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Federal except for Dayton, the remaining five Ohio cities had ratios that were more than twice as large as the average for all major U.S. cities. Therefore, not only was the level of long-term debt burden in Ohio's large cities out of line, but total indebtedness and total debt service payments also were consistently high relative to their overall debt- revenue bonds from a region where economic growth has lagged and municipalities have been experiencing financial problems. Burden of Debt The size and composition debt held by Ohio's major cities cance largely in relation to the payments and the debt-carrying of the total have signifidebt service capacity of carrying capacity. In addition to the relative debt burden, short-term debt also poses another potential problem for the fiscal management of Ohio's large cities. The percentage of cash and security holdings currently on hand to cover short-term debt repayment generally has been a sensitive measure of a city's ability to meet its short-term debt obligation in a fiscal emergency. A general rule is that the closer the ratio of short-term debt to cash and security holdings is to 1.00, the greater the possibility of fiscal stress. This rule of thumb may be inappropriate for growing cities with low budget surpluses. For major U.S. cities, an average value of 0.27 over the ten-year period has been an acceptable margin of safety and comparable with the average of all state and local governments. With the shift away from short-term debt in 1978, the cities. For the most part, the long-term debt burden of Ohio's cities in 1978 was in line with that of other large cities of the nation (see table 2). For example, total annual interest payments plus long-term debt retirement (long-term debt burden) tended to be less than one-fifth of revenues from own sources. However, the ratios for most of Ohio's cities exceeded those values over the ten-year period. Akron's ratio appeared to be substantially larger (averaging 0.32, compared with 0.12 for major U.S. cities). Most of the Ohio cities thus lowered their ratios in 1978. However, adding short-term debt to long-term debt service payments presented a much different picture. Only Cincinnati was below the debt-burden ratio (0.41) attained for major U.S. cities on average over the ten-year period. Indeed, Table 2 Ratios of Interest and Debt Retirement Long-term debt 10-year burden," to Own Source Revenues produce increasingly tight budgets and liquidity strains for Ohio's cities, Except for Toledo, the ratio of debt to cash and security holdings showed significant improvement by 1978 for the Ohio cities, but not as much as ach ieved by other major U.S. cities. Thus, while Toledo was the only Ohio city actually to exceed the 1.00 rule of thumb, Cleveland and Columbus also had abnormally high debt to cash and security burden," 10-year average, 10-year average, 1978 1968-77 1978 1968-77 Because of the complexity underlying any city's financial structure, there is no conclusive way of stating whether a particular debt position is within acceptable limits of municipal debt management. Thus, 0.15 0.17 0.23 0.41 0.10 0.18 0.32 0.78 1.40 Cincinnati Cleveland 0.15 0.15 0.25 0.20 0.44 0.38 NA 0.06 0.21 Columbus Dayton 0.19 0.12 0.11 0.24 0.16 0.11 0.19 0.76 0.21 1.07 0.36 0.65 1.01 0.97 BULK RATE U.S. Postage Paid Reserve Bank of Cleveland Cleveland,OH Department Permit P.O. Box 6387 Cleveland,OH 44101 Address correction requested NA 0.22 0.83 1.46 levels of long- and short-term debt of major U.S. cities. Even though the economic environment differs among various Oh io cities, access to the municipal bond market remains vital to their fiscal operations. Despite some financial restructuring in Cleveland since its default, the financial position of Ohio's cities had not improved substantially by 1978. Moreover, the economy of the state of Ohio and of many of its major cities has deteriorated much more than has been the case for many other areas of the United States since 1978. Such deterioration in the face of unfavorable debt ratios provides a clear warn ing that careful management of both long- and short-term debt is still required to preserve the financial soundness of Ohio's major cities. 0.27 Akron financial ratios that measure relative debt levels and servicing capacity can only suggest signs of fiscal strain in a city's debt position. Within the limits of the data available for analysis, the size of debt suggests a potentially troublesome situation for the major cities of Ohio. Each of the seven Ohio cities has at some point exceeded the average 0.53 0.96 NA 1.56 0.20 Toledo Youngstown a. Debt burden 0.14 represents own sources. city. See J. Richard tional The Tax Journal, SOURCE: ratios debt retirement measure Aronson debt and Arthur plus total service annual payments E. King, interest relative "Is There 0.66 NA 2.39 NA payments divided NA by revenues from to the debt-carrvinq a Fiscal Crisis Outside capacity of New York?," vol. 31, pp. 153-63. U.S. Bureau of the Census, City Government Finances in 1977-78 of (and previous issues). the March 23, 1981 S£Q,QomicCommentary Debt Management of Ohio's Major Cities by Robert H. Schnorbus Municipal debt grew dramatically be- tween 1968 and 1978-a period when gross capital formation by state and local governments was ebbing. The relative decline in public capital formation by state and local governments has been attributed to several factors, including lessening need for new capital (particularly with declining school term borrowing (i.e., with a maturity of one year or less), caused largely by spiraling interest rates and the resulting postponement of long-term debt issues.1 Local governments in Ohio have been confronted by mounting fiscal strain. Compared with other large U.S. cities, total debt and short-term debt of Ohio's cities are high relative to some standard measures of municipal debt management. Roughly one-half of No. 385 enrollments) and rising interest rates. Furthermore, cutbacks in capital spending have been steepest among older cities suffering from long-run decl ine in economic activity, especially in the industrial Northeast. Despite the decline in investment, however, debt has risen rapidly, as a larger share of capital formation has been financed through long-term debt. In addition, new financing devices (mostly non-guaranteed revenue bonds) have encouraged state and local governments to use the municipal bond market to attract industry. Because the new the short-term debt of local governments in Ohio is held by municipalities. (The bulk of the remainder is evenly distributed between school and special districts.) While imprudent management of debt, especially shortterm debt, is difficult to define, the state auditor