Bond Issuers

This section focuses on the issuers of municipal bonds. It deals with the uses and benefits of municipal debt, the security for municipal bonds, and the financing process of the bond issuers.

All fifty U.S. states as well as the District of Columbia, Puerto Rico, Guam, the Northern Mariana Islands, and the U.S. Virgin Islands have the power to issue municipal bonds. In addition to these states and territories as well as the local entities within them, authorities and special districts may now issue municipal bonds.

Authorities and Special Districts

Early in the 20th century, local and state governments began to create debt-issuing entities called authorities and special districts. They were used to serve specific geographic areas or even to fund a single project in a given area. A popular example of such an entity is the Port Authority of New York.

Uses of Municipal Debt

The uses of municipal debt are almost limitless. They may be used to fund any number of diverse projects. Municipal debt has been used for decades to fund local and state administration buildings as well as endless numbers of projects dedicated to serving the public, including hospitals, education centers, and roads/bridge � to name a few.

Tax-backed Bonds

Tax-backed bonds, or general obligation bonds, are based on the credit of the issuer and their ability to fulfill their municipal debt through the collection of taxes. Here are several different types of tax-backed bonds along with descriptions:

  • Unlimited tax bonds - General obligation securities that are backed by the full faith and credit of a local or state government. The taxing power of the issuer is not limited to the rate or amount of the issued bond
  • Limited tax bonds - Converse of unlimited tax bonds; the taxing power of the issuer is limited to a specific value
  • Moral obligation bonds - Securities with a government guarantor who does not have a legal obligation to pay back the debt to investors
  • Government credit-enhancement bonds - Programs that range from partial to total credit substitution of a strong governmental entity for a weaker one
  • Leases and appropriation-backed obligations - Used in the case that the issuer is constitutionally prohibited from using general obligation debt or if voters are not expected to approve GO debt.
  • Certificate of participation - A COP is an arrangement in which investors buy certificates that entitle them to receive a share in the lease payments from a particular project.
  • Special-purpose district bonds and special-assessment bonds - Tax-backed financing; only those who benefit directly from the bond-financed improvements are obligated to pay special taxes or assessments for the repayment of bonds.
  • Special-tax bonds Combine elements of general obligation and revenue bonds.
  • Tax-increment bonds- Used to finance improvements in developing and/or redeveloping areas
  • Tax-based notes - General obligation notes and some types of commercial paper that are also tax-backed securities

Revenue Bonds

These types of bonds are payable from a specific revenue-generating institution. Unlike general obligation bonds, they are not backed by the full faith and credit of the issuer; rather they rely solely on the revenue that they produce to pay back their municipal debt. Examples of what types of project that revenue bonds fund may be found below:

  • Utilities Revenue bonds may be used to finance electric power, gas, waste water, water, and solid waste systems. These institutions may then, in turn, provide the public with these services for a fee. The fee is the revenue generated by the given institution and will then be used to pay off the municipal debt that gave rise to them in the first place
  • Health Care, Higher Education, and Other Not-for-Profit Hospitals, private and public colleges, and other not-for-profit institutions may also be financed by revenue bonds. The income they generate from their varying services is used to pay their municipal debt
  • Housing Revenue bonds are commonly used to finance low-income or multi-family housing. In turn, these housing bonds are then payable from rents, mortgage payments, and federal subsidies
  • Transportation Revenue bonds may be used to finance highways, turnpikes, airports, bridges, ports, tolls, and mass-transit facilities. The revenue that they collect from tolls and other fees is once again used to pay off their debt.
  • Industrial Development and Pollution Control These projects are typically funded by revenue bonds and help to build government-owned institutions/equipment which is then leased privately at a rate equivalent to the payments of the original municipal debt.

The Financing Process

The issuer first needs to assess its situation. How much capital do they have? How much additional capital will they need? They also need to take into account their current needs and compare them to what they expect their future needs to include. The issuer may have to study utility usage, population growth, business growth, or any number of other factors depending on the type of project they plan on funding.

It is also crucial for bond issuers to be involved with the political process of getting a bond issued. Certain bonds require voter approval, and therefore must be included in elections for a particular region. In this case, it becomes the job of the issuers, or hired third party institutions, to champion their cause, inform the public of their project, and convince them of the benefits.

Financing Team

The bond issuer will need to select a financing team that includes a bond counsel, a financial advisor, or financial advisory firm, and an underwriter. The bond counsel consists of an expert legal team to advise the issuer of the process along the way and whether or not new legislation will be need for their particular project. The financial advisor handles the details of the bond transactions - dealing with the rating agencies, advising on the price and sale of bonds, assisting in preparation of financial documents, and evaluating financing options. The underwriter is the financial institution that initially purchases the municipal bonds from the issuer and therefore both funds and guarantees their project.