Project financing – another option to consider
Public officials at the local levels of government struggle with budget cuts, debt issues and finding ways to fund critical projects. Fortunately, there are some interesting options.
Historically, bonding has been the most popular way to finance public projects. However, another option is becoming more common – Certificates of Participation or COPs.
This type of financing agreement is structured so that a public entity makes payments on leased assets that eventually become owned assets. Such agreements resemble “rent to own” contracts in the commercial sector.
Social infrastructure such as buildings, convention centers, hospitals and offices are the most common kinds of projects financed through Certificates of Participation. Other projects such as fleet services or vehicles are also well suited to COP financing. And, though not as common, COPs can be used to finance technology and automation equipment.
Because of the leased aspect of the financing, the responsibilities of both parties are different and somewhat unique. There are definite protections for lenders in the event of a non-payment or default. Should a default occur, the investor (or lender) can simply take possession of the leased asset. While that sounds like a powerful position to hold, public officials also have significant leverage in COP endeavors. A governmental entity, under a COP agreement, can simply walk away from a project at any time. This type of flexibility allows financing to flow to public officials without voter approval. That provides flexibility and speed – two appealing aspects to public officials.
Another big difference between COPs and traditional municipal bonds is that investors don’t have to wait for bonds to mature. They are able to recoup their investment throughout the term of the contract. Public officials can, however, elect to defer payments until a project achieves a specific benchmark.
Colorado has been a hotbed for COP-backed projects. In 2005, almost $197 million was invested as COPs provided the funding for construction of new buildings on the Health Sciences Center and Fitzsimons campus. Another $130 million was invested in a correctional facility. In 2008, public higher education campuses across the state used $230 million in COP financing and one year later $87 million more was invested in elementary and secondary education facility construction and renovation. Colorado also used COPs to finance a history museum and justice center at a cost of $87 million.
In California, the SunLine Transit Commission, which serves the Coachella Valley, used COPs to finance replacement of its diesel buses with clean-burning natural gas vehicles.
In Cincinnati, a Certificate of Participation valued at $120 million was issued to fund the city’s K-12 infrastructure. The average project financed through COPS in Ohio, however, has been about $2 million.
More alternative funding options are anticipated, but, in the meantime, COPs are playing an important role in funding critical projects throughout the country. Taxpayers are beginning to pay attention to alternative funding options and COPs bear watching.