Understanding the Basics of Local Government Debt Service

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Wytheville, Va. – The Wythe County Board of Supervisors have been evaluating how to fund future Debt Service Payments for potential projects and feel that we should share how the potential projects would affect the tax rates of property owners. There are three basic components of any Debt Service calculation:

Principal – Total amount borrowed
Term – Length of the loan (years)
Interest Rate – Rate of return for the lending institution

The county’s current financial condition, ability to repay loans, past performance, and current loan capacity all work together in order to place the locality in a highly-favorable position when being viewed by potential lenders.

By law, the county is restricted on its ability to borrow and cannot issue more than $10,000,000 per year of bank qualified – tax exempt bonds. These type bonds allow the county to borrow funds at the best rates available. Bonds above $10,000,000 are taxable and usually have a higher interest rate. We have provided a few examples below of how general obligation bond issuances affect the tax rates of Wythe County for the citizen’s reflection:

The current real estate property tax rate in Wythe County is $0.49 per 100 dollars of assessed value.
A $100,000 home owner will pay $490 in real estate tax in 2016.
Each penny of tax increase raises that payment by $10.00 per year.

Each million dollars borrowed under the bank qualified-tax exempt status by the County is projected to incur an annual Debt Service payment of approximately $66,000 per year if the loan is placed in the open market as a bank qualified/tax exempt offering. Each million dollars borrowed above $10,000,000 is a taxable bond and is not considered as favorably in the bond market which results in a higher interest rate which ultimately results in a higher debt service payment per year.

Example 1 – A bond of $10,000,000 is projected to result in an annual Debt Service Payment of approximately $666,000 and a tax increase of approximately 3 cents or an increase of 6.1% in the annual real estate tax to the homeowner if it the bond is issued as a bank qualified – tax exempt offering, based on current rates.

Example 2 - A Bond of $25,000,000 would result in an annual Debt Service Payment of approximately $1,709,000 since only a portion of the loan qualifies as bank qualified – tax exempt. This bond issuance would require a tax increase of approximately 7.7 cents which would be an increase of over 15% on the $100,000 home owner based on current rates.

Example 3 – A Bond of $37,000,000 would result in an annual Debt Service Payment of approximately $2,543,000 and require a tax increase of approximately 11.5 cents which would be an increase of over 23% on the $100,000 home owner. The homeowner’s annual tax bill would go from $490 to $605 per year.

We hope this information assists the tax payers of Wythe County to understand how a bond issuance affects the tax rate of Wythe County.

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