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HomeMy WebLinkAbout12-09-2020 Administration Committee Meeting Complete Agenda Packet ORANGE COUNTY SANITATION DISTRICT SPECIAL NOTICE REGARDING CORONAVIRUS (COVID-19) AND ATTENDANCE AT PUBLIC MEETINGS On March 4, 2020, Governor Newsom proclaimed a State of Emergency in California as a result of the threat of COVID-19. On March 12, 2020 and March 18, 2020, Governor Newsom issued Executive Order N-25-20 and Executive Order N-29-20, which temporarily suspend portions of the Brown Act which addresses the conduct of public meetings. The General Manager and the Chairman of the Board of Directors have determined that due to the size of the Orange County Sanitation District’s Board of Directors (25), and the health and safety of the members, the Board of Directors will be participating in meetings of the Board telephonically and via Internet accessibility. PUBLIC PARTICIPATION Your participation is always welcome. The Administration Committee meeting will be available to the public online at: https://ocsd.legistar.com/Calendar.aspx You may submit your comments and questions in writing for the Administration Committee’s consideration in advance of the meeting by using the eComment feature available via the webpage above or sending them to OCSDClerk@ocsd.com with the subject line “PUBLIC COMMENT ITEM # (insert the item number relevant to your comment)” or “PUBLIC COMMENT NON-AGENDA ITEM”. Submit your written comments by 5:00 p.m. on Tuesday, December 8, 2020. You may also submit comments and questions for the Committee’s consideration during the meeting by using the eComment feature that will be available via the webpage above for the duration of the meeting. All public comments will be provided to the Administration Committee and may be read into the record or compiled as part of the record. Thank you. December 2, 2020 NOTICE OF MEETING ADMINISTRATION COMMITTEE ORANGE COUNTY SANITATION DISTRICT Wednesday, December 9, 2020 – 5:00 P.M. ACCESSIBILITY FOR THE GENERAL PUBLIC Due to the spread of COVID-19, the Orange County Sanitation District will be holding all upcoming Board and Committee meetings by teleconferencing and Internet accessibility. This meeting will be available to the public online at: https://ocsd.legistar.com/Calendar.aspx A regular meeting of the Administration Committee of the Orange County Sanitation District will be held in the manner indicated herein on Wednesday, December 9, 2020 at 5:00 p.m. ADMINISTRATION COMMITTEE MEETING DATE BOARD MEETING DATE 12/09/20 12/16/20 * JANUARY DARK 01/27/21 02/10/21 02/24/21 03/10/21 03/24/21 04/14/21 04/28/21 05/12/21 05/26/21 06/09/21 06/23/21 07/14/21 07/28/21 AUGUST DARK 08/25/21 09/08/21 09/22/21 10/13/21 10/27/21 11/10/21 11/17/21 * * Meeting will be held on the third Wednesday of the month ROLL CALL ADMINISTRATION COMMITTEE Finance, Information Technology, Environmental Services and Human Resources Meeting Date: December 9, 2020 Time: 5:00 p.m. Adjourn: COMMITTEE MEMBERS (13) Chad Wanke, Chair Richard Murphy, Vice-Chair Jim Ferryman Patrick Harper (Alternate) Anthony Kuo (Alternate) Mark Murphy Andrew Nguyen Glenn Parker Nitesh Patel (Alternate) Erik Peterson Tim Shaw David Shawver (Board Chair) John Withers (Board Vice-Chair) OTHERS Brad Hogin, General Counsel STAFF Jim Herberg, General Manager Rob Thompson, Assistant General Manager Lorenzo Tyner, Assistant General Manager Celia Chandler, Director of Human Resources Kathy Millea, Director of Engineering Lan Wiborg, Director of Environmental Services Kelly Lore, Clerk of the Board Orange County Sanitation District ADMINISTRATION COMMITTEE Regular Meeting Agenda Wednesday, December 9, 2020 - 5:00 PM Board Room Administration Building 10844 Ellis Avenue Fountain Valley, CA 92708 (714) 593-7433 AGENDA POSTING: In accordance with the requirements of California Government Code Section 54954.2, this agenda has been posted outside the main gate of the Sanitation District’s Administration Building located at 10844 Ellis Avenue, Fountain Valley, California, and on the Sanitation District’s website at www.ocsd.com not less than 72 hours prior to the meeting date and time above. All public records relating to each agenda item, including any public records distributed less than 72 hours prior to the meeting to all, or a majority of the Board of Directors, are available for public inspection in the office of the Clerk of the Board. AGENDA DESCRIPTION: The agenda provides a brief general description of each item of business to be considered or discussed. The recommended action does not indicate what action will be taken. The Board of Directors may take any action which is deemed appropriate. MEETING AUDIO: An audio recording of this meeting is available within 24 hours after adjournment of the meeting. Please contact the Clerk of the Board's office at (714) 593-7433 to request the audio file. NOTICE TO DIRECTORS: To place items on the agenda for a Committee or Board Meeting, the item must be submitted in writing to the Clerk of the Board: Kelly A. Lore, MMC, (714) 593-7433 / klore@ocsd.com at least 14 days before the meeting. FOR ANY QUESTIONS ON THE AGENDA, BOARD MEMBERS MAY CONTACT STAFF AT: General Manager: Jim Herberg, jherberg@ocsd.com / (714) 593-7300 Asst. General Manager: Lorenzo Tyner, ltyner@ocsd.com / (714) 593-7550 Asst. General Manager: Rob Thompson, rthompson@ocsd.com / (714) 593-7310 Director of Human Resources: Celia Chandler, cchandler@ocsd.com / (714) 593-7202 Director of Engineering: Kathy Millea, kmillea@ocsd.com / (714) 593-7365 Director of Environmental Services: Lan Wiborg, lwiborg@ocsd.com / (714) 593-7450 ADMINISTRATION COMMITTEE Regular Meeting Agenda Wednesday, December 9, 2020 CALL TO ORDER PLEDGE OF ALLEGIANCE ROLL CALL AND DECLARATION OF QUORUM: PUBLIC COMMENTS: Your participation is always welcome. The Administration Committee meeting will be available to the public online at: https://ocsd.legistar.com/Calendar.aspx. You may submit your comments and questions in writing for the Administration Committee’s consideration in advance of the meeting by using the eComment feature available via the webpage above or sending them to OCSDClerk@ocsd.com with the subject line “PUBLIC COMMENT ITEM # (insert the item number relevant to your comment)” or “PUBLIC COMMENT NON-AGENDA ITEM”. Submit your written comments by 5:00 p.m. on Tuesday, December 8, 2020. You may also submit comments and questions for the Committee’s consideration during the meeting by using the eComment feature that will be available via the webpage above for the duration of the meeting. All public comments will be provided to the Administration Committee and may be read into the record or compiled as part of the record. REPORTS: The Committee Chairperson and the General Manager may present verbal reports on miscellaneous matters of general interest to the Directors. These reports are for information only and require no action by the Directors. CONSENT CALENDAR: Consent Calendar Items are considered to be routine and will be enacted, by the Committee, after one motion, without discussion. Any items withdrawn from the Consent Calendar for separate discussion will be considered in the regular order of business. 1.2020-1362APPROVAL OF MINUTES RECOMMENDATION: Approve Minutes of the Regular Meeting of the Administration Committee held November 10, 2020. Originator:Kelly Lore Agenda Report 11-10-2020 Administration Committee Minutes Attachments: 2.2020-1363PAYMENT OF ANNUAL NATIONAL POLLUTANT DISCHARGE AND ELIMINATION SYSTEM (NPDES) PERMIT FEES RECOMMENDATION: Recommend to the Board of Directors to: Page 1 of 3 ADMINISTRATION COMMITTEE Regular Meeting Agenda Wednesday, December 9, 2020 Authorize the General Manager to approve payment of the annual NPDES permit fees, not to exceed $731,451. Originator:Lan Wiborg Agenda ReportAttachments: NON-CONSENT: 3.2020-1360ADOPT ORANGE COUNTY SANITATION DISTRICT’S DEBT POLICY RECOMMENDATION: Recommend to the Board of Directors to: Adopt Resolution No. OCSD 20-XX, entitled: “A Resolution of the Board of Directors of the Orange County Sanitation District Adopting the Orange County Sanitation District’s Debt Policy and Repealing Resolution No. OCSD 18-16”. Originator:Lorenzo Tyner Agenda Report Orange County Sanitation District Debt Policy (Clean) Orange County Sanitation District Debt Policy (Redline) Proposed Resolution No. OCSD 20-XX Attachments: 4.2020-1325INVEST AND/OR REINVEST ORANGE COUNTY SANITATION DISTRICT’S FUNDS AND ADOPT INVESTMENT POLICY STATEMENT RECOMMENDATION: Recommend to the Board of Directors to: Adopt Resolution No. OCSD 20-XX, entitled: “A Resolution of the Board of Directors of the Orange County Sanitation District, Authorizing the Orange County Sanitation District’s Treasurer to Invest and/or Reinvest the Orange County Sanitation District’s Funds, Adopting the Orange County Sanitation District’s Investment Policy Statement and Performance Benchmarks, and Repealing Resolution No. OCSD 19-21”. Originator:Lorenzo Tyner Agenda Report Orange County Sanitation District Calendar Year 2021 Investment Policy Statement (Clean) Orange County Sanitation District Calendar Year 2020 Investment Policy Statement (Redline) Proposed Resolution No. OCSD 20-XX Attachments: INFORMATION ITEMS: None. Page 2 of 3 ADMINISTRATION COMMITTEE Regular Meeting Agenda Wednesday, December 9, 2020 DEPARTMENT HEAD REPORTS: CLOSED SESSION: None. OTHER BUSINESS AND COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY: BOARD OF DIRECTORS INITIATED ITEMS FOR A FUTURE MEETING: At this time Committee members may request staff to place an item on a future agenda. ADJOURNMENT: The next Administration Committee meeting is scheduled for Wednesday, February 10, 2021 at 5:00 p.m. Page 3 of 3 Orange County Sanitation District ADMINISTRATION COMMITTEE Agenda Report Administration Building 10844 Ellis Avenue Fountain Valley, CA 92708 (714) 593-7433 File #:2020-1362 Agenda Date:12/9/2020 Agenda Item No:1. FROM:James D. Herberg, General Manager Originator: Kelly A. Lore, Clerk of the Board SUBJECT: APPROVAL OF MINUTES GENERAL MANAGER'S RECOMMENDATION RECOMMENDATION: Approve Minutes of the Regular Meeting of the Administration Committee held November 10, 2020. BACKGROUND In accordance with the Board of Directors Rules of Procedure,an accurate record of each meeting will be provided to the Directors for subsequent approval at the following meeting. RELEVANT STANDARDS ·Resolution No. OCSD 19-19 ATTACHMENT The following attachment(s)may be viewed on-line at the OC San website (www.ocsan.gov)with the complete agenda package: ·Minutes of the Administration Committee meeting held November 10, 2020 Orange County Sanitation District Printed on 12/1/2020Page 1 of 1 powered by Legistar™ Orange County Sanitation District Minutes for the ADMINISTRATION COMMITTEE Tuesday, November 10, 2020 5:00 PM Board Room Administration Building 10844 Ellis Avenue Fountain Valley, CA 92708 (714) 593-7433 CALL TO ORDER A regular meeting of the Administration Committee was called to order by Committee Chair Chad Wanke on Tuesday, November 10, 2020 at 5:00 p.m. in the Administration Building of the Orange County Sanitation District. Chair Wanke stated that the meeting was being held telephonically and via audio/video teleconferencing in accordance with the Governor's Executive Order No. N-29-20, due to the Coronavirus Pandemic (COVID-19). Director Christina Shea led the Flag Salute. ROLL CALL AND DECLARATION OF QUORUM: Roll call was taken and a quorum was declared present, as follows: PRESENT:Chad Wanke, Richard Murphy, James Ferryman, Peter Kim, Steve Nagel, Andrew Nguyen, Glenn Parker, Erik Peterson, Tim Shaw, Christina Shea, David Shawver and John Withers ABSENT:Mark Murphy STAFF PRESENT: Jim Herberg, General Manager; Kelly Lore, Clerk of the Board; and Brian Engeln were present in the Board Room. Rob Thompson, Assistant General Manager; Lorenzo Tyner, Assistant General Manager; Celia Chandler, Director of Human Resources; Kathy Millea, Director of Engineering; Lan Wiborg, Director of Environmental Services; Deirdre Bingman; Jennifer Cabral; John Frattali; Tina Knapp; Wally Ritchie; Thomas Vu; and Ruth Zintzun were in attendance telephonically. OTHERS PRESENT: Brad Hogin, General Counsel was present in the Board Room. Peter George, Macias Gini & O’Connell LLP (MGO), Certified Public Accountants attended telephonically. PUBLIC COMMENTS: None. Clerk of the Board, Kelly Lore stated late communication which had been received from Director of Environmental Services Lan Wiborg was distributed to the Committee amending the recommendation in Item No. 6 . REPORTS: General Manager Jim Herberg stated that the Sanitation District administrative offices would be closed on Wednesday, November 11, 2020 in observance of Veteran's Day; and provided an updated timeline and progress of the OCSD Headquarters Complex and the Food Waste Page 1 of 6 ADMINISTRATION COMMITTEE Minutes November 10, 2020 projects. CONSENT CALENDAR: 1. APPROVAL OF MINUTES 2020-1275 Originator: Kelly Lore MOVED, SECONDED, AND DULY CARRIED TO: Approve Minutes of the Regular Meeting of the Administration Committee held September 9, 2020. AYES:Chad Wanke, Richard Murphy, Peter Kim, Steve Nagel, Andrew Nguyen, Glenn Parker, Erik Peterson, Tim Shaw, Christina Shea, David Shawver and John Withers NOES:None ABSENT:James Ferryman and Mark Murphy ABSTENTIONS:None 2. CONSOLIDATED FINANCIAL REPORT FOR THE FIRST QUARTER ENDED SEPTEMBER 30, 2020 2020-1056 Originator: Lorenzo Tyner MOVED, SECONDED, AND DULY CARRIED TO: Recommend to the Board of Directors to: Receive and file the Orange County Sanitation District First Quarter Financial Report for the period ended September 30, 2020. AYES:Chad Wanke, Richard Murphy, Peter Kim, Steve Nagel, Andrew Nguyen, Glenn Parker, Erik Peterson, Tim Shaw, Christina Shea, David Shawver and John Withers NOES:None ABSENT:James Ferryman and Mark Murphy ABSTENTIONS:None 3. GENERAL MANAGER APPROVED PURCHASES AND ADDITIONS TO THE PRE-APPROVED OEM SOLE SOURCE LIST 2020-1315 Originator: Lorenzo Tyner MOVED, SECONDED, AND DULY CARRIED TO: Recommend to the Board of Directors to: Page 2 of 6 ADMINISTRATION COMMITTEE Minutes November 10, 2020 A. Receive and file District purchases made under the General Manager’s authority for the period of July 1, 2020 to September 30, 2020; and B. Approve the following additions to the pre-approved OEM Sole Source List for the period of July 1, 2020 to September 30, 2020: ·CHEVROLET - Chevrolet Truck Engine Replacements ·SANS - Vouchers for Cyber Security Trainings ·TOTAL RESOURCE MANAGEMENT - IBM Maximo Level 3 Support ·WATSON MARLOW - Pumps AYES:Chad Wanke, Richard Murphy, Peter Kim, Steve Nagel, Andrew Nguyen, Glenn Parker, Erik Peterson, Tim Shaw, Christina Shea, David Shawver and John Withers NOES:None ABSENT:James Ferryman and Mark Murphy ABSTENTIONS:None 4. IBM MAXIMO EMERGENCY AND LEVEL 3 SUPPORT 2020-1266 Originator: Lorenzo Tyner MOVED, SECONDED, AND DULY CARRIED TO: A. Approve a Sole Source Professional Services Agreement to Total Resource Management, Inc to provide Emergency and Level 3 support for IBM Maximo software, for the time period of January 1, 2021 through December 31, 2021, for a total amount not to exceed $160,000; and B. Authorize an option for four (4) one-year renewals at $160,000 per year. AYES:Chad Wanke, Richard Murphy, Peter Kim, Steve Nagel, Andrew Nguyen, Glenn Parker, Erik Peterson, Tim Shaw, Christina Shea, David Shawver and John Withers NOES:None ABSENT:James Ferryman and Mark Murphy ABSTENTIONS:None 5. CORITY PLATFORM IMPLEMENTATION - MY CORITY, INDUSTRIAL HYGIENE, AND ERGONOMICS 2020-1311 Originator: Lorenzo Tyner MOVED, SECONDED, AND DULY CARRIED TO: Page 3 of 6 ADMINISTRATION COMMITTEE Minutes November 10, 2020 A. Authorize a Purchase Order to Cority Software Inc. for the implementation and annual software maintenance of myCority, Industrial Hygiene, and Ergonomics, using the approved U.S. General Services Agreement (GSA) IT Schedule 70 (M.O. 5/25/16, Item #13), for a total amount not to exceed $134,834, in accordance with Ordinance No. OCSD-52, Section 2.03(B) Cooperative Purchases; and B. Approve a contingency in the amount of $13,483 (10%). AYES:Chad Wanke, Richard Murphy, Peter Kim, Steve Nagel, Andrew Nguyen, Glenn Parker, Erik Peterson, Tim Shaw, Christina Shea, David Shawver and John Withers NOES:None ABSENT:James Ferryman and Mark Murphy ABSTENTIONS:None Vice-Chairman R. Murphy, Board Vice-Chair Withers and Director Ferryman appeared disconnected from the meeting during the vote on Item No. 6. NON-CONSENT: 6.PFAS INVESTIGATIVE ORDER 2020-1309 Originator: Lan Wiborg Director of Environmental Services Lan Wiborg provided a brief PowerPoint presentation regarding the item. MOVED, SECONDED, AND DULY CARRIED TO: Recommend to the Board of Directors to: A.Approve a Professional Services Agreement to CDM Smith, Inc. (CDM Smith) to provide PFAS Sampling and Analysis Services, Specification No. CS-2020-1178BD, for a total amount not to exceed $369,006; that will begin uponthe effective date of the Notice to Proceed and continue for the period of one year; and B.Approve a contingency in the amount of $55,351 (15%). AYES:Chad Wanke, Peter Kim, Steve Nagel, Andrew Nguyen, Glenn Parker, Erik Peterson, Tim Shaw, Christina Shea and David Shawver NOES:None ABSENT:Richard Murphy, James Ferryman, Mark Murphy and John Withers ABSTENTIONS:None Director Ferryman appeared disconnected from the meeting during the vote on Item No. 7. 7. ORANGE COUNTY SANITATION DISTRICT COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR) FOR THE YEAR END JUNE 30, 2020 2020-1307 Page 4 of 6 ADMINISTRATION COMMITTEE Minutes November 10, 2020 Originator: Lorenzo Tyner Controller Wally Ritchie provided a PowerPoint presentation overview of the CAFR including OCSD's present financial information; and explained the three areas that were reviewed by the independent auditor. The independent auditor, Peter George (MGO) provided a second PowerPoint presentation which reviewed the audit responsibilities; focus areas; deliverables; and required communication to the Administration Committee. MOVED, SECONDED, AND DULY CARRIED TO: Recommend to the Board of Directors to: Receive and file the Orange County Sanitation District’s Comprehensive Annual Financial Report for the year ended June 30, 2020, prepared by staff and audited by Macias Gini & O’Connell LLP (MGO), Certified Public Accountants, along with the following reports prepared by MGO: 1. Report to the Board of Directors; and 2. Independent Accountants’ Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheets. AYES:Chad Wanke, Richard Murphy, Peter Kim, Steve Nagel, Andrew Nguyen, Glenn Parker, Erik Peterson, Tim Shaw, Christina Shea, David Shawver and John Withers NOES:None ABSENT:James Ferryman and Mark Murphy ABSTENTIONS:None INFORMATION ITEMS: 8. BIOSOLIDS THERMAL CONVERSION RFI UPDATE 2020-1316 Originator: Lan Wiborg Ms. Wiborg introduced Principal Environmental Specialist Deirdre Bingman who provided an Informational PowerPoint presentation regarding Biosolids Thermal Conversion (BTC). The presentation included information from OCSD 2019 Strategic Plan's Biosolids Management Policy Paper, explanation of the term BTC; rising concerns of emerging contaminants such as PFAS, State Water Board-ordered PFAS sampling; and BTC RFI project phasing, timelines and considerations. ITEM RECEIVED AS AN: Information Item. Page 5 of 6 ADMINISTRATION COMMITTEE Minutes November 10, 2020 DEPARTMENT HEAD REPORTS: None. CLOSED SESSION: None. OTHER BUSINESS AND COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY: None. BOARD OF DIRECTORS INITIATED ITEMS FOR A FUTURE MEETING: None. ADJOURNMENT: Board Chair Shawver recognized the contributions of the outgoing five Administration Committee members. Chair Wanke declared the meeting adjourned at 5:44 p.m. to the Regular meeting to be held on Wednesday, December 9, 2020 at 5:00 p.m. Submitted by: __________________ Kelly A. Lore, MMC Clerk of the Board Page 6 of 6 Orange County Sanitation District ADMINISTRATION COMMITTEE Agenda Report Administration Building 10844 Ellis Avenue Fountain Valley, CA 92708 (714) 593-7433 File #:2020-1363 Agenda Date:12/9/2020 Agenda Item No:2. FROM:James D. Herberg, General Manager Originator: Lan C. Wiborg, Director of Environmental Services SUBJECT: PAYMENT OF ANNUAL NATIONAL POLLUTANT DISCHARGE AND ELIMINATION SYSTEM (NPDES) PERMIT FEES GENERAL MANAGER'S RECOMMENDATION RECOMMENDATION: Recommend to the Board of Directors to: Authorize the General Manager to approve payment of the annual NPDES permit fees,not to exceed $731,451. BACKGROUND Under the Clean Water Act,Orange County Sanitation District (Sanitation District)lawfully discharges treated wastewater into the Pacific Ocean by its NPDES ocean discharge permit which is jointly administered by the Santa Ana Regional Water Quality Control Board (RWQCB)and the USEPA.In accordance with Sections 13260 and 13269 of the California Water Code,an annual fee is required to maintain this permit. The fee is based on the Sanitation District’s facility design flow. The Sanitation District has not yet received the annual invoice from the California State Water Resources Control Board (SWRCB)but it is expected to arrive in late November with payment due within 30 days of receipt.Although the exact amount due has not been disclosed to the Sanitation District,the SWRCB estimated a 10.8%increase in NPDES permit fees as part of its Budget Drivers Table for FY 2020-21 during its Water Quality Fees Stakeholder Meeting in August 2020.While it is possible for the SWRCB to make final adjustments to this amount,the adjustment is expected to be minor.Thus,staff anticipates the final permit fee to be no more than 12%above last year’s permit fee of $653,081,which results in an anticipated permit fee that is equal to or slightly less than $731,451. RELEVANT STANDARDS ·Comply with environmental permit requirements ·24/7/365 treatment plant reliability Orange County Sanitation District Printed on 12/1/2020Page 1 of 2 powered by Legistar™ File #:2020-1363 Agenda Date:12/9/2020 Agenda Item No:2. PROBLEM The Sanitation District is required by California Water Code Sections 13260 and 13269 to pay an annual fee to maintain our ocean discharge permit. PROPOSED SOLUTION Authorize staff to pay the annual fee in an amount not to exceed $731,451 for Fiscal Year 2020-21. TIMING CONCERNS May be subject to late fees if not paid in a timely manner. RAMIFICATIONS OF NOT TAKING ACTION If payment is delayed,the Sanitation District would be subject to penalties under provision of the Water Code Section 13261.These actions could include daily penalties in addition to the fee or other actions deemed appropriate by RWQCB. PRIOR COMMITTEE/BOARD ACTIONS This fee is invoiced and paid annually. FINANCIAL CONSIDERATIONS This request complies with authority levels of the Sanitation District’s Purchasing Ordinance.This item has been budgeted. (Line item: Section 6,Page 48). ATTACHMENT The following attachment(s) may be viewed on-line at the OC San website (www.ocsan.gov) with the complete agenda package: N/A Orange County Sanitation District Printed on 12/1/2020Page 2 of 2 powered by Legistar™ Orange County Sanitation District ADMINISTRATION COMMITTEE Agenda Report Administration Building 10844 Ellis Avenue Fountain Valley, CA 92708 (714) 593-7433 File #:2020-1360 Agenda Date:12/9/2020 Agenda Item No:3. FROM:James D. Herberg, General Manager Originator: Lorenzo Tyner, Assistant General Manager SUBJECT: ADOPT ORANGE COUNTY SANITATION DISTRICT’S DEBT POLICY GENERAL MANAGER'S RECOMMENDATION RECOMMENDATION: Recommend to the Board of Directors to: Adopt Resolution No.OCSD 20-XX,entitled:“A Resolution of the Board of Directors of the Orange County Sanitation District Adopting the Orange County Sanitation District’s Debt Policy and Repealing Resolution No. OCSD 18-16”. BACKGROUND The Orange County Sanitation District’s (Sanitation District)Debt Policy sets forth the parameters for issuing debt and managing outstanding debt,and provides guidance to decision makers regarding the timing and purposes for which debt may be issued,types and amounts of permissible debt, methods of sale that may be used,and structural features that may be incorporated.