How bonds are used to finance city, village, school district and park district improvements

  • SHELLY SCINTO

    SHELLY SCINTO

  • JIM SNYDER

    JIM SNYDER

 

In the public sector, a local governmental entity such as city, village, school district or park district ("taxing body") needs to borrow money for a variety of reasons -- more often than not, to finance capital improvements.

The issuance of "bonds" allows the taxing body to repay the borrowing over time. This method allows the payment burden for those improvements to be spread out over the period of expected useful life of the financed assets, as opposed to increasing taxes or impacting the taxing body's budget over a shorter term.

The various forms of bonds include general obligation bonds, alternate bonds, and debt certificates, to name a few -- each of which has its own set of issuance rules and repayment sources. Some forms of bonds count against the taxing body's statutory debt limit (unless the taxing body is a home rule city or village); other forms do not. Some forms require a petition period and public hearing requirement; again, other forms do not.

Capital projects can be funded by federal or state grants and other miscellaneous revenue available for general purpose use. However, the primary sources of funding to pay for capital projects by cities, villages, school districts and park districts are generally derived from the proceeds of municipal bonds.

Capital projects can be of long-term value to residents of the taxing body. Projects are usually prioritized based on their impact on the safety, resources and general well-being of the community served by the taxing body. Issuing bonds to fund a capital project allows current and future taxpayers within the city, village, school district or park district to pay related costs over the life of the project as they enjoy or appreciate the benefits of the completed project.

Below outlines common bond financing options for the various taxing bodies discussed above.

General obligation bonds

• Full faith and credit and backed by the ad valorem taxing power of the taxing body.

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• Statutory debt limit applies.

'Rollover' bonds

• Full faith and credit and backed by the ad valorem taxing power of the taxing body.

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• Statutory debt limit applies.

Alternate revenue bonds

• "Double-barreled" -- payable from a specific revenue source with the general obligation of the taxing body serving as backup security.

• Pledged revenues must meet 1.25 times debt service coverage requirement. Backdoor referendum procedures and BINA public hearing required. In general, no statutory debt limit applies.

Debt certificates

• No separate tax levy backing; obligation is a promise to pay by means of budgetary appropriation (no annual appropriation risk).

• Borrow money by entering into installment contract agreement. Statutory debt limit applies.

                                                                                                                                                                                                                       
 

Limited bonds

• Full faith and credit and backed by the ad valorem taxing power of the taxing body.

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• Bonds otherwise authorized pursuant to applicable law and payable from debt service extension base unlimited as to rate, but limited as to amount. Statutory debt limit applies.

• There are additional financing options available, unique to each of these taxing bodies. For more information, contact Ice Miller attorneys Jim Snyder at (630) 935-0967 (James.Snyder@icemiller.com) or Shelly Scinto at (708) 542-4625 (Shelly.Scinto@icemiller.com).

This article is intended for general information purposes only and does not and is not intended to constitute legal advice.

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