Magazine article Government Finance Review

Circumscribing Debt Issuance with Written Policies. (Best Practices)

Magazine article Government Finance Review

Circumscribing Debt Issuance with Written Policies. (Best Practices)

Article excerpt

The City of Virginia Beach credits its adherence to written debt policies for the city's strong financial position and credit ratings, not to mention reduced debt service costs.

In February, the GFOA Executive Board approved a new recommended practice entitled "Debt Management Policy." This replaces two 1995 recommended practices concerning debt policies: "Analyzing Debt Capacity and Establishing Debt Limits" and "Development of a Debt Policy."

GFOA's Committee on Governmental Debt Management periodically reviews all existing recommended practices to ensure that they reflect the latest debt practices and thinking. As part of the review process, the committee also considers whether it would be beneficial to combine practices that were meant to be used together. "Analyzing Debt Capacity and Establishing Debt Limits," for example, included all the essential ingredients of an effective debt policy, which were then reemphasized in "Development of a Debt Policy." The committee determined that combining the two into one new recommended practice would present a more complete picture of an effective debt policy.

"Debt management policies are written guidelines and restrictions that affect the amount and type of debt issued by a state or local government, the issuance process, and the management of a debt portfolio," the new practice states. "A debt management policy improves the quality of decisions, provides justification for the structure of debt issuance, identifies policy goals, and demonstrates a commitment to long-term financial planning, including a multi-year capital plan. Adherence to a debt management policy signals to rating agencies and the capital markets that a government is well managed and should meet its obligations in a timely manner.

Managed properly, debt can be an effective tool for furthering important government objectives. Debt financing for large capital improvements represents a practical alternative to pay-as-you-go financing that matches streams of costs and benefits over the useful life of an asset and promotes intergenerational equity. However, the burden of repayment is one that should not be taken lightly. Debt issuance must be managed in such a way that governments can continue to provide necessary and desired public services and repay all outstanding capital obligations. A debt policy establishes parameters to ensure that the overall debt program is managed within available resources.

The updated practice reaffirms GFOA's recommendation that state and local governments adopt comprehensive written debt management policies, which should be reviewed at least annually and revised as necessary. The practice also outlines the elements of an effective debt policy. A debt policy should address types of debt, debt limits (legal, policy, and financial), use of derivatives, debt structuring practices, debt issuance practices, and debt management practices.

Since the early 1990s, the City of Virginia Beach, Virginia, has had written debt policies to guide its debt management program (see Exhibit 1). The rest of this article describes how and why the city developed its debt policies and how they have positively affected the management of the city.

GROWTH FUELS BORROWING

Virginia Beach is located in the southeastern portion of the Commonwealth of Virginia. It was incorporated on January 1, 1963, the result of the merger of the smaller City of Virginia Beach and Princess Anne County. The city has grown rapidly over its 40 years. It now has an estimated population of 428,400 and covers approximately 300 square miles. The conservative charter permits the city to issue $10 million of general obligation bonds per year without a referendum (plus the principal of any debt retired in the year). As the city grew, it adhered to the charter limits on debt issuance, even though the city's infrastructure needs -- including water and sewer--could not keep pace with the growth. …

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