A government entity known as the Principle Debt Management Entity is mandated with the overall function of implementing the debt management strategy through derivatives, borrowing and various debt related transactions. We determine the debt capacity of a government organization by analyzing the obligations accrued by the government and whether it has the ability of repaying in the appropriate time without leading to revenue deficit. Capital budgeting has evolved rapidly and its importance has increased tremendously since the onset of the current economic crisis (Burns Walker, 2009). Capital budgeting is a fiscal policy instrument aimed at enhancing the governments net worth especially in the infrastructure sector so as to promote economic development.
In the City of Seattle for example, there are restrictions on debit limits provided under State law. Brian McCartan says that the entire legal debt capacity of the City of Seattle under State law is more than 3.0 billion, and the amount which is available currently is 2.6 billion (McCartan, 1995). Moreover, only a specific amount of debt can be in the form of non-voted debt or what is known as Limited Tax General Obligation. Although the City can issue new additional debt to the tune of 500 million, this would lessen the Citys general credit rating. The most significant obligation of Seattle is to achieve short and long term financial and capital objectives with respect to the Citys strategic capital planning and their long range Comprehensive plan.
Similar to other cities, factors used to establish the debt capacity include income, population, and the assessed value of a property. After finding these figures, the indicator of debt is divided by the ability to pay back the debt. When we divide the Seattles debt with its population, we get a debt per capita figure that can be compared to past performance of the City or to the trends of other cities (McCartan, 1995).
Effects of refunding existing debt obligations
Refunding enables a government agency to add more debt so as to gain more funds which will facilitate repayment of any outstanding debt at a specific date or as the debt becomes due. The advantages of refunding include being in a position to benefit from low interest rates, extension of maturity dates and revision of the repayment schedule by the government. The negative impact is that the government provides only short term budgetary savings while at the same time increasing the period of the original debt. Experts say that refunding bonds does not lead to the increase of capital stock or outstanding bond.
Reorganization of debt is a contractual agreement where the concern parties agree to alter the terms of the current debt, and mostly to the benefit of the debtor. There are several options of debt reorganization. The first option includes debt assumption where a new organization takes responsibility of the outstanding debt and all its liabilities. An example is where the government becomes liable for the debts of the City but coerces the City to repay the government for acquiring the debt. The second option involves debt restructuring where the City asks for the alteration of the existing terms. This may include extension of repayment period, reducing interest rates, or extension of grace periods of principal repayment (Swanson, 2003). The difficulties may include the conditions of the terms or the sustainability of the entity after debt reorganization.
Funding alternatives
A government entity can pursue other funding alternatives to finance its debt obligations. Some of the financial mechanisms which were introduced in the 1990s include shadow tolls, borrowing against future grants, and establishment of non-profit organizations to manage highways. Shadow tolls are government payment to private road operators on the basis of the amount of cars using the road. However, such mechanisms have been accused of contributing to minor improvement over the former toll model operated by the state.
The City can take advantage of non-recourse toll revenue financing which will earn future toll revenues that will be used to finance the outstanding debt. The major limitation will occur if the projections are short leading to the increase of the amount being owed in the long-term. In the City of Dallas, The Dallas-Fort Worth Turnpike was initiated in the 1957 but by 1977, it had eliminated its tolls, close to seventeen years before completion of its business plan (Samuel, 2005). This was as a result of the bonds being paid faster than it had been expected
Uncertainty may create pressure for huge funds reserves, raise the cost of capital and lower the credit ratings since people who invest in bonds ask for higher risk premium in interest charges. Some projects are excluded from full financing using toll revenues and this requires funding from tax money. The major advantage of this form of revenue is that, it has enabled creation and maintenance of more than 5,000 miles of the nations major highways and bridges without relying on taxpayers money. Shadow tolls also give the options of a project being designed, financed, and maintained by a private company. Projects financed by shadow tolls contribute to 15 cost saving in comparison to the cost of projects done by traditional contractors and serviced by government workers.
In the City of Seattle for example, there are restrictions on debit limits provided under State law. Brian McCartan says that the entire legal debt capacity of the City of Seattle under State law is more than 3.0 billion, and the amount which is available currently is 2.6 billion (McCartan, 1995). Moreover, only a specific amount of debt can be in the form of non-voted debt or what is known as Limited Tax General Obligation. Although the City can issue new additional debt to the tune of 500 million, this would lessen the Citys general credit rating. The most significant obligation of Seattle is to achieve short and long term financial and capital objectives with respect to the Citys strategic capital planning and their long range Comprehensive plan.
Similar to other cities, factors used to establish the debt capacity include income, population, and the assessed value of a property. After finding these figures, the indicator of debt is divided by the ability to pay back the debt. When we divide the Seattles debt with its population, we get a debt per capita figure that can be compared to past performance of the City or to the trends of other cities (McCartan, 1995).
Effects of refunding existing debt obligations
Refunding enables a government agency to add more debt so as to gain more funds which will facilitate repayment of any outstanding debt at a specific date or as the debt becomes due. The advantages of refunding include being in a position to benefit from low interest rates, extension of maturity dates and revision of the repayment schedule by the government. The negative impact is that the government provides only short term budgetary savings while at the same time increasing the period of the original debt. Experts say that refunding bonds does not lead to the increase of capital stock or outstanding bond.
Reorganization of debt is a contractual agreement where the concern parties agree to alter the terms of the current debt, and mostly to the benefit of the debtor. There are several options of debt reorganization. The first option includes debt assumption where a new organization takes responsibility of the outstanding debt and all its liabilities. An example is where the government becomes liable for the debts of the City but coerces the City to repay the government for acquiring the debt. The second option involves debt restructuring where the City asks for the alteration of the existing terms. This may include extension of repayment period, reducing interest rates, or extension of grace periods of principal repayment (Swanson, 2003). The difficulties may include the conditions of the terms or the sustainability of the entity after debt reorganization.
Funding alternatives
A government entity can pursue other funding alternatives to finance its debt obligations. Some of the financial mechanisms which were introduced in the 1990s include shadow tolls, borrowing against future grants, and establishment of non-profit organizations to manage highways. Shadow tolls are government payment to private road operators on the basis of the amount of cars using the road. However, such mechanisms have been accused of contributing to minor improvement over the former toll model operated by the state.
The City can take advantage of non-recourse toll revenue financing which will earn future toll revenues that will be used to finance the outstanding debt. The major limitation will occur if the projections are short leading to the increase of the amount being owed in the long-term. In the City of Dallas, The Dallas-Fort Worth Turnpike was initiated in the 1957 but by 1977, it had eliminated its tolls, close to seventeen years before completion of its business plan (Samuel, 2005). This was as a result of the bonds being paid faster than it had been expected
Uncertainty may create pressure for huge funds reserves, raise the cost of capital and lower the credit ratings since people who invest in bonds ask for higher risk premium in interest charges. Some projects are excluded from full financing using toll revenues and this requires funding from tax money. The major advantage of this form of revenue is that, it has enabled creation and maintenance of more than 5,000 miles of the nations major highways and bridges without relying on taxpayers money. Shadow tolls also give the options of a project being designed, financed, and maintained by a private company. Projects financed by shadow tolls contribute to 15 cost saving in comparison to the cost of projects done by traditional contractors and serviced by government workers.
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