What is Net Debt to Assessed Valuation
Net debt to asset valuation measures a municipality’s net debt compared to the value of the real property purchased as assessed for tax purposes in a municipal bond issue.
The lower a municipality's debt is relative to the assessed value of its property the less risky its bonds are deemed to be. There is less risk of the government being unable to finance repayment of the bond issue if they have low relative debt. A higher ratio could indicate that a sale of the underlying assets might be insufficient to pay the debt.
BREAKING DOWN Net Debt to Assessed Valuation
Net debt to asset valuation is one of the factors used to determine the credit quality of a municipal bond issue. There are many types of municipal bonds, but the broadest categories are general obligation (GO) bonds and revenue bonds. GO bonds basis is from the credit of the issuing state or local government and their ability to tax. Revenue bonds usually are issued to fund specific projects and are repaid by particular taxes or by the revenue generated by the project.
Net debt shows a municipality's overall financial situation by subtracting the total value of the city's obligations and debts from the total value of its cash, cash equivalents, and other liquid assets, in a process called netting.
Calculation of Net Debt to Assessed Valuation
For example, the city of Normal has 200 million in short-term debt, $200 million in long-term debt and $20 million in cash and cash equivalents. The market value of the city's real property such as buildings it owns, the parks and recreation lands, public utilities such as water and sewage services, and personal property like equipment and vehicles is $500 million.
According to the formula, city's net debt to estimated valuation is 0.76 ($200 mn + $200 mn - $20 mn)/$500 mn = 0.76).
Debt ratios in Municipal Bond Financing
Debt ratios are comparative statistics showing the relationship between the issuer’s outstanding debt and factors such as its tax base, income or population. These ratios are primarily useful when looking at GO bonds or other tax-supported debt.
Some of the more commonly used ratios in addition to net-overall debt to asset valuation include:
- The net-overall debt to estimated full valuation compares the net value of a municipal bond issue to the expected market value of the real estate secured by the debt.
- A net-overall debt per capita is the amount of an issuer’s debt outstanding divided by the population residing within the issuer’s jurisdiction. It indicates the issuer’s credit position because it compares the proportion of debt, borne per resident there, with that of residents in other jurisdictions.
- The tax-supported debt to personal income would be comparing a state’s level of debt to the total personal income of its residents, which measures the state’s ability to repay its obligations because it indicates its ability to generate revenue.