Cities, counties and utility districts throughout the United States are currently considering
the installation of fiber optic systems, known as Fiber to the Home (FTTH) or Fiber to the User
(FTTX) systems. In the course of reviewing FTTH systems, questions arise about the most
efficient method of financing the installation of these systems. Municipal entities
(including municipal utilities) normally qualify for the use of tax-exempt municipal bond financing,
thereby qualifying for interest rates that are about 20% to 30% lower than bank financing.
The charts below illustrate the primary tax-exempt options available to most municipal entities and
highlight the most obvious strengths and weaknesses of each option. The reader should be aware that
specific state laws may make some of these options less viable in some areas.
Option 1. General Obligation Bond Financing.
General Obligation ("GO") financing is typically the preferred method of financing for cities and
counties, as the interest rates are very low, however, a vote of the taxpayers affected is normally
required and for this reason there are many times this type of financing is not practical.
| Strengths: |
Weaknesses: |
| Will provide the lowest overall cost of money. |
Requires a vote of the taxpayers. |
| Allows the city, county or special district to increase property taxes on property owners in order to repay the debt. |
Requires one vote more than 50% of voters voting for approval. |
| Can provide 100% financing including planning and development costs. |
Will take more time to implement, due to the required vote. |
| Can be used for construction of the system. |
|
| Can include capitalized interest for debt payment during build-out period. |
|
| Investors will not be concerned about the speed of the build-out, because additional debt could be issued, if necessary. |
|
| Repayment of the debt does not depend on the success or the cash flow of the new system. |
|
Option 2. Revenue Bond Financing.
Revenue Bond financing is typically done by a city, county or utility system when there is an established revenue
stream that can be relied upon for repayment of the debt. Typically, Revenue Bond financing does not require a vote.
| Strengths: |
Weaknesses: |
| Does not normally require a vote. |
Will be a slightly higher interest rate than a General Obligation bond. |
| In some states the project may be tied into an existing revenue base, like water and sewer revenues, that will help support the credit of the new system. |
Some state laws, utility commissions, and/or prior loan agreements may preclude the ability to support non-related debt. |
| Can provide 100% financing if the borrower indicates support of the system. |
Unless there is other money available for debt service, the investors will be concerned about the speed of the build-out. |
| Can be used for construction of the system. |
|
| Can include capitalized interest for debt payment during build-out period. |
|
Option 3. Lease Purchase Financing (Certificates of Participation or COP's).
In today's marketplace, many municipal governments rely on COP financing as it does not
require a vote of the taxpayers and authorization can be made by the Board of the municipal entity.
| Strengths: |
Weaknesses: |
| Does not require a vote. |
Slightly higher interest rate than Revenue Bonds. |
| Can be issued by the City Council or County Commissioners by Resolution. |
COP's are slightly harder to sell to investors, and therefore may take longer to market. |
| Can be "off-balance sheet" financing. |
In most states, this strategy gives the borrower the ability to back out of the deal at some time in the future through "non-appropriation". |
| Borrower will generally need to put up some sort of equity (either cash or other type of equity of 10% to 20%) so that the investors can see a commitment on the part of the borrower to the success of the system. |
|
| Typically much easier and faster method of raising money from the City's perspective. |
|
