This post is sponsored by Johnson Controls.
As infrastructure ages, many local governments are looking for cost-effective ways to pay for upgrades and other investments. One type of financing is a performance contract, where municipalities use guaranteed savings to offset initial capital costs.
Here we talk with Ben Speed, executive director, structured finance at Johnson Controls, about how local governments can finance infrastructure upgrades and what options are available.
Question: How do local governments benefit from using a performance contract (PC) to procure capital improvements?
Ben Speed: A performance contract enables a local government to upgrade its infrastructure with new, reliable and more efficient assets without incurring additional budget expense. It’s designed to be a budget-neutral arrangement, where guaranteed savings offset capital costs. The local government is able to redirect its current expenses to pay the financing cost of new facility improvements. Money that was going to the utility can now be reinvested into the local government’s buildings.
Q: How do local governments typically finance PC projects?
BS: The tax-exempt lease-purchase (TELP) is the most popular way to finance PC projects. Local governments can obtain a TELP either from a third-party bank or through their Energy Services Company (ESCO). Customers also use general obligation bonds and revenue bonds. However, a TELP is often the easiest way to raise capital for projects that cost less than $20 million. A TELP has lighter documentation, a faster closing process and lower fees than a bond issuance.
Q: What …