Florida GFOA Formulating and Debt Management Policy

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Florida GFOAFormulating and Debt Management
Policy

• June 11, 2006

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Karl JacobDirectorStandard Poors

• Public Finance Ratings

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Formulating Debt Management Policies with Debt
Affordability Guidelines

• Role of Debt in Credit Analysis
• Key Debt Related Questions to be Asking
• Debt Policies/Affordability Context
• Components of a Good Capital Plan
• Follow-Up Questions

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Role of Debt Analysis in Credit Ratings

• General Obligation Bonds Analysis
• Key G.O. Ratings Factors
• Economy
• Finances
• Debt
• Management

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Debt Factors Are Key in the Rating Process

• Debt Burden (Past, Present, Future)
• Bond Retirement Schedule
• Debt Service as a Fixed Cost
• Contingent Liabilities

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Debt Factors Are Key in the Rating Process

• Debt Ratios
• Capital Needs
• Financing Options
• Legal Borrowing Limits
• Contingent Liabilities

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Debt Related Questions

• Do you have a multi-year CIP in place?
• How was it formulated?
• Is it a formal or informal CIP?
• Did the governing body adopt it?
• How often is it reviewed and modified?
• How many years does it cover?

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Debt Related Questions (cont)

• How are projects prioritized?
• Is the plan a wish list in the out years?
• Have funding sources been fully identified?
• How will the plan be funded?
• dedicated taxes
• property taxes
• state grants
• your own pay go sources
• bonding
• reserves

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Debt Related Questions (cont)

• What is the impact of the capital plan on the
  millage rate or on other revenue sources used to
  fund capital?
• How does the CIP integrate with your financial
  plan?
• Is your CIP/debt affordability balanced against
  general fund reserve levels?

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Debt Policies in the Context of Debt Affordability

• Establishing guidelines for future debt issuance
  and financial performance is a critical part of
  prudent debt management.
• The city cannot control the economic variables
  affecting debt ratios but it can control the
  amount of debt to be issued.
• The town shall endeavor to take all practical
  precautions to avoid any financial decision that
  it believes would negatively impact current
  credit ratings.

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A Few Good Debt Affordability Policies

• Articulate the balance between fiscal flexibility
  and infrastructure needs.
• Define parameters or methodology on funding of
  debt plan and its impact on financial position
  and debt burden.
• Set ranges (with ceilings and floors) on debt
  issuance.
• Measures projected debt ratios versus per group.
• Typical ratios include debt per capita, debt to
  market value, amortization over 10 years, debt to
  income, debt as a percentage of fixed costs.

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A Few Good Debt Affordability Policies (cont)

• Reviewed and endorsed by the governing body
  periodically.
• Meets new capital needs while maintaining
  existing infrastructure (I.e. avoiding a deferred
  maintenance problem).
• When borrowing for capital, seek to minimize debt
  interest costs.
• Articulate refunding savings targets when
  refinancing outstanding debt.
• Articulate how refunded debt savings will be
  used.
• Define what is best to fund with pay go versus
  capital borrowings.

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Debt Affordability

• What Measures/Guidelines/Ratios Do You Use to
  Guide Affordability?
• Common Guides
• Debt Per Capita
• Debt as a of Market or Assessed Valuation
• Debt Service as a of Operating Budget
• Debt Retirement

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Debt Affordability

• What Measures/Guidelines/Ratios Do You Use to
  Guide Affordability?
• Common Guides
• Debt Structure
• Impact on Bond Rating

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Debt Affordability

• The County will use an objective, analytical
  approach to determine the amount of debt to be
  considered for authorization and issuance. This
  process involves the comparison of generally
  accepted standards of affordability to the
  current County values.
• Measures include debt per capita, debt as a
  percentage of assessed valuation, debt as a
  percentage of the operating budget, 10 year
  payout and undesignated general fund balance.
• By establishing maximum debt ratios (ceilings and
  floors) and target debt ratios over a period of
  time, the County is demonstrating that there is a
  limit above which it will not issue additional
  debt in order to control its debt service burden.

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What About Derivatives/Variable Rate Debt?

• Does Your Debt Plan Allow For the Use of
  Derivatives?
• Are you using or contemplating using derivatives?
• If so do you have swap management policies that
  meld into your Debt Policies?
• Do you have variable rate exposure guidelines?
• Is your tolerance for risk expressed in the
  policies?

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Components of A Good Debt Plan

• If You Have Addressed Questions in This
  Presentation, Then You Have The Makings of a Good
  Debt Plan

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Questions

• Karl Jacob
• [phone]