Special to The Gardner News
Two types of bonds have been used in local projects in Gardner and Edgerton in recent years – General Obligation Bonds (GO) and Industrial Revenue Bonds (IRB’s). The key difference in the types of bonds is the source of the revenue used to make interest and principal payments. With one, the municipality is liable for repayment of the bonds, with the other it is not.
General Obligation bonds
General obligation bonds (GO) are debt instruments issued by states and local governments to raise funds for public works.
GO bonds are commonly used to finance new public projects by cities, school districts, states, and other issuers.
The bonds are backed by the full faith, credit, and taxing power of the issuer.
The planned new Justice Center in Gardner is financed by voter approved General Obligation bonds.
GO bonds do obligate the issuer with repayment of the debt, in full, by whatever means necessary. That means they may use revenues from any taxation power within their authority in order to meet repayment terms.
With General Obligation bonds, the city is “on the hook” and fully responsible for repayment of funds.
Industrial Revenue bonds
Industrial Revenue bonds (IRB’s) are basically tax subsidies, that come in the form of property tax abatements, and can include sales tax exemptions and federal tax exempt interest on the IRB payments.
IRB’s are offered as an incentive to attract economic development that will bring employment and other benefits to the community.
IRB’s are strictly regulated by K.S.A. 12-1740, and issuance is complicated, requiring the use of attorneys that specialize in that area.
In public meetings those attorneys consistently state that the municipality issuing the bonds is not responsible for the payment of debt service on those bonds – instead bonds are payable solely from lease payment revenue received from the specific project.
The Excelligence facility currently under construction in Gardner is being financed by $38M of IRB’s.
The city is not liable for those funds, should the business fail.
In Edgerton, all of the LPKC projects have been financed with IRB’s.
This is how it’s done – IRB project property is deeded from the benefiting company (Edgerton Land Holding Company, LLC) to the IRB issuer (City of Edgerton) for the bond term.
(Note: ELHC is owned by NorthPoint Development, not the city of Edgerton.)
The city then simultaneously leases the project back to ELHC for the term of the bonds. Once the city has a legal interest in the property, the property is eligible for exemption from property taxation as long as the bonds remain outstanding, but not to exceed ten calendar years.
Even though the property is exempt, the company agrees to a Payment In Lieu Of Taxes (PILOT) agreement for the abatement term which requires the company to pay a negotiated percentage of what the total property tax bill would have been without an exemption.