Many local governments issue municipal debt to provide funding for various types of projects. It is something we all are very familiar with, but have you recently evaluated your debt policies? If the answer is no, you may be at an increased risk for financial and compliance issues. In working with local governments over the years, we have seen a variety of compliance and financial issues that can arise from not having clear and specific policies for debt. How can your organization do better? Well, here are a few important considerations for your debt management policy.

Issuance

The issuance of municipal debt is a long-term financial decision that allocates future resources for the repayment of principal and interest. How does your policy provide for and ensure a proper analysis and evaluation of debt issuance? Does the policy analyze long-term affordability and consider flexibility for operations and other future projects? Does your policy require the analysis of alternative funding sources including grants and other arrangements in lieu of incurring debt? A well-designed policy should be specific as to how an evaluation is performed and include guidelines and measurement for financial policy goals and limitations. What percentages and thresholds do you use to evaluate and monitor total debt and annual debt service? A policy for debt refinancing should also include acceptable guidelines on the debt service savings.

Proceeds

The use of bond proceeds is often restricted in the debt covenant. How does your policy  ensure proper use? A policy should include specific accounting and internal controls  necessary to safeguard use of proceeds for intended purpose. Items to consider include the use of segregated accounts and funds, reporting and budgets, and authorization, oversight and monitoring.

Compliance

Certain compliance and reporting is often contracted with outside consultants and specialists. Make sure your policy includes procedures to oversee and monitor the work being done. Identify the specific requirements and timelines for reporting and disclosure. Do not fully rely on consultants without being involved in the process and knowing key elements and timelines. Make sure you are up to date with SEC Rule 15c2-12 and proposed
amendments in 2017 for event notices. Review https://emma.msrb.org/ and search your organization and make sure current information is being reported for your agency.

Financial

Timely financial reporting and disclosure is very important. Does your policy establish guidelines to ensure timely reporting? How? Does your policy consider reporting requirements with the Governmental Accounting Standards Board (GASB)? Different debt
arrangements may require different disclosure including pledge revenue debt and debt refinancing. Know the requirements to ensure proper and timely reporting.

Credit Ratings

Your organization should strive to achieve high credit ratings from rating agencies and have goals and policies to support that. Become knowledgeable about how and what rating agencies are analyzing and develop fiscal policies to achieve or maintain strong credit ratings. Another area to consider is how pension and other post-employment benefit  obligations impact ratings with your organization.

Good debt policies are critical to the financial health of local government. Make sure your policy is specific, includes policies that support fiscal health, and covers the requirements. LSL CPAs specializes in working with local governments and provides an array of audit and consulting services that are focused on you. If you need assistance, don’t hesitate to ask.  Contact our dedicated government team with any questions. As always, we are here to help.

This article was published in the CSMFO magazine and written by Bryan Gruber, a Partner with LSL CPAs. Bryan Gruber specializes in the audits of cities and special districts including CAFR and Single Audits and is well versed with the latest requirements from GASB, AICPA, and the GAO. He serves as a technical reviewer for the GFOA and is a regular speaker with CSMFO chapter meetings. Click HERE if you would like to download the latest Issue of CSMFO Magazine.


Bryan Gruber

Thinking he would eventually move into private industry, Bryan is now an audit partner at LSL with no sign of slowing down. Overseeing the firm’s multi-faceted government practice, Bryan leads financial and internal audits, working directly with government finance directors and board members. He enjoys the larger responsibility of providing assurance to donors, members and the public – supporting community health and vitality. You can reach Bryan at 714-672-0022. Read Bryan's complete bio.