This page provides an overview of debt management policies for cities and counties in Washington State, along with some examples.
The use of debt is governed by state and federal laws. State law establishes legal limits on the type and amount of debt that can be used by local government. Federal law establishes rules about the tax status of government securities and the process for issuing and disclosing debt obligations. Local government fiscal policies provide additional guidelines for the appropriate use of debt.
Local debt management policies are fiscal policies adopted by local government to provide written guidelines for the appropriate use of debt. While state laws establish the overall debt limits for a jurisdiction, The amount of debt issued is an important factor in measuring financial performance and condition of local government. Proper use and management of borrowing can yield significant fiscal advantages.
Issues to Consider
What are the acceptable uses of short-term debt?
Short-term borrowing should not be used to cover ongoing operating deficits. Consideration of how to best manage temporary cash flow deficits may consider interfund loans, TANs, or a commitment to increasing fund balance to cover these temporary cash flow issues.
“Pay-as-you-go” versus “pay-as-you-use”?
There are differing philosophies but the discussion should be part of the debt management process.
What is the appropriate term of the bond or loan?
The period of indebtedness should be no longer than the life of the facility/infrastructure. It can always be less, but debt that exceeds the life expectancy of the capital project should be evaluated as part of the policy development process.
When should non-voted debt be used?
Two issues should be considered here. First, there is a limited amount of non-voted debt capacity available. Policy discussion may want to retain a portion for future uses or emergencies. Second, the revenues to pay debt service on this form of debt must come from the general fund. Non-voted debt does not have its own revenue source, therefore any shortfall in revenues in the general fund must come from other items such as police, fire, and parks. Debt service cannot be cut.
What are the operating costs associated with capital projects funded by debt?
Almost every project will have operating costs in addition to the capital costs. Before deciding to issue debt to build a new facility, the impact on the annual budget should be considered as part of the overall financing decision matrix.
How much debt can be safely issued?
Each local government entity will have to find its own comfort level by developing a measure of its ability to pay for debt service. It can be helpful to begin by comparing your city’s debt levels and debt burden with those of other cities. Debt ratios are often used to make these comparisons. Utilization of tools such as the State Auditor’s Office Local Government Performance Center Financial Intelligence Tool would assist in evaluating this question.
Items to Include in a Policy
- State limitations
- Local ordinance/resolution or covenant
Type of Debt Permitted
- General obligation
- Maximum term
- Debt service patterns (such as equal payments or equal principal amortization)
- Variable or fixed-rate
- Short-term use
Debt Issuance Practices
- 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)
- Incorporation of the capital improvements plannning (CIP) document to the extent that it ties the objectives of the CIP into the policies of debt management.