CDIAC Municipal Debt Essentials Debt Administration CDIAC Municipal Debt Essentials Debt Administration Managing Debt Service Presented by Tim Tung February 3, 2011

P AGE 1 Overview l What is Debt Service? l The (Not So) Basics of Paying Debt Service  How much do I owe?  How am I going to pay? l Perspectives on Paying Debt Service  Accounting  Budget  Cash Management  Project Staff l Practical Applications with Bond Documents

P AGE 2 What is Debt Service? l Payment of principal and interest on debt obligations l More broadly, may also include all ancillary fees necessary to maintain the debt such as:  Trustee/Fiscal Agent Fees  Credit Enhancement Fees  Rating Agency Fees  Arbitrage Rebate Consultant Fees

P AGE 3 The (Not So) Basics of Paying Debt Service l How much do I owe? l How am I going to pay?

P AGE 4 How much do I owe? l Gross Debt Service  Internal Database/Schedules (Up to date)  Trustee Records (Up to date)  Bond Documents (As of Date of Issue)  Final Cash Flows (As of Date of Issue) l Net Debt Service = Gross Debt Service less Other Sources of Funds, which may include:  Capitalized Interest  Excess Reserve Funds  Interest Earnings  Other Account Balances

P AGE 5 How am I going to pay? l Set rates and charges (if revenue credit), millage (if ad valorem tax), etc, as appropriate l Budget for Expenditure l Establish an Appropriation l Generate Sufficient Liquidity l Verify Debt Service Amounts l Transfer Funds to Trustee Agent

P AGE 6 Perspectives on Debt Service l Accounting l Budget l Cash Management l Project Staff

P AGE 7 Accounting Perspective l Role before the closing:  Review funds and accounts and establish them in the organization’s financial system  Review the flow of funds and establish procedures to ensure compliance with flow of funds  Require the trustee send a debt service invoice l Documentation at closing:  Indenture  Official Statement  Final Numbers  Staff reports related to the financing

P AGE 8 Accounting Perspective l On-going Role:  Maintain up to date debt service schedules  Monitor the receipt of debt service invoices  Verify the accuracy of debt service invoices  Record the entries for payment of debt service  Review trustee account statements to: Verify flow of funds and application of transferred funds Record entries into the organization’s financial system

P AGE 9 Budget Perspective l Budgeting the correct funds  Primary source of repayment  Other available funds (grants, etc.) l Budgeting the correct amounts  Gross Debt Service  Net Debt Service l Establishing an Appropriation  Funds available by the correct date  With the correct appropriation type l Address Carryover Balances

P AGE 10 Cash Management Perspective l Role before the closing:  Plan for the investment of proceeds in anticipation of the closing l On-going role:  Provide liquidity for principal and interest payments – debt service is a core component of any cash flow analysis  Transfer funds to Trustee on the correct dates in the correct amounts

P AGE 11 Project Staff Perspective l Set rates and charges, millage, etc so that debt service can be paid and all required coverage ratios are met l Coordinate with staff on sources of funds for repayment of debt (i.e. general revenues, grant revenues, etc) l Notify appropriate staff when construction is completed and organization has beneficial use of the project

P AGE 12 Practical Applications with Bond Documents l Can I pay off the debt early? l What can I do with debt service reserve funds? Is the reserve requirement adequately funded? l What happens if I don’t pay my debt service?

P AGE 13 Practical Applications with Bond Documents l What funds and accounts are related to the financing and who holds them? l How should funds flow through accounts?