CDIAC Municipal Debt Essentials Debt Administration Managing Debt Service

1. Presented by Tim Tung February 3, 2011 CDIAC Municipal Debt EssentialsDebt AdministrationManaging Debt Service

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

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

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

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

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

7. Perspectives on Debt Service Accounting Budget Cash Management Project Staff

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

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

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

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

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

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

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