Economic Development Planning Flashcards
Assessed Valuation
dollar value assigned to a property to measure applicable taxes. Assessed valuation determines the value of a residence for tax purposes and takes comparable home sales and inspections into consideration. It is the price placed on a home by the corresponding government municipality to calculate property taxes. In general, the assessed value tends to be lower than the appraisal fair market value of property.
Bearer Bond
a fixed-income security that is owned by the holder (bearer), rather than a registered owner. Coupons for interest payments are physically attached to the security, and it is the bondholder’s responsibility to submit the coupons to a bank for payment and redeem the physical certificate when the bond reaches the maturity date. As with registered bonds, bearer bonds are negotiable instruments with a stated maturity date and coupon interest rate. The Tax Equity and Fiscal Responsibility Act of 1982 ended the practice of issuing bearer bonds in the United States. Many other developed economies have also stopped issuing these bonds, because bearer bonds can be used for money laundering or tax evasion.
Coupon Bond
a type of bond that includes attached coupons and pays periodic (typically annual or semi-annual) interest payments during its lifetime and its par value at maturity. These bonds come with a coupon rate, which refers to the bond’s yield at the date of issuance. Bonds that have higher coupon rates offer investors higher yields on their investment. In the past, such bonds were issued in the form of bearer bonds. Now, physical versions of bonds are uncommon since most bonds are created electronically and do not come with physical certificates. Nevertheless, the term “coupon” is still used, but it merely refers to the bond’s nominal yield.
Discount Rate
the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility–the discount window. The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured.
Face Value
financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the holder at maturity, which is customarily
$1,000. The face value for bonds is often referred to as “par value” or simply “par.”
Fair Market Value (FMV)
probable price at which a willing buyer will buy from a willing seller when both are unrelated, know the relevant facts, neither is under any compulsion to buy or sell, and all rights and benefit inherent in (or attributable to) the item must have been included in the transfer. Fair market value is generally the basis for tax assessment and court awards.
Fixed Cost
an expense or cost that does not change with an increase or decrease in the number of goods or services produced or sold. Fixed costs are expenses that have to be paid by a company, independent of any business activity. A fixed cost is an operating expense for a business that cannot be avoided regardless of the level of production or sales. Fixed costs are usually used in break-even analysis to determine pricing and the level of production and
sales under which a company generates neither profit nor loss. Fixed costs and variable costs together make up the total cost structure of a company, which plays a key role in determining its profitability.
General Obligation Bonds (GO Bonds)
debt instruments issued by states and local governments to raise funds for public works. What makes GO bonds unique is that they are backed by the full faith and credit of the issuing municipality. This means that the municipality commits its full resources to paying bondholders, including general taxation and the ability to raise more funds through credit. The ability to back up bond payments with tax funds is what makes GO bonds distinct from revenue bonds, which are repaid using the revenue generated by the specific project the bonds are issued to fund (fees from a public parking garage, for example). GO bonds give municipalities a tool to raise funds for projects that will not provide direct sources of revenue–roads and bridges, parks and equipment, and the like. As a result, GO bonds are typically used to fund projects that will serve the entire community; revenue bonds, on the other hand, are used to fund projects that will serve specific populations, who provide revenue to repay the debt through user fees and use taxes.
Highest and Best Use
fair value is determined based on the price at which an asset could theoretically be employed in its highest and best use, rather than the use in which the asset is currently employed. The highest and best use is subject to the following limitations:
o Physically possible. The physical characteristics and location of the asset may limit its alternative uses. For example, machinery that is bolted into a concrete platform may be so immovable that any other potential highest and best uses are not possible.
o Legally permissible. There may be legal restrictions on how an asset may be used, which bar certain alternative uses. For example, zoning regulations may prevent a plot of land in an industrial area from being used to construct high-rise residential apartments.
o Financially feasible. The alternative use must incorporate the costs incurred to convert the asset to that use, while still producing investment returns.
Industrial Revenue Bond (IRB)
municipal debt securities issued by a government agency on behalf of a private sector company and intended to build or acquire factories or other heavy equipment and tools. IRBs were formerly called Industrial Development Bonds (IDB).
Marginal Cost
the increase or decrease in the total cost of a production run for making one additional unit of an item. It is computed in situations where the breakeven point has been reached: the fixed costs have already been absorbed by the already produced items and only the direct (variable) costs have to be accounted for. Marginal costs are variable costs consisting of labor and material costs, plus an estimated portion of fixed costs (such as administration overheads and selling expenses). In companies where average costs are fairly constant, marginal cost is usually equal to average cost. However, in industries that require heavy capital investment (automobile plants, airlines, mines) and have high average costs, it is comparatively very low.
Par Value
a per share amount that will appear on some stock certificates and in the corporation’s articles of incorporation. Par value can also refer to an amount that appears on bond certificates. In the case of common stock the par value per share is usually a very small amount such as $0.10 or $0.01 and it has no connection to the market value of the share of stock. The par value is sometimes referred to as the common stock’s legal capital. When a corporation’s common or preferred stock has a par value, corporation’s balance sheet will report the total par value of the shares issued for each class of stock. This will be shown as a separate amount in the paid-in capital or contributed capital section of
stockholders’ equity.
Revenue Bond
a municipal bond supported by the revenue from a specific project, such as a toll bridge, highway or water or sewer utility. Revenue bonds are municipal bonds that finance income-producing projects and are secured by a specified revenue source. Typically, revenue bonds can be issued by any government agency or fund that is managed in the manner of a business, such as entities having both operating revenues and expenses. Revenue bonds, which are also called municipal revenue bonds, differ from general obligation bonds (GO bonds) that can be repaid through a variety of tax sources. While a revenue bond is backed by a specific revenue stream, holders of GO bonds are relying on the full faith and credit of the issuing municipality. Typically, since holders of revenue bonds can only rely on the specific project’s income, it has a higher risk than GO bonds and pays a higher rate of interest.
