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February 2, 2011
Joe YewCity of Oakland
California Debt and Investment Advisory CommissionDebt 2: Accessing the Market
Debt Policy and Plan of Finance
Presented by:
Sarah HollenbeckPublic Financial Management, Inc.
2
Effective Plans are Informed by Policy
Debt Management Policy
Capital Improvement
Plan
Debt Affordability
Analysis
Planof
Finance
3
Goals and Objectives of a Debt Policy
Evaluate critical debt issuance options Promote sound financial management Provide accurate and timely information on financial
conditions Maintain appropriate capital assets for present and future
needs Protect and enhance credit rating Develops proper Internal Controls Promote cooperation and coordination with other
departments in the financing
4
Approach to Debt Management
Capital Plan Integration Should be multi-year capital plan for minimum of 5 years Qualified capital projects, description of sources of funds,
availability of revenues, timing of projects, financing plan, and debt service requirements
Review of Capital Plan should be done annually Has O & M of project been taken into account?
5
Standard & Poor’s Top Ten Practices
Established budget reserve
Regular economic and revenue reviews
Prioritized spending plans and established contingency plans
Formal capital improvement plan
Long-term planning
Debt affordability model Pay-as-you-go financing Multi-year financial plan Effective management
and information systems Well-defined and
coordinated economic development plan
6
Fitch Ratings on Management Practices
Very Significant Fund balance policy
Debt affordability policy
Significant Pay-as-you-go capital
financing Multi-year forecasting Quarterly reporting Quick debt retirement
Influential Contingency plans Non-recurring revenue policy Depreciation of fixed assets (GASB 34 Implementation) 5 Year CIP integrating operating cost impacts GFOA financial reporting award GFOA budgeting award
7
Rating Agency Guidance on Debt Capacity Debt Capacity ratios are defined as annual debt service
payments as a percentage of General Fund and other revenues
Moody’s General Rule: Debt burdens (measured as a % of full valuation) from 0- 3% is low; 3-4% is average; 5-7% is high, and above 7% is a red flag.
Standard & Poor’s February 4, 2000 Research Publication: “Top 10 Ways to Improve or Maintain A Municipal Credit Rating” June 27, 2006 Research Publication: “Public Finance Criteria: Financial Management Assessment”
Fitch Ratings June 10, 2004 Research Publication: “Local Government General Obligation Rating Guidelines” June 27, 2006: “The Bottom Line: Local Government Reserves and Polices that Shape Them”
8
Have Governing Body Approve Debt Policy
By resolution, have governing body formally adopt debt management policy
Ensures governing body is assuming responsibility
Changes, amendments, modifications can be made annually
9
Summary – Debt Policies
Policies Are Powerful Fundamental foundation for long-term fiscal health:
underlying basis for case-by-case decision-making Provides context for what you would “but for” Essential component of any contingency plan Articulates your values before they are under stress
10
Plan of Finance
What is it? A long-term planning tool to balance scarce
resources among ongoing expenditures and capital needs
What does it do? Identifies capital needs and available sources of
revenue to fund them Helps control revenue streams/expenditures and
develops a rate-setting/budgeting plan to meet funding objectives
Determines the feasibility of various funding options Helps develop strategies for minimizing borrowing costs
over time
11
Developing a Plan of Finance
12
Elements of a Plan of Finance
Projects Capital improvement plan that identifies and prioritizes projects
Reliable cost estimates that incorporate future capital costs and O&M of the project to be financed
Revenue Realistic revenue forecasts Address the longevity, availability, reliability and flexibility of future revenue sources
Financial Policies and Targets Debt Policy
Coverage target Ratings target Tax/Fee target Reserve target
Legal Framework Authorization to levy taxes or fees
Authorization to issue debt Tax law governing the issuance of debt and use of proceeds
13
Determining the Optimal Funding Plan
A plan of finance will help evaluate the affordability of the financing strategy
Pay-as-you-Go, Debt, or a Combination
It helps determine the necessary action steps to meet funding needs
Budget actions, rate or fee setting, etc.
14
Sample Plan of Finance Objectives
Use a Combination of Debt and Cash to Fund the Capital Improvement Program
Maintain Targeted Debt Service Coverage
Maintain/Improve Credit Ratings
15
Bond Issuance Timing Considerations
Tax regulations provide exceptions to arbitrage rebate requirements including spending exceptions for:
6-months
18-months
2-years
Larger, less frequent financings can reduce cost of issuance and the amount of staff resources dedicated to bond financing
16
Plan of Finance Must Be Flexible
Rate increases approved or not
New environmental/legislative mandates
New management/elected officials
Economic environment changes
Tax law changes
Credit rating downgrade/upgrade
17
Optimizing Debt Issuance in Light of Plan of Finance
Debt Profile Evaluate impact on debt affordability of various terms or structures
Financial Risk ManagementAssess impact of new debt on the risk profile
Cash Evaluate options for available cash Equity contribution Reserves Defeasance
Market Analyze refunding or restructuring opportunities
Impact of the shape of the yield curve
Unique opportunities
18
Summary – Plan of Finance
A Plan of Finance is a management tool that is used in conjunction with debt and other policy objectives to develop the optimal funding strategy to meet capital needs
It is not meant to remain static, but should be revisited and be flexible
It should allow for continuous feedback and should be responsive to the needs of the various stakeholders
It should be flexible, in order to respond to any unforeseen challenges and to capitalize on any unique market opportunities
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