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Episode 7 Debt Growth and Debt Service Part 1 of 2The third most important mandatory expenditure that is financed by Tax Revenues, especially for financially troubled municipalities, is usually Debt Service which is payment of interest and principal on debt.
The Gross Debt rose from $939,495 in 2001 to $2,574,479 in 2007. The debt in 2001 was carried over from Loans taken out in 1995 to pay for Ridley Avenue Sewer, ($545,222), Storm Sewer Relief, ($348,000) and the Ariel Ladder Fire Truck, $100,000. The Debt grew in 2003 for LaFrance Ladder Fire Truck, $500,000 and PEMA LaFrance Ladder Fire Truck, $150,000. The Police Station Loan for $1,400,000 was taken out in 2007. The expenditures should have been more restrained or there should have been prudent additional 5% to 10% additional tax increases when the major capital expenditures were made. Pay me now or pay me latter syndrome.
The Growth in Debt for the period 2001 to 2008 is shown below along with the Growth in Debt Service.
The reason the Debt Service was so low in 2001 to 2003 is that there were no Principal payments made on the $500,000 Ridley Avenue Sewer and there were no Tax Anticipation Notes required because of the high level of the reserve fund. By delaying the payment of principal to 2005, the payments were higher in 2005 and when combined with the Fire Truck purchases in 2004 Debt Service jumped to $489,718 in 2005.
Because of the large Reserve Fund Balance no Tax Anticipation Notes were needed before 2003. As the Reserve Fund Balance declined Tax Anticipation Notes were taken out and paid back in 2003 ($300,000), 2004 ($300,000), 2005 ($300,000), 2006 ($350,000), 2007 ($400,000), 2008 ($400,000) and 2009 ($400,000). In 2010 a $500,000 Tax Anticipation Note was taken out and the pay back in 2010 is shown as a line item in the 2010 budget.
The loans for the Police Station increased the Debt Service to $666,651 in 2008.
Rapid growth in Debt and Debt Service are symptoms of a financially distressed municipality.
Charts will be updated for 2009 when Auditors' report is released in April 2010.