Photo by Rachel Goodspeed for the U.S. Army Corps of Engineers is licensed under CC BY 2.0
Most individuals know about crowdfunding Web sites. And, citizens everywhere are aware of inadequate funding for critical public projects. Not only is the nation’s infrastructure struggling, local residents are concerned about potholes that need to be repaired and school buildings that are long overdue for upgrades.
So, here’s a type of collaboration that will surprise some. It will at least be a new concept to most…but it’s a trend that appears to be gathering steam quickly.
Last August, the city of Denver used crowdfunding to fund $12 million worth of mini-bonds for the last phase of a $550 million bond program. Mini-bonds were created and they were designed to be attractive to small investors. They were affordably priced at denominations of $500 (versus the typical $5,000 minimum for municipal bonds). The money was pledged to road upgrades and civic buildings. Only Colorado residents were eligible to purchase the bonds. Denver had offered mini-bonds for five years, but this was the first time they were ever offered online. The offering sold out in 16 minutes.
Wow! Something big just happened. Other cities took note. The concept was more than interesting.
The question was – could other cities benefit from using crowdfunding platforms? Would this work at the state level as well?
Municipal bonds, which for decades have provided funding for local projects, started falling out of favor a few years ago. Taxpayers felt that municipal bonds were being used to excess, and that repayment costs were too high. In 2003, Illinois issued $10 billion in municipal bonds to cover a portion of the state’s pension obligations. At the beginning of fiscal year 2015, the state had $22 billion in bond debt, which required $4 billion, or 11 percent of its general funds budget, just to pay the annual debt service. Incidents like this were happening in too many states.
The crowdfunding model works as an “all or nothing” program. If citizens’ donations do not reach the stated target, no funds are accepted. Most crowdfunding revenues are small. Philadelphia, for instance, sponsored its first civic crowdfunding campaign and raised just $3,000 for a youth garden program.
In Kansas City, citizens used a community investing platform to sustain and expand the downtown’s public bike stations. Another small capital raised, but one for a project that would never have been funded in any other way.
Neighborly is a start-up enterprise that addresses the crowdfunding model as it attempts to break into the $3.7 trillion municipal bond market. The founders point out that in many ways, municipal bonds – loans that finance public works like schools, roads, water treatment plants and other projects – are ripe for innovation.
It will be interesting to see if crowdfunding becomes a significant model for raising bond funds. That’s a definite possibility!
To learn how crowdfunding can help your business reach your fundraising goals, give Strategic Partnerships, Inc. a call.