Nobody can afford to pay for a new road in cash. It takes financing, like issuing a bond: a loan given to a corporation or government, paid back to investors with interest during a specific timeframe.
Think about a mortgage – you get a loan. You pay it off over time with interest, and your interest payments are higher at first because the balance you owe is still high. As the amount you owe decreases, do does the interest you pay. Bonds work the same way.
Municipal bonds (municipality = city, but cities, counties and states all issue bonds) are used to pay for city projects. Think new schools, road work, and water treatment facilities.
Who’s loaning the money? When a government needs to fund a big project, they issue bonds to investors. Anyone can invest in municipal bonds (but it’s usually your city’s high-profile residents) – you can buy them individually from bond dealers, banks, or brokerage firms, or invest in a mutual fund that invests in bonds.
Then you get interest (called coupons) + payments back. 💸
One example: Greenville County Schools created a $1 billion bond program in 2002 to build or renovate 70 schools. Halfway through its payback period in 2014, it had returned $166.5 million of principal and $271.2 million in interest.
Investing in municipal bonds is a pretty safe bet – the City of Greenville has an AAA rating from Moody’s (the highest possible, only 7% of rated cities), which basically means they have awesome credit (we’re jealous).
But we hear about tax money going towards roads all the time. Why would a city choose to use a bond?
It’s a lot more reliable. When you have a multi-million dollar highway development or massive park to build, taxes aren’t a steady enough income source. Property taxes come in the year after an assessment, so you’re waiting on possible future payments, and sales tax revenue fluctuates by season.
And your taxes don’t have to go up. Greenville County Schools financed their billion-dollar project without raising taxes, and it’s typical that when an entity issues bonds they’ll pledge for taxes to be unaffected.
But back to highways and parks... what other GVL projects have bonds made happen?
If you already read today’s email, start here. ⬇
First, there are two types of municipal bonds.
- General obligation bonds: the government hasn’t specified a source of money to pay you back, so they could use anything, like taxes or fees (lower risk, because they’ll get the money somehow).
- Revenue bonds: the money the government uses to pay back the bond will come from a specific source, like hospitality taxes (higher risk, because they have a limited source of revenue to pay back with)
Legislative councils and boards authorize cities to issue bonds. It’s usually more difficult to get a revenue bond issue authorized, because they’re more difficult to pay back, but with Greenville’s AAA rating it’s not as high a risk.
Turning Falls Park into the downtown landmark it is today happened in the 90s, thanks to $13 million in hospitality money set aside specifically for major tourism projects. Today, hospitality tax money goes towards paying off bonds to maintain Falls Park (and the Swamp Rabbit Trail).
Hospitality taxes also help pay off bonds used to build the Bon Secours Wellness Arena, and for improvements to the TD Convention Center.
In 2017, Greenville City Council said they intend to use revenue bonds to pay for City Park, which would go in the location of the public works facility on the west side of Greenville (and would also be paid back with hospitality tax revenue).
Greer plans to issue $10 million in bonds to fund a 300-space parking garage for a new hotel (meaning no property tax increase). ReWa (Renewable Water Resources), is funding Dig Greenville through cash-on-hand and revenue bonds in the future.
And Greenville County Schools created a whole new system of issuing bonds in 2002, called the Greenville Plan, to fund its BEST program. They created a nonprofit corporation to issue $1 billion in bonds, getting around a state law that limited bond issue amounts to 8% of the value of taxable property in the district. Seven other school districts used the Greenville Plan, and lawmakers attempted to illegalize it shortly after.
Bonds are funding major projects all over Greenville – they’re investments in our city + pretty smart investments for you, too.