of Ohio recently indicated that at least six Ohio cities (Ashtabula, Niles, Norwood, Cleveland, Plymouth, and Youngstown) have had fiscal emergencies of varying degrees.2 This Economic Commentary ex- financing devices often have been backed only by the "moral obligation" of the gov- Research Major U.S. cities ratios. Conclusion Federal Short-term debt to cash and security holdings, Short- and long-term debt average, 1968-77 1978 Payments the ratio was reduced to 0.10 for major U.S. cities. However, three of the four Ohio cities for which data are available had short-term debt to cash and security holdings at least twice as high as those for major U.S. cities. Relatively sluggish growth in the state's economy might be expected to Reserve Bank of Cleveland amines the long-term and short-term debt positions of Ohio's major cities in 1978 and ernmental unit, their increased use has been a matter of growing concern in municipal bond markets. An even greater cause for concern has been the heavy volume of short-' tor o Robert H. Schnorbus is an economist, Federal Reserve Bank of Cleveland. The Ne- author Reserve OH 44101. opinions and not Bank Governors stated herein necessarily of Cleveland are those those or of of of the the Federal the Board of the Federal Reserve System. of abuse studies Advisory lations, short-term past municipal cities Commission City ing Office, that on Financial more financial have so than causal faccrises. defaulted, Intergovernmental Emergencies: Dimension, The U.S. Government For see Re- InterPrint- 1973. See "Auditor town Daily debt, has been an important of governmental 2. of debt, in many case Address Change Correct as shown o Remove from mailing list Please send mailing label to the Research Department, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, 1. The Ionq-terrn Unsure of City's Vindicator, September Future," Youngs- 16, 1980, p. 1. the previous ten-year period relative comparably Municipal Table 1 Major U.S. cities 1.04 0.80 0.25 0.48 0.54 Since 1968, there has been a dramatic shift by municipal borrowers toward revenue Akron Cincinnati Cleveland 0.12 0.37 1.98 0.18 0.79 0.30 0.81 0.72 0.13 0.27 0.75 0.19 0.07 0.47 Columbus Dayton Toledo Youngstown 0.83 0.84 0.33 1.19 0.68 0.34 0.74 0.46 0.81 0.69 0.89 0.92 0 0.10 0.50 0.20 0.07 0.05 0.50 0.16 Bond Market The municipal bond market is the ultimate barometer of a city's debt positionr' Bonds (i.e., debt with a maturity of longer than one year) generally are considered to be the appropriate instrument for financing 3. The term municipal indicates both state and local governments. Chart 1 Municipal Borrowing: bonds and greater reliance on short-term debt (see chart 1). Indeed, by 1978 revenue bonds 1968-78 ~----------------------------------------------~ Composition of Borrowing Ratio of notes to total 120 bonds 100 80 Ratio of general obligation .-~----.------.----- 60 .....•-. _ 40 to total bonds -.•...~..-..:.~:~:--=~::..~."..~~=~--:-< ....•-. - .~. _ .....-. --0 ---' Ratio of revenue to total bonds ...•--- ..._-. 20 o Billions of dollars 50 Annual Sales 45 Total bonds 40 ,../ 35 30 .- .•.. . ••..~ *. Notes _. ~ ..',••••••• - ------'i-. . ~~ .·7 25 ~.~~ ·····fIII ' ~ 20 ,' 15 .~ .:~ . •.....,.~,... 10 ••• ~' .Y s""'" General obligation ,...-.- . • I I r- -... ---.-.--._. General-obliqation if or gation of of the loan palitv 1970 1968 SOURCE: John Peterson, Economic Committee, 1972 "Changing April Conditions 1974 in the Market 1976 for State and Local 16, 1976. Data updated from The Bond Buyer. 1978 Governments," type the that the extends bonds full necessary, pure issuing C. Kimball, with interest and state; are bond nondebt range pledged bonds, instead, agency, of to meet pav- Non-guaranteed are not they an obli- are obligations and depend solely on the to the issuing agency from bond issue finances. a "moral as a form "States obligation" rnunici- to revenue- See Ralph Intermediaries," New England Economic Review, Federal Bank of Boston, 1976. January/February the The of a guarantee. as Financial the powers of the Reserve to Nonguaranteed 10-year average, 1968-77 City Government Finances in debts taxing principal. revenue revenues available o bonds itself, on bonds, -' 0.53 0.33 0.26 of activities that have extended far beyond such traditional purposes as schools, highways, and sewer projects. Non-guaranteed bonds are used for such purposes as financing housing projects often owned or operated by private entities, pollution-control facil ities, and industrial development. Nonguaranteed bonds have become increasingly popular with municipal governments, partly because these instruments typically have been excluded from debt limitations and voter referendums and partly because of the desire to stimulate local economic development. After the financial difficulties of New York's state agencies, quality of debt has become a primary concern of the municipal bond market.4 ments __ .- 0.30 0.72 1.18 constituted well over one-half of total sales. With the increased issuance of guaranteed revenue bonds, municipal has become a source of finance for a municipality, ....--:: issued, 1978 U.S. Bureau of the Census, municipality bonds 10-year Short-term debt to total debt average, 1968-77 to capital outlays, 1978 4. 5 Joint Long-term debt issued SOURCE: Percent 140 Ratios of Debt and Capital Outlays long-term capital expenditures. Indeed, in 1978 a record high of 65 percent of all municipal capital expenditures was financed with bonds. However, long-term debt for capital formation has been highly volatile on a year-to-year basis because of fluctuations in interest rates and the availability of capital. to sized cities in the nation. 1977-78 debt to total debt, 1978 (and previous 10-year average, 1968-77 NA 0.16 0.21 issues). Short-term borrowing increased from roughly $5 billion annually from 1960-68 to $25 billion annually from 1970-75. One reason for this sharp increase has been the use of short-term debt to smooth out revenue flows in anticipation of tax payments or intergovernmental grants that are due but not yet received (tax anticipation notes). Second, many municipalities use short-term debt in the form of bond anticipation notes as a means of postponing bond offerings until long-term interest rates have improved. Some of the increase in short-term debt also stems from the sale of U.S. government-backed public housing and urban renewal notes. Debt Position of Ohio's Major Cities Use of both long- and short-term debt is appropriate as long as the volume outstanding is kept in some sensible balance with the overall ability of the issuing governmental unit to service the debt. Perhaps the most prominent abuse of debt is reliance on short-term debt to cover operating expenses and excessive borrowing in anticipation of tax collections (requiring frequent renewals and refunding). In short, liabilities often are incurred without making proper provision for their payment. The actual situation varies greatly among state and local governments, making definitive conclusions difficult, if not impossible, until abuses go uncorrected long enough to become critical. The vulnerability of governmental units unexpected events may be assessed by comparing ratios of debt with revenues and with other relevant dimensions of municipal debt management. In this article several of these ratios are compared for all cities in the nation with populations in excess of 300,000, a group that includes seven Ohio cities but excludes New York City.5 Six debt ratios have been selected to highlight the change in the size and composition of debt for the municipalities. The ratios for any given year can be misleading because of the low level of aggregation and the lumpiness of both capital spending and debt issues at the municipal level. Generally speaking, the seven Ohio cities were further in debt than other major U.S. cities. Composition of Debt Major U.S. cities tended to fund a larger portion of their yearly capital expenditures out of new long-term borrowing than all municipalities. For example, proceeds from the sale of bonds and other long-term debt instruments by major U.S. cities contributed 80 percent of the funds needed for capital expenditures from 1968 to 1977, compared with roughly 60 percent of all municipalities. In this respect, the seven Ohio cities behaved more Iike smaller U.S. cities, relying less on new long-term borrowing than most major U.S. cities (see table 1). Only Clevela~d and Columbus had ratios comparable with major U.S. cities over the ten-year period. By 1978, however, Cleveland's ratio was nearly double the ratio for major U.S. cities. The reliance on bond issues to fund capital outlays also rose substantially for Dayton and Youngstown to a level comparable with major U.S. cities in 5. Because of the overwhelming City's city debts and its was eliminated U.S. cities. populations seven Ohio of Cincinnati, Toledo, and 47 between the of major all other 300,000, cities including Cleveland, Youngstown. has changed over time: of cities was 42 between and 1978. problems, the composite over cities-Akron, Dayton, The composition number from The sample comprised with Columbus, size of New York loan financial the total 1967 and 1969, 1970 and 1976, and 46 between 1977 1978. The remairunq Ohio cities (Akron, Toledo, and Cincinnati) typically funded slightly more than one-third of their capital expenditures with new borrowing. Low long-term debt-to-capital outlay ratios are generally a sign of financial strength, especially if capital outlays are funded from current operating budgets or sinking funds. Assuming that a city has access to credit markets, the use of current revenues bond or funds sales would city finances. accumulated from suggest relatively Avoidance past healthy of long-term debt can result in over-reliance on short-term debt to fund capital outlays-and greatly complicate a city's abil ity to manage the level of short-term debt. Among major U.S. cities, short-term debt averaged 10 percent of total debt outstanding and accounted for nearly one-half of the total debt issued from 1968-77. The seven Ohio cities exceeded both the average short-term debt outstanding and that issued for major U.S. cities over the ten-year period; with the exception of Toledo, they reduced those ratios in 1978. Nevertheless, the dependence of Ohio cities on short-term debt may be caused by factors other than' the postponement of long-term borrowing until interest The composition rates decline. of new long-term borrowing of Ohio's cities increasingly shifted to potentially higher-risk nonguaranteed bonds. Major U.S. cities utilized this source of funds heavily, as revenue bonds rose to an average of 54 percent of all long-term debt outstanding by 1978. Ohio's cities behaved similarly. Youngstown, Dayton, Cleveland, and Akron raised their 1978 ratio above their ten-year average, suggesting an upward trend. By 1978, Cleveland and Toledo were approaching the ratio of major U.S. cities, although Toledo's ratio was high over the ten-year period. Still, the lowerthan-average ratios suggest that Ohio's larger cities may have greater future maneuverability in the financing of capital expenditures than other large cities in the nation. The lesser reliance on revenue bonds also could be an indication of difficulty in securing investor confidence in purchasing the previous ten-year period relative comparably Municipal Table 1 Major U.S. cities 1.04 0.80 0.25 0.48 0.54 Since 1968, there has been a dramatic shift by municipal borrowers toward revenue Akron Cincinnati Cleveland 0.12 0.37 1.98 0.18 0.79 0.30 0.81 0.72 0.13 0.27 0.75 0.19 0.07 0.47 Columbus Dayton Toledo Youngstown 0.83 0.84 0.33 1.19 0.68 0.34 0.74 0.46 0.81 0.69 0.89 0.92 0 0.10 0.50 0.20 0.07 0.05 0.50 0.16 Bond Market The municipal bond market is the ultimate barometer of a city's debt positionr' Bonds (i.e., debt with a maturity of longer than one year) generally are considered to be the appropriate instrument for financing 3. The term municipal indicates both state and local governments. Chart 1 Municipal Borrowing: bonds and greater reliance on short-term debt (see chart 1). Indeed, by 1978 revenue bonds 1968-78 ~----------------------------------------------~ Composition of Borrowing Ratio of notes to total 120 bonds 100 80 Ratio of general obligation .-~----.------.----- 60 .....•-. _ 40 to total bonds -.•...~..-..:.~:~:--=~::..~."..~~=~--:-< ....•-. - .~. _ .....-. --0 ---' Ratio of revenue to total bonds ...•--- ..._-. 20 o Billions of dollars 50 Annual Sales 45 Total bonds 40 ,../ 35 30 .- .•.. . ••..~ *. Notes _. ~ ..',••••••• - ------'i-. . ~~ .·7 25 ~.~~ ·····fIII ' ~ 20 ,' 15 .~ .:~ . •.....,.~,... 10 ••• ~' .Y s""'" General obligation ,...-.- . • I I r- -... ---.-.--._. General-obliqation if or gation of of the loan palitv 1970 1968 SOURCE: John Peterson, Economic Committee, 1972 "Changing April Conditions 1974 in the Market 1976 for State and Local 16, 1976. Data updated from The Bond Buyer. 