Why debt indicators?

Financial Management SeriesFinancial Management SeriesNumber 11Number 11

DEBT INDICATORSDEBT INDICATORS

Alan ProbstAlan ProbstLocal Government SpecialistLocal Government Specialist

Local Government CenterLocal Government CenterUW-ExtensionUW-Extension

Financial Management SeriesFinancial Management SeriesNumber 11Number 11

DEBT INDICATORSDEBT INDICATORS

Alan ProbstAlan ProbstLocal Government SpecialistLocal Government Specialist

Local Government CenterLocal Government CenterUW-ExtensionUW-Extension

Why debt indicators?Why debt indicators?Why debt indicators?Why debt indicators?

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

Debt OutstandingDebt OutstandingDebt OutstandingDebt Outstanding

Debt OutstandingDebt Outstanding measures the measures the

total dollar amount of principal total dollar amount of principal

to be repaidto be repaid

Indicators of Debt OutstandingIndicators of Debt OutstandingIndicators of Debt OutstandingIndicators of Debt Outstanding

Indicator 1: Indicator 1: Debt as a % of fair market value (FMV) of taxable propertyDebt as a % of fair market value (FMV) of taxable property

Example: Example: County ACounty A General Obligation Debt = $400,000,000 General Obligation Debt = $400,000,000 Fair Market Value of 10,000,000,000 of taxable propertyFair Market Value of 10,000,000,000 of taxable property

Debt as a % of FMV = 400,000,000 /10,000,000,000 Debt as a % of FMV = 400,000,000 /10,000,000,000 = 0.04 or 4%= 0.04 or 4%

Uses:Uses:

Important measure of local government’s wealth available to Important measure of local government’s wealth available to support present and future tax taxing capacity to meet debt support present and future tax taxing capacity to meet debt obligationsobligations

Peer ComparisonPeer ComparisonPeer ComparisonPeer ComparisonDebt O/S as % of FMV - Mean = 0.044, Stddev

= 0.020

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

A B C D E F G

County Name

AnalysisAnalysis

County A has a ratio of debt outstanding to Fair Market Value of 0.04 whichCounty 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.

ConclusionConclusion - - PositivePositive

The present and future capacity of County A to meet its debt obligations areThe present and future capacity of County A to meet its debt obligations are

approximately equal to its peers. approximately equal to its peers.

Indicators of Debt OutstandingIndicators of Debt OutstandingIndicators of Debt OutstandingIndicators of Debt Outstanding

Indicator 2:Indicator 2: Debt as a % of per capita income Debt as a % of per capita income

Example:Example:Per capita income of the County A citizens = $350000/year. Per capita income of the County A citizens = $350000/year. General Obligation Debt = $400,000,000General Obligation Debt = $400,000,000Population = 20000 Population = 20000

Debt as a % of per capita income = $400,000,000/$350000Debt as a % of per capita income = $400,000,000/$350000 = 1142= 1142

Uses:Uses: Realistic estimate based on the assumption that all taxes and Realistic estimate based on the assumption that all taxes and

therefore the total principal debt are paid by the citizenstherefore the total principal debt are paid by the citizens

Peer ComparisonPeer ComparisonPeer ComparisonPeer ComparisonDebt O/S as % of Per capita - Mean = 1154,

Stddev = 143

0

200

400

600

800

1000

1200

1400

1600

A B C D E F G

County Name

AnalysisAnalysis

County A has a ratio of debt outstanding to per capita income of 1142 whichCounty 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.


County A is in a better position to repay its debt with the per capita of itsCounty A is in a better position to repay its debt with the per capita of itscitizens when compared to its peerscitizens when compared to its peers

Indicators of Debt OutstandingIndicators of Debt OutstandingIndicators of Debt OutstandingIndicators of Debt OutstandingIndicator 3:Indicator 3:Debt per capita as a % of personal income per capita Debt per capita as a % of personal income per capita

Example:Example:Per capita income of the County A citizens = $350,000/yearPer capita income of the County A citizens = $350,000/yearPersonal income = $7,000,000,000Personal income = $7,000,000,000General Obligation Debt = $400,000,000General Obligation Debt = $400,000,000Population = 20,000Population = 20,000

Debt per capita:$400,000,000/$350,000= 1142Debt per capita:$400,000,000/$350,000= 1142Personal income per capita:$4,500,000,000/$350,000=12857Personal income per capita:$4,500,000,000/$350,000=12857

