Which ratio should be reported in connection with debt limitations in the CAFR?

In the context of a Comprehensive Annual Financial Report (CAFR), reporting ratios related to debt limitations is essential for understanding an entity's financial capacity and regulatory compliance regarding borrowing.

The first ratio, which is the outstanding net debt divided by the debt limit, provides insight into how much of the allowable debt capacity is currently utilized. This ratio helps users comprehend the extent to which a municipality or government entity is actualizing its borrowing capability.

The second ratio, the legal debt margin divided by the debt limit, illustrates the remaining capacity to incur additional debt without surpassing legal constraints. This measurement informs stakeholders about the available "buffer" before reaching the maximum debt limit sanctioned by law, indicating fiscal responsibility and operational flexibility.

Both ratios are significant and serve different but complementary purposes in illustrating the entity's relationship with its debt limitations. Reporting either ratio (or both) gives stakeholders a comprehensive view of the entity’s debt situation in relation to what is legally permissible, enhancing transparency and accountability in financial reporting. Therefore, it is acceptable to report either or both ratios, aligning with the current requirements for comprehensive financial disclosure practices.