Financing the acquisition, or construction of buildings of the acquisition, and subsequent development of land are the two major capital financial commitments made by Illinois park, forest preserve and conservation districts. Due to the size of the initial capital cost, these capital costs are normally financed over an intermediate to longer period of time (10 to 20 years) as opposed to being financed with cash reserves or short term borrowing.

Financing these golf courses, racquet facilities, community centers, health and fitness centers, and other special facilities is a major capital expense. Unlike the acquisition and development of parks whose initial capital cost and subsequent operation is subsidized by taxpayers, special facilities normally generate sufficient fee-based revenues to offset operating costs, and perhaps also to have additional revenues available for the repayment of monies borrowed.

When a district borrows money whose source of repayment is fee based revenues as opposed to property taxes, great flexibility has been made available by the General Assembly to enable the project(s) to be financed. Four capital borrowing vehicles to finance intermediate to long term borrowings are available. These are revenue bonds, installment purchase contracts, voter authorized general obligation (G.O.) bonds, and the newest vehicle (authorized in December of 1988) general obligation (alternate revenue source) bonds.

Revenue bonds are infrequently used due to higher interest rates. Voter authorized G.O. bonds are infrequently used due to the recognition that the sale of these bonds normally eliminates the ability to issue 0.575% non-referendum G.O. bonds.

This process of elimination boils down the four legally available options to the two remaining, more practicable vehicles. The policy decision ultimately made by district officials weighs the factors listed below for the two remaining most practicable options to determine the single financing vehicle that has the most advantages and/or the least disadvantages to each specific set of circumstances.

Installment purchase contracts (IPC's)

The advantages of installment purchase contracts are that they are board authorized, and that the borrowing needs are known, not just anticipated. The disadvantages are higher interest expense due to need for annual appropriation and inability to obtain a credit rating or insurance, and slower financing IPC's are tied to specific contracts and are therefore able to be sold only after the opening of formal bids for construction or with agreement on land value.

General Obligation (Alternate Revenue Source) Bonds

Some advantages of General Obligation bonds include lower interest expense due to general obligation security and ability to rate and/or insure, and greater flexibility in issue sizing (anticipated costs) and timing (pre-bid). They are more easily sold by competitive sale.

The disadvantages include the risk. It is best to have a levy filed and annually abated with on-hand cash reserves to not jeopardize the G.O. bond rating of the district.

The district evaluates these factors and quantifies them as much as possible. The district's financial advisor should provide an estimate of the net annual, and lifetime, interest expense "penalty" that exists, should the district select the installment purchase approach, or the "savings" by selecting alternate bonds with a cash abatement of the annual levy.

Risk

There are two types of risk involved with alternate bonds.

Moody's Investors Service rates all G.O. debt, whether it is 0.575% non-referendum, voter authorized G.O. bonds, or alternate bonds the same. Alternate bonds with cash abatement of the debt levy can benefit from a district with a good bond rating and a sound cash position by elevating the alternate bond rating to the already good pre-existing G.O. bond rating. Alternate bonds can also act as an anchor to the district's good G.O. rating by drawing a district's previously good rating down to the lower level of a poorly structured alternate bond. The lower G.O. rating received remains valid for all future G.O. debt until all of the poorly rated alternate bonds are retired (unless the weakness is corrected) which means the district's G.O. bonds could suffer for perhaps 20 years.

Non-referendum G.O. Bonds

In larger districts where sufficient unused non-referendum G.O. bond capacity exists, districts can utilize non-referendum G.O. bonds to finance larger capital projects and abate the levy with facility revenues. This is only possible where a long term commitment of a substantial portion of the non-referendum bonds can be made without interfering with the "meat and potatoes" capital outlays of park and facility renovation and rolling stock replacement.

Summary

There is no one right way to finance the acquisition or construction of a special facility. Options must be evaluated to weigh risk and costs of each situation for each district. Sometimes the higher interest cost (lower risk) option is selected, and sometimes the lower interest costs and issue timing flexibility are judged to be worth the risk. Districts should challenge their financial advisor to examine and report on all viable options. It is the advisor's responsibility to inform the district about its options and to analyze the possible impact of these options on the district. These are frequently difficult policy decisions to make but are made by the board upon the recommendation of the staff with the technical data provided by the advisor to the district.

About the Author
David F. Phillips is vice president and director of marketing, director and owner of Speer Financial, Inc.