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Federal, State, and Local Governments
Government Finance and Employment Classification Manual
Chapter 9 - Indebtedness
 
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Contents and Abstract:

9.1 Debt Definition
9.11 Liabilities Outside Census Bureau Definition
9.12 Major Classification Changes with Fiscal Year 1987-88 Data

9.2 Four-Way Classification of Public Debt

9.3 Public Debt for Private Purposes
9.31 Related Revenue, Expenditure, and Cash and Security Issues

9.4 Refunding of Long-Term Debt
9.41 Regular Refunding
9.42 Advance Refunding

9.5 Derived Debt Statistics
9.51 Borrowing and Redemption
9.52 Change in Debt
9.53 Net Long-Term Debt Outstanding

9.6 Other Debt Topics
9.61 Zero Coupon and Other Deep Discount Bonds
9.62 Bond Banks and Pooled Debt
9.63 Leases and Lease-Purchase Agreements
9.64 Taxable Public Debt

Charts:

9-A Examples of Liabilities Included and Excluded from Census Bureau Definition of Public Debt

9-B Summary of Debt Categories and Codes

9-C Debt Detailed Code List with Coverage of Data Collection

Description Sheet:

Description of Debt Categories

Perhaps more than any other area of public finances, government debt has grown increasingly diverse and complex since the Census Bureau's classification system was created. The effect of these changes on the classification system has been so pronounced that major changes were made to it beginning with the fiscal year 1987-88 finance survey.

9.1 Debt Definition

Public debt comprises all interest-bearing short-term credit obligations and all long-term credit obligations incurred in the name of the government and all its dependent agencies, whether backed by the government's full faith and credit or nonguaranteed. It includes tax-exempt as well as taxable public debt.

The Census Bureau concept of public debt is an inclusive one, covering judgments, mortgages, "revenue" and "earning" bonds, and special assessment obligations as well as the more traditional general obligation bonds, notes, and interest-bearing short-term warrants. It includes not only public debt for public improvements (roads, sewers, airports, etc.) but also public debt issued for the direct benefit of the private sector (industrial development, mortgage revenue, pollution control abatement, etc.). See Section 9.3 for a more detailed discussion of this topic.

This definition covers obligations of all agencies, boards, commissions, or other organizations categorized as dependent on the government concerned (see Chapter 3). For instance, government business-type activities, particularly utilities, have debt that is payable exclusively from earnings of the facilities which the debt financed. Many special assessment obligations are paid completely from levies on the property benefiting from such improvements, without recourse to the general credit of the government. State authorities, educational institutions, and other agencies frequently have debt secured only by their own revenues, other dedicated receipts, or agency properties. These types of obligations are issued widely by dependent agencies of a government, such as special improvement districts of city corporations, state dormitory authorities, or housing finance agencies. Often, the parent government does not even maintain central accounts on such debt. Nonetheless, all these examples are types of credit obligations reported in Census Bureau statistics on public debt.

The Bureau assigns public debt, as defined above, to the government in whose name it is incurred, regardless of the location of responsibility for debt service. In the case of public debt for private purposes, this generally represents the government whose tax-exempt status was used to issue such debt. State obligations for which interest and principal payments are financed by local government payments to the state are treated as state debt. Similarly, debt of an agency classified as dependent on a local government is treated as local government debt.

9.11 Liabilities Outside Census Bureau Definition

This concept of public debt, however, is not so broad that it covers every liability listed on the balance sheets or elsewhere in government finance reports. The following types of liabilities are excluded from Census Bureau statistics:

Chart 9-A provides a sample of the most common types of government liabilities that are included and excluded from this definition of public debt.

9.12 Major Classification Changes with Fiscal Year 1987-88 Data

Because of the growing complexity of government debt financing and the increasing difficulty in collecting statistics regarding it, the Census Bureau instituted major classification changes to this area, effective with fiscal year 1987-88 data. The major effects of the changes were to simplify the classification scheme and to identify more completely public debt for private purposes.

