Financing Tools

Overview

There are two basic ways to approach paying for infrastructure: “pay-as-you-go” and debt financing. In a pay-as-you-go approach, improvements are made only when sufficient revenue is collected to cover the entire cost. In a debt financing approach, the improvement is paid for immediately, typically by borrowing against future revenues – in other words, issuing debt that is paid back over time. Either approach requires a designated funding – i.e., revenue – source  to pay for the cost of the improvement itself and, when a financing mechanism is used, to cover interest and other costs associated with issuing debt.​

Local governments typically borrow money by issuing bonds, which are promises to pay back investors over a defined period of time at a defined interest rate. Public entities can typically access lower interest rates by issuing bonds rather than by borrowing money from a private lender because most publicly issued bonds are exempt from state and federal taxes. Local governments can issue debt for projects that do not themselves generate revenue (typically in the form of general obligation bonds), but most types of debt must be secured by a dedicated source of revenue.

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General Obligation Bonds

General obligation (GO) bonds are backed by ad valorem property, sales and use, property transaction, or other general tax revenues, rather than the revenue from a specific project or geographic area, and can therefore be used to finance infrastructure that does not generate revenue. GO bonds are tax exempt and can be issued by governmental entities at the state or local level, including counties, cities, transit agencies, special-purpose districts, public utilities, school districts, etc.

CASE STUDIES

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West Dublin BART

 

 

 

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Revenue Bonds

Revenue bonds are issued for municipal projects that generate revenue and are secured by (i.e., repaid solely by) the revenue stream that is generated by the facility or geographic area they are used to finance – e.g., user fees from a parking garage or utility, or tolls from a road or bridge. Like GO bonds, revenue bonds are tax exempt and can be issued by governmental entities at the state or local level, including counties, cities, transit agencies, special-purpose districts, public utilities, school districts, etc.

CASE STUDIES
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Grant Anticipation Revenue Vehicle Bonds

Grant anticipation revenue vehicle (GARVEE) bonds are tax-exempt bonds backed (i.e., repaid) by future federal appropriations for transportation projects. Most commonly used for highway construction, GARVEE bonds may also be used in certain cases for transit and other federally funded transportation projects that are not expected to generate revenues.

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Private Activity Bonds

Private activity bonds (PABs) are issued by state or local governments, which apply the proceeds of the bonds to private business purposes with a public benefit, such as low income multifamily housing; industrial development; enterprise zones or facilities that treat water, sewage, or hazardous materials. Because PABs are tax exempt, they can provide lower interest rates than other forms of borrowing, facilitating the development of projects that might otherwise be infeasible. Like revenue bonds, PABs are secured by and paid from the revenues of the project for which they are sold. Unlike typical municipal bonds, however, the private business that receives the proceeds – not the issuing government agency – is not responsible for paying the principal and interest on PABs.

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Lease Revenue Bonds

Lease revenue bonds (LRBs) are tax-exempt bonds issued by state or local governments that are secured with revenues from the lease of land, public facilities, and transportation assets including parking facilities, light rail transit, water and wastewater treatment facilities, and many other public facilities.