Mayor Cherelle Parker’s housing plan relies on $800 million in bonds. Here’s what you need to know about Philly’s city debt.

Former Mayor Jim Kenney’s Rebuild program. Former Council President Darrell L. Clarke’s Neighborhood Preservation Initiative. Mayor Cherelle L. Parker’s proposed Housing Opportunities Made Easy plan.

What do all these things have in common? They are all signature programs of top city leaders. And they are all financed by city debt.

» READ MORE: Mayor Cherelle Parker unveils housing plan amid Trump’s federal funding cuts and Council skepticism

Parker’s H.O.M.E. initiative, which she is asking City Council to approve during this spring’s budget negotiations, has an eye-popping $2 billion price tag. But very little of that would come out of the city budget next year if lawmakers approve her plan.

That’s because $800 million would come from sales of city bonds that would be paid back over 20 years, and an additional $1 billion represents the estimated value of city-owned land that the administration is hoping to transfer to private developers to build housing, according to the plan. (Most of the remaining $200 million budget for the project would come from a variety of government programs, and Parker is also hoping the philanthropic community will contribute to the effort.)

Some Council members have raised questions about relying on debt financing for the H.O.M.E. initiative.

“It’s a big number that we have to look at because, after all, the taxpayers have to pay for this,” Councilmember Mike Driscoll said. “Future generations have to pay it off.“

Parker contends that there is an urgent need to work toward her goal of building or preserving 30,000 units of housing, and that issuing bonds could provide an immediate cash infusion for “shovel-ready” projects.

“This is an all-hands-on-deck moment for Philadelphia, and there is no time to waste,” Parker said in an address to Council last month. “Our administration will issue an historic and unprecedented $800 million in bonds for housing in Philadelphia.”

Here’s what you need to know about Philadelphia’s municipal debt and Parker’s plan.

Municipalities typically issue bonds to pay for infrastructure improvements such as repaving roads and building new facilities. The phenomenon of politicians using debt to finance their signature initiatives or tackle complicated societal challenges through what are called “social bonds” is relatively new.

In Philadelphia, it traces back to Mayor John F. Street’s Neighborhood Transformation Initiative, which used $300 million to finance blight reduction and housing projects in the early 2000s. City taxpayers are still making annual payments on some of that debt.

Despite the more complex missions of social bonds, the mechanics of how the city issues and repays bonds are largely the same as for traditional capital projects.

This year’s $6.7 billion city budget includes $235 million in debt service payments for past borrowings.

The process for issuing municipal bonds is highly regulated by state and local law, and the city treasurer’s office works with a team of professionals hired from outside city government, including financial advisers, attorneys known as bond counsel, and the underwriter, the firm that sells the bonds to investors on behalf of the city and guarantees they will be bought.

“That group will meet with our folks from our city treasurer’s office, figure out the best strategy for selling the bonds to make sure that we can get the best price for them, and then they will go to market,” Finance Director Rob Dubow said in an interview.

After that, bond-buyers — usually “major institutional investors,” Dubow said — will bid for the right to buy tranches of the bonds that mature at different dates within the 20-year window. If there are more bidders interested in the city’s bonds, it is more likely they will bid the interest rates lower, saving money for local taxpayers in the long run.

“Investors will put in bids and buy them in exchange for our guaranteeing that we’re going to repay the debt service over many years,” Dubow said.

Usually, the bonds are then packaged into investment products — such as in bundles with other cities’ bonds — and can be bought and sold many times before they mature years later.

Parker’s proposal involves the city issuing $400 million in bonds for the H.O.M.E. initiative this fall, and another $400 million in 2027. All would be general obligation bonds, meaning they are backed by the full faith and credit of the city government and are not tied to one particular revenue stream.

The annual debt service payments, including principal and interest, for the initial round of H.O.M.E. bonds are estimated to be about $33 million per year, according to the mayor’s proposed five-year financial plan. That annual payment would roughly double after the second $400 million is issued. The bonds would require Council approval.