The classification changes can be summarized as follows:

  • The functional detail on long-term debt issued, retired, and outstanding was reduced from 19 to eight categories, half of which are for utilities. The disposition of the previous function codes is shown in the chart below:
 
Old Code Character and Object Category New Code
Utility Debt (see Note 1):
A Water Supply Systems* A
B Electric Power Systems* B
C Natural Gas Supply Systems* C
D Public Mass Transit Systems* D
General Debt (see Note 2):
E Air Transportation X
F Elementary and Secondary Education* F
G Institutions of Higher Education G
H Other Education, N.E.C.# G
J Hospitals# X
K Highways-Regular X
L Highways-Toll X
M Housing and Community Development# X
N Parks and Recreation X
P Sewerage X
R Veterans' Bonuses X
S Water Transport and Terminals X
T Industrial Development and Pollution Control T
W Mortgage Revenue T
X General Debt, N.E.C. X
* Indicates no change to category.
# Indicates that some debt previously classified in this code is included in the new Public Debt for Private Purposes category.
 
  • A new category, Public Debt for Private Purposes (code T), was created as a combination of industrial development and pollution control (old T code) and mortgage revenue (old W code) plus debt that was recorded in other functions (e.g., from the education debt categories, debt for student education loans and from hospital debt category, debt to finance private hospital construction).
  • Two functional categories that had been used previously to classify state government full-faith and credit long-term debt, General Obligation Bonds and Debt Initially Payable from Specified Nontax Revenue, were eliminated.

9.2 Four-Way Classification of Public Debt

For Census Bureau statistics, public debt is classified into four categories using a 3-digit coding scheme. Except for the first category, all apply solely to long-term debt. These categories are defined in detail in the Description of Debt Categories. Below is a summary of each:

  • By length of term. Debt is classified as being either short-term or long-term. Note that for short-term debt, only the amounts outstanding at the beginning and end of the fiscal year are reported. Unlike long-term debt data, no effort is made to collect the entire amount of short-term debt sold and paid off during the fiscal year or to categorize short-term debt by function.
  • By type of long-term debt. Long-term debt is classified by one of three types: issued during the year, retired during the year, or outstanding at the end of the government's fiscal year. Note that the first two record debt activity over a period of time while the last one measures debt at a specific point. Also, the end of fiscal year refers to the government's own fiscal year, not the Census Bureau reporting period.
  • By character of long-term debt. Long-term debt is classified as either backed by the full-faith and credit of the government or as nonguaranteed. For smaller local governments, long-term debt issued and retired is not classed in either category but is categorized as "unspecified in character."
  • By purpose of long-term debt. Long-term debt is classified according to the purpose, or function, intended to be financed from its proceeds. There are currently eight functional categories for debt:
Utility Debt (see Note 1): Water Supply Systems
  Electric Power Systems
  Natural Gas Supply Systems
  Public Mass Transit Systems
 
General Debt: Elementary and Secondary Education
  Higher and Other Education
  Public Debt for Private Purposes
  All Other Debt, N.E.C. (see Note 2)

See Chapter Four for detailed definitions of these functional categories (except Public Debt for Private Purposes, which is not a function per se).

9.3 Public Debt for Private Purposes

This functional debt category, first used in the fiscal year 1987-88 survey, represents a consolidation of two former categories plus certain debt from others. It is now one of the largest type of state and local government debt.

Public debt for private purposes comprises credit obligations of a government or any of its dependent agencies for the purpose of funding private sector activities (see Note 3), including debt that is backed solely by the private organization(s) involved. Such debt is assigned to the government whose bond-issuing authority was used to secure its tax-exempt status or, in the case of taxable debt, was used for its issuance. Examples of private sector activities funded include industrial and commercial development, pollution control, housing and mortgage loans, private hospital facilities, student loans, and such private ventures as sports stadiums, convention centers, and shopping malls.

This type of debt poses certain data collection problems for the Bureau. First, it is not listed always in the financial statements of the government issuing it. Often, the debt is discovered in secondary sources, such as Moodys. Second, even if its issuance is identifiable, its retirement schedule, interest payments, and amount outstanding may be unavailable, requiring the Bureau to estimate them. Third, the governments' themselves often do not construe such debt to be their own and object to its being included in Census Bureau statistics about their finances. Finally, this debt can distort the presentation of data, such as its effect on per capita debt when a small government (in population) issues a large amount of public debt for private purposes.

9.31 Related Revenue, Expenditure, and Cash and Security Issues

Public debt for private purpose also generates special treatment regarding its related revenue, expenditure, and even cash and security holdings. This treatment was revised for the fiscal year 1987-88 survey to cover all types of debt like this; previously, it was limited to mortgage revenue debt (the old "W" code debt).

