Circumscribing debt issuance with written policies.

• Author: Phillips, Patricia
• Position: Best Practices - Virginia Beach, Virginia

The City of Virginia Beach credits its adherence to written debt policies for the city's strong financial position and credit ratings, not to mention reduced debt service costs.

In February, the GFOA Executive Board approved a new recommended practice entitled "Debt Management Policy." This replaces two 1995 recommended practices concerning debt policies: "Analyzing Debt Capacity and Establishing Debt Limits" and "Development of a Debt Policy."

GFOA's Committee on Governmental Debt Management periodically reviews all existing recommended practices to ensure that they reflect the latest debt practices and thinking. As part of the review process, the committee also considers whether it would be beneficial to combine practices that were meant to be used together. "Analyzing Debt Capacity and Establishing Debt Limits," for example, included all the essential ingredients of an effective debt policy, which were then reemphasized in "Development of a Debt Policy." The committee determined that combining the two into one new recommended practice would present a more complete picture of an effective debt policy.

"Debt management policies are written guidelines and restrictions that affect the amount and type of debt issued by a state or local government, the issuance process, and the management of a debt portfolio," the new practice states. "A debt management policy improves the quality of decisions, provides justification for the structure of debt issuance, identifies policy goals, and demonstrates a commitment to long-term financial planning, including a multi-year capital plan. Adherence to a debt management policy signals to rating agencies and the capital markets that a government is well managed and should meet its obligations in a timely manner.

Managed properly, debt can be an effective tool for furthering important government objectives. Debt financing for large capital improvements represents a practical alternative to pay-as-you-go financing that matches streams of costs and benefits over the useful life of an asset and promotes intergenerational equity. However, the burden of repayment is one that should not be taken lightly. Debt issuance must be managed in such a way that governments can continue to provide necessary and desired public services and repay all outstanding capital obligations. A debt policy establishes parameters to ensure that the overall debt program is managed within available resources.

The updated practice reaffirms...