Debt per capita/Personal income per capita:Debt per capita/Personal income per capita: =1142/12857 = 0.088 or 8.8%=1142/12857 = 0.088 or 8.8%Uses:Uses: More practical than debt per capita method as it incorporates citizens’ More practical than debt per capita method as it incorporates citizens’

ability to payability to pay

Peer ComparisonPeer ComparisonPeer ComparisonPeer ComparisonDebt per capita as % of Personal income per

capita - Mean=0.07, Stddev=0.015

0

0.02

0.04

0.06

0.08

0.1

0.12

A B C D E F G

County Name

AnalysisAnalysis

County A has a ratio of 0.088 debt per capita to personal income per capita 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. greater than the average of 0.07 across peer counties - B, C, D, E, F and G.

ConclusionConclusion - - NegativeNegative

Though not in grave danger, County A may be a little over the board with its 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 IndicatorsDebt Service IndicatorsDebt Service IndicatorsDebt Service Indicators

Debt ServiceDebt Service (i.e. principal & interest (i.e. principal & interest payments) payments) is an allocation of is an allocation of

current resources that are current resources that are

otherwise unavailable for otherwise unavailable for

other expendituresother expenditures

Debt Service IndicatorsDebt Service IndicatorsDebt Service IndicatorsDebt Service IndicatorsIndicator 1Indicator 1Debt service as a % of property tax revenueDebt service as a % of property tax revenue

Example:Example:Property Tax Revenue of County A = $100,000,000 Property Tax Revenue of County A = $100,000,000 Debt Service = $40,000,000.Debt Service = $40,000,000.

Debt service as a % of Property Tax Revenue: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:Uses: Particularly useful for evaluating cities that rely heavily on Particularly useful for evaluating cities that rely heavily on

property taxesproperty taxes

Peer ComparisonPeer ComparisonPeer ComparisonPeer ComparisonDebt Service as a % of Property Tax Revenue - Mean=0.37, Stddev=0.15

0

0.2

0.4

0.6

0.8

A B C D E F G

County Name

Ratio

s

AnalysisAnalysis

County A has a 0.4 ratio of debt service to propety tax revenue whichCounty 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.


The property tax revenue of County A is in a similar position as its peers in The property tax revenue of County A is in a similar position as its peers in

covering the debt service payments.covering the debt service payments.

Debt Service IndicatorsDebt Service IndicatorsDebt Service IndicatorsDebt Service IndicatorsIndicator 2:Indicator 2:Debt service as a % of per capita incomeDebt service as a % of per capita income

Example:Example:Per capita income County A citizens =$350,000/year Per capita income County A citizens =$350,000/year Debt Service =$40,000,000Debt Service =$40,000,000Population =20,000. Population =20,000.

Debt service as a % of per capita income = $40,000,000/$350,000 = 114 Debt service as a % of per capita income = $40,000,000/$350,000 = 114

Uses:Uses: Annual per capita burden on the citizens based on the assumption Annual per capita burden on the citizens based on the assumption

that all taxes and therefore the principal and interest payments are that all taxes and therefore the principal and interest payments are paid by the citizenspaid by the citizens

Peer ComparisonPeer ComparisonPeer ComparisonPeer ComparisonDebt Service as a % of Per capita income -

Mean=110.89, Stddev=16.96

0

50

100

150

A B C D E F G

County Name

Ratio

s

AnalysisAnalysis

County A has a 114.28 ratio of debt service to per capita income whichCounty 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.

ConclusionConclusion - - Negative Negative

The debt service imposes greater burden on the citizens of County A when The debt service imposes greater burden on the citizens of County A when

compared to its peers.compared to its peers.

Debt Service IndicatorsDebt Service IndicatorsDebt Service IndicatorsDebt Service IndicatorsIndicator 3:Indicator 3:Debt service per capita as a % of income per capita Debt service per capita as a % of income per capita

Example:Example:Per capita income of County A citizens = $350,000/yearPer capita income of County A citizens = $350,000/yearPersonal income =$7,000,000,000Personal income =$7,000,000,000Debt Service =$40,000,000Debt Service =$40,000,000Population =20,000Population =20,000

Debt service per capita = $40,000,000/$350,000= 114Debt service per capita = $40,000,000/$350,000= 114Income per capita 4,500,000,000/$350,000=20,000Income per capita 4,500,000,000/$350,000=20,000

Debt per capita/Personal income per capita: =114/12857 = 0.8%Debt per capita/Personal income per capita: =114/12857 = 0.8%