  • Revenue: Classified as Interest Earnings (code U20) is an amount equal to the interest expenditure (code I89) on all public debt for private purposes.
  • Expenditure: Unlike all other forms of debt issued, no expenditures from the proceeds of public debt for private purposes are reported. Classified as Interest on General Debt (code I89) are the actual (or estimated) interest payments on such debt.
  • Cash and Security Holdings: Classified as an Offset to Debt (code W01) is an amount equal to the public debt for private purposes outstanding at the end of the fiscal year. This figure is revised annually to account for amounts retired or issued.

9.4 Refunding of Long-Term Debt

Another growing (in volume and complexity) feature of public debt finances is the refunding of long-term debt. Governments often retire debt before it matures by issuing more debt--generally at a lower interest rate (like refinancing a mortgage). A more peculiar version is advance refunding where a government issues new debt but sets aside the proceeds rather than actually paying off the old debt. The old debt, in turn, is "defeased" and removed from the government's accounting statement. How such activities are reported in Census Bureau statistics is described in the next two sections.

9.41 Regular Refunding

Regular (or direct) refunding refers to the issuance of long-term obligations in exchange for, or to finance the retirement of, existing long-term debt, typically on or after the first call date of the debt to be refunded. This rather straightforward transaction is classified for Census Bureau statistics as described below:

  • Refunding debt issued: The par value of debt issued during the fiscal year is reported twice: (1) under regular debt issue categories (codes 21*, 24*, or 29*) and (2) under the refunding debt issued category (code 52T), an exhibit code. Note that the "T" in code 52T does not refer to public debt for private purposes. Any amounts authorized but not actually issued are excluded.
  • Debt retired by refunding: The par value of debt retired by refunding during the fiscal year is reported twice: (1) under regular debt retired categories (codes 31*, 34*, or 39*) and (2) under the debt retired by refunding category (code 53T), an exhibit code. Note that the "T" in code 53T does not refer to public debt for private purposes.
  • Refunding debt outstanding: The par value of debt outstanding that was issued for refunding purposes is reported under regular debt outstanding categories (codes 41* or 44*). The debt that has been retired by the refunding bonds is excluded.
Note: The asterisk (*) refers to the debt function code which is based on the function of the debt being refunded.

9.42 Advance Refunding

A much more complex situation is when a government issues refunding debt but cannot legally retire the old debt under the terms of the original debt issuance (typically, 10 years after its issuance). That is, the original debt's "first call" date has not yet been reached. Usually, this occurs during times when interest rates are falling dramatically. In these cases, the government places the proceeds of the refunding bonds in escrow, which includes enough monies to cover the debt service (principal and interest) until the original debt's first call date is reached, when the escrowed funds are used to retire the original debt's remaining balance.

The government generally has two choices on treating the refunded debt: One, if the refunding debt issued is sufficient to pay the remaining principal and all future interest on the original debt, then the government can remove the original debt from its balance sheet, an action called defeasance. For Census Bureau purposes, a debt is defeased whether or not the government is released from its legal obligation for the debt (legal defeasance) or remains the primary obligor (in-substance defeasance).

Two, the government may use the escrow funds to pay the interest and principle due on the refunding debt, not the original debt, until a certain date is reached, at which time the escrowed money is used to retire the original debt, which is then defeased. This type of advance refunding is called "crossover" refunding.

The example below illustrates a typical advance refunding:

City X has $10 million in water utility nonguaranteed debt outstanding at 13% interest whose first call date is not for four more years. It issues $12 million in advance refunding bonds (at 6%) to cover principal and interest to maturity. The proceeds are used to purchase Federal securities which are placed in escrow and used for debt service on the original issue. The original debt is "defeased" and removed from the books of the government. Assume that there is no other principal paid on either the original or advance refunding debt.

For Census Bureau statistics, this advance refunding scenario would be treated in the following manner:

9.5 Derived Debt Statistics

From the debt data that is collected from state and local governments, the Census Bureau also computes derived statistics on indebtedness. Some of these also use data gathered on cash and security holdings. Note that there are no census codes associated with these types of statistics.

9.51 Derived Debt Statistics

Borrowing is an estimate of the net amount of new money that a government has borrowed during the fiscal year, including short- and long-term debt. It consists of the par value of long-term debt issued during the year (other than for refunding purposes) plus any net increase in short-term debt between the beginning and end of the fiscal year. Note that it does not reflect the total amount of short-term debt sold during the year.

