2.2 City Management
A.
Finance
Theme:
Finance
Core Indicator:
Debt service ratio (debt service expenditure as percent of a
municipality’s own-source revenue).
Widely accepted as a measure of sound financial management, this indicator
reflects the amount of financial resources that are available for day-to-day
operations and how much money is spent paying down debt. It can be a
controllable cost and can assist in priority setting.
Debt service ratio is the ratio of debt service expenditures as a percent of a
Definition:
municipality’s own source revenue. A lower number can indicate either an
increased ability to borrow or a decision by a municipality to limit its debt to
enable funding of other service areas.
Debt service ratio is calculated by dividing total long-term debt servicing
Methodology:
costs including lease payments, temporary financing and other debt charges
by total own source revenue. Total own source revenue is total revenue less
transfers.
Debt service ratio exceeding 20% is considered a warning signal for
Benchmark:
municipalities. A ratio of 10% or less is considered acceptable.
Care must be used in evaluating this indicator. A high debt service ratio may
Comments and
indicate a municipality that has taken on too much debt but it may also
Limitations:
indicate that the municipality has taken an aggressive approach to debt
repayment and is paying down their debt quickly. Similarly, a low debt
service ratio could indicate a municipality is strong financially and can
finance most capital projects through their operating budget. It may also
indicate that a municipality is financially weaker and has deferred capital
projects and allowed important infrastructure to deteriorate.
The Government Finance Officers Association (GFOA) supports this measure
Other
Organizations/Agencies as part of its recommended budget best practices.
Which Use This
Debt Service Ratio is also a key indicator for bond rating agencies in
Indicator:
assessing a municipality’s credit rating. Depending upon which level of
government provides public transit (a high capital cost service) or
water/wastewater facilities, the size of the debt could be significantly higher
or lower between similar sized municipalities.
The 2006 BMA municipal study identified the City of Toronto with a ratio of
Example:
4.8 % and the City of Ottawa with 5.3%.
Another study by the New York City Comptroller showed NYC with a ratio
Rationale:
of 13.9 % for 2006.