Different Means of Infrastructure Finance

California’s infrastructure, including schools, hospitals, highways, water and sewage systems, jails and prisons, have been built over the past fifty years using a myriad of financing strategies. Initially these facilities were paid using current revenues (paying-as-you go), but as projects became larger and more expensive, and state and local governments had to allocate revenues for other purposes, a shift occurred to the use of bonds (borrowing). The use of bonds allows public agencies to complete projects more rapidly and have future residents, who will benefit from the completed project, contribute to the cost.

Sources of funding for infrastructure can include both general and selective taxes, user fees, the sales of other physical assets or income streams, and a variety of other alternatives. Generally speaking, three main options are available for financing the acquisition and use of capital infrastructure. These include¹:

• Pay-As-You-Go. This is when infrastructure projects are paid for directly.
• Renting and Leasing. This can sometimes be feasible in cases where privately owned infrastructure (such as buildings) is available for public use.
• Bond Financing. This is the most common form of infrastructure financing, and typically involves borrowing money to be paid off over several decades to build or acquire long-lived capital facilities that generate services over many years.

Bond financing is a type of long-term borrowing that the state uses to raise money for various purposes. The state obtains this money by selling bonds to investors. In exchange, it agrees to repay this money, with interest, according to a specified schedule. The state has traditionally used bonds to finance major capital outlay projects such as educational facilities, prisons, parks, water projects, and office buildings. This is done mainly because these facilities are used over many years, their large dollar costs can be difficult to pay for all at once, and different taxpayers over time benefit from the facilities. Recently, however, the state has also used bond financing to help close major shortfalls in its General Fund budget.

The state sells three major types of bonds. These include:

• General Fund-Supported Bonds. These are paid off from the state’s General Fund, which is largely supported by tax revenues. These bonds take two forms. The majority are general obligation (GO) bonds. These require voter approval, and their repayment is guaranteed by the state’s general taxing power. The second type is lease-revenue bonds, which are authorized by the Legislature. These are paid off from lease payments (primarily financed from the General Fund) by state agencies using the facilities they finance. These bonds do not require voter approval and are not guaranteed. As a result, they have somewhat higher interest costs than GO bonds.
• Traditional Revenue Bonds. These also finance capital projects but are not supported by the General Fund. Rather, they are paid off from a designated revenue stream—usually generated by the projects they finance—such as bridge tolls. These bonds also do not require voter approval.

Budget-Related Bonds. In March 2004, the voters authorized $15 billion in bonds to pay off the state’s accumulated budget deficit and other obligations. Of this amount, $11.3 billion was raised through bond sales in May and June of 2004. The General Fund cost of repaying the principal and interest on these bonds is the equivalent of a one-quarter-cent share of the state sales tax (project at $1.4 billion for 2006–07). The bonds’ repayments are also guaranteed by the state’s general taxing power in the event the sales tax proceeds fall short.

¹ CA Legislative Analyst’s Office, Infrastructure Overview