How can municipalities ensure they do not exceed their debt capacity?

Regularly reviewing financial ratios is crucial for municipalities to ensure they do not exceed their debt capacity. Financial ratios, such as debt-to-income and debt-to-value ratios, provide valuable insights into the municipality's financial health and its ability to manage existing and future debt. By continuously monitoring these ratios, municipal finance officers can identify trends, assess the sustainability of current debt levels, and make informed decisions regarding additional borrowing.

This proactive approach allows municipalities to maintain a sound financial position, adhere to legal debt limits, and ensure that they have sufficient revenue to cover debt service obligations without jeopardizing other essential public services. Regular reviews can also facilitate compliance with bond covenants and strengthen the municipality's credit rating, ultimately reducing borrowing costs.

While seeking new revenue sources, minimizing annual debt service payments, and increasing property tax rates are strategies that may also play a role in managing finances, these actions do not provide the same level of ongoing assessment and insight into debt capacity as the consistent analysis of financial ratios does. Regular reviews allow for timely adjustments and proactive financial management, making it the most effective method to prevent exceeding debt capacity.