CDIAC Municipal Debt Essentials Debt Administration Managing Debt

CDIAC Municipal Debt Essentials Debt Administration Managing Debt Service Presented by Tim Tung February 3, 2011

Overview l What is Debt Service? l The (Not So) Basics of Paying Debt Service Ø How much do I owe? Ø How am I going to pay? l Perspectives on Paying Debt Service Ø Ø l Accounting Budget Cash Management Project Staff Practical Applications with Bond Documents PAGE 1

What is Debt Service? l Payment of principal and interest on debt obligations l More broadly, may also include all ancillary fees necessary to maintain the debt such as: Ø Trustee/Fiscal Agent Fees Ø Credit Enhancement Fees Ø Rating Agency Fees Ø Arbitrage Rebate Consultant Fees PAGE 2

The (Not So) Basics of Paying Debt Service l How much do I owe? l How am I going to pay? PAGE 3

How much do I owe? l Gross Debt Service Ø Internal Database/Schedules (Up to date) Ø Trustee Records (Up to date) Ø Bond Documents (As of Date of Issue) Ø Final Cash Flows (As of Date of Issue) l Net Debt Service = Gross Debt Service less Other Sources of Funds, which may include: Ø Capitalized Interest Ø Excess Reserve Funds Ø Interest Earnings Ø Other Account Balances PAGE 4

How am I going to pay? l Set rates and charges (if revenue credit), millage (if ad valorem tax), etc, as appropriate l Budget for Expenditure l Establish an Appropriation l Generate Sufficient Liquidity l Verify Debt Service Amounts l Transfer Funds to Trustee Agent PAGE 5

Perspectives on Debt Service l Accounting l Budget l Cash Management l Project Staff PAGE 6

Accounting Perspective l Role before the closing: Ø Review funds and accounts and establish them in the organization’s financial system Ø Review the flow of funds and establish procedures to ensure compliance with flow of funds Ø Require the trustee send a debt service invoice l Documentation at closing: Ø Indenture Ø Official Statement Ø Final Numbers Ø Staff reports related to the financing PAGE 7

Accounting Perspective l On-going Role: Ø Maintain up to date debt service schedules Ø Monitor the receipt of debt service invoices Ø Verify the accuracy of debt service invoices Ø Record the entries for payment of debt service Ø Review trustee account statements to: • Verify flow of funds and application of transferred funds • Record entries into the organization’s financial system PAGE 8

Budget Perspective l Budgeting the correct funds Ø Primary source of repayment Ø Other available funds (grants, etc. ) l Budgeting the correct amounts Ø Gross Debt Service Ø Net Debt Service l Establishing an Appropriation Ø Funds available by the correct date Ø With the correct appropriation type l Address Carryover Balances PAGE 9

Cash Management Perspective l Role before the closing: Ø Plan for the investment of proceeds in anticipation of the closing l On-going role: Ø Provide liquidity for principal and interest payments – debt service is a core component of any cash flow analysis Ø Transfer funds to Trustee on the correct dates in the correct amounts PAGE 10

Project Staff Perspective l Set rates and charges, millage, etc so that debt service can be paid and all required coverage ratios are met l Coordinate with staff on sources of funds for repayment of debt (i. e. general revenues, grant revenues, etc) l Notify appropriate staff when construction is completed and organization has beneficial use of the project PAGE 11

Practical Applications with Bond Documents l Can I pay off the debt early? l What can I do with debt service reserve funds? Is the reserve requirement adequately funded? l What happens if I don’t pay my debt service? PAGE 12

Practical Applications with Bond Documents l What funds and accounts are related to the financing and who holds them? l How should funds flow through accounts? PAGE 13