How Local Governments Fund Infrastructure Projects

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Building, maintaining, and renovating local infrastructure requires a heavy budget. So, when a town, city, or municipality begins to plan a new project, acquiring the necessary funds is often the first bridge that must be crossed.

But where does this money come from? What is the logical approach to securing capital investment?

Today, we’ll discuss how local governments typically fund infrastructure projects.

How Proximity Funds Local Infrastructure

Society is structured to encourage an inward-out methodology, meaning that local governments should ideally seek investment from their own community, then the state, and finally, the federal government. This makes sense, seeing as the people and communities who will derive the most benefit from such projects will typically be those living in close proximity.

This ethos is reflected in federal, state, and local infrastructure spending. According to the Peter G. Peterson Foundation, on average, more than 75% of public spending on transportation and water infrastructure is handled by state and local government:

“That proportion remained constant between 1956 and 2017, with state and local governments funding about three-quarters ($15 trillion) of the total $20.4 trillion spent during that period on infrastructure construction and maintenance, while the federal government covered the remaining $5.4 trillion.”

Local Infrastructure Funding Sources

Knowing this, a local government has several potential funding avenues, including:

  • Local option taxes – The primary source of infrastructure funding should ideally come from the city itself via local taxes. In this case, the tax burden falls on the residents, tourists, and visitors. Typically, the tax methods include sales tax, fuel tax, and motor vehicle registration fees. In most places, local option taxes are earmarked for infrastructure-related purposes.

  • Private investment – If there is a gap between the project cost and the total amount of money the local budget has available, the next source for funding is via local private investment. In this case, to raise the funds, that asset must: “Generate a revenue stream sufficient to provide a return on investment to the private entity. Tolls, user fees, and utility rates are the most obvious way to generate revenue from a public asset.”

  • Asset recycling – With monetization, the local government sells or leases an asset to raise funds that can then be used to repair or improve an existing asset or to build a new one. With this exchange, the government receives cash upfront and the private entity handles operation and maintenance costs but also gets to collect the revenue generated.

  • Governmental financing – A local or state government can use various financing mechanisms to fund a project, including:
    • Tax-exempt bonds

    • Tax credit bonds

    • State revolving funds and infrastructure banks

    • Direct federal credit program

MFS Construction—Your Infrastructure Partner

After local governments have located funds for infrastructure projects, they then need to partner with a construction team capable of completing the job on time, on budget, and as specified.

That’s where the team at MFS Construction comes in. We’re an independent and innovative construction firm providing expertise in project management, design-build, general contracting, geotechnical drilling, and more.

To see how we can partner with you, reach out today!