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December 2013 Policy Study, Number 13-10

   

Fuel Tax:  What Is a Fair System for Iowa?

   

Debt-Financing Strategies

   

 

Ideally states in the past have followed the system of pay-as-you-go, which allows them the ability to avoid debt. But this isn’t always the best situation. Because as we well know, if you put off projects or extend them over several years, the prices increase. Also, problems arise as you fix one part, but not another. Therefore the NGA report addresses the use of debt strategies to pay for road construction and maintenance projects for state and local governments.

 

Debt is a touchy subject. Every state in the United States, except for Nebraska and Wyoming, has issued debt at some point in time to pay for transportation projects.[32] Yet states are leery of gaining too much debt, which is a very important concern. But as a family considers borrowing money to build a house, it is cheaper to get the house built and be living in it. Otherwise you are paying to still build the house and paying rent to live somewhere else. This is the case with the roads system. It is also important to note that interest rates for state and local governments have been at an all-time historical low. For the last five years interest rates have been at well below 5 percent and most of the time below 4 percent.[33] This means borrowing money is very cheap with the current economy.

 

State and local governments should take the time to make use of “bonding instruments, such as Grant Anticipation Revenue Vehicles (GARVEEs) and private activity bonds; federal credit assistance from the Transportation Infrastructure Finance and Innovation Act (TIFIA) loan program; and state infrastructure banks.”[34] The great thing about these forms of debt is that the state and local government can work with private investors to find revenue sources to pay for transportation projects.

 

States have to weigh the long-term outcomes of projects with the cost to decide what is in the best interest of the state, but it is important that states make use of all the tools they have at their disposal for projects.

 

   

 

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