Are Bonds Used to Finance Construction?
While state and local governments sell bonds for a myriad of purposes, one of the primary uses from the proceeds is to finance construction projects. At the end of 2009, there were roughly $3 trillion worth of municipal bonds outstanding in the United States with the bulk of the proceeds from those bond deals related to construction projects, according to the Bank for International Settlements. Municipal bonds are attractive to investors, particularly those in high-income tax brackets, because they are tax-exempt.
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Significance
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State and local governments represent the vast majority of entities that sell or issue bonds to finance capital needs. Others that issue bonds to finance construction projects include housing, mass transit and transportation agencies; health care, public power and utility systems; and not-for-profit health care and higher education systems. Even sports franchises can have their arenas and stadiums constructed with bond proceeds. In these cases, the debt is sold for the franchise by a government-created issuer.
Types
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Construction projects typically funded with bonds include those for infrastructure, such as roads and bridges, and water and sewer systems. Others projected funded by bonds include schools, airports, stadiums and arenas, government buildings, libraries, parks, prisons and sports facilities.
There are several types of bonds that can be issued for construction projects. They include general obligation and revenue bonds. Most construction projects are funded with general obligation bonds and in many jurisdictions voters must approve the projects through a referendum because these bonds are secured by the full-faith and credit of the government. That means that the issuing government agency will provide the funds to pay off the bonds to avoid defaulting, even if that means raising property taxes. Revenue bonds, on the other hand, are paid off by a specific revenue stream, such as a sales tax.
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Bond-funded Airport Construction Project
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One example of a bond-funded construction deal that was completed in November 2010 was for Hartsfield-Jackson Atlanta International Airport. The city of Atlanta, the government that sold the bonds, issued $600 million to complete the international terminal for the airport. Specific projects that will be funded with proceeds from bonds sold by the city for airport use include the construction of a passenger security screening system, concession stands and a baggage screening system. Proceeds are even being used to build an automated people-mover system to transport travelers to a rental car facility that was also constructed with bond proceeds.
Utility Bond-funded Project
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When it comes to projects being constructed with bond proceeds, the sky is not the limit.
The New York City Municipal Water Finance Authority in November 2010 sold $500 million of revenue bonds. The proceeds are being used to help fund the city's capital improvement program.New York's system supplies about 1 million gallons of water a day to more than 9 million people.
Effects
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Issuing bonds for construction projects has advantages. The government that issues the bonds will pay lower interest rates, which can result in taxpayers not having to worry about property taxes increasing. Governments can also free more cash for other community projects because they can pay off bonds over an extended period of time, instead of all at once.
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