Why debt indicators?

1. Financial Management SeriesNumber 11DEBT INDICATORSAlan ProbstLocal Government SpecialistLocal Government CenterUW-Extension

2. Why debt indicators? Debt indicators are used to determine what your borrowing capacity is, what your debt level is compared with your peers, and when is the right time to borrow.

3. Debt Outstanding Debt Outstanding measures the total dollar amount of principal to be repaid

4. Indicators of Debt Outstanding Indicator 1: Debt as a % of fair market value (FMV) of taxable property Example: County AGeneral Obligation Debt = $400,000,000 Fair Market Value of 10,000,000,000 of taxable property Debt as a % of FMV = 400,000,000 /10,000,000,000 = 0.04 or 4% Uses: • Important measure of local government’s wealth available to support present and future tax taxing capacity to meet debt obligations

5. Peer Comparison

6. Indicators of Debt Outstanding Indicator 2: Debt as a % of per capita income Example: Per capita income of the County A citizens = $350000/year. General Obligation Debt = $400,000,000 Population = 20000 Debt as a % of per capita income = $400,000,000/$350000 = 1142 Uses: • Realistic estimate based on the assumption that all taxes and therefore the total principal debt are paid by the citizens

7. Peer Comparison

8. Indicators of Debt Outstanding Indicator 3: Debt per capita as a % of personal income per capita Example: Per capita income of the County A citizens = $350,000/year Personal income = $7,000,000,000 General Obligation Debt = $400,000,000 Population = 20,000 Debt per capita:$400,000,000/$350,000= 1142 Personal income per capita:$4,500,000,000/$350,000=12857 Debt per capita/Personal income per capita: =1142/12857 = 0.088 or 8.8% Uses: • More practical than debt per capita method as it incorporates citizens’ ability to pay

9. Peer Comparison

10. Debt Service Indicators Debt Service (i.e. principal & interest payments) is an allocation of current resources that are otherwise unavailable for other expenditures

11. Debt Service Indicators Indicator 1 Debt service as a % of property tax revenue Example: Property Tax Revenue of County A = $100,000,000 Debt Service = $40,000,000. Debt service as a % of Property Tax Revenue: = 40,000,000/100,000,000 = 0.40 or 40% Uses: • Particularly useful for evaluating cities that rely heavily on property taxes

12. Peer Comparison

13. Debt Service Indicators Indicator 2: Debt service as a % of per capita income Example: Per capita income County A citizens =$350,000/year Debt Service =$40,000,000 Population =20,000. Debt service as a % of per capita income = $40,000,000/$350,000 = 114 Uses: • Annual per capita burden on the citizens based on the assumption that all taxes and therefore the principal and interest payments are paid by the citizens

14. Peer Comparison

15. Debt Service Indicators Indicator 3: Debt service per capita as a % of income per capita Example: Per capita income of County A citizens = $350,000/year Personal income =$7,000,000,000 Debt Service =$40,000,000 Population =20,000 Debt service per capita = $40,000,000/$350,000= 114 Income per capita 4,500,000,000/$350,000=20,000 Debt per capita/Personal income per capita: =114/12857 = 0.8% Uses: • More practical than debt per capita method as it incorporates citizens’ ability to pay

16. Peer Comparison

17. Debt Service Indicators Indicator 4: Debt service as a % of General Funds (GF) Revenue Example: County A General Funds (GF) Revenue = $200,000,000 Debt Service = $40,000,000. Debt service as a % of General Funds Revenue: = 40,000,000/200,000,000 = 0.20 or 20% Uses: • Reflects relatively narrow measure of resources that are available for the local government operations . Appropriate when debt service is essentially paid for with GF revenues

18. Peer Comparison

19. Debt Service Indicators Indicator 5: Debt service as a % of GF Budgeted Expenditures Example: County A GF Budgeted Expenditures = $275,000,000 Debt Service = $40,000,000 Debt service as a % of GF Budgeted Expenditures = 40,000,000/275,000,000 = 0.14 or 14% Uses: • Reflects that total resources appropriated by local government can exceed revenues • Also identifies relative spending priorities such as how much is spent on debt service vs current services like public safety

20. Peer Comparison

21. Debt Service Indicators Indicator 6: Debt service as a % of Operating Expenditures Example: County A has Operating Expenditures of $425,000,000 and debt service amount of $40,000,000. Debt service as a % of Operating Expenditures: = 40,000,000/425,000,000 = 0.09 or 9% Uses: • Eliminates budgetary and accounting glitches by encompassing expenditures from GF, special revenue funds and debt service funds

22. Peer Comparison

23. Break-Even Year - Assumptions • Debt outstanding payment at 3.5% • Debt service payment as 10% of debt outstanding between 2006-2011

24. Break-Even Year - Analysis

25. Break-Even Year - Analysis

26. Break-Even Year - Analysis

27. Break-Even Year - Analysis

28. Break-Even Year - Conclusion

29. Break-Even Year - Recommendations • No New Debt – YES Given the debt indicators, County A is financially healthy and will continue to remain close to peer averages if new debt is not issued • $20 million per year – YES Our analysis points out that it is feasible for County A to issue $20 million/yr new debt in 2006, though the ideal time of issue would be 2008 as debt per capita ratios get closer to peer averages • $40 million per year – NO This amount of debt per year affects debt indicators significantly and is not recommended. Such an aggressive debt policy of $40 million per year would lead to bankruptcy of County A

30. Conclusion • The proper use of debt indicators is essential to good debt and financial management • Incurring debt is part of good government provided the debt is incurred at the right time for the right project

31. LGC Information http://lgc.uwex.edu/