Shown as a formula using Census Bureau 3-digit debt codes, borrowing is computed as follows (the asterisk (*) in the formulas below stands for the appropriate function code for the debt issued or retired):

If net short-term debt has increased during the fiscal year:
 
21* + 24* + 29* + (64V - 61V) - 52T
 
If net short-term debt has decreased (or remained constant) during the fiscal year:
 
21* + 24* + 29* - 52T

Redemption is an estimate of the net amount of debt that a government has paid off during the fiscal year, including short- and long-term debt. It consists of the par value of long-term debt retired during the year (other than debt retired by refunding) minus any net decrease in short-term debt between the beginning and end of the fiscal year. Note that it does not reflect the total amount of short-term debt paid off during the year.

Shown as a formula using Census Bureau 3-digit debt codes, redemption is computed as follows:

If net short-term debt has increased during the fiscal year:
 
31* + 34* + 39* - 53T
 
If net short-term debt has decreased (or remained constant) during the fiscal year:
 
31* + 34* + 39* + (64V - 61V) - 53T

Note that debt redemption includes debt redeemed not only from current revenue or prior year fund balances but also from the sale of assets accumulated in debt service funds (sinking funds). The transfer of current revenue to such funds for future debt service is considered an intragovernmental transaction and, therefore, is not included in either revenue or expenditure statistics. (The amounts held, however, are recorded as cash and securities; see Chapter 10 for details.)

9.52 Change in Debt

Combining features of both debt borrowing and redemption, change in debt is an estimate of the net change in a government's indebtedness during the fiscal year. It consists of the par value of long-term debt issued during the fiscal year less the par value of long-term debt retired during the year plus (or minus) the change in short-term debt between the beginning and end of the fiscal year. Note that it does not reflect the total amount of short-term debt sold or paid off during the year.

Shown as a formula using Census Bureau 3-digit debt codes, change in debt is computed as follows:

21* + 24* + 29* - 31* - 34* - 39* + (64V - 61V)

9.53 Net Long-Term Debt Outstanding

Net long-term debt outstanding is the amount of long-term debt held by a government for which no funds have been set aside for its repayment. It consists of total long-term debt outstanding less total offsets to debt (i.e. cash and security holdings in debt service, or sinking, funds). Shown as a formula using Census Bureau 3-digit debt codes, net long-term debt outstanding is computed as follows:

41* + 44* - W01

For state governments and the largest city and county governments whose data are compiled specially by the Bureau, net long-term debt is divided further between full-faith and credit and nonguaranteed.

  • Net Long-Term Full-Faith and Credit Debt consists of the par value of total full-faith and credit long-term debt less offsets to full-faith and credit long-term debt. Shown as a formula using Census Bureau 3-digit debt codes, it is computed as follows:

41* - 71W

  • Net Long-Term Nonguaranteed Debt consists of the par value of total nonguaranteed long-term debt less offsets to nonguaranteed long-term debt. Shown as a formula using Census Bureau 3-digit debt codes, it is computed as follows:

  • 44* - 74W

    See Chapter 10 for a description of offsets to full-faith and credit and to nonguaranteed debt (codes 71W and 74W).

    9.6 Other Debt Topics

    This section covers topics not discussed elsewhere, primarily new and more complex debt instruments that governments have employed in recent years.

    9.61 Zero Coupon and Other Deep Discount Bonds

    Deep discount bonds and their equivalents (zero-coupon bonds, compound interest bonds, etc.) are debt instruments sold at a price much below their face value. The interest they earn is added to the value of the bond rather than paid out serially (similar to how U. S. savings bonds work). Stated formally, interest is reinvested, compounded at the original rate that applied to principal, and paid at maturity.

    For Census Bureau statistics, deep discount debt transactions are reported as follows:

    • Debt issued: Only the actual proceeds from the sale of the bonds are reported as long-term debt issued (i.e., not the higher face value amount).
    • Debt retired: When the bonds are finally paid off, only the original sale price is reported as long-term debt retired (i.e., not the higher face value which includes accumulated interest). Thus, the amount retired is equal to the amount originally reported as issued.
    • Debt outstanding: The amount of proceeds from the original sale of the bonds is reported as long-term debt outstanding (i.e., the outstanding amount is not incremented by the interest earned and added to its face value). Thus, the amount outstanding remains constant during the life of the bond.
    • Interest expenditure: The amount of interest earned by the bond and added to its face value is reported as interest expenditure (even if it does not involve actual cash disbursements).

