New debt policy ‘imposes order & discipline’

Covington codifies borrowing guidelines, limits to help improve credit
COVINGTON, Ky. - Cities shouldn't make the decision to borrow money lightly, especially when taxpayers are ultimately on the hook for paying that debt back.
That's one reason why the City of Covington has created a formal debt management policy and is codifying that policy as a new Chapter 40 in its Code of Ordinances.
Bond rating agencies recognize the need for such a policy, and it's also recommended by the national Government Finance Officers Association, Covington Finance Director Muhammed Owusu told the Covington City Commission.
"This is an accomplishment with practical, real impact," Owusu said. "Adherence to a debt management policy signals to the rating agencies and the capital markets that the City is well-managed and should be able to meet its obligations in a timely manner, and thus they look on us more favorably."
The City Commission approved the policy by a 5-0 vote Tuesday night.
Among other things, the policy sets forth parameters for issuing debt and managing outstanding debt; provides guidance to decision-makers regarding the purposes for which debt may be issued, the types and amounts of permissible debt, and the method of sale that may be used; and spells out when the City can refund or restructure debt.
Specifically, for example, Covington's policy: 
  • Requires the City to prepare and annually update a five-year Capital Improvement Program with the goal of funding at least 10 percent of projects' aggregate cost with cash. 
  • Dictates that long-term debt would be issued only for capital improvements or to buy equipment with a life expectancy of at least five years (meaning the debt shouldn't outlast the useful life of the stuff it funds). 
  • Forbids the use of long-term debt to finance annual operating needs while reserving short-term debt for that purpose only when a known source of revenue will be received in the current fiscal year or when there is a "clear financial emergency." 
  • Structures the City's net tax-supported debt in a manner that not less than 60 percent of it will be retired within 10 years. 
  • Sets a limit for debt that is significantly stricter than the limit for Cities set by the Kentucky Constitution. 
Owusu said the Constitution allows Cities to borrow up to 10 percent of the assessed value of real property within the City. That constitutional limit would allow close to $211 million in debt in Covington, he said. "That's not realistic or advisable," he said.
Instead, Covington is self-imposing its own debt target in the new policy, saying that net tax-supported general obligation debt service shall not exceed 10 percent of General Fund revenues. Currently, the yearly debt service (i.e. the payment of interest and principal) on the City's debt works out to 8.7 percent of its General Fund revenues.
"Our goal is to drop that number to 5 percent," Owusu said.
According to the new ordinance, the debt policy "enhances the quality of decisions" ... "imposes order and discipline" ... and "demonstrates a commitment to long-term financial planning objectives."
It's just one more in an array of new policies, procedures, and practices in the Finance Department designed to institutionalize best practices and build trust among taxpayers and others who deal with the City on financial matters, City Manager David Johnston said.
"This is a professionally run department, and I congratulate Muhammed and his entire team," Johnston said.
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