Revised: 06/20/2024
Capital projects are funded using several methods. The most prominent method is issuing conventional debt with bonds. The debt service (the principle and interest) on these bonds is typically paid for with General revenue Fund (GRF) cash and appropriation, and so the bonds are referred to as GRF-backed bonds. Ohio is able to issue these bonds at a lower interest rate given the state’s favorable bond rating. In addition, as long as the Internal Revenue Service public use requirements are being met, the bonds can be issued as tax-exempt, meaning that the interest paid to lenders is exempt from the lender having to pay federal income taxes on the interest. In some cases, the interest on these bonds are also exempt from state and local taxes.
In Ohio, the Treasurer of State and/or the Ohio Public Facilities Commission are authorized to issue and sell bonds in accordance with the Ohio Constitution, Article VIII. The specific amounts to be issued are authorized by fund in the capital bill, examples being Sections 207.440 and 213.20 of H.B. 687.
Prior to the start of the new capital biennium (typically in May), the OBM Debt Management section provides Post-Issuance Compliance Training to appropriate agency personnel. Post compliance training identifies agency/capital manager roles and responsibilities as they relate to bond issuances, managing project spending and use of bond proceeds, and records retention. Compliance with federal tax law is also important, as numerous requirements must be met when using tax-free bond funding. OBM also publishes Allowable Capital Expenditure Guidlines. The OBM Debt Management section is in charge of the bond sale schedule, setting the calendar, the size of the bond issuances, and the structure of the bond deals. The sale schedule is set so that continuous funding is provided to capital projects that have been appropriated by the General Assembly.
During the Capital Budget process, consideration is given to whether it is appropriate for a project to be paid for with Certificates of Participation (COPS). COPS are fixed-income securities similar to bonds; however, they are issued by a third party. The State utilizes COPS to finance the initial acquisition, development, deployment, and integration (including project management) of large information technology systems of statewide benefit and/or importance. An example is the Ohio Administrative Knowledge System (OAKS), the state’s overall accounting system of record. The COPS’ term should be equal to or less than the life of the financed IT asset. The State has primarily issued COPS with five or ten-year terms. After deciding to use COPS for a project, OBM works with the agency to determine the timing of the bond sale, the amount, and the project schedule. The agency may also have to complete or update a Major Project Funding Request through OBM’s Major Project Oversight GuidanceMajor Project Oversight GuidanceMajor Project Oversight Guidance. The Major Project Governance monitors all large and high-risk IT projects.
The General Assembly provides authorization to issue COPS for the project or asset, typically in the capital bill. The agency enters into a lease purchase agreement to secure the debt service payments on the COPS. The sale proceeds are deposited into a fund held by a trustee bank and dedicated solely to the funded project(s). Following the COPS issuance, the leasing agency administers the debt and interest payments, as well as payments to the supplier through the trustee bank. The agency initiates and manages the project, along with approving invoices and requesting the trustee bank to make disbursements from the project fund. The trustee bank is the entity actually paying the contractor or the supplier.