Best Practices in Debt Policy

1
Best Practices in Debt Policy
Presented by
Francine L. Ramaglia, CPA Director of
Administrative Financial Services Village of
Wellington
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Purpose and Framework

• Establish parameters for issuing and managing
  debt
• Provide guidance to decision makers related to
  debt affordability standards
• Facilitate the actual financing process by
  establishing important policy decisions in
  advance
• Promote objectivity in the decision making
  process and
• Document the objectives to be achieved by staff,
  both before the issuance and after

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Credit Worthiness Objectives- Factors

• Economic factors include employment opportunities
  and trends, leading industries, diversity of
  taxpayer base, wealth and income indicators,
  future growth prospects and surrounding regional
  economy
• Financial factors include the capacity to raise
  revenue, expenditure mandates, stated fiscal
  goals and policies and historical performance
• Administrative and management factors include
  planning effort, clear goals and policies,
  adherence to goals and policies, relationship
  between elected and appointed officials
• Debt factors include current debt burden ratios,
  current debt structure, debt repayment schedule
  and future capital financing needs

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Credit Spread Comparisons
Source Vanguard November 8, 2007
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Moodys Medians
For the most recent information please contact
Moodys.com
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Capital Planning and Financing Systems

• Debt Policy is a sub set of the Capital
  Improvement Program
• Capital Improvement Program ensures planned
  financing conforms to policy targets regarding
• Magnitude and composition of outstanding debt
• Economic and fiscal resources
• Planning considers long term horizon, paying
  special attention to financing priorities.
  Funding of Capital Outlays, Competing Projects,
  Maintenance, Replacement and Renewal

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Conditions of Debt Issuance

• Purpose of Debt
• Acquisition/Construction of Capital Projects and
  Capital Assets
• Not permitted for operations
• Refunding Criteria
• Aggregate net present value saving is 3-5 of par
  or annual average savings a target number
  established by the entity

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Types of Debt Pledges

• General Obligation Bonds (voter approval)
• Revenue Bonds (No voter approval)
• Utility Revenue Bonds
• Special Revenue Bonds
• Special Assessment Bonds
• Covenant to Budget and Appropriate

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Types of Debt Instruments

• Fixed Rate Bonds
• Variable Rate Notes
• Lines or Letters of Credit

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Affordability and Capacity Targets

• General Government Debt
• Debt per capita
• Debt as a percentage of taxable value
• Debt service payments as a percentage of current
  revenues and expenditures
• The level of overlapping net debt of all taxing
  jurisdictions
• Revenue Bonds
• Self supporting
• Related rates will be increased to attain
  necessary revenues

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Sample Targets and Ranges
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Method of Issuance and Sale

• Negotiated Bonds
• Competitive Bonds (G.O. Bonds)
• Bond Pools
• Private placement (including Banks)

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The Financing Team - Consultants and Service
Providers

• Bond Counsel
• Underwriters Counsel
• Financial Advisor
• Trustee and Paying Agent
• Underwriters
• Other Consultants

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Credit Enhancements and Derivatives

• Risk and Benefit analysis to be performed
• Cost effectiveness
• Expected impact on long-term financial operations
• Impact on Credit Rating

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Financing Proposals

• All financing proposals (regardless of debt
  instrument, method or pledge) should always come
  through the Finance Department to be evaluated,
  coordinated and recommended/not recommended to
  the Council

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Post Issuance

• Maintenance of Bond Accounts
• Investment of Bond Proceeds
• Continuing Disclosure Requirements
• Policy Compliance
• CAFR
• Debt Affordability
• Capacity Targets

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• Sample Policy

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Key Control Points of Sample Debt Management
Policy

• If during the course of a transaction an
  exception requires immediate attention, the
  Director of Administrative and Financial Services
  may proceed with the Village Managers
  acknowledgement of the exception
• The Village shall fund the General Governmental
  segment of the CIP program including debt service
  at the level equivalent to 1 mil in property
  taxes per year

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Key Control Points of Sample Debt Management
Policy

• If the Village issues G.O. debt, the ad valorem
  millage does not count towards the 1 mil
  commitment. Projects that cost less than 1
  million will not be funded from borrowings unless
  as a part of a group of projects
• Consistent with the philosophy of keeping the
  capital facilities and infrastructure systems in
  good repair and to maximize the capital stocks
  useful life, the Village should set aside
  sufficient revenue form operations to fund
  ongoing normal maintenance needs and to provide
  reserves for periodic replacement and renewal

