Government Code (GC) section 8855(i) requires California public agencies to provide certain information to the California Debt and Investment Advisory Commission (CDIAC) no later than 30 days prior to the sale of debt. CDIAC created the Report of Proposed Debt Issuance (RPDI) for this purpose.
SB 1029 (Chapter 307, Statutes of 2016) amends GC section 8855(i) to require issuers to certify on the RPDI that they have adopted local debt policies and that these debt policies incorporate the issue of debt being reported to CDIAC. In addition, the policies must address five elements:
- The purposes for which the debt proceeds may be used;
- The types of debt that may be issued;
- The relationship of the debt to, and integration with, the issuer’s capital improvement plan or budget, if applicable;
- Policy goals related to the issuers planning and objectives, and;
- The internal control procedures that the issuer has implemented, or will implement, to ensure that the proceeds of the debt will be directed to their intended purposes.
Debt policies, if thoughtfully developed and employed, can assist debt managers to make decisions and support efforts to identify conflicts, inconsistencies, and gaps in a local agency’s approach to project finance. It can also be instrumental in setting a proper balance between limits on the use of debt financing and the need to respond to unforeseen circumstances and opportunities. Lacking a set of well-understood and well communicated policies, issuers may run into problems in both the issuance and administration of debt. Failures, including the injudicious use of debt, poorly structured debt or repayment, or not meeting disclosure or tax obligations, may result in ratings downgrades or worse, costly violations of securities law and erode the public’s confidence in their governmental agencies.
The Requirements of GC Section 8855(i) as Amended by SB 1029
Using the framework of journalistic inquiry, let’s talk about the requirements of SB 1029 that pertain to debt policies.
Who is subject to the new requirements imposed by SB 1029?
Section 8855(i) refers to “local” debt policies. CDIAC has understood this to mean that only local governments that issue debt are considered. CDIAC defines local governments to include any city, city and county, county, public district, public corporation, authority, agency, board, commission, or other local public entity. By definition, then, the State of California and its instrumentalities as well as not-for-profit organizations are excluded. However, even the State will soon implement debt management policies that cover most of the elements deemed to be ‘best practices’. Where the “who” question gets tricky is in a conduit financing. Whether a local government conduit issuer must have debt policies is contingent upon the nature of the borrower. If the borrower is also a local government then the conduit issuer is subject to the certification requirement. However, if the borrow is not a local government, a not-for-profit, for example, then it is not subject to the requirement.
What must an issuer do to comply with this new requirement?
The intent of SB 1029 is to encourage issuers to undertake a deliberative assessment of their community’s goals and objectives and their capacity to finance them through debt. As a result, their local debt policies must address the five (5) elements identified above. The debt policies must then be adopted by the governing body through a formal action.
How must an issuer make the certification required by SB 1029?
If you are a local government issuer that is subject to the requirement to certify that it has adopted local debt policies you must, when submitting the RPDI, respond to the following statement appearing on the
RPDI: “The issuer has complied with the requirements of SB 1029 with respect to local debt policies— YES, NO, N/A”.
If you have adopted local debt policies that meet the requirements of SB 1029 you will likely check the YES box. If you have not yet adopted, do not have local debt policies, or do not have local debt policies that comply with SB 1029 you will check the NO box. If you are not a local government or the borrower is not a local government you will check NA.
When must an issuer make this certification?
The triggering event is the submission of RPDI. As a result, if you are a local government issuer and submit a RPDI after January 1, 2017 you must respond to the statement regarding the certification of debt policies.
Keys to Success
It’s important to remember that governmental plans, particularly debt management plans, are not an event. They are a process. As a public agency, you are likely to be engaged in a continuous process of assessing your priorities and how you will finance them. If through debt, you should have already considered the type of debt your agency will assume and how much debt you will carry. Because the answers to these and other questions relating to the use of debt differ between agencies no one debt policy works for all issuers. When developing your local debt policies, you can ensure that they will comply with SB 1029 if you adhere to the best practice recommendations of the Government Finance Officers Association regarding writing debt policies. As for the five elements that must now be considered in your debt policies because of SB 1029, consider these points.
Include in your debt policies only the types of debt you are authorized to issue. If you cannot issue enterprise revenue bonds, do not include them in your debt policies. Describe the type of debt you are authorized to issue, cite the authority (statute or other authority), and the purposes for which each type of debt may be used.
Discuss the method of sale, including considerations and goals for determining which method will be used and when. Regarding debt structure, the policies should address the term of the debt, the structure of the debt service or amortization schedule, whether the issuer will provide for redemptions and what form, if any, of credit enhancement may be used.
To encourage an integrated planning process that acknowledges the issuer’s long-term strategies, the plan should reflect decisions made in the capital improvement or facility plan. This includes recognition of the particular projects, their costs, source of funding and financing. In addition, the plan should be supported by the issuer’s budget plan which identifies the uses of debt financing and the impact of servicing the debt on the issuer’s other programs and services. The issuer’s debt policies should affirm the issuer’s strategic plan or long-term financial plan by integrating the goals and objectives identified in them.
The issuer’s debt plan should address the agency’s internal control system and measures that will be taken to ensure that proceeds of the debt are spent in the manner intended. The internal control system is, itself, a combination of several other elements that should be set forth in a separate internal control plan. These include the agency’s accounting procedures, its audit programs, the use and role of oversight and external review bodies, and the bond documents that set up the financial accounts and assign responsibility for managing expenditures.
Additional information on this topic is contained in a CDIAC-hosted webinar on Creating SB 1029
Compliant Debt Policies available on CDIAC’s Education page at www.treasurer.ca.gov/cdiac/.