Legal Requirements:

Pursuant to TCA Section 9-21-134(b), the State Funding Board is authorized to develop model financial transaction policies for public entities, including county governments. The State Funding Board, as amended June 23, 2025, adopted updated guidelines for adopting a debt management policy. ^[1]

These guidelines reflect four guiding principles for strong financial management in the public sector:

1. Understand the transaction;
2. Explain to citizens what is being considered;
3. Avoid conflicts of interest; and
4. Disclose costs and risks.

All county government entities that incur or issue debt must have a debt management policy adopted by its legislative body. This policy must contain the minimum requirements as described below. The policy shall also identify the types of debt the county currently uses or anticipates using for financing.

Minimum Requirements:

Debt management policies, including any revisions, must be filed with the Comptroller of the Treasury at LGF@cot.tn.gov.

The policy should address the following:

1. The information that is to be provided to the public, governing body, and all stakeholders regarding:
   1. the decision to issue debt, how debt will be structured and sold, and all costs involved in issuing debt (See glossary for a definition of costs.);
   2. the selection process for professionals who provide services related to debt issuance;
   3. conflicts of interest;
   4. all ongoing debt and related costs (including interest and recurring administrative costs); and
   5. federal and regulatory compliance issues.
2. A process for legal review of proposed debt to be issued to ensure the public entity is both authorized to issue the debt and in compliance with applicable state, local, and/or federal laws.
3. The overall financial management strategy and the purpose for issuing debt.
4. Transparency, the hiring of financial professionals, and conflicts of interest. (See Appendix A for minimum language to be included.
5. Terms of the debt issue that are required to be disclosed, such as maturity, interest rate, and scheduled debt service. In no event may payment of either principal or interest exceed the useful life of the asset financed.
6. Whether deferral of payment of principal (or backloading) is allowed. If permitted, the policy must require specific justification for the repayment structure. If local governments issue debt with a balloon structure, the government must comply with the requirements of Tenn. Code Ann. § 9-21-133, which requires approval by the Tennessee Comptroller's Office prior to the debt being issued.
7. Maximum levels or amounts of debt that the public entity may issue per security type. This may be based on locally adopted economic indicators, such as debt per capita, a comparison of debt to property values, or debt service as a percentage of revenues or expenditures. The policy should require that this limitation be evaluated before additional debt is issued and reviewed periodically with the governing body.

8. How the public entity addresses risks associated with debt instruments that include:

   1. a put (or tender) options (a provision where the holder of the debt can force repayment with a limited notice period);
   2. an interest rate reset provisions; or
   3. a variable interest rate.

   This may include setting a maximum amount, level, or percentage of debt the public entity is willing to have outstanding at any time that includes any of the above risks and maintaining reserves sufficient to safeguard against risks. Debt issued by local governments with a variable interest rate, rate reset provision or put option must be approved by the Comptroller's Office prior to being issued as required by Tenn. Code Ann. § 9-21-409.

   The State, as well as a few larger local governments, utilize commercial paper programs and revolving lines of credit to finance capital projects to be refinanced at a later date with long-term debt. Commercial paper is issued at variable rates, with terms ranging from 1 to 270 days, and at maturity commercial paper may be reissued at a different interest rate and with different terms or repaid. If public entities plan to issue commercial paper the policy should describe the program (including the type of commercial paper authorized to be issued, regular and/or extendable), outline the risks involved, and how the public entity manages the risks. The percentage of debt allowed to be outstanding with a variable interest rate generally excludes commercial paper due to its inherent short-term nature.

9. A plan for regularly reviewing and amending the policy. At a minimum, the policy must be reviewed each time there are legislative changes that impact the policy and when there is a change in the administration or governing body.

Minimum Language Required:

1. Transparency
   • The Entity shall comply with legal requirements for notice and for public meetings related to debt issuance. In the interest of transparency, all costs (including interest, issuance, continuing, and one-time) shall be disclosed to the citizens/members, governing body, and other stakeholders in a timely manner. (The method for disclosure of costs and other information, including documentation of compliance with the policy, shall be developed and outlined in the policy.)
2. Professionals
   • The Entity shall require all professionals engaged in the process of issuing debt to clearly disclose all compensation and consideration received related to services provided in the debt issuance process by both the Entity and the lender or conduit issuer, if any. This includes “soft” costs or compensations in lieu of direct payments.
   • Counsel: The Entity shall enter into an engagement letter agreement with each lawyer or law firm representing the Entity in a debt transaction. (No engagement letter is required for any lawyer who is an employee of the Entity or lawyer or law firm which is under a general appointment or contract to serve as counsel to the Entity. The Entity does not need an engagement letter with counsel not representing the Entity, such as underwriters ' counsel.)
   • Financial Advisor: If the Entity chooses to hire financial advisors, the Entity shall enter into a written agreement with each person or firm serving as financial advisor for debt management and transactions.
   • Underwriter: If there is an underwriter, the Entity shall require the underwriter to clearly identify itself in writing (e.g., in a response to a request for proposals or in promotional materials provided to an issuer) as an underwriter and not as a financial advisor from the earliest stages of its relationship with the Entity with respect to that issue. The underwriter must clarify its primary role as a purchaser of securities in an arm 's-length commercial transaction and that it has financial and other interests that differ from those of the Entity. The underwriter in a publicly offered, negotiated sale shall be required to provide pricing information both as to interest rates and to takedown per maturity to the governing body (or its designated official) in advance of the pricing of the debt.
3. Conflicts
   • Professionals involved in a debt transaction hired or compensated by the Entity shall be required to disclose to the Entity existing client and business relationships between and among the professionals to a transaction (including but not limited to financial advisor, swap advisor, bond counsel, swap counsel, trustee, paying agent, underwriter, counterparty, and remarketing agent), as well as conduit issuers, sponsoring organizations and program administrators. This disclosure shall include that information reasonably sufficient to allow the Entity to appreciate the significance of the relationships.
   • Professionals who become involved in the debt transaction as a result of a bid submitted in a widely and publicly advertised competitive sale conducted using an industry standard, electronic bidding platform are not subject to this disclosure. No disclosure is required that would violate any rule or regulation of professional conduct.

Before adopting a debt management policy, county legislative body members should have an adequate understanding of public finance to participate effectively in discussions and benefit from external professional assistance. However, it's important to note that the county remains solely responsible for the development, adoption, and implementation of its debt management policy, regardless of the assistance provided.

^[1] https://www.comptroller.tn.gov/content/dam/cot/slf/documents/policies/sfb/AdoptingaDebtManagementPolicy.pdf