Is it Time to Adopt a Debt Is it Time to Adopt a Debt Management Policy?Management Policy?

Presented for IASBO May 17, 2006Presented for IASBO May 17, 20062:00 PM – 3:00 PM 2:00 PM – 3:00 PM

Salon III (140) Skybox 4Salon III (140) Skybox 4

•David Holm, Asst. Supt, Indian Prairie CUSD No. 204

•Steve H. Larson, Independent Financial Advisor, Ehlers &

Associates•Sharon Gitles Uslan, Chevron,

Moderator

Presentation OverviewPresentation Overview

• Reasons to consider a debt management policy

• Items that can be included in a debt policy and background

• Examples• Indian Prairie CUSD No. 204 experience• GFOA recommended practices• Questions and Answers

Goals of the SessionGoals of the Session

• Provide you with the necessary information to develop a debt policy

• Provide a guide for you and your District when issuing debt

• Help you evaluate your current methods for debt issuance

Why is a Debt Management Policy a useful tool for school Why is a Debt Management Policy a useful tool for school districts?districts?

• Provides a guide for the Board and Administration, current and future

• Provides justification of debt practices to public

• Improves the quality of decisions• Shows a commitment to long term planning• It should help reduce borrowing costs• Provides positive signals to credit rating

agencies and the capital markets

Items to include in a Debt Management PolicyItems to include in a Debt Management Policy

• Purpose of the policy (guide for financing capital needs)

• Who is responsible for developing the capital improvement plan and financing recommendations (individual, committee)

• Review of Debt Policy and Capital Improvement Plan (at least annually)

• Debt Limitations (legal limits, public policy limits, short term debt)

Items to Include: Debt Structuring PracticesItems to Include: Debt Structuring Practices

• Maximum Term (20 years, useful life of asset), • Debt Service payments (level debt service,

level tax rate, increasing debt service tied to new construction projection, blending deferring principal and paying interest only, deferring payments (Capital Appreciation Bonds, higher rates .30% to .50%)

• Use of optional redemption or call option (10 yrs., 8 yrs, anytime, no call)

• Forced Premium (when to use it, if at all)• Fixed and variable rates of interest, • Credit enhancements, (ratings, bond

insurance, other)

Items to Include: Debt Issuance PracticesItems to Include: Debt Issuance Practices

• Criteria for Sale Method– Competitive– Negotiated (with or without financial

advisor)– Private Placement

• Criteria for Advance and Current Refunding Outstanding Bonds– Minimum savings criteria (examples: 3%

present value savings of refunded principal; current: anytime savings exceed cost to do it)

Items to Include: Debt Issuance Practices- Items to Include: Debt Issuance Practices- Selection of Professional Service ProvidersSelection of Professional Service Providers

Financial Advisor (independent and not)

Bond AttorneyLocal AttorneyUnderwriter (Bank, Investment

Firm)Rating Agency (S&P, Moody’s,

Fitch)Bond Insurer Paying Agent Escrow Agent (refunding)Verification Agent (refunding)

Items to Include: Debt Issuance Practices: Types of DebtItems to Include: Debt Issuance Practices: Types of Debt

• Unlimited Tax General Obligation Bonds (School Building, plus other G.O. bonds in non-Tax Cap districts)

• Limited Tax General Obligation Bonds (Working Cash, Life Safety, Funding) with Tax Capped Districts subject to a Debt Service Extension Base

• Debt Certificates (Limited Tax obligations usually payable from a revenue source other than a direct tax (unlimited and limited bonds).

• General Obligation Bonds (Alternate Revenue Source) Usually payable from a revenue source other than a direct tax but has a G.O. unlimited tax back-up.

• Short-Term Debt- Tax Anticipation Warrants and Notes

Items to Include: Debt Issuance Practices-Use of Items to Include: Debt Issuance Practices-Use of DerivativesDerivatives

• Specify How Derivatives Fit Within Overall Debt Management Program

• Conditions to use• Types to use• Identify approaches for managing and

measuring risk• Methods for procuring and selecting products

Items to Include: Debt Issuance Practices-Comparative Items to Include: Debt Issuance Practices-Comparative Pricing ServicesPricing Services

When negotiating interest rates, do you need to use some service, if not your financial advisor, to help determine and compare rates?

• Municipal Market Data (Thompson Financial)• Municipal Consensus• Bloomberg and the Bond Buyer for Actual

Sales Results• Investinginbonds.com (a web site of the Bond

Market Association to view bond activity of your district bonds in the secondary market, you need your CUSIP numbers to view)

Items to Include: Debt Issuance Practices-Use Items to Include: Debt Issuance Practices-Use of credit ratingsof credit ratings

• Do we get a rating?• One rating or two?• Minimum rating expectations? (A-, A3)• How do we select a rating agency? (Fitch,

Moody’s, Standard & Poor’s)

Items to Include: Debt Management PracticesItems to Include: Debt Management Practices

• Investment of Bond Proceeds• Continuing Disclosure Practices, Annual Filing

with Central Post Office • Arbitrage Rebate Monitoring and Filing• Market and Investor Relations Effort