Policy Changes and Management
Studies in Fiscal Federalism and State–local Finance series
Chapter 13: ‘Non-traditional’ capital financing mechanisms
This chapter details some of the evolving capital finance mechanisms beyond traditional municipal securities that subnational governments have begun to utilize in recent years. Given the sizeable capital needs at the subnational level, governments have turned to other ‘innovative’ financing strategies such as federal loans and credit support, public–private partnerships and infrastructure banks. The federal government has encouraged the use of these financial measures and made it easier and more attractive for subnational governments to use them as a way to more efficiently access capital. This chapter discusses these strategies in depth and details some of the trade-offs associated with their use especially as it relates to issues of fiscal federalism. As described in previous chapters, state and local governments have historically funded their capital activities either on a pay-as-you-go basis or a pay-as-you-use basis. Pay-as-you-go refers to funding capital with government taxes and fees as such revenues are realized. Pay-as-you-use financing entails the use of debt finance in leveraging future fiscal resources for payment of capital costs in the current period. Historically, state and local governments employed debt finance via the selling of tax-exempt municipal bonds to raise capital on an up-front basis. These bonds were primarily repaid with the state or local government’s own-source revenues.
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