Planning for debt management: a computer-based tool for analyzing debt capacity.

• Author: Wales, Leonard P.
• Position: Includes related article on debt management decision support model

Seeking a close coordination of the five-year financial forecast with the five-year capital improvement plan, Fairfax County developed spreadsheet programs that merge the two planning processes to produce analyses of cash-flow patterns, match bond sale amounts to construction needs, and balance debt levels with current and projected revenue patterns.

In 1992, Fairfax County, Virginia, was faced with a recession which had among its negative effects a diminution of the county's debt capacity. At that time, the authorized and planned five-year capital improvement program (CIP) projected requirements for new debt approaching $975 million through 1997. These requirements reflected capital needs for schools, roads, a new jail, parks, storm drainage and various other public improvements. The county's existing debt was already more than $940 million, and debt service claimed 9 percent of the general fund budget. The planned program was projected to increase debt service requirements to well over 11 percent of the budget if carried out as planned. It was believed that increasing levels of debt would jeopardize the county's coveted triple-A bond rating. As a result, long-standing county management principles and objectives were closely examined for continued relevance and effectiveness under the new fiscal realities.

Policies Govern Planning

Since 1975, Fairfax County's financial management has been governed by a set of firm principles designed to ensure the long-term stability of county finances. These policies, known as the Ten Principles of Sound Financial Management and presented in the accompanying sidebar, were developed as part of an effort to transform the county's credit rating from a weak AA to a strong triple-A - the highest rating given by the leading rating agencies. Both of the leading rating agencies have granted Fairfax County a triple-A rating since 1978, thus providing Fairfax County bonds an unusually high level of marketability. As a result, the county is able to borrow for needed capital improvements at low rates of interest, realizing significant savings in debt service.

Among the financial management principles is a self-imposed limitation on net debt which restricts debt service as a percent of general fund expenditures - it may not exceed 10 percent of general fund expenditures. This crucial provision is designed to ensure sufficient resources are available for essential services, such as schools and public safety.

Fairfax County uses two planning systems for financial management governed by the Ten Principles:

* the five-year financial forecast, which focuses on recurring tax revenues and operating expenditures, and

* the five-year capital improvement program.

During the growth years of the 1980s, only a loose association between the two was necessary. Management of bond sales was accomplished through analysis of cash-flow requirements and by matching projected debt service to projected revenues and expenditures. In the 1980s, the financial forecast always projected more than enough revenues to fund all operating requirements, pay-as-you-go capital needs, and bond programs, and the debt ratios were never approached.

In the new fiscal situation of the 1990s, it became clear that closer coordination of the two plans was required. In order to plan appropriately in this situation and rationally address potential conflicts, a more effective decision-support mechanism was required, one that would blend the capital planning process and financial forecasting to maximize the application of resources within the constraints of fiscal reality. Using the Ten Principles as the basis for the program, the planning processes were merged to analyze cash-flow patterns, match bond sale amounts to construction needs (i.e., a just-in-time method of planning sales), and balance debt levels with the current and projected revenue patterns.

The Debt Capacity Model

A personal computer-based model was developed as the decision support tool for the new planning process. A series of linked spreadsheets was designed by county staff to calculate the ratios generated by various combinations of demographic, financial forecast, and capital projects data. Primary inputs (and resources) included

* projected cash flow for authorized projects and planned sales (CIP),

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