Best practices optimize debt management.

• Author: Biery, Jonas

For many finance officers, issuing bonds and managing outstanding debt is just one of many tasks, and local governments sometimes go years between bond issues, in which case the market is likely to have evolved since the last time they entered it. Keeping up with market changes and industry best practices is, therefore, an ongoing challenge. The Government Finance Officers Association's 22 best practices on nearly all aspects of debt management provide a resource to help finance officers explain, document, and defend their debt-related decisions and recommendations to elected officials, staff, and the taxpayers and ratepayers they serve. This article highlights the GFOA's key recommendations.

PLANNING AND PREPARING TO ACCESS THE CAPITAL MARKETS

The Debt Management Policy. A debt management policy is a group of written guidelines and restrictions that describe debt capacity and limitations, and provide direction regarding debt portfolio management and implementation. A well-written debt management policy identifies goals and objectives, guides the debt issuance process, improves the quality of decisions, and ultimately demonstrates commitment to good management and long-term planning. A debt management policy functions best when it includes all debt-related factors and interacts efficiently with broader governmental policies and priorities.

Before creating or revising a debt management policy, an issuer should consider the primary objectives and desired outcomes, and fine-tune the document to the specific nuances of the organization. All debt management policies are aimed at supporting the lowest possible cost of borrowing, but a small entity might achieve that goal through a different set of conditions than a larger one.

Review, input, and support are needed, not just from financial managers and elected officials, but also from individuals across the organization--especially capital project managers and staff members who are responsible for budget preparation. Furthermore, policies should be reviewed at least annually and revised as necessary. Given the pace of regulatory and market change in recent years, maintaining a policy that accommodates the current environment is more important than ever.

Using a Website for Disclosure. Providing timely access to quality financial information demonstrates accountability and transparency and can enhance communication to investors, credit analysts, citizens, and other public stakeholders. Publishing information on an issuer website does not meet continuing disclosure responsibilities as set forth in Securities Exchange Commission Rule 15c2-12.

Things that may be made available via a website include relevant policy documents (including the debt management policy and other financial policies), audited financial statements, official bond offering disclosure, continuing disclosure documents, and other interim financial or management reports. Any documents posted online should be identical to those made available via hard copy. Many governments already post information about their actions online, but not with their financial or debt information.

Online information must be protected from misuse or misinterpretation. Access points to financial information should include a legal disclaimer stating that documents are accurate only as of the date on the page or form, and are not intended to reflect the entirety of the issuer's financial condition. Bond counsel can help identify appropriate precautionary language. Issuers also need to develop and test security provisions and software compatibility, including instructions for downloading software needed to view a document.

Websites that are used for disclosure also require ongoing monitoring and maintenance. Documents that are no longer current should be moved to an archive section that is labeled as historical information provided for information only. If the organization has advanced IT capabilities, it can also be useful to monitor exactly which information is accessed most frequently and adjust its presentation to make that information more prominent and easily accessible.

Maintaining an Investor Relations Program. Capital financing would not be possible without a substantial pool of informed investors. Developing an investor relations program can provide another enhancement, leading to reducing borrowing costs. An issuer should identify the individuals responsible for speaking on its behalf and managing communication to investors; issuers often use a website to communicate information about their investor relations programs. Your bond counsel and financial advisor will provide advice on appropriate conditions for program development.

THE BOND SALE

Who Should I Hire First? Every bond sale requires the participation of several outside parties that the issuers retain to carry out the financing. The primary parties include bond counsel, the financial advisor, underwriters, the underwriters' counsel, and the trustee/paying agent. The specific order in which these outside parties should be selected is driven by the recommendations contained in several GFOA best practices. Issuers should retain a financial advisor and bond counsel in the earliest stages of a financing because issuers and their financial advisor will determine early on whether the bonds will be sold through competitive bidding or through a negotiated sale with a pre-selected underwriter or syndicate of underwriters. If a competitive sale is determined to be in the best interests of the issuer, then there is no need to conduct a request for proposals process for pre-selecting an underwriter, since the underwriter is determined at the time the bonds are sold, based on the lowest true interest cost that is bid for the bonds.

Bond counsel should be hired early on to provide consistent legal advice throughout the bond sale process. The role of the bond counsel does not depend greatly on the method of sale chosen, so there's no reason to defer the selection. Some issuers prefer to hire bond counsel without the assistance of a financial advisor, but may wish to involve the financial advisor if the issuer is not experienced in evaluating the skills and experience of legal counsel.

The underwriter's counsel is typically not a party in a competitive sale. If the issuer and its financial advisor select a negotiated sale, underwriter's counsel is typically determined soon after the underwriter is selected. The trustee/paying agent can be hired at any time after the financial advisor and bond counsel; however, the scope of the trustee/paying agent's role may not be determined until later in the bond sale process.

Selecting the Financial Advisor. The financial advisor represents the issuer on matters related to the bond sale. Unlike the underwriter, the financial advisor has an absolute fiduciary obligation to represent the best interests of...