Abstract
Although the city treasurer rather than the budget officer is primarily responsible for debt activities, these actions can have an influence on the budget. This chapter is a basic discussion of debt and its influences. It first argues for the development of a capital improvements plan before any debt is discussed. It then distinguishes between pay-as-you-go finance and debt finance, both of which have budget implications. The chapter then identifies five basic debt issues for the local government to consider: taxable versus tax-exempt debt, how much debt has the jurisdiction already issued, should the debt be sold in a competitive or non-competitive manner, what should be the structure of the debt, and the possibility for arbitrage. The chapter identifies four basic types of debts as well as several more narrowly defined types. It then distinguishes between short-term and long-term debts. It concludes by identifying several debt actors with whom the budget office will be interacting.
For a detailed explanation of many of the topics discussed below, see California Debt and Investment Advisory Commission (2019) (CDIAC).
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Notes
- 1.
Cities also must ensure that there are adequate funds to cover the depreciation of infrastructure.
- 2.
In very limited cases, there may be some legal arbitrage that can occur when interest costs of the debt are very low because of the tax-exempt status of the debt.
- 3.
In some cases, taxable bonds are an alternative for local governments. In this case, some restrictions in federal regulations can be ignored and in restrictions on service charges with private users (Horler, 1987).
- 4.
Except in rare cases (typically private placement bonds), the local government does not sell debt directly to the public. Rather it uses an underwrite to do this. The local governments negotiate a price with the underwriter, or they use the market to competitively determine the price.
- 5.
Sometimes called “tranches.”
- 6.
Pension obligation bonds are an added type that will be discussed later. There are several additional types of debt, for example, Certificates of Participation, that are available for use by the jurisdiction.
- 7.
Limited obligation bonds are backed by a specified amount of revenues received from any local source, including property and sales taxes. If these funds are insufficient, the local government may pay from other funds.
- 8.
This type of debt is heavily circumscribed by federal and state laws, so legal consul is necessary.
- 9.
Interest on POBs is not federally tax exempt (CDIAC, 2019).
- 10.
Arizona does not allow tax increment financing; California eliminated tax increment finance and replaced it with a modification of infrastructure financing districts.
- 11.
Short term is less than three years.
- 12.
There are many more that this monograph does not discuss. See CDIAC (2019) for a more complete identification and discussion.
- 13.
Competitive sales usually do not need an underwriter’s counsel.
Bibliography
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California Debt and Investment Advisory Commission. (2019). California debt financing guide. California Debt and Investment Advisory Commission.
Denison, D. V. (2013). Debt management. In J. R. Bartle, W. B. Hildreth, & J. Marlowe (Eds.), Management policies in local government finance (6th ed., pp. 279–295). International City/County Management Association.
Horiuchi, C., & J. Chapman. (2019). TIF in California: Birth, growth, death and re-birth(?). In C. L. Johnson & K. Kriz (Eds.), Tax increment financing and economic development: Uses, structures and impact (2nd ed.). State University of New York Press
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Chapman, J. (2022). Debt. In: The Local Budget as a Complex System. Palgrave Studies in Public Debt, Spending, and Revenue. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-94903-7_5
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