Philadelphia’s recent city bond issuances have carried interest rates of about 4% to 5%. The interest rates for the H.O.M.E. bonds could be higher than what the city typically pays.

A vast majority of municipal bonds are tax-exempt, meaning bond-buyers do not have to pay federal income taxes on proceeds from their investment. That savings is one of the primary benefits of buying municipal bonds for U.S. investors, and it helps lower the cost of the debt for city taxpayers.

But the federal tax break generally does not extend to government bonds that finance projects that benefit nongovernment actors. That is the case in the H.O.M.E. initiative, in which Parker hopes to transfer thousands of vacant or underutilized properties owned by the city to private real estate developers to build housing.

Issuing taxable bonds will lead to the city paying higher interest rates, as Councilmember Katherine Gilmore Richardson noted in a recent hearing, because investors’ tax liabilities are priced in. Dubow said he could not project what the difference in costs to the city would be if the H.O.M.E. bonds were tax-exempt due to uncertainty over what the bond market will look like in the fall.

It is difficult for taxpayers to notice the cost of general obligation bonds because repayments are made from the overall city budget rather than from a dedicated tax.

But there is a cost: As the city takes on more debt, it will have fewer options to fund services and projects in the future because it will still be paying for initiatives of the past.

Council members have for the most part applauded Parker’s decision to make housing a priority, although some have raised questions about the details of her plan, including its reliance on debt financing.

Councilmember Isaiah Thomas noted in a hearing last month that interest rates have gone up in recent years as the Federal Reserve sought to combat inflation.

» READ MORE: Federal cuts, staffing struggles, homeless services: Philly City Council probes Mayor Parker’s $6.7B budget proposal

Higher rates make bonds more expensive for city taxpayers, and given that some economic forecasters increasingly believe an economic downturn may be coming — likely leading the Fed to cut rates — Thomas asked whether it was wiser for the city to wait on a major bond issuance and added that he was uncomfortable “spending money now to pay for it later.”

“Those are decisions that we make when we’re dealing with some type of fiscal crisis,” Thomas said. “The fiscal health of the city is pretty good. So I just think that it can become a little risky to earmark future spending.”

Dubow conceded that it is possible waiting longer could potentially lead to more favorable rates. But he said the urgent need to increase the housing stock and create and preserve affordable homes is the administration’s priority.

In an interview, he added that the very thing causing uncertainty in the economy — the dizzying series of policy moves coming out of President Donald Trump’s administration — is also a reason to ensure the city has access to resources.

Trump has repeatedly threatened to cut off federal aid to so-called sanctuary cities, which are jurisdictions like Philadelphia that decline to assist federal immigration enforcement.

» READ MORE: How much could Philly lose if Trump cuts funding to cities? Here’s what you need to know.

“The need is still there and, if anything, the need may be even greater,” Dubow said. “We don’t want to be paralyzed by the uncertainty.”

In the early 1990s, Philadelphia was on the verge of becoming the first major U.S. city to declare bankruptcy, and faith in the city’s debt was so weak that Harrisburg had to bail out City Hall with state-backed bonds that were not paid off until 2023.

Things have changed. The three major credit agencies have continually increased the city’s ratings thanks primarily to progress in reducing the pension system’s unfunded liability and the city’s ability to hold substantial annual reserves in recent budgets.

Philadelphia now holds the fifth-highest rating on all three agencies’ scales, its highest combined ratings in decades. S&P and Fitch both rate Philadelphia’s general obligation bonds as “A+,” while Moody’s classifies them as “A1.″

Better ratings translate to lower interest rates and savings for city taxpayers because buyers of Philadelphia’s bonds are assuming less risk.

“While pension funding ratios are weaker than those of many other large cities or peers in Pennsylvania,” Fitch wrote last year, “Philadelphia’s current debt and liability costs are manageable, in our view.”

Staff writers Joe Yerardi and Fallon Roth contributed to this article.