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Financial Policies: Debt Policies Investment Policies Revenue and Expenditure Policies October 3, 2013.

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Presentation on theme: "Financial Policies: Debt Policies Investment Policies Revenue and Expenditure Policies October 3, 2013."— Presentation transcript:

1 Financial Policies: Debt Policies Investment Policies Revenue and Expenditure Policies October 3, 2013

2 Debt Policies 2

3 Reasons to Have a Debt Policy 1.To maintain acceptable levels of indebtedness 2.Debt policies transmit the message that the government is committed to sound financial management 3.To provide consistency and continuity to public policy development 3

4 Debt Policies Aren’t Just for the Big Guys “Debt” includes Interfund borrowing Short-term debt Leases 4

5 Elements of a Debt Policy 1.Purpose of policy 2.Conditions for debt issuance 3.Restrictions on debt issuance 4.Financial limitations 5.Structuring practices 6.Debt issuance process 7.Debt management process 8.Special situations 5

6 Purpose of a Debt Policy To ensure that debt is used wisely and that future financial flexibility remains relatively unconstrained Scope of the debt policy – to which government(s) it applies (component units?) Describe oversight and delegation Explain the relationship between the use of debt and the government’s capital improvement plan Is there a debt advisory committee? 6

7 Conditions for Debt Issuance Acceptable purposes ▫Favorable market conditions ▫Consistent with financial limits ▫Bond ratings and investment grade ▫Distribute costs and benefits appropriately across generations ▫Project characteristics that support issuing debt ▫Project useful life meets minimum standard ▫Resources are adequate to cover debt service 7

8 Conditions for Debt Issuance Permissible debt instruments ▫General obligation debt ▫Lease financing ▫QZABs, QSCBs, BABs, etc. ▫Revenue, tax, and bond anticipation notes ▫Lines of credit 8

9 Restrictions on Debt Issuance Strongly consider prohibiting the use of long- term debt for operations Length of debt issuance Size of debt issue Statutory limitations (35% of assessed property value per LSA-RS 39:562) Self-imposed, more strict limitations? Prohibitions on certain types of debt 9

10 Financial Limitations Amount spent on debt service Budgetary impact ▫Annual debt service as a percent of general fund expenditures Community’s ability to support debt Revenue debt limitations 10

11 Standard & Poor’s Analysis of Debt Service as a Percentage of Expenditures LowBelow 8% Moderate8% - 15% Elevated15% - 20% HighAbove 25% 11

12 Standard and Poor’s Analysis of Coverage Ratios for Utilities StrongGreater than 1.50 GoodBetween 1.26 and 1.50 AdequateBetween 1.0 and 1.25 InsufficientLess than

13 Structuring Practices Maturity guidelines Debt service schedule Debt service funds Use of credit enhancements (insurance) Use of redemption features Use of capitalized interest 13

14 Debit Issuance Process Approval of issuance Determining the method of sale Selection and use of professionals Credit ratings Intergovernmental coordination 14

15 Debt Management Process Investment of bond proceeds Compliance practices Refunding bonds Market and investor relations Credit rating goals 15

16 Special Situations Use of derivatives Interfund borrowing Variable rate debt Short-term debt Leases Other forms of debt 16

17 Investment Policies 17

18 Elements of an Investment Policy 1.Scope 2.Objectives 3.Pooling funds 4.Standards of care 5.Investment portfolio 6.Safekeeping and custody 7.Reporting 18

19 Scope of an Investment Policy Identify the funds Identify the organizations to which the policy applies (component units?) 19

20 Investment Policy Objectives Safety ▫Credit risk ▫Interest rate risk ▫Liquidity risk Liquidity Yield Legality of investments 20

21 Pooling Funds Provide the conditions under which pooling of funds is permissible State how allocation of investment earnings will be allocated to each fund ▫Date (end of each month?) ▫Based on (average daily cash balance, balance at end of month, etc.) 21

22 Standards of Care Authority to invest Investment committee Conflicts of interest and ethics Prudence ▫Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable outcome to be derived 22

23 Investment Portfolio Authorized investments (LSA-RS 33:2955) Prohibited investments Diversification Maturities Competitive bidding 23

