Debt Service Fund Overview

Transcription

1 The Debt Service Fund is used to manage payments on all general government related debt. Required by Texas law, the Debt Service Fund is linked to the Interest and Sinking (I&S) component of the ad valorem (property) tax rate. In most Texas municipalities, the I&S levy funds the majority of annual debt service payments. In Westlake, Interest and Sinking revenues are only a subsidiary element of total Debt Service revenues. Transfers from the 4B Economic Development Fund, General Fund and the Visitors Association Fund comprise the bulk (93%) of Debt Service Fund revenues. Currently the Debt Service Fund is used to manage debt service payments associated with the construction of Westlake Academy facilities and various street projects. Any future debt issuances will also be paid from this Fund. Town Council and staff are dedicated to a conservative pattern of debt issuance that ensures property tax rates remain among the lowest in the region and attractive to prospective businesses and residents. Recognizing that long-term debt is usually a more expensive financing method, alternative financing sources will be explored before debt is issued. When debt is issued, it will be used to acquire major assets with expected lives which equal or exceed the average life of the debt issue. Revenues Total ad valorem property tax revenue for FY 2015/16 is budgeted to be $133,507. This amount represents a 24% decrease of $42,993 from the FY14/15 estimated revenues of $176,500 due to an additional $22K in receipts which reduced the tax rate needed to cover the debt for various street projects. Transfers In Total Transfers In for FY 2015/16 are budgeted to be $1,857,511, a less than 1% decrease of $1,763 from FY14/15 estimated transfers in of $1,859,274. o Transfers in from 4B Economic Development Fund account for $1,275,000 o Transfers in from General Fund account for $440,261. o Transfers in from Visitors Association Fund account for $142,250. Expenditures FY 2015/16 debt service expenditures are projected to be $2,013,494 This is a less than 1% increase of $884 compared to FY 2014/15 estimated expenditures of $2,014,378. FY 15/16 Debt Service Payment Breakdown Payments related to street infrastructure projects: o $154,903 on Series 2011 Certificates of Obligation Debt Limitations Westlake s legal debt capacity is limited by state rules which specify that the Town must be able to fulfill debt service payments on all outstanding general obligation debt from a maximum combined property tax rate of $1.50 per $100 of assessed valuation.

2 There are no debt limitations defined by local ordinance. Since Town Council and staff are committed to keeping the property tax rate at its current level, additional debt capacity must come from growth in the tax base. Payments related to the construction of Westlake Academy facilities: o $702,383 on Series 2007 General Obligation Refunding Bonds o $312,800 on Series 2011 General Obligation Refunding Bonds o $448,198 on Series 2013 Certificates of Obligation o $142,650 on Series 2013 General Obligation Refunding Bonds o $252,560 on Series 2014 General Obligation Refunding Bonds Historical Bond Issuances Issuances related to street infrastructure projects: o $ 2,095,000 Series 2011 Certificates of Obligation Issuances related to the construction of Westlake Academy facilities: o $12,400,000 Series 2002 Certificates of Obligation (refunded) Westlake Academy Phase 1 o $6,410,000 Series 2003 Certificates of Obligation (refunded) Westlake Academy Phase 2 o $7,465,000 Series 2007 General Obligation Refunding Bonds Partial refinance of Series 2002 Certificates of Obligation o $2,500,000 Series 2008 General Obligation Bonds Westlake Academy Arts & Sciences Building o $7,375,000 Series 2011 General Obligation Refunding Bonds Partial refinance of Series 2002 and 2003 Certificates of Obligation o $2,200,000 Series 2013 General Obligation Refunding Bonds Refinance of Series 2008 General Obligation Bonds o $ 8,500,000 Series 2013 Certificates of Obligation Westlake Academy Expansion o $ 1,980,000 Series 2014 General Obligation Refunding Bonds Partial refinance of 2003 Certificates of Obligation *Municipalities frequently refinance debt issuances to take advantage of changes in bond market interest rates. 20 Year Annual Debt Requirement $2.50 $2.25 $2.00 $1.75 $1.50 $1.25 $1.00 $0.75 $0.50 $0.25 $ Millions $1.246 $ $1.274 $ $1.088 $1.009 $1.127 $0.967 $1.160 $0.933 $1.198 $0.899 Principal $0.862 $0.824 $0.784 $1.232 $1.271 $1.311 Interest $0.741 $0.704 $0.653 $1.355 $1.390 $1.444 $1.494 $0.598 $1.554 $0.541 $1.953 $0.481 $2.028 $0.400 $2.119 $0.314 $2.195 $0.223

3 Debt per Capita In order to make apples-to-apples comparisons of debt levels between different municipalities, analysts often use measures like debt per capita, or the amount of governmental debt outstanding for each resident. Direct debt includes all long-term obligations directly supported by general revenues and taxes. It does not include interest expense. Westlake s debt per capita for FY15/16 is calculated at $22,070 and represents a 13% decrease of $3K from the previous year. Debt in Thousands $35 $30 $25 $20 $15 $10 $5 $0 Debt per Capita $26.45 $27.20 $27.04 $27.25 $25.79 $25.38 $25.39 $23.83 $21.34 $22.07 $ Debt Management Practices Debt management policies are written guidelines and restrictions that affect the amount and type of debt issued by a state or local government, the issuance process, and the management of a debt portfolio. A debt management 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, including a multi-year capital plan. Adherence to a debt management policy signals to rating agencies and the capital markets that a government is well managed and should meet its obligations in a timely manner. Debt levels and their related annual costs are important long-term obligations that must be managed within available resources. An effective debt management policy provides guidelines for a government to manage its debt program in line with those resources. The Town of Westlake debt management policies are reviewed annually and revised as necessary and address the following: Direct Debt - debt payable from ad valorem I&S tax, and other available fund of the Town. Interfund Borrowing loans for short-term cash flow needs. 1. Debt Limits - defines specific limits or acceptable ranges for each type of debt. Limits are generally set for legal, public policy, and financial reasons. For the Town of Westlake there is no legal limit to debt except by way of a tax rate limit. a. Legal limits are determined by: o State constitution and/or law which limit the Town s ad valorem rate. o Local charter, by-laws, resolution or ordinance, or covenant.

