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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General Obligation Bonds
General obligation (GO) bonds are backed by ad valorem property, sales and use, property transaction, or other general tax revenues, rather than the revenue from a specific project or geographic area, and can therefore be used to finance infrastructure that does not generate revenue. GO bonds are tax exempt and can be issued by governmental entities at the state or local level, including counties, cities, transit agencies, special-purpose districts, public utilities, school districts, etc.