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.The goals of a debt policy are to ensure that a government maintains a sound debt position and that credit quality is protected. California Government Code Section 8855(i)requires any issuer of public debt to provide to the California Debt and Investment Advisory Commission (CDIAC)a report of any proposed debt issuances.Issuers must certify on the Report of the Proposed Debt Issuance that they have adopted local debt policies concerning the use of debt and that the proposed debt issuance is consistent with those policies,specifically an updated debt policy.Staff has reviewed and updated the attached Debt Policy and there are no material changes to the Debt Policy or its structure. RELEVANT STANDARDS ·Orange County Sanitation District Debt Policy ·California Government Code Section 8855(i) ·Easy access to low cost credit Orange County Sanitation District Printed on 12/1/2020Page 1 of 2 powered by Legistar™ File #:2020-1360 Agenda Date:12/9/2020 Agenda Item No:3. PROBLEM Prior to any debt issuance (including debt refunding),issuers must certify on CDIAC’s Report of the Proposed Debt Issuance that they have adopted local debt policies concerning the use of debt and that the proposed debt issuance is consistent with those policies, specifically an updated debt policy. PROPOSED SOLUTION Staff has reviewed and updated the Sanitation District’s Debt Policy. TIMING CONCERNS The Series 2018A Revenue Refunding Certificate Anticipation Notes (CANs)are due and payable on August 15,2021 in the amount of $102,200,000.The Sanitation District must update its Debt Policy prior to completing any debt issuance (including debt refunding). RAMIFICATIONS OF NOT TAKING ACTION Not taking action will result in the Sanitation District not being able to have the option to take advantage of the opportunity to refinance old debt in a low interest rate environment. PRIOR COMMITTEE/BOARD ACTIONS September 2018 -The Board adopted Resolution No.OCSD 18-16,entitled “A Resolution of the Board of Directors of the Orange County Sanitation District Adopting a Board of Directors Debt Policy”. ATTACHMENT The following attachment(s)may be viewed on-line at the OC San website (www.ocsan.gov)with the complete agenda package: ·Orange County Sanitation District Debt Policy (Clean) ·Orange County Sanitation District Debt Policy (Redline) ·Proposed Resolution No. OCSD 20-XX Orange County Sanitation District Printed on 12/1/2020Page 2 of 2 powered by Legistar™ Page 1 of 20 FINANCIAL MANAGEMENT POLICY AND PROCEDURE Subject: Debt Policy Index: Finance Administration Number: 201-3-1 Effective Date: December 16, 2020 Prepared by: Financial Management Division Supersedes: September 26, 2018 Approved By: Board of Directors 1.0 PURPOSE: 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 decision makers regarding the timing and purposes for which debt may be issued, types and amounts of permissible debt, methods of sale that may be used and structural features that may be incorporated. 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. The goals of a debt policy are to ensure that a government maintains a sound debt position, and that credit quality is protected, and is intended to comply with applicable California Government Code Sections prescribed by the California Debt and Investment Advisory Commission (CDIAC) to ensure all debt issuance is consistent with the Orange County Sanitation District’s (Sanitation District) debt policy and all the required reports are submitted to CDIAC on time. 2.0 OBJECTIVES: Each debt issuance must accomplish the following objectives: a. Accelerate the delivery of projects. Debt financing allows the delivery of projects on an accelerated basis; b. Spread cost over the useful life of an asset. Debt financing allows the Sanitation District to spread the cost of a project over its useful life rather than paying for it at one time; c. Smooth out annual cash flow. Debt financing spreads the cost of a project over a period of years, thereby smoothing out the Sanitation District’s cash flow; Page 2 of 20 d. Optimize overall financial resources. To enable existing cash to be invested at a rate higher than the cost of borrowing; e. Refundings: It may become desirable for the Sanitation District to issue bonds or other securities to refinance outstanding obligations. The reasons for refinancing include: i) To Achieve Debt Service Savings. In general, the net present value savings generated by the refunding bonds shall be at least 3% of the refunded bond amount. ii) For Programmatic Reasons. Such as: restructuring outstanding debt, changing the type of debt instruments originally used, retiring a bond issue, removing covenants/pledges that have become restrictive, or retiring debt prior to maturity. f. The debt policy must be viewed as an integral component of its overall financial practices and in the context of the Sanitation District’s capital-intensive expenditure plans. The Sanitation District’s issuance of debt must be generally consistent with its planning goals, capital improvement programs and budget. The Sanitation District’s financial practices, including the issuance of debt, must be designed to assure sufficient resources to fund all of its operating and capital requirements in all foreseeable circumstances. Advantages of a debt policy are as follows: 1.1 enhances the quality of decisions by imposing order and discipline, and promotes consistency and continuity in decision making; 1.2 rationalizes the decision-making process; 1.3 identifies objectives for staff to implement; 1.4 demonstrates a commitment to long-term financial planning objectives; 1.5 is viewed positively by the rating agencies in reviewing credit quality; 1.6 minimizes debt service and issuance costs; 1.7 ensures full and timely repayment of debt; 1.8 maintains full and complete financial disclosures and reporting and adequate internal controls; 1.9 ensures use of debt is consistent with the Sanitation District’s policies and the proceeds will be directed to the intended use; Page 3 of 20 3.0 ORGANIZATIONS AFFECTED: General Manager’s Department, Financial Management Division, General Counsel, bond rating agencies, financial advisors, bond underwriters, bond counsel and external independent auditors. 4.0 REFERENCES: 4.1 November 2019 Strategic Plan 4.2 2017 Facilities Master Plan 4.3 Government Finance Officers Association’s Best Practice on Debt Management Policy. 4.4 California Debt and Investment Advisory Commission’s “Employing a Debt Management Policy – Practices Among California Local Agencies” (CDIAC No. 14.02) 5.0 POLICY: 5.1 Limitations on Indebtedness 5.1.1 The Sanitation District’s debt capacity shall not exceed legal limitations such as coverage requirements or additional bonds tests imposed by existing bond covenants. 5.1.2 Before any new debt is issued, the impact of debt service payments on total annual fixed costs shall be analyzed. In accordance with existing COP indenture agreements, Net Operating Revenues must be at least a 1.25 coverage ratio to the maximum annual debt service. 5.1.3 The Sanitation District shall restrict long-term borrowing to capital improvements that provide long-term benefits to the Sanitation District. 5.1.4 Proceeds from long-term debt shall not be used for current on-going operations. 5.1.5 The decision to incur new indebtedness shall be integrated with the Sanitation District’s biennial Operating Budget and Capital Improvement Program Budget. The annual debt service payment shall be included in the Operating Budget. Page 4 of 20 5.1.6 The Sanitation District shall integrate its debt issuances with the goals of its Capital Improvement Program by timing the issuance of debt to ensure that funds for projects are available when needed. 5.2 Types of Debt 5.2.1 The Sanitation District may use short-term debt to cover temporary or emergency cash flow shortages. All short-term borrowing shall be subject to Board of Directors approval by resolution. 5.2.2 Commercial Paper – The Sanitation District may issue short-term debt in the form of Commercial Paper. 5.2.3 Revenue Bonds – The Sanitation District may issue as special obligations various types of revenue securities including notes, warrants, interim debentures, bonds and temporary bonds. Securities issued as special obligations do not constitute outstanding indebtedness of the Sanitation District nor do they exhaust its legal debt-incurring power. Bonding should be limited to projects with available revenue sources, whether self-generated or dedicated from other sources such as user fees. Adequate financing feasibility studies should be performed for each revenue issue. Sufficiency of revenues should continue throughout the life of the bonds. 5.2.4 Certificates of Participation – Certificates of participation are essentially leases which are sold to the public. The lease payments are subject to annual appropriation. Investors purchase certificates representing their participation in the lease. Often, equipment or facilities being acquired serve as collateral. These securities are most useful when other means to finance are not available under state law. 5.2.5 Refundings – A refunding is generally the underwriting of a new bond issue whose proceeds are used to redeem an outstanding issue. 5.2.5.1 Prior to beginning a refunding bond issue, the Sanitation District shall review and estimate the savings achievable from the refunding. The Sanitation District may also review a pro forma schedule estimating the savings assuming that the refunding is done at various points in the future. Following are the conditions under which the Sanitation District shall consider refunding outstanding bonds: 5.2.5.1.1 Net present value savings are at least three (3) percent of the par amount of the refunded bonds. Net present value savings of less than Page 5 of 20 three (3) percent of refunded bonds are acceptable when compared to savings that could be achieved by waiting for more favorable interest rates and/or call premiums. 5.2.5.1.2 Net present value savings exceed the costs of issuing the bonds. 5.2.5.1.3 The bonds to be refunded have restrictive or outdated covenants. 5.2.5.1.4 Restructuring debt is deemed to be desirable. 5.3 Debt Structure 5.3.1 Debt shall be structured to achieve the lowest possible net overall cost to the Sanitation District balanced against potential risks given market conditions, the urgency of the capital program and the nature and type of security to be provided. Structuring options shall also consider available opportunities related to maximizing earnings and minimizing costs while complying with all Arbitrage regulations, including the timing of issuance and current market conditions. 5.3.2 The term of Sanitation District debt issues shall not extend beyond the useful life of the project and generally shall not extend beyond 30 years unless there are compelling factors which make it necessary to extend the term further. 5.3.3 For the issuance of new money debt, the Sanitation District shall consider the appropriate amount to be sold based on the overall debt versus revenue funding targets as part of its long-term capital plan and prior to each issuance of new money debt. 5.3.4 New money debt issued by the Sanitation District shall be structured to provide for either level principal or level debt service on an individual issuance or aggregate debt service basis. Deferring the repayment of principal shall be avoided except in select instances where it will take a period of time before project revenues are sufficient to pay debt service. Ascending debt service shall generally be avoided. 5.3.4.1 The Sanitation District shall consider target financial ratios (including debt service coverage) and future financial flexibility when determining the structure of its new money debt. Page 6 of 20 5.3.5 Variable Rate Obligations – When appropriate, the Sanitation District may choose to issue variable rate obligations or securities that pay a rate of interest that varies according to a predetermined formula or results from a periodic remarketing or auction of the securities. 5.3.5.1 The maximum level of net variable rate obligations incurred shall not exceed 150% of the level of available invested reserves. The percentage is intended to reflect the inherent relationship between taxable and tax-exempt interest rates based on the highest marginal federal income tax rate. Such percentage should be adjusted as the highest marginal federal income tax changes. 5.4 Credit Objectives 5.4.1 The Sanitation District’s goal is to maintain or improve its bond ratings. To that end, prudent financial management policies shall be adhered to in all areas. 5.4.1.1 The Sanitation District shall monitor its current and projected key financial ratios (e.g., debt service coverage, debt-to-equity, net floating rate exposure, reserve level) in comparison to those of other similar municipal entities. These ratios shall be updated and compared prior to the issuance of new money debt or the restructuring of existing debt. The Sanitation District shall consider these ratios in its financial management policies. 5.4.2 Rating Agencies 5.4.2.1 Full disclosure of operations shall be made to the bond rating agencies. Sanitation District staff, with the assistance of the financial advisors and bond counsel, shall prepare the necessary materials for and presentation to the rating agencies. 5.4.2.2 The Sanitation District shall maintain a line of communications with the rating agencies (Fitch, Moody’s and/or Standard & Poor’s), informing them of major financial events at the Sanitation District as they occur. The Comprehensive Annual Financial Report (CAFR) shall be distributed to the rating agencies after it has been accepted by the Board of Directors. 5.4.2.3 The rating agencies shall be notified when the Sanitation District begins preparation for a debt issuance. After the Page 7 of 20 initial contact, a formal ratings application shall be prepared and sent along with the draft of the Official Statement relating to the bond sale to the rating agencies. This application and related documentation shall be sent several weeks prior to the bond sale to give the rating agencies sufficient time to perform their review. 5.4.2.4 A meeting with representatives of the rating agencies shall be scheduled at least once every three years or whenever a major project is initiated. 5.4.3 Credit Enhancements – Credit enhancements are mechanisms which guarantee principal and interest payments. They include bond insurance and a line or letter of credit. A credit enhancement, while costly, shall sometimes bring a higher rating from the rating agencies and a lower interest rate on debt, thus lowering overall costs. Credit enhancements shall only be used when net debt service is reduced by more than the cost of the enhancement. During the debt issuance planning, the financial advisor or underwriter shall advise the Sanitation District which credit enhancements if any, should be purchased. 5.4.4 Dedicated Revenue Sources – In order to ensure the most favorable credit ratings, Sanitation District revenues are dedicated to debt service in the following order: 5.4.4.1 Ad valorem property tax. 5.4.4.2 Sanitary sewer service charges. 5.4.4.3 Other revenues. 5.5 Method of Sale 5.5.1 The Sanitation District shall 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. 5.5.1.1 Competitive Sales – Debt obligations are generally issued through a competitive sale. The Sanitation District and its financial advisor shall set the terms of the sale to encourage as many bidders as possible. By maximizing bidding, the Sanitation District seeks to obtain the lowest possible interest rates on its bonds. 5.5.1.2 Negotiated Sales – When certain conditions favorable for a competitive sale do not exist and when a negotiated sale Page 8 of 20 will provide significant benefits to the Sanitation District that would not be achieved through a competitive sale, the Sanitation District may elect to sell its debt obligations through a private or negotiated sale. 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 upon approval by the Administration Committee. 5.6 Methods of Selecting Consultants 5.6.1 Financial Advisor – The Sanitation District shall retain an external independent financial advisor, selected through a competitive process, and renewed at the discretion of the Administration Committee. The financial advisor contract shall be administered by the Sanitation District’s Financial Management Division. The utilization of the financial advisor for a particular bond sale shall be on a case by case basis upon recommendation by the Director of Finance and Administrative Services and approval by the Administration Committee, pursuant to a financial advisory service contract. 5.6.2 Underwriters – For negotiated sales, underwriters shall be required to demonstrate sufficient capitalization and experience related to the debt issuance. The selection of underwriters may be for an individual or series of financings or a specified time period. 5.6.3 Bond Counsel – The Sanitation District shall retain external bond counsel for all debt issues. All debt issued by the Sanitation District shall include a written opinion by bond counsel affirming that the Sanitation District is authorized to issue the debt, stating that the Sanitation District has met all state constitutional and statutory requirements necessary for issuance, and determining the debt’s federal income tax status. Bond counsel shall be selected through a competitive process administered by the Sanitation District’s Financial Management Division. The selection process shall require comprehensive municipal debt experience. 5.6.4 Disclosure Counsel – The Sanitation District shall retain, when appropriate, Disclosure Counsel for debt issues. Disclosure Counsel shall be responsible for ensuring that the official statement complies with all applicable rules regulations and guidelines. Disclosure Counsel for a particular transaction may also serve the Sanitation District as bond counsel on the same issue. Disclosure counsel shall be selected through a competitive process administered by the Sanitation District’s Financial Management Division. The selection process shall require comprehensive municipal debt experience. Page 9 of 20 5.6.5 Trustee and Paying Agent – The Sanitation District shall retain a trustee and paying agent for all debt issues. The trustee and paying agent shall be responsible for carrying out the administrative functions that are required under the bond documents. These functions include, but are not limited to, establishing the accounts and holding the funds relating to bond issues, maintaining a list of bondholders, and paying principle and interest on the debt. Trustee and paying agent shall be selected through a competitive process administered by the Sanitation District’s Financial Management Division. Selection shall be based on the cost of providing such services, along with other qualitative measurements. 5.6.6 Compensation for financial advisor, underwriters, bond counsel, disclosure counsel, trustee and paying agent, and other financial service providers shall be as low as possible, given desired qualification levels and consistent with industry standards. All costs and fees related issuance of bonds shall be paid out of bond proceeds. 5.7 Disclosure and Arbitrage Compliance 5.7.1 The Sanitation District shall follow all State and Federal regulations and requirements regarding bond provisions, issuance, taxation and disclosure. 5.7.2 The Financial Management Division shall be responsible for providing trustees and/or dissemination agents ongoing disclosure information for filing with the Municipal Standards Rulemaking Board (MSRB) via the Electronic Municipal Market Access (EMMA). The Sanitation District may elect to utilize the services of a dissemination agent for continuing disclosure reporting; however, the responsibility for ensuring the reports are filed timely remains with the Sanitation District. 5.7.2.1 Copies of the CAFR and updated tables from the Official Statement shall be provided to EMMA within six months of year end. 5.7.3 The Sanitation District shall maintain compliance with disclosure standards promulgated by State and Federal regulatory bodies, such as annual reporting to the California Debt and Investment Commission of the State Treasurer’s Office in accordance with SB 1029 for debt issued after January 1, 2017. 5.7.4 Official Statements accompanying debt issues, CAFRs and continuing disclosure statements shall meet, at a minimum, the standards articulated by the MSRB, the Government Accounting Page 10 of 20 Standards Board (GASB), the National Federation of Municipal Analysts, the Securities and Exchange Commission (SEC) and Accounting Principles Generally Accepted in the United States (US GAAP). 5.7.5 The Sanitation District shall monitor compliance with bond covenants, continuing disclosure requirements and adhere to federal arbitrage regulations. Occurrence of any event, specified in Rule 15c2-12 under the Securities and Exchange Act of 1934, which must be filed with EMMA shall be immediately reported to the Administration Committee. Examples of such events are credit rating downgrades, major disasters, major litigation, default on existing debt, bankruptcy, etc. 5.7.6 The Sanitation District shall maintain good communications with bond rating agencies about its financial condition and shall follow a policy of full disclosure in every financial report and bond prospectus (Official Statement). 5.8 Administration and Internal Control Procedures 5.8.1 Expenditure of Proceeds – Whenever reasonably possible, proceeds of the Sanitation District’s debt shall be held by a third party trustee which shall release such proceeds upon written requisition signed by the Director of Finance and Administrative Services, or authorized designee. The bank statements for money managed by trustees shall be reconciled on a monthly basis. 5.8.2 Requisition of Bond Proceeds – To reimburse the Sanitation District for expenditures incurred, bond proceeds requisitions shall be prepared by staff and shall include summary expenditure data listing the projects funded and related dollar amounts, all totaling to the requisition amount. 5.8.3 Investment of Debt Proceeds – Proceeds raised in a debt financing shall be invested in a manner that is consistent with the bond indenture and pursuant to the Sanitation District’s Investment policy for investments not addressed by the indenture. 5.8.4 Continuing Disclosure – The Sanitation District shall remain in compliance with SEC Rule 15c2-12 by filing its annual financial statements and other financial and operating data for the benefit of its bondholders within the period required by each Continuing Disclosure Agreement. Page 11 of 20 5.8.5 Reporting and Filing Requirements – The Sanitation District shall comply with the applicable reporting and filing requirements in California Government Code Section 8855. 5.8.6 Federal Tax Compliance – The Sanitation District shall comply with any federal tax requirements, including without limitation, private use tracking, arbitrage and rebate compliance. 5.8.7 Debt Service Payments – The Sanitation District shall make debt service payments electronically, on time and error free. 6.0 DEFINITIONS: 6.1 ACCRUED INTEREST – In the sale of a new issue of municipal bonds, the dollar amount, based on the stated rate or rates of interest, which has accrued on the bonds from the dated date, or other stated date, up to but not including the date of delivery. When a bond is purchased in the secondary market, the dollar amount, based upon the stated rate of interest, which has accrued on the bond from the most recent interest payment date, up to but not including the date of settlement. Accrued interest is paid to the seller by the purchaser and is usually calculated on a 360-day year basis (assumes each month has 30 days). 6.2 ADDITIONAL BONDS TEST – Refers to legal test found in resolution or ordinance securing bonds; governs ability to issue additional bonds having the same lien on pledged revenues. Usually expressed as a ratio in which historic earnings meet certain levels of future debt service coverage. 6.3 ADDITIONAL OBLIGATIONS TEST – Refers to legal test found in the resolution which governs an agency’s ability to issue additional obligations having the same lien on pledged revenues. The Sanitation District’s additional obligations test is expressed as a ratio in which historic earnings must meet or exceed certain levels of future obligation service coverage. 6.4 AD VALOREM TAX – A direct tax based “according to value” of property. Counties and school districts and municipalities usually are, and special tax districts may be, authorized by law to levy ad valorem taxes on property other than intangible personal property. Local government bodies with taxing powers may issue bonds or short-term certificates payable from ad valorem taxation. 6.5 ADVANCE REFUNDING – A transaction in which new debt is issued to provide monies to pay interest on old, outstanding debt as it becomes due and to pay the principal on the old debt either as it matures or at an earlier call date. An advance refunding occurs before the maturity or call date (more than 90 days before the maturity or call date) of the old debt and the proceeds of the new debt are invested until the maturity or call date of the old debt. Most advance refundings result in defeasance of debt. Page 12 of 20 6.6 AMORTIZATION – The process of paying the principal amount of an issue of bonds by periodic payments either directly to certificate holders or to a sinking fund for the benefit of certificate holders. Payments are usually calculated to include interest in addition to a partial payment of the original principal amount. 6.7 ARBITRAGE – Classically, the simultaneous purchase and sale of the same or an equivalent security in order to profit from price discrepancies. The most common occurrence in the public sector involves the investment of the proceeds from the sale of tax-exempt securities in a taxable money market instrument that yields a higher rate, resulting in interest revenue in excess of interest costs. 6.8 ARBITRAGE REBATE REQUIREMENTS – Arbitrage profits (interest revenue in excess of interest costs) from investment bond proceeds that are invested in taxable instruments must be rebated to the U.S. Treasury Department. 6.9 AVERAGE COUPON – Weighted average interest cost of an issue. 