FINANCIAL MANAGEMENT/Improving municipal debt efficiency

For many government finance officers, the ability to take advantage of lower borrowing costs can be affected by how close their municipalities are to their debt ceilings. But several financing options can help improve the efficiency of a municipality’s debt, freeing up funds and increasing debt capacity.

The Chicago-based Government Finance Officers Association recommends that state and local government issuers analyze their debt capacities before issuing bonds. In most cases, debt policies and limitations ensure that prudent debt management tools are in place to guide finance officers in their debt management.

The same factors that rating agencies and financial guaranty insurers consider when they evaluate an issuer’s ability to repay its debt are many of the factors local governments should consider when evaluating debt capacity. The insurers evaluate the following components, which include demographic, wealth and management indices.

• Debt burden. The ratio of total debt to fair market value of taxable property helps assess an issuer’s wealth. The concept reflects the use of property taxes to pay debt service on general obligation bonds.

• Debt per capita. The ratio of total GO debt divided by an issuer’s population base is the debt per capita. If debt burden borne by each resident is already too high, any additional debt (and concurrent tax increases) may impinge on the ability and/or willingness of the issuer to pay debt service.

• Debt to income. Debt per capita divided by average personal income reflects residents’ ability to pay debt service.

• Debt service as a percentage of general fund expenditures. Debt service divided by general fund expenditures shows the amount of expenditures used to pay debt service and shows budget flexibility.

• Tax base diversity. The top five taxpayers should not account for more than 25 percent of the tax base, and the largest taxpayer should not account for more than 10 percent.

• Market value per capita. Market value divided by population helps indicate the wealth of a community.

• Historic rate of tax base growth. Growth patterns help indicate what the debt burden might look like in the future.

• Tax collections. Studying the municipality’s history of tax collections indicates residents’ ability to pay debt service.

• Financial obligations. Dividing the general fund ending balance by the expenditures indicates an issuer’s ability to live within its means, as well as the sufficiency of its reserves.

• Government finance officers have long known the benefits of maintaining strong credit ratings to ensure access to the capital markets. Financial guaranty insurance is one option available to government finance officers to improve the efficiency of their debt offerings. The use of Triple-A-rated bond insurance on public debt helps improve the marketability of the issue while dramatically reducing interest costs. Financial guaranty insurance can help lower the overall amount of money it costs to issue the bond, thereby increasing the debt capacity of the state or local government that benefits from the issue.

  Insurance on debt service reserve funds (DSRF) also can free up funds tied up in debt issuance. Surety bonds can satisfy the DSRF requirements on existing and new bond issues, releasing funds to meet more pressing needs within a municipality, effectively reducing the size of borrowing and increasing a municipality’s debt capacity.

  By effectively managing an issuer’s debt capacity, government finance officers can improve the security, marketability and efficiency of their debt offerings while helping to increase the capacity for debt within their municipalities.

  The author is vice president, eastern region, of Armonk, N.Y.-based MBIA Insurance.