Elements of a comprehensive local government debt policy.

• Author: Miranda, Rowan

An analysis of 97 debt policies from a large sample of cities identifies 36 factors commonly considered and their frequency of use.

A formal debt policy is essential to effective financial management. In 1995, the Government Finance Officers Association (GFOA) stated that a formal policy is a recommended practice that should be followed by all jurisdictions intending to issue debt. A debt 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. For these reasons, a debt policy is viewed favorably by credit rating agencies. The GFOA's statement outlined several major elements that should be addressed by a debt policy; these are shown in the accompanying sidebar.

Debt policies are written guidelines and restrictions affecting the amount, issuance process, and type of debt issued by a governmental entity. This article summarizes the findings of a November 1995 survey which studied such policies across a large sample of cities. An analysis of individual policy statements identified elements that are not included in the GFOA's recommended practice but are nevertheless relevant to a comprehensive debt policy. The findings of this study are presented by the authors as a checklist of elements for financial managers to consider when designing a debt policy.

In 1995, the City of Pittsburgh sought to compare its debt issuance practices to those of comparable jurisdictions as part of an effort to develop a new debt policy. The following methodology was utilized. A sample of cities was identified based on membership in the GFOA. Membership information was provided by the GFOA for all municipalities with a population of 25,000 or more, and a sample of 600 municipalities was identified, based on population.

In August 1995, a standard letter was sent to the chief financial officer of each of the 600 municipalities; the letter requested a copy of the formal debt policy adopted by that government. Follow-up phone calls were made approximately three weeks after the letter was sent if no response had been received by that time. In several cases, the government reported that it had no formal debt policy but that its statutory restrictions were viewed as the "policy statement." No response was received from several governments despite written requests and follow-up phone calls. The number of debt policies received was 97, 16 percent of the sample.

Each policy statement was reviewed using content analysis - a methodology frequently used in the social sciences. Content analysis entails ascertaining patterns in policy statements and then classifying these patterns by theme. By its very nature, content analysis is a qualitative methodology and hence subjective. The application of the methodology was relatively straightforward since common features were repetitively identified and classified through an iterative process.

Seven major categories were identified by the content analysis: 1) conditions for debt issuance; 2) restrictions/limitations on debt issuance; 3) debt service limitations; 4) limitations on outstanding debt; 5) characteristics/terms/provisions of debt issuance; 6) debt issuance process; and 7) other forms of debt. Subcategories were developed under each of the seven major categories. The resulting 36 subcategories, or elements of debt policy statements, are discussed in the following seven sections of this article; examples are cited to amplify or illustrate the nature of policies encompassed in the various categories. Exhibit 1 lists the frequency of 36 elements within the debt policies analyzed.

Conditions for Debt Issuance

A number of policies were identified which generally specified the conditions or purposes for which debt could be issued; these were classified into the five subcategories discussed below: 1) purposes and uses of debt, 2) capital expenditures, 3) project life, 4) types of debt, and 5) refunding bonds policies.

Purposes and uses of debt policies identify the nature of projects and/or expenditures for which bond proceeds can be used. Project-oriented policies generally focused on "major capital infrastructure creation including planning, design, and land acquisition" or "meeting the capital needs of the community." Philosophical policies are used to set a tone such as "debt should not constitute an unreasonable burden to residents and taxpayers" or "use self-supporting debt wherever possible." Equity is also a concern ("matching of benefits with payment" or "a significant proportion of...