Consider this very recent example: A local city fire department has $9,000 budgeted for new two-way radios. The problem is that the radios they need will cost $27,885. Their Chief told us that he knows he will receive an additional $10,000 each of the following two years but he cannot wait to get the equipment he needs, he needs them now.
Benefits of Public Financing for Municipalities
- Public Financing helps fund major expansion
- Public Financing conserves working capital
- Public Financing helps avoid obsolescence
- Public Financing ties monthly payments directly to tax income vs. expenses
- Public Financing makes more equipment available
- Public Financing offers fixed rate financing
- Public Financing is a hedge against inflation
Other benefits include the following:
Bond election not required
In most cases, a bond election is not required. Because of the annual appropriation feature, tax-exempt Public Financing is not counted against the municipality’s debt limit nor is it subject to normal debt incurrence procedures. Public Financing eliminates the expense of bond issues.
Annual funding out clause
A Public Financing obligation includes a non-appropriation of funds clause; language that most states’ laws require.
Public Financing terms generally are matched to the useful life of the equipment to be financed. Monthly payments provide for easy budgeting and, in most cases, no down payment or advance payments are required. Prepaid arrangements can be made. Payments can be billed either in advance or arrears; quarterly, semiannually or annually.
Unlike rentals, Public Financing permits the municipality to rebuild equity with each payment. At the end of the term, the municipality owns the equipment.
Avoids inflation delay costs
A Public Financing obligation permits acquisition of needed equipment today, before prices rise further. There is no need to build up capital improvement funds until an outright purchase is possible, all the while watching inflation stay one or two steps ahead of purchasing power.
Does not affect constitutional debt limitation
Unlike other ways of obtaining funds (bond issue or bank lending), Public Financing does not affect constitutional debt limitation. Debt to fund balance ratios are very important in keeping a good rating as well as staying within statutory requirements.
Funds for equipment purchases can usually be available in a matter of hours after the municipality has completed the documentation. This is particularly important in times of emergency when bond proceeds might not be available for weeks or even months.