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Key Control Points of Sample Debt Management
Policy

• The issuance of debt to fund operating deficits
  or operations is not permitted
• The final maturity of the debt issued shall not
  be longer than the estimated useful life of the
  capital asset constructed or acquired and shall
  be less than 20 years

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Key Control Points of Sample Debt Management
Policy

• The Village may issue advance or current
  refunding bonds when advantageous, legally
  permissible, prudent, and when aggregate net
  present value saving, expressed as a percentage
  of the par amount for the refunding bonds, within
  a target range of 3-5 or when the average annual
  savings are greater than 10,000 per year,
  refundings are also done for additional reasons
  including the restructuring of debt and to
  provide for undated and/or less restrictive bond
  covenants

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Key Control Points of Sample Debt Management
Policy

• If the securities are to be purchased on the open
  market, the Village will have procedures in place
  that will allow an open competition form at least
  three vendors
• New revenues sources should not be pledged
  towards a bond issue until there is a historical
  trend that establishes the credit worthiness of
  the revenue stream. If there is a new revenue
  item for the State that is guaranteed, the
  Village may only pledge up to 50 of the annual
  revenue received for debt service

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Key Control Points of Sample Debt Management
Policy

• The Village will increase any related rate in
  order to attain the revenue necessary to achieve
  the required coverage ratio
• All General Obligation Bonds (G.O. Bonds) issued
  by the Village should be sold on a competitive
  basis

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Key Control Points of Sample Debt Management
Policy

• The Director of Administrative and Financial
  Services shall be responsible for analyzing the
  proposal, responding to the proposal and
  recommending to the Village manager and/or the
  Council if in the opinion of the Director of
  Administrative and Financial Services the
  proposed financing agreement is beneficial to the
  Village and complies with the Villages long term
  financial planning

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Key Control Points of Sample Debt Management
Policy

• The Villages Comprehensive Financial Report
  (CAFR) will be the primary vehicle for compliance
  with the continuing disclosure requirements. The
  CAFR may be supplemented with additional
  documentation as required. The Village will
  follow a policy of full disclosure in its CAFR
  and bond prospectuses
• Each year included in the CAFR, the Village will
  report its compliance with the target and goals
  of this Debt Management Policy

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Key Control Points of Sample Debt Management
Policy

• The Village shall seek bond ratings and/or
  upgrades for a variety of reasons. Some examples
  are
• They are beginning a new Capital Improvement
  initiative
• They are issuing a new type of debt not issued
  before
• They have a complex financing to present
• They have not sought a ratings review for some
  time
• They have an improved financial profile which
  could result in upgrade of an outstanding bond
  issue

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Decisions to be Made Within Framework, But
Outside Policy

• Results of financing team research and evaluation
  examples
• Type of debt to be selected for a particular
  project
• Economics/Mechanics of specific debt transactions
  (the deal)
• Timing
• Players

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Sample Compliance Reporting in CAFR
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• Resources

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Debt Policy Resource Disk

• Debt Policy Documents
• Cape Coral, Florida
• Coral Springs, Florida
• Miami, Florida
• Orlando, Florida (1994 2004)
• Tamarac, Florida
• Village of Wellington, Florida
• City of Portland, Oregon
• City of Champaign, Illinois
• Clark County, Nevada
• DC Swap Policy
• Auburn, Washington
• Fort Collins, Colorado
• Howard County, Maryland
• Lakewood County, Colorado
• Memphis, Tennessee
• School Debt Policy, Mackinac, Michigan
• Washington State
• City of Lubbock, Texas

• Supplemental Materials
• Fitch 12 habits
• Government Finance Review Elements of Debt Policy
• Village of Wellington Analysis of Outstanding
  Debt
• Village of Wellington Debt Capacity Analysis
• Collection of Debt Policies
• Moody 2005 Local Government National Medians
• Top SP 10 Ways to Improve or Maintain a
  Municipal Credit Rating

