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Financial Management Series Number 5 DEBT MANAGEMENT Alan Probst Local Government Specialist Local Government Center University of Wisconsin - Extension. Capital Financing Strategy.
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Alan ProbstLocal Government SpecialistLocal Government CenterUniversity of Wisconsin - Extension
Manage debt to borrow for the right projects at pre-determined borrowing points that maximize the government’s borrowing efficiency
Wisconsin Constitution limits county, municipal, and town borrowing and other debt to 5% of equalized taxable property
For a local government to decide how much debt it can afford to issue, it must look at bond and debt ratios. Common ratios are:
The Wisconsin Constitution also specifics HOW and WHEN local government debt must be repaid
Before a governmental body decides to borrow or sell debt, it needs to determine its financial status, i.e. whether it can afford to incur debt
Bond ratings are an evaluation of the insurer's credit quality rated by:
Your bond rating is influenced by such factors as:
Pays for capital projects and acquisitions from sources other than debt such as current taxes and revenue; funds from Capital Reserves; special assessments or impact fees; and grant revenue from federal, state, or foundation sources
Every long-term improvement or expenditure is financed by serial debt issues with maturities arranged so that retirement of debt coincides with the depreciation of the project
When a projects' useful life finally ends, the last dollar of debt is paid off
When using debt financing, a Financing Plan should be set up to show a project’s anticipated effect on the local mil rate, the community’s financial position, and credit rating.
Serves as a financial planning tool:
1. Establishes priorities that balance capital needs with available resources
2. Pairs projects with their intended funding sources
3. Ensures orderly improvement or replacement of fixed assets
4. Provides an estimate of the size and timing of future bond sales
A written debt policy establishes guidelines for the use of debt
A municipality issues a $12,000 General Obligation Bond to build a state-of-the-art community recreation center, projected to last for 25 years plus, which was approved in an advisory referendum
The bond is issued at 4.15% interest over a 20 year period
Special assessment bonds
Tax increment financing bonds
Governments may issue short-term notes which have maturities of less than thirteen (13) months
If considering whether to borrow between funds, remember:
A bond issue should not exceed the useful life of the project being financed
“Management Policies in Local Government Finance,” ICMA University, 5th Edition, 2004
“Capital Budgeting and Finance: A Guide for Local Governments,” A. John Vogt, International City/County Management Association, 2004