(1) As part of the Commission’s operating and capital budget approval process, the Prince George’s County Council and Montgomery County Council establish spending affordability limits, which include identification of the greatest debt service that can be realized by the Commission in a given fiscal year.

Except for capital projects with dedicated funding sources, such as grants, appropriations, the Commission’s system development charge, etc., WSSC’s capital expenditures are funded principally with debt. Capital projects usually have a long useful life and will serve future ratepayers as well as current ratepayers. Debt issues are therefore structured in a manner that provides for the retirement of debt that is equitable, spreading the cost of capital projects over their useful lives.

(2) Projects deemed to be debt-eligible should:

(1) Policy on Terms for Debt. The Commission’s debt typically takes the form of general obligation bonds and notes, with the pledge of the levy of an unlimited ad valorem tax upon the assessable property of the Washington Suburban Sanitary District for repayment. However, substantially all of the debt service on WSSC bonds and notes of the Sanitary District is paid from revenues that WSSC derives from its water consumption charges, sewage usage charges, front foot benefit charges and assessments and other available funds. Through sound financial management and the long-term strength of the local economy, the Commission’s continuing objective is to maintain the highest quality rating of its general obligation bonds, AAA. This top rating by national rating agencies, enjoyed by very few local governments in the country, assures the Commission of a ready market for its bonds and the lowest available interest rates on its debt.

To maintain the AAA rating, the Commission adheres to the following guidelines in deciding how much additional debt, total debt and instrument type should be issued.

(2) General Obligation Bonds. General obligation bonds are general obligations of the Sanitary District that will mature no later than 40 years from the date of issuance or such later time that may be authorized under the PUA. The Commission will structure its debt based on advice of its financial advisor to enable issuance at the lowest possible cost considering benefits and risks associated with the recommended structure.

While level debt retirement (amortization) was historically the most commonly utilized structure for the bonds, the Commission gives consideration to alternative methods of structuring debt to support the Commission’s capital program. Debt may be structured with level principal, equal payments or other amortization schedules which best meets the Commission’s financial plan. The Commission shall consider alternative methods of structuring debt retirement as (a) financial and budgetary objectives change from time to time, (b) market conditions dictate, (c) project useful life is considered, and (d) relevant regulations and statutes evolve.

The bonds generally provide funding for the water supply facilities and construction or reconstruction of major water supply lines and transmission mains, for sewage disposal facilities and construction or reconstruction of large collection mains, and for other uses identified in the Annotated Code of Maryland. The bonds may also be issued to replace short-term bond anticipation notes.

(3) General Obligation Variable Rate Notes. The use of variable rate debt allows the Commission to take advantage of short-term interest rates, which are typically lower, as well as to provide interim financing for the water and sewer projects comprising a portion of the Commission’s capital program. The Commission has established a general obligation multi-modal bond anticipation note program (the “BANs”) whereby the notes may bear interest in a weekly mode, a daily mode, a commercial paper mode, a term-rate mode, or a fixed-rate mode. In deciding to utilize this note program, the Commission shall consider market conditions, funding needs, the level of variable rate debt outstanding, and other relevant issues when determining in which mode the notes will be initially issued, and reserves the right to convert to a different mode if market conditions change. Historically, the Commission has utilized the weekly mode.

The principal of the BANs is amortized as if they were bonds, with associated debt service utilizing the same revenue sources as bonds. BANs are also payable from the proceeds of the long-term water supply bonds, sewage disposal bonds and general construction bonds of the District. When replaced with bonds, the life of the bond issue is adjusted to complete the life of the BANs from its original issuance, based on the Commission’s policy on the life of its bonds. For example, if a BAN was issued five years previously, and the Commission’s policy on bond life was 20 years, then a bond issuance that would replace the BAN would have a 15-year amortization.

(4) Use of Maryland State Revolving Loan Fund. The Commission has previously participated in the revolving loan fund offered by the Maryland Water Quality Financing Administration. This loan fund was established by the Maryland General Assembly for the purposes of providing below-market interest rates for qualifying water quality projects. When advantageous to the Commission, debt financing via this program will be pursued.

(5) Use of Current Revenues and Accumulated Net Revenues as PAYGO. Pay-as-you-go (“PAYGO”) funding is set aside in the opening budget and is used instead of bonds for debt eligible expenditures. To reduce the impact of capital programs on future years, the Commission may fund a portion of its CIP on a pay-as-you-go basis. PAYGO funding can save money by eliminating interest expense on the funded projects, but comes at the cost of expending current revenues for long-term assets. The use of PAYGO for capital expenditures can be adjusted in the event of sudden revenue shortfalls or emergency spending, thus providing improved financial flexibility.

Use of current revenues or accumulated net revenues to fund capital projects as PAYGO financing may be desirable since, when applied to debt-eligible projects, it reduces the debt burden of the Commission. Decisions to use current revenue funding for the CIP have impacts on future resources available to annual operating budgets, and require recognition that certain costs of public facilities should be supported on a current basis rather than paid for over time. Use of accumulated net revenue constitutes a one-time revenue source, and, as such, should be considered for the funding of capital assets or other nonrecurring expenditures so as not to incur ongoing expenditure obligations for which revenues may not be adequate in future years.

(6) Use of Federal and State Grants and Other Contributions. Grants and other contributions should be sought and used to fund capital projects whenever they are available on terms that are to the Commission’s long-term fiscal advantage. Such funding should be used as current revenues for debt avoidance and not for debt service.

(7) Operating Budget Impacts. In the development of capital projects, the Commission evaluates the funding source of a project on the operating budget and displays such sources on the project description form. In evaluating the value of constructing or acquiring assets funded with debt, the Commission strives to ensure that funding is available not only for the debt service but also for the subsequent annual operation and maintenance costs of the asset.

(8) Use of Revenue Bonds. Revenue bonds are limited obligations, secured by the pledge of particular revenues to their repayment in contrast to general obligation debt, which pledges the Commission’s overall unlimited ad valorem taxing authority. The revenues pledged may be those of a special revenue fund, or they may be derived from the funds or revenues received from or in conjunction with a project. Pursuant to the PUA, the Commission is authorized to issue revenue bonds having a maturity date no later than 50 years from the date of issuance. The Commission has never issued revenue bonds, but, if it were to do so, would have to ensure that the ratings of its general obligation debt were not impaired by the terms, conditions, or obligations of the revenue bonds. (REG-FIN-FI-2015-002 § V)