What method is used to determine how much debt can be supported by a municipality?

Debt capacity analysis is used to determine how much debt a municipality can support. This method involves evaluating the financial health of the municipality, including its revenue streams, expenses, and existing debt obligations. By analyzing these factors, officials can assess the municipality's ability to repay debt while maintaining essential services and meeting its financial obligations.

This analysis considers various metrics such as debt-to-revenue ratios and debt service coverage ratios, helping financial leaders understand the maximum amount of borrowing that can reasonably be undertaken without jeopardizing the fiscal stability of the municipality. This ensures prudent financial management and responsible borrowing that aligns with the municipality's overall budgetary goals and long-term financial plan.

The other methods mentioned, while important in their own right, do not specifically focus on assessing debt capacity for a municipality. Revenue forecasting primarily predicts future income streams without directly evaluating debt levels, while rate of return analysis concentrates on investment efficiency rather than debt management. Budgetary comparison measures financial performance against the budget, but it does not specifically analyze how much debt a municipality can sustain.