Financial Policies: Debt Policies Investment Policies Revenue and Expenditure Policies

October 3, 2013

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Debt Policies

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Reasons to Have a Debt Policy

1. To maintain acceptable levels of indebtedness

2. Debt policies transmit the message that the government is committed to sound financial management

3. To provide consistency and continuity to public policy development

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Debt Policies Aren’t Just for the Big Guys

“Debt” includes Interfund borrowingShort-term debtLeases

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Elements of a Debt Policy

1. Purpose of policy2. Conditions for debt issuance3. Restrictions on debt issuance4. Financial limitations5. Structuring practices6. Debt issuance process7. Debt management process8. Special situations

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Purpose of a Debt Policy

•To ensure that debt is used wisely and that future financial flexibility remains relatively unconstrained

•Scope of the debt policy – to which government(s) it applies (component units?)

•Describe oversight and delegation•Explain the relationship between the use

of debt and the government’s capital improvement plan

•Is there a debt advisory committee?

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Conditions for Debt Issuance

•Acceptable purposes▫Favorable market conditions▫Consistent with financial limits▫Bond ratings and investment grade▫Distribute costs and benefits appropriately

across generations▫Project characteristics that support issuing

debt▫Project useful life meets minimum standard▫Resources are adequate to cover debt

service

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Conditions for Debt Issuance

•Permissible debt instruments▫General obligation debt▫Lease financing▫QZABs, QSCBs, BABs, etc.▫Revenue, tax, and bond anticipation notes▫Lines of credit

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Restrictions on Debt Issuance

•Strongly consider prohibiting the use of long-term debt for operations

•Length of debt issuance•Size of debt issue•Statutory limitations (35% of assessed

property value per LSA-RS 39:562)•Self-imposed, more strict limitations?•Prohibitions on certain types of debt

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Financial Limitations

Amount spent on debt service•Budgetary impact

▫Annual debt service as a percent of general fund expenditures

•Community’s ability to support debt•Revenue debt limitations

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Standard & Poor’s Analysis of Debt Service as a Percentage of Expenditures

Low Below 8%

Moderate 8% - 15%

Elevated 15% - 20%

High Above 25%

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Standard and Poor’s Analysis of Coverage Ratios for Utilities

Strong Greater than 1.50

Good Between 1.26 and 1.50

Adequate Between 1.0 and 1.25

Insufficient Less than 1.0

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Structuring Practices

•Maturity guidelines•Debt service schedule•Debt service funds•Use of credit enhancements (insurance)•Use of redemption features•Use of capitalized interest

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Debit Issuance Process

•Approval of issuance•Determining the method of sale•Selection and use of professionals•Credit ratings•Intergovernmental coordination

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Debt Management Process

•Investment of bond proceeds•Compliance practices•Refunding bonds•Market and investor relations•Credit rating goals

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Special Situations

•Use of derivatives•Interfund borrowing•Variable rate debt•Short-term debt•Leases•Other forms of debt

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Investment Policies

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Elements of an Investment Policy1. Scope2. Objectives3. Pooling funds4. Standards of care5. Investment portfolio6. Safekeeping and custody7. Reporting

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Scope of an Investment Policy

•Identify the funds•Identify the organizations to which the

policy applies (component units?)

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Investment Policy Objectives

•Safety▫Credit risk▫Interest rate risk▫Liquidity risk

•Liquidity •Yield•Legality of investments

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Pooling Funds

•Provide the conditions under which pooling of funds is permissible

•State how allocation of investment earnings will be allocated to each fund▫Date (end of each month?)▫Based on (average daily cash balance,

balance at end of month, etc.)

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Standards of Care• Authority to invest• Investment committee • Conflicts of interest and ethics• Prudence

▫ Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable outcome to be derived

www.ethics.state.la.us

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Investment Portfolio

•Authorized investments (LSA-RS 33:2955)•Prohibited investments•Diversification•Maturities•Competitive bidding

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Safekeeping and Custody

•Eligible institutions•Investment advisors•Collateral•Safekeeping•Internal control

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Reporting

•Frequency and format•Performance targets

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Revenue Policies

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Elements of a Revenue Policy

1. Revenue goals2. Non-recurring and volatile revenues3. New revenues and changes to revenue4. Revenue estimates5. Earmarking6. User fees7. Property taxes8. Grants

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Revenue Goals

•Diversification and stabilization•Equity•Relation to economic development•Collections

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Non-recurring and Volatile Revenues

•Should non-recurring revenues be used to fund ongoing expenditures?

