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Finance and Budgeting 131 <br /> • for long-range financial planning and management; can help stabilize tax rates <br /> through intelligent debt management;can avoid-such mismanagement as paving <br /> a street one year and tearing it up the next to build a sewer;can offer an oppor- <br /> tunity for citizens and public interest groups to participate in decision making; <br /> and can contribute to a better overall management of city affairs. <br /> How capital improvements are financed <br /> Because most capital investments involve the outlay of substantial funds, local <br /> government can seldom pay for these facilities through annual appropriations in <br /> the annual operating budget. Therefore, numerous techniques have evolved to <br /> enable local government to pay for capital improvements over a longer period of <br /> .time than a single year. Most but not all of the techniques involve financial in- <br /> struments, such as bonds, in which a government borrows money from inves- <br /> tors(both institutional and individual)and pays the principal and interest over a <br /> number of years. Most of these techniques are carefully prescribed by state law.. <br /> In addition, whether a governmental unit uses these techniques may depend on <br /> such financial factors as bond ratings given cities by bond rating services, cur- <br /> rent interest rates for municipal securities,and the current outstanding debt that <br /> the unit is already obligated to pay. <br /> State laws governing local government finance and the literature of public fi- <br /> nance classify techniques that are used to finance capital improvements. These <br /> techniques are discussed below. <br /> Current revenue(pay-as-you-go) Pay-as-you-go is the financing of improvements <br /> from current revenues such as general taxation, fees, service charges, special <br /> funds, or special assessments. <br />.';s • <br /> Reserve funds In reserve fund financing, funds are accumulated in advance for <br /> capital construction or purchase. The accumulation may result from surplus or <br /> earmarked operational revenues. funds in depreciation reserves, or the sale of <br /> capital assets. <br /> R General obligation bonds Some projects may be financed by general obligation <br />*� bonds. Through this method, the taxing power of the jurisdiction is pledged to <br /> pay interest and principal to retire the debt. General obligation bonds can be <br /> sold to finance permanent'types of improvements such as schools, municipal <br /> buildings, parks, and recreation facilities. Voter approval may be required. <br /> Revenue bonds Revenue bonds frequently are sold for projects, such as water <br /> and sewer systems,that produce revenues. Such bonds usually are not included <br /> in state imposed debt limits, as are general obligation bonds, because they are <br /> not backed by the full faith and credit of the local jurisdiction but are financed in <br /> the long run through service charges or fees. However, these bonds may have <br /> supplemental guarantees. The interest rates are almost always higher than those <br /> of general obligation bonds, and voter approval is seldom required. <br /> Lease-purchase Local governments using the lease-purchase method prepare <br /> specifications for a needed public works project that is constructed by a private <br /> company or authority. The facility is then leased to the jurisdiction. At the end <br /> of the lease period the title to the. facility can be conveyed to the local govern <br /> ment without any future payments. The rental over the years will have paid the <br /> total original cost plus interest. <br /> • Authorities and special districts Special authorities or districts may be created, <br /> - usually to,provide'a single service such as schools,water,sewage treatment,toll <br /> roads, or parks. Sometimes these authorities are formed to avoid restrictive <br />