California Debt and Investment Advisory Commission Debt 2
California Debt and Investment Advisory Commission Debt 2: Accessing the Market Debt Policy and Plan of Finance February 2, 2011 Presented by: Joe Yew City of Oakland Sarah Hollenbeck Public Financial Management, Inc.
Effective Plans are Informed by Policy Debt Management Policy Debt Affordability Analysis Plan of Finance Capital Improvement Plan 2
Goals and Objectives of a Debt Policy n n n n 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 3
Approach to Debt Management n 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 n n Review of Capital Plan should be done annually Has O & M of project been taken into account? 4
Standard & Poor’s Top Ten Practices n n n Established budget reserve Regular economic and revenue reviews Prioritized spending plans and established contingency plans Formal capital improvement plan Long-term planning n n n Debt affordability model Pay-as-you-go financing Multi-year financial plan Effective management and information systems Well-defined and coordinated economic development plan 5
Fitch Ratings on Management Practices n Very Significant ¡ Fund balance policy ¡ Debt n affordability policy ¡ Pay-as-you-go capital financing ¡ Multi-year ¡ Quick Influential ¡ Contingency plans ¡ Non-recurring revenue policy ¡ Depreciation Significant ¡ Quarterly n forecasting reporting debt retirement of fixed assets (GASB 34 Implementation) ¡ 5 Year CIP integrating operating cost impacts ¡ GFOA financial reporting award ¡ GFOA budgeting award 6
Rating Agency Guidance on Debt Capacity ratios are defined as annual debt service payments as a percentage of General Fund and other revenues n Moody’s ¡ General Rule: 3% is Debt burdens (measured as a % of full valuation) from 0 low; 3 -4% is average; 5 -7% is high, and above 7% is a red flag. n Standard & Poor’s n Fitch Ratings ¡ 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” ¡ 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” 7
Have Governing Body Approve Debt Policy n n n By resolution, have governing body formally adopt debt management policy Ensures governing body is assuming responsibility Changes, amendments, modifications can be made annually 8
Summary – Debt Policies n 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 9
Plan of Finance n What is it? ¡A long-term planning tool to balance scarce resources among ongoing expenditures and capital needs n 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 10
Developing a Plan of Finance Identify Funding Needs Stakeholder Feedback Plan of Finance Financial Projections Project Development and Prioritization 11
Elements of a Plan of Finance n Projects Financial Policies and ¡Capital improvement plan that ¡Debt Policy Targets n identifies and prioritizes projects ¡Coverage ¡Ratings ¡Reliable cost estimates that incorporate future capital costs and O&M of the project to be financed n Revenue ¡Realistic ¡Address n revenue forecasts the longevity, availability, reliability and flexibility of future revenue sources target ¡Tax/Fee target ¡Reserve target Legal Framework ¡Authorization to levy taxes or ¡Authorization to issue debt fees ¡Tax law governing the issuance of debt and use of proceeds 12
Determining the Optimal Funding Plan A plan of finance will help evaluate the affordability of the financing strategy n Pay-as-you-Go, Debt, or a Combination Plan of Finance n It helps determine the necessary action steps to meet funding needs Pay-as-you -Go Debt Financing n Action Steps Budget actions, rate or fee setting, etc. n 13
Sample Plan of Finance Objectives Use a Combination of Debt and Cash to Fund the Capital Improvement Program n n Maintain Targeted Debt Service Coverage n Maintain/Improve Credit Ratings 14
Bond Issuance Timing Considerations Tax regulations provide exceptions to arbitrage rebate requirements including spending exceptions for: n ¡ 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 n 15
Plan of Finance Must Be Flexible n Rate increases approved or not n New environmental/legislative mandates n New management/elected officials n Economic environment changes n Tax law changes n Credit rating downgrade/upgrade 16
Optimizing Debt Issuance in Light of Plan of Finance n Debt Profile n ¡Evaluate options for available cash ¡Evaluate impact on debt affordability of various terms or structures Financial Risk Management ¡Assess impact of new ¡Equity contribution ¡Reserves n debt on the risk profile Cash ¡Defeasance n Market ¡Analyze refunding or restructuring opportunities ¡Impact of the shape of the yield curve ¡Unique opportunities 17
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 n It is not meant to remain static, but should be revisited and be flexible n § 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 18
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