6.10 BANK INVESTMENT CONTRACT – A separate account at a financial institution that functions like a guaranteed investment contract, whereby the contract is designed to provide guarantees of principal and interest on funds deposited for a specified period. 6.11 BASIS POINT – Yields on municipal securities are usually quoted in basis points where one basis point is equal to 1/100 of one percent. 6.12 BOND – Written evidence of the issuer’s obligation to repay a specified principal amount on a date certain (maturity date), together with interest at a stated rate, or according to a formula for determining that rate. Bonds are distinguishable from notes, which mature in a much shorter period of time. 6.13 BOND COUNSEL – An attorney (or firm of attorneys) retained by the issuer to give a legal opinion on the legality and security of the issue and its tax exemption or taxability. Typically, bond counsel may prepare, or review and advise the issuer regarding, authorizing resolutions or ordinances, trust indentures, official statements, validation proceedings and litigation. 6.14 BONDED DEBT – The portion of an issuer’s total indebtedness as represented by outstanding bonds. 6.15 BOND INSURANCE – An insurance policy purchased by an issuer or an underwriter for either an entire issue or specific maturities, which guarantees the payment of principal and interest. This security provides a higher credit rating and thus a lower borrowing cost for an issuer. Bond Page 13 of 20 insurance can be purchased directly by the Sanitation District prior to the bond sale (direct purchase) or at the underwriter’s option and expense (bidder’s option). 6.16 BOND RESOLUTION OR ORDINANCE – The document or documents representing action of the issuer authorizing the issuance and sale of municipal bonds. Issuance of the bonds is usually approved in the authorizing resolution or ordinance and the sale is usually authorized in a separate document known as the “sale” or “award” resolution. All of such resolutions, read together, constitute the bond resolution, which describes the nature of the obligation and the issuer’s duties to the bondholders. 6.17 BROKER – A person or firm, other than a bank, which acts as an intermediary by purchasing and selling securities for others rather than for its own account. 6.18 CALLABLE BOND – A bond which permits or requires the issuer to redeem the obligation before the stated maturity date at a specified price, usually at or above par by giving notice of redemption in a manner specified in the bond contract. 6.19 CAPITALIZED INTEREST – Interest paid on long-term obligations during the period of time required to complete and prepare an asset for its intended use is capitalized as part of the acquisition cost of an asset. 6.20 CERTIFICATES OF PARTICIPATION – Obligations of a public entity based on a lease or installment sale agreement. These are not considered debt under Article 13 of the California Constitution. 6.21 CERTIFICATE HOLDER – The owner of a municipal certificate of participation to whom payments of principal and interest are made. Generally certificates are registered and the owner is the person whose name is noted on the certificate register. 6.22 CERTIFICATE REGISTER – The listing of names and addresses of the current registered owners of the certificates, as maintained by the trustee or certificate registrar. 6.23 COMPETITIVE SALE – The sale of bonds through sealed bids. 6.24 COST OF ISSUANCE – The expenses associated with the sale of a new issue of municipal securities, including such items as underwriter’s spread, printing, legal fees and rating costs. 6.25 COVENANTS – The issuer’s enforceable promise to perform or refrain from performing certain actions. With respect to municipal bonds, covenants are generally stated in the bond contract, resolution, or indenture. Page 14 of 20 6.26 COVERAGE – The ratio of pledged revenues available annually to pay debt service obligations, as compared to the annual debt service obligation requirement. This ratio is one indication of the margin of safety for debt service obligations. 6.27 CREDIT ENHANCEMENT – The availability of additional outside support designed to improve an issuer’s own credit standing. Examples include bank lines of credit or collateralized funds. 6.28 CURRENT REFUNDING – A refunding transaction in which the proceeds of the refunding debt are applied immediately (no more than 90 days from issuance) to redeem the debt to be refunded. This situation differs from an advance refunding, where the proceeds of the refunding bonds are placed in escrow pending the call date or maturity of the debt to be refunded. 6.29 CURRENT YIELD – The ratio of the annual dollar amount of interest to the purchase price of a bond, stated as a percentage. 6.30 CUSIP NUMBERS (COMMITTEE ON UNIFORM SECURITY IDENTIFICATION PROCEDURES) – Identification numbers assigned each maturity of a bond issue and usually printed on the face of each individual bond in the issue. The CUSIP numbers are intended to facilitate identification and clearance of municipal securities. 6.31 DEBT LIMIT – The maximum amount of debt which an issuer of municipal securities is permitted to incur under constitutional, statutory, or charter provisions. 6.32 DEBT PER CAPITA – Bonded debt divided by population. 6.33 DEBT SERVICE OBLIGATION – The amount of funds necessary to pay principal and interest, and the required contributions to an amortization sinking fund for term certificates on an outstanding obligation. Debt service obligation on certificates may be calculated on a calendar-year or on a fiscal-year basis. 6.34 DEBT SERVICE RESERVE FUND – A fund usually amounting to principal and interest payments for one year and used only if pledged revenues do not generate sufficient funds to satisfy the debt service requirement. The reserve fund is typically funded in whole or in part from the proceeds of the debt issuance. The size and investment of the reserve fund are usually subject to arbitrage regulations. 6.35 DEBT SERVICE SCHEDULE – A table listing the annual payments necessary to meet debt service requirements over the period of time the bonds are to be outstanding. Page 15 of 20 6.36 DEFAULT – Failure to make timely payment of principal and interest or to comply with other features of the indenture. 6.37 DEFEASANCE – Eliminating bonded indebtedness off an issuer’s books through creation of a portfolio of allowable securities sufficient to make all debt service payments on pre-refunded, outstanding bonds. 6.38 DIRECT DEBT – The debt that a governmental agency incurs in its own name. 6.39 DISCOUNT – The amount by which par value exceeds the price paid for a security which generally represents the difference between the nominal interest rate and the actual or effective return to the investor. 6.40 DOUBLE-BARRELED BOND –Traditionally, a bond secured by a defined source of revenue plus the full faith and credit of the issuer. The term is occasionally, although erroneously, used to refer to bonds secured by any two sources of pledged revenue. 6.41 DOWNGRADE –The lowering of a bond rating by a rating service. A downgrade would be considered if the issuer encountered major financial difficulties or an economic decline, which may be viewed by the rating service as reducing the credit quality of the bond issue. 6.42 EFFECTIVE INTEREST RATE –The actual rate of interest earned by the investor on bonds purchased, after allowing for premiums, discounts, or accrued interest over the period of the investment. 6.43 FEASIBILITY STUDY – A report by an independent expert on the economic need and practicality of a proposed debt program. 6.44 FINANCIAL ADVISOR – Performs analysis as to the appropriateness of a bond sale and, if the governing body of the agency determines that a bond sale is necessary, they then assist in its planning and preparation. 6.45 FLOATER – A security sold with a variable rate that changes at intervals ranging from daily to annually. 6.46 FULL FAITH AND CREDIT – The pledge of a government’s general taxing power to pay off its debt obligations. 6.47 GENERAL OBLIGATION BONDS – Bonds which are secured by the full faith and credit of the issuer. General obligation bonds are secured by a pledge of a portion of the ad valorem taxing power. Such bonds constitute debts of the issuer and require approval by election prior to issuance. Page 16 of 20 6.48 GUARANTEED INVESTMENT CONTRACT (GIC) – A group annuity contract designed to provide guarantees of principal and interest on funds deposited with an insurance company for a specified period. 6.49 HIGH GRADE BONDS – Top-rated bonds, usually triple-A. 6.50 INDENTURE – Legal document describing the terms and conditions of a bond offering, the rights of the bondholder and the obligations of the issuer to the bondholder. The document is alternatively referred to as a bond resolution or deed of trust. 6.51 INTEREST RATE SWAP – An agreement between two parties to exchange future flows of interest payments. Swap payments may be based on actual bond payments and/or based on various market indices. 6.52 INVERTED YIELD CURVE – When short-term rates are higher than long-term rates. 6.53 INVESTMENT GRADE – The broad credit designation given bonds which have a high probability of being paid. Such bonds, have few, if any, speculative features and are rated by the rating agencies in one of their top four categories, ranging from triple-A to BBB and Baa. 6.54 ISSUER – A state, political subdivision, agency, or authority that borrows money through the sale of bonds or notes. 6.55 JUNIOR LIEN BONDS – Bond with a subordinate claim against pledged revenues. 6.56 LETTER OF CREDIT – An agreement, usually with a commercial bank, to guarantee demands for payment upon compliance with conditions established in the agreement. Bank letters of credit are typically used as additional sources of security and liquidity with variable rate obligations. 6.57 LIQUIDITY – The ability to convert assets, such as investments, readily into cash. MATURITY – The date on which the principal amount of a security is due and payable to the certificate holder. 6.58 NEGOTIATED SALE – The sale of a new issue of municipal securities by an issuer through an exclusive agreement with a previously selected underwriter or underwriting syndicate. A negotiated sale should be distinguished from a competitive sale, which requires public bidding by the underwriters. Primary points of negotiation for the issuer are the interest rate and purchase price, which reflect the issuer’s cost of offering its securities in the market. Page 17 of 20 6.59 NET INTEREST COST (NIC) – Traditional method of calculating an issuer’s borrowing cost. NIC is derived by adding the total volume of interest payments for the entire offering and dividing by the amount of certificates outstanding times the years they are outstanding. 6.60 NET PRESENT VALUE SAVINGS – Present value of gross savings discounted at the refunding bond yield to the closing date plus accrued interest less any contribution from a reserve or debt service fund and anticipated loss investment earnings. 6.61 NOTES – A written, short-term promise of the issuer to repay a specified principal amount on a certain date, together with interest at a stated rate, or according to a formula for determining that rate, payable from a defined source of anticipated revenue. Notes usually mature in less than five years. Notes are used to cover seasonal cash flow needs or interim financings. 6.62 OFFICIAL STATEMENT (OS) – A document published by the issuer who generally discloses material information on a bond issue, including the purpose of the bond issue, how the bonds will be repaid, and the financial, economic and demographic characteristics of the issuer. Investors may use this information to evaluate the credit quality of the bonds. 6.63 ORIGINAL ISSUE DISCOUNT (OID) – The discount from par at which a new issue comes to market. For tax-exempt bonds, the capital gain represented by the OID is deemed tax-exempt by the IRS. 6.64 OVERLAPPING DEBT – The issuer’s share of the debt of other local units. 6.65 PAR VALUE – The principal amount of a security, which must be paid at maturity. Par value is also referred to as the face amount of a security. 6.66 PARITY BONDS – Separate bond issues that have the same lien against pledged revenues. 6.67 PAY-AS-YOU GO BASIS – The financial policy of a municipality that finances all capital outlays from current revenues rather than from borrowing. 6.68 PAYING AGENT – The entity responsible for the payment of principal and interest on municipal obligations on behalf of the issuer. The paying agent is usually a bank or trust company. 6.69 PLEDGED REVENUES – Funds obligated for the payment of debt service and other deposits as required by the bond contract. Page 18 of 20 6.70 PRELIMINARY OFFICIAL STATEMENT (POS) – A preliminary version of the official statement which is used by the issuer or underwriter to describe the proposed issue of municipal bonds prior to the determination of an interest rate and offering price. The preliminary official statement is a marketing tool used to gauge buyer’s interest in the issue and is relied upon by potential purchasers in making their investment decisions. 6.71 PREMIUM – The amount by which the price paid for a security exceeds par value, generally representing the difference between the nominal interest rate and the actual or effective return to the investor. 6.72 PRINCIPAL – The par value or face amount of a bond payable or issue of bonds payable on stated dates of maturity. 6.73 PRIMARY MARKET – The market for new issues of municipal securities. 6.74 PRIVATE PLACEMENT – An original issue of municipal securities sold directly to an institutional or private investor by way of a negotiated sale rather than through a public offering. 6.75 RATE CONVENANT – A bond indenture provision requiring rate changes necessary to meet annual debt service payments. 6.76 RATING AGENCIES – Credit quality evaluation of an issuer’s securities made by independent rating services. The three primary rating agencies with regard to municipal debt are Moody’s Investors Services, Standard & Poor’s Corporation and Fitch. 6.77 RATINGS – Evaluations of the credit quality of obligations usually made by independent rating services. Ratings generally measure the probability of the timely repayment of principal and interest on municipal obligations. The higher the credit rating, the more favorable the effect on the marketability of the security. 6.78 REDEMPTION – A transaction in which the issuer pays an outstanding obligation at a specified price, usually at or above par prior to the specified maturity date. Also known as a call. 6.79 REFUNDING – Selling a new bond issue for redemption or defeasance of an outstanding bond issue. There are generally two reasons for refunding: to reduce the issuer’s interest costs or to remove a burdensome or restrictive covenant imposed by the terms of the bonds being refinanced. 6.80 REGISTRAR – The person or entity responsible for maintaining records on behalf of the issuer for the purpose of noting the owners of registered obligations. The paying agent frequently performs this function. Page 19 of 20 6.81 REVENUE BONDS – Bonds payable from a specific source of revenue and which do not pledge the full faith and credit of the issuer. 6.82 SECONDARY MARKET – Market for bonds previously offered and sold. 6.83 SENIOR LIEN OBLIGATIONS – Obligations having a prior claim on pledge revenues. 6.84 SERIAL BONDS – Bonds of an issue in which some bonds mature in each year over a period of years. 6.85 SETTLEMENT – Delivery of and payment for a new issue of municipal bonds. Settlement usually occurs within 30 days after the bonds are awarded to the underwriters, which allows for the printing of the bonds and the completion of certain legal matters. 6.86 SETTLEMENT DATE – The date used in price and interest computations, usually the date of delivery. 6.87 SINKING FUND – A fund established in a bond indenture that contains money available to call bonds prior to maturity. 6.88 STANDBY BOND PURCHASE AGREEMENT – A legal agreement with a commercial bank or trust company whereby the bank agrees to purchase demand bonds which the remarketing agent was unable to remarket to other parties and chose not to purchase for itself. 6.89 SUBORDINATE (JUNIOR) LIEN OBLIGATIONS – Obligations having a subordinate claim against pledged revenues. 6.90 TAX-EXEMPT OBLIGATIONS – Obligations whose interest is exempt from federal income taxation pursuant to Section 103 of the Internal Revenue Code and may or may not be exempt from state income or personal property taxation in the jurisdiction where issued. 6.91 TERM BONDS – Bonds coming due in a single maturity. The issuer usually agrees to make periodic payments into a sinking fund for mandatory redemption of term bonds before maturity or for payment at maturity. 6.92 TRUE INTEREST COST (TIC) – The present value borrowing cost of the issuer is reflected by taking into account the costs of issuance and underwriting. TIC is similar to NIC, but also accounts for the time value of money. 6.93 TRUSTEE – A financial institution with trust powers which acts in a fiduciary capacity for the benefit of bond holders in enforcing the terms of the bond indenture agreement. Page 20 of 20 6.94 TRUST INDENTURE – A contract between the issuer of municipal securities and a trustee, serving for the benefit of the security holders. 6.95 UNDERWRITER – A dealer at a bank or brokerage house who buys an agency’s bonds in order for the firm’s sales force to resell them to both institutional and retail investors. The underwriter may acquire the bonds either by negotiation with the issuer, or by award on the basis of competitive bidding. 6.96 UNDERWRITERS COUNSEL – A lawyer involved in the transaction, who represents the securities firm buying an issuer’s bonds. 6.97 VARIABLE RATE OBLIGATIONS – A security whose interest rate is reset periodically by the remarketing agent according to a preset formula defined in the indenture agreement. The variable interest rate, also known as a “floater”, is determined by the remarketing agent as the level at which all bonds trade at par. 6.98 YIELD CURVE – Graph displaying the term structure of interest rates by plotting the yields of all bonds of the same quality with maturities ranging from shortest to the longest available. 6.99 YIELD TO MATURITY – The rate of return to the investor earned from payments of principal and interest, which is compounded semiannually and assumes that interest paid is reinvested at the same rate. Yield to maturity takes into consideration the time value of the investment. 6.100 ZERO-COUPON BONDS – Bonds sold at a deep discount from par, which pay no interest and appreciate to full value at maturity. Also known as capital appreciation bonds. Page 1 of 22 FINANCIAL MANAGEMENT POLICY AND PROCEDURE Subject: Debt Policy Index: Finance Administration Number: 201-3-1 Effective Date: September 26, 2018 December 16, 2020 Prepared by: Financial Management Division Supersedes: September 17, 2008 September 26, 2018 Approved By: Board of Directors 1.0 PURPOSE: 2.0 1.0 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 decision makers regarding the timing and purposes for which debt may be issued, types and amounts of permissible debt, methods of sale that may be used and structural features that may be incorporated. 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. The goals of a debt policy are to ensure that a government maintains a sound debt position, and that credit quality is protected, and is intended to comply with applicable California Government Code Sections prescribed by the California Debt aAnd Investment Advisory Commission (CDIAC) to ensure all the debt issuance is consistent with the Orange County Sanitation Sanitation District’s (Sanitation District) debt policyies and all the required reports are submitted to CDIAC on time. 2.0 OBJECTIVES: OBJECTIVES: Each debt issuance must accomplish the following objectives: a. Accelerate the delivery of projects. Debt financing allows the delivery of projects on an accelerated basis; Page 2 of 22 b. Spread cost over the useful life of an asset. Debt financing allows the Sanitation District to spread the cost of a project over its useful life rather than paying for it at one time; c. Smooth out annual cash flow. Debt financing spreads the cost of a project over a period of years, thereby smoothing out the Sanitation District’s cash flow; c. d. Optimize overall financial resources. To enable existing cash to be invested at a rate higher than the cost of borrowing; e. Refundings: It may become desirable for the Sanitation District to issue bonds or other securities to refinance outstanding obligations. The reasons for refinancing include: i) To Achieve Debt Service Savings. In general, the net present value savings generated by the refunding bonds shall be at i) least 3% of the refunded bond amount. ii) For Programmatic Reasons. Such as: restructuring outstanding debt, changing the type of debt instruments originally used, retiring a bond issue, removing covenants/pledges that have ii) become restrictive, or retiring debt prior to maturity. f. The debt policy must be viewed as an integral component of its overall financial practices and in the context of the Sanitation District’s capital-intensive expenditure plans. The Sanitation District’s issuance of debt must be generally consistent with its planning goals, capital improvement programs and budget. The Sanitation District’s financial practices, including the issuance of debt, must be designed to assure sufficient resources to fund all of its operating and capital requirements in all foreseeable circumstances. Advantages of a debt policy are as follows: 1.1 enhances the quality of decisions by imposing order and discipline, and promotesing consistency and continuity in decision making; 1.2 rationalizes the decision-making process; 1.3 identifies objectives for staff to implement; 1.4 demonstrates a commitment to long-term financial planning objectives; 1.5 is viewed positively by the rating agencies in reviewing credit quality; Page 3 of 22 1.6 minimizes debt service and issuance costs; 1.7 ensures full and timely repayment of debt; 1.8 maintains full and complete financial disclosures and reporting and adequate internal controls; 1.9 ensures use of debt is consistent with the Sanitation District’s policies and the proceeds will be directed to the intended use; 1.9 2.03.0 ORGANIZATIONS AFFECTED: General Manager’s Department, Financial Management Division, General Counsel, bond rating agencies, financial advisors, bond underwriters, bond counsel, and external independent auditors. 3.04.0 REFERENCES: 3.14.1 December 2015 Five-Year November 2019 Strategic Plan 3.24.2 2017 Facilities Master Plan 3.34.3 Government Finance Officers Association’s publication “A Guide for Preparing a Debt Policy”.Best Practice on Debt Management Policy. 3.44.4 “Moody’s on Municipals- An Introduction to Issuing Debt” by Moody’s Investor Services.California Debt and Investment Advisory Commission’s “Employing a Debt Management Policy – Practices Among California Local Agencies” (CDIAC No. 14.02) 3.5 Handbook for Muni-Bond Issuers by Joe Mysak, published by Bloomberg Professional Library. 4.05.0 POLICY: 4.15.1 Limitations on Indebtedness- 4.1.15.1.1 The Sanitation District’s debt capacity shallwill not exceed legal limitations, such as coverage requirements or additional bonds tests imposed by existing bond covenants. 4.1.25.1.2 Before any new debt is issued, the impact of debt service payments on total annual fixed costs shallwill be analyzed. In accordance with existing COP indenture agreements, Net Operating Page 4 of 22 Revenues must be at least a 1.25 coverage ratio to the maximum annual debt service. 4.1.35.1.3 The Sanitation District shallwill restrict long-term borrowing toof capital improvements that provide long-term benefits to the Sanitation District. 4.1.45.1.4 Proceeds from long-term debt shallwill not be used for current on-going operations. 4.1.55.1.5 The decision to incur new indebtedness shallould be integrated with the Sanitation District’s biennial Operating Budget and Capital Improvement Program Budget. The annual debt service payment shall be included in the Operating Budget. 4.1.65.1.6 The Sanitation District shallwill integrate its debt issuances with the goals of its Capital Improvement Program by timing the issuance of debt to ensure that funds for projects are available when needed. 4.25.2 Types of Debt- 4.2.15.2.1 The Sanitation District may use short-term debt to cover temporary or emergency cash flow shortages. All short-term borrowing shallwill be subject to Board of Directors approval by resolution. 4.2.2 The District may utilize Board approved intra-agency loans rather than outside debt instruments to meet short-term cash needs. Intra-agency loans will be permitted only if an analysis of the affected Revenue Areas indicates funds are available and the use of these funds will not impact current operations. The principal, along with interest at the prevailing rate as established by the Sanitation District’s Treasurer, will be paid to the lending Revenue Area. 4.2.35.2.2 Commercial Paper – - The Sanitation District may issue short-term debt in the form of Commercial Paper. 