•How should high yields from volatile revenue sources be used?

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New Revenues and Changes to Revenues – Potential Features•Stability of tax source over its expected

life•Suitability to the program or purpose it’s

intended to fund•Fair distribution of revenue burden•Acceptability to the community•Impact on economic competitiveness•Cost of administering•Minimal effect on private economic

decisions

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Revenue Estimates

•Forecasting philosophy▫Aids in planning and consistency▫Strive for accuracy

•Multi-year forecasts▫Provides lead-time▫Can be challenging, depending on revenue

source•Revenue manual

▫Important characteristics ▫Historical background

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Earmarking

•Designating a particular revenue source for a specific use

•Political appeal•Consider minimizing earmarking

▫Describe current earmarks▫List how much of revenue is earmarked▫Provide rationale for earmarking

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User Fees

•Goals▫Ease of use and simplicity▫Maintain or increase usage ▫Acceptability and marketing of fee

structure▫Enforceability of payment

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User Fees

•Cost recovery levels – factors to consider when setting a target▫Similarity to a service in the private sector▫Correlation between amount paid and

benefit received▫Is goal to discourage use (alarm fees) or

encourage use (library, museum)?▫Is service regulatory?

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User Fees

•Review fees▫How often▫Who will perform the review▫To whom the review will be presented▫Emphasize flexibility and discretion▫Annual Consumer Price Index adjustments?▫Survey other governments

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Property Taxes

•Challenges▫Highly visible annual payment▫Difficulty to value properties fairly

•Goals▫Fund programs providing a general

benefit?▫Minimize tax rate increases?

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Grants

•Grant revenues don’t often fund the entire program for the entire period

•May require matching funds•Consider overhead costs

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Expenditure Policies

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Elements of an Expenditure Policy1. Funding operations2. Personnel compensation3. Funding long-term liabilities4. Efficiency5. Outsourcing

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Funding Operations

•Is the government committed to a level of expenditures sufficient to ensure the ongoing health, safety, and welfare of constituents?

•Can expenditures expand beyond the government’s ability to pay for them with current revenues?

•Does the government want to encourage certain types of expenditures, such as investments in labor-saving technologies?

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Personnel Compensation

•Maintain compensation packages that are sufficient to attract and retain qualified employees

•Ensure compensation packages are competitive with other public-sector employees

•Establish personnel budgets necessary to provide quality services

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Funding Long-term Liabilities

•Bond principal and interest payments•Compensated absences•Other post-employment benefits (OPEB)•Pension liabilities•Maintenance and replacement of capital

assets and infrastructure

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Efficiency

•Use resources efficiently

•Efficiency is defined as “effective operation as measured by a comparison of production with cost”

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Suggestions to Improve EfficiencyAnalyze systems and procedures to remove

unnecessary requirementsEvaluate new technologies and capital

investmentsDevelop the skills and abilities of staffDevelop methods of recognizing and rewarding

exceptional employee performanceEstablish a systematic, ongoing process for

periodic formal reviews of operationsMaintain the right balance between centralization

and decentralization of support services

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Outsourcing

•General philosophy of outsourcing•How employees will be treated•Criteria to evaluate outsourcing proposals

▫Competitive forces throughout the entire contract period

▫List the specific task to be contracted▫Replacing contractors when dissatisfied▫Ends rather than means▫Economics make sense

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Expenditure Policy ComponentsPolicy element Essential Important Discretionary

Funding operations X

Personnel compensation X

Asset maintenance and replacement

X

Pensions and OPEB X

Efficiency X

Outsourcing X

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Thank you!

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Contact Information

Diane B. Allison, CPA, CGMA, CGFODirector of Business Services

Ascension Parish School Boarddiane.allison@apsb.orgOffice: (225) 391-7073

Donaldsonville, LA