1. Financial Management Series Number 11 DEBT INDICATORS Alan Probst Local Government Specialist Local Government Center UW-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 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

5. 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. 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.

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 = 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

7. 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

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% =1142/12857 = 0.088 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

9. 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 outstanding based on its citizens' ability to pay.

10. 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

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% = 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

12. 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.

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 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 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. 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.

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 More practical than debt per capita method as it incorporates citizens’ ability to pay

16. Peer Comparison 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. 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.

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% = 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

18. 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.

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% = 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

20. Peer Comparison 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.

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% = 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

22. Peer Comparison 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. 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.

23. 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 2006-2011 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 Debt Outstanding Payment RateDebt Outstanding Payment Rate Debt Service Payment Rate (as % of Debt O/S) Between 2006-2011Between 2006-2011

24. Projected Debt Issuance Impact 2006200720082009 Baseline: No New Debt Annual Debt Service 40000000386000003724900035945285 Principal Outstanding 400000000386000000372490000359452850 $20 million Per Year Annual Debt Service 42000000425300004304145043534999 Principal Outstanding 420000000425300000430414500435349993 $40 million Per Year Annual Debt Service 44000000464600004883390051124714 Principal Outstanding 440000000464600000488339000511247135 Fair Market Value (FMV) 10000000000105000000001102500000011576250000 Per capita 350000367500385875405169 GF Revenue 200000000208000000216320000224972800 Budgeted Expenditures 275000000288750000303187500318346875 Break-Even Year - Analysis

25. 2010201120122013201420152016 34687200334731483230158831171032300800462902724528011291 346872000334731480323015878311710323300800461290272445280112910 44011274444708804491439945342395457554114615397246538583 440112743444708797449143989453423949457554111461539717465385827 53335349554686115752721059513758614307766328069965065874 533353485554686113575272099595137576614307761632806989650658744 12155062500127628156251340095640614071004227147745544381551328216016288946268 425427446699469033492485517109542965570113 233971712243330580253063804263186356273713810284662362296048857 334264219350977430368526301386952616406300247426615259447946022

26. Projected Debt Indicators Projected Debt Indicators 2006200720082009 Baseline: No New Debt G.O Debt/FMV of Property 0.040.040.030.03 G.O Debt per capita 1142.861050.34965.31887.17 Debt Service/GF Revenue 0.200.190.170.16 Debt Service/Budgeted Expenditures 0.150.130.120.11 Debt Service per capita 114.29105.0396.5388.72 $20 million Per Year G.O Debt/FMV of Property 0.040.040.040.04 G.O Debt per capita 1200.001157.281115.421074.49 Debt Service/GF Revenue 0.210.200.200.19 Debt Service/Budgeted Expenditures 0.150.150.140.14 Debt Service per capita 120.00115.73111.54107.45 $40 million Per Year G.O Debt/FMV of Property 0.040.040.040.04 G.O Debt per capita 1257.141264.221265.541261.81 Debt Service/GF Revenue 0.220.220.230.23 Debt Service/Budgeted Expenditures 0.160.160.160.16 Debt Service per capita 125.71126.42126.55126.18

27. Break-Even Year - Analysis 2010201120122013201420152016 0.030.030.020.020.020.020.02 815.35749.35688.68632.93581.70534.61491.33 0.150.140.130.120.110.100.09 0.100.100.090.080.070.070.06 81.5374.9368.8763.2958.1753.4649.13 0.040.030.030.030.030.030.03 1034.52995.55957.59920.69884.83850.04816.30 0.190.180.180.170.170.160.16 0.130.130.120.120.110.110.10 103.4599.5595.7692.0788.4885.0081.63 0.040.040.040.040.040.040.04 1253.691241.751226.511208.441187.961165.471141.28 0.230.230.230.230.220.220.22 0.160.160.160.150.150.150.15 125.37124.17122.65120.84118.80116.55114.13

28. 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 200620062006 G.O Debt per capita 200620082016 Debt Service / GF Revenue 200620062014 Debt Service / Budgeted Expenditures 200620062014 Debt Service per capita 200720092016

29. 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

30. 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

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