Step 3: Procure Financial Resources

Most municipal construction projects—particularly water, wastewater, transportation, and stormwater infrastructure—require significant capital investment. Developing a financing plan that addresses both construction costs and long-term operation and maintenance is one of the owner's most important responsibilities. Financial decisions made during planning will affect utility rates, taxes, debt capacity, operating budgets, and future capital improvements for many years.

Before selecting a financing strategy, revisit the questions identified in Step 1:

• Will the project meet regulatory, operational, and service objectives?
• What are the estimated construction costs?
• What are the anticipated operation and maintenance costs?
• What staffing, equipment, and training will be required to operate the completed facility?
• Can the community afford both construction and long-term operation?
• How will the selected financing method affect the total life-cycle cost of the project?

Utility Projects 
Utility infrastructure is typically financed through one or more of the following sources:

• Pay-as-you-go financing (equity) using accumulated reserves or capital replacement funds.
• Debt financing, including revenue bonds, general obligation bonds, bank loans, or the Tennessee Municipal League Bond Fund.
• Grant funding from federal, state, or regional programs.

Utilities with long-term capital improvement plans should establish rates that generate sufficient revenue to fund routine capital replacement and reduce dependence on borrowing. While pay-as-you-go financing is generally the most economical approach, major capital improvements often require a combination of reserves, grants, and long-term financing.

Potential funding sources include:

• Appalachian Regional Commission (ARC)
• Community Development Block Grant (CDBG) Program
• USDA Rural Development
• Tennessee State Revolving Fund (SRF) Loan Program administered by TDEC
• Tennessee Municipal League Bond Fund
• Commercial lending institutions
• Revenue bonds and general obligation bonds

Other state and federal funding opportunities periodically become available. Municipalities should work closely with local development districts, grant administrators, funding agencies, and financial advisors to identify the most appropriate financing package.

In many smaller communities, consulting engineers assist with grant applications and loan coordination. Although consultants provide valuable assistance, the municipality remains responsible for understanding the financing package and its long-term effects on rates, debt service, operating budgets, and future capital improvements.

Best Practice: Before accepting any financing package, evaluate the total life-cycle cost of the project, including construction, financing costs, operation, maintenance, replacement, and eventual decommissioning.

Transportation and Stormwater Infrastructure 
Transportation and stormwater projects are typically financed through local revenues, debt financing, grants, or a combination of these sources.

Local funding may include:

• Property taxes
• Local option sales taxes
• State-shared fuel taxes
• Stormwater utility fees
• Special assessments
• Capital reserves

Major projects often require outside assistance. Potential funding sources include:

• Tennessee Department of Transportation (TDOT) – Transportation Alternatives Program (TAP) and Surface Transportation Block Grant (STBG) Program
• Community Development Block Grant (CDBG) – Tennessee Department of Economic and Community Development
• Appalachian Regional Commission (ARC)
• USDA Rural Development
• FEMA Hazard Mitigation Assistance and Flood Mitigation Assistance
• State Revolving Fund (SRF) loans for eligible stormwater-related improvements

Local development districts, grant administrators, and consulting engineers can assist municipalities in identifying funding opportunities and preparing competitive applications.

Proprietary Equipment 
Municipalities occasionally specify proprietary equipment because of operational experience, compatibility with existing systems, maintenance considerations, or regulatory requirements. Although proprietary equipment may have a higher initial cost, it may reduce long-term operating expenses by standardizing maintenance procedures, replacement parts, operator training, and inventory.

When specifying proprietary equipment, municipalities should clearly document the reasons for doing so and evaluate life-cycle costs rather than purchase price alone. Consider equipment reliability, availability of replacement parts, manufacturer support, warranty provisions, training, software updates, and long-term maintenance requirements.

Owners should be cautious when evaluating newly developed technologies. Before selecting unfamiliar equipment or processes, verify that the technology has demonstrated reliable performance under operating conditions similar to those expected in your community. Avoid becoming the first installation whenever practical.

Construction Cost Inflation 
Construction costs can change significantly during project development. Cost estimates prepared during planning should be updated periodically throughout design and again immediately before bidding. Inflation, material shortages, labor availability, and changes in interest rates may substantially affect project affordability. Owners should include appropriate contingencies and evaluate whether additional financing or project modifications are necessary before proceeding to construction.