Benefits of Effective Debt Management

Guest Correspondence

BY KEVIN COOPER SRQ DAILY SATURDAY PERSPECTIVES EDITION SATURDAY MAR 14, 2015

By Florida law, Sarasota County must submit a balanced budget on an annual basis. Because of that, and because many of the projects the County pursues require significant financial commitment, without the option to utilize debt financing the County would find itself struggling to keep up with current needs. The local government doesn’t have a credit card with which to make purchases, but it does have the ability to issue bonds and obtain loans.

Government debt financing works much like how individual debt financing works, a borrower is able to make large purchases by committing future revenue streams plus interest. A mortgage, car loan and/or a credit card are common examples of individual debt financing.  Government, as it utilizes debt financing, behaves much like its constituents in that it doesn’t always have to save to spend but, instead, can sometimes borrow to spend. 

Roughly 15 percent ($171,669,710) of the County’s nearly $1.15-billion annual budget is committed to satisfy principal and interest payments on bonds, commercial paper and other debt. It’s important to note a significant amount of the budget is comprised of internal fund transfers (i.e., moving money around), so the percentage of annual revenues committed to debt is much higher when backing out transferred funds. 

Perhaps thankfully, because debt service comprises such a considerable amount of its annual expenditures, the County Commission has approved a debt management policy which provides guidelines for staff in regards to managing the County’s debt. One of these guidelines is that, if bonds can be refinanced at a lower rate such that the net present value savings is at least 5 percent of the bonds being refunded, then staff needs to explore the opportunities to refinance that debt.

This may sound complicated, but it is pretty straightforward: as an example, if the County owes $20 million on a bond, then staff should pursue refinancing that bond if the savings are at least $1 million (i.e., 5 percent of the $20 million).

When the County is to able refinance general fund debt obligations at a lower rate, it reduces some of the amount that would otherwise have come out of the general fund to pay debt service. Any savings in debt service benefits the general fund, and reduces some of the financial pressure to raise millage. Put another way, it frees up funds in the general fund to use for other things. For surtax and utilities debt obligations, the benefit of refinancing is to accelerate some of the projects for the benefit of the public as more funding is made available.

The public should be aware that, since 2007, the County has saved approximately $70 million in total net present value and future savings through debt restructurings. Much of the County’s ability to refinance at favorable rates is due to its positive credit rating and sound fiscal policies.  Because of their efforts, County staff has been able to keep up with current projects and add some additional expenditures all without burdening citizens with tax increases. 

SRQ Daily Columnist Kevin Cooper is the vice president for Public Policy and Sarasota Tomorrow Initiatives for The Greater Sarasota Chamber of Commerce

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