How do local governments typically finance large construction projects such as retrofitting hospitals to be safe in earthquakes, fixing aging community facilities, or expanding schools?
A. by getting jumbo loans from a bank
B. by selling bonds that must be paid back with interest
C. by raising taxes to pay for each project
D. by charging fees to users of the facilities
While issuing tax hikes and charging user fees, such as highway fees, are often methods employed for funding smaller local government infrastructure projects, government bonds are used to fund large infrastructure projects.
The term infrastructure refers to the facilities and systems used in any local, city, state, or national area that are absolutely essential for keeping the economy functioning. Examples of small infrastructure projects include roads, highways, bridges, and telecommunication systems. Large infrastructure projects include schools, hospitals, parks, prisons, and waterworks projects; even retrofitting hospitals for earthquake safety, repairing community facilities, and expanding schools would be considered large infrastructure projects. Since such large projects require major capital outlay, it's far too impractical to try and fund them through tax increases and fees.
Issuing bonds is a method of long-term borrowing. Local and state governments, as well as the federal government, will sell bonds to investors with the promise to repay the purchase price with interest within a specified time frame. Since it is problematic to pay for costly, large infrastructure projects all at once, bond's are a useful method of financing because bonds can be repaid over a long period of time. Plus, bonds are cheaper for local and state governments than loans because the interest such governments pay on bonds is exempt from income taxes local and state governments must pay to the state and federal governments.