Employing a Debt Management Policy: Practices at California Local Agencies

Government Finance Review, August 2014 | Go to article overview

Employing a Debt Management Policy: Practices at California Local Agencies


A structured analysis of the use of debt management policies in California found that cities, counties, and school districts that had issued debt generally did not have a policy.

Public agencies develop and apply debt management policies to ensure that debt is issued and managed prudently. This practice is advocated by the Government Finance Officers Association, which has published best practice guidelines for debt management policies. (1) These guidelines, along with other GFOA publications, recommend that a formal debt management policy, guiding debt issuance, should be a part of a public agency's debt administration. (2) The GFOA endorsed the use of a debt management policy to improve the quality of decisions, articulate policy goals, provide guidelines for the structure of debt issuance, and demonstrate a commitment to long-term capital and financial planning.

To assess the extent to which local public agencies in the State of California have adopted GFOA's recommendations, the California Debt and Investment Advisory Commission compared the debt management policies adopted by a sample of local agencies against the GFOA's best practice guidelines. Specifically, the study assessed the degree to which local agency debt management policies addressed debt limits, debt structuring, debt issuance, and debt management.

This study reveals that an unexpectedly low number of cities, counties, and school districts that issued debt between January 2001 and January 2012 have adopted debt management policies. Based on a valid sampling of issuers, 61 percent of county issuers, 49 percent of city issuers, and 23 percent of school district issuers have adopted policies.

Furthermore, the study finds (through a review of the contents of 84 individual debt management policies) that county issuers more consistently complied with the GFOA's best practice guidelines, while school district issuers were the least likely to follow the guidelines. The California Debt and Investment Advisory Commission realizes that the GFOA best practice guidelines do not universally apply to all types of issuers or all types of debt. But as a standard, these guidelines and the GFOA's supporting publications provide any public agency with a comprehensive and easy-to-use framework to develop a debt management policy. Public agencies that issue debt are more likely to protect the interests of the agency and the public if they give thought to the structure, use, and administration of a debt program in advance of entering the market.

BENEFITS OF A DEBT MANAGEMENT POLICY

A local agency's debt management policy can help its debt managers with making decisions and with support efforts to identify conflicts, inconsistencies, and gaps in a local agency's approach to project finance and debt management. A debt policy can also be instrumental in setting a proper balance between limits on the use of debt financing and providing sufficient flexibility to respond to unforeseen circumstances and opportunities. Potential benefits of a formal debt policy include:

* Supporting financial decisions that are transparent and consistent.

* Establishing standard operating procedures to guide daily financial activities.

* Providing performance measures and limits based on predetermined levels and benchmarks.

* Providing justification for decisions.

* Providing an interface between capital planning, long-term financing objectives, and daily operations.

* Focusing on the overall financial plan in contrast to individual issues.

* Proactively safeguarding public agencies from making unsuitable debt-related decisions.

* Providing consistency and instruction to new and transitioning staff.

* Establishing an effective management mechanism for post-issuance compliance.

Lacking a formal set of well-understood and well-communicated policies, issuers may run into problems in both the issuance and administration of debt. …

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