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Funding Alternatives 67 7.5 Bonds For significant capital improvement programs, another local funding option is the issuance of bonds. There are two basic types of bonds: general obligation and revenue bonds. 7.5.1 General Obligation Bonds General obligation bonds are secured by the full faith, credit, and taxing authority of the issu- ing government agency. General obligation bonds are instruments of credit and, because of the government guarantee, the interest rate that must be paid to the bondholders is reduced. This type of bond uses tax revenues to retire the debt and a key element is usually the approval of the electorate of a tax levy to support airport development. Government entities generally have limits established for the maximum level of indebtedness that can be assumed. 7.5.2 Revenue Bonds Another type of bond is an airport revenue bond, which is secured only by the revenues of the airport. Revenue bonds are retired solely from the revenue of a particular project or from the operating income of the issuing agency. Generally, they fall outside the statutory limitation on public indebtedness and in many cases do not require voter approval. Revenue bonds normally carry a higher interest rate because they lack the security of general obligation bonds. An additional challenge is that revenue bonds usually require a large reserve if there are no firm guarantees. Often it is required that the net income (total revenue less maintenance and operating expenses) available for debt service must be at least 1.25 to 1.5 times the annual debt service. This money must be put in a fund to be used only for payment of the bond's principal and interest if net revenues in any particular year are not sufficient to meet these payments. It is possible to mix the benefits of a general obligation bond with some of the advantages of a rev- enue bond. When this is done, it is generally intended that the bond will be retired from revenues, as is the case with a true revenue bond. However, if the revenues would not be enough to meet all debt service payment, the community's tax base would have to make up the difference. Some states also have bond banks or another form of pooled credit through which smaller projects can be combined for bond issuance. Where bond banks exist, there is a potential to lower the costs of initiating a bond. 7.6 Private Investment If a project is intended to serve a specific corporate user, in some cases it may be possible to obtain support from the corporate users of the facility. Although corporate support may not cover the full cost or full local share, it can contribute to the overall funding, while delivering a strong message about the importance of the improvement. Some airport operators have successfully used bank financing for obtaining airport develop- ment capital. Generally two conditions are required to obtain bank financing: the airport must demonstrate the ability to repay the loan at current interest rates, and the capital improvement must be less than the value of the facility. Another important source for development funding is the private sector. There are many areas in which private development can occur at an airport. In these cases, typically the airport owner grants the developer a land lease and the private developer provides the funding to construct the improvement. Private-sector funding typically is associated with revenue-producing development rather than airfield infrastructure.