What does borrowing capacity refer to?

Borrowing capacity specifically refers to the financial ability of an entity, such as a municipality, to take on debt based on its projected revenues. This capacity is influenced by multiple factors, including existing debt levels, revenue streams, and overall financial health. When assessing borrowing capacity, entities will look at anticipated revenues from taxes and other sources to determine how much additional debt they can sustain while still meeting their financial obligations.

This concept hinges on the idea that future revenue must be sufficient to cover both existing debt service and any new borrowing that may be undertaken. A sound understanding of revenue projections allows municipalities to responsibly manage their finances and avoid excessive debt that could lead to financial distress.

The other options, while related to borrowing or debt, do not accurately capture the essence of borrowing capacity. For instance, total collective debt signifies what is currently owed, while legal limits refer to any statutory or regulatory restrictions on borrowing. The amount of money needed for projects, although important for planning, does not directly relate to the calculations and considerations of borrowing capacity as tied to projected revenues.