i.2.2.1 When should a public agency consider PAYGO?

Notwithstanding intergenerational equity, PAYGO has its advantages. It is often less expensive and can be the simplest method of funding capital improvements.

But PAYGO also has its drawbacks:

It may not be financially feasible.
The public agency may find a mismatch between when it receives revenues and when it needs to pay for the facilities that generate them; for example, this could occur for public utilities that generate the revenues to pay the cost of facilities over time.
PAYGO can deplete reserves to a level that affects the agency’s credit and financial stability.
Even if debt is more expensive, the agency’s stakeholders may value the services that the asset offers now rather than forego services while they wait for sufficient funds to accumulate to construct the project.
And, of course, inter generational equity. PAYGO can place an excessive burden on current stakeholders.

If a public agency is going to consider using PAYGO for major projects, then each of the following should be true:

The public agency has accumulated sufficient financial resources to fully address the need.

The public agency needs to be able to not only pay for the capital improvement but also provide for its other capital and operating needs. The amount that the public agency has on hand needs to be sufficient and readily available (or reasonably certain to be received in time) and not committed to some other purpose or vulnerable to diversion or attrition.
The CIP identifies the capital improvement as a priority.

Using PAYGO runs the risk of using financial resources on capital improvements of lower priority simply because the project is “ready to go” at the time the public agency has the resources to pay for the need. This places the public agency at risk of deferring more critical (or costly) improvements.
The public agency is not concerned that funding the capital improvement on a PAYGO basis will create inter generational inequity.

Using PAYGO calls on current tax payers or rate payers to pay the full cost of major capital replacements that may benefit future generations. This runs the risk that all of the cost for the capital improvement will be unfairly borne by current stakeholders.

Accordingly, public agencies tend to use PAYGO to fund capital improvements for the following situations:

Capital improvements that are smaller or have shorter useful or economic lives (such as equipment purchases of police cars or photocopiers) and do not create inter generational inequities.
Larger capital improvements for new or growing communities when development impact fees are measurable and available, and the use of those funds does not inappropriately burden a stakeholder.
When reserves or set aside funds are sufficient to fund a capital improvement without jeopardizing the service level solvency of the agency.