Debt Management Policy

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POLICY STATEMENT 176

DEBT MANAGEMENT POLICY

Prepared by:

Karen Mills, Finance Director

Adopted by Council:

 April 21, 2015

Effective:

April 21, 2015

Supersedes:

6/12/2008 - Section III. C of POLICY STATEMENT 112 – FINANCE POLICY

 

I. OBJECTIVES  

A.     To secure the highest possible credit and bond ratings by meeting or exceeding the requirements of bond rating agencies through sound, conservative financial decision making
B. To ensure compliance with all State and Federal laws governing debt
C. To maintain sufficient financial flexibility to meet future obligations and take advantage of opportunities
D. To establish the parameters for issuing and managing debt

II. POLICY

Scope:

  1. This policy applies to all debt issued or incurred by the Town.  This includes at a minimum, general obligation bonds, certificates of participation, limited obligation bonds, two-thirds bonds, revenue bonds, private placements and installment financings.

Uses of Debt:

  1. Debt will be used to finance capital projects or for purchases of equipment that provide value to current and future citizens. 
  2. Debt will not be used for operational needs. 

Terms and Structure:

  1. Capital projects financed through the issuance of bonds will be financed for a period not to exceed the expected useful life of the project.
  2. Non-utility debt will normally have a term of 20 years or less.
  3. Utility debt will normally have a term of 30 years or less.
  4. General obligation bonds will be amortized on a level principal basis to the extent practical, and revenue bonds will be amortized on a level debt service basis to the extent practical considering the forecasted available pledged revenues.
  5. The Town will seek the best financing type, debt structure and timeframe for each financing need based on the flexibility to meet the project needs, timing, tax or rate payer equity and lowest interest cost.
  6. Cash financing (pay-as-you-go) is a component of the capital program that contributes to the financial integrity of the Town and its ability to maintain AAA bond ratings. 

Debt Capacity: 

  1. The general obligation debt of the Town as defined in G.S. 159-55 is statutorily limited to eight percent of the assessed valuation of the taxable property within the Town.
  2. Tax-supported debt service as a percentage of the approved General Fund operating budget will be 15% or less.  In extraordinary circumstances, acknowledged by Council in budget planning, debt service could exceed 15%, but in no case shall it exceed 20%.  General Fund operating budget is defined as Total Expenditures from the Budget Summary (during budget process) or Comprehensive Annual Financial Report (for historical analysis) and excludes Other Financing Sources and Uses.  Actual results reported in the CAFR may be higher than the target due to expenditure savings as operating expenditures typically come in under budget.  This is not deemed to be a violation of this policy.
  3. Coverage ratios for the Combined Enterprise System debt will be maintained at 1.4 times for parity debt service and 1.1 times for parity, system general obligation and subordinated debt service. This is above the levels required in the debt covenants of 1.2 times for parity and 1.0 times for all debt service. 
  4. These ratios will be monitored and reported annually in the Comprehensive Annual Financial Report. 

Capitalized Interest:

  1. Interest expense will be capitalized only for facilities of enterprise activities and if utilized, will be strictly limited to those expenses incurred during construction of the facilities.

 Refunding:

  1. Refunding and/or restructuring opportunities will be evaluated on a regular basis.  A refunding transaction may proceed when net present value savings from a refunding will be at least three percent of the amount of debt service to be refunded. 
  2. Under normal circumstances, the Town will refund bonds within the term of the originally issued debt. 

Bond Ratings:

  1. The Town will continue to strive to retain its AAA rating (the highest possible bond rating) in order to minimize the Town’s interest expenses.

Disclosure:

 The Town will continue to meet its ongoing disclosure requirements in accordance with SEC rule 15c2-12.  The Town will disclose all bond sales and annually file certain financial information and operating data related to the bonds with national and state repositories.

  1. The Town will prepare announcements and disclose to the Municipal Securities Rule Making Board (MSRB) in a timely manner if any of the material events as noted in SEC rule 15c2-12 occur.
  2. The Town will comply with all applicable U.S. Internal Revenue Service and U.S. Treasury arbitrage requirements for bonded indebtedness in order to preserve the tax-exempt status of such bonds.