Positives
Interest is earned No interest is paid Those who use project pay for it OR (Aligns project users and payers at same time) Complete project immediately
Negatives
Requires Payment of Interest Long wait time to complete project Risk of inflation costs Possible conditions for use Arduous qualification process
Methods for Financing Capital Projects Pay-as-you-go Save up and set aside Grants Debt Financing X X X X X X X
may require a lot of time and human resources to prepare. Because there may be several applicants for limited grant money, a county may not know with certainty that it will receive complete or partial funding. Grants may also have conditions that limit the way funds may be used or how construction may proceed under guidelines set by the issuer of the grant. Other types of “below market” cost of money may also be obtained through low-interest rate loans offered by some state and federal agencies. •
Debt Financing. Counties can pledge their revenues and other resources to borrow money by issuing tax-exempt municipal bonds. Debt financing allows counties to build and use their projects immediately and avoid the risk of construction inflation. However, interest must be paid over the life of the bonds. Some types of municipal financings may require voter approval, and if the election is not successful the county may not be able to finance the project. One appealing feature of debt financing is that those who use the project pay for it.
Characteristics of a Municipal Bond Municipal bonds can be issued by municipal entities for projects they will own. A bond is simply an “I Owe You” that is issued by a county and purchased by an investor who will receive interest and principal payments on the bond from the county until it is paid off. Because the federal government does not tax states or their subdivisions, and states cannot tax the federal government, the interest that an investor earns on a bond issued by a municipality is usually exempt from federal and state taxes. This tax-exemption increases the purchasers return on investment and makes municipal
X X
X X X
X X
bonds an attractive alternative to other taxable bonds. For instance, an investor who is in the 35% tax bracket would be equally satisfied buying either a taxable bond with a 8% return or a tax-exempt municipal bond with a 5.2% return. Tax exemption results in a lower borrowing rate for the county. Types of Debt Counties are regulated in their issuance of debt and can issue many types of bonds that are differentiated by the nature of the security or collateral they pledge, and by the authorization required to issue them. Different governmental entities may issue different types of bonds depending on the revenue sources they receive and can legally pledge. A county’s decision regarding the correct type of bonds to issue can usually be determined by examining what the county will pledge, the nature of the project, and the expected source of repayment. General Obligation (G.O.) Bonds G.O. bonds pledge the ad valorem property taxes of a county and usually use a G.O. property tax levy to generate revenue to repay the bonds. These bonds are typically viewed as being low risk and, therefore, result in a lower interest rate. G.O. bonds can only be issued after receiving over 50% voter authorization at a bond election that can only be held in June or November. Counties have a debt incurring limit set at 2% of their market value. Revenue Bonds (Enterprise Fund) Revenue bonds pledge the funds in a county’s enterprise fund (such as a library fund), and usually use revenues from this fund to repay the bonds. The bond market will usually require that a county have revenues equal to at least 125% of the required bond payment available after operations and maintenance expenses have been paid and
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