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Other Resources to Consider

• Recommended Practices
• GFOA
• Fitch
• GFOA Small Government Series
• GFOA Elected Officials Guides
• Useful Websites
• Government Finance Officers Association (GFOA)
  www.gfoa.org
• Florida Government Finance Officers Association
  (FGFOA) www.fgfoa.org
• National League of Cities (NLC)www.nlc.org
• Florida League of Cities (FLOC)www.flcities.com
• Florida Auditor General (AG)www.state.fl.us/audge
  n

• Legislative Committee on Intergovernmental
  Relations (LCIR)www.fcn.state.fl.us/lcir
• International City/County Management Association
  (ICMA)www.icma.org
• Florida Institute of Government
  (FIOG)www.fau.edu/fiog
• National Association of Towns and Townships
  (NATAT)www.natat.org
• National Center for Small Communities (
  NCSC)www.natat.org/ncsc

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Notes
33

• Definitions

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Types of Local Government Bonds

• Zero Coupon Zeros Capital Appreciation Bonds
  Cabs
• Sold below face value
• Interest payment on zero bonds accumulates and
  paid at maturity
• Interest component is held by issuer and
  compounded at a stated rate - paid at maturity
• Variable Rate Demand Bonds
• Interest rate is reset periodically according to
  a specified index
• Bondholder is able to require the purchase of the
  bonds by issuer
• Refunding Bonds
• Proceeds are used to retire the outstanding debt
  of a prior bond issue

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Types of Local Government Bonds (Continued)

• Commercial Paper
• Short-term debt
• At maturity, the debt can be paid off or rolled
  over into a new commercial paper issue at the
  prevailing market interest rate
• Foreign-denomination Bonds
• Also known as foreign-currency bonds
• Bonds issued in a currency other than U.S. Dollars

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Types of Local Government Bonds (Continued)

• Mini-bonds
• Small denomination bonds of 1,000, 500 or 100
  face value
• Encourages small investors
• Debt Derivatives
• Hybrid financial instruments whose value is
  derived from or based upon the value of another
  underlying security
• Caps, floors collars
• Inverse floaters
• Forward purchase contracts
• Interest rate swaps
• Bond banks

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Types of Local Government Bonds (Continued)

• Debt Derivatives continued Caps, Floors
  Collars
• Associated with variable rate debt
• Issuers can maintain interest rate payments on
  variable rate bonds within set boundaries
• Caps - a contract in which a counterparty, in
  exchange for a one-time premium, agrees to pay
  the bond issuer if an interest rate index rises
  above a certain percentage rate, known as the cap
  or strike rate. Also called a ceiling
• Floors - an agreement in which the bond issuer
  receives an up front fee from a counterparty in
  exchange for making payments when the interest
  rate index falls below the floor or strike level
• Collars - the simultaneous purchase of a cap and
  sale of a floor by the issuer in which it trades
  any benefits from a potential fall in the
  interest rate index for protection against an
  excessive rise. The issuer defines a specific
  range for its interest rate payments

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Types of Local Government Bonds (Continued)

• Debt Derivatives - continued
• Inverse floaters
• Breaks a fixed rate bond into two floating rate
  issues
• Floater portion pays a coupon that rises with
  interest rates
• Inverse floater portion consists of the remaining
  fixed rate bond and moves against the direction
  of interest rates
• Forward purchase contracts
• An agreement by an investor to purchase bonds
  from the issuer on a specific, future date at a
  specified date, at a specified rate of interest

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Types of Local Government Bonds (Continued)

• Debt Derivatives - continued
• Interest rate swaps
• Contract that allow a debt issuer to swap the
  interest rate it currently pays on an outstanding
  debt issue
• Issuer enters into a floating-to-fixed swap,
  whereby the issuer will now pay a fixed interest
  rate
• Bond banks
• Financial mechanisms sponsored by an entity that
  are designed to allow smaller, local governments
  lower costs and greater financial flexibility
• Typically, the sponsoring entity will issue bonds
  and use the proceeds to purchase the debt of
  local governments that want to participate in the
  bond bank
• Often allows local governments to obtain lower
  interest costs and lower debt issuance costs

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Notes
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• Questions?

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Contact Information

• Francine L. Ramaglia, CPA
• Director of Administrative Financial Services
  for the Village of Wellington
• 14000 Greenbriar Boulevard
• Wellington, FL 33414
• 561-791-4000 Phone
• framaglia_at_ci.wellington.fl.us

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Notes