1978 Governments," type the that the extends bonds full necessary, pure issuing C. Kimball, with interest and state; are bond nondebt range pledged bonds, instead, agency, of to meet pav- Non-guaranteed are not they an obli- are obligations and depend solely on the to the issuing agency from bond issue finances. a "moral as a form "States obligation" rnunici- to revenue- See Ralph Intermediaries," New England Economic Review, Federal Bank of Boston, 1976. January/February the The of a guarantee. as Financial the powers of the Reserve to Nonguaranteed 10-year average, 1968-77 City Government Finances in debts taxing principal. revenue revenues available o bonds itself, on bonds, -' 0.53 0.33 0.26 of activities that have extended far beyond such traditional purposes as schools, highways, and sewer projects. Non-guaranteed bonds are used for such purposes as financing housing projects often owned or operated by private entities, pollution-control facil ities, and industrial development. Nonguaranteed bonds have become increasingly popular with municipal governments, partly because these instruments typically have been excluded from debt limitations and voter referendums and partly because of the desire to stimulate local economic development. After the financial difficulties of New York's state agencies, quality of debt has become a primary concern of the municipal bond market.4 ments __ .- 0.30 0.72 1.18 constituted well over one-half of total sales. With the increased issuance of guaranteed revenue bonds, municipal has become a source of finance for a municipality, ....--:: issued, 1978 U.S. Bureau of the Census, municipality bonds 10-year Short-term debt to total debt average, 1968-77 to capital outlays, 1978 4. 5 Joint Long-term debt issued SOURCE: Percent 140 Ratios of Debt and Capital Outlays long-term capital expenditures. Indeed, in 1978 a record high of 65 percent of all municipal capital expenditures was financed with bonds. However, long-term debt for capital formation has been highly volatile on a year-to-year basis because of fluctuations in interest rates and the availability of capital. to sized cities in the nation. 1977-78 debt to total debt, 1978 (and previous 10-year average, 1968-77 NA 0.16 0.21 issues). Short-term borrowing increased from roughly $5 billion annually from 1960-68 to $25 billion annually from 1970-75. One reason for this sharp increase has been the use of short-term debt to smooth out revenue flows in anticipation of tax payments or intergovernmental grants that are due but not yet received (tax anticipation notes). Second, many municipalities use short-term debt in the form of bond anticipation notes as a means of postponing bond offerings until long-term interest rates have improved. Some of the increase in short-term debt also stems from the sale of U.S. government-backed public housing and urban renewal notes. Debt Position of Ohio's Major Cities Use of both long- and short-term debt is appropriate as long as the volume outstanding is kept in some sensible balance with the overall ability of the issuing governmental unit to service the debt. Perhaps the most prominent abuse of debt is reliance on short-term debt to cover operating expenses and excessive borrowing in anticipation of tax collections (requiring frequent renewals and refunding). In short, liabilities often are incurred without making proper provision for their payment. The actual situation varies greatly among state and local governments, making definitive conclusions difficult, if not impossible, until abuses go uncorrected long enough to become critical. The vulnerability of governmental units unexpected events may be assessed by comparing ratios of debt with revenues and with other relevant dimensions of municipal debt management. In this article several of these ratios are compared for all cities in the nation with populations in excess of 300,000, a group that includes seven Ohio cities but excludes New York City.5 Six debt ratios have been selected to highlight the change in the size and composition of debt for the municipalities. The ratios for any given year can be misleading because of the low level of aggregation and the lumpiness of both capital spending and debt issues at the municipal level. Generally speaking, the seven Ohio cities were further in debt than other major U.S. cities. Composition of Debt Major U.S. cities tended to fund a larger portion of their yearly capital expenditures out of new long-term borrowing than all municipalities. For example, proceeds from the sale of bonds and other long-term debt instruments by major U.S. cities contributed 80 percent of the funds needed for capital expenditures from 1968 to 1977, compared with roughly 60 percent of all municipalities. In this respect, the seven Ohio cities behaved more Iike smaller U.S. cities, relying less on new long-term borrowing than most major U.S. cities (see table 1). Only Clevela~d and Columbus had ratios comparable with major U.S. cities over the ten-year period. By 1978, however, Cleveland's ratio was nearly double the ratio for major U.S. cities. The reliance on bond issues to fund capital outlays also rose substantially for Dayton and Youngstown to a level comparable with major U.S. cities in 5. Because of the overwhelming City's city debts and its was eliminated U.S. cities. populations seven Ohio of Cincinnati, Toledo, and 47 between the of major all other 300,000, cities including Cleveland, Youngstown. has changed over time: of cities was 42 between and 1978. problems, the composite over cities-Akron, Dayton, The composition number from The sample comprised with Columbus, size of New York loan financial the total 1967 and 1969, 1970 and 1976, and 46 between 1977 1978. The remairunq Ohio cities (Akron, Toledo, and Cincinnati) typically funded slightly more than one-third of their capital expenditures with new borrowing. Low long-term debt-to-capital outlay ratios are generally a sign of financial strength, especially if capital outlays are funded from current operating budgets or sinking funds. Assuming that a city has access to credit markets, the use of current revenues bond or funds sales would city finances. accumulated from suggest relatively Avoidance past healthy of long-term debt can result in over-reliance on short-term debt to fund capital outlays-and greatly complicate a city's abil ity to manage the level of short-term debt. Among major U.S. cities, short-term debt averaged 10 percent of total debt outstanding and accounted for nearly one-half of the total debt issued from 1968-77. The seven Ohio cities exceeded both the average short-term debt outstanding and that issued for major U.S. cities over the ten-year period; with the exception of Toledo, they reduced those ratios in 1978. Nevertheless, the dependence of Ohio cities on short-term debt may be caused by factors other than' the postponement of long-term borrowing until interest The composition rates decline. of new long-term borrowing of Ohio's cities increasingly shifted to potentially higher-risk nonguaranteed bonds. Major U.S. cities utilized this source of funds heavily, as revenue bonds rose to an average of 54 percent of all long-term debt outstanding by 1978. Ohio's cities behaved similarly. Youngstown, Dayton, Cleveland, and Akron raised their 1978 ratio above their ten-year average, suggesting an upward trend. By 1978, Cleveland and Toledo were