SU 8: Government Long-term debt

Question 1

Direct debt

Answer 1

incurred in the government’s own name and repaid by the government

Question 2

Debt limit

Answer 2

Maximum amount of debt government can have (often set by a higher government)

Question 3

Debt margin

Answer 3

Pertinent for general obligation debt only

the difference between the debt limit and the net debt outstanding

aka the amount of debt that can still be taken out

Question 4

Moral obligation debt

Answer 4

Bonds/Notes issued by one entity but backed by the promise of another (Avoids voter approvals & circumvents debt limitations)

Question 5

Overlapping (indirect) debt

Answer 5

Obligations of outside government entities that have the power to tax property in another government entity’s jurisdiction (aka state and local)

Question 6

Conduit debt

Answer 6

obligations in the name of a government on behalf of an NGO

AKA non-commitment debt
- in case of default bondholders have claim only on property and lease payments

may allow NGOs to finance at preferred government rates

Question 7

bond related ratios

Answer 7

Debt per capita to percentage of
taxable property

Debt service expenditures to total general expenditures

(and multiple year trends of the above)

Question 8

Debt per capita to percentage of taxable property

Answer 8

Debt divided by residents of area compared to percentage of taxable property (aka tax base)

Question 9

Debt service expenditures to total general expenditures

Answer 9

interest payments / total expenditures

Question 10

Long term debt used to finance capital assets

Answer 10

Principal recorded in schedule of LT obligations with expenditures recognized when payments made

Interest transferred from general revenue fund or special revenue fund to debt service fund as payments are made

Question 11

Transfer to DSF of cash for interest payment

Answer 11

In General Fund or special revenue fund

DR Transfer out - DSF
CR Cash

no AJE in government-wide

Question 12

interest payment with premium or discount from DSF

Answer 12

DR Expenditure - interest
CR cash (interest payable)

no discount or premium recognized, only what is being actually paid

Question 13

Interest payment with premium or discount Government-wide entry

Answer 13

Split into interest expense and DR bond premium or CR bond discount to recognize amortization of premium or discount

Question 14

Repayment of principal in debt service fund

Answer 14

only show expenditure in year payment is due

DR expenditure - principal
CR cash or payable

Question 15

Repayment of bond principal in government -wide financials

Answer 15

have used full accrual method all along to amortize discount premium

DR Bond payable
CR cash

Question 16

Can states file for bankruptcy?

Answer 16

No, but can go under a financial control board to reorganize debt by cutting back services and raising taxes

Question 17

Chapter 9 bankruptcy eligibility

Answer 17

Municipalities can reorganize under chapter 9 if:
- are insolvent (have more debt than assets)
AND
Either: obtain agreement of majority of creditors, negotiate in good faith and fail to obtain agreement, prove negotiation is impracticable, or reasonably believe a creditor will force bankruptcy