    9.62 Bond Banks and Pooled Debt

    To reduce the cost of issuing debt and to achieve a lower interest rate, governments sometimes agree to issue debt jointly rather than individually. For instance, a state government may create a "bond bank" that issues debt in the state's name that is then used to purchase securities from local governments. Local governments may also create their own bond banks or enter into "pooled debt" arrangements where one member issues debt and others borrow from the proceeds.

    For Census Bureau statistics, such arrangements are reported as follows:

    • Debt issued, retired, and outstanding: The government in whose name the bond bank or pooled debt was issued is recorded with the amount issued, retired, and outstanding using regular census debt codes.
    • Loaning of proceeds to other governments: The distribution of the proceeds from the bond bank or pooled debt is not reported as an intergovernmental transaction. Instead, for the government issuing such debt, the purchase of other government's securities or the borrowing of debt proceeds by other governments is reported as an investment under Offsets to Debt (code W01). For the governments whose securities are sold or which borrows the proceeds, it is treated a long-term debt issued (codes 21*, 24*, or 29*).
    • Repayment of proceeds: When the member government repays part or all of the loan from the issuing government, it is reported as long-term debt retired by the former. For the issuing government, the amount repaid each year reduces the security holding for offsets to debt (code W01).
    • Interest on debt: For the issuing government, the interest paid on the debt is reported under the appropriate interest expenditure category (I89, I91, I92, I93, or I94). For the member governments, it is treated as in intergovernmental expenditure (and for the issuing government as intergovernmental revenue).
    Note that in some cases, the original debt is issued by a nongovernmental entity (such as a league of cities) which operates more like the joint activities described in
    Chapter 3. In these cases, the debt and its related transactions are assigned to the member governments and reported as regular long-term debt.

    9.63 Leases and Lease-Purchase Agreements

    For Census Bureau statistics, leases, lease-purchase arrangements, lease-rental agreements, and the like are not considered public debt (see Note 5). Instead, payments on them are reported as capital outlay; see Section 6.72 for details.

    A government may enter into a leasing arrangement with a private firm in lieu of issuing debt and building their own facilities. The private firm obtains funding for the project, builds it, and leases the facility or equipment back to the government. For the government, leases offer the advantages of not requiring voter approval and are not counted toward its debt limitation ceiling.

    Note that Census Bureau debt categories do include lease-rental bonds issued by a dependent agency of a government which builds a facility that it leases back to the parent government. Lease payments, of course, would not be reported since they represent intragovernmental transfers.

    9.64 Taxable Public Debt

    For Census Bureau statistics, taxable public debt is reported in the same manner as tax exempt public debt.

    Most government debt is tax exempt; that is, the interest it pays to bondholders is exempt from Federal income taxes. In some cases, however, governments will issue debt that does not receive exemption from Federal taxes (for instance, to get around debt limitations).


    1. Utility debt applies only to debt amounts that can be identified readily as being for particular utility purposes. Such obligations are included without reference to the conditions determining payment of interest and principal--that is, whether or not utility or general revenues are used. Likewise, general obligation bonds or other "tax supported" obligations issued specifically to fund utility operations or facilities are classed as utility debt (and interest on them as utility interest expenditure). citation.
    2. Includes any debt issued for liquor stores or insurance trust purposes. citation.
    3. Take note that this statistical category is broader than the "private activity bonds" that are regulated by such Federal laws as the Tax Reform Act of 1984, which excludes such debt as private multi-family rental housing and mortgage subsidy bonds that are included in the Census Bureau category. citation.
    4. For purposes of determining whether or not the original debt has been removed from the government's books, the Bureau considers the "official record" to be the balance sheet from the government's annual finance report. Thus, defeased debt carried only in notes to the financial statements or in a debt compilation sheet would not be considered outstanding debt of the government. citation.
    5. Leases are not classified as debt for Census Bureau purposes for various reasons. Unlike bonded debt, leases rarely generate any cash flow. With no proceeds available, there are no funds to expend on capital outlays or to turn over to the private sector in return for an investment security. Moreover, leases are rarely negotiable instruments, do not require voter approval or apply to debt ceiling limits, are funded by annual appropriations rather than dedicated taxes or other revenue sources (in effect, making them renewable one-year contracts), can be canceled in some cases, and often have an "interest" component that is simply an imputed amount. Thus, for Census Bureau statistics, leases are closer to the "pay-as-you-go" way of financing capital improvements than to debt. citation.

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    Source: U.S. Census Bureau, Governments Division
    Created: November 16 2000
    Last revised: October 31 2011