One of the most important responsibilities of a city is to ensure that the needs of
its citizens are met. The city commission's preferred method of funding is "pay-as-you-go"
capital planning. As with all purchases, if the city were able to purchase capital
items without the use of financing options this would result in the lowest overall
cost but the greatest single annual cash flow decrease. The issuance of debt has historically
provided governments with a major source of funding for capital needs. Because of
the high cost of acquiring or replacing capital assets, governments are often not
in a position to be able to accumulate enough cash from current receipts to pay for
necessary improvements. Debt permits governments to acquire assets as needed rather
than wait until a sufficient amount of cash has been accumulated to begin capital
projects or improvements.
Debt issuance is subject to close public scrutiny, because it involves raising large
amounts of money, which obligates future generations of taxpayers. The decision to
issue debt has far-reaching consequences by committing the city's revenues for future
periods, and hence, limiting the city's flexibility in responding to changing service
priorities, revenue inflows, or cost structures. The debt issuance process is complex;
therefore, it is important that city officials recognize the need to understand and
formalize a process in order to make informed and objective judgments with respect
to the many decisions that are necessary to successfully complete a debt transaction.
The foundation of any well-managed debt program is a comprehensive debt policy. A
debt policy sets forth the parameters for issuing and managing debt and provides guidance
to decision makers, helping to ensure that debt is issued prudently and is affordable.
A debt policy recognizes a long-term binding commitment to full and timely repayment
of all debt as an intrinsic requirement for entry into the capital markets. Adherence
to a debt policy helps to ensure that the city maintains a sound debt position and
that its credit quality is protected. A debt policy is beneficial because it enhances
the quality of decisions, rationalizes the decision-making process, identifies objectives
to be implemented, and demonstrates a commitment to long-term financial planning objectives.
A consistently applied debt policy provides evidence to the rating agencies of a community's
commitment to sound financial management and controlled borrowing practices. As such,
it is regarded positively in evaluating a city's creditworthiness. It is important
that the debt policy be reviewed and updated on a regular basis to insure the use
of the city's resources to meet its commitment to provide needed services to its citizens
and to maintain sound financial management practices.
