Debt Affordability Model
Have you ever wondered, how much debt is too much? The Debt Affordability Model is a long-term financial planning model that helps answer that question.
Debt affordability is more than paying back the principal and interest on debt. It also takes into consideration the municipality’s future revenue and expenditure growth, as well as:
- The impact on the tax burden on future generations;
- Future infrastructure needs;
- Population and economic growth;
- Maintaining the current municipal tax rate; and
- Ensuring current municipal services are not jeopardized.
In 2004, the NSMFC developed a Debt Affordability Model to help councils determine the appropriate level of debt for their municipality. This is achieved through the use of trend analysis, projections of economic and revenue growth, and capital improvement needs in the future.
The model allows decision-makers:
- Flexibility to plan for the future;
- Ability to develop future capital improvement plans in a balanced and measured way;
- To prioritize capital projects that are competing for scarce resources;
- To develop a long-term financial plan
- Promote the municipal use of the Debt Affordability Model, and provide technical support for municipal administrators. The Debt Affordability Model is a tool used by municipalities to help determine how much debt is too much debt to carry. The model can also be used by municipalities for multi-year budgeting and forecasting and analyzing revenue and expenditure options.