City of Port Coquitlam Capital Improvement Program May 1993

Pay-As-You-Go

Pay-as-you-go is a method of financing capital projects with current revenues, paying cash instead of
borrowing against future revenues.

Pay-as-you-go works well where capital needs are steady and modest and financial capability is
adequate.

Pay-as-you-go has several advantages. First, it saves interest costs. Interest on long-term debt can
more or less equal the original capital cost, depending on interest rates and repayment schedules.
Second, pay-as-you-go protects borrowing capacity for unforeseen major outlays that are beyond any
current year's capability. Finally, the technique avoids the cost of obtaining approval of the ratepayers
prior to the undertaking of a project.

Arguments against a pay-as-you-go program include:

1. A long-life asset should be paid for by its users throughout its normal life rather than all at once
by those who may not have the use of it for the full term. The higher cost due to interest, spread
over a larger number of users/payers, actually lowers the cost to all.

If tax rates have to be increased to pay for a series of capital improvements in a short period of
time, it would not be fair to people who leave after a brief residence. It would co.sstitute a
subsidy for those who came after <ixe cpaital improvement was completed.

When inflation is driving up construction costs, it may be cheaper to borrow and pay today's
prices rather than wait and pay tomorrow's.

The City's policy because of the quantity of items (roads, sidewalks, street lights, utilities, playfields,
etc) is that infrastructure replacement should be financed on a pay-as-you-go basis with a portion of
the plant to be renewed each year.