This page provides detailed guidance to local governments in Washington State develop and adopt debt management policies, including key questions to consider and sample policies.
It is part of MRSC’s Financial Policies Tool Kit, funded through a partnership with the State Auditor’s Office Center for Government Innovation.
Why Develop a Debt Management Policy?
Most local government entities consider issuing debt at some point. (See our page on Types of Municipal Debt.) The amount of debt your jurisdiction issues is an important factor in measuring financial well-being, and proper use and management of debt can yield significant fiscal advantages. But issuing debt also obligates your entity to debt service that is often 30 years or more, so debt can have a significant impact on your jurisdiction's financial condition for an extended period of time and limit the funding available for changing service priorities.
The purpose of a well written debt management policy is to articulate your jurisdiction’s goals with respects to debt, enhance your ability to make decisions on issuing or entering into debt obligations, exhibit a commitment to long-term financial planning that will ensure fiscal prudence and financial stability, and (if issuing debt on the open market) demonstrate to rating agencies and lenders that your entity is well managed and therefore more likely to meet its debt obligations.
Key Components of a Debt Management Policy
There are many components of a successful debt management policy. At a minimum, it should include:
- Scope and purpose
- Uses of debt
- Types of debt permitted
- Debt limitations
- Debt structure and repayment
- Debt issuance practices
In particular, there are several critical decisions to make to ensure accountability and help your jurisdiction achieve its financial goals, as discussed below.
Scope and Purpose
Debt policies typically start with a statement of purpose to explain the overall objective of adopting a debt management policy. As an example, Kirkland’s debt policy states:
The Debt Policy for the City of Kirkland (City) is established to help ensure that all debt is issued both prudently and cost effectively. The Debt Policy sets forth guidelines for the issuance and management of all financings of the City. Adherence to the policy is essential to ensure that the City maintains a sound debt position and protects the credit quality of its obligations while providing flexibility and preserving financial stability.
Uses of Debt
A successful debt management policy must consider when it is appropriate to use debt and for what purpose. Of equal importance is to clarify those circumstances in which your jurisdiction will not use debt.
Long-term debt is most frequently used to finance capital improvements and should never be used to support current operations. Your debt policy should consider the capital improvement plan (CIP) to demonstrate the jurisdiction’s commitment to long-term capital planning.
Types of Debt Permitted
Debt management policies should address the types of debt permitted (both short-term and long-term), what each type of debt should be used for, and when it is appropriate to use each form. Using the key consideration points above in “Uses of Debt,” expand the policy considerations to speak to the specific types of debt and borrowing that will be authorized by your entity.
The types of debt can be generally broken down into:
- Short Term Obligations are typically less than 1-3 years, depending on your jurisdiction’s policy decisions, and can be used for a variety of reasons. They are often used as a bridge for the immediate needs of a capital project.
- Assessment/LID Bonds are often used to finance capital improvements that benefit a specific group of property owners.
- Limited Tax General Obligation (LTGO) Bonds, also known as "councilmanic" or "non-voted" debt, are payable from the general fund revenues from current taxes being collected.
- Unlimited Tax General Obligation (UTGO) Bonds, also known as "voted debt," are payable from excess tax levies and subject to 60% voter approval.
- Revenue Debt is used to finance capital improvements and facilities for enterprise activities and repaid from service charges.
- Other Types of Debt include leases, intergovernmental loans, Local Option Capital Asset Lending (LOCAL), and interfund loans.
For more details, see our page on Types of Municipal Debt.
Debt Limitations
The use of debt is governed in part by state and federal laws. State law establishes legal debt limits on the type and amount of debt that can be used by local government, while federal law establishes rules about the tax status of government securities and the process for issuing and disclosing debt obligations.
It is important to understand the state limitations, as they will have a direct bearing on the types of debt that you will use, but federal regulations are much more complex and will require professional guidance from bond counsel and others experienced in this area (see the section below on Debt Issuance Practices).
While your jurisdiction’s maximum debt levels are established by state law, each jurisdiction will have to find its own comfort level and determine its ability to pay for debt service. Some jurisdictions may adopt ordinances or resolutions imposing stricter (lower) debt limits than state law.
Note that revenue debt is not subject to statutory limitations or voter approval, so the debt limits should clarify exactly the types of debt that are being limited.
Debt Structure and Repayment
Debt policies should also address debt structure and general repayment terms, including maximum repayment terms, debt service patterns (such as equal payments or equal principal amortization), and the use of variable or fixed-rate interest.
Debt Issuance Practices
Establishing clear and consistent debt issuance practices is critical to a successful bond issue. For medium to large jurisdictions that issue their own debt, your debt policy should address:
- Selection and use of professional service providers (bond counsel, financial advisor, underwriters)
- Criteria for selecting sale method (competitive vs. negotiated, private placement)
- Criteria for issuance of advance refunding and current refunding bonds
- Credit ratings (use, minimum, selection)
Small jurisdictions typically do not issue their own debt but will go through a more limited process typically required by the USDA Rural Development program. If this is the case in your jurisdiction, consider reducing this section of your debt management policy to accommodate this type of limited issuance.
Debt Policy Certification
The Washington Public Treasurers Association (WPTA) provides a useful Debt Policy Certification Program for members. A WPTA policy review committee will go over your debt policy to make sure it adequately addresses the core policy areas and, if so, certify the policy. Certification provides useful guidance to protect your jurisdiction, as well as reassuring your elected officials and members of the public.
WPTA strongly recommends certifying the policy before submitting it to your governing body for adoption. WPTA also recommends reviewing and updating your debt policy at least every four years.
The Association of Public Treasurers of the United States and Canada (APTUSC) also offers a higher-level debt policy certification program that might interest larger jurisdictions.
Examples of Debt Management Policies
Below are some examples of debt policies that may be useful, focusing particularly on small and mid-sized jurisdictions.
Debt Policy Template
City Debt Policies
County Debt Policies
Special Purpose District Debt Policies
Post Issuance Compliance Policies
Recommended Resources
Below are some useful resources from state agencies, the Government Finance Officers Association (GFOA), and other sources to help you develop a debt policy.
- Washington Public Treasurers Association Debt Policy Certification Program – Guidance for local governments developing debt policies, including policy guidance, debt policy template, and review process
- GFOA Best Practice: Debt Management Policy – Best practices on debt structuring, issuance, management, and use of derivatives
- WA Department of Commerce Bond Users Clearinghouse – Collects, analyzes, and publishes information on all bonds issued in the state and on local government outstanding general obligation debt
- Association of Public Treasurers of the U.S. and Canada Debt Policy Certification – National certification program, includes a Debt Policy Handbook that you can order by phone. Handbook includes chapters on formulating a policy, legal and regulatory requirements, needs assessment and funding alternatives, issuance of obligations, administration of obligations, and using pertinent websites.
- Governing Institute: Bond Issuance Guide for Small & Mid-Sized Municipalities (2017) – Useful handbook discusses how bond procurement works, best practices for bond issuance, municipal bond insurance, and regulatory outlook
- GFOA: An Elected Officials Guide: Debt Issuance (2005) – For-purchase publication provides introduction to the principles and practices of issuing debt including development of plans and debt policies before bonds are issued, the debt issue process, and outstanding debt management.
- GFOA: Financial Policies (2012) – For-purchase publication provides step-by-step approach to developing and implementing financial policies, with a chapter devoted to debt management.