Economics and Financing Flashcards
Hard taxes
burden falls on most or all tax payers, hard to implement because typically require voter approval
Soft taxes
hotel-motel, rental cars, sin taxes, easier to levy because borne by small group
Bonds
long-term debt instruments that allow local governments to borrow in advance (typically from a bank) the money needed to underwrite construction costs
General property tax
primary source of revenue for local governments, used because other taxes might actually reduce tax base, property is immobile so easier to tax, principle of ability to pay, a benefit tax, tax base, tax rate, must pay - can have tax lien placed on property, can appeal assessment
General sales taxes
largest single source of revenue for many US states, typically at rate between 3-10%, can be used by cities and counties in US, the greater the area covered by the tax, the more revenues generated and the greater the dispersion of the tax burden
Tourist taxes
hotel or occupancy tax, car rental tax - justified on grounds that tourist will be beneficiaries of infrastructure development
Hotel taxes
“bed taxes”, usually levied at rate of 2-5%, used frequently in US to fund major league sports facilities
Car rental taes
avg 8% in US, problem = half of car rentals may be from local residents
Sin taxes
very regressive, costs borne by those who can’t afford it
Player taxes “jock”
visiting players pay a tax for work done in area, nonresident players pay tax, 1-4%
Debt financing
similar to the way individuals purchase cars or homes, money bored from a lending institution then debt serviced through instalments over a set period, revenues from hard or soft taxes pledged to repay debt obligation, downside is interest costs paid over length of the repayment period, upside is payments spread out over time to reduce annual tax burden, preferred method from a political perspective, ore equitable to taxpayers – if paid upfront would burden taxpayer of today who might never use the facility in the future
Bond 3 elements
face value, fixed rate of interest, maturity date
General obligation bonds
unconditional promise to repay debt
Statutory debt ceiling
limit on amount that govt can borrow
Certificates of obligation
do not require voter approval, unconditional promise to repay, public hearing announced, electorate can request referendum, also retired over designated period
Non guaranteed debt
used due to resistance towards guaranteed debt, debt repaid by revenue streams, but govt not obligated to make up shortfalls
Three advantages of NG debt
voter approval not required, does not count against govt debt ceiling, if revenues repay debt drawn directly from the project then those benefiting from the project pay for it
Cities generally agree to make up shortfall because
two reduce investor risk and lower borrowing rate, defaulting would damage city’s reputation in investment markets
Non guaranteed debt revenue bonds
where revenues from facility used to repay debt - user pay, no vote, no count to debt ceiling, higher interest rates as NG, can only use in facilities that turn a profit, may result in higher user fees
COP public trust model
lease fees are a revenue stream from the facility (eg. An arena or golf course) and
revenues less than projected, then shortfall is covered by public agency’s general fund
COP Public-private partnership model
Same as above, except public agency does not take direct operational responsibility for facility
Instead, turns it over to private company to manage day-to-day operations
Works best when expertise needed
Tax increment financing TIF
tool for facilitating urban development, allowed to create district to subsidize development cost, exists for set amount of time
TIF advantages
no tax increases required, when dissolved city receives additional tax revenues
TIF disadvantages
incremental increases in tax base used to service debt, not address increased infrastructure demands within the district (police, fire, roads, etc.), risk that development will not occur at anticipated rate, or appraised development not high enough
Private placement bonds
organization developing the facility issues longterm fixed rate certificates to private lenders, may include private pension funds, insurance companies, secured by facility revenues, sometimes guaranteed by a private party
Asset-backed securitization
variation on private-placement bonds, most credit-worthy streams are
bundled and sold to private investors, does not require all revenue from a facility to be pledged to debt service, future cash flow from these sources essentially “sold” to investors
Examples of sources of asset-backed:
Naming rights, concession contracts, corporate sponsorship deals
