1. Debt Management and Fund Balance Policies
Presented by
Gregory S. Allison, CPA
Teaching Professor
UNC School of Government

2. Policy Practices Typical recommended policies
Cash management
Debt management –TODAY’S FOCUS
Audit procurement
Fund balance – TODAY’S FOCUS
Capital plans/capital improvements
Policies should be approved by the governing board
GFOA has published Best Practices on many policy issues
NC FinanceConnect is building a resource library as well

3. Debt Management Policies
GFOA Best Practice entitled “Debt Management Policy”
Addresses 5 main areas of a debt policy
Debt limits
Debt structuring practices
Debt issuance practices
Debt management practices
Use of derivatives

4. Debt Limits Legal restrictions
In NC, that is established in G.S and is known as the net debt limitation
The limitation applies to general obligation (GO) and installment financing borrowings
Limits the net debt of a unit to 8 percent of the appraised value of the property subject to taxation
Basic formula takes the gross GO and installment financing debt and generally deducts the debt that is repaid from sources other than the property tax
As a general rule, it is a non-issue (rarely exceeds 2% for an unit in NC)

5. Debt Limits (cont.) Net debt limit calculation Gross debt
Outstanding GO debt
Proposed financings and GO bonds planned but not yet authorized
Unissued GO bonds that have been authorized
Outstanding installment financings

6. Debt Limits (cont.) Net debt limit calculation (cont.) Minus:
Funding/refunding bonds authorized but not issued or adopted (gross debt being refunded is already in gross amount);
Moneys set aside in debt service fund or elsewhere to retire outstanding bonds (not including utility debt);
Utility debt (enterprise fund debt – water, gas, electricity, some sewer);
Certain uncollected special assessment debt

7. Total Assessed Valuation
Debt Limits (cont.)
Net debt limit calculation (cont.)
Resulting Net Debt
divided by
Total Assessed Valuation =
Percentage of Net Debt

8. Debt Limits (cont.) Policy may also address
Purposes for which debt may be issued
Types of debt issued (obviously constrained by what is legally allowed)
Relationship with a capital improvement program
Relationship with a capital reserve fund

9. Debt Limits (cont.)
Restrictions that are in place or could be triggered
Targets for general obligation bonds
Debt per capita
Debt to personal income
Debt to taxable property
Debt service as % of general fund revenues or expenditures
Revenue-backed debt limitations
Other types of debt
Conduit
Short-term
Variable rate

10. Debt Structuring Practices
Guidelines for each type of bond
Maximum terms
Average maturity goals
Debt service pattern
Variable vs. fixed rate debt
In NC, much of this is determined in conjunction with the staff of the Local Government Commission (LGC)

11. Debt Issuance Practices
Selection/use of professional services
In NC, primarily provided by the staff of the LGC
Criteria for method of sale
Comparative bond pricing
Timing
Criteria for evaluation propriety of refundings
Professional assist in such valuations
Credit rating practices/needs

12. Debt Management Practices
Policy should address, as applicable, on-going administrative activities
Investment practices of bond proceeds
Primary and secondary market disclosure practices
Arbitrage monitoring and filing
Federal and state compliance requirements
Investor relations

13. Use of Derivatives
Not Going There

14. Debt Policy Summary
Best resource is to share/learn from other NC policies;
LGC is an active partner in most debt issuance activities (unlike other states)
Policy should be consistent with how debt is issued and managed in NC
Critical for governing board to review regularly and revise as might be necessary

15. Fund Balance Policies
GFOA Best Practice entitled “Fund Balance Guidelines for the General Fund”
Recognizes that GAAP and budgetary fund balance may be different
In NC, that is not the case
While focus is on the general fund, adequacy in other funds should not be ignored

16. Specific Fund Balance Policy Recommendations
Appropriate levels and target percentages
Use and replenishment conditions
Unrestricted fund balance exceeding policy requirements

17. Appropriate Levels of Fund Balance
Focus on the level of unrestricted fund balance in the general fund
Policy should be tailored to the unique circumstances of any particular government (e.g., proneness to natural disasters, statutory legal limitation/restrictions, vulnerability of revenue sources)
GFOA recommends unrestricted be no less than 2 months worth of regular general fund revenue or expenditures

18. Appropriate Levels (cont.)
Factors to consider when determining appropriate level of unrestricted fund balance
Predictability of revenues/volatility of expenditures
Exposure to unexpected outlays (e.g., disasters)
Other funds’ potential reliance on general fund resources
Relationship to bond ratings
Relationship to commitments/assignments
How much of unrestricted was dedicated to commitments/assignments?

19. Use and Replenishment
Policy should specifically address appropriate uses of fund balance
Capital needs
Emergencies
Contingencies
Identify the level at which replenishment of fund balance needs to be planned

20. Use and Replenishment (cont.)
Replenishment plans
Recommended that replenishment be planned over a one to three year timeframe
Factors that may affect timing of replenishment
Recovery from disasters/unexpected events
Politics
Long-term forecasts
Economic conditions

21. Uses and Replenishment (cont.)
Replenishment plans (cont.)
Identify sources of replenishment
Nonrecurring revenues
Budget surpluses
Excess resources in other funds
Year-end surpluses

22. Excessive Unrestricted Fund Balance
When excesses routinely occur, evaluate whether certain trends need to be addressed
Considerations
Should policy modifications occur?
How should excess funds potentially be used?
Is the excess expected to continue?

23. NC Considerations Stabilization by state statute calculation
Certain restricted resources that are still considered available for use by LGC calculations
Powell Bill
Grants
Stabilization for other purposes vs. minimum fund balance policies (Z.54.23)
True stabilization can only be used for specified purposes under certain circumstances
Fund balance policies typically just establish a target, not stipulations