A Deeper Understanding of Debt Management.

Author:Campbell, Mark B.
 
FREE EXCERPT

In the narrowest sense, the concept of debt management as used by public finance professionals covers the financial and regulatory obligations imposed on debt issuers by agreements and laws. But this definition does not incorporate the full scope of tasks and duties associated with managing a public debt portfolio. A broader understanding of debt management, one that accounts for the interplay between organizational, economic, and political forces, would help issuers by increasing the likelihood that they will identify the risks associated with managing their debt portfolio--and in doing so, they are more likely to develop strategies to eliminate or mitigate that risk, and to be better able to plan and manage their obligations.

WHY DEBT MANAGEMENT IS IMPORTANT

Government debt portfolios are complex, involving different commitments, securities, and risks. Failing to adopt and maintain adequate debt management practices leaves issuers exposed. Points of weakness include:

* Subjecting the Agency to Increased Structural Risk. Issuers should avoid even minor levels of risk in their debt portfolios. Unfortunately, some do not. In an effort to lower costs, some issuers may rely too heavily on short-term debt and expose themselves to interest rate risk as a result. Others may take on forms of debt that include terms (e.g., acceleration provisions) that may affect their ability to meet other outstanding obligations.

* Incomplete Understanding of Debt Burden. Debt limits are either set by statute or policy. Neither reflects the issuer's capacity to generate the required revenues to repay the debt, and they do not necessarily take the perspective of the taxpayer into account in considering the impact of overlapping debt.

* Planning Processes Do Not Tie Together. Public agencies often do not undertake the effort to develop and administer plans that can be used to guide financing decisions or achieve policies and goals. That means they do not use the outcomes of their strategic plan, capital plan, or long-term financial plan to guide debt financing decisions.

* Inadequate Data to Manage Long-Term Financial Risks. Issuers focus their attention on the debt schedule and repayment, but they may not collect or have the technological capacity to manage other data points (e.g., refundings, swap and arbitrage calculations, or term bonds) on their financial position.

* Inadequate Data to Understand the Benefits of Debt Financing. Post-issuance data collection, particularly with regard to the use of proceeds, is seldom a consideration for issuers. As a result, neither the issuer nor the taxpayer understands the full cost or benefit of issuing debt. Issuers are also susceptible to the misuse of bond funds and the long-term legal and financial impacts of resolving such problems.

THE OBJECTIVES OF A FULL-SCOPE DEBT MANAGEMENT SYSTEM

It is generally assumed that a debt management system will provide the resources necessary to allow a public agency to finance its borrowing needs...

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