Bonding White Paper
Pay as you Go or Bond? Funding transportation infrastructure in our high-growth area is important to keep our economy strong, our communities vibrant, and efficiently moving goods and people. The Bonding White Paper offers considerations in accessing the tax-exempt municipal market including a discussion of interest rates, credit rating criteria, market supply-demand characteristics, market depth of municipal bonds, timing factors, and financial and economic considerations.

  • The interest rates did spike significantly in the early months of 2020 as the COVID pandemic spread across the US, by April 2020, markets had calmed down and interest rates began to decline to their present levels.
  • Continued high demand for tax-exempt municipal bonds has worked to keep interest rates low and is expected to continue through at least the early part of 2021.

  • Debt financing is appropriate not only when other sources are not available, but when economic, fiscal, and planning considerations dictate its use. Debt financing should not be viewed as a “last resort”, because it is often the best alternative available.

  • Pay as you go disadvantage:

    • Intergenerational inequity. Those who benefit in the future from a capital facility contribute proportionally less to the cost of the facility compared to those who generated the revenues that were accumulated over one or more years.

  • Bonding Advantages:

    • Timeliness of constructing infrastructure. Debt financing allows construction to occur when a particular project is needed.

    • Accelerated economic benefits. The State, regional and local economies benefit from having the infrastructure in place sooner through the issuance of debt than would otherwise occur. 

    • The reduced operating cost of capital facilities. as older, higher maintenance cost capital facilities are more quickly replaced by fewer, lower maintenance cost facilities.

    • The “All Average Unit Bid Prices” construction cost inflation has averaged 6.75%.

    • The borrowing cost to the State in each of these cases has ranged from a low of 1.19% to a high of 3.71%, with an average interest rate of 2.35%

    • Repayment in cheaper dollars. With a positive inflation rate, repayment costs will be less burdensome than would full payment at the time of acquisition.

    • Bonding allows the State to both avoid future inflation cost increases while receiving the benefits to the overall State economy of improved transportation infrastructure much sooner than would be the case if the State-operated on a pay-as-you-go basis.

  • Example: bonding for a project that is 10 years away. 

    The example uses a theoretic capital improvement program (CIP) of $100M need to fund roadway infrastructure. Using the average cost of construction inflation produced and tracked by UDOT over the past 20 year period, which is 6.75%, shows that the total cost of the $100M CIP campaign over the 10 year period is actually $192M in total cost. Whereas, using the average borrowing rate that the State of Utah has enjoyed over the past 10-13 years, which is a true interest cost (TIC%) of 2.35% on average, the same $100M CIP only costs the State of Utah $114M. This comparison saves taxpayers approximately $78M in total cost and accelerates the project timing, increases economic stimulus, and enhances overall comfort and safety to the residents of the State.

    Many times we hear bonding is not a new source of revenue, and this is true, but you can see from the example that using bonding can lower the cost of future projects, in effect, allowing more projects to be built.

    Every day in Davis Co there are approximately 16,000 hours of user delay (pre-pandemic). If I-15 was improved by 2025 that delay would fall to 6,000 hours, saving 10k every day. Every day you save by bonding gives 10k hours back to the taxpayers of Davis Co.