Uses:Uses: More practical than debt per capita method as it incorporates citizens’ More practical than debt per capita method as it incorporates citizens’

ability to payability to pay

Peer ComparisonPeer ComparisonPeer ComparisonPeer ComparisonDebt Service as a % of Income per capita -

Mean=0.008, Stddev=0.0023

00.0020.0040.0060.0080.010.0120.014

A B C D E F G

County Name

Ratios

AnalysisAnalysis

County A has a 0.00889 ratio of debt service to income per capita thatCounty A has a 0.00889 ratio of debt service to income per capita that



This shows that debt service payments of County A matches other peer This shows that debt service payments of County A matches other peer

counties when combined with its citizens' ability to pay.counties when combined with its citizens' ability to pay.

Debt Service IndicatorsDebt Service IndicatorsDebt Service IndicatorsDebt Service IndicatorsIndicator 4:Indicator 4:Debt service as a % of General Funds (GF) RevenueDebt service as a % of General Funds (GF) Revenue

Example:Example:County A General Funds (GF) Revenue = $200,000,000 County A General Funds (GF) Revenue = $200,000,000 Debt Service = $40,000,000.Debt Service = $40,000,000.

Debt service as a % of General Funds Revenue: Debt service as a % of General Funds Revenue: = 40,000,000/200,000,000 = = 40,000,000/200,000,000 = 0.20 or 20%0.20 or 20%

Uses:Uses: Reflects relatively narrow measure of resources that are available for Reflects relatively narrow measure of resources that are available for

the local government operations . Appropriate when debt service is the local government operations . Appropriate when debt service is essentially paid for with GF revenuesessentially paid for with GF revenues

Peer ComparisonPeer ComparisonPeer ComparisonPeer ComparisonDebt Service as a % of General Funds (GF)

Revenue - Mean=0.22, Stddev=0.089

0

0.1

0.2

0.3

0.4

A B C D E F G

County Name

Ratio

s

AnalysisAnalysis

County A has a 0.2 ratio of debt service to General Funds (GF) revenue thatCounty A has a 0.2 ratio of debt service to General Funds (GF) revenue that



This ratio which reflects the measure of resources available for local This ratio which reflects the measure of resources available for local

government operations, is healthy for County A.government operations, is healthy for County A.

Debt Service IndicatorsDebt Service IndicatorsDebt Service IndicatorsDebt Service IndicatorsIndicator 5:Indicator 5:Debt service as a % of GF Budgeted ExpendituresDebt service as a % of GF Budgeted Expenditures

Example:Example:County A GF Budgeted Expenditures = $275,000,000 County A GF Budgeted Expenditures = $275,000,000 Debt Service = $40,000,000Debt Service = $40,000,000

Debt service as a % of GF Budgeted ExpendituresDebt service as a % of GF Budgeted Expenditures = 40,000,000/275,000,000 = = 40,000,000/275,000,000 = 0.14 or 14%0.14 or 14%

Uses:Uses: Reflects that total resources appropriated by local government can Reflects that total resources appropriated by local government can

exceed revenues exceed revenues Also identifies relative spending priorities such as how much is Also identifies relative spending priorities such as how much is

spent on debt service vs current services like public safetyspent on debt service vs current services like public safety

Peer ComparisonPeer ComparisonPeer ComparisonPeer ComparisonDebt Service as a % of General Funds (GF)

Budgeted Expenditures - Mean=0.15, Stddev=0.027

0

0.05

0.1

0.15

0.2

0.25

A B C D E F G

County Name

Ratios

AnalysisAnalysis

County A has a 0.145 ratio of debt service to General Funds (GF) Budegeted 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.Expenditures which is close to the mean of 0.15 across its peer counties.


The relative spending of County A on debt service vs current service such asThe relative spending of County A on debt service vs current service such as

public safety spending is similar to its peer counties.public safety spending is similar to its peer counties.

Debt Service IndicatorsDebt Service IndicatorsIndicator 6:Indicator 6:Debt service as a % of Operating ExpendituresDebt service as a % of Operating Expenditures

Example:Example:County A has Operating Expenditures of $425,000,000 and debt County A has Operating Expenditures of $425,000,000 and debt

service amount of $40,000,000.service amount of $40,000,000.