Serial Bond
a bond issue that is structured so that a portion of the outstanding bonds mature at regular intervals until all of the bonds have matured. Because the bonds mature gradually over a period of years, these bonds are used to finance projects that provide a consistent income stream for bond repayment. The entire bond issue is sold to the public on the same date, and the maturity dates are stated in the offering documents.
Special Assessment Bond
a type of municipal bond used to fund a development project. Interest owed to lenders is paid by taxes levied on the community benefiting from the particular bond-funded project. As an example, if a bond of this sort was issued to pay for sidewalks to be re-paved in a certain community, an additional tax would be levied on homeowners in the area benefiting from this project. Area homeowners get nicer walking paths, and will probably see the value of their property increase accordingly, but this comes at a price. Their property taxes will increase to pay the interest owed to the bondholders by the municipality. Since the interest on special assessment bonds is paid by taxes of the community that benefit from the development, it is not unusual for the members of the benefiting community to invest in the issue, thereby, offsetting the additional taxes that are levied in order to finance the bond.
Treasury Bill (T-bill)
a short-term debt obligation backed by the U.S. Treasury Department with a maturity of one year or less. Treasury bills are usually sold in denominations of $1,000. However, some can reach a maximum denomination of $5 million on noncompetitive bids. The Treasury Department sells T-Bills during auctions using a competitive and noncompetitive bidding process. Noncompetitive bids, also known as noncompetitive tenders, have a price based on the average of all the competitive bids received.
Treasury Bond
intermediate-term bonds issued by the U.S. Treasury. They mature in two, three, five, or ten years. Treasury notes help fund shortfalls in the federal budget, regulate the nation’s money supply, and execute U.S. monetary policy. Like any bond issuer, the U.S. Treasury considers the market’s risk and return requirements in order to successfully and efficiently raise capital. As with all Treasuries, they are backed by the full faith and credit of the U.S. government. This means default is extremely unlikely and would really only occur if the U.S. government could not print additional money to pay off its debt. For this reason, the notes are generally considered risk-free investments and act as benchmarks against which other investments are compared. Their low risk and extremely high level of liquidity cause Treasury notes to usually have the lowest yields of any bonds on the market.
Turnkey Project
a program, project, solution, or system where the contractor or provider undertakes the entire responsibility from design through completion and commissioning. The client or customer only has to turn the proverbial key to make everything function as it should.
Zero Coupon Bond
a debt security that does not pay interest, but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value. Some bonds are issued as zero-coupon instruments from the start, while others bonds transform into zero-coupon instruments after a financial institution strips them of their coupons, and repackages them as zero-coupon bonds. Because they offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price, much more so than coupon bonds. A zero-coupon bond is also known as an accrual bond.
Regional tax base
reduces the parochial competition among localities for new tax revenue. A typical tax base sharing agreement would provide the sharing of some or all the new revenue in one locality among the region. The Minneapolis St. Paul region was one of the first to carry out such a program. They share 40 percent of all new growth among the 14 governments in the region.
Tax Increment Financing
provides a technique to pay for improvements in a targeted area. They are a substitute for general obligation debt, and revenue bonds which typically cover major cost for improvement. The approach is well defined by its name. The increment, the difference between a base year and the growth that occurs the following years, pays for the improvement. The improvement must be paid off during a specified time period and once the improvement is paid the incremental change is restored to the property tax fund.
Property Tax Abatements
an incentive to attract new businesses into a locality. One assumes that the abatement, the reduction of a tax source, will pay for itself since the business is assumed to add new tax dollars. A typical agreement might provide a reduction of the property tax by 50 percent for a stipulated time period. Some large cities such as Cleveland have refused to extend abatements due to a poor showing of tax production compared to the abatement.
Community Reinvestment Act (CRA) 1977
is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate including low- and moderate-income neighborhoods, consistent with safe and sound banking operations. The CRA requires that each insured depository institution’s record in helping meet the credit needs of its entire community be evaluated periodically. That record is taken into account in considering an institution’s application for deposit facilities, including mergers and acquisitions. The CRA was passed in an effort to reverse the urban blight that had become evident in many American cities by the 1970s. In particular, it aimed to reverse the effects of redlining, a decades-long practice in which banks actively avoided making loans to lower-income neighborhoods. The objective of the act was to strengthen existing chartering laws that required banks to sufficiently address the banking needs of all the members of the communities they served. The CRA regulations define community development to include designated disaster areas (DDA), areas receiving Major Disaster Declarations administered by the Federal Emergency Management Agency (FEMA), pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
Tax Increment Financing (TIF) Bonding
cities have accessed capital markets to help fund urban regeneration in a variety of ways including the issuance of TIF bonds. This method has provided them with a locally administered redevelopment financing tool that takes advantage of the rise in economic value and associated increase in tax receipts that accompanies successful urban redevelopment. TIF allows local governments to invest in public infrastructure and other improvements up-front. Local governments can then pay later for those investments. They can do so by capturing the future anticipated increase in tax revenues generated by the project. This financing approach is possible when a new development is of a sufficiently large scale, and when its completion is expected to result in a sufficiently large increase in the value of surrounding real estate such that the resulting incremental local tax revenues generated by the new project can support a bond issuance. TIF bonds have been used to fund land acquisition, sewer and water upgrades, environmental remediation, construction of parks, and road construction, among others. Over the past several decades in the United States, two project variations of TIF have evolved: bond financing and pay as you go.
