Debt Management and Fund Balance Policies - PowerPoint Presentation

Slide1

Debt Management andFund Balance Policies

Presented by

Gregory S. Allison, CPA

Teaching Professor

UNC School of GovernmentSlide2

Policy PracticesTypical recommended policies

Cash management

Debt

management –TODAY’S FOCUS

Audit procurement

Fund

balance – TODAY’S FOCUS

Capital plans/capital improvements

Policies should be approved by the governing board

GFOA has published

Best Practices

on many policy

issues

NC

FinanceConnect

is building a resource library as wellSlide3

Debt Management PoliciesGFOA Best Practice entitled

“Debt Management Policy”

Addresses 5 main areas of a debt policy

Debt limits

Debt structuring practices

Debt issuance practices

Debt management practices

Use of derivativesSlide4

Debt LimitsLegal restrictionsIn NC, that is established in G.S. 159-55 and is known as the

net debt limitation

The limitation applies to general obligation (GO) and installment financing borrowings

Limits the net debt of a unit to 8 percent of the appraised value of the property subject to taxation

Basic formula takes the

gross

GO and installment financing debt and generally deducts the debt that is repaid from sources other than the property

tax

As a general rule, it is a non-issue (rarely exceeds 2% for an unit in NC)Slide5

Debt Limits (cont.)Net debt limit calculation

Gross debt

Outstanding GO debt

Proposed financings and GO bonds

planned

but not yet authorized

Unissued GO bonds that have been authorized

Outstanding installment financingsSlide6

Debt Limits (cont.)Net debt limit calculation (cont.)

Minus:

Funding/refunding bonds authorized but not issued or

adopted (gross debt being refunded is already in gross amount);

Moneys set aside in debt service fund or elsewhere to retire outstanding bonds (not including utility debt);

Utility debt (enterprise fund debt – water, gas, electricity, some sewer);

Certain uncollected special assessment debtSlide7

Debt Limits (cont.)Net debt limit calculation (cont.)

Resulting Net Debt

divided by

Total Assessed Valuation

=

Percentage of Net DebtSlide8

Debt Limits (cont.)Policy may also addressPurposes for which debt may be issued

Types of debt issued (obviously constrained by what is legally allowed)

Relationship with a capital improvement program

Relationship with a capital reserve fundSlide9

Debt Limits (cont.)Restrictions that are in place or could be triggeredTargets for general obligation bonds

Debt per capita

Debt to personal income

Debt to taxable property

Debt service as % of general fund revenues or expenditures

Revenue-backed debt limitations

Other types of debt

Conduit

Short-term

Variable rateSlide10

Debt Structuring PracticesGuidelines for each type

of bond

Maximum terms

Average maturity goals

Debt service pattern

Variable vs. fixed rate debt

In NC, much of this is determined in conjunction with the staff of the Local Government Commission (LGC)Slide11

Debt Issuance PracticesSelection/use of professional servicesIn NC, primarily provided by the staff of the LGC

Criteria for method of sale

Comparative bond pricing

Timing

Criteria for evaluation propriety of

refundings

Professional assist in such valuations

Credit rating practices/needsSlide12

Debt Management PracticesPolicy should address, as applicable, on-going administrative activities

Investment practices of bond proceeds

Primary and secondary market disclosure practices

Arbitrage monitoring and filing

Federal and state compliance requirements

Investor relationsSlide13

Use of Derivatives

Not Going ThereSlide14

Debt Policy SummaryBest resource is to share/learn from other NC policies;

LGC is an active partner in most debt issuance activities (unlike other states)

Policy should be consistent with how debt is issued and managed in NC

Critical for governing board to review regularly and revise as might be necessarySlide15

Fund Balance PoliciesGFOA Best Practice entitled “Fund Balance Guidelines for the General Fund”

Recognizes that GAAP and budgetary fund balance may be different

In NC, that is not the case

While focus is on the general fund, adequacy in other funds should not be ignoredSlide16

Specific Fund Balance Policy RecommendationsAppropriate levels and target percentages

Use and replenishment conditions

Unrestricted fund balance exceeding policy requirementsSlide17

Appropriate Levels of Fund BalanceFocus on the level of unrestricted fund balance in the general fund

Policy should be tailored to the unique circumstances of any particular government (e.g., proneness to natural disasters, statutory legal limitation/restrictions, vulnerability of revenue sources)

GFOA recommends unrestricted be no less than 2 months worth of regular general fund revenue

or

expendituresSlide18

Appropriate Levels (cont.)Factors to consider when determining appropriate level of unrestricted fund balance

Predictability of revenues/volatility of expenditures

Exposure to unexpected outlays (e.g., disasters)

Other funds’ potential reliance on general fund resources

Relationship to bond ratings

Relationship to commitments/assignments

How much of unrestricted was dedicated to commitments/assignments? Slide19

Use and ReplenishmentPolicy should specifically address appropriate uses of fund balance

Capital needs

Emergencies

Contingencies

Identify the level at which replenishment of fund balance needs to be plannedSlide20

Use and Replenishment (cont.)Replenishment plans

Recommended that replenishment be planned over a one to three year timeframe

Factors that may affect timing of replenishment

Recovery from disasters/unexpected events

Politics

Long-term forecasts

Economic conditionsSlide21

Uses and Replenishment (cont.)Replenishment plans (cont.)

Identify

sources of replenishment

Nonrecurring revenues

Budget surpluses

Excess resources in other funds

Year-end surplusesSlide22

Excessive Unrestricted Fund BalanceWhen excesses routinely occur, evaluate whether certain trends need to be addressed

Considerations

Should policy modifications occur?

How should excess funds potentially be used?

Is the excess expected to continue?Slide23

NC Considerations Stabilization by state statute calculation

Certain restricted resources that are still considered available for use by LGC calculations

Powell Bill

Grants

Stabilization for other purposes vs. minimum fund balance policies (Z.54.23)

True stabilization can only be used for specified purposes under certain circumstances

Fund balance policies typically just establish a target, not stipulations