What is state bonding?
State bonds are a form of public debt that the State uses to pay for large-scale construction projects. There are a few types of State bonds, but the most common are State General Obligation (GO) Bonds. GO Bonds are fully backed by the state. There is no statutory or constitutional limit on the amount of debt the state can carry, but in 2009, the State issued formulas capping state bonding to ensure a good credit rating.
What can State bonding be used for?
There are constitutional restrictions for issuing GO bonds. Bond proceeds must be used for capital “bricks and mortar” projects. State bonding can only be used for land acquisition, predesign, design, construction, and major remodeling. Bonding cannot be used for operating expenses and costs, overhead, master planning, or general maintenance. Unlike more flexible state appropriations, GO bonding requires that the property or facility be owned by state or political subdivision and the program operated in that facility must have a public benefit.
Although private non-profits cannot directly receive GO bonding funds, local governments can serve as a public fiscal agent to allow state bonding for a project that will be managed for a non-profit’s purpose. This is done through a set of agreements: the non-profit provides a long-term lease for the bonding project site to the local entity serving as fiscal agent, which allows for GO bonds to be used for the project. Simultaneously, the local government fiscal agent enters a use agreement with the nonprofit for the purpose specified by the bonding legislation.
Typical projects receiving state GO bonding have statewide significance, such as university and college campuses, libraries, museums, state agency buildings, parks, trails, municipal infrastructure, zoos, water-treatment plants.
How do local governments and nonprofits secure state bonding?
A non-profit or local government entity can build support for a bonding request by first raising non-state funds dedicated to the project. The capital project can be completed in phases as well. Many capital projects come before the Legislature in multiple phases; first seeking funds to be used for site acquisition and/or planning, thereby making it more feasible to raise the private match and then return to the state for a request to complete the project.
Once a non-profit garners the support of the local unit of government and are added to their list of bonding priorities, non-profits must build support among state legislators – local delegation members, bonding committee members, and caucus leaders in the House and Senate. The next step is to secure a coveted spot on the local bonding tour agenda arranged by the House and Senate Capital Investment Committees with the local government officials and staff. These “bonding tours” are held during the interim, and legislators tour communities across the state to see first-hand the local infrastructure needs.
During the legislative session, a local legislator will introduce a bill and request a committee hearing. Powerful Senate and House committee chairs decide which projects they will fund and the total size of their bill. The bonding bill must pass the House and Senate with 3/5ths majority, so projects from members in the minority must also be included in the final package to have sufficient votes to pass. Once the Legislature reaches agreement and the bonding bill is passed by both the House and Senate, it must be signed into law by the Governor.
Securing state bonding is a feat in itself, but it is only the beginning. There are additional steps to be taken after the bonding bill passes and the project has been appropriated funds. Matching funds must be raised with proper documentation; predesign and design require state approval; and a grant agreement with the state must be signed.