Define the debt service coverage ratio in the context of state debt management.

Define the debt service coverage ratio in the context of state debt management.

• A. A measure of debt outstanding relative to revenue.
• B. Net available revenues to service debt divided by annual debt service; indicates capacity to meet debt obligations.
• C. Debt service divided by current year revenues.
• D. Net revenues divided by debt outstanding.

Answer: (B)

Debt service coverage ratio shows whether the money available to pay debt in a given period is enough to cover the required debt payments. In state debt management, it’s calculated by taking the net revenues available to service debt and dividing them by the annual debt service due that year. The result reflects capacity to meet debt obligations: a value above 1 means there’s enough revenue to cover the payments, while a value below 1 signals a shortfall. Using the net available revenues ensures we account for what’s actually left after operating needs and other adjustments, and using the annual debt service keeps the measure focused on a year’s required payments. If net available revenues are, say, 120 million and annual debt service is 100 million, the ratio is 1.2, indicating solid coverage. The other options don’t capture this concept. One compares debt outstanding to revenue, which describes leverage or debt burden rather than service capacity. Another inverts the ratio or uses current revenues instead of net revenues, which misstates the available resources relative to obligations. Another mixes net revenues with debt outstanding, not with the annual debt service due.

Debt service coverage ratio shows whether the money available to pay debt in a given period is enough to cover the required debt payments. In state debt management, it’s calculated by taking the net revenues available to service debt and dividing them by the annual debt service due that year. The result reflects capacity to meet debt obligations: a value above 1 means there’s enough revenue to cover the payments, while a value below 1 signals a shortfall.

Using the net available revenues ensures we account for what’s actually left after operating needs and other adjustments, and using the annual debt service keeps the measure focused on a year’s required payments. If net available revenues are, say, 120 million and annual debt service is 100 million, the ratio is 1.2, indicating solid coverage.

The other options don’t capture this concept. One compares debt outstanding to revenue, which describes leverage or debt burden rather than service capacity. Another inverts the ratio or uses current revenues instead of net revenues, which misstates the available resources relative to obligations. Another mixes net revenues with debt outstanding, not with the annual debt service due.