4.2.45.2.3 Revenue Bonds – - The Sanitation District may issue as special obligations various types of revenue securities including notes, warrants, interim debentures, bonds, and temporary bonds. Securities issued as special obligations do not constitute outstanding indebtedness of the Sanitation District nor do they exhaust its legal debt-incurring power. Bonding should be limited to projects with available revenue sources, whether self-generated or dedicated from other sources such as user fees. Adequate financing feasibility Page 5 of 22 studies should be performed for each revenue issue. Sufficiency of revenues should continue throughout the life of the bonds. 4.2.55.2.4 Certificates of Participation – - Certificates of participation are essentially leases which are sold to the public. The lease payments are subject to annual appropriation. Investors purchase certificates representing their participation in the lease. Often, equipment or facilities being acquired serve as collateral. These securities are most useful when other means to finance are not available under state law. 4.2.65.2.5 Refundings – - A refunding is generally the underwriting of a new bond issue whose proceeds are used to redeem an outstanding issue. 4.2.6.15.2.5.1 Prior to beginning a refunding bond issue, the Sanitation District shallwill review and estimate of the savings achievable from the refunding. The Sanitation District may also review a pro forma schedule estimating the savings assuming that the refunding is done at various points in the future. Following are the conditions under which the Sanitation District shallwill consider refunding outstanding bonds: 4.2.6.1.15.2.5.1.1 Net present value savings are at least three (3) percent of the par amount of the refunded bonds. Net present value savings of less than three (3) percent of refunded bonds are acceptable when compared to savings that could be achieved by waiting for more favorable interest rates and/or call premiums. 4.2.6.1.25.2.5.1.2 Net present value savings exceed the costs of issuing the bonds. 4.2.6.1.35.2.5.1.3 The bonds to be refunded have restrictive or outdated covenants. 4.2.6.1.45.2.5.1.4 Restructuring debt is deemed to be desirable. 4.35.3 Debt Structure- 4.3.15.3.1 Debt shallwill be structured to achieve the lowest possible net overall cost to the Sanitation District balanced against potential risks given market conditions, the urgency of the capital program, and the nature and type of security to be provided. Structuring options shall Page 6 of 22 also consider available opportunities related to maximizing earnings and minimizing costs while complying with all Arbitrage regulations, including the timing of issuance and current market conditions. 4.3.25.3.2 The term of Sanitation District debt issues shallould not extend beyond the useful life of the project and generally shallould not extend beyond 30 years unless there are compelling factors which make it necessary to extend the term further. 4.3.35.3.3 For the issuance of new money debt, the Sanitation District shallould consider the appropriate amount to be sold based on the overall debt - versus revenue -funding targets as part of its long-term capital plan and prior to each issuance of new money debt. 4.3.45.3.4 New money debt issued by the Sanitation District shallould be structured to provide for either level principal or level debt service on an individual issuance or aggregate debt service basis. Deferring the repayment of principal shallould be avoided except in select instances where it will take a period of time before project revenues are sufficient to pay debt service. Ascending debt service shallould generally be avoided. 4.3.4.15.3.4.1 The Sanitation District shallould consider target financial ratios (including debt service coverage) and future financial flexibility when determining the structure of its new money debt. 4.3.55.3.5 Variable Rate Obligations -– When appropriate, the Sanitation District may choose to issue variable rate obligations, or securities that pay a rate of interest that varies according to a predetermined formula or results from a periodic remarketing or auction of the securities. 4.3.5.15.3.5.1 The maximum level of net variable rate obligations incurred shall not exceed 150% of the level of available invested reserves. The percentage is intended to reflect the inherent relationship between taxable and tax-exempt interest rates based on the highest marginal federal income tax rate. Such percentage should be adjusted as the highest marginal federal income tax changes. 4.45.4 Credit Objectives- 4.4.15.4.1 The Sanitation District’s goal is to maintain or improve its bond ratings. To that end, prudent financial management policies shallwill be adhered to in all areas. Page 7 of 22 4.4.1.15.4.1.1 The Sanitation District shallould monitor its the Sanitation District’s current and projected key financial ratios (e.g., debt service coverage, debt-to-equity, net floating rate exposure, reserve level) in comparison to those of other similar municipal entities. These ratios shallould be updated and compared prior to the issuance of new money debt or the restructuring of existing debt. The Sanitation District shallwill consider these ratios in its financial management policies. 4.4.25.4.2 Rating Agencies - 4.4.2.15.4.2.1 Full disclosure of operations shallwill be made to the bond rating agencies. Sanitation District staff, with the assistance of the financial advisors and bond counsel, shallwill prepare the necessary materials for and presentation to the rating agencies. 4.4.2.25.4.2.2 The Sanitation District shallwill maintain a line of communications with the rating agencies (Fitch, Moody’s, and/or Standard & Poor’s, and/or Fitch), informing them of major financial events at the Sanitation District as they occur. The Comprehensive Annual Financial Report (CAFR) shall be distributed to the rating agencies after it has been accepted by the Board of Directors. 4.4.2.35.4.2.3 The rating agencies shallwill be notified when the Sanitation District begins preparation for a debt issuance. After the initial contact, a formal ratings application shallwill be prepared and sent along with the draft of the Official Statement relating to the bond sale to the rating agencies. This application and related documentation shallould be sent several weeks prior to the bond sale to give the rating agencies sufficient time to perform their review. 4.4.2.45.4.2.4 A personal meeting with representatives of the rating agencies shallwill be scheduled at least once every three years or whenever a major project is initiated. 4.4.35.4.3 Credit Enhancements -– Credit enhancements are mechanisms which guarantee principal and interest payments. They include bond insurance and a line or letter of credit. A credit enhancement, while costly, shallwill sometimes bring a higher rating from the rating agencies and a lower interest rate on debt, thus lowering overall costs. Credit enhancements shallwill only be used Page 8 of 22 when net debt service is reduced by more than the cost of the enhancement. During the debt issuance planning, the fFinancial aAdvisor or uUnderwriter shallwill advise the Sanitation District which credit enhancements if any, should be purchased. 4.4.45.4.4 Dedicated Revenue Sources -– In order to ensure the most favorable credit ratings, Sanitation District revenues are dedicated to debt service in the following order: 4.4.4.15.4.4.1 Ad valorem property tax. 4.4.4.25.4.4.2 Sanitary sewer service charges. 4.4.4.35.4.4.3 Other revenues. 4.55.5 Method of Sale - 4.5.15.5.1 The Sanitation District shallwill 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. 4.5.1.15.5.1.1 Competitive Sales -– Debt obligations are generally issued through a competitive sale. The Sanitation District and its financial advisor shallwill set the terms of the sale to encourage as many bidders as possible. By maximizing bidding, the Sanitation District seeks to obtain the lowest possible interest rates on its bonds. 4.5.1.25.5.1.2 Negotiated Sales -– When certain conditions favorable for a competitive sale do not exist and when a negotiated sale will provide significant benefits to the Sanitation District that would not be achieved through a competitive sale, the Sanitation District may elect to sell its debt obligations through a private or negotiated sale. 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 upon approval by the Administration Committee. 4.65.6 Methods of Selecting Consultants- 4.6.15.6.1 Financial Advisor -– The Sanitation District shallwill retain an external independent financial advisor, selected through a competitive processprocess, and renewed at the discretion of the Administration Committee. The financial advisor contract shallwill be Page 9 of 22 administered by the Sanitation District’s Financial Management Division. The utilization of the financial advisor for a particular bond sale shallwill be on a case by case basis upon recommendation by the Director of Finance and Administrative Services and approval by the Administration Committee,. pursuant to a financial advisory service contract. 4.6.25.6.2 Underwriters -– For negotiated sales, underwriters shallwill be required to demonstrate sufficient capitalization and experience related to the debt issuance. The selection of underwriters may be for an individual or series of financings or a specified time period. 4.6.35.6.3 Bond Counsel -– The Sanitation District shallwill retain external bond counsel for all debt issues. All debt issued by the Sanitation District shallwill include a written opinion by bond counsel affirming that the Sanitation District is authorized to issue the debt, stating that the Sanitation District has met all state constitutional and statutory requirements necessary for issuance, and determining the debt’s federal income tax status. Bond counsel shallwill be selected through a competitive process administered by the Sanitation District’s Financial Management Division. The selection process shallwill require comprehensive municipal debt experience. 5.6.4 Disclosure Counsel – - The Sanitation District shallwill retain, when appropriate, Disclosure Counsel for debt issues. Disclosure Counsel shallwill be responsible for ensuring that the official statement complies with all applicable rules regulations and guidelines. Disclosure Counsel for a particular transaction may also serve the Sanitation District as bond counsel on the same issue. Disclosure counsel shallwill be selected through a competitive process administered by the Sanitation District’s Financial Management Division. The selection process shallwill require comprehensive municipal debt experience. 5.6.5 Trustee and Paying Agent – The Sanitation District shall retain a trustee and paying agent for all debt issues. The trustee and paying agent shall be responsible for carrying out the administrative functions that are required under the bond documents. These functions include, but are not limited to, establishing the accounts and holding the funds relating to bond issues, maintaining a list of bondholders, and paying principle and interest on the debt. Trustee and paying agent shall be selected through a competitive process administered by the Sanitation District’s Financial Management Division. Selection shall be based on the cost of providing such services, along with other qualitative measurements. Page 10 of 22 5.6.6 Compensation for financial advisor, underwriters, bond counsel, disclosure counsel, trustee and paying agent, and other financial service providers shall be as low as possible, given desired qualification levels and consistent with industry standards. All costs and fees related issuance of bonds shall be paid out of bond proceeds. 4.6.4 4.75.7 Disclosure and Arbitrage Compliance- 5.7.1 The Sanitation District shallwill follow all State and Ffederal regulations and requirements regarding bond provisions, issuance, taxation, and disclosure. 5.7.2 The Financial Management Division shall be responsible for providing trustees and/or dissemination agents ongoing disclosure information for filing with the Municipal Standards Rulemaking Board (MSRB) via the Electronic Municipal Market Access (EMMA). The Sanitation District may elect to utilize the services of a dissemination agent for continuing disclosure reporting; however, the responsibility for ensuring the reports are filed timely remains with the Sanitation District. 5.7.2.1 Copies of CAFR and updated tables from the Official Statement to EMMA within six months of year end. 5.7.3 The Sanitation District shall maintain compliance with disclosure standards promulgated by State and Federal regulatory bodies, such as annual reporting to the California Debt and Investment Commission of the State Treasurer’s Office in accordance with SB 1029 for debt issued after January 1, 2017. 4.7.15.7.4 Official Statements accompanying debt issues, CAFRs and continuing disclosure statements shall meet, at a minimum, the standards articulated by the MSRB, the Government Accounting Standards Board (GASB), the National Federation of Municipal Analysts, the Securities and Exchange Commission (SEC) and Accounting Principles Generally Accepted in the United States (US GAAP). 4.7.25.7.5 The Sanitation District shallwill monitor compliance with bond covenants, continuing disclosure requirements and adhere to federal arbitrage regulations. OAny ccurrence of any event, specified in Rule 15c2-12 under the Securities and Exchange Act of 1934, which must be filed with EMMA instances of noncompliance shallwill be immediately reported to the Administration Committee. Page 11 of 22 Examples of such events are credit rating downgrades, major disasters, major litigation, default on existing debt, bankruptcy, etc. 4.7.3 The Sanitation District shallwill maintain good communications with bond rating agencies about its financial condition and shallwill follow a policy of full disclosure in every financial report and bond prospectus (Official Statement). 5.7.6 4.7.4 Official Statements accompanying debt issues, CAFRs, and continuous disclosure statements will meet, at a minimum, the standards articulated by the Municipal Standards Rulemaking Board (MSRB), the Government Accounting Standards Board (GASB), the National Federation of Municipal Analysts, the Securities and Exchange Commission (SEC), and Generally Accepted Accounting Principles (GAAP). The Financial Management Division will be responsible for ongoing disclosure to all Nationally Recognized Municipal Information Depositories (NRMSIRs) designated by the SEC and for maintaining compliance with disclosure standards promulgated by state and national regulatory bodies. 4.7.4.1 Quarterly compliance reports to NRMSIRs. 4.7.4.2 Copies of CAFR and updated tables from the Official Statement to NRMSIRs within six month of year end. 4.85.8 Administration and Internal Control Procedures - 5.8.1 4.8.1 Expenditure of Proceeds -– Whenever reasonably possible, proceeds of the Sanitation District’s debt shall be held by a third party trustee which shallwill release such proceeds upon written requisition signed by the Director of Administrative Service Department Finance and Administrative Services, or authorized designee. The bank statements for money managed by trustees shall be reconciled on a monthly basis. 5.8.2 4.8.2 Requisition of Bond Proceeds -– To reimburse the Sanitation District for expenditures incurred, bond proceeds requisitions shallwill be prepared by staff and shallwill include summary expenditure data listing the projects funded and related dollar amounts, all totaling to the requisition amount. 5.8.3 4.8.3 Investment of Debt Proceeds -– Proceeds raised in a debt financing shall be invested in a manner that is consistent with the bond indenture, and pursuant to the Sanitation District’s Investment policy for investments not addressed by the indenture. Page 12 of 22 4.8.4 Continuing Disclosure -– The Sanitation District shall remain in compliance with 5.8.4 SECecurities and Exchange Commission (S.E.C.) Rule 15c2-12 by filing its annual financial statements and other financial and operating data for the benefit of its bondholders within the period required by each Continuing Disclosure Agreement. 4.8.5 Reporting and Filing Requirements -– The Sanitation District shall comply with the applicable reporting and filing requirements in California Government Code Section 8855. 5.8.5 5.8.6 4.8.6 Federal Tax Compliance -– The Sanitation District shall comply with any federal tax requirements, including without limitation, private use tracking, arbitragearbitrage and rebate compliance. 5.8.7 Debt Service Payments – The Sanitation District shall make debt service payments electronically, on time and error free. 6.0 DEFINITIONS: 5.0 6.1 5.1 ACCRUED INTEREST -– In the sale of a new issue of municipal bonds, the dollar amount, based on the stated rate or rates of interest, which has accrued on the bonds from the dated date, or other stated date, up to but not including the date of delivery. When a bond is purchased in the secondary market, the dollar amount, based upon the stated rate of interest, which has accrued on the bond from the most recent interest payment date, up to but not including the date of settlement. Accrued interest is paid to the seller by the purchaser and is usually calculated on a 360-day year basis (assumes each month has 30 days). 6.2 ADDITIONAL BONDS TEST -– Refers to legal test found in resolution or ordinance securing bonds; governs ability to issue additional bonds having the same lien on pledged revenues. Usually expressed as a ratio in which historic earnings meet certain levels of future debt service coverage. 5.2 5.36.3 ADDITIONAL OBLIGATIONS TEST –- Refers to legal test found in the resolution which governs an agency’s ability to issue additional obligations Page 13 of 22 having the same lien on pledged revenues. The Sanitation District’s additional obligations test is expressed as a ratio in which historic earnings must meet or exceed certain levels of future obligation service coverage. 5.46.4 AD VALOREM TAX – - A direct tax based “according to value” of property. Counties and school districts and municipalities usually are, and special tax districts may be, authorized by law to levy ad valorem taxes on property other than intangible personal property. Local government bodies with taxing powers may issue bonds or short-term certificates payable from ad valorem taxation. 5.56.5 ADVANCE REFUNDING – - A transaction in which new debt is issued to provide monies to pay interest on old, outstanding debt as it becomes due, and to pay the principal on the old debt either as it matures or at an earlier call date. An advance refunding occurs before the maturity or call date (more than 90 days before the maturity or call date) of the old debt, and the proceeds of the new debt are invested until the maturity or call date of the old debt. Most advance refundings result in defeasance of debt. 5.66.6 AMORTIZATION – - The process of paying the principal amount of an issue of bonds by periodic payments either directly to certificate holders or to a sinking fund for the benefit of certificate holders. Payments are usually calculated to include interest in addition to a partial payment of the original principal amount. 5.76.7 ARBITRAGE – - Classically, the simultaneous purchase and sale of the same or an equivalent security in order to profit from price discrepancies. The most common occurrence in the public sector involves the investment of the proceeds from the sale of tax-exempt securities in a taxable money market instrument that yields a higher rate, resulting in interest revenue in excess of interest costs. 5.86.8 ARBITRAGE REBATE REQUIREMENTS – - Arbitrage profits (interest revenue in excess of interest costs) from investment bond proceeds that are invested in taxable instruments must be rebated to the U.S. Treasury Department. 5.96.9 AVERAGE COUPON – - Weighted average interest cost of an issue. 5.106.10 BANK INVESTMENT CONTRACT – - A separate account at a financial institution that functions like a guaranteed investment contract, whereby the contract is designed to provide guarantees of principal and interest on funds deposited for a specified period. 5.116.11 BASIS POINT – - Yields on municipal securities are usually quoted in basis points where one basis point is equal to 1/100 of one percent. Page 14 of 22 5.126.12 BOND – - Written evidence of the issuer’s obligation to repay a specified principal amount on a date certain (maturity date), together with interest at a stated rate, or according to a formula for determining that rate. Bonds are distinguishable from notes, which mature in a much shorter period of time. 2.1 BOND COUNSEL – - An attorney (or firm of attorneys) retained by the issuer to give a legal opinion on the legality and security of the issue and its tax exemption or taxability. Typically, bond counsel may prepare, or review and advise the issuer regarding, authorizing resolutions or ordinances, trust indentures, official statements, validation proceedings, and litigation. 6.13 5.136.14 BONDED DEBT – - The portion of an issuer’s total indebtedness as represented by outstanding bonds. 5.14 BOND INSURANCE –- An insurance policy purchased by an issuer or an underwriter for either an entire issue or specific maturities, which guarantees the payment of principal and interest. This security provides a higher credit rating and thus a lower borrowing cost for an issuer. Bond insurance can be purchased directly by the Sanitation District prior to the bond sale (direct purchase) or at the underwriter’s option and expense (bidder’s option). 6.15 5.156.16 BOND RESOLUTION OR ORDINANCE – - The document or documents representing action of the issuer authorizing the issuance and sale of municipal bonds. Issuance of the bonds is usually approved in the authorizing resolution or ordinance, and the sale is usually authorized in a separate document known as the “sale” or “award” resolution. All of such resolutions, read together, constitute the bond resolution, which describes the nature of the obligation and the issuer’s duties to the bondholders. 5.166.17 BROKER – - A person or firm, other than a bank, which acts as an intermediary by purchasing and selling securities for others rather than for its own account. 5.176.18 CALLABLE BOND – - A bond which permits or requires the issuer to redeem the obligation before the stated maturity date at a specified price, usually at or above par by giving notice of redemption in a manner specified in the bond contract. 5.186.19 CAPITALIZED INTEREST –- Interest paid on long-term obligations during the period of time required to complete and prepare an asset for its intended use is capitalized as part of the acquisition cost of an asset. Page 15 of 22 5.196.20 CERTIFICATES OF PARTICIPATION –- Obligations of a public entity based on a lease or installment sale agreement. These are not considered debt under Article 13 of the California Constitution. 5.206.21 CERTIFICATE HOLDER – - The owner of a municipal certificate of participation to whom payments of principal and interest are made. Generally certificates are registered, and the owner is the person whose name is noted on the certificate register. 5.216.22 CERTIFICATE REGISTER – - The listing of names and addresses of the current registered owners of the certificates, as maintained by the trustee or certificate registrar. 5.226.23 COMPETITIVE SALE – - The sale of bonds through sealed bids. 5.236.24 COST OF ISSUANCE –- The expenses associated with the sale of a new issue of municipal securities, including such items as underwriter’s spread, printing, legal fees, and rating costs. 5.246.25 COVENANTS – - The issuer’s enforceable promise to perform or refrain from performing certain actions. With respect to municipal bonds, covenants are generally stated in the bond contract, resolution, or indenture. 5.256.26 COVERAGE – - The ratio of pledged revenues available annually to pay debt service obligations, as compared to the annual debt service obligation requirement. This ratio is one indication of the margin of safety for debt service obligations. 5.266.27 CREDIT ENHANCEMENT –- The availability of additional outside support designed to improve an issuer’s own credit standing. Examples include bank lines of credit or collateralized funds. 5.276.28 CURRENT REFUNDING –- A refunding transaction in which the proceeds of the refunding debt are applied immediately (no more than 90 days from issuance) to redeem the debt to be refunded. This situation differs from an advance refunding, where the proceeds of the refunding bonds are placed in escrow pending the call date or maturity of the debt to be refunded. 5.286.29 CURRENT YIELD –- The ratio of the annual dollar amount of interest to the purchase price of a bond, stated as a percentage. 5.296.30 CUSIP NUMBERS (COMMITTEE ON UNIFORM SECURITY IDENTIFICATION PROCEDURES) – - Identification numbers assigned each maturity of a bond issue, and usually printed on the face of each Page 16 of 22 individual bond in the issue. The CUSIP numbers are intended to facilitate identification and clearance of municipal securities. 5.306.31 DEBT LIMIT – - The maximum amount of debt which an issuer of municipal securities is permitted to incur under constitutional, statutory, or charter provisions. 5.316.32 DEBT PER CAPITA – - Bonded debt divided by population. 5.326.33 DEBT SERVICE OBLIGATION –- The amount of funds necessary to pay principal and interest, and the required contributions to an amortization sinking fund for term certificates on an outstanding obligation. Debt service obligation on certificates may be calculated on a calendar- year or on a fiscal-year basis. 