Debt service as a % of Operating Expenditures: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:Uses: Eliminates budgetary and accounting glitches by Eliminates budgetary and accounting glitches by

encompassing expenditures from GF, special revenue funds encompassing expenditures from GF, special revenue funds and debt service fundsand debt service funds

Peer ComparisonPeer ComparisonPeer ComparisonPeer ComparisonDebt Service as a % of Operating

Expenditures - Mean=0.07, Stddev=0.029

0

0.02

0.04

0.06

0.08

0.1

0.12

A B C D E F G

County Name

Ratio

s

AnalysisAnalysis

County A has a 0.094 ratio of debt service to Operating Expenditures thatCounty 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.

ConclusionConclusion - - Negative Negative

This shows that County A has to sacrifice a greater proportion of its operatingThis shows that County A has to sacrifice a greater proportion of its operating

expenditures for debt service payments when compared to its peer counties.expenditures for debt service payments when compared to its peer counties.

Break-Even Year - AssumptionsBreak-Even Year - AssumptionsBreak-Even Year - AssumptionsBreak-Even Year - Assumptions

Debt outstanding payment at 3.5%Debt outstanding payment at 3.5%

Debt service payment as 10% of debt outstanding Debt service payment as 10% of debt outstanding between 2006-2011between 2006-2011

Projected Growth RatesProjected Growth Rates

Fair Market Value Fair Market Value 0.050.05

Per capitaPer capita 0.050.05

GF RevenueGF Revenue 0.040.04

Budgeted ExpendituresBudgeted Expenditures 0.050.05

Projected Debt Issuance ImpactProjected Debt Issuance Impact

20062006 20072007 20082008 20092009

Baseline: No New DebtBaseline: No New Debt

Annual Debt ServiceAnnual Debt Service 4000000040000000 3860000038600000 3724900037249000 3594528535945285

Principal OutstandingPrincipal Outstanding 400000000400000000 386000000386000000 372490000372490000 359452850359452850

$20 million Per Year$20 million Per Year






Fair Market Value (FMV)Fair Market Value (FMV) 1000000000010000000000 1050000000010500000000 1102500000011025000000 1157625000011576250000

Per capitaPer capita 350000350000 367500367500 385875385875 405169405169

GF RevenueGF Revenue 200000000200000000 208000000208000000 216320000216320000 224972800224972800

Budgeted ExpendituresBudgeted Expenditures 275000000275000000 288750000288750000 303187500303187500 318346875318346875

Break-Even Year - AnalysisBreak-Even Year - AnalysisBreak-Even Year - AnalysisBreak-Even Year - Analysis


20102010 20112011 20122012 20132013 20142014 20152015 20162016

3468720034687200 3347314833473148 3230158832301588 3117103231171032 3008004630080046 2902724529027245 2801129128011291

346872000346872000 334731480334731480 323015878323015878 311710323311710323 300800461300800461 290272445290272445 280112910280112910

4401127444011274 4447088044470880 4491439944914399 4534239545342395 4575541145755411 4615397246153972 4653858346538583

440112743440112743 444708797444708797 449143989449143989 453423949453423949 457554111457554111 461539717461539717 465385827465385827

5333534953335349 5546861155468611 5752721057527210 5951375859513758 6143077661430776 6328069963280699 6506587465065874

533353485533353485 554686113554686113 575272099575272099 595137576595137576 614307761614307761 632806989632806989 650658744650658744

1215506250012155062500 1276281562512762815625 1340095640613400956406 1407100422714071004227 1477455443814774554438 1551328216015513282160 1628894626816288946268

425427425427 446699446699 469033469033 492485492485 517109517109 542965542965 570113570113

233971712233971712 243330580243330580 253063804253063804 263186356263186356 273713810273713810 284662362284662362 296048857296048857

334264219334264219 350977430350977430 368526301368526301 386952616386952616 406300247406300247 426615259426615259 447946022447946022

Break-Even Year - AnalysisBreak-Even Year - AnalysisBreak-Even Year - AnalysisBreak-Even Year - Analysis Projected Debt IndicatorsProjected Debt Indicators

20062006 20072007 20082008 20092009

Baseline: No New DebtBaseline: No New Debt

G.O Debt/FMV of PropertyG.O Debt/FMV of Property 0.040.04 0.040.04 0.030.03 0.030.03

G.O Debt per capitaG.O Debt per capita 1142.861142.86 1050.341050.34 965.31965.31 887.17887.17

Debt Service/GF RevenueDebt Service/GF Revenue 0.200.20 0.190.19 0.170.17 0.160.16

Debt Service/Budgeted ExpendituresDebt Service/Budgeted Expenditures 0.150.15 0.130.13 0.120.12 0.110.11

