DEFINITION of debt overlap
Debt overlap refers to the financial obligations of a political jurisdiction which is also partly the responsibility of a neighboring jurisdiction. Debt overlap is common in most states, as states are divided into many jurisdictions for different tax purposes, such as building a new public school and building a new road.
BREAKDOWN Overlapping debt
Municipalities issue debts to raise funds from the public to finance capital projects that will benefit residents of the region. For example, if a city or county decides to build a school, airport, highway or hospital, it will usually issue debt to borrow the funds necessary to build such infrastructure. Two municipal government bodies may have overlapping jurisdictions, such as a state and a city or a city and a county. The different jurisdictions can each issue debts in the form of bonds and municipal notes when they need to raise funds to pay these important expenses intended to serve all the residents of a political jurisdiction.
When the debt of a municipal authority is shared with another government, the debt is called an overlapping debt. For example, a bond that funds a project in a county school district could be viewed as an overlap of debt to a city located in that school district. The city is only responsible for its proportional share of the overlapping debt. This proportional share plus the direct debt of the municipality together constitute the overall net debt of the municipality. The municipality’s overall net debt is an important factor in its ability to obtain future debt financing. In addition, taxpayers are required to pay their share of the debt of each jurisdiction.
Debt overlap is often greater than the direct debt of a municipal government and is determined by the ratio of the property assessment of taxable property within the boundaries of the municipality to the property assessment of each overlapping district. Overlapping debt can affect the ability to repay one or both governments.