approaching the ratio of major U.S. cities, although Toledo's ratio was high over the ten-year period. Still, the lowerthan-average ratios suggest that Ohio's larger cities may have greater future maneuverability in the financing of capital expenditures than other large cities in the nation. The lesser reliance on revenue bonds also could be an indication of difficulty in securing investor confidence in purchasing the previous ten-year period relative comparably Municipal Table 1 Major U.S. cities 1.04 0.80 0.25 0.48 0.54 Since 1968, there has been a dramatic shift by municipal borrowers toward revenue Akron Cincinnati Cleveland 0.12 0.37 1.98 0.18 0.79 0.30 0.81 0.72 0.13 0.27 0.75 0.19 0.07 0.47 Columbus Dayton Toledo Youngstown 0.83 0.84 0.33 1.19 0.68 0.34 0.74 0.46 0.81 0.69 0.89 0.92 0 0.10 0.50 0.20 0.07 0.05 0.50 0.16 Bond Market The municipal bond market is the ultimate barometer of a city's debt positionr' Bonds (i.e., debt with a maturity of longer than one year) generally are considered to be the appropriate instrument for financing 3. The term municipal indicates both state and local governments. Chart 1 Municipal Borrowing: bonds and greater reliance on short-term debt (see chart 1). Indeed, by 1978 revenue bonds 1968-78 ~----------------------------------------------~ Composition of Borrowing Ratio of notes to total 120 bonds 100 80 Ratio of general obligation .-~----.------.----- 60 .....•-. _ 40 to total bonds -.•...~..-..:.~:~:--=~::..~."..~~=~--:-< ....•-. - .~. _ .....-. --0 ---' Ratio of revenue to total bonds ...•--- ..._-. 20 o Billions of dollars 50 Annual Sales 45 Total bonds 40 ,../ 35 30 .- .•.. . ••..~ *. Notes _. ~ ..',••••••• - ------'i-. . ~~ .·7 25 ~.~~ ·····fIII ' ~ 20 ,' 15 .~ .:~ . •.....,.~,... 10 ••• ~' .Y s""'" General obligation ,...-.- . • I I r- -... ---.-.--._. General-obliqation if or gation of of the loan palitv 1970 1968 SOURCE: John Peterson, Economic Committee, 1972 "Changing April Conditions 1974 in the Market 1976 for State and Local 16, 1976. Data updated from The Bond Buyer. 1978 Governments," type the that the extends bonds full necessary, pure issuing C. Kimball, with interest and state; are bond nondebt range pledged bonds, instead, agency, of to meet pav- Non-guaranteed are not they an obli- are obligations and depend solely on the to the issuing agency from bond issue finances. a "moral as a form "States obligation" rnunici- to revenue- See Ralph Intermediaries," New England Economic Review, Federal Bank of Boston, 1976. January/February the The of a guarantee. as Financial the powers of the Reserve to Nonguaranteed 10-year average, 1968-77 City Government Finances in debts taxing principal. revenue revenues available o bonds itself, on bonds, -' 0.53 0.33 0.26 of activities that have extended far beyond such traditional purposes as schools, highways, and sewer projects. Non-guaranteed bonds are used for such purposes as financing housing projects often owned or operated by private entities, pollution-control facil ities, and industrial development. Nonguaranteed bonds have become increasingly popular with municipal governments, partly because these instruments typically have been excluded from debt limitations and voter referendums and partly because of the desire to stimulate local economic development. After the financial difficulties of New York's state agencies, quality of debt has become a primary concern of the municipal bond market.4 ments __ .- 0.30 0.72 1.18 constituted well over one-half of total sales. With the increased issuance of guaranteed revenue bonds, municipal has become a source of finance for a municipality, ....--:: issued, 1978 U.S. Bureau of the Census, municipality bonds 10-year Short-term debt to total debt average, 1968-77 to capital outlays, 1978 4. 5 Joint Long-term debt issued SOURCE: Percent 140 Ratios of Debt and Capital Outlays long-term capital expenditures. Indeed, in 1978 a record high of 65 percent of all municipal capital expenditures was financed with bonds. However, long-term debt for capital formation has been highly volatile on a year-to-year basis because of fluctuations in interest rates and the availability of capital. to sized cities in the nation. 1977-78 debt to total debt, 1978 (and previous 10-year average, 1968-77 NA 0.16 0.21 issues). Short-term borrowing increased from roughly $5 billion annually from 1960-68 to $25 billion annually from 1970-75. One reason for this sharp increase has been the use of short-term debt to smooth out revenue flows in anticipation of tax payments or intergovernmental grants that are due but not yet received (tax anticipation notes). Second, many municipalities use short-term debt in the form of bond anticipation notes as a means of postponing bond offerings until long-term interest rates have improved. Some of the increase in short-term debt also stems from the sale of U.S. government-backed public housing and urban renewal notes. Debt Position of Ohio's Major Cities Use of both long- and short-term debt is appropriate as long as the volume outstanding is kept in some sensible balance with the overall ability of the issuing governmental unit to service the debt. Perhaps the most prominent abuse of debt is reliance on short-term debt to cover operating expenses and excessive borrowing in anticipation of tax collections (requiring frequent renewals and refunding). In short, liabilities often are incurred without making proper provision for their payment. The actual situation varies greatly among state and local governments, making definitive conclusions difficult, if not impossible, until abuses go uncorrected long enough to become critical. The vulnerability of governmental units unexpected events may be assessed by comparing ratios of debt with revenues and with other relevant dimensions of municipal debt management. In this article several of these ratios are compared for all cities in the nation with populations in excess of 300,000, a group that includes seven Ohio cities but excludes New York City.5 Six debt ratios have been selected to highlight the change in the size and composition of debt for the municipalities. The ratios for any given year can be misleading because of the low level of aggregation and the lumpiness of both capital spending and debt issues at the municipal level. Generally speaking, the seven Ohio cities were further in debt than other major U.S. cities. Composition of Debt Major U.S. cities tended to fund a larger portion of their yearly capital expenditures out of new long-term borrowing than all municipalities. For example, proceeds from the sale of bonds and other long-term debt instruments by major U.S. cities contributed 80 percent of the funds needed for capital expenditures from 1968 to 1977, compared with roughly 60 percent of all municipalities. In