Preparing a municipal debt policy statement.

• Author: Hayllar, Ben

The cities of Pittsburgh and Philadelphia are responsible for managing their own general obligation debt as well as the debt of several municipal authorities. In an effort to consolidate the essential information about their debt responsibilities, the finance department of each of these cities produces an annual debt policy statement that provides debt schedules, elemental tax base-to-debt ratios and policies governing the issuance of long-term debt.

There are three purposes in preparing an annual debt policy statement. First, it provides finance officials with a comprehensive view of a city's long-term debt picture. The rigor of compiling data and preparing the 30-page book helps officials comprehend the trends and status of the subject. Second, the book makes it easier for policy makers, such as city council, to understand the issues concerning debt issuance and management. And finally, the publication of the book is particularly welcomed by the rating agencies as a sign of a disciplined approach to borrowing.

The heart of the document is a summary of all bond issues for which the city is responsible, principal outstanding, issuance dates, final maturities and interest ranges. The book also provides updated debt service schedules for each year of the life of the issue for which the city is responsible. This table is broken down into annual principal and interest payments. These tables also include information on overlapping debt from the school district and other independent governmental units, as shown in Exhibit 1.

Other sections provide charts and graphs concerning debt service schedules for gross bonded debt, gross direct debt and overall net debt. Primary measurements of municipal borrowing capacity are charted to help decision makers formulate borrowing plans: these are expressed as ratios, such as debt per capita, debt service as a percentage of the annual general fund and debt as a percent of the principal local revenue source--real estate assessments.

In order to enforce a sense of discipline on debt management, the debt policy section defines how city debt can be structured. Key principles are spelled out clearly, such as the commitment that long-term borrowing only will be used for capital improvements or that general obligation debt service must remain below 15 percent of the annual operating budget. In addition, policies of a more technical nature, such as limiting the terms of issues or controlling the use of variable...