Debt Service per capitaDebt Service per capita 114.29114.29 105.03105.03 96.5396.53 88.7288.72




Debt Service/GF RevenueDebt Service/GF Revenue 0.210.21 0.200.20 0.200.20 0.190.19

Debt Service/Budgeted Debt Service/Budgeted ExpendituresExpenditures 0.150.15 0.150.15 0.140.14 0.140.14


$40 million$40 million Per YearPer Year



Debt Service/GF Revenue Debt Service/GF Revenue 0.220.22 0.220.22 0.230.23 0.230.23

Debt Service/Budgeted Debt Service/Budgeted ExpendituresExpenditures 0.160.16 0.160.16 0.160.16 0.160.16



20102010 20112011 20122012 20132013 20142014 20152015 20162016

0.030.03 0.030.03 0.020.02 0.020.02 0.020.02 0.020.02 0.020.02

815.35815.35 749.35749.35 688.68688.68 632.93632.93 581.70581.70 534.61534.61 491.33491.33

0.150.15 0.140.14 0.130.13 0.120.12 0.110.11 0.100.10 0.090.09

0.100.10 0.100.10 0.090.09 0.080.08 0.070.07 0.070.07 0.060.06

81.5381.53 74.9374.93 68.8768.87 63.2963.29 58.1758.17 53.4653.46 49.1349.13

0.040.04 0.030.03 0.030.03 0.030.03 0.030.03 0.030.03 0.030.03

1034.521034.52 995.55995.55 957.59957.59 920.69920.69 884.83884.83 850.04850.04 816.30816.30

0.190.19 0.180.18 0.180.18 0.170.17 0.170.17 0.160.16 0.160.16

0.130.13 0.130.13 0.120.12 0.120.12 0.110.11 0.110.11 0.100.10

103.45103.45 99.5599.55 95.7695.76 92.0792.07 88.4888.48 85.0085.00 81.6381.63

0.040.04 0.040.04 0.040.04 0.040.04 0.040.04 0.040.04 0.040.04

1253.691253.69 1241.751241.75 1226.511226.51 1208.441208.44 1187.961187.96 1165.471165.47 1141.281141.28

0.230.23 0.230.23 0.230.23 0.230.23 0.220.22 0.220.22 0.220.22

0.160.16 0.160.16 0.160.16 0.150.15 0.150.15 0.150.15 0.150.15

125.37125.37 124.17124.17 122.65122.65 120.84120.84 118.80118.80 116.55116.55 114.13114.13

Break-Even Year - ConclusionBreak-Even Year - ConclusionBreak-Even Year - ConclusionBreak-Even Year - ConclusionProjected Break-even Year for County Projected Break-even Year for County

AA

Debt-Burden IndicatorsDebt-Burden Indicators No New No New

DebtDebt $20 million/year$20 million/year $40 million/year$40 million/year

G.O Debt / FMV of PropertyG.O Debt / FMV of Property 20062006 20062006 20062006

G.O Debt per capitaG.O Debt per capita 20062006 20082008 20162016

Debt Service / GF RevenueDebt Service / GF Revenue 20062006 20062006 20142014

Debt Service / Budgeted Debt Service / Budgeted ExpendituresExpenditures 20062006 20062006 20142014

Debt Service per Debt Service per capitacapita 20072007 20092009 20162016

Break-Even Year - Break-Even Year - RecommendationsRecommendationsBreak-Even Year - Break-Even Year - RecommendationsRecommendations

No New DebtNo New Debt – – YESYES

Given the debt indicators, County A is financially healthy and will continue to Given the debt indicators, County A is financially healthy and will continue to remain close to peer averages if new debt is not issuedremain close to peer averages if new debt is not issued

$20 million per year$20 million per year – – YESYES

Our analysis points out that it is feasible for County A to issue $20 million/yr new debt in 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 2006, though the ideal time of issue would be 2008 as debt per capita ratios get closer to peer averagespeer averages

$40 million per year$40 million per year – – NONO

This amount of debt per year affects debt indicators significantly and is not recommended. 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 Such an aggressive debt policy of $40 million per year would lead to bankruptcy of County AA

ConclusionConclusionConclusionConclusion

The proper use of debt indicators is The proper use of debt indicators is essential to good debt and financial essential to good debt and financial managementmanagement

Incurring debt is part of good Incurring debt is part of good government provided the debt is government provided the debt is incurred at the right time for the right incurred at the right time for the right projectproject

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http://lgc.uwex.edu/http://lgc.uwex.edu/

Why debt indicators?

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