How Public Improvement Projects Are Funded

How are public improvement projects funded?

Eminent domain law allows governmental entities and transportation, communications, utility, and railroad companies the right to acquire privately-owned real estate for projects that will be dedicated to a public purpose, subject to certain statutory requirements. Various means of funding for these public projects exist, and the type of funding that is available depends upon the type of entity planning the project and the purpose of the project.

Federal, State, and Local Government Financing

When an Indiana governmental entity, whether the state or a local public agency (LPA), i.e., a county, city or town, is planning a public improvement project, it can be directly funded through a legislative allotment of funds. Alternatively, the project can be funded through bond financing, which allows a governmental entity to borrow funds for the project at a low-interest rate and then repay the amount borrowed over the course of several years. Currently, since interest rates are still relatively low, this option is appealing for governmental entities planning infrastructure repair or other public improvement projects.

Additionally, the federal government provides or matches funds allocated by state or local government entities for infrastructure projects. This funding is quite common for projects that involve highways or other roads. When the federal government provides funds to LPAs for infrastructure projects, the Indiana Department of Transportation (INDOT) oversees such projects.

Also, in a recent legislative session in Indiana, the Community Crossings Initiative was created. The legislation was enacted for state funds to be allocated for various infrastructure projects throughout Indiana. The gas tax was increased to generate more revenue, which will be devoted to highway and road improvements and repair projects. The State will also seek to convert some interstate highways in Indiana to toll roads.

LPAs can develop partnerships with state governments through inter-agency agreements, which spread the project costs among the entities, thereby benefitting the project. LPAs can also choose to fund projects on their own through revenues created by taxes for highway and road improvement projects.

For smaller utility improvement projects on a local level, such as water and wastewater infrastructure, county and municipal governmental entities may be able to reach out directly to the federal government for funding assistance through grants. Various federal agencies have funding programs designed to assist with these types of projects, especially in rural areas. The Indiana Finance Authority (IFA) administers the State Revolving Fund (SRF) for projects to improve drinking water and wastewater infrastructure as well.  The SRF funds are in place to provide low-interest loans to communities in Indiana on the local level.  In order to be approved to receive SRF funds, a local government entity needs to meet certain eligibility criteria, including approval of engineering specifications and financial due diligence. If approved for funding, a community could receive a loan from the SRF funds with an interest rate as low as zero percent.

When it comes to transportation infrastructure, some local communities have even found that their taxpayers are willing to approve a directed tax increase for these projects – residents are oftentimes more willing to pay increased taxes for improvements in their local area.

Tax Incremental Financing

Tax Incremental Financing (TIF), is another option for local governmental entities seeking to fund infrastructure projects. A TIF is a designated area that is intended to increase tax revenue to the government by developing a broader base of taxpayers. The funds received through the greater tax revenue can then be used for infrastructure design and improvement, along with other economic redevelopment projects.

Public-Private Partnerships

Another option that has been utilized recently, particularly at the federal and state levels, is public-private partnership (PPP) financing. In this funding model, the governmental entity issues tax credits to private companies, which subsidize the cost of the planned projects. The private companies shoulder most of the financial burden of the projects, but, upon completion, the projects generate revenue for the private company, particularly on bridges, tunnels, and highways, through tolls. The benefit to the governmental entity comes from the private spending and investing that occurs for the project, creating jobs and purchases, which will generate tax revenue. Some PPPs also involve full payment by the private entity upfront, and then repayment by the governmental entity once construction is completed. One of the most crucial aspects of a PPP is the private entity’s obligation to maintain the infrastructure after it is designed and constructed. The private entity may negotiate for the right to operate the infrastructure improvement – thereby receiving revenue from tolls – but these private entities are not always responsible for maintaining the infrastructure in the long-term.

Private Utility and Railroad Company Infrastructure

 Private companies that plan projects for expanding, modernizing or replacing transportation lines, communications systems, utility lines and railroads typically fund their own projects. These companies work with landowners to secure easements that allow their lines and systems to cross privately-owned real estates, such as overhead electric power lines or underground pipelines. The profit these companies generate from providing service to their customers is often re-invested into better, more efficient delivery systems, while the costs are often defrayed by customer rate increases.

 

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