Public debt comprises all interest-bearing short-term credit obligations and all long-term credit obligations incurred in the name of the government and all its dependent agencies, whether backed by the government's full faith and credit or nonguaranteed. It includes tax-exempt as well as taxable public debt.

This concept of public debt, however, is not so broad that it covers every liability listed on the balance sheets or elsewhere in government finance reports. The following types of liabilities are excluded from Census Bureau statistics:

Because of the growing complexity of government debt financing and the increasing difficulty in collecting statistics regarding it, the Census Bureau instituted major classification changes to this area, effective with fiscal year 1987-88 data. The major effects of the changes were to simplify the classification scheme and to identify more completely public debt for private purposes.

The classification changes can be summarized as follows:

• The functional detail on long-term debt issued, retired, and outstanding was reduced from 19 to eight categories, half of which are for utilities. The disposition of the previous function codes is shown in the chart below:

This functional debt category, first used in the fiscal year 1987-88 survey, represents a consolidation of two former categories plus certain debt from others. It is now one of the largest type of state and local government debt.

Public debt for private purpose also generates special treatment regarding its related revenue, expenditure, and even cash and security holdings. This treatment was revised for the fiscal year 1987-88 survey to cover all types of debt like this; previously, it was limited to mortgage revenue debt (the old "W" code debt).

• Revenue: Classified as Interest Earnings (code U20) is an amount equal to the interest expenditure (code I89) on all public debt for private purposes.
• Expenditure: Unlike all other forms of debt issued, no expenditures from the proceeds of public debt for private purposes are reported. Classified as Interest on General Debt (code I89) are the actual (or estimated) interest payments on such debt.
• Cash and Security Holdings: Classified as an Offset to Debt (code W01) is an amount equal to the public debt for private purposes outstanding at the end of the fiscal year. This figure is revised annually to account for amounts retired or issued.

Another growing (in volume and complexity) feature of public debt finances is the refunding of long-term debt. Governments often retire debt before it matures by issuing more debt--generally at a lower interest rate (like refinancing a mortgage). A more peculiar version is advance refunding where a government issues new debt but sets aside the proceeds rather than actually paying off the old debt. The old debt, in turn, is "defeased" and removed from the government's accounting statement. How such activities are reported in Census Bureau statistics is described in the next two sections.

Regular (or direct) refunding refers to the issuance of long-term obligations in exchange for, or to finance the retirement of, existing long-term debt, typically on or after the first call date of the debt to be refunded. This rather straightforward transaction is classified for Census Bureau statistics as described below:

• Refunding debt issued: The par value of debt issued during the fiscal year is reported twice: (1) under regular debt issue categories (codes 21*, 24*, or 29*) and (2) under the refunding debt issued category (code 52T), an exhibit code. Note that the "T" in code 52T does not refer to public debt for private purposes. Any amounts authorized but not actually issued are excluded.
• Debt retired by refunding: The par value of debt retired by refunding during the fiscal year is reported twice: (1) under regular debt retired categories (codes 31*, 34*, or 39*) and (2) under the debt retired by refunding category (code 53T), an exhibit code. Note that the "T" in code 53T does not refer to public debt for private purposes.
• Refunding debt outstanding: The par value of debt outstanding that was issued for refunding purposes is reported under regular debt outstanding categories (codes 41* or 44*). The debt that has been retired by the refunding bonds is excluded.

A much more complex situation is when a government issues refunding debt but cannot legally retire the old debt under the terms of the original debt issuance (typically, 10 years after its issuance). That is, the original debt's "first call" date has not yet been reached. Usually, this occurs during times when interest rates are falling dramatically. In these cases, the government places the proceeds of the refunding bonds in escrow, which includes enough monies to cover the debt service (principal and interest) until the original debt's first call date is reached, when the escrowed funds are used to retire the original debt's remaining balance.

The government generally has two choices on treating the refunded debt: One, if the refunding debt issued is sufficient to pay the remaining principal and all future interest on the original debt, then the government can remove the original debt from its balance sheet, an action called defeasance. For Census Bureau purposes, a debt is defeased whether or not the government is released from its legal obligation for the debt (legal defeasance) or remains the primary obligor (in-substance defeasance).

Two, the government may use the escrow funds to pay the interest and principle due on the refunding debt, not the original debt, until a certain date is reached, at which time the escrowed money is used to retire the original debt, which is then defeased. This type of advance refunding is called "crossover" refunding.

The example below illustrates a typical advance refunding:

City X has $10 million in water utility nonguaranteed debt outstanding at 13% interest whose first call date is not for four more years. It issues $12 million in advance refunding bonds (at 6%) to cover principal and interest to maturity. The proceeds are used to purchase Federal securities which are placed in escrow and used for debt service on the original issue. The original debt is "defeased" and removed from the books of the government. Assume that there is no other principal paid on either the original or advance refunding debt.