this respect, the seven Ohio cities behaved more Iike smaller U.S. cities, relying less on new long-term borrowing than most major U.S. cities (see table 1). Only Clevela~d and Columbus had ratios comparable with major U.S. cities over the ten-year period. By 1978, however, Cleveland's ratio was nearly double the ratio for major U.S. cities. The reliance on bond issues to fund capital outlays also rose substantially for Dayton and Youngstown to a level comparable with major U.S. cities in 5. Because of the overwhelming City's city debts and its was eliminated U.S. cities. populations seven Ohio of Cincinnati, Toledo, and 47 between the of major all other 300,000, cities including Cleveland, Youngstown. has changed over time: of cities was 42 between and 1978. problems, the composite over cities-Akron, Dayton, The composition number from The sample comprised with Columbus, size of New York loan financial the total 1967 and 1969, 1970 and 1976, and 46 between 1977 1978. The remairunq Ohio cities (Akron, Toledo, and Cincinnati) typically funded slightly more than one-third of their capital expenditures with new borrowing. Low long-term debt-to-capital outlay ratios are generally a sign of financial strength, especially if capital outlays are funded from current operating budgets or sinking funds. Assuming that a city has access to credit markets, the use of current revenues bond or funds sales would city finances. accumulated from suggest relatively Avoidance past healthy of long-term debt can result in over-reliance on short-term debt to fund capital outlays-and greatly complicate a city's abil ity to manage the level of short-term debt. Among major U.S. cities, short-term debt averaged 10 percent of total debt outstanding and accounted for nearly one-half of the total debt issued from 1968-77. The seven Ohio cities exceeded both the average short-term debt outstanding and that issued for major U.S. cities over the ten-year period; with the exception of Toledo, they reduced those ratios in 1978. Nevertheless, the dependence of Ohio cities on short-term debt may be caused by factors other than' the postponement of long-term borrowing until interest The composition rates decline. of new long-term borrowing of Ohio's cities increasingly shifted to potentially higher-risk nonguaranteed bonds. Major U.S. cities utilized this source of funds heavily, as revenue bonds rose to an average of 54 percent of all long-term debt outstanding by 1978. Ohio's cities behaved similarly. Youngstown, Dayton, Cleveland, and Akron raised their 1978 ratio above their ten-year average, suggesting an upward trend. By 1978, Cleveland and Toledo were approaching the ratio of major U.S. cities, although Toledo's ratio was high over the ten-year period. Still, the lowerthan-average ratios suggest that Ohio's larger cities may have greater future maneuverability in the financing of capital expenditures than other large cities in the nation. The lesser reliance on revenue bonds also could be an indication of difficulty in securing investor confidence in purchasing Federal except for Dayton, the remaining five Ohio cities had ratios that were more than twice as large as the average for all major U.S. cities. Therefore, not only was the level of long-term debt burden in Ohio's large cities out of line, but total indebtedness and total debt service payments also were consistently high relative to their overall debt- revenue bonds from a region where economic growth has lagged and municipalities have been experiencing financial problems. Burden of Debt The size and composition debt held by Ohio's major cities cance largely in relation to the payments and the debt-carrying of the total have signifidebt service capacity of carrying capacity. In addition to the relative debt burden, short-term debt also poses another potential problem for the fiscal management of Ohio's large cities. The percentage of cash and security holdings currently on hand to cover short-term debt repayment generally has been a sensitive measure of a city's ability to meet its short-term debt obligation in a fiscal emergency. A general rule is that the closer the ratio of short-term debt to cash and security holdings is to 1.00, the greater the possibility of fiscal stress. This rule of thumb may be inappropriate for growing cities with low budget surpluses. For major U.S. cities, an average value of 0.27 over the ten-year period has been an acceptable margin of safety and comparable with the average of all state and local governments. With the shift away from short-term debt in 1978, the cities. For the most part, the long-term debt burden of Ohio's cities in 1978 was in line with that of other large cities of the nation (see table 2). For example, total annual interest payments plus long-term debt retirement (long-term debt burden) tended to be less than one-fifth of revenues from own sources. However, the ratios for most of Ohio's cities exceeded those values over the ten-year period. Akron's ratio appeared to be substantially larger (averaging 0.32, compared with 0.12 for major U.S. cities). Most of the Ohio cities thus lowered their ratios in 1978. However, adding short-term debt to long-term debt service payments presented a much different picture. Only Cincinnati was below the debt-burden ratio (0.41) attained for major U.S. cities on average over the ten-year period. Indeed, Table 2 Ratios of Interest and Debt Retirement Long-term debt 10-year burden," to Own Source Revenues produce increasingly tight budgets and liquidity strains for Ohio's cities, Except for Toledo, the ratio of debt to cash and security holdings showed significant improvement by 1978 for the Ohio cities, but not as much as ach ieved by other major U.S. cities. Thus, while Toledo was the only Ohio city actually to exceed the 1.00 rule of thumb, Cleveland and Columbus also had abnormally high debt to cash and security burden," 10-year average, 10-year average, 1978 1968-77 1978 1968-77 Because of the complexity underlying any city's financial structure, there is no conclusive way of stating whether a particular debt position is within acceptable limits of municipal debt management. Thus, 0.15 0.17 0.23 0.41 0.10 0.18 0.32 0.78 1.40 Cincinnati Cleveland 0.15 0.15 0.25 0.20 0.44 0.38 NA 0.06 0.21 Columbus Dayton 0.19 0.12 0.11 0.24 0.16 0.11 0.19 0.76 0.21 1.07 0.36 0.65 1.01 0.97 BULK RATE U.S. Postage Paid Reserve Bank of Cleveland Cleveland,OH Department Permit P.O. Box 6387 Cleveland,OH 44101 Address correction requested NA 0.22 0.83 1.46 levels of long- and short-term debt of major U.S. cities. Even though the economic environment differs among various Oh io cities, access to the municipal bond market remains vital to their fiscal operations. Despite some financial restructuring in Cleveland since its default, the financial position of Ohio's cities had not improved substantially by 1978. Moreover, the economy of the state of Ohio and of many of its major cities has deteriorated much more than has been the case for many other areas of the United States since 1978. Such deterioration in the face of unfavorable debt ratios provides a clear warn ing that careful management of both long- and short-term debt is still required to preserve the financial soundness of Ohio's major cities. 