"The real goal should be reduced government spending, rather than balanced budgets achieved by ever rising tax rates to cover ever rising spending."
-- Thomas Sowell
Municipalities are prohibited by law from using long-term debt to finance current operating expenses. However, cities have the authority to issue long-term debt to finance capital improvements -- particularly for projects that require a large, immediate investment and whose benefits are expected to be realized over several years.
Deciding whether capital improvements should be funded with current revenues or through long-term debt, depends on your answers to such questions as, "who should pay and when?" and, "is a pay-as-you-go or pay-as-you-use a preferable approach?"
I argue that debt should be avoided, that projects should be funded from current revenues, and that a city should save for capital improvement projects requiring more money than can be provided in any one year. The proven result can be found in Layton city, where the discipline of carefully screened and prioritized projects enabled the building of a new "high-tech" fire training facility and a "state of the art" splash pad. They're paid for -- no debt.
Likewise, others argue that new facilities should be paid for by those who realize the benefit and that those payments should be made when benefits are realized.
Since interest on long-term bonds can often total as much or more than the principal over the life of bonds, interest costs can be saved by using a pay-as-you-go approach.
Funds that are set aside earn interest, thus helping to finance the project and to lower the final burden on the taxpayer.
Better long range planning is fostered, encouraging the development of a superior capital improvement plan, which is essential to the financial strength and credit worthiness of any government.
If municipal government is inclined to initiate a pay-as-you-use system, those who use will be those who pay. Also, a service is not being paid for until it is rendered and the benefit is received.
Fee increases are minimized by spreading the charge over an anticipated interval.
In time of inflation, both principal and interest costs are paid from inflated dollars coming from a large stream of revenue in future years.
The cost of many capital improvements is really an investment in the city's future welfare. The financing costs should be paid from the future stream of benefits.
In many cases, a municipal government can choose a combination of debt financing and the use of current revenues. For larger capital projects and improvements, however, the benefits of debt financing usually outweigh the disadvantages and the majority of local governments currently finance large capital improvement projects through long-term bonds.
Debt limitations are typically specified as a percentage of the total assessed valuation of property located within municipal boundaries and subject to taxation.
Provisions protect bond buyers and subsequent investors from debt management practices that could jeopardize the ability of the issuer to meet interest principal payments on schedule. The only security a bond holder has is the city's general integrity and its ability to generate revenues sufficient to service its debt.
Steve Curtis has worked as a business consultant and communication specialist. He is currently mayor of Layton. He can be reached at firstname.lastname@example.org.