Capital Financing Options for Local Governments - Summer 2014 NCLGBA Conference

1. Funding Capital Projects
Kara A. Millonzi, Associate Professor of Public Law and Government
July 2014
millonzi@sog.unc.edu

2. Financing Options for Purchasing / Constructing Capital Assets
Current
Revenues
Savings Grants / Gifts
/ Partnerships
Special Levies Borrowing
Money
General Fund
Revenues
Fund Balance Federal Grants Special Tax
Districts
General
Obligation
(G.O.) Bonds
Enterprise Fund
Revenues
Capital Reserve
Fund
State Grants Special
Assessments
Revenue Bonds
Private Grants Impact Fees /
Development
Exactions
Special Obligation
(S.O.) Bonds
Private Donations
“CrowdFunding”
Installment
Financings
(COPs, LOBs,)
(Synthetic TIFs)
Public/Private
Partnerships
Reimbursement
Agreements
Downtown Development
Projects
Project
Development
Financings
(TIFs)

3. Savings
Fund Balance (FB)
– Can be used for capital or
operating expenses
– No legal limit on amount of
FB for savings
• LGC prescribes minimum
fund balance level for cash
flow purposes
– No statutory process
needed
Capital Reserve Fund (CRF)
– Dedicated to capital
expenses only (forever),
but can change type of
capital expense at any time
– No legal limit on amount of
$ in CRF
– Statutory process must be
followed to create and
maintain CRF (see G.S. 159-
18 through -22)

4. CRF Ordinance / Resolution
1. The purposes for which the fund is being created.
A board may accumulate moneys for multiple capital projects within a single
capital reserve fund, but it must list each project separately.
2. The approximate periods of time during which the
moneys will be accumulated for each purpose.
A board must provide a rough estimate of when moneys will be expended from
the capital reserve fund for each capital project.
3. The approximate amounts to be accumulated for
each purpose.
A board must provide a rough estimate of the total amounts it intends to save for
each capital project.
4. The sources from which moneys for each purpose
will be derived.
A board must indicate the revenue sources it intends to allocate to the capital
reserve fund to finance each project (e.g. property tax proceeds, utility fees, local
sales and use tax proceeds, grant proceeds, etc.).

5. CrowdFunding

6. Special Levies

7. Special Levies
Special Taxing Districts
(Service Districts)
Special Assessments Impact Fees
• Unit may establish one or
more taxing districts in the
unit and levy additional
property taxes in order to
fund a project or provide
services within the district
to a greater extent than in
the rest of the unit
• Tax rate assessed on same
property tax base as
general property tax(es)
• Limited to funding certain
projects and services
• Special Assessments are
levied against property to
pay for public
infrastructure that benefits
the property
• Lien on property; collected
in same way as delinquent
property taxes
• Two different special
assessment methods
• Limited to funding certain
projects
• Impact fees are not
authorized under general
law in NC
• All units can impose
fees/charges to cover
capital costs of operating
public enterprises

8. Service (Tax) Districts
Counties
• Beach erosion control
• Fire protection
• Recreation
• Sewage collection and disposal
systems
• Solid waste collection and
disposal systems
• Water supply and distribution
systems
• Ambulance and rescue
• Watershed improvement
projects
• Cemeteries
Municipalities
• Beach erosion control
• Downtown revitalization
• Urban-area revitalization
• Transit oriented development
• Drainage projects
• Sewage collection and disposal
systems
• Off-street parking facilities
• Watershed improvement
projects

9. Service (Tax) District Process
1. Unit prepares report with map of district; statement
that services needed to a greater extent in district;
and plan for providing services in proposed district
2. Unit provides notice of report
3. Board holds public hearing
4. Governing board adopts resolution adopting district
5. District becomes effective at beginning of fiscal year
6. Board sets district tax rate each year
7. Unit must begin providing services within one year
after levying district tax

10. Special Assessments
Traditional Special Assessments
• Limited Statutory Purposes
• Generally No Petition Requirement
• Amount of assessment must be
based on one or more statutory
bases
• Unit must follow detailed statutory
procedures before imposing
assessments
• Unit must complete public
improvement projects before
assessments may be imposed
• Assessments often are paid in up to
10 yearly installments
New Special Assessments
• Expansive Statutory Purposes
• Petition Requirement
• Assessment method within discretion
of governing board, but must relate
to benefit to properties assessed
• Unit must follow detailed statutory
procedures before imposing
assessments
• Unit may borrow money to front the
costs of capital projects and may
pledge assessment revenue as
security for loans
• Unit may impose assessment before
the capital projects are complete,
based on estimated costs
• Assessments may be paid in up to 30
yearly installments
• Currently Expires July 2013

11. Traditional Assessment Projects

12. Newer Special Assessments
• Allows unit to do public
infrastructure projects
that benefit new
development
• Unit is reimbursed for up
to 100% of costs over
time
• Payment expected to be
made primarily by
eventual property owners
(not developer)

