As utility systems look to continue reinvesting in existing systems and expanding to serve new customers, one typical hurdle they face is how to pay for investments. Fortunate systems may have enough cash on hand or access to grant funding to offset the costs of needed improvements, but often a system will need to use debt to fund project costs. For a system investing in long-term assets, not only is debt usually necessary, but it is often the best method to spread costs out to both existing and potential new users who will benefit from investments. However, the specifics on how to debt fund a project may have broader implications to the project as a whole.
In this article, two common methods of funding a project are compared: 1. Traditional bonding and 2. State revolving fund (SRF) loan. The renewed look at these funding options is due, in part, to recent trends in the debt market that have created incentives for funding agencies to consider adjustments to the administration of some funding programs. The table below outlines some of the key differences between the two methods.
On the whole, a system must balance the flexibility achieved through traditional bonding with the potential cost savings they can see from below market interest rates. Often a detailed analysis using actual project costs and current interest rates can help in the overall decision making process as a utility evaluates to the total cost of debt alternatives.
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