October 22, 2026
Definition
Responsible fiscal management requires governments to pay for current operating expenses with current revenues rather than shifting those costs onto future taxpayers through long-term borrowing. Operating expenses include ongoing costs of providing public services, such as employee salaries and benefits, contractual services, supplies, and routine maintenance.
While debt is an appropriate tool for financing long-term investments in capital projects like roads, facilities, and transit systems, it should not be used to cover current-year operating expenditures when repayment extends beyond a single year. Borrowing for operations creates future debt service obligations without producing a corresponding long-term asset or benefit.
This principle is fundamental to maintaining a structurally balanced operating budget, in which recurring revenues are sufficient to cover recurring expenditures. Using borrowed funds to close operating budget gaps may provide immediate relief, but it does not resolve the underlying imbalance between revenues and expenditures. Instead, it adds principal and interest payments to future budgets, potentially worsening fiscal pressures and pushing current costs onto future taxpayers.
Governments may appropriately use short-term borrowing to manage temporary cash-flow shortages, such as when property tax revenues are received after operating expenses come due. Such borrowing should be supported by identifiable revenues and repaid within the fiscal year. This differs fundamentally from issuing multi-year debt to pay for current operations.
Why It Matters
Using long-term debt to pay for current operating expenses has significant consequences for government finances. Unlike capital borrowing, which spreads the costs of long-term assets (e.g., a building or bridge with a 30-year lifespan) across the generations that benefit from those assets, operational borrowing requires future taxpayers to pay for today’s government expenses.
Avoiding long-term borrowing for operations helps governments:
- Maintain structurally balanced budgets, where annual revenues are sufficient to meet annual expenditures.
- Ensure current taxpayers pay for current services, rather than future taxpayers paying for current services.
- Avoid unnecessary interest costs and escalating debt obligations.
- Protect credit ratings and maintain access to affordable capital financing.
When governments issue bonds to cover operating deficits, they risk creating a cycle of fiscal instability in which future revenues must support both current operating expenditures and paying down long-term debt. This can dig a government already struggling financially into an even deeper hole, crowding out funding available to pay for essential services and making structural budget deficits more difficult to resolve.
What Responsible Operating Budget Financing Looks Like
1. Prohibit Long-Term Debt for Current Operating Expenses
Governments should adopt formal financial policies prohibiting the use of debt with maturities greater than one year to finance current-year operating expenses. These policies should apply not only to recurring operating costs, but also one-time operating costs such as legal settlements and other current liabilities that do not produce long-term capital assets.
Long-term debt should generally be reserved for capital investments that provide benefits over multiple years, with repayment schedules aligned to the useful lives of the assets being financed.
2. Limit Short-Term Borrowing to Temporary Cash-Flow Needs
Short-term borrowing may be appropriate when governments experience timing differences between revenue collections and expenditure obligations. Tax anticipation notes and other short-term financing instruments can help maintain liquidity until anticipated revenues are received. Such borrowing should be supported by reliable revenue projections, used only for temporary cash-flow needs, and repaid within the fiscal year rather than extended or refinanced to push out repayments.
3. Maintain a Structurally Balanced Operating Budget
Governments should ensure recurring revenues are sufficient to support recurring operating expenditures. The Government Finance Officers Association (GFOA) recommends adopting policies that distinguish recurring from nonrecurring resources and demonstrate how ongoing expenditures are supported by sustainable revenues. Borrowing should not be treated as a substitute for recurring revenue or used to conceal structural budget deficits.
When expenditures exceed available revenues, governments should develop plans to restore structural balance through sustainable revenue measures, expenditure adjustments, operational efficiencies, or other recurring solutions. Ideally, a government would have a sufficient operating reserve to manage revenue volatility without resorting to long-term borrowing.
4. Establish Clear Oversight and Accountability
Governments should adopt and regularly review debt management policies that explicitly limit long-term debt to long-term capital projects and prohibit long-term debt for operating purposes. Any proposed debt issuance should clearly disclose whether proceeds will finance capital investments, temporary cash-flow needs, or current expenditures, allowing policymakers and the public to assess the fiscal consequences of such decisions.
Common Pitfalls
The Civic Federation's budget analyses have identified several practices that can undermine fiscal sustainability. Common pitfalls include:
- Issuing long-term debt to pay for current operating expenses, shifting costs to future taxpayers.
- Borrowing to finance one-time operating costs, such as legal settlements, rather than paying for them through current resources.
- Using borrowed proceeds to close recurring budget gaps without addressing the underlying structural imbalance.
- Repeatedly rolling over short-term debt or extending repayment schedules to defer operating costs.
- Using debt refinancing to generate near-term budget relief by pushing debt service payments into future years.
- Treating borrowing proceeds as available operating resources without clearly identifying future repayment obligations.
- Failing to maintain adequate reserves and multi-year financial plans, increasing reliance on borrowing during periods of fiscal stress.
Examples
Prohibiting the use of debt for operations is a standard practice. Many governments, including some in the Chicago area, include this in their financial policies. The following are several examples of local governments that have adopted explicit prohibitions on using long-term debt to finance operating expenses.
Chicago Board of Education – Debt Management Policy, Policy 404.1
Chicago Public Schools adopted a formal debt management policy that restricts the use of borrowing for operating expenses. The policy states that the Board should not finance general operating costs through debt with maturities greater than one year.
County of San Diego – Administrative Code, Section 113.5(c)
San Diego County's Administrative Code prohibits using long-term obligations to finance current operations or recurring needs.
City of Pittsburgh – Debt Management Policy, Chapter 20
Pittsburgh's Debt Management Policy prohibits using long-term debt to finance current operations.
Sources
Government Finance Officers Association (GFOA) – Achieving a Structurally Balanced Budget
The GFOA recommends that local governments maintain budgets in which recurring revenues equal or exceed recurring expenditures. The GFOA’s guidance on achieving a structurally balanced budget distinguishes between sustainable operating revenues and nonrecurring resources or short-term budget-balancing measures.
Iowa League of Cities – Debt Policy Model
The Iowa League of Cities recommends that municipalities adopt a debt policy that governs the use of debt and provides a model debt policy for cities to consider using. The model debt policy includes a provision prohibiting long-term borrowing for current operations, while directing long-term debt toward planned capital investments.
Civic Federation – Best Practices – Municipal Debt
The Civic Federation’s related best practice on municipal debt recommends using debt for long-term capital investments rather than operating expenses and avoiding debt structures that shift current costs onto future taxpayers.
*This piece is part of the Civic Federation’s Local Government Best Practices Hub, a central resource of research, recommendations, and examples to help Chicago and Illinois local governments make sound financial decisions. Explore the full collection of best practices here.