5.336.34 DEBT SERVICE RESERVE FUND –- A fund usually amounting to principal and interest payments for one year and used only if pledged revenues do not generate sufficient funds to satisfy the debt service requirement. The reserve fund is typically funded in whole or in part from the proceeds of the debt issuance. The size and investment of the reserve fund are usually subject to arbitrage regulations. 5.346.35 DEBT SERVICE SCHEDULE –- A table listing the annual payments necessary to meet debt service requirements over the period of time the bonds are to be outstanding. 5.35 DEFAULT –- Failure to make timely payment of principal and interest or to comply with other features of the indenture. 6.36 5.366.37 DEFEASANCE – - Eliminating bonded indebtedness off an issuer’s books through creation of a portfolio of allowable securities sufficient to make all debt service payments on pre-refunded, outstanding bonds. 5.376.38 DIRECT DEBT – - The debt that a governmental agency incurs in its own name. 5.386.39 DISCOUNT – - The amount by which par value exceeds the price paid for a security which generally represents the difference between the nominal interest rate and the actual or effective return to the investor. 5.396.40 DOUBLE-BARRELED BOND –- Traditionally, a bond secured by a defined source of revenue plus the full faith and credit of the issuer. The term is occasionally, although erroneously, used to refer to bonds secured by any two sources of pledged revenue. 5.406.41 DOWNGRADE –- The lowering of a bond rating by a rating service. A downgrade would be considered if the issuer encountered major financial Page 17 of 22 difficulties or an economic decline, which may be viewed by the rating service as reducing the credit quality of the bond issue. 5.416.42 EFFECTIVE INTEREST RATE –- The actual rate of interest earned by the investor on bonds purchased, after allowing for premiums, discounts, or accrued interest over the period of the investment. 5.426.43 FEASIBILITY STUDY – - A report by an independent expert on the economic need and practicality of a proposed debt program. 5.436.44 FINANCIAL ADVISOR – - Performs analysis as to the appropriateness of a bond sale and, if the governing body of the agency determines that a bond sale is necessary, they then assist in its planning and preparation. 5.446.45 FLOATER – - A security sold with a variable rate that changes at intervals ranging from daily to annually. 5.456.46 FULL FAITH AND CREDIT – - The pledge of a government’s general taxing power to pay off its debt obligations. 5.466.47 GENERAL OBLIGATION BONDS – - Bonds which are secured by the full faith and credit of the issuer. General obligation bonds are secured by a pledge of a portion of the ad valorem taxing power. Such bonds constitute debts of the issuer and require approval by election prior to issuance. 5.476.48 GUARANTEED INVESTMENT CONTRACT (GIC) – - A group annuity contract designed to provide guarantees of principal and interest on funds deposited with an insurance company for a specified period. 5.486.49 HIGH GRADE BONDS – - Top-rated bonds, usually triple-A. 5.496.50 INDENTURE – - Legal document describing the terms and conditions of a bond offering, the rights of the bondholder, and the obligations of the issuer to the bondholder. The document is alternatively referred to as a bond resolution or deed of trust. 5.506.51 INTEREST RATE SWAP – - An agreement between two parties to exchange future flows of interest payments. Swap payments may be based on actual bond payments and/or based on various market indices. 5.516.52 INVERTED YIELD CURVE – - When short-term rates are higher than long-term rates. 5.526.53 INVESTMENT GRADE – - The broad credit designation given bonds which have a high probability of being paid. Such bonds, have few, if any, Page 18 of 22 speculative features and are rated by the rating agencies in one of their top four categories, ranging from triple-A to BBB and Baa. 5.536.54 ISSUER – - A state, political subdivision, agency, or authority that borrows money through the sale of bonds or notes. 5.546.55 JUNIOR LIEN BONDS – - Bond with a subordinate claim against pledged revenues. 5.556.56 LETTER OF CREDIT – - An agreement, usually with a commercial bank, to guarantee demands for payment upon compliance with conditions established in the agreement. Bank letters of credit are typically used as additional sources of security and liquidity with variable rate obligations. 5.566.57 LIQUIDITY – Y- The ability to convert assets, such as investments, readily into cash. 5.57 MATURITY – - The date on which the principal amount of a security is due and payable to the certificate holder. 5.586.58 NEGOTIATED SALE – - The sale of a new issue of municipal securities by an issuer through an exclusive agreement with a previously selected underwriter or underwriting syndicate. A negotiated sale should be distinguished from a competitive sale, which requires public bidding by the underwriters. Primary points of negotiation for the issuer are the interest rate and purchase price, which reflect the issuer’s cost of offering its securities in the market. 5.596.59 NET INTEREST COST (NIC) – - Traditional method of calculating an issuer’s borrowing cost. NIC is derived by adding the total volume of interest payments for the entire offering and dividing by the amount of certificates outstanding times the years they are outstanding. 5.606.60 NET PRESENT VALUE SAVINGS – - Present value of gross savings discounted at the refunding bond yield to the closing date plus accrued interest less any contribution from a reserve or debt service fund and anticipated loss investment earnings. 5.616.61 NOTES – - A written, short-term promise of the issuer to repay a specified principal amount on a certain date, together with interest at a stated rate, or according to a formula for determining that rate, payable from a defined source of anticipated revenue. Notes usually mature in less than five years. Notes are used to cover seasonal cash flow needs or interim financings. Page 19 of 22 5.626.62 OFFICIAL STATEMENT (OS) – - A document published by the issuer who generally discloses material information on a bond issue, including the purpose of the bond issue, how the bonds will be repaid, and the financial, economic, and demographic characteristics of the issuer. Investors may use this information to evaluate the credit quality of the bonds. 5.636.63 ORIGINAL ISSUE DISCOUNT (OID) – - The discount from par at which a new issue comes to market. For tax-exempt bonds, the capital gain represented by the OID is deemed tax-exempt by the IRS. 5.646.64 OVERLAPPING DEBT – - The issuer’s share of the debt of other local units. 5.656.65 PAR VALUE – - The principal amount of a security, which must be paid at maturity. Par value is also referred to as the face amount of a security. 5.666.66 PARITY BONDS – - Separate bond issues that have the same lien against pledged revenues. 5.676.67 PAY-AS-YOU GO BASIS- – The financial policy of a municipality that finances all capital outlays from current revenues rather than from borrowing. 5.686.68 PAYING AGENT – - The entity responsible for the payment of principal and interest on municipal obligations on behalf of the issuer. The paying agent is usually a bank or trust company. 5.696.69 PLEDGED REVENUES – - Funds obligated for the payment of debt service and other deposits as required by the bond contract. 5.706.70 PRELIMINARY OFFICIAL STATEMENT (POS) – - A preliminary version of the official statement which is used by the issuer or underwriter to describe the proposed issue of municipal bonds prior to the determination of an interest rate and offering price. The preliminary official statement is a marketing tool used to gauge buyer’s interest in the issue and is relied upon by potential purchasers in making their investment decisions. 5.71 PREMIUM – - The amount by which the price paid for a security exceeds par value, generally representing the difference between the nominal interest rate and the actual or effective return to the investor. 6.71 5.726.72 PRINCIPAL – - The par value or face amount of a bond payable or issue of bonds payable on stated dates of maturity. Page 20 of 22 5.736.73 PRIMARY MARKET – - The market for new issues of municipal securities. 5.746.74 PRIVATE PLACEMENT – - An original issue of municipal securities sold directly to an institutional or private investor by way of a negotiated sale rather than through a public offering. 5.756.75 RATE CONVENANT – - A bond indenture provision requiring rate changes necessary to meet annual debt service payments. 5.766.76 RATING AGENCIES – - Credit quality evaluation of an issuer’s securities made by independent rating services. The three primary rating agencies with regard to municipal debt are Moody’s Investors Services, Standard & Poor’s Corporation, and Fitch. 5.776.77 RATINGS – - Evaluations of the credit quality of obligations usually made by independent rating services. Ratings generally measure the probability of the timely repayment of principal and interest on municipal obligations. The higher the credit rating, the more favorable the effect on the marketability of the security. 5.786.78 REDEMPTION – - A transaction in which the issuer pays an outstanding obligation at a specified price, usually at or above par prior to the specified maturity date. Also known as a call. 5.796.79 REFUNDING – - Selling a new bond issue for redemption or defeasance of an outstanding bond issue. There are generally two reasons for refunding: to reduce the issuer’s interest costs or to remove a burdensome or restrictive covenant imposed by the terms of the bonds being refinanced. 5.806.80 REGISTRAR – : The person or entity responsible for maintaining records on behalf of the issuer for the purpose of noting the owners of registered obligations. The paying agent frequently performs this function. 5.816.81 REVENUE BONDS – - Bonds payable from a specific source of revenue and which do not pledge the full faith and credit of the issuer. 5.82 SECONDARY MARKET – - Market for bonds previously offered and sold. 6.82 5.836.83 SENIOR LIEN OBLIGATIONS – : Obligations having a prior claim on pledge revenues. 5.846.84 SERIAL BONDS – - Bonds of an issue in which some bonds mature in each year over a period of years. Page 21 of 22 5.856.85 SETTLEMENT – - Delivery of and payment for a new issue of municipal bonds. Settlement usually occurs within 30 days after the bonds are awarded to the underwriters, which allows for the printing of the bonds and the completion of certain legal matters. 5.866.86 SETTLEMENT DATE – - The date used in price and interest computations, usually the date of delivery. 5.876.87 SINKING FUND – - A fund established in a bond indenture that contains money available to call bonds prior to maturity. 5.886.88 STANDBY BOND PURCHASE AGREEMENT – - A legal agreement with a commercial bank or trust company whereby the bank agrees to purchase demand bonds which the remarketing agent was unable to remarket to other parties and chose not to purchase for itself. 5.896.89 SUBORDINATE (JUNIOR) LIEN OBLIGATIONS – - Obligations having a subordinate claim against pledged revenues. 5.906.90 TAX-EXEMPT OBLIGATIONS – - Obligations whose interest is exempt from federal income taxation pursuant to Section 103 of the Internal Revenue Code, and may or may not be exempt from state income or personal property taxation in the jurisdiction where issued. 5.916.91 TERM BONDS – - Bonds coming due in a single maturity. The issuer usually agrees to make periodic payments into a sinking fund for mandatory redemption of term bonds before maturity or for payment at maturity. 5.926.92 TRUE INTEREST COST (TIC) – - The present value borrowing cost of the issuer is reflected by taking into account the costs of issuance and underwriting. TIC is similar to NIC, but also accounts for the time value of money. 5.936.93 TRUSTEE – - A financial institution with trust powers which acts in a fiduciary capacity for the benefit of bond holders in enforcing the terms of the bond indenture agreement. 5.946.94 TRUST INDENTURE – - A contract between the issuer of municipal securities and a trustee, serving for the benefit of the security holders. 5.956.95 UNDERWRITER – - A dealer at a bank or brokerage house who buys an agency’s bonds in order for the firm’s sales force to resell them to both institutional and retail investors. The underwriter may acquire the bonds either by negotiation with the issuer, or by award on the basis of competitive bidding. Page 22 of 22 5.966.96 UNDERWRITERS COUNSEL – - A lawyer involved in the transaction, who represents the securities firm buying an issuer’s bonds. 5.976.97 VARIABLE RATE OBLIGATIONS – - A security whose interest rate is reset periodically by the remarketing agent according to a preset formula defined in the indenture agreement. The variable interest rate, also known as a “floater”, is determined by the remarketing agent as the level at which all bonds trade at par. 5.986.98 YIELD CURVE – - Graph displaying the term structure of interest rates by plotting the yields of all bonds of the same quality with maturities ranging from shortest to the longest available. 5.996.99 YIELD TO MATURITY – - The rate of return to the investor earned from payments of principal and interest, which is compounded semiannually and assumes that interest paid is reinvested at the same rate. Yield to maturity takes into consideration the time value of the investment. 5.1006.100 ZERO-COUPON BONDS – - Bonds sold at a deep discount from par, which pay no interest and appreciate to full value at maturity. Also known as capital appreciation bonds. OCSD 20-XX-1 RESOLUTION NO. OCSD 20-XX A RESOLUTION OF THE BOARD OF DIRECTORS OF THE ORANGE COUNTY SANITATION DISTRICT ADOPTING THE ORANGE COUNTY SANITATION DISTRICT'S DEBT POLICY AND REPEALING RESOLUTION NO. OCSD 18-16 WHEREAS, on September 26, 2018, the Board of Directors adopted Resolution No. 18-16, adopting a Board of Directors Debt Policy. NOW, THEREFORE, the Board of Directors of the Orange County Sanitation District, DOES HEREBY RESOLVE, DETERMINE, AND ORDER: Section 1: That the Board of Directors hereby adopts the Orange County Sanitation District’s Debt Policy. Section 2: That any change in the Policies and Procedures set forth in the Orange County Sanitation District’s Debt Policy must be approved by the Board of Directors prior to implementation. Section 3: That this Resolution shall take effect immediately upon its adoption. Section 4: That Resolution No. OCSD 18-16 is hereby repealed. PASSED AND ADOPTED at regular meeting of the Board of Directors, Orange County Sanitation District held December 16, 2020. David John Shawver Board Chairman ATTEST: Kelly A. Lore, MMC Clerk of the Board OCSD 20-XX-2 STATE OF CALIFORNIA ) ) ss COUNTY OF ORANGE ) I, Kelly A. Lore, Clerk of the Board of Directors of the Orange County Sanitation District, do hereby certify that the foregoing Resolution No. OCSD 20-XX was passed and adopted at a regular meeting of said Board on the 16th day of December 2020, by the following vote, to wit: AYES: NOES: ABSTENTIONS: ABSENT: IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official seal of Orange County Sanitation District this 16th day of December 2020. Kelly A. Lore, MMC Clerk of the Board of Directors Orange County Sanitation District Orange County Sanitation District ADMINISTRATION COMMITTEE Agenda Report Administration Building 10844 Ellis Avenue Fountain Valley, CA 92708 (714) 593-7433 File #:2020-1325 Agenda Date:12/9/2020 Agenda Item No:4. FROM:James D. Herberg, General Manager Originator: Lorenzo Tyner, Assistant General Manager SUBJECT: INVEST AND/OR REINVEST ORANGE COUNTY SANITATION DISTRICT’S FUNDS AND ADOPT INVESTMENT POLICY STATEMENT GENERAL MANAGER'S RECOMMENDATION RECOMMENDATION: Recommend to the Board of Directors to: Adopt Resolution No.OCSD 20-XX,entitled:“A Resolution of the Board of Directors of the Orange County Sanitation District,Authorizing the Orange County Sanitation District’s Treasurer to Invest and/or Reinvest the Orange County Sanitation District’s Funds,Adopting the Orange County Sanitation District’s Investment Policy Statement and Performance Benchmarks,and Repealing Resolution No. OCSD 19-21”. BACKGROUND This agenda item presents an update to the Orange County Sanitation District’s (Sanitation District) Investment Policy Statement to the Administration Committee for consideration in the Committee’s capacity as the oversight committee for the Investment Policy (Section 18.2).With adoption of the Resolution,the Board of Directors would readopt the Sanitation District's Investment Policy Statement,portfolio performance benchmarks,and monitoring and reporting requirements for calendar year 2021. The following is a summary of the changes to the Investment Policy Statement: ·Added:Public Bank Obligations of a maximum of five (5)years maturity which includes commercial paper,debt securities,or other obligations of a public bank,a public bank as defined in California Government Code Section 57600-57607. ·Changed:Commercial paper shall not exceed 40%of the market value of the portfolio. Previously,commercial paper shall not exceed 25%of the market value of the portfolio. Senate Bill No.998 (SB 998)increases the allowable limit for investments in commercial paper for Local Agencies with more than $100,000,000 of investable assets under management from 25% to 40% until January 1, 2026. ·Added:Securities backed by the US Government with zero or negative yields.Current language in California Government Code does not permit investment in negative yielding securities,as such,SB 998 permits local agencies to invest in securities backed by the US Government with zero or negative yields. ·Changed:No more than the statutory maximum may be invested in LAIF.Previously,Orange County Sanitation District Printed on 12/1/2020Page 1 of 3 powered by Legistar™ File #:2020-1325 Agenda Date:12/9/2020 Agenda Item No:4. ·Changed:No more than the statutory maximum may be invested in LAIF.Previously, investment in LAIF is no more than the lesser of 15%of the portfolio or the statutory maximum. The Sanitation District’s Investment Policy Statement was previously approved by the Administration Committee and the Board of Directors for calendar year 2020 in December 2019. RELEVANT STANDARDS ·Comply with Sanitation District Policy - Orange County Sanitation District Investment Policy ·California Government Code Sections 53607 and 53646 ·Senate Bill No. 998 PROBLEM California Government Code Section 53607 allows for the Board of Directors to delegate authority to invest and/or reinvest the Sanitation District’s funds to the Treasurer for a one-year period.California Government Code Section 53646 requires the Sanitation District to review its Investment Policy annually and readopt its Policy at a public meeting,which will establish specific performance benchmarks and objectives,and specific monitoring and reports.On December 18,2019,the Board of Directors adopted Resolution No.OCSD 19-21,entitled:“A Resolution of the Board of Directors of the Orange County Sanitation District,Authorizing the Orange County Sanitation District’s Treasurer to Invest and/or Reinvest the Orange County Sanitation District’s Funds,Adopting the Orange County Sanitation District’s Investment Policy Statement and Performance Benchmarks,and Repealing Resolution No.OCSD 18-23”.Authority delegated by the Board of Directors to the Assistant General Manager &Director of Finance and Administrative Services/Treasurer to invest and/or reinvest the Sanitation District’s funds expires on December 31,2020.Pursuant to California Government Code Section 53646,the Sanitation District’s Investment Policy must be reviewed and readopted prior to December 31, 2020. PROPOSED SOLUTION With adoption of the Resolution,the Board of Directors would renew its delegation of investment authority to the Assistant General Manager &Director of Finance and Administrative Services/Treasurer for a one-year period,January 1,2021 to December 31,2021,in compliance with the requirements of California Government Code Section 53607.Each year,the Board of Directors will consider similar actions,along with the annual reconsideration of the Sanitation District's Investment Policy. TIMING CONCERNS The Board of Directors delegation of authority to the Assistant General Manager &Director of Finance and Administrative Services/Treasurer to invest and/or reinvest the Sanitation District’s funds will expire on December 31,2020.Pursuant to California Government Code Section 53646,the Sanitation District’s Investment Policy must be reviewed and readopted prior to December 31, 2020. Orange County Sanitation District Printed on 12/1/2020Page 2 of 3 powered by Legistar™ File #:2020-1325 Agenda Date:12/9/2020 Agenda Item No:4. RAMIFICATIONS OF NOT TAKING ACTION The Sanitation District’s Assistant General Manager &Director of Finance and Administrative Services/Treasurer will not have the authority to invest and/or reinvest the Sanitation District’s funds and the Sanitation District will not be in compliance with California Government Code Section 53646. PRIOR COMMITTEE/BOARD ACTIONS December 2019 -Board adopted Resolution No.OCSD 19-21,entitled:“A Resolution of the Board of Directors of the Orange County Sanitation District,Authorizing the Orange County Sanitation District’s Treasurer to Invest and/or Reinvest the Orange County Sanitation District’s Funds,Adopting the Orange County Sanitation District’s Investment Policy Statement and Performance Benchmarks, and Repealing Resolution No. OCSD 18-23”. ADDITIONAL INFORMATION The Sanitation District Investment Policy Statement is a comprehensive document describing the policy, authorizations, benchmarks, delegations, and investment limitations. The Investment Policy will govern the investment activities of Chandler Asset Management,the Sanitation District's external money manager, on behalf of the Sanitation District. Annual Review of Investment Policy The Investment Policy includes the requirement that the Sanitation District shall review its Investment Policy annually (Sections 1.2 and 18.1).Chandler Asset Management reviewed the existing policy to ensure that the language remains current with the California Government Code.The proposed Investment Policy is attached with redlined changes from the most recent approved policy in December 2019. Annual Delegation of Investment Authority Effective January 1,1997,California Government Code Section 53607 states that governing boards of local agencies may only delegate authority to invest and/or reinvest agency funds to the agency's Treasurer for a one-year period. ATTACHMENT The following attachment(s)may be viewed on-line at the OC San website (www.ocsan.gov)with the complete agenda package: ·Orange County Sanitation District Calendar Year 2021 Investment Policy Statement (Clean) ·Orange County Sanitation District Calendar Year 2020 Investment Policy Statement (Redline) ·Proposed Resolution No. OCSD 20-XX Orange County Sanitation District Printed on 12/1/2020Page 3 of 3 powered by Legistar™ Page 1 ORANGE COUNTY SANITATION DISTRICT INVESTMENT POLICY STATEMENT 1.0 Policy: It is the policy of the Orange County Sanitation District (Sanitation District) to invest public funds in a manner which ensures the safety and preservation of capital while meeting reasonably anticipated operating expenditure needs, achieving a reasonable rate of return and conforming to all state and local statutes governing the investment of public funds. 1.1. This Investment Policy is set forth by the Sanitation District for the following purposes: 1.1.1. To establish a clear understanding for the Board of Directors, Sanitation District management, responsible employees, and third parties of the objectives, policies, and guidelines for the investment of the Sanitation District’s idle and surplus funds. 1.1.2. To offer guidance to investment staff and any external investment advisors on the investment of Sanitation District funds. 1.1.3. To establish a basis for evaluating investment results. 1.2. The Sanitation District establishes investment policies which meet its current investment goals. The Sanitation District shall review this policy annually and may change its policies as its investment objectives change. 2.0 Scope: This Investment Policy applies to all financial assets of the Sanitation District; except for the proceeds of the Sanitation District’s capital projects financing program, which are invested in accordance with provisions of their specific bond indentures; and such other funds excluded by law or other Board-approved covenant or agreement. These funds are accounted for by the Sanitation District as Enterprise Funds as represented in the Sanitation District’s Comprehensive Annual Financial Report. 