0.27 Akron financial ratios that measure relative debt levels and servicing capacity can only suggest signs of fiscal strain in a city's debt position. Within the limits of the data available for analysis, the size of debt suggests a potentially troublesome situation for the major cities of Ohio. Each of the seven Ohio cities has at some point exceeded the average 0.53 0.96 NA 1.56 0.20 Toledo Youngstown a. Debt burden 0.14 represents own sources. city. See J. Richard tional The Tax Journal, SOURCE: ratios debt retirement measure Aronson debt and Arthur plus total service annual payments E. King, interest relative "Is There 0.66 NA 2.39 NA payments divided NA by revenues from to the debt-carrvinq a Fiscal Crisis Outside capacity of New York?," vol. 31, pp. 153-63. U.S. Bureau of the Census, City Government Finances in 1977-78 of (and previous issues). the March 23, 1981 S£Q,QomicCommentary Debt Management of Ohio's Major Cities by Robert H. Schnorbus Municipal debt grew dramatically be- tween 1968 and 1978-a period when gross capital formation by state and local governments was ebbing. The relative decline in public capital formation by state and local governments has been attributed to several factors, including lessening need for new capital (particularly with declining school term borrowing (i.e., with a maturity of one year or less), caused largely by spiraling interest rates and the resulting postponement of long-term debt issues.1 Local governments in Ohio have been confronted by mounting fiscal strain. Compared with other large U.S. cities, total debt and short-term debt of Ohio's cities are high relative to some standard measures of municipal debt management. Roughly one-half of No. 385 enrollments) and rising interest rates. Furthermore, cutbacks in capital spending have been steepest among older cities suffering from long-run decl ine in economic activity, especially in the industrial Northeast. Despite the decline in investment, however, debt has risen rapidly, as a larger share of capital formation has been financed through long-term debt. In addition, new financing devices (mostly non-guaranteed revenue bonds) have encouraged state and local governments to use the municipal bond market to attract industry. Because the new the short-term debt of local governments in Ohio is held by municipalities. (The bulk of the remainder is evenly distributed between school and special districts.) While imprudent management of debt, especially shortterm debt, is difficult to define, the state auditor of Ohio recently indicated that at least six Ohio cities (Ashtabula, Niles, Norwood, Cleveland, Plymouth, and Youngstown) have had fiscal emergencies of varying degrees.2 This Economic Commentary ex- financing devices often have been backed only by the "moral obligation" of the gov- Research Major U.S. cities ratios. Conclusion Federal Short-term debt to cash and security holdings, Short- and long-term debt average, 1968-77 1978 Payments the ratio was reduced to 0.10 for major U.S. cities. However, three of the four Ohio cities for which data are available had short-term debt to cash and security holdings at least twice as high as those for major U.S. cities. Relatively sluggish growth in the state's economy might be expected to Reserve Bank of Cleveland amines the long-term and short-term debt positions of Ohio's major cities in 1978 and ernmental unit, their increased use has been a matter of growing concern in municipal bond markets. An even greater cause for concern has been the heavy volume of short-' tor o Robert H. Schnorbus is an economist, Federal Reserve Bank of Cleveland. The Ne- author Reserve OH 44101. opinions and not Bank Governors stated herein necessarily of Cleveland are those those or of of of the the Federal the Board of the Federal Reserve System. of abuse studies Advisory lations, short-term past municipal cities Commission City ing Office, that on Financial more financial have so than causal faccrises. defaulted, Intergovernmental Emergencies: Dimension, The U.S. Government For see Re- InterPrint- 1973. See "Auditor town Daily debt, has been an important of governmental 2. of debt, in many case Address Change Correct as shown o Remove from mailing list Please send mailing label to the Research Department, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, 1. The Ionq-terrn Unsure of City's Vindicator, September Future," Youngs- 16, 1980, p. 1. Federal except for Dayton, the remaining five Ohio cities had ratios that were more than twice as large as the average for all major U.S. cities. Therefore, not only was the level of long-term debt burden in Ohio's large cities out of line, but total indebtedness and total debt service payments also were consistently high relative to their overall debt- revenue bonds from a region where economic growth has lagged and municipalities have been experiencing financial problems. Burden of Debt The size and composition debt held by Ohio's major cities cance largely in relation to the payments and the debt-carrying of the total have signifidebt service capacity of carrying capacity. In addition to the relative debt burden, short-term debt also poses another potential problem for the fiscal management of Ohio's large cities. The percentage of cash and security holdings currently on hand to cover short-term debt repayment generally has been a sensitive measure of a city's ability to meet its short-term debt obligation in a fiscal emergency. A general rule is that the closer the ratio of short-term debt to cash and security holdings is to 1.00, the greater the possibility of fiscal stress. This rule of thumb may be inappropriate for growing cities with low budget surpluses. For major U.S. cities, an average value of 0.27 over the ten-year period has been an acceptable margin of safety and comparable with the average of all state and local governments. With the shift away from short-term debt in 1978, the cities. For the most part, the long-term debt burden of Ohio's cities in 1978 was in line with that of other large cities of the nation (see table 2). For example, total annual interest payments plus long-term debt retirement (long-term debt burden) tended to be less than one-fifth of revenues from own sources. However, the ratios for most of Ohio's cities exceeded those values