The following was taken from the statistical section of the City of Wyoming, Michigan's annual report (see also Problem 8-7).
Computation of Legal Debt Margin for General Obligation Bonds as of June 30
Assessed value, estimate.................................$1,934,971,000
Debt limit-10 percent of assessed value..................193,497,110
Debt applicable to limit:
City direct debt................................................103,352,972
Less: revenue bonds..........................................(86,999,142)
Total net debt applicable to limits.........................$ 16,353,830
Legal debt margin..........................................$ 177,143,280
Assume that in its fiscal year ending June 30, the city issued an additional (net of repayments) $30 million in general obligation bonds and $6 million in revenue bonds. Moreover, owing to both a recession and a change in valuing property, the assessed value of its property decreased by 5 percent.
1. What is the maximum the city could issue in general obligation bonds as of June 30? What would the city's net debt be?
2. Suppose the city:
a. Signed a five-year agreement with a waste disposal firm. The firm agreed to provide services to the city for $50,000 per year. The city could not cancel the contract unless the firm failed to deliver the specified services.
b. Signed a five-year lease to acquire equipment. The useful life of the equipment was also five years. Annual payments were $50,000, and the city had the option to purchase the equipment at the end of its useful life for $1. The lease agreement was based on an interest rate of 8 percent and contained a "non-appropriation clause," which local courts recognized as being decisive with respect to whether the debt was subject to the legal debt margin.
How would each be reflected in the city's government-wide statement of net position? If you were writing the legislation establishing debt limits, would you make either leases or service contracts subject to the limits?
3. As indicated in the schedule, and as is typical of most debt limitations, the debt margin does not apply to revenue bonds. What do you think is the reason for this exemption? What argument could you make that revenue bonds should not be exempt?