Debt financing is a necessary tool for all public entities when they are faced with major capital projects. School districts purchase new fleets of buses, counties manage infrastructure projects that span multiple years, and cities construct public spaces meant to attract residents and tourists. Though these endeavors carry a large price tag, they also provide worthwhile benefits.
Government entities, having limited sources of revenue, strive to pass balanced budgets each year. Debt financing allows for the opportunity to pursue more ambitious public works by funding the projects over several years.
Moreover, when a public entity borrows for a project, the financial burden is spread across generations of taxpayers. This is more equitable than asking current residents to pick up the entire tab for public parks and buildings that will be utilized well into the future.
If you’re a finance official who is currently navigating the debt-financing process, it is imperative that you know your duties don’t end once the funds are secured. Your cash is more valuable today than at any point in the past decade and these proceeds can significantly help reduce your initial borrowing costs.
Collaborating with project managers to develop an accurate draw schedule will help you maximize your earnings without sacrificing liquidity. Additionally, the IRS has arbitrage laws that limit the amount of interest certain entities can earn on borrowed proceeds. Don’t shy away from working to offset borrowing costs because arbitrage calculations seem intimidating. Rather, talk to your municipal advisors and work with vendors who specialize in these areas.
Finance officials will be called on to lead debt-financing efforts when their entity is considering a large project outside the scope of their routine activities, or if the state mandates a specific capital project.
Public entities that work with threeplusone® to receive time-horizon data feel confident that their operating and reserve funds are always earning the highest yield possible without sacrificing safety or liquidity. We encourage our clients to be proactive in managing their bond proceeds with a similar level of detail in order to offset borrowing costs to the fullest extent possible.
