What if you need more money for your project than the voters approved? Imagine this situation:
Jefferson County had a bond referendum in November 2020, and the voters approved up to $5,000,000 in bonds to build a recreation center. After completing design, the County finds that because of the passage of time and increases in costs, it now has a $6,000,000 construction estimate. How can the County bridge the gap?
When your local government has a bond referendum, the voters are asked to approve the issuance of (up to) a maximum amount of bonds. Although the board deliberations and public engagement may focus on particular projects, the voters’ approval is for a set amount of bonds. Jefferson County therefore doesn’t have the option to issue more than $5 million in bonds based on the idea that “it’s the same project the voters approved.” What are the County’s options?
* Haggle with the contractors or re-design the project. Always a good first step, but contractors don’t seem very open to haggling these days. And with the delay associated with a re-design, there’s no assurance your new project will come in at a substantially lower price – unless you significantly scale back the project, and that raises its own concerns.
* Pay cash for the difference. Also a good step to consider, but in many cases we’re talking about more in cash than a government is comfortable contributing, especially if you’re worried about a downturn in tax collections caused by a slow-down or outright recession.
* Borrow the difference through an installment financing. You can fill the gap by separately borrowing money through an installment financing (sometimes called a “160A-20 financing). In an installment financing, you secure the repayment obligation by a security interest in some or all of the facilities you’re financing, but not by a promise to levy taxes or a pledge of any specific revenue stream.
* Borrow all the money through an installment financing. You may have voter-approved bonds, but it may turn out to be a better idea to borrow the whole project amount through an installment financing. You will have only one set of transaction costs, and you can often proceed with an installment financing more quickly than with a bond sale. While interest rates on an installment financing may run slightly higher than on a general obligation bond, that difference may well be offset by the savings in transaction costs.
When a project costs more than what the voters have approved, local government officers and elected officials usually try to consider which approach is most in keeping with what the voters approved. If we spend more money (regardless of its source), have we exceeded the mandate? Or have the voters expressed that they want this facility, and we need to provide it, even if it costs more? Those questions will have different answers in different communities, and of course the associated question is always, “How much more money are we talking about?” But there are ways to fill in a gap in general obligation financing if that’s the way the community wants to proceed.