Municipal Debt Issuance Basics

Does your community need to complete a large road or utility project? Maybe it’s time to construct a new village hall. The large price tags for these projects leave many municipal officials scratching their heads about how their community could ever afford them. While they are certainly major undertakings, a well-crafted approach to issuing municipal debt often provides the feasible financing solution many communities need.

Municipal debt offers several advantages beyond simply providing the cash needed to complete an important project. First, it ensures that the users of a project pay for that project. Property taxes or utility charges of current residents go toward paying the debt rather than using funds saved over time from tax or rate payers who may no longer be in your community. Second, debt can simplify the process of budgeting for capital expenditures by giving you predictable annual debt payments. Finally, most types of debt are exempt from levy limits in Wisconsin. For example, having a $100,000 debt payment next year would allow you to raise your levy by $100,000.

There is a wide variety of debt options available in Wisconsin. The most basic distinction is between general obligation (G.O.) and revenue debt. G.O. debt is backed by the full faith and credit of a municipality and commits it to levy a tax to pay that debt. It is considered the strongest pledge and therefore generally has the lowest interest rates. The amount of G.O. debt outstanding is limited by state statute to five percent of a municipality’s equalized value. Revenue debt is backed by a specific revenue source, which is most commonly the revenue generated from a utility. The amount of revenue debt a municipality can have is not restricted by statute, but is limited by the ability of the revenue source to pay annual debt service.

Communities can turn to a number of programs and sources for financing. Larger transactions may be good candidates for a commercial market bond issue on a G.O. or revenue basis. Large utility projects are often eligible for subsidized revenue loans from the State of Wisconsin, or may qualify for United States Department of Agriculture Rural Development Loans, which can have terms as long as 40 years and often include grants. Local banks are active participants on shorter-term G.O. transactions, and the State Trust Fund Loan Program is a simple State-sponsored program that can offer a long-term fixed rate for G.O. or revenue loans.

It is important to keep in mind when issuing debt that there are many rules and regulations to follow. State statute limits the maximum term of debt based on the type of project and prescribes procedures for authorizing debt that vary depending on whether a municipality is a city, village, town or county. Federal regulations revolve primarily around whether the interest paid on municipal debt is exempt from income tax for bond holders. Tax-exemption results in lower interest rates for you, but is generally restricted to projects that benefit the public at large rather than a specific private party. Taxable debt has far fewer federal restrictions, but higher interest rates. We encourage you to speak with your attorney and independent municipal advisor to craft the best financing plan for your needs and to navigate the complicated legal realm of municipal debt.

This article was written by Patrick Malloy and Sean Lentz of Ehlers & Associates, Inc.

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