We do issue long-term debt as part of our financial management plan. Debt is only issued for specific purposes and associated with long-term capital assets and projects designed to provide long-term benefit to the city.
Issuing debt allows us to invest in long-term improvements to streets, utility systems, etc. that would be cost-prohibitive if it were shouldered by today’s taxpayers alone. By spreading out the cost of improvements, we structure the expense across the useful life of the capital assets. These obligations have repayment schedules and are funded from various sources. We absolutely, positively do not issue “debt” to pay the bills each month or fund day-to-day operations.
Our Debt Outlook
Kansas law limits the city’s net outstanding bonded debt (exclusive of revenue bonds) to 30% of the assessed valuation of property. Our current statutory debt limit is $19,704,400. At the beginning of the year, we carried net outstanding bonds of $7,605,000 with maturities ranging from 2017 through 2034. This leaves a legal debt margin of $12,099,400, the amount that we have the ability to bond if we had to. With current debt at 39% of our bonded debt capacity, our city leaders are satisfied with the current position of our debt service. The City’s bonded debt was issued to fund street and other infrastructure improvements, including a water plant upgrade. The water portion of the bonded debt will mature in 2018 which will greatly improve that fund’s cash flow.
In addition to bonded debt, the city has entered into several loan agreements with the Kansas Department of Health and Environment (KDHE) to fund improvements to the water and sewer systems. At the beginning of the year we carried an outstanding balance on these loans of $15,531,340 with maturities ranging from 2017 to 2036. These state funded loans do not count against the legal debt margin.
Bond Rating
Our current bond rating from Moody’s is A1. This is considered Upper Medium Grade and is comparable to an A+ rating from other rating agencies. For our size and local economic condition, an A1 is exactly where we should be.
What influences a bond rating?
- Economic factors;
- Administrative factors;
- Financial factors; and
- Debt factors
Although we maintain a satisfactory bond rating, key steps to sustaining or- one day – improving our bond rating include preserving fund reserve of 15-20% across multiple years and promoting a strong local economy with a robust outlook.
Management Characteristics of Highly Rated Credits in U.S. Public Finance*
- An established rainy day/budget stabilization reserve.
- Regular economic and revenue reviews to identify shortfalls early.
- Prioritized spending plans and established contingency plans for operating budgets.
- A formalized capital improvement plan in order to assess future infrastructure requirements.
- Long-term planning for all liabilities of a government, including pension obligations and other post-employment benefits.
- A debt affordability model in place to evaluate future debt profile.
- A pay-as-you-go financing strategy as part of the operating and capital budget.
- A multi-year financial plan in place that considers the affordability of actions or plans before they are part of the annual budget.
- Effective management and information systems.
- A well-defined and coordinated economic development strategy.
*[Excerpted from Standard & Poor’s Ratings Direct, June 13, 2008]