Transcript Debt Indicators - UW-Extension`s Local Government Center

Financial Management Series
Number 11
DEBT INDICATORS
Alan Probst
Local Government Specialist
Local Government Center
UW-Extension
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.
Debt Outstanding
Debt Outstanding measures the
total dollar amount of principal
to be repaid
Indicators of Debt Outstanding
Indicator 1:
Debt as a % of fair market value (FMV) of taxable property
Example:
County A General 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
Peer Comparison
Analysis
County A has a ratio of debt outstanding to Fair Market Value of 0.04 which
is close to the mean of 0.044 across 7 similar counties - B, C, D, E, F and G.
Conclusion - Positive
The present and future capacity of County A to meet its debt obligations are
approximately equal to its peers.
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
Peer Comparison
Analysis
County A has a ratio of debt outstanding to per capita income of 1142 which
is less than the mean of 1154 across 7 peer counties - B, C, D, E, F and G.
Conclusion - Positive
County A is in a better position to repay its debt with the per capita of its
citizens when compared to its peers
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
Peer Comparison
Analysis
County A has a ratio of 0.088 debt per capita to personal income per capita
greater than the average of 0.07 across peer counties - B, C, D, E, F and G.
Conclusion - Negative
Though not in grave danger, County A may be a little over the board with its
debt outstanding based on its citizens' ability to pay.
Debt Service Indicators
Debt Service (i.e. principal & interest
payments) is an allocation of
current resources that are
otherwise unavailable for
other expenditures
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
Peer Comparison
Debt Service as a % of Property Tax
Revenue - Mean=0.37, Stddev=0.15
Ratios
0.8
0.6
0.4
0.2
0
A
B
C
D
E
F
G
County Name
Analysis
County A has a 0.4 ratio of debt service to propety tax revenue which
is close to the mean of 0.37 across 7 peer counties - B, C, D, E, F and G.
Conclusion - Positive
The property tax revenue of County A is in a similar position as its peers in
covering the debt service payments.
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
Peer Comparison
Debt Service as a % of Per capita income Mean=110.89, Stddev=16.96
Ratios
150
100
50
0
A
B
C
D
E
F
G
County Name
Analysis
County A has a 114.28 ratio of debt service to per capita income which
is higher than the mean of 110 across peer counties - B, C, D, E, F and G.
Conclusion - Negative
The debt service imposes greater burden on the citizens of County A when
compared to its peers.
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
Peer Comparison
Ratios
De bt Se rvice as a % of Incom e pe r capita Me an=0.008, Stdde v=0.0023
0.014
0.012
0.01
0.008
0.006
0.004
0.002
0
A
B
C
D
E
F
G
County Name
Analysis
County A has a 0.00889 ratio of debt service to income per capita that
is close to the mean of 0.008 across 7 peer counties - B, C, D, E, F and G.
Conclusion - Positive
This shows that debt service payments of County A matches other peer
counties when combined with its citizens' ability to pay.
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
Peer Comparison
Debt Service as a % of General Funds (GF)
Revenue - Mean=0.22, Stddev=0.089
0.4
Ratios
0.3
0.2
0.1
0
A
B
C
D
E
F
G
County Name
Analysis
County A has a 0.2 ratio of debt service to General Funds (GF) revenue that
is close to the mean of 0.22 across 7 peer counties - B, C, D, E, F and G.
Conclusion - Positive
This ratio which reflects the measure of resources available for local
government operations, is healthy for County A.
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
Peer Comparison
Debt Service as a % of General Funds (GF)
Budgeted Expenditures - Mean=0.15,
Stddev=0.027
0.25
Ratios
0.2
0.15
0.1
0.05
0
A
B
C
D
E
F
G
County Name
Analysis
County A has a 0.145 ratio of debt service to General Funds (GF) Budegeted
Expenditures which is close to the mean of 0.15 across its peer counties.
Conclusion - Positive
The relative spending of County A on debt service vs current service such as
public safety spending is similar to its peer counties.
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
Peer Comparison
Debt Service as a % of Operating
Expenditures - Mean=0.07, Stddev=0.029
0.12
Ratios
0.1
0.08
0.06
0.04
0.02
0
A
B
C
D
E
F
G
County Name
Analysis
County A has a 0.094 ratio of debt service to Operating Expenditures that
is higher than the mean of 0.07 across 7 peer counties - B, C, D, E, F and G.
Conclusion - Negative
This shows that County A has to sacrifice a greater proportion of its operating
expenditures for debt service payments when compared to its peer counties.
Break-Even Year - Assumptions

