What does "pay-as-you-go" financing entail in capital planning?

"Pay-as-you-go" financing in capital planning refers to the approach of using current revenues to directly fund capital projects, rather than relying on borrowing or issuing debt instruments. This method emphasizes a more immediate and sustainable way to finance capital expenditures, as it minimizes future liabilities associated with debt service.

By utilizing current revenues, municipalities can maintain better control over their spending, ensuring that they only undertake projects that they can afford in the current fiscal cycle. This approach can also enhance financial stability and responsibility, as it discourages excessive debt accumulation and promotes a pay-for-what-you-use philosophy. Additionally, pay-as-you-go financing often results in quicker project initiation, as there is no need for the time-consuming process of securing loans or bonds.

Securing funding through long-term loans, building a reserve for future spending, or issuing bonds typically involve future financial commitments that add complexity and risk to a city’s financial planning, whereas the pay-as-you-go model aligns expenditures more directly with available resources. This method remains a preferred choice in capital planning for entities focused on fiscal prudence and disciplined financial management.