13. Town of Hillsborough
• $4.63 million at 7.75% for
10 year term
• Funds will be used to
establish parks and open
space, construct and
improve water,
wastewater and drainage
facilities, construct and
improve streets, roads,
and rights-of-way in the
assessment district
• Assessments totaled $6.2
million on properties
with 210 acre area, with
payments over 10.5 years

14. Special Assessment Process
1. (Government receives petition)
2. Unit determines scope and cost of project
3. Board adopts preliminary assessment resolution
4. Unit publishes notice
5. Board holds public hearing
6. Board adopts final assessment resolution
7. Unit completes project
8. Unit prepares preliminary assessment roll
9. Unit publishes notice of assessment roll
10. Board holds public hearing
11. Board confirms assessment roll – assessments
become lien on property assessed

15. Special Assessments:
Basis of Assessment
Traditional Special Assessments
1. Frontage abutting project, equal rate
per foot
2. Area of land served, equal rate per unit
of area
a. Can establish benefit zones
3. Value added to land (difference
between appraised values before and
after project), equal rate per dollar of
value added
b. Can establish benefit zones
4. Number of lots served if involves
extension of existing system to
residential or commercial subdivision,
equal rate per lot
5. Combination of the above bases
New Special Assessments
• Governing board establishes
assessment method that most
accurately assesses each lot or parcel of
land according to the benefits
conferred upon it by the project

16. Borrowing Money (Issuing Debt)

17. Borrowing Money (Issuing Debt)
 Can the borrowing method legally be used to fund project
(state law)?
 What is the security for the borrowing (state law)?
 What funds will be used to repay the loan (state law)?
 Is voter approval required (state law)?
 Is Local Government Commission approval required (state
law)?
 Is the borrowing method feasible (market)?
 Is the borrowing method tax exempt (federal law)?

18. Borrowing Money (Issuing Debt)
General
Obligation
Bonds
Revenue
Bonds
Installment
Financings
Synthetic TIFs
Special
Obligation
Bonds
Project
Development
Financings
Security Unlimited
taxing power
Revenues from
revenue-
producing
asset or system
Some or all of
financed
property
Revenues other
than unit-levied
taxes
Taxes on
increased
valuation in
defined area
Authorized
Projects
Most capital
projects
Revenue-
generating
capital projects
Most capital
projects
Solid waste,
wastewater,
water,
municipal
service district
projects only
Specified capital
projects
Voter
Approval
Usually No No No No
LGC
Approval
Always Always Sometimes Always Always
Special
Limitations
Net Debt
Limitation
Feasibility
Studies
Covenants
Net Debt
Limitation
Feasibility
Studies
Covenants
Enhanced
Security

19. Borrowing Money: G.O. Bonds
• Pledge of “full faith and
credit”
• Can fund almost all
capital projects
• Voter referendum
almost always required
• Local Government
Commission approval
always required

20. Borrowing Money: Revenue Bonds
• Pledge of revenue from
revenue generating asset or
system
• Can only fund revenue-
generating capital projects
• Voter approval never
required
• Local Government
Commission approval
always required
• Times-coverage
requirement

21. Borrowing Money: S.O. Bonds
• Pledge any unrestricted
revenues except unit-levied
taxes
• Can only fund landfills,
water/sewer projects, BID
projects and urban area
revitalization projects
• Voter approval never
required
• Local Government
Commission approval
always required

22. Borrowing Money: Installment Financings
• Pledge of financed asset
• Can fund almost all
capital projects
– Essentiality principle
• Voter approval never
required
• Local Government
Commission approval
sometimes required

23. Borrowing Money: Installment Financings
Simple Installment Financings
• Unit borrows no more than
$10 million (tax-exempt) in
calendar year (bank
qualified)
• Borrow directly from
vendor, bank, or lending
institution
• Simple borrowing
transaction
Certificates of Participation (COPs)
Limited Obligation Bonds (LOBs)
• Unit borrows more than
$10 million (tax-exempt) in
calendar year
• Sell loan off to investors
• Complicated borrowing
transaction

24. Borrowing Money: TIFs
• Pledge of increased property
tax revenue from new private
development
• Can fund certain capital
projects
• Voter approval never required
• Local Government
Commission approval always
required
• Enhanced security usually
required
• 5% limitation

25. Valuation Proceeds allocated to
pay off TIF bonds
Proceeds allocated
to unit’s general
fund

26. Enhanced Security
• Additional pledges
– Financed asset
– Revenues other than unit-levied taxes
– Taxing power (if voter approval)
– Special assessments
• Minimum assessed value agreements

27. Valuation

28. Borrowing Money: Synthetic TIFs
• Installment Financing
• Anticipate using
increased property tax
revenue from new
development to actually
repay loan