24 Safekeeping and Custody Eligible institutions Investment advisors Collateral Safekeeping Internal control 24

25 Reporting Frequency and format Performance targets 25

26 Revenue Policies 26

27 Elements of a Revenue Policy 1.Revenue goals 2.Non-recurring and volatile revenues 3.New revenues and changes to revenue 4.Revenue estimates 5.Earmarking 6.User fees 7.Property taxes 8.Grants 27

28 Revenue Goals Diversification and stabilization Equity Relation to economic development Collections 28

29 Non-recurring and Volatile Revenues Should non-recurring revenues be used to fund ongoing expenditures? How should high yields from volatile revenue sources be used? 29

30 New Revenues and Changes to Revenues – Potential Features Stability of tax source over its expected life Suitability to the program or purpose it’s intended to fund Fair distribution of revenue burden Acceptability to the community Impact on economic competitiveness Cost of administering Minimal effect on private economic decisions 30

31 Revenue Estimates Forecasting philosophy ▫Aids in planning and consistency ▫Strive for accuracy Multi-year forecasts ▫Provides lead-time ▫Can be challenging, depending on revenue source Revenue manual ▫Important characteristics ▫Historical background 31

32 Earmarking Designating a particular revenue source for a specific use Political appeal Consider minimizing earmarking ▫Describe current earmarks ▫List how much of revenue is earmarked ▫Provide rationale for earmarking 32

33 User Fees Goals ▫Ease of use and simplicity ▫Maintain or increase usage ▫Acceptability and marketing of fee structure ▫Enforceability of payment 33

34 User Fees Cost recovery levels – factors to consider when setting a target ▫Similarity to a service in the private sector ▫Correlation between amount paid and benefit received ▫Is goal to discourage use (alarm fees) or encourage use (library, museum)? ▫Is service regulatory? 34

35 User Fees Review fees ▫How often ▫Who will perform the review ▫To whom the review will be presented ▫Emphasize flexibility and discretion ▫Annual Consumer Price Index adjustments? ▫Survey other governments 35

36 Property Taxes Challenges ▫Highly visible annual payment ▫Difficulty to value properties fairly Goals ▫Fund programs providing a general benefit? ▫Minimize tax rate increases? 36

37 Grants 37 Grant revenues don’t often fund the entire program for the entire period May require matching funds Consider overhead costs

38 Expenditure Policies 38

39 Elements of an Expenditure Policy 1.Funding operations 2.Personnel compensation 3.Funding long-term liabilities 4.Efficiency 5.Outsourcing 39

40 Funding Operations Is the government committed to a level of expenditures sufficient to ensure the ongoing health, safety, and welfare of constituents? Can expenditures expand beyond the government’s ability to pay for them with current revenues? Does the government want to encourage certain types of expenditures, such as investments in labor-saving technologies? 40

41 Personnel Compensation Maintain compensation packages that are sufficient to attract and retain qualified employees Ensure compensation packages are competitive with other public-sector employees Establish personnel budgets necessary to provide quality services 41

42 Funding Long-term Liabilities Bond principal and interest payments Compensated absences Other post-employment benefits (OPEB) Pension liabilities Maintenance and replacement of capital assets and infrastructure 42

43 Efficiency Use resources efficiently Efficiency is defined as “effective operation as measured by a comparison of production with cost” 43

44 Suggestions to Improve Efficiency Analyze systems and procedures to remove unnecessary requirements Evaluate new technologies and capital investments Develop the skills and abilities of staff Develop methods of recognizing and rewarding exceptional employee performance Establish a systematic, ongoing process for periodic formal reviews of operations Maintain the right balance between centralization and decentralization of support services 44

45 Outsourcing General philosophy of outsourcing How employees will be treated Criteria to evaluate outsourcing proposals ▫Competitive forces throughout the entire contract period ▫List the specific task to be contracted ▫Replacing contractors when dissatisfied ▫Ends rather than means ▫Economics make sense 45

46 Expenditure Policy Components Policy elementEssentialImportantDiscretionary Funding operationsX Personnel compensationX Asset maintenance and replacement X Pensions and OPEBX EfficiencyX OutsourcingX 46

47 Thank you! 47

48 Contact Information Diane B. Allison, CPA, CGMA, CGFO Director of Business Services Ascension Parish School Board Office: (225) Donaldsonville, LA 48


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