1. Long-term debt will not be used to finance current operations or to capitalize expenses. The school district will avoid the use of long-term debt to finance facility maintenance, repairs, recurring equipment purchases, and other items traditionally funded in the annual operating budget.
The capitalization of expenses—that is, the shifting of operational costs, facility maintenance, and repair onto long-term debt—is a classic pitfall of government finance. The practice should be expressly prohibited.
2. Long-term debt will be used only for capital projects that cannot be financed from current revenue sources. Where acquisitions are financed by issuing bonds, the bonds will be paid off in a period not to exceed the expected life of the acquisition, using IRS depreciation schedules as a guideline.
This policy ensures that current funds, if available, will be used for capital projects before long-term debt is used. It also ensures payments will not continue to be made on acquisitions after their useful life has expired.
3. Total indebtedness of the school district will not exceed fifteen percent of the taxable valuation of the school district for any given year.
The legal debt limitation is fifteen percent,27 though it should be noted that qualified school bonds are exempt from this limit under Michigan law. Qualified school bonds are general obligations of the school district, while they are budgetary (sometimes called "moral") obligations of the state in the event of default. It is arguable as a matter of local district policy and of honesty to taxpayers and bond buyers that qualified bonds be included in the fifteen-percent limitation. This fifteen-percent limitation is a maximum; however, fiscal prudence and the financial situation of the district may warrant a lesser percentage.
4. The school district will retire fifty percent of the total principal outstanding for general obligation debt within ten years of the date of issuance.
This policy encourages repayment of debt in the shortest possible time without creating undue hardship for the taxpayers.28
5. The school district will use only level or declining debt repayment schedules; it will not use back-loaded or ballooning repayment schedules or variable-rate debt. When a bond issue for a capital project includes the purchase of technology, equipment, or other items having a shorter life expectancy than the capital project, then debt repayments for the capital project will not be deferred but rather made on a level or declining repayment schedule. The school district will avoid borrowing from the School Bond Loan Fund.
Level or declining repayment schedules incur less interest cost. Delayed repayment schedules, typically used in an over-optimistic expectation of strong long-term growth of tax base, incur greater interest cost. Delayed or back-loaded repayment schedules also lock future taxpayers into unnecessarily high debt repayment taxes. Variable-rate debt, dependent upon external rates and indices, is arguably a form of speculation.
6. The school district will not issue refunding (refinancing) bonds for the purpose of interest rate savings unless net present value savings exceed three percent of the par value of the proposed new bonds.
Three to five percent is the range for typical savings thresholds.
7. The school district will avoid the use of capital leases, certificates of participation, or similar instruments for the acquisition or use of facilities or equipment.
Capital leases (also called certificates of participation) are a form of lease obligation whereby a government enters into a lease agreement with a third party. The third party then uses the lease payments as security for obligations ("certificates" or conduit securities) that it issues for the acquisition of the facility or equipment to be leased. The government makes lease payments as a first budgetary obligation and no additional tax is imposed to secure the obligation. Therefore voter approval is unnecessary. But avoidance of voter approval creates suspicion, which is the main source of controversy for capital leases. Also, the government may vacate the lease through non-appropriation, and although capital leases are not considered "debt," such termination of the lease can have a serious impact on the government’s creditworthiness.29
8. The instruments of investment of capital funds will be limited to the following:
U. S. Treasury securities;
obligations of specific agencies of the federal government;
fully insured or collateralized certificates of deposit at commercial banks and savings and loans associations;
money market mutual funds whose portfolio consists of government securities;
local government pools or trusts; or
repurchase agreements collateralized by U.S. Treasury securities.
This policy ensures security of capital funds. Note that the 1994 financial disaster of Orange County, California, involving investments in derivatives could easily have been averted through a sound investment policy.30
9. Debt will be issued through the competitive bidding process except as expressly approved by resolution of the school board. If it is proposed that debt not be issued through competitive bidding, the resolution will state the compelling reasons why the competitive bidding process is not deemed suitable for the particular issuance of debt.
Competitive bidding can reduce interest costs. It avoids questions of unfairness and favoritism in the debt underwriter selection process. General obligation school bonds are typically not so complex, and marketing or timing considerations not so critical, as to warrant anything but competitive bidding for most bond issues.
10. The school district is committed to the principles of full and continuing disclosure and will comply with all applicable U. S. Security and Exchange Commission (SEC) rules, Government Finance Officers Association guidelines, and National Federation of Municipal Analysts recommendations pertaining to disclosure. The school district will use Generally Accepted Accounting Principles in the preparation of all financial statements used in complying with disclosure requirements, and will submit annual financial information to securities information repositories as required. All financial statements pertaining to debt issuance will be audited annually by an independent, certified public accounting firm. All financial information and other data pertaining to debt issuance will be provided only by the school board or its authorized representative.
Under SEC regulations, full and continuing disclosure is mandatory for issuers of debt. An explicit policy statement stresses its importance to the issuer.
11. Consultants providing advice or counsel for any issuance of school district debt and broker/dealers acquiring school district debt shall be independent. The financial advisor, bond counsel, and broker/dealer for any issuance of debt shall each be separate entities having no relationship to one another.
This policy prevents conflict of interest and incorporates and exceeds the requirements of Municipal Securities Rulemaking Board Rule G-23 (which permits financial advisor/underwriter relationships if such relationships are disclosed to the issuer).
12. Any financial advisor to the school district also capable of providing underwriting services shall be prohibited from participating in the underwriting of any debt in the school district for a period of two years from the date of termination of his contract for financial advisory services.
This policy prevents "role-switching" and insures that the financial advisor, having no interest in underwriting the debt, will be able to provide independent financial advice.
13. The financial advisor and bond counsel shall provide full and continuing disclosure to the school district of any relationship or agreement, formal or informal, that may be in conflict with the best interest of the school district. The financial advisor and bond counsel shall further be prohibited from engaging in such relationships or agreements without the express prior consent of the school board. The financial advisor and bond counsel shall certify in writing their compliance with this policy.
The potential for conflict of interest, where it may exist, should be expressly recognized by bond consultants.
14. Selection of consultants for the providing of professional services for any bond issue will be based upon qualification, through formal requests for proposals. Procurement of services related to the issuance of bonds, including selection of paying agent, bond registrar, escrow agent, bond printer, official statement printer, and trustee will be through competitive bidding whenever possible.
The process for securing bond-related services should be open, fair, and objective, as it should be for all public procurement.31
15. Public funds, property, and resources will not be used, directly or indirectly, to influence the outcome of ballot questions. No financial consultant, bond counsel, underwriter, broker/dealer, or other person or business involved or potentially involved with the issuance of debt in the school district shall provide contributions to ballot committees involved in school district bond elections, nor shall they provide contributions to any person able to recommend their services.
Financial consultants, bond counsel, underwriters, broker/dealers, and design consultants should be expected to uphold a position of neutrality with respect to the outcome of bond elections, as should the school district itself. Bond professionals and others should be barred from "pay to play" practices—that is, making political contributions to those involved in the issuance of public debt.32