Debt outstanding payment at 3.5%

Debt service payment as 10% of debt outstanding
between 2006-2011
Projected Growth Rates
Fair Market Value
0.05
Per capita
0.05
GF Revenue
0.04
Budgeted Expenditures
0.05
Break-Even Year - Analysis
Projected Debt Issuance Impact
2006
2007
2008
2009
Annual Debt Service
40000000
38600000
37249000
35945285
Principal Outstanding
400000000
386000000
372490000
359452850
Annual Debt Service
42000000
42530000
43041450
43534999
Principal Outstanding
420000000
425300000
430414500
435349993
Annual Debt Service
44000000
46460000
48833900
51124714
Principal Outstanding
440000000
464600000
488339000
511247135
10000000000
10500000000
11025000000
11576250000
350000
367500
385875
405169
GF Revenue
200000000
208000000
216320000
224972800
Budgeted Expenditures
275000000
288750000
303187500
318346875
Baseline: No New Debt
$20 million Per Year
$40 million Per Year
Fair Market Value (FMV)
Per capita
Break-Even Year - Analysis
2010
2011
2012
2013
2014
2015
2016
34687200
33473148
32301588
31171032
30080046
29027245
28011291
346872000
334731480
323015878
311710323
300800461
290272445
280112910
44011274
44470880
44914399
45342395
45755411
46153972
46538583
440112743
444708797
449143989
453423949
457554111
461539717
465385827
53335349
55468611
57527210
59513758
61430776
63280699
65065874
533353485
554686113
575272099
595137576
614307761
632806989
650658744
12155062500
12762815625
13400956406
14071004227
14774554438
15513282160
16288946268
425427
446699
469033
492485
517109
542965
570113
233971712
243330580
253063804
263186356
273713810
284662362
296048857
334264219
350977430
368526301
386952616
406300247
426615259
447946022
Break-Even Year - Analysis
Projected Debt Indicators
2006
2007
2008
2009
0.04
0.04
0.03
0.03
1142.86
1050.34
965.31
887.17
Debt Service/GF Revenue
0.20
0.19
0.17
0.16
Debt Service/Budgeted Expenditures
0.15
0.13
0.12
0.11
114.29
105.03
96.53
88.72
0.04
0.04
0.04
0.04
1200.00
1157.28
1115.42
1074.49
Debt Service/GF Revenue
0.21
0.20
0.20
0.19
Debt Service/Budgeted
Expenditures
0.15
0.15
0.14
0.14
Debt Service per capita
120.00
115.73
111.54
107.45
0.04
0.04
0.04
0.04
1257.14
1264.22
1265.54
1261.81
Debt Service/GF Revenue
0.22
0.22
0.23
0.23
Debt Service/Budgeted
Expenditures
0.16
0.16
0.16
0.16
Debt Service per capita
125.71
126.42
126.55
126.18
Baseline: No New Debt
G.O Debt/FMV of Property
G.O Debt per capita
Debt Service per capita
$20 million Per Year
G.O Debt/FMV of Property
G.O Debt per capita
$40 million Per Year
G.O Debt/FMV of Property
G.O Debt per capita
Break-Even Year - Analysis
2010
2011
2012
2013
2014
2015
2016
0.03
0.03
0.02
0.02
0.02
0.02
0.02
815.35
749.35
688.68
632.93
581.70
534.61
491.33
0.15
0.14
0.13
0.12
0.11
0.10
0.09
0.10
0.10
0.09
0.08
0.07
0.07
0.06
81.53
74.93
68.87
63.29
58.17
53.46
49.13
0.04
0.03
0.03
0.03
0.03
0.03
0.03
1034.52
995.55
957.59
920.69
884.83
850.04
816.30
0.19
0.18
0.18
0.17
0.17
0.16
0.16
0.13
0.13
0.12
0.12
0.11
0.11
0.10
103.45
99.55
95.76
92.07
88.48
85.00
81.63
0.04
0.04
0.04
0.04
0.04
0.04
0.04
1253.69
1241.75
1226.51
1208.44
1187.96
1165.47
1141.28
0.23
0.23
0.23
0.23
0.22
0.22
0.22
0.16
0.16
0.16
0.15
0.15
0.15
0.15
125.37
124.17
122.65
120.84
118.80
116.55
114.13
Break-Even Year - Conclusion
Projected Break-even Year for County
A
Debt-Burden Indicators
No New
Debt
$20 million/year
$40 million/year
G.O Debt / FMV of Property
2006
2006
2006
G.O Debt per capita
2006
2008
2016
Debt Service / GF Revenue
2006
2006
2014
Debt Service / Budgeted
Expenditures
2006
2006
2014
Debt Service per
capita
2007
2009
2016
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
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
LGC Information
http://lgc.uwex.edu/