February 2, 2011 Joe Yew City of Oakland California Debt and Investment Advisory Commission Debt 2: Accessing the Market Debt Policy and Plan of Finance Presented by: Sarah Hollenbeck Public Financial Management, Inc.

2 Effective Plans are Informed by Policy Debt Management Policy Capital Improvement Plan Debt Affordability Analysis Plan of Finance

3 Goals and Objectives of a Debt Policy Evaluate critical debt issuance options Promote sound financial management Provide accurate and timely information on financial conditions Maintain appropriate capital assets for present and future needs Protect and enhance credit rating Develops proper Internal Controls Promote cooperation and coordination with other departments in the financing

4 Approach to Debt Management Capital Plan Integration  Should be multi-year capital plan for minimum of 5 years  Qualified capital projects, description of sources of funds, availability of revenues, timing of projects, financing plan, and debt service requirements Review of Capital Plan should be done annually Has O & M of project been taken into account?

5 Standard & Poor’s Top Ten Practices Established budget reserve Regular economic and revenue reviews Prioritized spending plans and established contingency plans Formal capital improvement plan Long-term planning Debt affordability model Pay-as-you-go financing Multi-year financial plan Effective management and information systems Well-defined and coordinated economic development plan

6 Fitch Ratings on Management Practices Very Significant  Fund balance policy  Debt affordability policy Significant  Pay-as-you-go capital financing  Multi-year forecasting  Quarterly reporting  Quick debt retirement Influential  Contingency plans  Non-recurring revenue policy  Depreciation of fixed assets (GASB 34 Implementation)  5 Year CIP integrating operating cost impacts  GFOA financial reporting award  GFOA budgeting award

7 Rating Agency Guidance on Debt Capacity Debt Capacity ratios are defined as annual debt service payments as a percentage of General Fund and other revenues Moody’s  General Rule: Debt burdens (measured as a % of full valuation) from 0-3% is low; 3-4% is average; 5-7% is high, and above 7% is a red flag. Standard & Poor’s  February 4, 2000 Research Publication: “Top 10 Ways to Improve or Maintain A Municipal Credit Rating”  June 27, 2006 Research Publication: “Public Finance Criteria: Financial Management Assessment” Fitch Ratings  June 10, 2004 Research Publication: “Local Government General Obligation Rating Guidelines”  June 27, 2006: “The Bottom Line: Local Government Reserves and Polices that Shape Them”

8 Have Governing Body Approve Debt Policy By resolution, have governing body formally adopt debt management policy Ensures governing body is assuming responsibility Changes, amendments, modifications can be made annually

9 Summary – Debt Policies Policies Are Powerful  Fundamental foundation for long-term fiscal health: underlying basis for case-by-case decision-making  Provides context for what you would “but for”  Essential component of any contingency plan  Articulates your values before they are under stress

10 Plan of Finance What is it?  A long-term planning tool to balance scarce resources among ongoing expenditures and capital needs What does it do?  Identifies capital needs and available sources of revenue to fund them  Helps control revenue streams/expenditures and develops a rate-setting/budgeting plan to meet funding objectives  Determines the feasibility of various funding options  Helps develop strategies for minimizing borrowing costs over time

11 Developing a Plan of Finance 6

12 Elements of a Plan of Finance Projects  Capital improvement plan that identifies and prioritizes projects  Reliable cost estimates that incorporate future capital costs and O&M of the project to be financed Revenue  Realistic revenue forecasts  Address the longevity, availability, reliability and flexibility of future revenue sources Financial Policies and Targets  Debt Policy  Coverage target  Ratings target  Tax/Fee target  Reserve target Legal Framework  Authorization to levy taxes or fees  Authorization to issue debt  Tax law governing the issuance of debt and use of proceeds

13 Determining the Optimal Funding Plan A plan of finance will help evaluate the affordability of the financing strategy Pay-as-you-Go, Debt, or a Combination It helps determine the necessary action steps to meet funding needs Budget actions, rate or fee setting, etc.

14 Sample Plan of Finance Objectives Use a Combination of Debt and Cash to Fund the Capital Improvement Program Maintain Targeted Debt Service Coverage Maintain/Improve Credit Ratings

15 Bond Issuance Timing Considerations Tax regulations provide exceptions to arbitrage rebate requirements including spending exceptions for:  6-months  18-months  2-years Larger, less frequent financings can reduce cost of issuance and the amount of staff resources dedicated to bond financing

16 Plan of Finance Must Be Flexible Rate increases approved or not New environmental/legislative mandates New management/elected officials Economic environment changes Tax law changes Credit rating downgrade/upgrade

17 Optimizing Debt Issuance in Light of Plan of Finance Debt Profile  Evaluate impact on debt affordability of various terms or structures Financial Risk Management  Assess impact of new debt on the risk profile Cash  Evaluate options for available cash  Equity contribution  Reserves  Defeasance Market  Analyze refunding or restructuring opportunities  Impact of the shape of the yield curve  Unique opportunities

18 Summary – Plan of Finance A Plan of Finance is a management tool that is used in conjunction with debt and other policy objectives to develop the optimal funding strategy to meet capital needs It is not meant to remain static, but should be revisited and be flexible  It should allow for continuous feedback and should be responsive to the needs of the various stakeholders  It should be flexible, in order to respond to any unforeseen challenges and to capitalize on any unique market opportunities