Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Securitization wikipedia , lookup
Quantitative easing wikipedia , lookup
Federal takeover of Fannie Mae and Freddie Mac wikipedia , lookup
European debt crisis wikipedia , lookup
Debt settlement wikipedia , lookup
Debt collection wikipedia , lookup
Debtors Anonymous wikipedia , lookup
First Report on the Public Credit wikipedia , lookup
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 • • • • 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 • • • • 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