maybe insurance will resurrect interest

8. Concerns Lead to Bifurcated Market • Issuance w/ Relative Ease • Large transactions • > $50 million • Well-known municipality • Frequent participant in market → more secondary market liquidity • Issuance w/ Market Challenges • Small transactions • <$30 million • Less-known municipality • Infrequent issuer • → less secondary market liquidity

9. Black & White: Bond Counsel “Clarifies” Bankruptcy Law

10. POTENTIAL AREAS OF SAVINGS IN BANKRUPTCY • Labor Contracts • Pensions (?) • Retiree Health Care • Bond Debt Service • Constitutional Limitation on Debt Prevents Other Long-term General Fund Liabilities

11. Labor Contracts • Cut Pay • Cut Benefits • Cut Employees

12. Pensions (?) • Are Pensions protected in Bankruptcy? • Two arguments against changing: • Pensions are contracts and have special statutory protection under State law that cannot be impaired • California courts have continually upheld the primacy of pensions, which should be honored by a Federal bankruptcy judge • “Impairment” requires: • a legitimate fiscal crisis or emergency; • that the proposed solution is reasonable and necessary to address the fiscal crisis or emergency; and • That there is not a less intrusive way to accomplish the same result

13. Retiree Health Care • Appears to have no similar (to Pensions) protection under California Law • Stockton has reduced its payments for Retiree Health Care

14. Bond Debt Service • Revenue Bonds with statutory liens are protected in a Chapter 9 Proceeding • Sentiment is that G.O. Bonds are similarly protected since tax overrides can only be used for G.O. Bond Debt Service • General Fund Obligations –COPs, Lease Revenue Bonds & POBs– are at risk • Asset Essentiality becomes important as the bankrupt entity seeks to “walk away” from the lease

15. Creditor’s Commentary: An Investor Explains It’s Decision Tree

16. Decision-Making Process • Bond Security • Issuer Credit Quality • Legal/structural framework • Financial position • Debt & pension burden • Disclosure • Market • Supply of alternative bonds • Retail • Buy – Sell - Hold • Bond Security • Issuer Credit Quality • Demographics, economy & wealth indicators • Discussion with management • Disclosure • Market • Rates • Daily pricing of the funds • Buy – Sell - Hold

17. How Have Things Changed? • Insurance • Ratings • Media / Headline Risk • Disclosure

18. Challenges • Decision-making in a political environment • Pensions, unions, long-term liabilities • Bankruptcy • Appropriation risk • Essentiality • Headlines/Media • Partnerships between issuers and buyers

19. Speaking to the Market: An Issuer Explains It’s Debt Management Procedures

20. Primary Disclosure • Development of an Official Statement • Appendix A – general City information prepared and updated by City staff • Actively engage more staff in disclosure process • Budget Office • Retirement Staff • Public Works • City Attorney’s Office

21. Evolving Pension Disclosure • Growth in sheer volume of pension disclosure • Between 2003 and 2013, increased from 2 pages to 40 pages • Extensive review, each and every time enter the capital markets by: • Plan Actuary • Retirement Staff • City Attorney’s Office • Disclosure Counsel

22. Secondary Market Disclosure • Annual Report pursuant to requirements of Continuing Disclosure Agreement • Rating Agencies’ Periodic Review • Comprehensive Annual Financial Report • Material Event Notices

23. Reporting • Publically available reporting and periodic education with City Council on matters related to disclosure and finances • Quarterly investment and debt reports • Comprehensive annual debt report • Monthly financial reports • Comprehensive staff reports highlighting key disclosure issues • City Council study sessions • CAFR presented to City Council within 5 months after end of Fiscal Year

24. Key Points We ALWAYS Remember • Disclosure is the CITY’S responsibility • Cannot solely rely on consultants • Be active and INVOLVED in the process • Disclosure is hard work and is NEVER done • Disclosure is CRITICAL to the city’s success in the marketplace