The debt capacity is the upper limit on the dollar amount of capital improvements that the City can afford to fund from debt. The GFOA recommends that government “issuers undertake an analysis of their debt capacity prior to issuing bonds.” The rationale for this recommendation is that a “comprehensive and routine analysis of debt capacity provides assurance that the amount of debt issued by a government is affordable and cost-effective.” In so doing, government officials are able to keep debt at affordable levels. Further, assessing debt on an ongoing basis is essential for effective debt management and for ensuring that debt-planning activities are integrated with the capital improvement process. Debt capacity analysis, in short, ensures that “an appropriate balance is struck between a jurisdiction’s capital needs and its ability to pay for them.”
In the analysis of debt capacity, many items are considered such as existing debt, debt service as a percentage of expenditures. an evaluation of trends relating to financial performance, measures of debt burden on the community (debt per capita), population trends, statutory or constitutional limitations, and market factors affecting tax-exempt interest costs and credit ratings.
The City is in preliminary stages of determining debt capacity for the upcoming 2021 fiscal year. The following graph depicts four scenarios which represent the adoption of various rates considering the current property tax rate of $0.803000/100. Please note that these numbers are estimates and not a reflection of actual rates. This information was presented to city council during the budget workshop on July 15, 2020. A full copy of the presentation can be found here.
Analysis: The four bars in the graph below indicate the different scenarios of debt capacity provided the city maintains a tax rate of $0.803000/100. For example, the using the "No New Revenue Tax Rate" provides the city with approximately $21.5 million for a bond issuance. While this option provides the city with the greatest amount of money to fund capital improvements, it is at the expense of maintenance and operations. In other words, the more that is available for additional debt or I&S (interest and sinking), the less there is to maintain general fund maintenance and operations - operational costs for public safety, street maintenance, parks and recreation, community development, and general government. Looking at the opposite end of the spectrum, using the "Disaster Provision Rate" provides the city with approximately $6.9 million to fund a capital project. While this option provides less funding for capital improvements, the maintenance and operations portion of the tax rate provides the ability for the city to cover increasing costs within operations of the general fund.