Introduction
Mecklenburg County recognizes that one of the keys to sound financial management is a debt policy. These benefits are recognized by bond rating agencies and the development of a debt policy is a recommended practice by the Government Finance Officers Association. A debt policy establishes the parameters for issuing and managing debt. It provides guidelines regarding the timing and purposes for which debt may be issued, presents the types of permissible debt, and the methods of sale that may be used. The debt policy should recognize an obligation to fully and timely repay all debt as an essential requirement for entry into the capital markets. Adherence to a debt policy helps to ensure that a government maintains a sound financial position and that credit quality is protected.
The debt policy is to be used in conjunction with the operating and capital budgets, the Capital Improvement Program (CIP), and other financial policies. The advantages of a debt policy are:
- enhancing the quality of decisions;
- documenting the decision-making process;
- identifying objectives for staff to implement;
- demonstrating a commitment to long-term financial planning objectives; and
- being viewed positively by the bond rating agencies.
Debt Instruments
General obligation bonds are bonds secured by a promise to levy taxes in an amount necessary to pay debt service, principal and interest, coming due each fiscal year. General obligations bonds are backed by the full faith and credit of the County. These bonds are authorized by a referendum or by non-voted (2/3's) authorization by the governing body. The non-voted authorization allows governments to issue up to two-thirds of the previous year's net debt reduction without a referendum.
Revenue bonds are a pledge of the revenues generated by the debt financed asset or by the operating system of which that asset is a part.
Special obligation bonds are bonds that are payable from the pledge of revenues other than locally levied taxes. Examples include the beer and wine tax or enterprise revenues.
Certificates of Participation (COPs) are an alternative financing method that does not require voter approval. These certificates represent an undivided interest in the payments made by a public agency pursuant to a financing lease or an installment purchase agreement. The security for this financing is represented by a lien on the property acquired or constructed. The County uses COPs for county facilities and school purposes.
An Installment Purchase Contract is an agreement in which the equipment or property is acquired and periodic payments, which are sufficient to pay debt service, are made. The County has used this type of financing for short-term (2-5 years) equipment purchases.
County Debt Policy
A. Long-term debt shall not be used to finance ongoing operational expenses.
B. Any debt issued shall not have a maturity date beyond the useful life of the asset being acquired or constructed by the debt proceeds.
C. The County shall establish an affordable debt level to preserve credit quality and ensure sufficient revenue is available to pay annual debt service. This will be balanced against the County's need to maintain its infrastructure and manage growth.
D. The County will use appropriate debt instruments to provide funding for capital assets at the lowest cost with minimal risk. The County will monitor its debt positions to maintain the lowest effective cost.
E. The County will, at all times, manage its debt and sustain its strong financial position, including healthy reserves, to seek and maintain the highest credit rating possible.
F. The County shall utilize pay-as-you go and other alternative sources of funding for capital projects to minimize debt levels. To have an effective pay-as-you-go program, at least one funding source must be identified that is consistent, reliable, and large enough to provide for capital needs in an amount that reduces dependency on debt.
Purposes for Debt Issuance
The County may issue debt for the purpose of acquiring or constructing capital assets including land, buildings, machinery, equipment, furniture and fixtures. When feasible, debt issuance will be pooled together to minimize issuance expense. Annually, the County will prepare and adopt a Capital Improvement Program (CIP) to identify and establish an orderly plan to meet the County's infrastructure needs. The CIP will also identify all debt-funded projects and the related debt service impact.
Debt Structure
Debt will be paid off in a timeframe that is less than or meets the useful life of the asset or project acquired through the financing. The life of the debt, interest mode and principal maturity schedule make up the structure of the debt. This debt could be general obligation, revenue or special obligation bonds, certificates of participation or other installment financing agreements.
The County will consider various financing techniques including fixed or variable interest rate debt and interest rate swap agreements in order to minimize the interest costs over the life of the issue. The use of these techniques will be evaluated based on market conditions and the maximum benefit to the County while minimizing the County's risk. The County will limit the ratio of unhedged variable rate debt to 35% of the total outstanding debt.
Debt Ratios
The County shall abide by the following debt ratios:
-
Overall Debt as a Percentage of Assessed Valuation. This ratio measures debt levels against the property tax base which generates the tax revenues that are the main source of debt repayment. The ceiling for this ratio is 4.0%.
-
Overall Debt per Capita
This ratio measures the burden of debt placed on the size of the population supporting the debt and is widely used by rating analysts as a measure of an issuers' ability to repay debt. This measure will not exceed $4,200. General Debt Service as a percentage of Operational Expenditures. This ratio reflects the County's budgetary flexibility to adapt spending levels and respond to economic condition changes. This ratio is targeted at a level of 20% with a ceiling of 22%. The County's policy is to manage to the target of 20%. The ceiling of 22% is meant to provide flexibility in extraordinary circumstances.
-
Ten year Payout Ratio
This ratio reflects the amortization of the County's outstanding debt. A faster payout is considered to be a positive credit attribute. The County will maintain a floor for its ten-year payout of 64.0%.
These ratios will be calculated and reported each year in conjunction with the capital budget process, the annual financial audit and as needed for fiscal analysis.
Debt Management Policies
-
The County will issue debt only for the purposes of constructing or acquiring capital assets and for making major renovations to existing capital assets.
