About this resource
This series features expert-led, action-oriented explainers focused on key finance topics. The series is intended to help leaders learn about the topic, apply proven practices, and access hands-on tools that can strengthen their approach.
What is "pay-as-you-go" or "paygo"?
Pay-as-you-go (or “PAYGO”) is an avenue of public finance that governments use to pay expenditures for operating or infrastructure needs from cash or other available resources, without raising money from loans or other debt instruments. Pay-as-you-go can be used to the extent that cash or other resources are sufficient to cover expenses, as permitted and enabled by the laws in the framework of fiscal governance of the jurisdiction.
"While funding projects using a pay-as-you-go strategy emphasizes aligning current revenues with current expenditures, debt financing allows costs to be shared across current and future beneficiaries."
What types of expenditure categories do governments use pay-as-you-go for?
Pay-as-you-go can be applied across a range of spending categories, from maintenance to small-scale capital projects. In some cases where sufficient resources exist, governments use pay-as-you-go for larger infrastructure investments. The legal and institutional framework governing a jurisdiction’s fiscal practices, including balanced budget requirements, capital planning rules, restrictions on the use of funds, or others, shape its use. Ultimately, the feasibility of pay-as-you-go can depend on the availability, stability, and flexibility of revenues, as well as competing demands on those resources.
What principles and practices typically inform how governments engage in pay-as-you-go?
Revenue predictability and resilience are important elements that often support pay-as-you-go use. Jurisdictions with stable and diversified revenue streams are better positioned to rely on pay-as-you-go as a strategy, as they can more confidently forecast available resources. Volatile or constrained revenues may limit the extent to which pay-as-you-go can be used as a strategy without disrupting service or delaying investments. Financial policies and reserve management are also key enabling practices. Governments often establish formal policies that designate portions of recurring revenues or year-end surpluses for capital purposes, creating dedicated pay-as-you-go funding streams for infrastructure. Maintaining adequate reserves and fund balances also allows jurisdictions to smooth expenditures over time and respond to unexpected needs without resorting to borrowing.
Transparency and accountability with respect to revenues can be an important part of effective pay-as-you-go implementation. Clear communication about how current revenues fund infrastructure and services helps build public trust and supports informed decision-making about trade-offs, particularly when pay-as-you-go requires deferring projects, increasing revenues, or reallocating funds from other priorities.
How can governments begin to align revenue strategies to support the use of pay-as-you-go?
Revenue predictability and resilience are important elements that often support pay-as-you-go use. Jurisdictions with stable and diversified revenue streams are better positioned to rely on pay-as-you-go as a strategy, as they can more confidently forecast available resources. Volatile or constrained revenues may limit the extent to which pay-as-you-go can be used as a strategy without disrupting service or delaying investments. Financial policies and reserve management are also key enabling practices. Governments often establish formal policies that designate portions of recurring revenues or year-end surpluses for capital purposes, creating dedicated pay-as-you-go funding streams for infrastructure. Maintaining adequate reserves and fund balances also allows jurisdictions to smooth expenditures over time and respond to unexpected needs without resorting to borrowing.
Actionable Resources
- General Fund Reserve Calculation Worksheet: This resource can support local governments in calculating and analyzing different revenue metrics related to the establishment or maintenance of a reserve fund, supporting reserve management practices. (Source: Government Finance Officers Association (GFOA)
- Budget & Tax Rate Planning Calculation Worksheet: This resource allows a community to input data and review tax rate options and shifts. While it is designed with Massachusetts local statutes for reference, elements of the worksheet may be relevant to localities across the country who want to consider the relationship between levy limits, appropriations needs, and other elements in the context of tax revenues. (Source: Massachusetts Division of Local Services)
- Financial Forecasting Template: This resource can support localities in strengthening revenue forecasting practices. While it is designed with Massachusetts statutes for reference, elements of the worksheet may be relevant to localities nationally engaging in revenue forecasts across a 5 year time horizon. (Source: Massachusetts Division of Local Services)
Project Spotlight: The State of Nebraska
The state of Nebraska funds most investments on a pay-as-you-go basis because of limitations in the state constitution. Article XIII of the State of Nebraska Constitution prohibits the state from incurring debt in excess of $100,000. Transportation is Nebraska’s largest capital outlay, in fiscal year 2025, the state spent over $772 million on investment in highways, roads, bridges, and other transportation projects. To cover the expenses, the state needs to effectively forecast cash flows to determine whether projects can be funded with current revenues. While the state has paid for millions of dollars of construction every year from its operations fund, members of the legislature have noted that the limitations of the pay-as-you-go model have impacted its ability to fund projects.
It is with these challenges in mind that the state created the Transportation Infrastructure Bank, capitalized with $50 million from reserves in 2016 and annual fuel tax revenues. The Transportation Infrastructure Bank gives the Nebraska Department of Transportation increased access to flexible sources of funding, investments, and revenues to fund projects and catalyze highway capital improvements. We analyzed the State of Nebraska's public finance practices in a report commissioned by the Pew Charitable Trusts, to read more, click here.
Acknowledgements, Disclaimer & Contributing Authors
This resource was created for educational purposes only as part of the Rural & Small Cities Program, with the support of the Robert Wood Johnson Foundation. The views and perspectives presented in this resource are those of the author and the Public Finance Institute team. The Public Finance Institute acknowledges staff members Katy Hansen, Richard Figueroa, Haley Mulligan, and Peter Hamlin for their contributions to this resource.
