Ideas & Insights

Delivering Value and Security via a Principled Debt Management Policy

Delivering Value and Security via a Principled Debt Management Policy

Best Practices for Government Agencies Issuing Debt under SB 1029

By: Richard Green, CPA, Partner and Industry Leader, State and Local Government

California’s public government agencies have long relied on the issuing of bonds, or other debt, as a reliable method for generating funds for public projects. Motivated by growing concern that reporting requirements for managing and spending debt issuances were insufficient, leaving opportunities for fraud or mismanagement, State Treasurer John Chiang sponsored SB 1029, which was signed into law in September, 2016. SB 1029, affecting all debt issued following January 1, 2017, requires greater transparency from all California public agencies and presents a series of requirements that agencies must meet before issuing bonds or other debt. According to the bill’s author:

Taxpayers deserve to have enough information to determine, with confidence, that public officials are being good stewards of public funds. Investors will benefit from having more knowledge about the types of internal controls that governments have in place to ensure that debt proceeds are used as promised.

The first step for any debt issuing agency seeking to meet the new requirements will be to adopt a comprehensive Debt Management Policy that meets the requirements set forth by SB 1029. While the law requires more steps before an agency can issue debt, the resulting oversight and transparency reflect sound public policy and may have a positive impact on fiscal outcomes and the marketability of the agency’s direct debt.

SB 1029 in Brief

SB 1029 requires all public agencies planning to issue debt – via bonds, notes, certificates and other forms – to meet several stages of qualification before issuing said debt. These requirements already apply to certain forms of debt, including Mello-Roos district bonds and school districts’ general obligation bonds, and SB 1029 represents an expansion of these requirements.

Three of the important requirements affecting government agencies include:

  1. Before issuing debt, all agencies must adopt a comprehensive Debt Management Policy that follows recommendations set forth by the Government Finance Officers Association (GFOA), if they have not already.
  2. Agencies must file a Debt Certification with the California Debt and Investment Advisory Commission (CDIAC) at least 30 days prior to the sale of any debt. The CDIAC has developed a web-based portal to file the certification.
  3. Public agencies must release an annual report for any debt sold after January 1, 2017. The report is due to the CDIAC within seven months of the end of the reporting period and will provide information on authorized or outstanding debt and the use of proceeds. The CDIAC has developed a standardized reporting form that can be submitted through the web-based portal.
Best Practices for Establishing a Debt Management Policy

An effective Debt Management Policy will establish firm guidelines that will provide internal and external checks for the issuance process, management of the debt portfolio, and observance of various laws and regulations. A Debt Management Policy should be written with specific attention to the needs of the organization and available financing options and it must be vetted, approved and enacted by the issuer’s governing body to provide oversight and credibility regarding debt financing.

An effective Debt Management Policy will:

  • Provide a clear articulation of goals;
  • Provide additional accountability, for the agency and borrowers;
  • Establish clear benchmarks for quality and success;
  • Improve the decision-making process;
  • Provide clearly articulated policy goals;
  • Ensure guidelines for the structure of debt issuance;
  • Demonstrate a commitment to long-term financial goals, and
  • Signal to rating agencies and the capital markets that the debt issuance is well-managed.

Specifically, SB 1029 requires that agencies adopt a Debt Management Policy that governs:

  • Purposes for which the debt proceeds may be used;
  • Types of debt that may be issued;
  • Relation of the debt to the issuer’s capital improvement program or budget;
  • Issuer policy related to planning goals and objectives; and,
  • Internal control procedures that the issuer has implemented, or will implement, to ensure that the proceeds will be directed to the intended use.

A Debt Management Policy should provide clear guidelines in the following areas: Debt Limits, Debt Structuring Practices, Debt Issuance Practices, Debt Management Practices and Use of Derivatives.

