I. Introduction
The purpose of the Mecklenburg County Debt Policy is to provide guidelines, parameters and procedural requirements for the issuance and management of debt. Many of the processes for approval, sale and repayment of debt are controlled by various North Carolina statutes. These laws and regulations which provide debt policy for most of North Carolina local governments are not repeated here, but this policy must be considered in conjunction with those laws.
II. Use of Debt Financing
Debt is only to be incurred for financing capital assets that, because of their long-term nature or because of budgetary restraints, cannot be acquired from current or budgeted resources. Debt is not to be used for operational needs. Debt financing can include general obligation bonds, revenue bonds, certificates of participation, lease/purchase agreements, special obligation bonds, or any other financing instrument allowed under North Carolina statutes. Mecklenburg County will seek to utilize the least costly/most appropriate form of financing for its project needs.
III. Capital Planning and Debt Determination
The Citizens Capital Budget Advisory Committee (CCBAC), appointed by the Board of County Commissioners, reviews departments and other agency's capital requests and makes a Capital Improvement Program recommendation. The Board then approves both a ten-year needs assessment and a three-year Capital Improvement Program.
Debt financing will be considered in conjunction with the approval by the Board of County Commissioners of the County's Capital Improvement Program. Additionally, debt financing will be considered for equipment items that normally do not go through the CCBAC, but are included in departmental requests, and are not treated as current year operating expenditures.
When possible, the County will utilize the non-voted (two-thirds) authorization for General Obligation Bonds that are allowed under North Carolina law. All voted authorizations will be scheduled for referendum in November of even-numbered years at the time of the general election, unless such approval must be sought for emergency purposes.
Any capital item that has not been included in either of the above two processes, but because of its critical or emergency need 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 approval for debt financing.
IV. Debt Affordability
The County will use an objective, analytical approach to determine the amount of debt to be considered for authorization and issuance. This process involves the comparison of generally accepted standards of affordability to the current County values.
These standards and guidelines shall include the following:
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 analysts as a measure of an issuers' ability to repay debt. This measure will be maintained with a ceiling in the range of $3,500 to $3,600.
Debt as 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. This ratio is to be targeted at 3.3% with a ceiling of 4.0%.
Debt Service as Percentage of Operational Budget
This ratio reflects the County's budgetary flexibility to change spending and respond to economic downturns. This ratio is targeted at a level of 14% with a ceiling of 16%.
Ten-year Payout Ratio
A faster payout is considered to be a positive credit attribute. The County will maintain a floor for its ten-year payment of 64.0%.
Unreserved/Undesignated General Fund Balance
The suggested target range of unreserved General Fund balance to General Fund expenditures is 12.0% to 14.0% and the target for Undesignated Fund Balance is 8% of budgeted expenditures, in accordance with the County's Fund Balance Policy.
These measures shall also be judged against the necessity of and the benefits derived from the proposed acquisitions.
By establishing maximum debt ratios (ceilings or floors) and target debt ratios over a period of time the County is demonstrating that there is a limit above which the County will not issue additional debt in order to control its debt service burden. The County is committing to either decrease capital spending or to find other funding sources rather than create an excessive debt burden on future budgets.
The County will update its Debt Affordability study annually along with a review of comparable AAA rated counties to continue to analyze and control its debt effectively.
V. Debt Structure
For most debt issues, the actual structure and sale is conducted in conjunction with the Local Government Commission (LGC), a division of the Office of the State Treasurer. The LGC functions as the financial advisor to local governments when issuing debt. Structuring must take into consideration current conditions and practices in the municipal finance market.
Debt will be paid off in a timeframe that is less than the useful life of the asset or project acquired through the financing. General obligation bonds will be generally competitively bid with no more than a 20-year life. Negotiated or private placements, however, may be used where allowed when complex financing or structure is a concern with regard to marketability. Debt service for each issue will be structured in an attempt to level
out the County's total debt service payments. This structuring assists in minimizing the interest payments over the life of the issue.
The County will consider utilization of variable rate debt in order to lessen the potential interest costs over the life of the issue.
Bond sales will be scheduled in January of each year with the size of the bond sale to be determined by the County, based on expected cash needs for construction or acquisition of projects for approximately 12 months. This will accommodate necessary spending requirements to avoid arbitrage rebates. The size of other types of financings will be determined by the cost of the assets being acquired, including all issuance costs. The time of the sale will be determined based on existing cash balances from previous financings, acquisition and construction cash draw down requirements, and expectations of needs for new projects to be funded by the financing.
VI. Credit
The County will seek to maintain its current triple-A rating on its general obligation debt and maintain the highest possible ratings on other financing instruments, if rated. Credit enhancements will only be used when necessary for cost-effectiveness and/or marketability. The County will maintain good communications with bond rating agencies about its financial conditions and operations with information being sent to the rating agencies on a regular basis. Credit ratings will be sought from the major, national rating agencies.
VII. Interest Rate Savings
a. Refunding of Outstanding Debt
The County will monitor the municipal bond market for opportunities to obtain interest savings by refunding or advance refunding outstanding debt. The estimation of net present savings should be, at a minimum, in the range of 2.5 - 3%, of the refunded maturities before a refunding process begins.
b. Interest Rate Exchange Agreements
An 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. Interest Rate Exchange Agreements may be used to achieve significant savings as compared to a product available in the bond market; to enhance investment returns within prudent risk guidelines; to prudently hedge risk in the context of a particular financing or in the overall asset/liability management of the County; to incur variable rate exposure within prudent guidelines; and/or to achieve more flexibility in meeting the County's overall financial objectives than is available in conventional markets. Interest Rate Exchange Agreements shall not be used for speculative purposes. Associated risks will be prudent risks that are appropriate for the County to take. The estimated net present value of savings should be, at a minimum, in the range of 4 - 5%.
In evaluating a particular transaction involving the use of Interest Rate Exchange Agreements, the County shall review long-term implications associated with entering into Interest Rate Exchange Agreements, including costs of borrowing, historical interest rate trends, variable rate capacity, credit enhancement capacity, opportunities to refund related debt obligations and other similar considerations.
In general, the County should procure Interest Rate Exchange Agreements by competitive bidding. However, based on particular circumstances, the County may procure Interest Rate Exchange Agreements by negotiated methods.
VIII. Arbitrage Rebate Reporting and Covenant Compliance
The County will maintain a system of record keeping and reporting to meet the arbitrage rebate compliance requirements of the federal tax code. This effort includes tracking investment earnings on bond proceeds, calculating rebate payments in compliance with 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.
Additionally, general financial reporting and certification requirements included in debt issue documents are monitored to ensure compliance with all covenants.
IX. 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.
X. Selection of Financial Consultants and Service Providers
The County will provide for a solicitation and selection process for securing all professional services required in connection with any debt issues. This selection will be done on an issue-by-issue basis, will focus on the particular experience and expertise necessary for that issue, and will be made in order to secure such services at competitive prices to the County.
The Board has a selection process and appointment criteria already established for bond counsel.
XI. Legality
The County must receive an opinion acceptable to the market from a nationally recognized law firm that any financing transaction complies with applicable law and all agreements in connection with any financing are legal, valid and binding obligations of the County.
XII. 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.
Amended by Board of County Commissioners February 18, 2003.
Amended by Board of County Commissioners April 15, 2003.
Amended by Board of County Commissioners September 3, 2003.