3.0 Standard of Prudence: The standard of prudence to be used by Sanitation District internal staff, and any authorized investment advisor(s), shall be as described in Section 53600.3 of the California Government Code as follows: Except as provided in subdivision (a) of Section 27000.3, all governing bodies of local agencies or persons authorized to make investment decisions on behalf of those local agencies investing public funds pursuant to this chapter are trustees and therefore fiduciaries subject to the prudent investor standard. When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under Page 2 the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. Within the limitations of this section and considering individual investments as part of an overall strategy, investments may be acquired as authorized by law. 4.0 Investment Objectives: The primary objectives of the Sanitation District’s investment activities, in priority order, and as described in Section 53600.5 of the California Government Code, shall be: 4.1 Safety: The safety and preservation of principal is the foremost objective of the investment program of the Sanitation District. Investments shall be selected in a manner that seeks to ensure the preservation of capital in the Sanitation District’s overall portfolio. This will be accomplished through a program of diversification, more fully described in Section 13.0, and maturity limitations, more fully described in Section 14.0, in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. 4.2 Liquidity: The investment program will be administered in a manner that will ensure that sufficient funds are available for the Sanitation District to meet its reasonably anticipated operating expenditure needs. 4.3 Return on Investments: The Sanitation District investment portfolio will be structured and managed with the objective of achieving a market rate of return throughout budgetary and economic cycles, commensurate with legal, safety, and liquidity considerations. 5.0 Delegation of Authority: 5.1 Authority to manage the Sanitation District’s investment program is derived from the California Government Code Sections 53600 et seq. and Sections 53635 et seq. The Board of Directors hereby delegates management responsibility for the Sanitation District’s investment program to its Assistant General Manager & Director of Finance and Administrative Services/Treasurer, who shall establish written procedures for the operation of the investment program, consistent with this Policy. The Controller/Assistant Treasurer shall be responsible for day-to-day administration, monitoring, and the development of written administrative procedures for the operation of the investment program, consistent with this Policy. No person may engage in an investment transaction except as provided under the terms of this Policy and the procedures established by the Treasurer. The Treasurer shall be responsible for all transactions undertaken by Sanitation District internal staff and shall establish a system of controls to regulate the activities of internal staff and external investment advisors engaged in accordance with Section 5.3. Page 3 5.2 The administrative procedures for the operation of the Sanitation District’s investment program will provide for, but not be limited to, the following: 5.2.1 Formats for monthly and quarterly reports to the Administration Committee and the Board of Directors. 5.2.2 Compliance with generally accepted accounting principles of the Government Accounting Standards Board. 5.2.3 Establishment of benchmarks for performance measurement. 5.2.4 Establishment of a system of written internal controls. 5.2.5 Establishment of written procedures for competitive bids and offerings of securities that may be purchased or sold by internal Sanitation District staff. 5.2.6 Establishment of a Desk Procedures Manual for treasury operations and management. 5.3 The Board of Directors may, in its discretion, engage the services of one or more registered investment advisors to assist in the management of the Sanitation District’s investment portfolio in a manner consistent with the Sanitation District’s objectives. Such external investment advisors, which shall be selected through a competitive process, shall be granted discretion to purchase and sell investment securities in accordance with this Investment Policy. Such advisors must be registered under the Investment Advisers Act of 1940 or be exempt from such registration. 6.0 Ethics and Conflicts of Interest: Officers and employees of the Sanitation District involved in the investment process shall refrain from personal business activities that could conflict with proper execution of the Sanitation District’s investment program, or which could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the General Manager any material financial interests in financial institutions that conduct business within the Sanitation District’s boundaries, and they shall further disclose any large personal financial/investment positions, the performance of which could be related to the performance of positions in the Sanitation District’s portfolio. 7.0 Authorized Financial Dealers and Institutions: 7.1 For investment transactions conducted by Sanitation District internal staff, the Treasurer will maintain a list of financial institutions authorized to provide investment services to the Sanitation District, including "primary" or regional dealers that qualify under Securities and Exchange Commission Rule 15C3-1 (Uniform Net Capital rule), and Federal or State of California chartered banks. No public deposit shall be made except in a qualified public depository as established by State law. Page 4 All financial institutions which desire to become qualified bidders for investment transactions with the Sanitation District must supply the following for evaluation by the Treasurer: 7.1.1. Audited financial statements for the institution’s three (3) most recent fiscal years. 7.1.2. A statement, in the format prescribed by the Government Finance Officers Association (GFOA), certifying that the institution has reviewed the Sanitation District’s Investment Policy and that all securities offered to the Sanitation District shall comply fully and in every instance with all provisions of the California Government Code and with this Investment Policy. The current statement is presented in Appendix "A." 7.1.3. A statement describing the regulatory status of the dealer, and the background and expertise of the dealer's representatives. Selection of financial institutions, broker/dealers, and banks authorized to engage in transactions with the Sanitation District shall be made through a competitive process. An annual review of the financial condition of qualified institutions will be conducted by the Treasurer. 7.2 Selection of broker/dealers used by external investment advisors retained by the Sanitation District, shall be in compliance with contract provisions between the Sanitation District and any external investment advisors, and shall be in substantially the following form: Use of Securities Brokers: Neither the Investment Advisor nor any parent, subsidiary or related firm shall act as a securities broker with respect to any purchases or sales of securities which may be made on behalf of the Sanitation District, provided that this limitation shall not prevent the Investment Advisor from utilizing the services of a securities broker which is a parent, subsidiary or related firm, provided such broker effects transactions on a "cost only" or "nonprofit" basis to itself and provides competitive execution. The Investment Advisor shall provide the Sanitation District with a list of suitable independent brokerage firms (including names and addresses) meeting the requirements of Government Code Section 53601.5, and, unless otherwise directed by the Sanitation District, the Investment Advisor may utilize the service of any of such independent securities brokerage firms it deems appropriate to the extent that such firms are competitive with respect to price of services and execution. 8.0 Authorized and Suitable Investments: All investments shall be made in accordance with the California Government Code including Sections 16429.1 et seq., 53600 et seq., and 53684, and as described within this Investment Policy. Permitted investments under this Policy shall include: Page 5 8.1 Securities, obligations, participations, or other instruments of, or issued by, or fully guaranteed as to principal and interest by the US Government, a federal agency, or a US Government-sponsored enterprise pursuant to Section 53601 (f) of the California Government Code. US Treasury securities must make up at least 10% of the portfolio. 8.2 Supranational Obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, or Inter-American Development Bank. Securities must be eligible for purchase in the United States and be US dollar denominated senior unsecured unsubordinated obligations, with a maximum maturity of five years. Securities eligible for purchase under this section must be rated “AA” or better by a Nationally Recognized Statistical Rating Organization (NRSRO) and shall not exceed 30% of the total portfolio. 8.3 Mortgage pass-through security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease- backed certificate, consumer receivable pass-through certificate, or consumer receivable-backed bond. Securities eligible for investment under this subdivision shall be rated in a rating category of “AA” or its equivalent or better by an NRSRO and have a maximum remaining maturity of five years or less. Purchase of securities authorized by this subdivision may not exceed 20 percent of the agency’s surplus moneys that may be invested pursuant to this section. Purchase of mortgage derivatives, which include interest-only payments (IOs) and principal-only payments (POs); inverse floaters, and RE-REMICs (Real Estate Mortgage Investment Conduits), is hereby prohibited. 8.4 Commercial paper of "prime" quality of the highest ranking or of the highest letter and number rating as provided by an NRSRO, and issued by a domestic corporation organized and operating in the United States with assets in excess of $500 million and having a rating of "A" or better on its long-term debt as provided by an NRSRO. Purchases of eligible commercial paper may not exceed 270 days to maturity from the date of purchase. Purchases of commercial paper shall not exceed 40% of the market value of the portfolio. No more than 5% of the market value of the portfolio, or 10% of the issuer's outstanding paper, may be invested in commercial paper issued by any one (1) eligible corporation. 8.5 Banker’s acceptances issued by institutions, the short-term obligations of which are rated of the highest ranking or the highest letter and number rating as provided by an NRSRO provided that: (a) the acceptance is eligible for purchase by the Federal Reserve System; (b) the maturity does not exceed 180 days; (c) no more than 40% of the total portfolio may be invested in banker’s acceptances; and (d) no more than 5% of the total portfolio may be invested in the banker's acceptances of any one (1) commercial bank. Page 6 8.6 Medium term (or corporate) notes of a maximum of five (5) years maturity issued by corporations organized and operating within the United States, or issued by depository institutions licensed by the United States, or any state, and operating within the United States with assets in excess of $500 million, and which is rated in a rating category of “A” or better on its long-term debt as provided by an NRSRO. If, after purchase, the rating of an eligible note falls below the minimum rating category stipulated above, the external investment advisor shall notify the Sanitation District of the downgrade, and shall present an analysis and recommendations as to the disposition of the note consistent with the investment objectives of this Investment Policy. No more than 30% of the portfolio may be invested in medium term notes. 8.7 Notes, bonds, or other obligations that are at all times secured by a valid first priority security interest in securities of the types listed by California Government Code Section 53651 as eligible securities for the purpose of securing local agency deposits having a market value at least equal to that required by California Government Code Section 53652 for the purpose of securing local agency deposits. The securities serving as collateral shall be placed by delivery or book entry into the custody of a trust company or the trust department of a bank that is not affiliated with the issuer of the secured obligation, and the security interest shall be perfected in accordance with the requirements of the Uniform Commercial Code or federal regulations applicable to the types of securities in which the security interest is granted. 8.8 Shares of mutual funds investing in securities permitted under this policy and under Section 53601 (l) of the California Government Code. Such funds must either: (1) attain the highest ranking, or the highest letter and numerical rating, provided by not less than two of the three largest nationally recognized rating services; or (2) have an Investment Advisor registered with the Securities and Exchange Commission with not less than five (5) years of experience investing in the securities and obligations authorized under this Policy and under California Government Code Section 53601, and with assets under management in excess of $500 million. The purchase price of shares of beneficial interest purchased pursuant to this policy, and the California Government Code may not include any commission that the companies may charge, and shall not exceed 20% of the Sanitation District’s surplus money that may be invested pursuant to this section. No more than 10% of the Sanitation District’s surplus funds may be invested in shares of beneficial interest of any one (1) mutual fund pursuant to this section. Money market mutual funds are limited to 20% per issuer and are not subject to the 10% stipulation. 8.9 Certificates of deposit: 8.9.1 Secured (collateralized) time deposits issued by a nationally or state-chartered bank or state or federal savings and loan association, as Page 7 defined by Section 5102 of the California Financial Code, and having a net operating profit in the two (2) most recently completed fiscal years. Collateral must comply with Chapter 4, Bank Deposit Law, Section 16500 et seq., and Chapter 4.5, Savings and Loan Association and Credit Union Deposit Law, Section 16600 et seq., of the California Government Code. 8.9.2 Negotiable certificates of deposit (NCDs) issued by a nationally or state-chartered bank or state of federal savings and loan association, as defined by Section 5102 of the California Financial Code; and which shall have a rating of "A" or better on its long-term debt as provided by a NRSRO; or which shall have the highest letter and number rating for deposits as provided by a NRSRO; or as otherwise approved by the Board of Directors. No more than 30% of the portfolio may be invested in securities pursuant to this section. 8.9.3 To be eligible to receive local agency money, a bank, savings association, federal association, or federally insured individual loan company shall have received an overall rating of not less than “satisfactory” in its most recent evaluation by the appropriate federal financial supervisorial agency of its record of meeting the credit needs of California’s communities, including low and moderate income neighborhoods, pursuant to Section 2906 of Title 12 of the United States Code. 8.10 Taxable or tax-exempt municipal bonds issued by any of the 50 United States. Such securities must be rated “A” or higher by a NRSRO; or as otherwise approved by the Board of Directors. 8.11 The State of California Local Agency Investment Fund (LAIF). The LAIF is an investment alternative for California's local governments and special districts managed by the State Treasurer's Office. LAIF is more fully described in the Glossary (See Appendix "C"). The Sanitation District shall use LAIF as a short-term cash management facility. Investment of Sanitation District funds in LAIF shall be subject to investigation and due diligence prior to investing, and on a continual basis to a level of review pursuant to Section 3.0, Standard of Prudence, of this Policy. 8.12 The Orange County Treasurer's Money Market Commingled Investment Pool (OCCIP). The OCCIP is a money market investment pool managed by the Orange County Treasurer's Office. OCCIP is more fully described in the Glossary (See Appendix "C"). The Sanitation District has no funds invested in OCCIP at this time. Investment of Sanitation District funds in OCCIP would be subject to investigation and due diligence prior to investing, and on a continual basis to a level of review pursuant to Section 3.0, Standard of Prudence, of this Policy. Page 8 8.13 Repurchase agreements provided that: 8.13.1 All repurchase agreements shall be collateralized with securities eligible for purchase under this Policy. In order to anticipate market changes and to provide a level of security for all repurchase agreement transactions, collateralization shall be maintained at a level of at least 102% of the market value of the repurchase agreements and shall be adjusted no less than weekly. 8.13.2 All repurchase agreements must be the subject of a Master Repurchase Agreement between the Sanitation District and the provider of the repurchase agreement. The Master Repurchase Agreement shall be substantially in the form developed by The Bond Market Association. 8.14 Reverse repurchase agreements provided that: 8.14.1 No more than five percent (5%) of the Sanitation District’s portfolio shall be invested in reverse repurchase agreements, and there shall be no long-term reverse repurchase agreements unless otherwise authorized by the Board of Directors. 8.14.2 The maximum maturity of reverse repurchase agreements shall be ninety (90) days. 8.14.3 Reverse repurchase agreements shall mature on the exact date of a known cash flow which will be unconditionally available to repay the maturing reverse repurchase agreement. 8.14.4 Proceeds of reverse repurchase agreements shall be used solely to supplement portfolio income or to provide portfolio liquidity and shall not be used to speculate on market movements. 8.14.5 All reverse repurchase agreements must be the subject of a Master Repurchase Agreement between the Sanitation District and the provider of the reverse repurchase agreement. The Master Repurchase Agreement shall be substantially in the form developed by The Bond Market Association. 8.15 Public Bank Obligations of a maximum of five (5) years maturity which includes commercial paper, debt securities, or other obligations of a public bank, a public bank as defined in California Government Code Section 57600-57607. 8.16 Sales of Sanitation District-owned securities in the secondary market may incur losses in order to improve the risk or return characteristics of the portfolio, to prevent anticipated further erosion of principal, or when trading for securities that result in an expected net economic gain to the Sanitation District. Page 9 8.17 If securities owned by the Sanitation District are downgraded below the quality required by this Investment Policy, it shall be the Sanitation District’s policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio. If a decision is made to retain the downgraded securities in the portfolio, their presence in the portfolio will be monitored and reported quarterly to the Sanitation District General Manager, the Administration Committee, and Board of Directors. 8.18 The Sanitation District is authorized to invest in securities issued by or backed by the United States Government that could result in zero or negative interest accrual if held to maturity. 9.0 Review of Investment Portfolio:  The securities held by the Sanitation District must be in compliance with Section 8.0 “Authorized and Suitable Investments” at time of purchase. If at a later date, a security is no longer in compliance with Section 8.0, the Treasurer shall report the non-compliant security to the Administration Committee and the Board of Directors and shall include a disclosure in the quarterly Treasurer’s Report if the security is held at the date the report is prepared. 10.0 Investment Pools/Mutual Funds:  A thorough investigation of the pool/fund is required prior to investing, and on a continual basis. A questionnaire shall be developed that will provide the following information: 10.1 A description of eligible investment securities, and a written statement of investment policy and objectives. 10.2 A description of interest calculations and how they are distributed, and how gains and losses are treated. 10.3 A description of how the securities are safeguarded (including the settlement processes) and how often the securities are priced and the program audited. 10.4 A description of who may invest in the program, how often, and what size deposits and withdrawals are allowed. 10.5 A schedule for receiving statements and portfolio listings. 10.6 A description of the utilization and level of reserves, retained earnings or other collateral and how they are used by the fund. 10.7 A fee schedule, and when and how is it assessed. Page 10 10.8 Whether the pool/fund is eligible for bond proceeds and/or whether it will accept such proceeds. 11.0 Collateralization: Generally, the value to secure deposits under this Policy shall comply with Section 53652 of the California Government Code. Collateralization will be required for secured time deposits, as more fully described in Section 8.9.1; and repurchase agreements, as more fully described in Section 8.13.1. Collateral will always be held by an independent third-party, as more fully described in Section 12.0. The right of collateral substitution is granted. Under provisions of the California Government Code, California banks and savings and loans associations are required to secure the Sanitation District’s deposits by pledging government securities with a value of 110% of principal and accrued interest. State law also allows financial institutions to secure the Sanitation District’s deposits by pledging first trust deed mortgage notes having a value of 150% of the Sanitation District’s total deposits. 12.0 Safekeeping and Custody: All securities transactions, including collateral for repurchase agreements, entered into by, or on behalf of the Sanitation District, shall be conducted on a delivery-versus- payment (DVP) basis. Securities will be held by the Sanitation District's third-party custodian bank, which shall be selected through a competitive process, or that agent's representative, or in the agent's account at the Federal Reserve Bank, or within clearing corporations in the U.S., and evidenced by book entry statements. Third-party safekeeping arrangements will be approved by the Treasurer and will be corroborated by a written custodial agreement. 13.0 Diversification: The Sanitation District will diversify its investments by security type, issuer, and financial institution in accordance with the following: 13.1 There is no limit on investment in securities issued by or guaranteed by the full faith and credit of the U.S. government. 13.2 No more than 20% of the portfolio may be invested in securities of a single agency of the U.S. government, which does not provide the full faith and credit of the U.S. government. 13.3 No more than 5% of the portfolio may be invested in securities of any one issuer, other than Supranationals, the U.S. government or its agencies. Investment in mutual funds is not governed by this Section 13.3. See Section 13.8 for conditions of purchase of mutual funds. 13.4 No individual holding shall constitute more than 5% of the total debt outstanding of any issuer. Page 11 13.5 No more than 40% of the portfolio may be invested in banker’s acceptances. 13.6 No more than 40% of the portfolio may be invested in commercial paper. 13.7 No more than 30% of the portfolio may be invested in medium-term (corporate) notes. 13.8 No more than 20% of the portfolio may be invested in mutual funds. No more than 10% of the Sanitation District’s portfolio may be invested in shares of beneficial interest of any one (1) mutual fund. Money market mutual funds are limited to 20% per issuer and are not subject to the 10% stipulation. 13.9 No more than 30% of the portfolio may be invested in negotiable certificates of deposit. 13.10 No more than 10% of the portfolio may be invested in eligible municipal bonds. 13.11 No more than 20% of the Long Term Operating Monies portfolio may be invested in a combination of mortgage-backed securities, CMOs and asset-backed securities. 13.12 No more than the statutory maximum may be invested in LAIF. 13.13 No more than 15% of the portfolio may be invested in the Orange County Investment Pool. 13.14 No more than 20% of the portfolio may be invested in repurchase agreements. 13.15 No more than 5% of the portfolio may be invested in reverse repurchase agreements. 14.0 Maximum Maturities: To the extent possible, the Sanitation District will attempt to match its investments with reasonably anticipated cash flow requirements. The Treasurer shall develop a five-year cash flow forecast, which shall be updated quarterly. Based on this forecast, the Treasurer shall designate, from time-to-time, the amounts to be allocated to the investment portfolio. Sanitation District monies invested in accordance with this Policy are divided into two (2) categories: 14.1 Liquid Operating Monies. Funds needed for current operating and capital expenditures are known as Liquid Operating Monies. Page 12 14.1.1 The maximum final stated maturity of individual securities in the Liquid Operating Monies account portfolio shall be one (1) year from the date of settlement. 