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Bonds

Bonds. Essentially loans used for capital improvement projects such as land acquisition or facility construction Allows a facility to be used now instead of when enough cash is saved far into the future. When to use bonds. When the inflation rate is higher than the interest rate

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Bonds

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  1. Bonds Essentially loans used for capital improvement projects such as land acquisition or facility construction Allows a facility to be used now instead of when enough cash is saved far into the future

  2. When to use bonds • When the inflation rate is higher than the interest rate • When a facility (and its benefits) are needed today • When property essential to the master plan must be purchased now to prevent it from being developed

  3. Types of BONDS • General Obligation • Revenue • variations of the above

  4. General Obligation Bonds • The security is provided by taxpayer’s (and government entity’s) pledge to increase their tax burden to retire the bond

  5. General Obligation Bonds (pros) • low risk, as promise is based on full faith and credit of property taxpayers • cheaper than revenue bonds • tax deductible to investors which serves as an incentive to purchase even though interest rates are low • usually requires a vote (if over a $ limit)

  6. General Obligation Bonds (cons) • Difficult to pass referendum for some projects • Increases the local tax burden • Assumes a public good when the beneficiaries may be primarily users • Increases the statutory debt limit (e.g.. 3%)

  7. Revenue Bonds • The income generated by a particular facility is used to retire the bond

  8. Sales Tax and Revenue BondsSTAR BONDS The purpose of STAR bonds is to allow a locality to finance infrastructure improvements that will boost the community’s economy.  The increased revenue flow from the development is then diverted to pay off the bonds.  • For instance, STAR bonds were used to finance the Kansas Speedway and its surrounding property.  The extra tax revenue collected from the Speedway and the surrounding property goes to pay off the bonds.  • Amendments: Senate Bill 395 is designed to amend the STAR bonds program.  It would exclude the collection of taxes from a STAR bonds district from streamline sales tax collection methods.  Last year, the legislature enacted a destination-based sales tax collection.  If a merchant was to sell a good and have it delivered out of the taxing jurisdiction, sales tax would have to be collected at the rate of and directed to the taxing jurisdiction where the good was delivered.  As such, it takes resources away from the STAR bond district that were to be used to pay off the bond debt.  • If SB 395 is adopted, currently existing STAR bond districts would be exempt from destination  based tax collection.  In other words, if a merchant sells a good to a person, the tax revenue stays within the district where the good is sold regardless of whether it is delivered elsewhere.  This allows the STAR bond districts to meet the financial obligations of the bonds. 

  9. Revenue Bonds (pros) • Only users pay for the bond • No referendum for voter approval is required • Not included in the statutory debt limit • eliminates problems with residents paying a disproportionate share of costs

  10. Revenue Bonds (cons) • Interest rates are higher (2 pts) • increased risk (facility may not be able to generate enough revenue and default) • may result in higher fees and restrict some use to economically disadvantaged

  11. Bond Ratings • Private firms rate the issue’s risk of default and assign a credit rating • Bonds with the best rating are more sellable at a lower interest rate • Best rating Aaa(Moody’s) or AAA (S & P)

  12. Passing a G.O. bond referendum • Establish the need • Choose the right time (political climate) • Research why other referendums might have failed and select a strategy and position (focus on positive) • Obtain broad citizen involvement • Clearly communicate costs

  13. Committees needed for a G.O. Bond Referendum • Local Officials committee (executive) • community leaders • Speakers Bureau • Canvassing (get out the vote) • Public relations/publicity • use specialists who do this regularly • Finance

  14. One successful strategyManhattan’s Quality of Life • Quality of Life theme (hard to not like) • Something for everyone • all areas of community and variety of participant groups • northview pool • linear trail • softball and outdoor sports complex • upgrade community house

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