What does GFOA typically advise regarding the use of variable rate debt instruments?

The Government Finance Officers Association (GFOA) advises exercising caution and thoroughly evaluating objectives when considering the use of variable rate debt instruments. This guidance is grounded in the recognition that while variable rate debt can offer lower initial interest costs compared to fixed rate debt, it also introduces interest rate risk. The potential for interest rates to rise can increase debt service costs unexpectedly.

In the context of public finance, it's essential for entities to assess their financial situation, risk tolerance, and the overall economic environment before committing to variable rate instruments. Factors such as interest rate forecasts, the stability of the issuer's revenue streams, and the length of the debt issuance should be considered to align the choice of financing with the entity's financial objectives and risk management strategies. This careful evaluation allows organizations to leverage the possible benefits of variable rate debt while mitigating associated risks.