14.1.2 The average duration of the Liquid Operating Monies account portfolio shall be recommended by the Treasurer based on the Sanitation District’s cash flow requirements but may never exceed 180 days. 14.2 Long Term Operating Monies. Funds needed for longer term purposes are known as the Long Term Operating Monies. 14.2.1 The maximum final stated maturity of individual securities in the Long Term Operating Monies account portfolio shall be five (5) years from the date of settlement. 14.2.2 The duration of the Long Term Operating Monies account portfolio shall be recommended by the Treasurer based on the Sanitation District’s five-year cash flow forecast but may never exceed 60 months. 14.2.3 The duration of the Long Term Operating Monies account portfolio shall never exceed 120% of the duration as established in accordance with Section 14.2.2. 14.2.4 The duration of the Long Term Operating Monies account portfolio shall never be less than 80% of the duration as established in accordance with Section 14.2.2. 15.0 Internal Control: The Treasurer 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. 16.0 Performance Objectives and Benchmarks: 16.1 Overall objective. The investment portfolio of the Sanitation District shall be designed with the overall objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with investment risk constraints and reasonably anticipated cash flow needs. 16.2 The Liquid Operating Monies. The investment performance objective for the Liquid Operating Monies shall be to earn a total rate of return over a market cycle which exceeds the return on a market index approved by the Administration Committee and by the Board of Directors, when the duration of the portfolio is established. This market index is more fully described in Board Resolution No. OCSD 20-XX (see Appendix "B"). Page 13 16.3 The Long Term Operating Monies. The investment performance objective for the Long Term Operating Monies shall be to earn a total rate of return over a market cycle which exceeds the return on a market index selected by the Administration Committee and approved by the Board of Directors, when the duration of the portfolio is established. This market index is more fully described in Board Resolution No. OCSD 20-XX (See Appendix "B"). 17.0 Reporting: 17.1 Monthly transaction reports in accordance with California Government Code Section 53607 shall be submitted by the Treasurer to the Board of Directors. 17.2 Quarterly investment reports will be submitted by the Treasurer to the Administration Committee which shall forward the reports to the Board of Directors. The quarterly reports shall provide clear and concise status information on the Sanitation District’s portfolios at the end of each reporting period, including performance measures using the benchmarks described in Section 16.0 of this Investment Policy. These reports shall contain listings of individual securities held at the end of each reporting period, and shall disclose, at a minimum, the following information about the risk characteristics of the Sanitation District’s portfolio: 17.2.1 Cost and accurate and complete market value of the portfolio. 17.2.2 Modified duration of the portfolio compared to Benchmark. 17.2.3 Dollar change in value of the portfolio for a one percent (1%) change in interest rates. 17.2.4 Percent of portfolio invested in reverse repurchase agreements, and a schedule which matches the maturity of such reverse repurchase agreements with the cash flows which are available to repay them at maturity. 17.2.5 For the Liquid Operating Monies account only, the percent of portfolio maturing within 90 days. 17.2.6 Average portfolio credit quality. 17.2.7 Percent of portfolio with credit ratings below "A" by any rating agency, and a description of such securities. 17.2.8 State that all investments are in compliance with this policy and the California Government Code or provide a listing of any transactions or holdings which do not comply with this policy or with the California Government Code. Page 14 17.2.9 Time-weighted total rate of return for the portfolio for the prior three months, twelve months, year to date, and since inception compared to the Benchmark returns for the same periods. 17.2.10 State that sufficient funds are available for the Sanitation to meet its operating expenditure requirements for the next six months, or if not, state the reasons for the shortfall. 17.3 The Sanitation District’s Treasurer shall meet quarterly with the Administration Committee to review investment performance, proposed strategies, and compliance with this Investment Policy. External investment advisors may be required to attend said meetings at the discretion of the Chairman of the Administration Committee. 18.0 Investment Policy Adoption and Revision: 18.1 The Investment Policy of the Sanitation District shall be adopted by resolution of the Board of Directors. The Investment Policy shall be reviewed on an annual basis in accordance with California Government Code Section 53646, by the Administration Committee, which shall recommend revisions, as appropriate, to the Board of Directors. Any modifications made thereto shall be approved by the Board of Directors. 18.2 The Administration Committee shall serve as the oversight committee for the Sanitation District’s Investment program and shall adopt guidelines for the ongoing review of duration, quality, and liquidity of the Sanitation District’s portfolio. Page 1 ORANGE COUNTY SANITATION DISTRICT INVESTMENT POLICY STATEMENT 1.0 Policy: It is the policy of the Orange County Sanitation District (Sanitation DistrictOCSD) to invest public funds in a manner which ensures the safety and preservation of capital while meeting reasonably anticipated operating expenditure needs, achieving a reasonable rate of return and conforming to all state and local statutes governing the investment of public funds. 1.1. This Investment Policy is set forth by the Sanitation DistrictOCSD for the following purposes: 1.1.1. To establish a clear understanding for the Board of Directors, Sanitation DistrictOCSD management, responsible employees, and third parties of the objectives, policies, and guidelines for the investment of the Sanitation District’sOCSD’s idle and surplus funds. 1.1.2. To offer guidance to investment staff and any external investment advisors on the investment of Sanitation DistrictOCSD funds. 1.1.3. To establish a basis for evaluating investment results. 1.2. The Sanitation DistrictOCSD establishes investment policies which meet its current investment goals. The Sanitation DistrictOCSD shall review this policy annually and may change its policies as its investment objectives change. 2.0 Scope: This Investment Policy applies to all financial assets of the Sanitation DistrictOCSD; except for the proceeds of the Sanitation District’sOCSD's capital projects financing program, which are invested in accordance with provisions of their specific bond indentures; and such other funds excluded by law or other Board-approved covenant or agreement. These funds are accounted for by the Sanitation DistrictOCSD as Enterprise Funds as represented in the Sanitation District’sOCSD's Comprehensive Annual Financial Report. 3.0 Standard of Prudence: The standard of prudence to be used by Sanitation DistrictOCSD internal staff, and any authorized investment advisor(s), shall be as described in Section 53600.3 of the California Government Code as follows: Except as provided in subdivision (a) of Section 27000.3, Page 2 all governing bodies of local agencies or persons authorized to make investment decisions on behalf of those local agencies investing public funds pursuant to this chapter are trustees and therefore fiduciaries subject to the prudent investor standard. When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. Within the limitations of this section and considering individual investments as part of an overall strategy, investments may be acquired as authorized by law. 4.0 Investment Objectives: The primary objectives of the Sanitation District’sOCSD’s investment activities, in priority order, and as described in Section 53600.5 of the California Government Code, shall be: 4.1 Safety: The safety and preservation of principal is the foremost objective of the investment program of the Sanitation DistrictOCSD. Investments shall be selected in a manner that seeks to ensure the preservation of capital in the Sanitation District’sOCSD's overall portfolio. This will be accomplished through a program of diversification, more fully described in Section 13.0, and maturity limitations, more fully described in Section 14.0, in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. 4.2 Liquidity: The investment program will be administered in a manner that will ensure that sufficient funds are available for the Sanitation DistrictOCSD to meet its reasonably anticipated operating expenditure needs. 4.3 Return on Investments: The Sanitation DistrictOCSD investment portfolio will be structured and managed with the objective of achieving a market rate of return throughout budgetary and economic cycles, commensurate with legal, safety, and liquidity considerations. 5.0 Delegation of Authority: 5.1 Authority to manage the Sanitation District’sOCSD’s investment program is derived from the California Government Code Sections 53600 et seq. and Sections 53635 et seq. The Board of Directors hereby delegates management responsibility for the Sanitation District’sOCSD investment Page 3 program to its Assistant General Manager & Director of Finance and Administrative Services/Treasurer, who shall establish written procedures for the operation of the investment program, consistent with this Policy. The Controller/Assistant Treasurer shall be responsible for day-to-day administration, monitoring, and the development of written administrative procedures for the operation of the investment program, consistent with this Policy. No person may engage in an investment transaction except as provided under the terms of this Policy and the procedures established by the Treasurer. The Treasurer shall be responsible for all transactions undertaken by Sanitation DistrictOCSD internal staff, and shall establish a system of controls to regulate the activities of internal staff and external investment advisors engaged in accordance with Section 5.3. 5.2 The administrative procedures for the operation of the Sanitation District’sOCSD's investment program will provide for, but not be limited to, the following: 5.2.1 Formats for monthly and quarterly reports to the Administration Committee and the Board of Directors. 5.2.2 Compliance with generally accepted accounting principles of the Government Accounting Standards Board. 5.2.3 Establishment of benchmarks for performance measurement. 5.2.4 Establishment of a system of written internal controls. 5.2.5 Establishment of written procedures for competitive bids and offerings of securities that may be purchased or sold by internal Sanitation DistrictOCSD staff. 5.2.6 Establishment of a Desk Procedures Manual for treasury operations and management. 5.3 The Board of Directors may, in its discretion, engage the services of one or more registered investment advisors to assist in the management of the Sanitation District’sOCSD’s investment portfolio in a manner consistent with the Sanitation District’sOCSD’s objectives. Such external investment advisors, which shall be selected through a competitive process, shall be granted discretion to purchase and sell investment securities in accordance with this Investment Policy. Such advisors must be registered under the Investment Advisers Act of 1940 or be exempt from such registration. 6.0 Ethics and Conflicts of Interest: Page 4 Officers and employees of the Sanitation DistrictOCSD involved in the investment process shall refrain from personal business activities that could conflict with proper execution of the Sanitation District’sOCSD's investment program, or which could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the General Manager any material financial interests in financial institutions that conduct business within the Sanitation District’sOCSD's boundaries, and they shall further disclose any large personal financial/investment positions, the performance of which could be related to the performance of positions in the Sanitation District’sOCSD’s portfolio. 7.0 Authorized Financial Dealers and Institutions: 7.1 For investment transactions conducted by Sanitation DistrictOCSD internal staff, the Treasurer will maintain a list of financial institutions authorized to provide investment services to the Sanitation DistrictOCSD, including "primary" or regional dealers that qualify under Securities and Exchange Commission Rule 15C3-1 (Uniform Net Capital rule), and Federal or State of California chartered banks. No public deposit shall be made except in a qualified public depository as established by State law. All financial institutions which desire to become qualified bidders for investment transactions with the Sanitation DistrictOCSD must supply the following for evaluation by the Treasurer: 7.1.1. Audited financial statements for the institution’s three (3) most recent fiscal years. 7.1.2. A statement, in the format prescribed by the Government Finance Officers Association (GFOA), certifying that the institution has reviewed the Sanitation District’sOCSD’s Investment Policy and that all securities offered to the Sanitation DistrictOCSD shall comply fully and in every instance with all provisions of the California Government Code and with this Investment Policy. The current statement is presented in Appendix "A." 7.1.3. A statement describing the regulatory status of the dealer, and the background and expertise of the dealer's representatives. Selection of financial institutions, broker/dealers, and banks authorized to engage in transactions with the Sanitation DistrictOCSD shall be made through a competitive process. An annual review of the financial condition of qualified institutions will be conducted by the Treasurer. 7.2 Selection of broker/dealers used by external investment advisors retained by the Sanitation DistrictOCSD, shall be in compliance with contract provisions between the Sanitation DistrictOCSD and any external investment advisors, and shall be in substantially the following form: Use of Securities Brokers: Neither the Investment Advisor nor any parent, Page 5 subsidiary or related firm shall act as a securities broker with respect to any purchases or sales of securities which may be made on behalf of the Sanitation DistrictOCSD, provided that this limitation shall not prevent the Investment Advisor from utilizing the services of a securities broker which is a parent, subsidiary or related firm, provided such broker effects transactions on a "cost only" or "nonprofit" basis to itself and provides competitive execution. The Investment Advisor shall provide the Sanitation DistrictOCSD with a list of suitable independent brokerage firms (including names and addresses) meeting the requirements of Government Code Section 53601.5, and, unless otherwise directed by the Sanitation DistrictOCSD, the Investment Advisor may utilize the service of any of such independent securities brokerage firms it deems appropriate to the extent that such firms are competitive with respect to price of services and execution. 8.0 Authorized and Suitable Investments: All investments shall be made in accordance with the California Government Code including Sections 16429.1 et seq., 53600 et seq., and 53684, and as described within this Investment Policy. Permitted investments under this Policy shall include: 8.1 Securities, obligations, participations, or other instruments of, or issued by, or fully guaranteed as to principal and interest by the US Government, a federal agency, or a US Government-sponsored enterprise pursuant to Section 53601 (f) of the California Government Code. US Treasury securities must make up at least 10% of the portfolio. 8.2 Supranational Obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, or Inter-American Development Bank. Securities must be eligible for purchase in the United States and be US dollar denominated senior unsecured unsubordinated obligations, with a maximum maturity of five years. Securities eligible for purchase under this section must be rated “AA” or better by a Nationally Recognized Statistical Rating Organization (NRSRO) and shall not exceed 30% of the total portfolio. 8.3 Mortgage pass-through security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease- backed certificate, consumer receivable pass-through certificate, or consumer receivable-backed bond. Securities eligible for investment under this subdivision shall be rated in a rating category of “AA” or its equivalent or better by an NRSRO and have a maximum remaining maturity of five years or less. Purchase of securities authorized by this subdivision may not exceed 20 percent of the agency’s surplus moneys that may be invested pursuant to this section. Purchase of mortgage derivatives, which include interest-only payments (IOs) and principal-only payments (POs); inverse floaters, and RE-REMICs (Real Estate Mortgage Page 6 Investment Conduits), is hereby prohibited. 8.4 Commercial paper of "prime" quality of the highest ranking or of the highest letter and number rating as provided by an NRSRO, and issued by a domestic corporation organized and operating in the United States with assets in excess of $500 million and having a rating of "A" or better on its long-term debt as provided by an NRSRO. Purchases of eligible commercial paper may not exceed 270 days to maturity from the date of purchase. Purchases of commercial paper shall not exceed 4025% [DW1]of the market value of the portfolio. No more than 5% of the market value of the portfolio, or 10% of the issuer's outstanding paper, may be invested in commercial paper issued by any one (1) eligible corporation. 8.5 Banker’s acceptances issued by institutions, the short-term obligations of which are rated of the highest ranking or the highest letter and number rating as provided by an NRSRO provided that: (a) the acceptance is eligible for purchase by the Federal Reserve System; (b) the maturity does not exceed 180 days; (c) no more than 40% of the total portfolio may be invested in banker’s acceptances; and (d) no more than 5% of the total portfolio may be invested in the banker's acceptances of any one (1) commercial bank. 8.6 Medium term (or corporate) notes of a maximum of five (5) years maturity issued by corporations organized and operating within the United States, or issued by depository institutions licensed by the United States, or any state, and operating within the United States with assets in excess of $500 million, and which is rated in a rating category of “A” or better on its long-term debt as provided by an NRSRO. If, after purchase, the rating of an eligible note falls below the minimum rating category stipulated above, the external investment advisor shall notify the Sanitation DistrictOCSD of the downgrade, and shall present an analysis and recommendations as to the disposition of the note consistent with the investment objectives of this Investment Policy. No more than 30% of the portfolio may be invested in medium term notes. 8.7 Notes, bonds, or other obligations that are at all times secured by a valid first priority security interest in securities of the types listed by California Government Code Section 53651 as eligible securities for the purpose of securing local agency deposits having a market value at least equal to that required by California Government Code Section 53652 for the purpose of securing local agency deposits. The securities serving as collateral shall be placed by delivery or book entry into the custody of a trust company or the trust department of a bank that is not affiliated with the issuer of the secured obligation, and the security interest shall be perfected in accordance with the requirements of the Uniform Commercial Code or federal regulations applicable to the types of securities in which the security interest is granted. 8.8 Shares of mutual funds investing in securities permitted under this policy Page 7 and under Section 53601 (l) of the California Government Code. Such funds must either: (1) attain the highest ranking, or the highest letter and numerical rating, provided by not less than two of the three largest nationally recognized rating services; or (2) have an Investment Advisor registered with the Securities and Exchange Commission with not less than five (5) years of experience investing in the securities and obligations authorized under this Policy and under California Government Code Section 53601, and with assets under management in excess of $500 million. The purchase price of shares of beneficial interest purchased pursuant to this policy, and the California Government Code may not include any commission that the companies may charge, and shall not exceed 20% of the Sanitation District’sOCSDs surplus money that may be invested pursuant to this section. No more than 10% of the Sanitation DistrictOCSD’s surplus funds may be invested in shares of beneficial interest of any one (1) mutual fund pursuant to this section. Money market mutual funds are limited to 20% per issuer and are not subject to the 10% stipulation. 8.9 Certificates of deposit: 8.9.1 Secured (collateralized) time deposits issued by a nationally or state-chartered bank or state or federal savings and loan association, as defined by Section 5102 of the California Financial Code, and having a net operating profit in the two (2) most recently completed fiscal years. Collateral must comply with Chapter 4, Bank Deposit Law, Section 16500 et seq., and Chapter 4.5, Savings and Loan Association and Credit Union Deposit Law, Section 16600 et seq., of the California Government Code. 8.9.2 Negotiable certificates of deposit (NCDs) issued by a nationally or state-chartered bank or state of federal savings and loan association, as defined by Section 5102 of the California Financial Code; and which shall have a rating of "A" or better on its long-term debt as provided by a NRSRO; or which shall have the highest letter and number rating for deposits as provided by a NRSRO; or as otherwise approved by the Board of Directors. No more than 30% of the portfolio may be invested in securities pursuant to this section. 8.9.3 To be eligible to receive local agency money, a bank, savings association, federal association, or federally insured individual loan company shall have received an overall rating of not less than “satisfactory” in its most recent evaluation by the appropriate federal financial supervisorial agency of its record of meeting the credit needs of California’s communities, including low and moderate income neighborhoods, pursuant to Section 2906 of Title 12 of the United States Code. 8.10 Taxable or tax-exempt municipal bonds issued by any of the 50 United States. Such securities must be rated “A” or higher by a NRSRO; or as otherwise approved by the Board of Directors. Page 8 8.11 The State of California Local Agency Investment Fund (LAIF). The LAIF is an investment alternative for California's local governments and special districts managed by the State Treasurer's Office. LAIF is more fully described in the Glossary (See Appendix "C"). The Sanitation DistrictOCSD shall use LAIF as a short-term cash management facility. Investment of Sanitation DistrictOCSD funds in LAIF shall be subject to investigation and due diligence prior to investing, and on a continual basis to a level of review pursuant to Section 3.0, Standard of Prudence, of this Policy. 8.12 The Orange County Treasurer's Money Market Commingled Investment Pool (OCCIP). The OCCIP is a money market investment pool managed by the Orange County Treasurer's Office. OCCIP is more fully described in the Glossary (See Appendix "C"). The Sanitation DistrictOCSD has no funds invested in OCCIP at this time. Investment of Sanitation DistrictOCSD funds in OCCIP would be subject to investigation and due diligence prior to investing, and on a continual basis to a level of review pursuant to Section 3.0, Standard of Prudence, of this Policy. 8.13 Repurchase agreements provided that: 8.13.1 All repurchase agreements shall be collateralized with securities eligible for purchase under this Policy. In order to anticipate market changes and to provide a level of security for all repurchase agreement transactions, collateralization shall be maintained at a level of at least 102% of the market value of the repurchase agreements and shall be adjusted no less than weekly. 8.13.2 All repurchase agreements must be the subject of a Master Repurchase Agreement between the Sanitation DistrictOCSD and the provider of the repurchase agreement. The Master Repurchase Agreement shall be substantially in the form developed by The Bond Market Association. 8.14 Reverse repurchase agreements provided that: 8.14.1 No more than five percent (5%) of the Sanitation DistrictOCSD’s portfolio shall be invested in reverse repurchase agreements, and there shall be no long-term reverse repurchase agreements unless otherwise authorized by the Board of Directors. 8.14.2 The maximum maturity of reverse repurchase agreements shall be ninety (90) days. 8.14.3 Reverse repurchase agreements shall mature on the exact date of a known cash flow which will be unconditionally available to repay the maturing reverse repurchase agreement. Page 9 8.14.4 Proceeds of reverse repurchase agreements shall be used solely to supplement portfolio income or to provide portfolio liquidity and shall not be used to speculate on market movements. 