What must be considered when determining a local government's borrowing capacity?

When determining a local government's borrowing capacity, revenue projections and existing debt levels are critical factors. Revenue projections provide insight into the government's ability to generate income through taxes, fees, and other sources. This estimation helps in assessing future cash flows, which are essential for servicing new debt. Understanding existing debt levels is equally important since it indicates the current obligations that the government must fulfill. A government already burdened with significant debt may have limited capacity to take on additional obligations without jeopardizing its financial stability.

Ultimately, sound borrowing capacity analysis hinges on a comprehensive evaluation of revenue potential against current liabilities. This ensures that any new borrowing is sustainable and does not exceed the local government’s ability to repay, thus safeguarding its financial health.