APPENDIX C: GLOSSARY OF FINANCIAL TERMS

Adapted from the U.S. EPA's "Alternative Financing Mechanisms for Environmental Programs" (1992).

Ad Valorem Tax
A tax based on the assessed value of property.

Bond
A written promise to repay a debt at a specific date or maturity with periodic payments of interest (customarily every six months).

Bond Bank
A state-chartered organization that purchases the bonds of local governments and secures its own debt with the pool of local bonds.

Capacity Credit
A reservation of future capacity in a public facility purchased generally by private real estate developers prior to the construction of that facility. Typically, the revenue generated from selling capacity credits is used to finance facility construction.

Capital Costs
Expenditures that typically result in the acquisition or addition to fixed assets that have a useful life of over one year. Would include expenditures for major replacements, but not for routine repairs.

Capital Budget
A unified financial plan that accounts for needs and spending levels for a group of current and prospective capital facilities within a broader governmental budget.

Conditional Sale Lease
A lease in which the lessee has the option of applying lease payments to the purchase of a facility for a reduced price. The lessee is owner for tax purposes. For public lessees, it is also called a tax-exempt lease.

Credit Risk
The risk of default.

Credit Support
The guaranty of timely payment of principal and interest provided by a third party (such as a bank or insurance company) in exchange for a fee. Also called credit enhancement.

Debt Affordability
The capital debt affordability committee annually sets a recommended limit on the amount of new state general obligation bond authorizations for the upcoming session of the General Assembly. This committee, chaired by the state treasurer, recommends a debt level that is fiscally manageable and that will preserve the state's AAA (the highest) bond rating. In setting this level, the committee seeks to assure that state debt service will not exceed 8% of revenues and that outstanding debt will not exceed 3.2% of state personal income. These standards have been acknowledged by the bond rating agencies and others in the financial community.

Debt Limit
The statutory or constitutional limit on the amount of debt a municipality, county or state may issue or have outstanding. Also called a Debt Ceiling.

Debt Service
Periodic repayment of interest and/or principal of an outstanding debt.

Dedicated Tax Bond
A bond secured by the pledge of the revenues from a particular tax source.

Easement
In most states, an easement is a legal restriction contained within a deed that prohibits certain land uses in perpetuity.

Fee
Spreading out costs of a project to those that benefit from the project.

General Obligation Bond
A bond secured by the pledge of the issuer's full faith, credit, and taxing power.

Impact Fee
A fee assessed against private developers in compensation for the new capacity requirements their projects impose upon public facilities.

Industrial Development Bond (IDB)
A bond secured by the pledge of lease revenue from publicly owned industrial facilities. Also called an Industrial Revenue Bond.

Leveraging
The use of grant or loan funds as reserve funds for the issuance of debt. Many states leverage their State Revolving Fund (SRF) to increase the amount of funds available for lending.

Maturity
The date when the principal amount of a debt is due and payable.

Mitigation Banking
These programs allow developers (and others) to purchase credits in a publicly-owned Mitigation Bank which uses the proceeds to enhance, restore, preserve or create a needed natural resource, such as a wetland or forest buffer. The developers may use these credits to fulfill mitigation requirements for impacts in other locations, generally within the same watershed.

Rating
A letter designation used by investment services to represent the relative quality or creditworthiness of a bond issue.

Revenue Bond
A bond secured solely by the pledge of project or system revenues, without recourse to any tax support.

Secondary Market
The trading market for outstanding bonds or other debt instruments (such as mortgages and student loans).

Securitization (structured municipal bonds and grant-backed credit enhancements)
Structured municipal bonds securities state and local debt by pooling infrastructure loans, by structuring principal and interest payments into different classes of securities aimed at different groups of investors, and/or by cred* enhancing senior bondholders. Grant-backed credit enhancement (GBCE) uses the authorized flow of federal and state formula grants to credit enhance state and local loans and bonds, particularly structured municipal bonds. Unlike federal guarantees or letters of credit, GBCE should not jeopardize the municipal bond tax exemption.

Sinking Fund
A fund accumulated over a period of time for retirement of debt.

Special Assessment Bond
A bond payable from the proceeds of assessments imposed on properties that have benefited from the construction of public improvements such as water, sewer, transportation, and irrigation systems.

Special Districts
An independent unit of local government organized to perform a single governmental function or a limited number of related functions. A local taxing district can be organized for a special purpose such as a road, sewer, irrigation or fire district. Special districts usually have the power to incur debt and levy taxes.

Special Tax Bond
A bond secured by revenues generated from a special tax, such as a gasoline tax.

State Revolving Fund (SRF)
Established in 1987 to replace the U.S. EPA construction grants program for wastewater treatment facilities, the program's objective is to improve water quality. See page 26 for a full description or contact the Water Management Administration at MDE.

Tax Increment
Financing The dedication of incremental increases in real estate taxes to repay an original investment in improved public facilities that created the increased real estate values.

Surcharge
Unlike a general tax, a surcharge often targets a particular group or type of consumer.

Transferable Development Rights (TDR) Programs
These programs allow owners of rural or undeveloped land to sell an assigned number of development rights to developers at a mutually agreed upon price. The developers can then use the purchased rights to exceed height and density limitations in other, already-developed areas. Ideally, a TDR program is intended to preserve rural and undeveloped land while allowing landowners to reap the full value for their property.

User Fee
Payments made by direct users of a facility (or recipients of a publicly provided service) according to individual level of use.

Zero Coupon Bond (ZCB)
A bond sold at a discount of par that pays no interest until maturity, when the investor receives the par amount.