Municipal Debt

Federalism and Municipal Debt Structure
Municipal debt takes on tens of thousands of forms in the U.S. This is because there are 50 states and almost 90,000 local governments - counties, cities, towns, school districts, etc. - within the U.S.

Federalism assures that there are multiple layers of government over each geographical boundary, since it bestows autonomy and power to various levels of government. As a result, the borough of Brooklyn, New York City is controlled by the Brooklyn Borough government, Kings County government, the New York City government, the New York State government, and the federal government, among others. Each government has its own authority, guaranteed by relevant state and federal constitutions, some rights of which are inviolable by other layers of government. Generally speaking, however, local governments - any government below the state level - have limited powers that can only be granted by the states, thanks to the states' Constitutionally-protected right to state sovereignty. As such, whether or not a local government may incur or issue bonds is a question decided by each individual state.

It is important to note that the definition of municipal government does not include states; however, the municipal bond market sells state debt instruments. As such, we will refer to municipal debt to encompass all debt instruments sold in the market: state and local and quasi-public debt.

Forms of Municipal Debt
Municipal debt takes on many forms in the United States, depending on the repayment source, length, and purpose for which the debt is being issued.
 * Municipal bonds are debt instruments issued by state and local governments to finance capital projects. Some bonds, if they are short-term bonds, can take 1-3 years to mature. Other bonds, if they are long-term bonds, can take 10-30 years to mature. The common bond types include :
 * General obligation bonds, which are bonds backed by the full faith and credit of a government, and which are generally repaid using tax revenue. Most states have specific requirements on how this debt may be issued, and for what purposes it may be used. Some also limit the amount of debt that can be issued in this fashion. For example, New York requires that all general obligation debt be approved by New York voters once a year, during a general election.
 * Revenue bonds, which are bonds backed by a dedicated revenue source, such as highway tolls.
 * Appropriation bonds, which are bonds for which debt service payments are appropriated each year into the government’s annual budget. These bonds are generally debt securities issued by a secondary entity, for which the government has promised to pay all debt service.
 * Private activity bonds (conduit debt or conduit bonds), which are bonds issued by municipalities on behalf of private entities, normally for projects which will provide society with a public good, like building private hospitals. Municipal governments are not liable for conduit debt service payments; all debt service is paid by the borrower. It is beneficial, though, for private entities because they can reap the benefits of the municipality’s tax-exempt status.

Back to Municipal Debt
 * Municipal notes are short-term debt instruments issued by state and local governments to smooth their revenue flows. Some common examples include :
 * Tax anticipation notes, which are issued in anticipation of tax revenue.
 * Revenue anticipation notes, which are issued in anticipation of other revenue.
 * Bond anticipation notes, which are issued in anticipation of bond proceeds.
 * Commercial papers, which are short-term debt obligations usually backed by a line of credit.