Maximum annual debt service is the upper limit of available capital to make principal and interest payments on municipal bonds over a one-year period. Often, municipalities set aside cash to cover the maximum annual debt service to avoid any interruptions.
For example, a municipality with a maximum annual debt service of $50 million will not be able to issue municipal bonds that have principal and interest obligations of greater than $50 million over a one-year period, otherwise it may be at risk of defaulting on those payments.