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February 2, 2011

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.

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February 2, 2011

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  1. 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.

  2. Effective Plans are Informed by Policy Debt Management Policy Plan of Finance Debt Affordability Analysis Capital Improvement Plan

  3. Goals and Objectives of a Debt Policy • 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

  4. Approach to Debt Management • 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 • Review of Capital Plan should be done annually • Has O & M of project been taken into account?

  5. Standard & Poor’s Top Ten Practices • Established budget reserve • Regular economic and revenue reviews • Prioritized spending plans and established contingency plans • Formal capital improvement plan • Long-term planning • Debt affordability model • Pay-as-you-go financing • Multi-year financial plan • Effective management and information systems • Well-defined and coordinated economic development plan

  6. Fitch Ratings on Management Practices • Very Significant • Fund balance policy • Debt affordability policy • Significant • Pay-as-you-go capital financing • Multi-year forecasting • Quarterly reporting • Quick debt retirement • Influential • Contingency plans • Non-recurring revenue policy • Depreciation of fixed assets (GASB 34 Implementation) • 5 Year CIP integrating operating cost impacts • GFOA financial reporting award • GFOA budgeting award

  7. Rating Agency Guidance on Debt Capacity • Debt Capacity ratios are defined as annual debt service • payments as a percentage of General Fund and other revenues • Moody’s • General Rule: Debt burdens (measured as a % of full valuation) from 0- 3% is low; 3-4% is average; 5-7% is high, and above 7% is a red flag. • Standard & Poor’s • 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” • Fitch Ratings • 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”

  8. Have Governing Body Approve Debt Policy • By resolution, have governing body formally adopt debt management policy • Ensures governing body is assuming responsibility • Changes, amendments, modifications can be made annually

  9. Summary – Debt Policies • 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

  10. Plan of Finance • What is it? • A long-term planning tool to balance scarce resources among ongoing expenditures and capital needs • 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

  11. Developing a Plan of Finance Identify Funding Needs Plan of Finance StakeholderFeedback FinancialProjections Project Development and Prioritization 6

  12. Financial Policies and Targets • Projects • Capital improvement plan that identifies and prioritizes projects • Reliable cost estimates that incorporate future capital costs and O&M of the project to be financed • Debt Policy • Coverage target • Ratings target • Tax/Fee target • Reserve target • Legal Framework • Revenue • Realistic revenue forecasts • Address the longevity, availability, reliability and flexibility of future revenue sources • Authorization to levy taxes or fees • Authorization to issue debt • Tax law governing the issuance of debt and use of proceeds Elements of a Plan of Finance

  13. Determining the Optimal Funding Plan • A plan of finance will help evaluate the affordability of the financing strategy • Pay-as-you-Go, Debt, or a Combination • It helps determine the necessary action steps to meet funding needs • Budget actions, rate or fee setting, etc. Plan of Finance Pay-as-you-Go Debt Financing Action Steps

  14. Sample Plan of Finance Objectives • Use a Combination of Debt and Cash to Fund the Capital Improvement Program • Maintain Targeted Debt Service Coverage • Maintain/Improve Credit Ratings

  15. Bond Issuance Timing Considerations • Tax regulations provide exceptions to arbitrage rebate requirements including spending exceptions for: • 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

  16. Plan of Finance Must Be Flexible • Rate increases approved or not • New environmental/legislative mandates • New management/elected officials • Economic environment changes • Tax law changes • Credit rating downgrade/upgrade

  17. Debt Profile • Cash • Evaluate options for available cash • Equity contribution • Reserves • Defeasance • Evaluate impact on debt affordability of various terms or structures • Financial Risk Management • Market • Assess impact of new debt on the risk profile • Analyze refunding or restructuring opportunities • Impact of the shape of the yield curve • Unique opportunities Optimizing Debt Issuance in Light of Plan of Finance

  18. 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 • It is not meant to remain static, but should be revisited and be flexible • 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

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