CITY COUNCIL WORKSHOP AGENDA PACKET

Financial Management for Elected Officials January 2013 Institute for Local Government www.ca-ilg.org 17 Capital Financing and Debt Management Debt financing is neither a “bad” nor a “good”—it is simply a tool for achieving community goals. However, debt does come at the price of costs of issuance and interest charges, as well as the obligation to make regular loan payments and conform to market disclosure and terms of the debt instruments on an ongoing basis.27 Allowing these payments to become a dominant part of the agency’s budget limits the agency’s ability to respond to unplanned expenses. Debt financing is usually appropriate for: • Temporary Short-Term Cash Flow Issues. An agency may need to bridge cash flow gaps while waiting to receive key revenues (like property taxes in December and franchise fees in April). The agency may cover these gaps by issuing “tax” or “revenue” anticipation notes (sometimes known by the acronym “TRANs”). In this case, any amount borrowed must generally be paid back within a year. • Long-Term Improvements. Debt financing is also appropriate for truly high-priority, one- time improvements – when it makes sense for current taxpayers to share the cost with those who will benefit 20 or 30 years in the future. By contrast, borrowing for ongoing operational expenses or short-term capital needs is inadvisable. The length of the debt should never exceed the useful life of the debt-financed asset. Any agency’s ability to borrow and repay debt capacity is limited. Amounts borrowed for today’s project are funds that cannot be borrowed tomorrow. Amounts required for debt repayment in the future are funds that will not be available for other programs and services. Recognizing the significance of the decision to incur long-term debt for a public agency, California’s constitution requires the public voters to approve debt 28 that would be repaid from future general fund revenues.29 While there are a number of exceptions to this requirement (including the special fund doctrine for revenue bonds 30 and an exception for financing leases), the constitutional principle is important to keep in mind. Incurring debt obligates the community into the future and reduces financial flexibility. Accordingly, the benefits of doing so should outweigh these costs.31 Questions to Ask • Does the agency have a multi-year capital improvement plan? (Having such a plan enables decision-makers to consider key factors like project priorities, debt capacity and what role fees will play in financing). o If the agency has such a plan, is it realistic? If not, what steps are necessary to make it realistic? Page 67 of 109