over the ten-year period. Akron's ratio appeared to be substantially larger (averaging 0.32, compared with 0.12 for major U.S. cities). Most of the Ohio cities thus lowered their ratios in 1978. However, adding short-term debt to long-term debt service payments presented a much different picture. Only Cincinnati was below the debt-burden ratio (0.41) attained for major U.S. cities on average over the ten-year period. Indeed, Table 2 Ratios of Interest and Debt Retirement Long-term debt 10-year burden," to Own Source Revenues produce increasingly tight budgets and liquidity strains for Ohio's cities, Except for Toledo, the ratio of debt to cash and security holdings showed significant improvement by 1978 for the Ohio cities, but not as much as ach ieved by other major U.S. cities. Thus, while Toledo was the only Ohio city actually to exceed the 1.00 rule of thumb, Cleveland and Columbus also had abnormally high debt to cash and security burden," 10-year average, 10-year average, 1978 1968-77 1978 1968-77 Because of the complexity underlying any city's financial structure, there is no conclusive way of stating whether a particular debt position is within acceptable limits of municipal debt management. Thus, 0.15 0.17 0.23 0.41 0.10 0.18 0.32 0.78 1.40 Cincinnati Cleveland 0.15 0.15 0.25 0.20 0.44 0.38 NA 0.06 0.21 Columbus Dayton 0.19 0.12 0.11 0.24 0.16 0.11 0.19 0.76 0.21 1.07 0.36 0.65 1.01 0.97 BULK RATE U.S. Postage Paid Reserve Bank of Cleveland Cleveland,OH Department Permit P.O. Box 6387 Cleveland,OH 44101 Address correction requested NA 0.22 0.83 1.46 levels of long- and short-term debt of major U.S. cities. Even though the economic environment differs among various Oh io cities, access to the municipal bond market remains vital to their fiscal operations. Despite some financial restructuring in Cleveland since its default, the financial position of Ohio's cities had not improved substantially by 1978. Moreover, the economy of the state of Ohio and of many of its major cities has deteriorated much more than has been the case for many other areas of the United States since 1978. Such deterioration in the face of unfavorable debt ratios provides a clear warn ing that careful management of both long- and short-term debt is still required to preserve the financial soundness of Ohio's major cities. 0.27 Akron financial ratios that measure relative debt levels and servicing capacity can only suggest signs of fiscal strain in a city's debt position. Within the limits of the data available for analysis, the size of debt suggests a potentially troublesome situation for the major cities of Ohio. Each of the seven Ohio cities has at some point exceeded the average 0.53 0.96 NA 1.56 0.20 Toledo Youngstown a. Debt burden 0.14 represents own sources. city. See J. Richard tional The Tax Journal, SOURCE: ratios debt retirement measure Aronson debt and Arthur plus total service annual payments E. King, interest relative "Is There 0.66 NA 2.39 NA payments divided NA by revenues from to the debt-carrvinq a Fiscal Crisis Outside capacity of New York?," vol. 31, pp. 153-63. U.S. Bureau of the Census, City Government Finances in 1977-78 of (and previous issues). the March 23, 1981 S£Q,QomicCommentary Debt Management of Ohio's Major Cities by Robert H. Schnorbus Municipal debt grew dramatically be- tween 1968 and 1978-a period when gross capital formation by state and local governments was ebbing. The relative decline in public capital formation by state and local governments has been attributed to several factors, including lessening need for new capital (particularly with declining school term borrowing (i.e., with a maturity of one year or less), caused largely by spiraling interest rates and the resulting postponement of long-term debt issues.1 Local governments in Ohio have been confronted by mounting fiscal strain. Compared with other large U.S. cities, total debt and short-term debt of Ohio's cities are high relative to some standard measures of municipal debt management. Roughly one-half of No. 385 enrollments) and rising interest rates. Furthermore, cutbacks in capital spending have been steepest among older cities suffering from long-run decl ine in economic activity, especially in the industrial Northeast. Despite the decline in investment, however, debt has risen rapidly, as a larger share of capital formation has been financed through long-term debt. In addition, new financing devices (mostly non-guaranteed revenue bonds) have encouraged state and local governments to use the municipal bond market to attract industry. Because the new the short-term debt of local governments in Ohio is held by municipalities. (The bulk of the remainder is evenly distributed between school and special districts.) While imprudent management of debt, especially shortterm debt, is difficult to define, the state auditor of Ohio recently indicated that at least six Ohio cities (Ashtabula, Niles, Norwood, Cleveland, Plymouth, and Youngstown) have had fiscal emergencies of varying degrees.2 This Economic Commentary ex- financing devices often have been backed only by the "moral obligation" of the gov- Research Major U.S. cities ratios. Conclusion Federal Short-term debt to cash and security holdings, Short- and long-term debt average, 1968-77 1978 Payments the ratio was reduced to 0.10 for major U.S. cities. However, three of the four Ohio cities for which data are available had short-term debt to cash and security holdings at least twice as high as those for major U.S. cities. Relatively sluggish growth in the state's economy might be expected to Reserve Bank of Cleveland amines the long-term and short-term debt positions of Ohio's major cities in 1978 and ernmental unit, their increased use has been a matter of growing concern in municipal bond markets. An even greater cause for concern has been the heavy volume of short-' tor o Robert H. Schnorbus is an economist, Federal Reserve Bank of Cleveland. The Ne- author Reserve OH 44101. opinions and not Bank Governors stated herein necessarily of Cleveland are those those or of of of the the Federal the Board of the Federal Reserve System. of abuse studies Advisory lations, short-term past municipal cities Commission City ing Office, that on Financial more financial have so than causal faccrises. defaulted, Intergovernmental Emergencies: Dimension, The U.S. Government For see Re- InterPrint- 1973. See "Auditor town Daily debt, has been an important of governmental 2. of debt, in many case Address Change Correct as shown o Remove from mailing list Please send mailing label to the Research Department, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, 1. The Ionq-terrn Unsure of City's Vindicator, September Future," Youngs- 16, 1980, p. 1.
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