The Downside of Municipalities Taking Out Revenue Bonds to Finance Waterworks Debt

Water is essential to our everyday lives, and we count on municipalities to provide a safe, reliable supply of clean water. However, managing water systems can be an expensive endeavor, with aging infrastructure and the constantly changing needs of the community. One solution that many municipalities turn to is the use of revenue bonds to finance waterworks debt. While this may seem like a straightforward approach, there are some serious disadvantages that taxpayers need to be aware of.

First, let's define what we mean by revenue bonds. Revenue bonds are a type of municipal bond that is paid back with revenues generated by the project being funded, in this case, the water system. The idea behind revenue bonds is that the project being funded will generate enough income to pay back the principal and interest on the bond. However, this is not always the case with water systems, where revenues are often unpredictable and may not keep up with the debt service requirements. This means that taxpayers may end up footing the bill for a revenue bond that was used to finance waterworks debt.

Second, revenue bonds are often issued with higher interest rates than other types of municipal bonds, such as general obligation bonds, which are backed by the full faith and credit of the municipality. This means that taxpayers may end up paying more in interest over the life of the bond, which can be decades long. In addition, revenue bonds may come with additional fees and costs, such as underwriting fees, legal fees, and rating agency fees, all of which add to the cost of borrowing.

Third, revenue bonds may limit the ability of the municipality to raise rates to pay for the increased cost of debt service. This is because water is often considered an essential service, and there may be regulatory limits on how much the municipality can charge for water. If the cost of debt service exceeds the revenue generated by the water system, the municipality may have to cut back on other services or raise taxes to make up the difference.

Fourth, revenue bonds may be structured in a way that prioritizes bondholders over taxpayers. This means that if the water system is sold or leased, bondholders may be paid back before taxpayers, even if the sale or lease generates a profit. This can be particularly problematic if the water system is sold to a private entity, as it may result in higher rates and lower quality service for consumers.

Fifth, revenue bonds may not always be the best solution for financing waterworks debt. There may be other options available, such as state or federal grants, low-cost loans, or public-private partnerships. These options may come with lower interest rates, fewer fees and costs, and greater flexibility in terms of repayment. It is important for municipalities to consider all of their options before deciding to issue revenue bonds.

In conclusion, municipal governments need to be diligent when funding waterworks debt. While revenue bonds may seem like an easy solution, they come with risks that can impact taxpayers for decades. It is essential that municipalities explore all possible funding sources and understand the costs associated with each one. As voters, we have a responsibility to hold our local officials accountable for their financial decisions, and to ensure that they are acting in our best interests. By educating ourselves on the pros and cons of revenue bonds, we can make informed decisions about the future of our water systems.