Public Works
LONG-TERM FINANCIAL STABILITY: Debt Service Coverage Ratio for the Bureau of Environmental Services
Current Value
1.85
Definition
Taken from the Annual Comprehensive Financial Report (ACFR) schedule SS15a, debt service coverage is calculated by dividing net operating income by total debt service. This includes both first and second lien debt for BES.
Why Is This Important?
The City issues debt (in the form of bonds) to pay for capital construction. The Debt-Service Coverage Ratio (DSCR) provides a measure of the City’s ability to meet its debt obligations using its operating income. It is a critical tool for lenders, investors, and management to evaluate financial stability and risk.
Lenders use DSCR to determine whether a company is a reliable borrower. A strong DSCR indicates that the company generates sufficient income to cover its debt payments, making it a safer candidate for loans. A safer candidate means lower risk of default and generally means a lower interest rate on the debt. The Bureau of Environmental Services's (BES) strong DSCR is one of the reasons for our lower debt interest costs.
What Do The Numbers Show?
The Debt Service Coverage Ratio (DSCR) shows a company's ability to generate enough operating income to cover its debt obligations, including both principal and interest payments. It reflects the financial health and cash flow stability of a company in relation to its debt commitments. The DSCR is calculated based on bureau-specific revenues and expenditures. For BES, this is calculated only based activity in the City’s sewer and stormwater funds.
BES has maintained a DSCR ratio above 1.3 since 2014 and has steadily increased as the bureau retires debt related to the Big Pipe combined sewer overflow project. The current year 1.85 ratio shows financial strength and ability to meet its debt obligations.
How Did We Arrive at These Numbers?
DSCR= (Net Operating Income (NOI)) / (Total Debt Service (TDS))
Steps to Calculate DSCR:
- Determine Net Operating Income (NOI):
- Net Operating Income is the company’s revenue minus certain operating expenses (excluding taxes and interest). It is often equivalent to Earnings Before Interest and Taxes (EBIT).
Formula: NOI=Revenue-Certain Operting Expenses (COE)
Also, NOI = EBIT
- Net Operating Income is the company’s revenue minus certain operating expenses (excluding taxes and interest). It is often equivalent to Earnings Before Interest and Taxes (EBIT).
- Calculate Total Debt Service (TDS):
- Total Debt Service includes all debt-related payments due in a fiscal year. This includes:
- Principal payments
- Interest payments
- Lease payments
- Sinking fund contributions
- Total Debt Service includes all debt-related payments due in a fiscal year. This includes:
Where Can I Find More Information?
You can find more information on BES bond issuances, credit rating, and continuing disclosure is available on the Sewer System Revenue Bonds webpage.
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