8.14.5 All reverse repurchase agreements must be the subject of a Master Repurchase Agreement between the Sanitation DistrictOCSD and the provider of the reverse repurchase agreement. The Master Repurchase Agreement shall be substantially in the form developed by The Bond Market Association. 8.15 Public Bank Obligations of a maximum of five (5) years maturity which includes commercial paper, debt securities, or other obligations of a public bank, a public bank as defined in California Government Code Section 57600-57607. 8.165 Sales of Sanitation DistrictOCSD-owned securities in the secondary market may incur losses in order to improve the risk or return characteristics of the portfolio, to prevent anticipated further erosion of principal, or when trading for securities that result in an expected net economic gain to the Sanitation DistrictOCSD. 8.176 If securities owned by the Sanitation DistrictOCSD are downgraded below the quality required by this Investment Policy, it shall be the Sanitation DistrictOCSD’s policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio. If a decision is made to retain the downgraded securities in the portfolio, their presence in the portfolio will be monitored and reported quarterly to the Sanitation DistrictOCSD General Manager, the Administration Committee, and Board of Directors. 8.18 The Sanitation DistrictOCSD is authorized to invest in securities issued by or backed by the United States Government that could result in zero or negative interest accrual if held to maturity.[DW2] 9.0 Review of Investment Portfolio:  The securities held by the Sanitation DistrictOCSD must be in compliance with Section 8.0 “Authorized and Suitable Investments” at time of purchase. If at a later date, a security is no longer in compliance with Section 8.0, the Treasurer shall report the non- compliant security to the Administration Committee and the Board of Directors and shall include a disclosure in the quarterly Treasurer’s Report if the security is held at the date the report is prepared. 10.0 Investment Pools/Mutual Funds:  A thorough investigation of the pool/fund is required prior to investing, and on a continual basis. A questionnaire shall be developed that will provide the following information: Page 10 10.1 A description of eligible investment securities, and a written statement of investment policy and objectives. 10.2 A description of interest calculations and how they are distributed, and how gains and losses are treated. 10.3 A description of how the securities are safeguarded (including the settlement processes) and how often the securities are priced and the program audited. 10.4 A description of who may invest in the program, how often, and what size deposits and withdrawals are allowed. 10.5 A schedule for receiving statements and portfolio listings. 10.6 A description of the utilization and level of reserves, retained earnings or other collateral and how they are used by the fund. 10.7 A fee schedule, and when and how is it assessed. 10.8 Whether the pool/fund is eligible for bond proceeds and/or whether it will accept such proceeds. 11.0 Collateralization: Generally, the value to secure deposits under this Policy shall comply with Section 53652 of the California Government Code. Collateralization will be required for secured time deposits, as more fully described in Section 8.9.1; and repurchase agreements, as more fully described in Section 8.13.1. Collateral will always be held by an independent third-party, as more fully described in Section 12.0. The right of collateral substitution is granted. Under provisions of the California Government Code, California banks and savings and loans associations are required to secure the Sanitation District’s deposits by pledging government securities with a value of 110% of principal and accrued interest. State law also allows financial institutions to secure the Sanitation District’s deposits by pledging first trust deed mortgage notes having a value of 150% of the Sanitation District’s total deposits. 12.0 Safekeeping and Custody: All securities transactions, including collateral for repurchase agreements, entered into by, or on behalf of the Sanitation DistrictOCSD, shall be conducted on a delivery-versus-payment (DVP) basis. Securities will be held by the Sanitation DistrictOCSD's third-party custodian bank, which shall be selected through a competitive process, or that agent's representative, or in the agent's account at the Federal Reserve Bank, or within clearing corporations in the U.S., and evidenced by book entry statements. Third-party safekeeping arrangements will be approved by the Treasurer and will be corroborated by a written custodial agreement. Page 11 13.0 Diversification: The Sanitation DistrictOCSD will diversify its investments by security type, issuer, and financial institution in accordance with the following: 13.1 There is no limit on investment in securities issued by or guaranteed by the full faith and credit of the U.S. government. 13.2 No more than 20% of the portfolio may be invested in securities of a single agency of the U.S. government, which does not provide the full faith and credit of the U.S. government. 13.3 No more than 5% of the portfolio may be invested in securities of any one issuer, other than Supranationals, the U.S. government or its agencies. Investment in mutual funds is not governed by this Section 13.3. See Section 13.8 for conditions of purchase of mutual funds. 13.4 No individual holding shall constitute more than 5% of the total debt outstanding of any issuer. 13.5 No more than 40% of the portfolio may be invested in banker’s acceptances. 13.6 No more than 2540% of the portfolio may be invested in commercial paper. 13.7 No more than 30% of the portfolio may be invested in medium-term (corporate) notes. 13.8 No more than 20% of the portfolio may be invested in mutual funds. No more than 10% of the Sanitation DistrictOCSD’s portfolio may be invested in shares of beneficial interest of any one (1) mutual fund. Money market mutual funds are limited to 20% per issuer and are not subject to the 10% stipulation. 13.9 No more than 30% of the portfolio may be invested in negotiable certificates of deposit. 13.10 No more than 10% of the portfolio may be invested in eligible municipal bonds. 13.11 No more than 20% of the Long Term Operating Monies portfolio may be invested in a combination of mortgage-backed securities, CMOs and asset-backed securities. 13.12 No more than the lesser of 15% of the portfolio or the statutory maximum may be invested in LAIF. 13.13 No more than 15% of the portfolio may be invested in the Orange County Page 12 Investment Pool. 13.14 No more than 20% of the portfolio may be invested in repurchase agreements. 13.15 No more than 5% of the portfolio may be invested in reverse repurchase agreements. 14.0 Maximum Maturities: To the extent possible, the Sanitation DistrictOCSD will attempt to match its investments with reasonably anticipated cash flow requirements. The Treasurer shall develop a five-year cash flow forecast, which shall be updated quarterly. Based on this forecast, the Treasurer shall designate, from time-to-time, the amounts to be allocated to the investment portfolio. Sanitation DistrictOCSD monies invested in accordance with this Policy are divided into two (2) categories: 14.1 Liquid Operating Monies. Funds needed for current operating and capital expenditures are known as Liquid Operating Monies. 14.1.1 The maximum final stated maturity of individual securities in the Liquid Operating Monies account portfolio shall be one (1) year from the date of settlement. 14.1.2 The average duration of the Liquid Operating Monies account portfolio shall be recommended by the Treasurer based on the Sanitation DistrictOCSD’s cash flow requirements but may never exceed 180 days. 14.2 Long Term Operating Monies. Funds needed for longer term purposes are known as the Long Term Operating Monies. 14.2.1 The maximum final stated maturity of individual securities in the Long Term Operating Monies account portfolio shall be five (5) years from the date of settlement. 14.2.2 The duration of the Long Term Operating Monies account portfolio shall be recommended by the Treasurer based on the Sanitation DistrictOCSD’s five-year cash flow forecast but may never exceed 60 months. 14.2.3 The duration of the Long Term Operating Monies account portfolio shall never exceed 120% of the duration as established in accordance with Section 14.2.2. 14.2.4 The duration of the Long Term Operating Monies account portfolio shall never be less than 80% of the duration as established in accordance with Section 14.2.2. Page 13 15.0 Internal Control: The Treasurer 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. 16.0 Performance Objectives and Benchmarks: 16.1 Overall objective. The investment portfolio of the Sanitation DistrictOCSD shall be designed with the overall objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with investment risk constraints and reasonably anticipated cash flow needs. 16.2 The Liquid Operating Monies. The investment performance objective for the Liquid Operating Monies shall be to earn a total rate of return over a market cycle which exceeds the return on a market index approved by the Administration Committee and by the Board of Directors, when the duration of the portfolio is established. This market index is more fully described in Board Resolution No. OCSD 1920-XX (see Appendix "B"). 16.3 The Long Term Operating Monies. The investment performance objective for the Long Term Operating Monies shall be to earn a total rate of return over a market cycle which exceeds the return on a market index selected by the Administration Committee and approved by the Board of Directors, when the duration of the portfolio is established. This market index is more fully described in Board Resolution No. OCSD 1920-XX (See Appendix "B"). 17.0 Reporting: 17.1 Monthly transaction reports in accordance with California Government Code Section 53607 shall be submitted by the Treasurer to the Board of Directors. 17.2 Quarterly investment reports will be submitted by the Treasurer to the Administration Committee which shall forward the reports to the Board of Directors. The quarterly reports shall provide clear and concise status information on the Sanitation DistrictOCSD’s portfolios at the end of each reporting period, including performance measures using the benchmarks described in Section 164.0 of this Investment Policy. These reports shall contain listings of individual securities held at the end of each reporting period, and shall disclose, at a minimum, the following information about the risk characteristics of the Sanitation DistrictOCSD’s portfolio: 17.2.1 Cost and accurate and complete market value of the portfolio. 17.2.2 Modified duration of the portfolio compared to Benchmark. Page 14 17.2.3 Dollar change in value of the portfolio for a one -percent (1%) change in interest rates. 17.2.4 Percent of portfolio invested in reverse repurchase agreements, and a schedule which matches the maturity of such reverse repurchase agreements with the cash flows which are available to repay them at maturity. 17.2.5 For the Liquid Operating Monies account only, the percent of portfolio maturing within 90 days. 17.2.6 Average portfolio credit quality. 17.2.7 Percent of portfolio with credit ratings below "A" by any rating agency, and a description of such securities. 17.2.8 State that all investments are in compliance with this policy and the California Government Code or provide a listing of any transactions or holdings which do not comply with this policy or with the California Government Code. 17.2.9 Time-weighted total rate of return for the portfolio for the prior three months, twelve months, year to date, and since inception compared to the Benchmark returns for the same periods. 17.2.10 State that sufficient funds are available for the SanitationOCSD to meet its operating expenditure requirements for the next six months, or if not, state the reasons for the shortfall. 17.3 The Sanitation DistrictOCSD’s Treasurer shall meet quarterly with the Administration Committee to review investment performance, proposed strategies, and compliance with this Investment Policy. External investment advisors may be required to attend said meetings at the discretion of the Chairman of the Administration Committee. 18.0 Investment Policy Adoption and Revision: 18.1 The Investment Policy of the Sanitation DistrictOCSD shall be adopted by resolution of the Board of Directors. The Investment Policy shall be reviewed on an annual basis in accordance with California Government Code Section 53646, by the Administration Committee, which shall recommend revisions, as appropriate, to the Board of Directors. Any modifications made thereto shall be approved by the Board of Directors. 18.2 The Administration Committee shall serve as the oversight committee for the Sanitation DistrictOCSD’s Investment program and shall adopt guidelines for the ongoing review of duration, quality, and liquidity of the Sanitation DistrictOCSD’s portfolio. OCSD 20-XX-1 RESOLUTION NO. OCSD 20-XX A RESOLUTION OF THE BOARD OF DIRECTORS OF THE ORANGE COUNTY SANITATION DISTRICT, AUTHORIZING THE ORANGE COUNTY SANITATION DISTRICT'S TREASURER TO INVEST AND/OR REINVEST THE ORANGE COUNTY SANITATION DISTRICT'S FUNDS, ADOPTING THE ORANGE COUNTY SANITATION DISTRICT'S INVESTMENT POLICY STATEMENT AND PERFORMANCE BENCHMARKS, AND REPEALING RESOLUTION NO. OCSD 19-21 WHEREAS, on December 18, 2019, the Board of Directors adopted Resolution No. 19-21, readopting the Orange County Sanitation District's (“Sanitation District”) Investment Policy Statement, and establishing specific performance benchmarks and objectives, together with a schedule of frequency of investment performance reports; and WHEREAS, pursuant to California Government Code Section 53607, the Board of Directors may delegate authority to invest and/or reinvest the Sanitation District’s funds to the Treasurer for a one-year period; and WHEREAS, pursuant to California Government Code Section 53646, the Sanitation District is required to review its Investment Policy annually and readopt its Policy at a public meeting, which Policy will establish specific performance benchmarks and objectives, and specific monitoring and reports. NOW, THEREFORE, the Board of Directors of the Orange County Sanitation District, DOES HEREBY RESOLVE, DETERMINE AND ORDER: Section 1: That the authority of the Board of Directors to invest or reinvest surplus funds, or to sell or exchange securities so purchased, or to deposit for safekeeping the funds and investments of the Sanitation District with depositories, as provided for in California Government Code Sections 53608 and 53630, is hereby delegated to the Sanitation District’s Treasurer for a one-year period, January 1, 2021 through December 31, 2021, as authorized by California Government Code Section 53607. OCSD 20-XX-2 Section 2: That the Board of Directors hereby adopts the Investment Policy Statement of the Orange County Sanitation District. Section 3: That the Board of Directors hereby adopts the following specific performance benchmarks for their two investment funds in accordance with Section 16.0 of the Sanitation District’s Investment Policy: LIQUID OPERATING MONIES: The Short-Term Operating Fund will be compared to the three-month Bank of America Merrill Lynch T-Bill Index and the Callan Money Market Funds. LONG-TERM OPERATING MONIES: The Long-Term Operating Fund will be compared to the Bank of America Merrill Lynch Corporate and Government One- to-Five Year Maturity Index and to the Callan Short Term Fixed Income Group. Section 4: That the Board of Directors hereby adopts a performance monitoring and reporting schedule, as required by Section 17.0 of the Sanitation District’s Investment Policy. Section 5: That Resolution No. OCSD 19-21 is hereby repealed. OCSD 20-XX-3 PASSED AND ADOPTED at regular meeting of the Board of Directors, Orange County Sanitation District held December 16, 2020. David John Shawver Board Chairman ATTEST: Kelly A. Lore, MMC Clerk of the Board OCSD 20-XX-4 STATE OF CALIFORNIA ) ) ss COUNTY OF ORANGE ) I, Kelly A. Lore, Clerk of the Board of Directors of the Orange County Sanitation District, do hereby certify that the foregoing Resolution No. OCSD 20-XX was passed and adopted at a regular meeting of said Board on the 16th day of December 2020, by the following vote, to wit: AYES: NOES: ABSTENTIONS: ABSENT: IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official seal of Orange County Sanitation District this 16th day of December 2020. Kelly A. Lore, MMC Clerk of the Board of Directors Orange County Sanitation District ORANGE COUNTY SANITATION DISTRICT COMMON ACRONYMS ACWA Association of California Water Agencies LOS Level Of Service RFP Request For Proposal APWA American Public Works Association MGD Million Gallons Per Day RWQCB Regional Water Quality Control Board AQMD Air Quality Management District MOU Memorandum of Understanding SARFPA Santa Ana River Flood Protection Agency ASCE American Society of Civil Engineers NACWA National Association of Clean Water Agencies SARI Santa Ana River Interceptor BOD Biochemical Oxygen Demand NEPA National Environmental Policy Act SARWQCB Santa Ana Regional Water Quality Control Board CARB California Air Resources Board NGOs Non-Governmental Organizations SAWPA Santa Ana Watershed Project Authority CASA California Association of Sanitation Agencies NPDES National Pollutant Discharge Elimination System SCADA Supervisory Control And Data Acquisition CCTV Closed Circuit Television NWRI National Water Research Institute SCAP Southern California Alliance of Publicly Owned Treatment Works CEQA California Environmental Quality Act O & M Operations & Maintenance SCAQMD South Coast Air Quality Management District CIP Capital Improvement Program OCCOG Orange County Council of Governments SOCWA South Orange County Wastewater Authority CRWQCB California Regional Water Quality Control Board OCHCA Orange County Health Care Agency SRF Clean Water State Revolving Fund CWA Clean Water Act OCSD Orange County Sanitation District SSMP Sewer System Management Plan CWEA California Water Environment Association OCWD Orange County Water District SSO Sanitary Sewer Overflow EIR Environmental Impact Report OOBS Ocean Outfall Booster Station SWRCB State Water Resources Control Board EMT Executive Management Team OSHA Occupational Safety and Health Administration TDS Total Dissolved Solids EPA US Environmental Protection Agency PCSA Professional Consultant/Construction Services Agreement TMDL Total Maximum Daily Load FOG Fats, Oils, and Grease PDSA Professional Design Services Agreement TSS Total Suspended Solids gpd gallons per day PFAS Per- and Polyfluoroalkyl Substances WDR Waste Discharge Requirements GWRS Groundwater Replenishment System PFOA Perfluorooctanoic Acid WEF Water Environment Federation ICS Incident Command System PFOS Perfluorooctanesulfonic Acid WERF Water Environment & Reuse Foundation IERP Integrated Emergency Response Plan POTW Publicly Owned Treatment Works WIFIA Water Infrastructure Finance and Innovation Act JPA Joint Powers Authority ppm parts per million WIIN Water Infrastructure Improvements for the Nation Act LAFCO Local Agency Formation Commission PSA Professional Services Agreement WRDA Water Resources Development Act ORANGE COUNTY SANITATION DISTRICT GLOSSARY OF TERMS ACTIVATED SLUDGE PROCESS – A secondary biological wastewater treatment process where bacteria reproduce at a high rate with the introduction of excess air or oxygen and consume dissolved nutrients in the wastewater. BENTHOS – The community of organisms, such as sea stars, worms, and shrimp, which live on, in, or near the seabed, also known as the benthic zone. BIOCHEMICAL OXYGEN DEMAND (BOD) – The amount of oxygen used when organic matter undergoes decomposition by microorganisms. Testing for BOD is done to assess the amount of organic matter in water. BIOGAS – A gas that is produced by the action of anaerobic bacteria on organic waste matter in a digester tank that can be used as a fuel. BIOSOLIDS – Biosolids are nutrient rich organic and highly treated solid materials produced by the wastewater treatment process. This high-quality product can be recycled as a soil amendment on farmland or further processed as an earth-like product for commercial and home gardens to improve and maintain fertile soil and stimulate plant growth. CAPITAL IMPROVEMENT PROGRAM (CIP) – Projects for repair, rehabilitation, and replacement of assets. Also includes treatment improvements, additional capacity, and projects for the support facilities. COLIFORM BACTERIA – A group of bacteria found in the intestines of humans and other animals, but also occasionally found elsewhere, used as indicators of sewage pollution. E. coli are the most common bacteria in wastewater. COLLECTIONS SYSTEM – In wastewater, it is the system of typically underground pipes that receive and convey sanitary wastewater or storm water. CERTIFICATE OF PARTICIPATION (COP) – A type of financing where an investor purchases a share of the lease revenues of a program rather than the bond being secured by those revenues. CONTAMINANTS OF POTENTIAL CONCERN (CPC) – Pharmaceuticals, hormones, and other organic wastewater contaminants. DILUTION TO THRESHOLD (D/T) – The dilution at which the majority of people detect the odor becomes the D/T for that air sample. GREENHOUSE GASES (GHG) – In the order of relative abundance water vapor, carbon dioxide, methane, nitrous oxide, and ozone gases that are considered the cause of global warming (“greenhouse effect”). GROUNDWATER REPLENISHMENT SYSTEM (GWRS) – A joint water reclamation project that proactively responds to Southern California’s current and future water needs. This joint project between the Orange County Water District and OCSD provides 70 million gallons per day of drinking quality water to replenish the local groundwater supply. LEVEL OF SERVICE (LOS) – Goals to support environmental and public expectations for performance. N-NITROSODIMETHYLAMINE (NDMA) – A N-nitrosamine suspected cancer-causing agent. It has been found in the GWRS process and is eliminated using hydrogen peroxide with extra ultra-violet treatment. NATIONAL BIOSOLIDS PARTNERSHIP (NBP) – An alliance of the NACWA and WEF, with advisory support from the EPA. NBP is committed to developing and advancing environmentally sound and sustainable biosolids management practices that go beyond regulatory compliance and promote public participation to enhance the credibility of local agency biosolids programs and improved communications that lead to public acceptance. PER- AND POLYFLUOROALKYL SUBSTANCES (PFAS) – A large group (over 6,000) of human-made compounds that are resistant to heat, water, and oil and used for a variety of applications including firefighting foam, stain and water-resistant clothing, cosmetics, and food packaging. Two PFAS compounds, perfluorooctanesulfonic acid (PFOS) and perfluorooctanoic acid (PFOA) have been the focus of increasing regulatory scrutiny in drinking water and may result in adverse health effects including developmental effects to fetuses during pregnancy, cancer, liver damage, immunosuppression, thyroid effects, and other effects. PERFLUOROOCTANOIC ACID (PFOA) – An ingredient for several industrial applications including carpeting, upholstery, apparel, floor wax, textiles, sealants, food packaging, and cookware (Teflon). PERFLUOROOCTANESULFONIC ACID (PFOS) – A key ingredient in Scotchgard, a fabric protector made by 3M, and used in numerous stain repellents. PLUME – A visible or measurable concentration of discharge from a stationary source or fixed facility. PUBLICLY OWNED TREATMENT WORKS (POTW) – A municipal wastewater treatment plant. SANTA ANA RIVER INTERCEPTOR (SARI) LINE – A regional brine line designed to convey 30 million gallons per day of non-reclaimable wastewater from the upper Santa Ana River basin to the ocean for disposal, after treatment. SANITARY SEWER – Separate sewer systems specifically for the carrying of domestic and industrial wastewater. SOUTH COAST AIR QUALITY MANAGEMENT DISTRICT (SCAQMD) – Regional regulatory agency that develops plans and regulations designed to achieve public health standards by reducing emissions from business and industry. SECONDARY TREATMENT – Biological wastewater treatment, particularly the activated sludge process, where bacteria and other microorganisms consume dissolved nutrients in wastewater. SLUDGE – Untreated solid material created by the treatment of wastewater. TOTAL SUSPENDED SOLIDS (TSS) – The amount of solids floating and in suspension in wastewater. ORANGE COUNTY SANITATION DISTRICT GLOSSARY OF TERMS TRICKLING FILTER – A biological secondary treatment process in which bacteria and other microorganisms, growing as slime on the surface of rocks or plastic media, consume nutrients in wastewater as it trickles over them. URBAN RUNOFF – Water from city streets and domestic properties that carry pollutants into the storm drains, rivers, lakes, and oceans. WASTEWATER – Any water that enters the sanitary sewer. WATERSHED – A land area from which water drains to a particular water body. OCSD’s service area is in the Santa Ana River Watershed.