-
The County shall not construct or acquire a public facility if it is unable to adequately provide for the subsequent annual operation and maintenance costs of the facility.
-
The County will ensure that adequate systems of internal control exist so as to provide reasonable assurance as to compliance with applicable laws, regulations, and covenants associated with outstanding debt.
-
The County will manage debt issuance to comply with the adopted debt limits and will evaluate those limits at least every five years.
-
The County will attempt to structure debt in the best and most appropriate manner consistent with the financial policies of the County in order to level principal repayment and minimize interest expense.
-
The County will monitor its outstanding debt in relation to existing conditions in the debt market and will refund any outstanding debt when sufficient cost savings can be realized or utilize interest rate swap agreements to achieve cost savings.
-
To reduce the impact of capital programs on future years, the County will fund a portion of its CIP on a pay-as-you-go basis by:
-
appropriating a minimum of three cents on the property tax rate for capital projects;
-
appropriating 50% of the 8% excess fund balance for capital projects; and
-
appropriating proceeds from all county land sales for capital projects. Pay-as-you-go funding will save money by eliminating interest expense on the funded projects.
Pay-as-you-go capital appropriations improve financial flexibility in the event of sudden revenue shortfalls or emergency spending.
Administration and Implementation
The County Manager and the Director of Finance are responsible for the administration and issuance of debt including the completion of specific tasks and responsibilities included in this policy. The County will evaluate the debt policy at least every five years.
Capital Planning and Debt Determination
The Citizens Capital Budget Advisory Committee (CCBAC) appointed by the Board of County Commissioners (BOCC), reviews departments' and other agencies' capital requests and recommends capital projects based on needs. The County Manager provides a recommended Capital Improvement Program (CIP) for consideration by the BOCC. The BOCC then approves both a ten-year needs assessment and an annual capital budget. The BOCC adopts capital projects ordinances which provide budgetary authority.
Funding of the capital budget will be determined in conjunction with the approval of the CIP by the BOCC. Available pay-as-you-go funding and debt issuance will be allocated to fund the CIP based on the debt management policy. Debt financing will also be considered for equipment items that normally do not go through the CCBAC, but are included in departmental requests.
All voted authorizations for those purposes authorized by the Local Government Bond Act will be scheduled for referendum in November at the time of the general election. When possible, the County will utilize the non-voted (two-thirds) bond authorization for bonds to fund projects, such as government facilities.
The County uses a combination of bonds and Certificates of Participation (COPS) to finance capital assets. COPs do not require voter approval but do require collateral as security. COPs are usually used to finance projects deemed essential by the governing body and timing is such that it is impractical to seek voter approval.
Any capital item that has not been included in either of the above two processes, but because of its critical or emergency nature where timing was not anticipated in the CIP or budgetary process, or is mandated immediately by either State or Federal requirements, will be considered for financing by installment purchase contract.
Issuance of Debt
The scheduling and amount of bond sales and installment purchase transactions will be recommended by the Director of Finance and the County Manager. The BOCC must approve the sale. These decisions will be based upon the identified cash flow requirements for each project to be financed, market conditions, and other relevant factors including the debt ratios. If the cash requirements for capital projects are minimal in any given year, the County may choose not to issue debt. Instead, the County may fund up-front project costs and reimburse these costs when financing is arranged. In these situations the County will adopt a reimbursement resolution prior to the expenditure of project funds.
Fixed rate general obligation bond sales are conducted on a competitive basis by the Local Government Commission (LGC), a division of the Office of the State Treasurer. Variable rate bonds, revenue and special obligation bonds and COPs will be sold on a negotiated basis with the underwriter selection determined through a competitive process. Underwriters will be selected for each issue based on the particular experience and expertise necessary for that issue.
Debt service for each issue will be structured in an attempt to level out the county's total debt service payments over the life of the debt portfolio. This structuring also assists in minimizing the interest payments over the life of the issue. Structuring must take into consideration current market conditions and practices in the municipal finance market.
Legality
The County must receive an opinion acceptable to the market from a nationally recognized law firm that each financing transaction complies with applicable law and all agreements in connection with any financing are legal, valid and binding obligations of the County.
Interest Rate Exchange Agreements
Interest Rate Exchange Agreement shall mean a written contract entered into in connection with the issuance of County debt or in connection with County debt already outstanding with a counterparty to provide for an exchange of payments based upon fixed and/or variable interest rates. The County will govern the use of Interest Rate Exchange Agreements by the policy described in Attachment I to this debt management policy.
Continuing Disclosure
The County will provide on-going disclosure information to established national information repositories and maintain compliance with disclosure standards promulgated by state and national regulatory agencies. The County will maintain good communications with bond rating agencies to inform them about the County's financial position by providing them the County's Comprehensive Annual Financial Report (CAFR) and operating and capital improvements Budget.
Arbitrage Rebate Reporting
The County will comply with all arbitrage rebate requirements as established by the Internal Revenue Service and all disclosure requirements established by the Securities and Exchange Commission. This effort includes tracking investment earnings on bond proceeds, calculating rebate payments in compliance with the tax law and remitting rebatable earnings to the federal government in a timely manner in order to preserve the tax exempt status of the County's outstanding debt issues.
Amended by the Board of County Commissioners, November 5, 2008
Amended by the Board of County Commissioners, September 3, 2003
Amended by the Board of County Commissioners, April 15, 2003
Amended by the Board of County Commissioners, February 15, 2003