2.2.1 Sources of Revenue and Security for Repayment

2.2.1 Sources of Revenue and Security for Repayment

A public agency using debt to fund a project or financing must decide how the debt should be repaid. Expressed differently, who, among the public agency’s residents, businesses, property owners, and customers should bear the burden of debt repayment? Although shaped in detail by legal constraints, structural characteristics, and market conventions, the first general operating principle applied by public agencies is that the payment of municipal debt should be linked to the purpose for which the debt has been incurred. 

First General Operating Principle of Municipal Debt—The funds to pay debt should be derived from taxes, assessments, fees, and charges paid by those who benefit from the financed facilities or services.

As there is a broad range of purposes for which municipal debt may be incurred, there is likewise a wide variety of repayment sources. Debt used to fund an enterprise such as wastewater treatment may be paid off from fees and charges assessed upon the users of this service. Many governmental services, projects and programs, however, provide general community benefits and do not generate revenues. 

In determining the best type of debt obligation to issue, a public agency must consider the revenue source and a means to secure those revenues (i.e., security pledge) to repay the debt. Determining which funding source should be used to pay debt service generally hinges on four questions:

1. What sources of revenues are legally permissible to serve as security and source of payment for the debt?
   
   
2. Is there a funding source that is most fair and appropriate given the need that is being financed?
   
   
3. Is the funding source sufficiently creditworthy to serve as security for the debt? Is it vulnerable to interruption or adverse changes? Must the public agency secure the debt in other ways?
   
   
4. Would the public agency be locked into a commitment that may affect its ability to meet its service mission if it is pledged to repay debt? Is there a risk that a draw on financial resources to meet its debt obligation will force cuts to other services?

As an example, a city that wants to finance the construction of a parking facility must decide whether its source of revenues for repayment will come from its general fund or from the parking facility revenues. Using parking revenues makes sense because those who benefit from the project would be responsible for funding it. Investors may not, however, be willing to bear the risk that parking revenues will be insufficient to meet debt service in a given year. The city, in this case, may decide to agree to use general fund revenues as security for the debt, but to reimburse the general fund from the parking facility revenues for any debt service payments made from the general fund.