In this article, we examine how cities are implementing smart city initiatives and how more of these projects will be funded through municipal bonds in the coming years.

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Smart city projects are improving the quality, efficiency and environmental impact of city services including transportation, water, waste management, power management and public safety. Advances in technology – specifically the use of fiber networks, cloud storage and the Internet of things (IoT) – have made it possible for cities to connect electronic sensors, buildings, city infrastructure and software to collect data and solve problems. Here are a few ways cities are doing this:

• Transportation - Denver, Pittsburgh and Portland have plans to use sensors installed on traffic lights to monitor traffic congestion in real-time and alert commuters through their mobile devices. The use of this data will improve the efficiency of autonomous vehicles in the future.

• Water - Madison, Wisconsin installed smart meters that wirelessly provide the city and customers information on daily water usage. Other cities have installed sensors to monitor for water leaks as well. These efforts to reduce water usage improves the sustainability of the water supply and lowers cost.

• Waste Management - Cleveland, Ohio installed radio frequency identification devices (RFID) onto their trash and recycling bins with the goal of cutting costs and increasing the use of their recycling program by identifying households that are not recycling.

• Public Safety - Cities are using a variety of technology to improve their efforts in public safety. Cameras and microphones are being used to monitor activity in areas with elevated crime levels. In Indiana, drones fitted with thermal imaging technology have been used to locate suspects, and in California, drones were used by firefighters to monitor wildfires.

These initiatives have obvious benefits but come at a cost. In order to fund these projects, cities must balance their budgetary flexibility through both traditional and alternative sources of financing.

One of the biggest challenges with smart city initiatives is finding the funds to implement the project. Cities have limited budgetary flexibility to spend money on these projects since funds are needed to address issues such as public safety and rising pension costs. Most cities are reluctant to raise taxes to fund infrastructure projects so they turn to alternative sources of financing from the private sector and crowdfunding. Crowdfunding became popular through Kickstarter, but the same idea has been used to launch funding campaigns for over 1,200 municipal projects since 2010. It was interesting to see how Denver, Colorado issued $500 “mini-bonds” in 2014 that were limited to residents of Colorado as a means of crowdfunding certain infrastructure projects.

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Cities are increasingly using municipal bonds as a means of financing their smart city initiatives. For instance, in 2015, Atlanta, GA issued $250 million in voter-approved GO bonds specifically for improving infrastructure through smart city projects. These GO bonds are supported by property taxes collected by the city. Other revenue sources such as water and sewer fees, toll collections and sales taxes are revenue streams that could be used to back municipal bonds for smart city projects. In addition, environmentally friendly smart city projects that reduce water usage, air pollution and energy use could be funded through green muni bonds.

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The transportation and energy sectors are the two areas that will need the most innovation as population growth continues to impact urban areas. Traffic congestion is a problem that is being solved through ride-sharing services for cars and bikes, traffic sensors and electric self-driving buses. Private companies such as Zipcar, Uber and Lyft are providing platforms that help cities on this front. On the energy side, cities are developing smart power grids that connect the utility with the consumer to become more energy efficient.

Billions of dollars will be needed to fund these types of initiatives and by convincing the public of the benefits, city governments can rely on the municipal market as a source of financing. In the past, the federal government has instituted policies to promote infrastructure investment such as the Grow America Act and the Build America Investment Initiative. These types of initiatives could encourage investment through public-private partnerships funded by Qualified Public Infrastructure Bonds (QPIBs), which benefit from not being subject to the alternative-minimum tax.

Another challenge smart cities face is the regulation and legal issues surrounding the collection of public data. Cities must strike a balance between becoming a “Big Brother” entity of mass surveillance while using the data they collect for public good.

In the coming years, cities will continue implementing smart city initiatives that will be financed through the private and public sectors. Municipal bonds will play a big role as cities become smarter and improve the efficiency and sustainability of the services they provide.

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