The most commonly used option is to sell bonds, which are long-term debt instruments that investors buy in return for the governmental unit's promise to repay the principal with interest. The proceeds are then loaned to private businesses are rates that are below those they could get from commercial lenders. From the investor's point of view, bonds are a relatively safe investment, and they're typically tax-exempt.
Here's a look at the different types of bonds.
General obligation bonds. One type is called general obligation bonds. Most of the debt service - the interest owed to bond purchasers - is paid from the governmental unit's general funds, which means, for example, from income and sales tax revenues for a state and from property tax revenues for a county. General obligation bonds typically cannot be sold until they are approved by a public vote. They typically carry a 30-year term.
Under Illinois law, certain limited types of general obligation bonds don't require a referendum or vote. For example, bonds issued to abate pollution under an order from the EPA and bonds issued to pay for a judgment indebtedness don't require a vote.
Revenue bonds. Another type is called revenue bonds. They do not require a public vote because they are used for projects that are supported from revenues that the project generates, such as tolls on bridges and toll ways. A lease revenue bond is a special type of revenue bond that is financed by leases paid by government agencies. Lease revenue bonds might be sold, for example, to finance the construction of higher education buildings, prisons, or state office buildings.
Industrial development bonds. Industrial development bonds are a type of revenue bond that are used to finance manufacturing facilities. The city issues the bonds and lends the proceeds to a borrower at rates below those available on conventional loans. The funds are repaid by the borrower and are not a general obligation of the municipality.
The Tax Reform Act of 1986 limited their use, so that now some are tax-exempt and some are not. State and local governments, often through special authorities such as the Illinois Development Finance Authority, issue the bonds. They are typically tied to specific projects and can finance core manufacturing costs including acquisition, expansion or renovation of land or real estate and the purchase of machinery and equipment.
Special assessment bonds. If a municipality wants to build or enhance services in a particular part of the city, it will designate the area as a special service area. Those who benefit from improvements are assessed a special fee. The city issues bonds and uses the special fees to offset costs.
Once upon a time in Illinois, when the municipality wanted to raise money for the project, it was limited to basing the special fee on the assessed value of property, which potentially meant that properties that benefited the most from the project would pay the same as the properties that benefited the least. The law was changed, however, to allow municipalities to use another basis, as long as it was rationally related to the benefits provided.
Thus, if a municipality, for example, wants to make street improvements in a neighborhood, it can base the fee on each property's street footage. Under the old rule, a vacant lot would have paid less than an occupied house, even though the benefit to the property is the same. Under the newer rule, lots with the same street footage pay the same special tax.
Tax increment financing (TIF). TIF is an economic development tool that is designed to help revitalize blighted urban areas. A city or town will designate a blighted area as a tax increment district. Once the district is identified, the city or town sells bonds to pay for new streets, lights, sidewalks, and other improvements. The idea is that a combination of the new improvements and a freeze on property taxes at the old rates will entice businesses into the area. The additional tax revenues generated by the new businesses are used to service the debt.
Federal empowerment zone facility bonds. Under a federal law enacted in 1993, certain impoverished areas were designated as either an Empowerment Zone or an Enterprise Community. Chicago, for example, has been named as an Empowerment Zone, which means that it was entitled to federal grants and can issue tax-exempt bonds to finance enterprise zone facilities, including both industrial and commercial facilities. The idea behind Empowerment Zones is similar to the idea behind TIFs - to create incentives to revitalize downtrodden areas.
Private activity bonds. In some cases, tax-exempt government bonds can be issued to fund certain private activity. The bonds can be used to finance the following commercial facilities: airports, docks and wharves, mass commuting facilities, sewage facilities, solid waste disposal facilities, facilities for furnishing of water, residential rental projects, local electric energy or gas facilities, local district heating or cooling facilities, hazardous waste facilities, high-speed intercity rail facilities, or environmental improvements to hydroelectric generating facilities.
State enterprise zones. An enterprise zone is an area designated by Illinois in cooperation with local governments to receive tax incentives and other benefits to stimulate economic activity. Currently 91 enterprise zones exist in Illinois.
Foreign trade zones. State law grants to certain government units, public corporations, and private corporations the right to apply to the U.S. government to establish foreign trade zones, which are areas considered to be outside the U.S. customs territory. By being outside the customs area, they are supposed to be able to attract and promote international trade and commerce. Foreign trade zones exist in portions of Chicago, Rock Island, Granite City, Peoria, and Moline.