For Census Bureau statistics, this advance refunding scenario would be treated in the following manner:

From the debt data that is collected from state and local governments, the Census Bureau also computes derived statistics on indebtedness. Some of these also use data gathered on cash and security holdings. Note that there are no census codes associated with these types of statistics.

Borrowing is an estimate of the net amount of new money that a government has borrowed during the fiscal year, including short- and long-term debt. It consists of the par value of long-term debt issued during the year (other than for refunding purposes) plus any net increase in short-term debt between the beginning and end of the fiscal year. Note that it does not reflect the total amount of short-term debt sold during the year.

Shown as a formula using Census Bureau 3-digit debt codes, borrowing is computed as follows (the asterisk (*) in the formulas below stands for the appropriate function code for the debt issued or retired):

Combining features of both debt borrowing and redemption, change in debt is an estimate of the net change in a government's indebtedness during the fiscal year. It consists of the par value of long-term debt issued during the fiscal year less the par value of long-term debt retired during the year plus (or minus) the change in short-term debt between the beginning and end of the fiscal year. Note that it does not reflect the total amount of short-term debt sold or paid off during the year.

Shown as a formula using Census Bureau 3-digit debt codes, change in debt is computed as follows:

Net long-term debt outstanding is the amount of long-term debt held by a government for which no funds have been set aside for its repayment. It consists of total long-term debt outstanding less total offsets to debt (i.e. cash and security holdings in debt service, or sinking, funds). Shown as a formula using Census Bureau 3-digit debt codes, net long-term debt outstanding is computed as follows:

This section covers topics not discussed elsewhere, primarily new and more complex debt instruments that governments have employed in recent years.

Deep discount bonds and their equivalents (zero-coupon bonds, compound interest bonds, etc.) are debt instruments sold at a price much below their face value. The interest they earn is added to the value of the bond rather than paid out serially (similar to how U. S. savings bonds work). Stated formally, interest is reinvested, compounded at the original rate that applied to principal, and paid at maturity.

For Census Bureau statistics, deep discount debt transactions are reported as follows:

• Debt issued: Only the actual proceeds from the sale of the bonds are reported as long-term debt issued (i.e., not the higher face value amount).
• Debt retired: When the bonds are finally paid off, only the original sale price is reported as long-term debt retired (i.e., not the higher face value which includes accumulated interest). Thus, the amount retired is equal to the amount originally reported as issued.
• Debt outstanding: The amount of proceeds from the original sale of the bonds is reported as long-term debt outstanding (i.e., the outstanding amount is not incremented by the interest earned and added to its face value). Thus, the amount outstanding remains constant during the life of the bond.
• Interest expenditure: The amount of interest earned by the bond and added to its face value is reported as interest expenditure (even if it does not involve actual cash disbursements).

To reduce the cost of issuing debt and to achieve a lower interest rate, governments sometimes agree to issue debt jointly rather than individually. For instance, a state government may create a "bond bank" that issues debt in the state's name that is then used to purchase securities from local governments. Local governments may also create their own bond banks or enter into "pooled debt" arrangements where one member issues debt and others borrow from the proceeds.

For Census Bureau statistics, such arrangements are reported as follows:

• Debt issued, retired, and outstanding: The government in whose name the bond bank or pooled debt was issued is recorded with the amount issued, retired, and outstanding using regular census debt codes.
• Loaning of proceeds to other governments: The distribution of the proceeds from the bond bank or pooled debt is not reported as an intergovernmental transaction. Instead, for the government issuing such debt, the purchase of other government's securities or the borrowing of debt proceeds by other governments is reported as an investment under Offsets to Debt (code W01). For the governments whose securities are sold or which borrows the proceeds, it is treated a long-term debt issued (codes 21*, 24*, or 29*).
• Repayment of proceeds: When the member government repays part or all of the loan from the issuing government, it is reported as long-term debt retired by the former. For the issuing government, the amount repaid each year reduces the security holding for offsets to debt (code W01).
• Interest on debt: For the issuing government, the interest paid on the debt is reported under the appropriate interest expenditure category (I89, I91, I92, I93, or I94). For the member governments, it is treated as in intergovernmental expenditure (and for the issuing government as intergovernmental revenue).

For Census Bureau statistics, taxable public debt is reported in the same manner as tax exempt public debt.

Most government debt is tax exempt; that is, the interest it pays to bondholders is exempt from Federal income taxes. In some cases, however, governments will issue debt that does not receive exemption from Federal taxes (for instance, to get around debt limitations).