How Do Cities Fund Projects?
One critical aspect of city development that often goes unnoticed is the question, “How Do Cities Finance Projects?” Understanding the behind-the-scenes financial management offers profound insights into the growth and prosperity of a city. Financing is much more than political decisions; cities have to work around real constraints on spending, affecting their growth significantly over time.
Types of Financing at the Municipal Level
Depending upon the project type and purpose, cities employ various financing types. In this article, we look into some commonly used financing methods, primarily in the U.S. and Canada.
General Obligation Bonds
Commonly issued by local governments, general obligation bonds are secured by the Taxing District’s Property Tax Authority. They primarily fund capital projects like land acquisition, development of parks, and transportation projects. The bonds come in two types: limited tax general obligation bonds and unlimited tax general obligation bonds. The former is issued by a legislative body vote and ties to general fund revenues for debt services, while the latter requires voters’ approval for an excess levy to cover debt service payments.
Revenue Bonds
Revenue bonds are used to finance water and wastewater projects, airports, and stormwater systems. Unlike general obligation bonds, these are not backed by the city’s full faith and credit. Instead, they rely on user fees generated by the capital facility being built. This makes them slightly riskier, attracting a higher interest rate than general obligation bonds.
Improvement District Bonds
When a capital project benefits only a subset of the community, improvement district bonds come into play. The local improvement district is created to fund all or part of the project, with options to block the same if property owners protest the improvement resolution.
Government Loans
Federal and state-level loans are an essential source of funding for capital projects. The U.S. Department of Energy, Department of Agriculture, and several other agencies extend loans for various purposes, from restoring water supplies to improving infrastructure. Similarly, in Canada, programs like the Canada Community Building Fund offer strategic investment opportunities in multiple project categories.
Refunding Bonds
Commonly used to replace and refinance existing obligations, refunding bonds are triggered by the desire to secure a lower interest rate and reduce payment amounts on older, more expensive debt.
In essence, each city’s bonding capacity — the amount of collateral that it can pledge to pack funding — is an integral constraint in borrowing. In general, cities are not allowed to borrow money for operating expenses, which form claims against future revenues.
| Key Financing Types | Purpose |
|---|---|
| General Obligation Bonds | Finance capital projects like land acquisition, parks development, transportation projects, etc. |
| Revenue Bonds | Finance water and wastewater projects, airports, stormwater systems, etc. |
| Improvement District Bonds | Finance capital projects that primarily benefit a community subset. |
| Government Loans | Finance various city projects via federal and state-level loans. |
| Refunding Bonds | Replace and refinance existing obligations, securing lower interest rates and reducing payment amounts on older debt. |
Remember, these represent just a handful of financing types available at the municipal or county level. Have an insightful day and go make some great things happen!
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