User fees and rates include the fees charged for the use of public infrastructure or goods (e.g., toll road or bridge, water or wastewater system). Such fees and rates are typically set to cover a system’s operating and capital expenses each year, which can include debt service for improvements to the system. The revenues generated from user fees help offset operations and maintenance costs. It is sometimes possible to use some portion of user fee or rate revenue toward financing the costs of new infrastructure,
though doing so may require raising rates.
Value capture is not one thing but a bundle of tools that
raise revenue by capturing the value generated by public infrastructure
improvements and/or a strong or strengthening real estate market. Value capture
can entail the creation of a new assessment, tax, or fee (such as a special
localized tax or development impact fee), the diversion of new revenues
generated by an existing tax (as in tax increment financing), or a
revenue-sharing agreement that allows a government agency to share in some of
the revenues generated by developing publicly owned land (known as joint
Grants are funds that do not need to be paid back and are typically provided by a higher level of government to a lower level (e.g., from the federal government to states or localities; from states to local
governments) or by a philanthropic entity. The federal government, the State of
California, and each region’s metropolitan planning organization (MPO) provide
a wide range of grants and formula funding programs that are relevant for
TOD/infill infrastructure needs, including for transportation, community and
economic development, clean air and water, brownfield cleanup, parks and open
space, and local and regional planning. Because grant programs are typically
competitive, grant funds are an unpredictable funding source.
These case studies profile comprehensive smart growth funding/financing strategies and the use of different tools and resources, including emerging tools that are likely to become more important for California cities seeking post-redevelopment funding solutions.
Managing and financing public parking is often a key component of a successful TOD/smart growth plan. Many transit station areas need expensive parking structures to accommodate commuters and adjacent development instead of surface parking lots. In other station areas or infill districts, parking management strategies can help ensure efficient use of existing parking spaces reducing the amount of new parking needed while helping to attract new shoppers and transit users, mitigate traffic congestion, generate funding for neighborhood improvements, and protect nearby residential neighborhoods from visitor, employee, and/or commuter parking. These case studies describe various methods and strategies for managing and financing parking to support TOD and smart growth development in an urban setting.
There are two basic ways to approach paying for infrastructure: “pay-as-you-go” and debt financing. In a pay-as-you-go approach, improvements are made only when sufficient revenue is collected to cover the entire cost. In a debt financing approach, the improvement is paid for immediately, typically by borrowing against future revenues – in other words, issuing debt that is paid back over time. Either approach requires a designated funding – i.e., revenue – source to pay for the cost of the improvement itself and, when a financing mechanism is used, to cover interest and other costs associated with issuing debt.
Local governments typically borrow money by issuing bonds, which are promises to pay back investors over a defined period of time at a defined interest rate. Public entities can typically access lower interest rates by issuing bonds rather than by borrowing money from a private lender because most publicly issued bonds are exempt from state and federal taxes. Local governments can issue debt for projects that do not themselves generate revenue (typically in the form of general obligation bonds), but most types of debt must be secured by a dedicated source of revenue.
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Local governments—including cities, counties, and
special districts such as sewer or water districts—have traditionally been
charged with building, operating, and maintaining basic infrastructure and
facilities in California. In a smart growth context, however, local governments
often partner with local or regional transportation agencies to improve
bicycle/pedestrian access, provide parking, or make other station area
improvements. Transit agencies may also get involved more directly in
transit-oriented development when the agency owns land near the station that
they wish to develop, as in the West Dublin BART case study.
Public/private partnerships (PPPs) are agreements between
public agencies and private sector entities whereby each party agrees to
contribute assets, skills, or other resources in return for sharing in the
costs and benefits of the project. Local governments are working more often
with private partners—for-profit companies as well as nonprofit/community-based organizations—to help deliver and manage local infrastructure
and services. Examples of different
types of PPPs include a joint development and parking management district.
Anchor institutions are entities such as universities, hospitals, and companies that are inextricably tied to their locations because of real estate holdings or capital investment, history, or mission. Because of these deep ties to their communities, these organizations may have an interest in investing in local economic or community development. From the perspective of a city or community, an anchor institution may bring new funding sources to the table as well as leadership capacity, research expertise, and other forms of human capital. The case study of the Greater University Circle Initiative and University Circle, Inc, in Cleveland, Ohio provides examples of how anchor institutions can work with cities to fill the gaps in traditional sources of funding and financing for smart growth infrastructure.
These financing case studies illustrate the importance of formulating a long-term strategy for infrastructure financing. This strategy essentially involves six fundamental steps:
- Understand the local real estate market and other existing conditions.
- Create a clear Plan/Vision that sets the overall direction but is flexible on the details.
- Identify all infrastructure components necessary to achieve the plan; break each component into phases as necessary and treat parking as infrastructure for a district, not project by project.
- Look for multiple funding sources and partnerships to fill the gaps.
- Look for short-term strategies to build long-term value; utilize funds as they become available, put value capture tools in place early, be willing to charge for things, and spread your costs.
- Assign responsibility for implementation of each strategy identified in Step 5.