7.2 External Funding For Capital Improvements
Much of the funding for capital projects comes from external sources or non-utility revenues. These sources typically include governmental or commercial loans, governmental grants, and bonds. A utility reserve account may be used to pay for part of a project or may serve as a local match, when required by a funding agency.
Government loans typically involve relatively low transaction costs, and interest rates may be subsidized, particularly for small communities. Each state and federal loan program has specific application procedures, eligibility requirements, and deadlines. For example, in some cases the applicant must prove a benefit for low to moderate income residents in order to be eligible for funding. Commercial loans are more flexible than government loans, but are typically more expensive for public borrowers. Commercial loans may be one of the few available options for privately-owned utilities.
In its simplest form, a bond is a written promise to repay borrowed money on a definite schedule and usually at a fixed rate of interest for the life of the bond. Some types of bonds are tax exempt to the purchaser of the bond, making them somewhat more attractive. Bonds can represent a large source of capital for a utility, but the utility must have the authority to issue bonds. It can be a complex and more expensive way to borrow money due to legal and other fees and administrative time. In some cases voter approval is required. A Revenue bond is a bond on which the debt service is payable from revenue generated through the utility. These bonds may be issued by state and local governments, or an authority or special district for the purpose of facility construction. General obligation bonds require that the entity has taxing authority and don't require voter approval. Utility revenues are obligated to cover the debt payment.
To assist utilities with funding options, the Kansas Interagency Coordinating (KAIC) Committee, composed of Kansas Department of Health and Environment, Kansas Department of Commerce, and Rural Development, typically meets once a month to discuss the best mix of potential loan and grant funding available for applicants. Appendix E provides a list of funding sources available for Kansas utilities.