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Approaches to funding infrastructure

Pay-as-you-go funding requires governments to pay for infrastructure costs directly from current revenues. Revenue sources commonly used for this approach include taxes, fees and user charges, interest earnings, and grants. These specific approaches are obviously quite different. Local governments, for example, clearly have a preference for grants or transfers such as state and federal funding programs. Only when grants are exhausted must local governments look to the resources of their own citizens, who then typically pay either through taxes or user charges. The advantages of this approach include reduced interest, increased flexibility, enhanced debt capacity, improved borrowing terms, and increased fiscal responsibility. The major disadvantages of this approach are insufficient funding, intergenerational inequity (if, for example, long-term facilities are paid for disproportionately by current users), inconsistency of funding requirements, and use of accumulated reserves.

Debt financing requires local governments raise money though the issuance of debt obligations (usually bonds). A more simple term for this approach is borrowing. These obligations are then paid back over time, with interest. The primary advantages of debt financing are that improvements can be financed as needed, intergenerational equity, repayment in cheaper dollars (if inflation is significant), and enhanced stability. Disadvantages include interest costs, encumbered future revenues, and limits on the amount of debt that can be issued.

Public/Private Ventures require local goverments enter into agreements with private sector to leverage public funds.

Evaluating Funding sources

• Legal Authority refers to the ability of counties and municipalities to engage in various types of financial and contractual commitments. Many financing programs are governed by state and federal statutes. Others are permitted under municipal home rule, these programs require enabling ordinances be adopted by the city.

• Financial Capacity provides a measure of the revenue-generating potential of a particular financing mechanism.

• Stability is a measure of the predictability and reliability of a funding mechanism. This criteria addresses the amount of variability in revenues and the long-term viability of mechanisms to fund maintenance and improvements.

• Administrative Feasibility is an evaluation of the administrative requirements that each funding mechanism would impose on the City. Administrative requirements vary significantly from program to program. Some programs will require considerable staff time to establish and administer.

• Equity is a polite name for "Who pays?" Cities and their citizens will usually prefer to spread the costs to the federal government, the state, or nonresidents (e.g., through gas taxes). Funding options that make users pay costs proportionate to the level of use are generally perceived to be fairer. Options based on factors having little or no relationship to use are generally less equitable.

• Political Acceptability refers to public acceptance of individual funding programs. In theory, if an evaluation shows a funding source to be legal, sufficient, stable, fair, and efficient relative to other sources, then it should be politically acceptable. In practice, local history and special interests often make it more complicated. Many local funding programs will require local review; some require voter approval. Recent trends in Oregon and nationwide provide an unfavorable precedent for many funding options. Voters are unlikely to approve mechanisms that are perceived as "taxes". The public is much more likely to support programs such as impact fees or systems development charges that place the financial burden on new residents.

Pay-as-you-go funding

• taxes
• special assessments
• special districts
• fees/user charges
• negotiated exactions, impact fees, and systems development charges
• interest earnings
• grants and transfer payments

Debt financing

• short term notes
• general obligation bonds
• revenue bonds
• taxable bonds
• tax increment financing
• leasing
• revolving loan funds

Pay as you go funding

Advantages:

• reduced interest
• increased flexibility
• enhanced debt capacity
• improved borrowing terms
• increased fiscal responsibility

Disadvantages

• insufficient funding
• intergenerational inequity
• inconsistency of funding requirements
• use of accumulated reserves

Negotiated exactions/impact fees/systems development charges:

•  Dedication of sites for public or common facilities
• Construction and dedication of public or common facilities
• Purchase and donation of vehicles and equipment for public or common use
• Payments to defray the costs of land, facilities, vehicles, and equipment in connection with public or common use

Must meet "rational nexus" tests:

1. the development creates a need for capital facilities
2. The fee represents the developments proportionate share
3. The fees collected from a development actually, but not exclusively, benefit the development

Borrowing

 Advantages

• improvements can be financed as needed
• intergenerational equity
• repayment in cheaper dollars (if inflation is significant)
• enhanced stability

 Disadvantages

• interest costs
• encumbered future revenues
• limits on the amount of debt that can be issued

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This page maintained by Bob Parker, ©2000
May 03, 2000