Transcript Debt - Phun Doctors

Debt Administration
Troy University
PA6650- Governmental Budgeting
Chapter 15
Overview
• Debt is a result of governments borrowing from
individuals and institutions
• Bonds represent a debt that gives the
borrower’s long-term promise to repay the
lender
– Bonds have a face amount and a maturity date
– The nominal return on a bond is stated as its coupon
rate
• DEBT RESULTS FROM:
– Covering deficits
– Financing capital projects
– Covering short periods when bills exceed cash on
hand
Federal Debt
• A result of:
– War finance
– Attempts to stabilize the nation’s macroeconomy
– Miscellaneous political disputes
• The federal deficit
– The difference between total federal spending and revenue in a
given year
• Federal debt (national debt) - Two important measures:
– Gross debt
• All federal debt outstanding
– Debt held by private investors
• All federal debt except that held by federal accounts and the
Federal Reserve System
Federal Debt
• Figure 15-1 on page 577 shows Federal
Debt relative to GDP
• Table 15-1 on page 578 shows history of
federal debt...it has grown considerably!
• Over 50% of privately-held debt is foreignowned
• Most federal debt has short-term maturity
(average 4 yrs/10 months)
State & Local Government Debt
• Currently near $2 trillion
• States, counties, municipalities, townships, school
districts, special districts
• Mostly long term
• Two types of debt
– Full-faith-and-credit debt (unlimited claim), usually
issued as a General Obligation Bond (GOB)
• Schools, police stations, bridges
– Non-guaranteed (or limited liability) debt, issued with a
Revenue Bond
• Toll roads, water plants, revenue-producing infrastructure
State & Local Government Debt
• Municipalities are the largest users of debt
markets
• Special districts are the heaviest users of
non-guaranteed debt (waste, transit, water)
• School districts are heavy users of full faith
and credit debt (schools don’t generate
revenue)
• Non-guaranteed debt has significantly
increased
Municipal Bonds and the Tax
Reform Act of 1986
• Interest on state and local government
bonds is exempt at federal level
• Industrial Development Bonds (IDB’s) offer
tax-exempt status for private development
(controls)
• Registered bonds – owner specifically
named
• Bearer bonds – whoever holds the bond
Appropriate Debt Policy
• Borrowing provides funds to acquire
resources for public use
– Debt must be repaid, with interest, in the
future
– Borrowing commits future budgets
– Don’t issue debt for a period longer than the
project’s useful life
• Economic growth requires infrastructure,
and debt is not necessarily a bad thing
• Debt must be handled with care
The Mechanics of Bond Values
• Coupon bond example (p. 588)
– 15 year maturity (m)
– 30 semiannual periods (m x 2 = 30)
– 8% interest coupon rate C, but must use C/2)
– $5000 face value (F)
– 6% market interest rate ®
– Bond Price = $6,006
Debt Structure Decisions
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Type of security
Term to maturity
Call provision
Rating
– US government not rated (A+)
– Three firms do bond rating
• Mergent
• Standard & Poor’s
• Fitch Investors Service / ICBA
Bond Rating
– Rating criteria
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The economy
Debt
The government
Financial analysis
Credit Enhancements
• A way to reduce the interest rates
• Third-party guarantee
– State credit guarantees
– Bank letters of credit
– Municipal bond insurance
Underwriting, Interest Rates,
and Ownership
• Bond bought by an individual investor,
then sold at a slightly higher price (spread)
to individual investors
• Important underwriter documents
– Official statement
– Legal opinion
• Bond issue…Sidebar 15-3
Lease-purchase Financing &
Certificates of Participation
• Lease-purchase financing
– an installment purchase
– When fully paid, owner gets full ownership of
the property
• Certificates of Participation
– Investors buy them
– Federal tax-exempt
– Uses a nonprofit trustee
– Useful to fund public infrastructure
Conclusion
• Debt exists because expenditure exceeds
revenue
• Federal debt from annual deficits, state & local
debt from capital projects
• Debt management important, and results in
good ratings, careful tailoring of maturities and
timing of debt issues, guarantees, etc.
• Debt itself is not evidence of poor fiscal
management