Fiscally Ready Communities Best Practices
Debt Policy Guide

The Fiscally Ready Communities debt policy guide supplements the local government’s process of monitoring their debt. Debt management policies are written guidelines, allowances, and restrictions that guide the debt issuance practices of local governments.  A debt management policy should follow state, federal, and local laws and improve the quality of decisions, articulate policy goals, provide guidelines for the structure of debt issuance, prioritize debt payments, and demonstrate a commitment to long-term capital and financial planning.

When a community adheres to their debt management policy, it shows rating agencies and the capital markets that they are well managed and therefore are likely to meet their debt obligations in a timely manner.  Debt management policies should be written to meet the local community’s needs.  Debt management policies should be approved by the local unit’s governing body to provide credibility, transparency and to ensure that there is a common understanding among elected officials and staff regarding the local unit’s approach to debt financing. This policy should be reviewed on a regular basis to ensure it is adhered to and updated when necessary.

Fiscally Ready Communities Debt Policies

At a minimum the debt policy should include the following:

• The local unit shall establish debt limits for each specific issuance or acceptable ranges for each type of debt. Limits generally are set for legal, public policy, and financial reasons (Government Finance Officers Association, 2012).
  • Legal restrictions may be determined by:
    • State constitution or law.
    • Local charter.
    • By-laws.
    • Resolution or ordinance.
    • Covenant.
    • Bond referenda approved by voters.
  • Debt policies shall address the internal standards and considerations within a government. This may include:
    • Purposes for which debt proceeds may be used or prohibited.
    • Types of debt that may be issued or prohibited.
    • Relationship to and integration with the Capital Improvement Program (CIP).
    • Policy goals related to economic development, including use of tax increment financing and public-private partnerships.
    • Prioritizing debt payments.
  • Financial limits often are expressed as ratios customarily used by credit analysts. 
  • Different financial limits are used for different types of debt.  Examples of debt include:
    • Direct Debt (including general obligation bonds) is subject to legal requirements and may be able to be measured or limited by the following ratios:
      • Debt per capita.
      • Debt to personal income.
      • Debt to taxable property value.
      • Debt service payments as a percentage of general fund revenues or expenditures.
    • Revenue Debt levels often are limited by debt service coverage ratios (e.g., annual net pledged revenues to annual debt service), 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 and circumstances under which it can be used, as well as limitations in term or size of borrowing.
    • Variable Rate Debt should include information about when using non-fixed rate debt is acceptable to the entity either due to the term of the project, market conditions, or debt portfolio structuring purposes.
  • The local unit shall establish debt structuring practices.  The debt policy should include specific guidelines regarding the debt structuring practices for each type of bond, including:
    • Maximum term (often stated based on the useful life of the asset(s) or in absolute terms).
    • Average maturity.
    • Debt service pattern such as equal payments or equal principal amortization.
    • Other structuring practices should be considered, such as capitalizing interest during the construction of the project and deferral of principal, and/or other internal credit support, including general obligation pledges.
  • The local unit shall establish debt issuance practices.  The debt 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, including an independent financial advisor and a bond attorney, to assist with determining the method of sale and the selection of other financing team members.
    • 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, as well as to evaluate final bond pricing results.
    • Criteria for issuance of advance refunding and current refunding bonds.
    • Use of credit ratings, minimum bond ratings, determination of the number of ratings, and selection of rating services.
  • The local unit shall establish debt management practices.  The debt policy should provide guidance for ongoing administrative activities including:
    • Investment of bond proceeds.
    • Primary and secondary market disclosure practices, including annual certifications as required.
    • Arbitrage rebate monitoring and filing.
    • Federal and state law compliance practices.
    • Ongoing market and investor relations efforts.
  • The local unit shall establish a policy for the use of derivatives.  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 (Government Finance Officers Association, 2015).
    • For additional information see the following:
      • GFOA’s Advisory.
      • GFOA’s Developing a Derivatives Policy.
      • GFOA’s Derivatives Checklist.

Debt Policy Review Table

Please use the table below to consider whether your debt policy needs an overhaul or refresh. This document has been built so you can track where you are in the process.