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% = 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 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 across 7 similar counties - B, C, D, E, F and G. is close to the mean of 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 = Debt as a % of per capita income = $400,000,000/$ = 1142 = 1142Uses: Realistic estimate based on the assumption that all taxes and therefore the total principal debt are paid by the citizens 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. 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 = or 8.8% =1142/12857 = or 8.8%Uses: More practical than debt per capita method as it incorporates citizens’ ability to pay More practical than debt per capita method as it incorporates citizens’ ability to pay

Peer Comparison Analysis County A has a ratio of 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 outstanding based on its citizens' ability to pay.

Debt Service Indicators Debt Service (i.e. principal & interest payments) is an allocation of 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% = 40,000,000/100,000,000 = 0.40 or 40%Uses: Particularly useful for evaluating cities that rely heavily on property taxes Particularly useful for evaluating cities that rely heavily on property taxes

Peer Comparison 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. 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 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 Analysis County A has a 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. 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 More practical than debt per capita method as it incorporates citizens’ ability to pay

Peer Comparison Analysis County A has a ratio of debt service to income per capita that is close to the mean of across 7 peer counties - B, C, D, E, F and G. is close to the mean of 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% = 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 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 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. 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% = 40,000,000/275,000,000 = 0.14 or 14%Uses: Reflects that total resources appropriated by local government can exceed revenues 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 Also identifies relative spending priorities such as how much is spent on debt service vs current services like public safety

Peer Comparison Analysis County A has a 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% = 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 Eliminates budgetary and accounting glitches by encompassing expenditures from GF, special revenue funds and debt service funds

Peer Comparison Analysis County A has a 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. 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 outstanding payment at 3.5% Debt service payment as 10% of debt outstanding between Debt service payment as 10% of debt outstanding between Projected Growth Rates Fair Market Value 0.05 Per capita 0.05 GF Revenue 0.04 Budgeted Expenditures 0.05 Debt Outstanding Payment RateDebt Outstanding Payment Rate Debt Service Payment Rate (as % of Debt O/S) Between Between

Projected Debt Issuance Impact Baseline: No New Debt Annual Debt Service Principal Outstanding $20 million Per Year Annual Debt Service Principal Outstanding $40 million Per Year Annual Debt Service Principal Outstanding Fair Market Value (FMV) Per capita GF Revenue Budgeted Expenditures Break-Even Year - Analysis

Projected Debt Indicators Projected Debt Indicators Baseline: No New Debt G.O Debt/FMV of Property G.O Debt per capita Debt Service/GF Revenue Debt Service/Budgeted Expenditures Debt Service per capita $20 million Per Year G.O Debt/FMV of Property G.O Debt per capita Debt Service/GF Revenue Debt Service/Budgeted Expenditures Debt Service per capita $40 million Per Year G.O Debt/FMV of Property G.O Debt per capita Debt Service/GF Revenue Debt Service/Budgeted Expenditures Debt Service per capita

Break-Even Year - Analysis

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 G.O Debt per capita Debt Service / GF Revenue Debt Service / Budgeted Expenditures Debt Service per capita

Break-Even Year - Recommendations No New Debt – YES 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 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 $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 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 $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 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

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

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