February 2, 2011

Joe YewCity of Oakland

California Debt and Investment Advisory CommissionDebt 2: Accessing the Market

Debt Policy and Plan of Finance

Presented by:

Sarah HollenbeckPublic Financial Management, Inc.

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Effective Plans are Informed by Policy

Debt Management Policy

Capital Improvement

Plan

Debt Affordability

Analysis

Planof

Finance

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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

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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?

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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

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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

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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”

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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

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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

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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

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Developing a Plan of Finance

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Elements of a Plan of Finance

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

Revenue Realistic revenue forecasts Address the longevity, availability, reliability and flexibility of future revenue sources

Financial Policies and Targets Debt Policy

Coverage target Ratings target Tax/Fee target Reserve target

Legal Framework Authorization to levy taxes or fees

Authorization to issue debt Tax law governing the issuance of debt and use of proceeds

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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.

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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

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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

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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

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Optimizing Debt Issuance in Light of Plan of Finance

Debt Profile Evaluate impact on debt affordability of various terms or structures

Financial Risk ManagementAssess impact of new debt on the risk profile

Cash Evaluate options for available cash Equity contribution Reserves Defeasance

Market Analyze refunding or restructuring opportunities

Impact of the shape of the yield curve

Unique opportunities

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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