A municipality which desires to finance a project must do so according to State law. State law authorizes certain methods by which you can structure and repay the financing. A financing or "obligation" is narrowly defined in The Revised Municipal Finance Act, Act 34 of 2001 as bonds or notes. Hence, financings primarily take the form of bond issues with the exception of installment purchase contracts.

The following is by no means comprehensive. It is a partial listing of commonly used bond issue formats. This is intended to give you an introduction to and workable outline for bond financing in Michigan. ACI Finance, Inc. provides the experience and expertise to guide you to the bond issue format that is right for your financing need.

Unlimited Tax General Obligation (UTGO)

UTGO Bonds are voted issues and considered by the market to be the most secure and most preferred form of financing. A voted issue can be for a wide variety of public purposes. Because it is the most secure option, a UTGO Bond will typically produce the lowest net interest rate of any open market bond option. The ballot language may limit the application to one bond issue or a "series" of bond issues for the completion of a project and is capped by a dollar amount. It may be capped by the number of mills as well but has the effect of making the issue "limited" tax in designation and is seldom recommended.

Limited Tax General Obligation (LTGO)

There are several choices that allow for a LTGO pledge. The pledge would be a first budget obligation of the general fund but is only allowed to the charter or statutory limitation of your millage. Often a referendum period is required for the pledge. The revenue support typically comes from rates and charges, special assessments, connection charges and/or millage. The following are possible LTGO bonds:

• Act 34 of 2001 "Capital Improvement" or "Budget Bonds": This allows a county, city, village or township to issue bonds for a wide variety of public purposes. A 45-day referendum period is required. The aggregate amount of this form of bond may not exceed 5% of SEV. This allows a local unit to issue bonds without a vote for water, sewer, roads, public facilities, and other projects. This may avoid the need of a third party arrangement with a Utility Authority or County.
  
  
• Act 34 of 2001 "Bond Anticipation Notes" and "Grant Anticipation Notes": This allows a county, city, village or township to issue short term obligations, "notes", for the purpose of providing interim funds until the full project is financed. This is helpful in instances where engineering or other planning cost are significant in the preparation period or where grant dollars have been committed but not distributed. The amount of BAN's or GAN's may not exceed 50% of total project cost.
  
  
• Act 233 of 1955 "Utility Authority": An Authority issue involves forming a Utility Authority by two or more municipalities. The purpose of an Authority is to accomplish financings and/or have operational control. The powers of the Authority can be limited or broad. Many are designed to only have the power to issue bonds on behalf of the members. The advantage of the Act 233 Authority is that the member municipalities can pledge their limited tax general obligation to the repayment of the bonds which makes for a more marketable issue than a revenue only secured financing on the one hand and does not require voter approval on the other ... however, the need may be somewhat negated by Act 34, Capital Improvement Bonds (described above). Another important advantage is that various revenues may be used for repayment.
  
  
• Act 185 of 1957 or 342 of 1939 County issue for Water and Sewer: This method of issuing bonds is similar to the Act 233 Authority. One or more municipality may contract with the County for the repayment of debt issued by the County. The municipality pledges their limited tax full faith and credit to the repayment of the bonds in a contract with the County. The County, in turn, pledges its limited tax full faith and credit to the issuance of County bonds. The advantage is potential purchasers than that of the individual units. This is, in part, due the broader tax base of the County. However, this advantage needs to be closely scruitinzed as to the potential credit rating of the County, as well as additional cost and time. Again, an important advantage is that various revenues may be used for repayment.
  
  
• Act 175 of 1952 and Act 51 of 1963 "Michigan Transportation Fund (MTF) Bonds" for Road Improvement: For cities and villages the bonds are sold with a pledge of and limited by Act 51 revenue; major and local streets. The bonds come with an automatic rating representing the pledge of State collected monies and typically sell quite well. The community would also pledge the Limited Tax General Obligation (LTGO).
  
  
• Act 31 of 1948 "Building Authority Bonds": Previous to Act 34 of 2001, a county, city, village or township was not able to directly issue limited tax bonds for a building project. Under Act 31 of 1948 they can form a building authority that can issue the bonds with a limited tax pledge of the community without a vote. The building authority has always seemed like an unnecessary step in the process, which has been remedied with Act 34 of 2001. The Building Authority Act, which is still an option, authorizes the construction of specific types of facilities including most public purpose municipal buildings. It even allows for revenue bonds, which might be useful for such projects as parking structures. Building Authority Bonds count toward the more general 10% of SEV debt limit which is an advantage over the 5% limit for Act 34 Capital Improvement Bonds.
  
  
• Various Acts "Special Assessment" and ". . . Portion Bonds": A Special Assessment roll of individual properties may be established as a method of supporting a bond issue where there is specific benefit to the property. This can be used in conjunction with other forms of financing. A city, village or township portion bond with revenue support from another source, for example rates and charges, may be issued in conjunction with a SA bond.
  
  
• Act 197 of 1975, Act 450 of 1980 and Act 281 of 1986 "Tax Increment": Various tax increment capture.
  
  
• Act 99 of 1933, "Installment Purchase Contracts": Utilized by cities, villages, and townships, this format has a maximum fifteen-year duration and the total of all IPCs is capped at 1.25% of SEV. Typically the IPC is used for equipment purchase but may have certain limited application for infrastructure and building projects.

Revenue Bond

Act 94 of 1933, the "Revenue Bond Act" provides for an issue to be supported solely by the revenues of the system. A potential purchaser of the bonds takes into account that there is no security to back up this revenue support and, therefore, tends to produce the highest interest rate of the bond options outlined. In other words, if revenues are insufficient to pay debt service and there is a default on the bonds, the community is not obligated to make up any portion of the debt service from the general fund.

The community does pass an ordinance which covenants that rates and charges will be maintained sufficient to cover debt service usually by at least 115% for open market issues. Debt coverage is based on the percentage of net revenues (operating revenues less operating expenses) to annual debt service. The rating agencies typically give a lower grade rating to a revenue bond in comparison to LTGO and UTGO bonds. Unfortunately, for a municipality of small to medium size, especially if it is a new system, there may not be a market for revenue bonds other than USDA Rural Development, DWRF & SRF or sometimes the Michigan Municipal Bond Authority (in which cases there may be the opportunity for a LTGO pledge to the Revenue Bond).