Public officials are often tasked with bringing their constituents’ dreams to life by finding creative, efficient, and sustainable ways to secure the funds necessary to see them through.
Recently, DebtBook hosted a panel discussion on debt management with the North Carolina Local Government Budget Association. The discussion featured several experts, including Jennifer Shonebarger, debt manager for the City of Raleigh. Shonebarger presented on ways North Carolina local governments use debt to meet their capital needs. Watch the video or continue reading below for a brief summary.
Whether the vision is a park, school, or other community project, public officials must navigate a continuous, non-linear process to take a project from idea to completion. In that process, most local governments engage in many, if not all, of the following steps:
- Annual budgeting
- Capital improvement planning
- Debt modeling
- Community engagement
- Bond referendum and related voter education (if needed)
- Cash flow analysis
- Debt issuance
- Reimbursement of expenditures
Depending on scope, finance teams may fund a project using current or forecasted cash flows or designated reserves. Local governments may also issue new debt using their existing debt capacity or debt to be repaid from new revenue sources resulting from the project itself.
The five basic ways North Carolina local governments borrow money are summarized below. While the general approach and concepts used in North Carolina apply in many jurisdictions, the specific financing processes, structures, and requirements will vary from state to state.
General Obligation Bonds
General obligation bonds are the most common method local governments use to finance projects. Local governments typically issue general obligation bonds to finance parks, streets, housing, and school improvements. A local government pledges its full faith and credit to the repayment of the bonds, which means voter approval is usually required. Once voter approval is obtained, the local government generally has seven years to issue the bonds before the approval expires.
Installment Financing Agreements
Installment financing agreements area popular option local governments use to fund facilities, vehicles, and equipment. Under North Carolina law, the local government’s repayment obligations under an installment financing agreement must be secured by a lien on at least some portion of the assets financed. Local governments are generally not required to secure voter approval to enter into an installment financing agreement, which simplifies and accelerates the process for issuing the debt and acquiring the underlying asset. Installment financing agreements, however, are not backed by the local government’s full faith and credit, which generally means installment financing agreements carry a slightly higher interest rate than the local government’s general obligation debt.
Local governments use revenue bonds to leverage future cash flows in order to finance revenue-generating assets like airport improvements, tollways, or projects for the local water and wastewater system. When issuing revenue bonds, the local government pledges future project or enterprise system revenues to repay the debt. Because revenue bonds are not backed by the government’s full faith and credit, voter approval is not required.
Special Obligation Bonds
Special obligation bonds are less common in North Carolina but provide another valuable financing tool in certain situations. Local governments typically use special obligation bonds to finance landfills, utility projects, and improvements located in special service districts.
Project Development Financing
Project development financings may help fund important and creative public-private partnerships. A local government may elect, for example, to finance critical infrastructure improvements in strategic locations to spur private investment in an underdeveloped or distressed area. The private investment, in turn, boosts the area’s economic activity and tax base, generating additional property and sales tax revenues, fees, and other funds the local government can then use to repay the debt.
To plan effectively and manage debt strategically, local governments must be able to evaluate and model their current and future cash flows, debt service requirements, and capital needs on a fund-by-fund, purpose-by-purpose, and project-by-project basis. If cash flows available for a particular purpose or project prove insufficient to repay the associated debt, a local government may be forced to delay critical improvements or raise taxes, charges, or other fees to cover the shortfall.
Once bonds are issued, a local government must be able to track projects and spending to ensure it remains in compliance with any applicable provisions imposed under their bond agreements or applicable law. For example, local governments must be able to track debt approved in multiple special elections and issued across multiple series to ensure compliance with the seven-year time limit for issuing debt subject to voter approval.
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