Debt Policy Page Four
The MDTA’s carrying cost of cash is tied to its financing rates and its net carrying cost is the difference between the financing rates and multiyear average investment returns on cash reserves. Careful consideration is given to investment return volatility and minimizing net multiyear carrying costs of cash reserves. Recognize that the carrying cost of a larger reserve depends on the difference between the indirect borrowing rate 6 and the investment rate. In the current yield curve environment, there is no carrying cost of the larger liquidity position, as the indirect borrowing rate in the tax-exempt market is slightly lower than prevailing yields for investments in the two reserves. Even in periods with no cost associated with the cash carry, it is reasonable to model a carrying cost in a normal, positively sloped yield curve environment characterized by long-term financing rates that exceed shorter-term investment rates. The currently modeled financing rate in the multiyear financing forecast of 4.15% is slightly below the weighted composite index yield for the General and M&O accounts. The extra spread or yield demanded by investors for lower rated debt becomes material in the long-term, with more than $3 billion of expected financings over the next six years. The interest savings associated with maintaining the MDTA’s double-A credit ratings will likely exceed the carrying cost of additions to the cash reserve. RECOMMENDATION Approve the revised Debt Policy incorporating new bonding limit and formulaic change to the liquidity reserve minimum. ATTACHMENT • Debt Policy Draft
6 Indirect Borrowing Rate – Net operating revenues held in a reserve, lower amounts otherwise available for capital spending, necessitating additional borrowings.
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