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Government entities commonly finance state and local transportation infrastructure projects by authorizing transportation bonds. Bonds are commonly defined as loans which are later repaid with interest at standardized intervals.
There are several types of bonds which are used for transportation financing purposes, and these include General Obligation Bonds, Revenue Bonds, Private Activity Bonds, and Certificates of Participation (COPs).
General Obligation Bonds are backed by the government and represent the highest rated debt. These bonds can sometimes require voter approval. General Obligation Bonds have low-interest costs, and therefore they are not risky to investors. These bonds may be limited in scope depending on the existing statute imposed on the debt-issuing authority. Currently, forty-four states use General Obligation Bonds to finance transportation infrastructure projects, and these bonds are used for transportation projects that are not designed to generate revenue.
Revenue Bonds are tax-exempt and are issued by individual state or local governments in order to finance transportation projects that are projected to raise new revenues. The project revenue is then collected and used to repay these revenue bonds. Revenue Bonds are backed by a dedicated revenue source, like a motor fuel tax or toll, and the debt is therefore secured. The debt is paid for by the population through sales taxes or other forms of taxation. Examples of revenue bonds include toll roads or bridges, where revenues are collected as tolls.
Private Activity Bonds (PABs) represent one of the main ways that the U.S. Department of Transportation helps to support public-private partnership projects throughout the nation. PABs are tax-exempt bonds that are authorized by a public issuer on behalf of a private firm to finance the construction of highways and other transportation projects. Currently, six states use PABs, and although they are issued by state and local governments, the federal government finances the majority of these projects.
Certificates of Participation (COPs) are tax-exempt bonds that can be issued by government entities, and COPs are guaranteed with revenue from facility leases or other revenue-generating sources. This then allows governments to finance capital transportation projects without acquiring long-term debt.