The City funds its Capital Improvements Program in several ways. One way is through voter-approved General Obligation (GO) bonds. GO bonds give cities a tool to raise funds for capital improvement projects that are otherwise not funded by City revenue, such as roads, bridges, bikeways and urban trails and parks. As a result, GO bonds are typically used to fund capital improvement projects that will serve the community. If voters approve a bond proposition on an election ballot, the City is authorized to sell bonds up to the amount indicated in the proposition language to fund capital improvement projects that meet the public purpose of that bond proposition. For example, in November 2012, voters approved City of Austin Proposition 14, allowing the City to borrow up to $77,680,000 to fund parks and recreation projects.
GO Bonds are backed by the full faith and credit of the City of Austin. This means the City is obligated to pay back the bonds by pledging its ad valorem taxing power, or in other words its ability to collect property taxes, to repay the debt.
The property tax rate is composed of two parts: the Operations and Maintenance rate (O&M) and the debt service rate. The debt service rate is set in order to generate the revenue necessary to make the City’s payments for tax-supported debt. The 2014 fiscal year debt service rate is 11.71 cents for every $100 of assessed property value.
Bond debt can be compared to a home mortgage that is repaid over time, while O&M expenses are like the daily household expenditures that are paid for immediately, such as groceries. Like buying a house, major capital improvement projects, such as park or library improvements, have a long useful life, so their cost is spread out over many years and paid for by current and future citizens who use them. The debt is typically financed over a 20-year period.
When voters approve bond propositions, the City does not issue all of the debt immediately. Instead, debt issuances are spread out over several years according to the annual spending needs of the bond program. By monitoring the annual spending needs and not issuing all the debt at one time, the City can keep the debt service tax rate more stable from year to year.