BRADENTON, Fla. — The Tennessee State Funding Board is expected to approve a new model debt policy Wednesday establishing minimum requirements for all issuers selling debt, including state and local borrowers.
The move will help the state regain its standing as a leader in debt policies for state and local governments. Under the model, public entities issuing debt will be expected to adopt their own debt-management policy by Jan. 1, 2012, using the state model as a guideline.
State Comptroller Justin Wilson proposed the model policy as part of a comprehensive review he began shortly after becoming comptroller in early 2009 when he learned that some local governments with variable-rate debt and derivatives exposure experienced difficulties following the market meltdown.
Wilson proposed new, sweeping guidelines for the use of those instruments, which were adopted by the Funding Board in October 2009. Since then, he has been developing the state's debt-management model with input from the public and municipal market experts, he said.
The model suggests standards for governments to follow, such as setting limits on how much debt can be sold, restricting the use of back-loaded debt, and publicly disclosing details about each deal, the professionals involved, and costs of issuance.
"It's very common for debt decisions to be made by local governments that did not understand the decisions they made," Wilson said in an interview Tuesday. "They didn't make information available to their citizens and conflicts of interest were present that were not fully disclosed, and it was very difficult to figure out what the taxpayers paid for the transactions."
Wilson described the state model as a "roadmap" governments can use to develop their own debt-management policies. It is not intended to prevent issuers from selling debt.
"No policy will safeguard against bad decision-making or unforeseen events that might negatively affect an entity's financial situation," he said. "However, it seems smart for government officials to understand the transactions they are considering."
Nashville council member Emily Evans, who formerly worked for several municipal bond underwriting firms, said she is pleased that Wilson is moving forward with the debt-management model because many local governments don't have established policies to guide their decision-making processes.
"For many of these [issuers], an underwriter would show up, pitch a deal, and that was how debt decisions were made," Evans said. "The comptroller's policy establishes what are generally agreed to be best practices to protect local governments, allow for public and legislative review, and create a mechanism whereby the policy can be altered and amended as things change."
The challenge for Wilson will be ensuring compliance with the policies, she said.
Wilson said he does not anticipate having an enforcement division since the state's model is not proscriptive.
"It's more a way of doing things," he said. "It is not designed to prohibit any sort of transaction, but it is designed to have openness and more considered decisions that are clear and understandable."
The state's debt-management model includes recommendations for addressing financing needs, providing notices for public meetings related to debt sales, and disclosing all issuance costs, including compensation paid to market consultants.
The model recommends that issuers disclose how debt will be sold and structured, including a debt-service schedule outlining the rate of retirement for the principal amount.