Much of the terminology and mathematical basis for tax increment
financing is drawn from accounting, particularly municipal bond
accounting.
PRINCIPAL: Principal is the amount of money borrowed to finance
the project. The principal is usually repaid in specified (but
not necessarily equal) increments over the life of the bond issue.
INTEREST: Interest is the price a borrower has to pay a lender
for the use of money. In the case of bonds, interest (or "coupon
rate") changes over time, usually increasing the longer the
debt is held. In addition, bonds may be offered at any time during
the year. Bonds pay interest every six months; by convention,
a bond offered before July 1 begins paying interest in the second
half of that first year.
DEBT SERVICE: Interest payment due, plus principal repayment (if
any). Unlike most debt service, bond debt service is not set up
in equal annual amounts.
INVESTED SURPLUS EARNINGS: Usually a lender likes to see a "cushion"
of surplus funds which can protect the debt repayment from unforeseen
events. Prudence dictates that this surplus should not be left
idle, but should be invested so it can produce a return while
it is being held in readiness. The program on the worksheet defines
invested earnings as INVESTMENT RATE X PRIOR CUMULATIVE
SURPLUS.
CUMULATIVE CASH SURPLUS: This is the total "cushion"
which protects the lender's investment. The project may include
some funds to cover early interest expenses; the bond may have
been larger than was needed for the direct costs of the project.
This surplus is called "capitalized interest." Cumulative
cash surplus for any given year is any remaining capitalized interest
or prior surplus, plus any investment earnings and any tax increment
revenues, minus the debt service payment for that year.
DEBT COVERAGE RATIO: Debt coverage ratio is a measure of the security of the investor's interest. It is the ratio of cash on hand (tax increment revenue and invested surplus, plus any cash surplus remaining from the prior year) to the required debt service payment.