What is the main risk associated with long-term debt?

The main risk associated with long-term debt lies in the potential for higher interest rates. When a municipality or organization chooses to finance projects through long-term debt, they are subject to the interest rates that prevail at the time of issuing the bonds or loans. If the rates are high when the debt is taken on, the cost of borrowing increases, which can significantly impact the fiscal health of the entity in the long run, as it may lead to higher interest payments that strain budgets over time.

This risk is compounded by the possibility that rates could rise further in the future. If a municipality needs to issue additional debt later or refinance existing debt, they may encounter even higher rates than anticipated, which could lead to increased financial strain. Additionally, interest rate fluctuations can have a broader impact on overall market conditions, affecting the economic environment in which the municipality operates.

Understanding this risk is essential for a certified municipal finance officer, as effective debt management strategies must account for these potential variations in interest rates to ensure sustainable financial practices.