Challenges and Opportunities for Innovation in the Public Works ...

Many infrastructure improvements are financed through debt issued by special
assessment and tax increment districts. Backed by a special property tax on the value of property
in the district which is in addition the regular ad valorem rate, special assessment debt has the
advantage of targeting the beneficiaries of the improvement for theopayment of the debt service.
Tax increment districts issue debt that is backed by a tax on increases in property value that are
presumed to have resulted from the provision of the infrastructure improvement. These formats
are often used for either transportation or sewer and water improvements.
Specific revenue sources may also be pledged for debt service payments on revenue
bonds. General sales taxes; sales taxes on specific items, such as gasoline or tires; water and
sewer rate collections; lottery proceeds; toll revenues; licenses; and many other revenue sources
may be pledged as security for the various forms of revenue bonds. Some revenue bonds are
additionally secured by a pledge of general fund support. These bonds, referred to as "double-
barrelled," bonds generally are issued when the revenue stream pledged for debt service
payment is not deemed sufficiently reliable to attract investors at a low interest rate.
There are numerous variations of GO and revenue bond issue types, as local
governments and their financial advisors continually search for ways to issue tax-exempt debt
at lower cost. Some of these efforts aim at enhancing the credit quality of the issue, a strategy that
is available through the use of letters of credit, bond insurance, restrictive bond covenants and
the use of reserve funds, among other techniques. While the popularity of these techniques varies
in relation to changes in interest rates, all have grown in usage over the last several years.
Municipal issuers also employ a variety of methods of sale and structure. Small-
denomination bonds (also called minibonds), variable-rate demand notes, or foreign currency
denominated instruments have all been used creatively to attract investors. Other innovative
techniques currently in use include: Dutch auctions, guaranteed investment contracts (GICs),
interest rate swaps, and capital appreciation or zero-coupon bonds.
All these techniques are used to attempt to lower the issuer's cost of borrowing. The
promise of a government to meet its debt service obligations must compete with the government's
desire to meet its service responsibilities, and any technique that lowers interest rates (and
therefore reduces debt service) must be explored in these times of tight budgets.
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