Annex 2 Indicators of the Emerging and Sustainable Cities Initiative
116
Detailed Descriptions
Debt service ratio Topic:
Sub-Topic:
Debt
Sustainability of municipal debt
Definition Debt service ratio is the ratio of debt service expenditures as a percentage of a 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.
Methodology Debt service ratio is calculated by dividing total long-term debt servicing costs—including lease payments, temporary financing, and other debt charges—by total own source revenue. Total own source revenue is total revenue less transfers. Care must be used in evaluating this indicator. A high debt service ratio may indicate a municipality that has taken on too much debt, but it may also indicate that the municipality has taken an aggressive approach to debt repayment and is paying down its debt quickly. Similarly, a low debt service ratio could indicate a municipality is strong financially and can finance most capital projects through its operating budget. It may also indicate that a municipality is financially weaker, and has deferred capital projects and allowed important infrastructure to deteriorate. (Based on GCIF indicator description for “Debt service ratio.”)
Benchmarks Green
Yellow
Red
< 10%
10–20%
> 20%
Rationale The purpose of this indicator is to evaluate the sustainability of the city’s current indebtedness. That capacity to become indebted is evaluated in relation to the capacity of the city to pay for the depreciation of capital and the interest on the debt contracted. The capacity to pay is approximated through a municipality’s own revenues—that is, the revenue it can spend at will. In countries in which there are rules governing municipal indebtedness, the analysis of this indicator should take these regulations into account.
Other organizations or agencies that use this indicator GCIF. The Government Finance Officers Association (GFOA) supports this measure as part of its recommended budget best practices. Debt Service Ratio is also a key indicator for bond rating agencies in 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. (Based on GCIF indicator description for “Debt service ratio.”)
176