There never seems to be enough money to go around for construction and maintenance of streets and sidewalks. Here are some ways a local government can borrow money to finance these projects —
General obligation bonds
For many, many years this was the only viable method available. For general obligation bonds, the municipality promises to levy taxes as necessary for timely payment on the bonds.
Usually general obligation bonds must be approved by the voters, but you can also use your two-thirds bonds – general obligation bonds that don’t need voter approval – for streets and sidewalk projects. If you’re not familiar with two-thirds bonds, here’s a blog post on that topic.
Advantages – No need for any physical collateral. Voter approval provides public buy-in for related tax increases, if necessary. 20-year financing readily available. Disadvantages – Many see need for voter approval as a disadvantage – at least, makes it more difficult to coordinate amount and timing of financing. Local Government Commission policies on selling G.O. bonds add substantial cost and time for all but very small localities.
Installment financing
In an installment financing as authorized under Section 160A-20 of the General Statutes, the local government borrows money and secures the repayment obligation with a lien on some or all of the property improved or acquired through the financing.
Some lenders have been willing from time to time to undertake this kind of financing with a lien only on the improved streets or sidewalks – even while understanding that lien may be of limited value in the unlikely event of a payment failure. Usually, however, money for streets and sidewalks projects must be “tacked on” to financing for another project that has more collateral value. For example, if you borrow money to put a new roof on Town Hall, a lender can usually add money to that borrowing to pay for unrelated streets and sidewalk projects.
Advantages – project timing and size of borrowing can be more easily coordinated with financing schedule. Financing directly with a bank available where it usually wouldn’t be permitted for a general obligation bond. No voter approval required. Disadvantages – under current conditions financing beyond a 15-year term difficult and expensive to obtain. Need for physical collateral in the “tack on” scenario requires additional coordination of timing between projects.
Special obligation bonds
Under Section 159I-30 of the Statutes, a municipality can borrow money for a wide range of projects and pledge to the repayment any source that’s not a tax directly levied by the municipality – and therefore, cities and towns can pledge sales tax receipts, since those taxes are in fact levied by the county government. These bonds can be used for streets and sidewalk projects, but only for projects that are within a defined municipal service district formed under Article 23 of Chapter 160A.
Advantages – no need for physical collateral. Can be done as a direct bank financing. No need for voter approval. After the first borrowing of this type, process and documentation for additional special obligation bond financings is relatively simple. Disadvantages – probably also limited to 15-year term under current conditions. Because this is a less common method, first financing can be more challenging for staff to work through – it’s not inherently more difficult than an instalment financing, it just may be less familiar.
For more on special obligation bonds for downtown projects, here’s a related blog post.
Special assessment revenue bonds
Article 10A of Chapter 160A of the Statutes allows a local government to borrow money and pledge to the repayment amounts received from special assessments levied against the benefitted property (there’s similar authority for counties in Chapter 153A). Local governments often use special assessment receipts to repay loans incurred some other tool, but this statute allows you to recover the full cost of the project (including the interest on any borrowed money) from the benefitted owners and to extend the assessment period to match the financing term. It’s a relatively new statute and only a few projects have been done using the authorization. There’s a detailed LGC approval process that may add time but which befits a relatively new, little-used financing tool and which also can provide additional assurance as to the soundness of the financing plan.
Advantages – requires neither physical collateral nor a vote of the people. Allows debt service costs to be assessed directly against the benefitted property owners with no promise to use other government funds. Disadvantages – going beyond a 15-year term for a bank placement greatly increases financing costs. Requires consent of the assessed property owners – majority by parcels, two-thirds by assessed value, among the parcels to be assessed.
The requirement for consent of the property owners means this tool will be most useful when there are a limited number of owners – for example, when a developer owns the whole tract and wants to finance the streets and sidewalks within the development, and the developer can give the consent for all parcels. It can also be used when most of the owners to be assessed see the community benefit, which could be the case in a single neighborhood.
We’ve worked on two of the three North Carolina projects we know about that have used this tool. Here’s a blog post about the success of the first one ever.
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The best approach for your community will of course depend on your local conditions, needs and resources. Many localities use a combination of tools. And this post is about how to borrow money for these projects, so we haven’t talked about pay-as-you-go financing, using taxes in your municipal service districts to pay for streets and sidewalks in the district, or obtaining grant funding from outside sources.
Please see our disclaimer, click here for more information about our public finance practice, and contact us if you want to talk about financing for streets and sidewalks or anything else we can help you with.