Defining Practical, Attainable Debt Limits

Government agencies without an established process for establishing debt limits puts the institution at risk of over- or under-reaching fund-raising goals, and thereby damaging the institution’s credit rating and limiting future opportunities for debt issuance. The debt limit will be determined by balancing factors within Legal Restrictions, Public Policies or Financial Restrictions.

Legal Restrictions – A Debt Management Policy must first, and foremost, conform to existing directives via California state laws; local charters, by-laws, resolutions and ordinances; and bond referenda approved by voters.

Public Policies –The agency must establish internal standards that will govern: how debt proceeds may be used; types of debt that may be issued; integration with the agency’s Capital Improvement Program; and policy goals related to economic development, including use of tax increment financing and public-private partnerships.

Financial Restrictions – Appropriate debt limits can have a positive impact on bond ratings, particularly if the agency demonstrates adherence to the Debt Management Policy. Different financial limits should be applied to different types of debt. Examples include:

  • Direct Debts are subject to legal requirements and may be measured by the following ratios: debt per capita, debt to personal income, debt to taxable property value, and debt service payments as a percentage of general fund revenues or expenditures.
  • Revenue Debt levels are limited by debt service coverage ratios, additional bond provisions contained in bond covenants, and potential credit rating impacts.
  • Conduit Debt limitations may reflect the right of the issuing government to approve the borrower’s creditworthiness, including a minimum credit rating, and the purpose of the borrowing issue.
  • Short-Term Debt Issuance should describe the specific purposes under which debt can be used, as well as limitations in terms or size of borrowing.
  • Variable Rate Debt should include information about when using non-fixed rate debt is acceptable due to the term of the project, market conditions, or debt portfolio structuring purposes.
Effective Debt Structuring Practices

A successful Debt Management Policy will include specific guidelines for the debt structuring practices of each type of bond, including:

  • Maximum term (stated in absolute terms or based on the useful life of the asset(s)),
  • Average maturity,
  • Debt service pattern,
  • Use of optional redemption features,
  • Guidelines for the use of variable or fixed-rate debt, credit enhancements, derivatives, and short-term debt, and
  • Other structuring practices, such as capitalizing interest during the construction of the project and deferral.
Efficient Debt Issuance Practices

The Debt Management Policy should provide guidance regarding the issuance process, which may differ for each type of debt. These practices include:

  • Selection and use of professional service providers,
  • Criteria for determining the sale method (competitive, negotiated, private placement) and investment of proceeds,
  • Use of comparative bond pricing services or market indices as a benchmark in negotiated transactions,
  • Criteria for issuance of advance refunding and current refunding bonds, and
  • Use of credit ratings, minimum bond ratings, determination of the number of ratings, and selection of rating services.
Implementing Debt Management Practices

The Debt Management Policy must provide guidance for ongoing administration governing the debt issuance, including:

  • Investment of bond proceeds,
  • Primary and secondary market disclosure practices, including annual certifications,
  • Arbitrage rebate monitoring and filing,
  • Federal and state law compliance practices, and
  • Ongoing market and investor relations efforts.
Planning for the Use of Derivatives

Finally, the Debt Management Policy should clearly state whether or not the entity can or should use derivatives. If the policy allows for the use of derivatives, a separate and comprehensive derivatives policy should be developed.

First Steps toward Driving Future Value and Security

CB 1092 requires substantial initial investment before a government agency can issue debt. This may at first appear as an obstacle preventing agencies from accessing necessary funds. Yet, agencies conforming to CB 1092 can benefit from how a clear, principled approach to debt issuance will have a positive impact on both the agency and the borrower, and may also improve credit ratings and value for agencies across California. The first step toward meeting the guidelines in CB 1092 is to establish a firm, responsible and effect Debt Management Policy.

The specialists in MGO’s State and Local Government Practice have substantial experience assisting government agencies with debt issuance. Reach out to a specialist for valuable insight in all stages of conforming to CB 1092, and issuing debt.

Questions? Let’s Talk.



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