August/September 2023

The main disadvantages of pay-as-yougo
financing (relative to bond financing)
are as follows:
• Insufficient funds - Current revenues
are not likely to be sufficient to
pay for significant capital outlays or
infrastructure projects.
• Higher cost of construction – Inflation
may raise costs at a rate higher
than the interest cost of borrowing.
• Uncertainty of funding requirements
- Unlike bond payments, the
funds necessary for capital projects
may be greatly inconsistent from
year to year.
• Depletion of reserves - Reserves
may be reduced for other uses before
they are sufficient to pay for the
desired projects.
Bond Financing
Borrowing or bond financing is not a
new source of revenue. Borrowing is a
way of moving the completion of capital
projects to the present and the payment
for those projects into the future.
However, the debt plus interest expense
must be repaid from the current revenue
sources. Nevertheless, the repayment of
the bonds can be made over time as the
project is used. Debt financing should
not be viewed as a “last resort,” because
it is often the best alternative available.
The main advantages of bond financing
(relative to pay-as-you-go) are as follows:
• Acquisition as needed - Cities can
enjoy prompt use and benefit of
capital improvements. Immediate
or rapid construction is limited with
pay-as-you-go financing.
• Repayment in cheaper dollars - With
a positive inflation rate, repayment
costs will be less burdensome than
full payment at the time of acquisition.
• Stability - Since debt service payments
are known and predictable,
wide fluctuations in required expenditures
are avoided.
• Reduced operating cost - Older,
high-maintenance infrastructure
is more quickly replaced by newer,
low-maintenance projects.
The main disadvantages of financing
(relative to pay-as-you-go) are as follows:
• Interest costs - The cost for the use
of money must be added to the total
cost of the capital project.
• Encumbered future revenues - Potential
revenues are dedicated to
the repayment of debt and are thus
not available for other uses.
In summary, neither approach is inherently
superior to the other. Usually, the
best course of action is a combination of
both approaches. For example: A municipality
might utilize bond financing for
the purchase, acquisition, or construction
of a public building and PAYGO
funding for the equipment and furnishings.
The financing decision should be
carefully considered as to which option
the city is willing to embark.
By Nnamdi
Thompson
Government
Consultants, Inc.
Government Consulting Inc, can be reached
by emailing nthompson@gc-la.net.
LMR | AUGUST/SEPTEMBER 2023 Page 37