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.

We were a whole step ahead of the grant-writing process.
--Chris Jacobs, Somersworth, NH


Although utilities may regard grants as a more desirable option than loans, these funds may be very competitive, and their availability is diminishing. Many grants also require a loan in addition to the grant in order to fund an entire project. Each state and federal grant program has specific application procedures, eligibility requirements, and deadlines.

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. Due to the current economic climate, government funding has decreased and the process has become more competitive. This new reality requires utilities to think about using more customer generated sources of funding for future projects and to plan more long term funding to pay for capital expenses. For example, if the utility knows it wants to drill a new well in 10 years and it will cost $400,000 to drill the well, the utility could consider collecting additional revenue at $40,000 per year in order to have sufficient funds to pay for the new well. As discussed in Chapter 6, the utility must carefully examine all capital projects to make sure they are necessary and that the best alternative was selected.

Our alliance got together and went to the legislature and got a grant.
-- Larry Covington, Picacho, NM


Utilities may also wish to seriously consider funding projects in phases to reduce the immediate costs of the project and create more time to acquire the needed revenue. Some phases of the project may be paid for with external funds, while others might be financed with internal funds.

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.