Commissioners weigh policy on county debt

Mar. 28, 2013 @ 05:41 PM

Union County officials presented a policy about how the county should issue new debt and handle current debt during a Thursday morning meeting of the Union County Board of Commissioners.

The proposed debt policy provides county officials a path to managing debt in ways most beneficial to the county. Most of its debt is already structured in ways that keep interest rates low, reflect well in bond ratings and allow a maximum annual cash flow. But few of those practices were formalized into a formal document.

“It’s really integrating in policy what we already do in practice,” Finance Director Jeff Yates said.

If and when county officials take on more debt, they first must consider what residents can afford, Yates said. Union County’s tax base is heavily residential. A fast-growing population required the county to borrow to build new schools several years ago. The county must plan new capital projects while still making debt payments for school construction.  

If the county chooses to take on more debt, the proposed policy requires the county to have certain service providers in place, such as a finance director, financial advisor, bond council, underwriters and trustees. Officials would also decide on the structure of the sale, whether it is competitive so the county gets the lowest total interest cost, a negotiated sale where an underwriter buys whatever bonds are not sold or private placement though an underwriting bank.

The county would keep an updated debt and budget projections to estimate the money needed year-by-year, making budget planning easier, Yates said.

Once bonds sell, the county must follow any bond requirements as part of post-issuance compliance, Yates said. That was written into the proposed policy as a necessary step.

The policy also touches on how to manage old debts. Where prudent, county officials can change debt structure to mitigate risk or refunding when beneficial to the county. It limits the amount of variable rate debt to 10 percent of the total debt portfolio because of risk. Currently, the county has about 26 percent in variable rate debt. That was an acceptable ratio before the recession, but now the market favors less volatile debt structures.

“In our last discussion, particularly with S&P, they were a little concerned with our level variable rate debt,” Yates said. “In fact, that was one of the major things that they kind of listed as a hinderance to getting an upgrade in our bond rating was the level of variable rate debt.”

Having a debt policy in place also benefits the county’s bond rating. By having rules in place for dealing with budget deficits by cutting operational expenses instead of using one-time money to plug the gap, it shows rating agencies the county can trim spending to fit revenues, Yates said.

The policy also sets some benchmarks the county has not reached yet, Yates said. The current debt ratio is about 18 percent of the General Fund balance, but the policy sets the maximum at 15 percent. The Local Government Commission, the state agency governing local government finances, requires the county to limit its debt to no more than 8 percent of the total county’s annual assessed property tax revenues.

“We’re not there yet, but we’re laying the framework for it,” Yates said.