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.