DEFINITION of Overlapping Debt

Overlapping debt refers to the financial obligations of one political jurisdiction that also falls partly on a nearby jurisdiction. Overlapping debt is common in most states because states are divided into numerous jurisdictions for different tax purposes, such as building a new public school and building a new road.

BREAKING DOWN Overlapping Debt

Municipalities issue debt to raise money from the public to fund capital projects that will benefit residents of the region. For example, if a city or county decides to build a school, airport, highway, or hospital, it will typically issue debt to borrow the funds needed to construct such infrastructure. Two municipal government bodies may have overlapping jurisdictions, such as a state and a city or a city and a county. The different jurisdictions may each issue debt in the form of municipal bonds and notes when they need to raise money to pay for these major expenses that are intended to serve all the residents of a political jurisdiction.

When the debt of a municipal authority is shared with another government, the debt is referred to as an overlapping debt. For example, a bond that funds a project in a county school district could be considered overlapping debt to a town located within that school district. The town is only responsible for its proportional share of the overlapping debt. This proportional share plus the municipality's direct debt together make up the municipality's overall net debt. The municipality's overall net debt is an important factor in its ability to obtain future debt financing. Also, taxpayers are responsible for paying their share of the debt from each jurisdiction.

Overlapping debt is often greater than the direct debt of a municipal government and is determined by the ratio of assessed valuation of taxable property lying within the corporate limits of the municipality to the assessed valuation of each overlapping district. Having overlapping debt may affect one or both governments' ability to repay.