Your city is expanding. There have been several problems with street flooding, w

Question

Your city is expanding. There have been several problems with street flooding, which is affecting your business. You decided to attend a city council meeting, during which there is a discussion of building storm and sewer lines in advance of home construction. At the meeting, Tom Frank the city manager states, that the city is prohibited by law from financing these projects through a sales or property tax. He says that after the new homes are built, the city will be able to charge a monthly sewer fee to each homeowner and business. He asked for suggestions on financing the new sewer system.

What would you propose the city do to raise this money?

Why is this investment vehicle attractive to investors?

Explanation / Answer

The city council can issue bonds for raising the money for financing the projects. Long term bonds issued by the city council are quasi government and can form part of the portfolio of investors who are looking at stable returns.

The bonds can be structured such that coupon payments commence after such time that is estimated for completion of these storm water and sewer lines.

The investment would be attractive to investors because:

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