4 b. Public Policy limits include: o Purposes for which debt proceeds may be used or prohibited, o Types of debt that may be issued or prohibited, o Relationship to and integration with the Capital Improvement Program, o Policy goals related to economic development, capital improvement financings, tax increment financing, and public-private partnerships. c. Financial limits generally reflect policy or other financial resource constraints. Appropriate debt limits can positively impact bond ratings, if the government demonstrates adherence to such policies over time. Financial limits are often expressed as ratios customarily used by credit analysts. Different criteria for determining credit worthiness i.e. credit rating). Direct Debt can be measured or limited by the following ratios o Debt per capita, o Debt to personal income, Westlake holds a AA+/stable o Debt to taxable property value o Debt service payments as a percentage of general bond rating from Standard & fund revenues or expenditures. Poor s. DID YOU KNOW? 2. Debt Structuring Practices. Includes specific policies regarding the debt structuring practices for each type of bond, including: o Maximum term (often stated in absolute terms or based on the useful life of the asset), o Average maturity, o Debt service pattern such as equal payments or equal principal amortization, o Use of optional redemption features that reflect market conditions and/or needs of the government, o Use of variable or fixed-rate debt, credit enhancements, and short-term debt, and limitations as to when each can be used, and o Other structuring practices should be considered such as capitalized interest, deferral of principal and/or other internal credit support, including general obligation pledges. Their assessment reflects the Town s historically strong finances and management, fund reserves in excess of 50% of General Fund expenditures, and Westlake s participation in the Dallas - Fort Worth metro area economy. A strong rating allows Westlake to keep borrowing costs low. 3. Debt Issuance Practices. Provides guidance regarding the issuance process, which may differ for each type of debt. These practices include: o Criteria for determining the sale method (competitive, negotiated, placement) and investment of proceeds, o Criteria for issuance of advance refunding and current refunding bonds, o Selection and use of professional service providers, o Use of comparative bond pricing services or market indices as a benchmark in negotiated transactions, as well as to evaluate final bond pricing results, and o Use of credit ratings, minimum bond ratings, determination of the number of ratings, and selection of rating services.

5 4. Debt Issuance Analysis - All consideration of debt issuance for major capital assets will be prepared within the framework of a Council approved multi-year capital improvement plan and forecast for all Town facilities and infrastructure. 5. Analysis of Debt Issuance and Debt Issuance Alternatives - Staff will explore alternatives to the issuance of debt for capital acquisitions and construction projects. These alternatives will include, but not be limited to, o grants- in- aid o use of reserves o use of either current on-going general revenues or one-time revenues o contributions from developers and others o leases o user fees o impact fees 6. Use of Debt Financing - The useful life of the asset or project shall, at a minimum, exceed the payout schedule of any debt the Town assumes. Debt financing instruments to be considered by the Town may include: o General obligation bonds - These must be authorized by a vote of the citizens of Westlake. o Revenue bonds - These bonds generate capital requirements necessary for continuation or expansion of a service which produces revenue and for which the asset may reasonable be expected to provide for a revenue stream to fund the debt service requirement. o Certificates of obligation - These can be authorized by Council approval with debt service by either general revenues or backed by a specific revenue stream or a combination of both. o Lease/purchase agreements - These shall only be used to purchase capital assets that cannot be financed from either current revenues or fund balance/retained earnings and to fund infrastructure improvements and additions. 7. Assumption of Additional Debt - The Town shall not assume more tax-supported general purpose debt than it retires each year without first conducting an objective analysis as to the community's ability to assume and support additional debt service payments. 8. Affordability Targets - The Town shall use an objective multi-year analytical approach to determine whether it can afford to assume new general purpose debt beyond what it retires each year. This process shall compare generally accepted standards of affordability to the current values for the Town. The process shall also examine the direct costs and benefits of the proposed expenditures. The decision on whether or not to assume new debt shall be based on these costs and benefits and on the Town's ability to "afford new debt as determined by the aforementioned standards. The Town shall strive to achieve and/or maintain these standards at a low to moderate classification.

6 9. Debt Structure - The Town shall structure its debt payment schedules for general purpose debt to ensure level principal repayment schedules. The Town shall not assume any debt with "balloon' repayment schedules which consist of low annual payments and one large payment of the balance due at the end of the term. While balloon payment structures minimize the size of debt payments during the period, they force a large funding requirement on the budget of the final year. Given the uncertainties of the future, level payment schedules improve budget planning and financial management. 10. Sale Process - The Town shall use a competitive bidding process in the sale of debt unless the nature of the issue warrants a negotiated bid. The Town shall award bonds based on a true interest cost (TIC) basis as long as the financial advisor agrees that the TIC basis can satisfactorily determine the lowest and best bid. 11. Bond Rating Agencies Presentations - Full disclosure of operations and open lines of communication shall be made to the bond rating agencies. Town staff, with assistance of financial advisors, shall prepare the necessary materials and presentation to the bond rating agencies. 12. Continuing Disclosure - The Town is committed to continuing disclosure of financial and pertinent credit information relevant to the Town's outstanding securities. 13. Debt Refunding - Town staff and the financial advisor shall monitor the municipal bond market for opportunities to obtain interest savings by refunding outstanding debt. As a general rule, the present value savings of a particular refunding should exceed 3.5% of the refunded maturities.