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Want a bike path? Crowdfund it

Your friends ask you to fund their marathon training, their home renovations, even their potato salad. Why not crowdfund something you'd actually use, like a bike path or a public park?

That's what a growing number of startups are helping people do as communities with a goal look for sources of financing outside of the municipal bond market.

“More and more, people are seeing this as a great alternative avenue as opposed to going through your tax dollars or local public servant,” said Slava Rubin, the chief executive officer of Indiegogo, a crowdfunding platform. Rubin said he started seeing public works projects on the site in 2011, with campaigns funding small-scale infrastructure projects such as a $1,000 dog park in Chicago, and expects interest to grow.

“Government is a very slow-moving industry, and it's quite bureaucratic,” Rubin said. “Indiegogo, and anybody who creates a campaign, is able to move much more nimbly.”

The pickup in crowdfunded infrastructure projects comes at a time of waning city budgets and interest in funding projects, said Erin Barnes, a founder of Ioby, a startup that helps neighborhood residents kick-start public works development. Brooklyn-based Ioby has helped individual contributors fund about $2 million in projects, such as bike lanes, gardens, and park landscaping.

Taking On the Muni Market

Federal and state governments are spending less on public works projects than in recent years, despite historically low interest rates, with transportation and water infrastructure spending in the U.S. declining by about 9 percent between 2003 and 2014, according to a Congressional Budget Office report. Tracy Gordon, a senior fellow at the Urban Institute's State and Local Finance Initiative, said public-private partnerships are starting to fill the void.

“What I hear a lot is that debt is a four-letter word,” she said. “There's a strong anti-debt, anti-tax sentiment out there. Politicians are very concerned that voters won't approve a municipality selling bonds in order to fund a project.” When municipalities do sell or refinance bonds, it's more likely to pay for a large-scale project with a lot of community visibility, like a school or a stadium. Crowdsourcing allows communities to target projects with smaller price tags that might otherwise get overlooked.

“They might not rise to the top in some other government processes in financing public projects,” Barnes said of the kinds of projects funded on Ioby's platform. “When neighbors fund something in their community, it sends a signal [to city organizations] that there is significant buy-in.”

The Downtown Denver Partnership used Ioby to raise $36,085 for a protected bike lane expected to open this fall, said Aylene McCallum, the director of the partnership's downtown environment division. She said the project garnered significant interest and the selection, design, and construction of the project will take one year compared to three or four years for other buffered or protected bike lanes in the area.

Critics of the project said the city should have funded the project with the tax dollars residents are already paying for such projects, McCallum said. “It was important to explain that we didn't see this as an ongoing funding approach to fund infrastructure,” she said. “We saw it as an opportunity to kick- start, if you will, a specific project in downtown Denver to demonstrate to the city that there was broad support for it.”

The Urban Institute's Gordon pointed to another potential problem with the model. “A lot of the things we've talked about seem like amenities for affluent areas,” she said. “You have to wonder about that desperately needed capital improvement across town, where perhaps the neighbors aren't as well mobilized.”

How the Golden Gate Bridge Got There

Many community-interest projects are still funded by traditional sources. When they are, startups like Neighborly are helping individuals play a role. The company, which says on its website it is “democratizing the $3.8T municipal securities market,” aims to allow users to buy portions of a municipal bond rather than the whole thing.

“Most people don't think to go, ‘Hey, I'm going to go buy a municipal bond,'” said Jase Wilson, the chief executive officer of Neighborly. “It's about breaking down the minimum denomination on one side so there's more of a democratic access. It's about demystifying it.”

Wilson said Neighborly seeks to sell municipal securities through its registered broker-dealer and tries to make it easy for investors to understand where their money is going. He said he hopes the company will help rekindle the local involvement in the municipal market that once created projects like the Golden Gate Bridge. At the moment, the bond market that millennials' grandparents invested in is gone, he said.

“They would go buy bonds in their own community for a project they support,” Wilson said. “They would put [the bond certificate] under their bed and clip the coupon, and they would just get some ice cream. It was super local, super hands on, super regenerative.”

Mitchell Moss, an urban planning professor at New York University, said crowdfunding municipal bonds would be a breakthrough for issuers, underwriters, and investors.

“It's a terrific way to access capital very inexpensively,” Moss said. “We could have a revolution in the municipal bond market by making it as easy to use as an ATM.”

The Shakeout

Jouko Ahvenainen, the executive chairman of Grow VC Group, which works on crowdfunding investment models, said bringing municipal bonds to digital investing services will make the market more efficient. Still, Ahvenainen said, the market is fragmented, and it's too early to tell how the nascent sector will shake out.

“There will be consolidation and companies with models that disappear,” said Ahvenainen, whose firm works on crowd-based investment models.

It will depend on how well technology can bring investors to provide the capital that the issuer needs, said Thomas Doe, the president of the research firm Municipal Market Analytics. Although the impact of firms like Neighborly won't be seen until more deals are done, the tax-exempt status of municipal bonds is piquing investors' interest, he said.

“People are intrigued. They're engaged by the passion and excitement that's being displayed by a couple of these firms,” he said. “It may happen in smaller communities first.”

Gordon, of the Urban Institute, said the main challenge is for firms like Neighborly, as increased access to household investors doesn't necessarily mean governments will start issuing more debt.

“It doesn't replace large-scale infrastructure projects or maintenance,” she said. “I don't see these firms displacing governments.”

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