CAPITAL FINANCING STRATEGIES

As we enter what has been referred to as the “golden age” of infrastructure redevelopment, increasing amounts of the fiscal challenges facing utility administrators will be related to financing capital improvement programs. In addition to keeping up with ever-changing regulatory challenges, many utility systems are faced with the replacement of treatment facilities and major distribution and collection infrastructure, i.e., facilities that have reached the end of their useful lives. As a result, for the foreseeable future, the percentag e of annual utility revenue requirements dedicated to capital financing will likely increase far more dramatically than inflation.In order to mitigate the impact of this increased investment in infrastructure on annual utility costs (and ultimately on utility ratepayers) the need for innovative capital financing strategies are more vital than ever. This paper explores a variety of topics regarding these financing strategies, including the following:Overall municipal fiscal policy goals and objectives.Effective marketing of the bond issuance process to achieve favorable ratings and interest rates.New municipal bond “products” that can result in lower interest costs.Alternative financing sources – such as State Revolving Funds.Pursuing federal financing in the “post-grant” era.Effective long-term planning.This paper focuses on the process of weaving each of these topics into a cohesive plan to be delivered to the municipal finance community. This aspect is crucial – regardless of the extent of success a municipality achieves in accessing alternative ‘free’ financing sources, the bulk of capital financing will continue to be achieved through the issuance of some type of debt instrument. Achieving the most favorable commercial terms for these instruments is paramount. Such terms are established largely by the perception of a municipal utility's creditworthiness. In effect, the better the utility's story, the more attractive the bonds, and the lower the costs to ratepayers.Utility administrators trying to control rising costs and rates sometimes give little attention to effective revenue bond marketing as a cost cutting technique. Effective bond marketing involves the process of establishing the optimum debt funding requirements for capital programs and the subsequent marketing of bonds at optimum interest rates. This can result in significant savings in debt service costs and smaller utility rate increases. The process requires a clear understanding of the roles of bond marketing team members and the bond rating process. This paper also describes the bond-rating process. By understanding typical rating agency procedures and concerns, administrators can be prepared to supply the required utility operating and planning documents and to address both positive and negative aspects of the utility in the most favorable light.