Using Bonds to Finance Public Projects

Public Works Resource
May 7, 2013 — 1,794 views  
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In a volatile financial market, municipalities need money more than ever to build and expand local initiatives. Federal monies are much slower coming down the pike and private financing is getting much more difficult to procure even for cities, towns and counties with good credit - banks simply do not want to lend money to projects that do not have a short term and extremely low risk profile. This basically reduces private banks to lending to corporations on the basis of account ledgers, which municipalities have a harder time providing.

However, there is still a way for all municipalities to raise money for local projects - the sale of bonds. The sale of bonds has been used historically in the United States for all types of municipal projects from railroads to museums ever since the Civil War. 

Bonds have many advantages for municipalities as well as the people who buy them, as listed below:

One - Guaranteed return

Municipal bonds are considered the least risky types of investments next to federal and state issued bonds. They guarantee a certain rate of return that usually outpaces inflation depending on the term period of the bond in question. Most of them are fixed rate so the calculations are easy to make even for people who do not invest in bonds a great deal.

Two - Tax exempt status for bond purchasers

The people who purchase bonds often receive a reprieve from federal, state as well as local taxes. Not only do the bonds gain interest tax free, but they are not taxed at the end of term, depending on the type of bond that is purchased.

Three - Local political power

Many people will purchase bonds because it makes them feel a larger part of the community. Purchasing bonds is also a very real investment that can leverage political power in large enough purchases.

Advantages to the Municipality

One - Capital projects can be funded immediately.

A municipality that is waiting on funding from the federal or local level may have to put off certain aspects of their project until the funding agents get around to providing money. If a municipality sells its own bonds, it sets its own timeline, which is quite advantageous when it comes to time sensitive and seasonal operations.

Two - There are fewer limitations as to the amount of money that can be raised.

With outside funding, a municipality must set a budget and hope that the projects that are to be funded do not go over that budget. Otherwise, they must go back and ask for more money. With municipal bonds straight from the source, a city or town can actually raise more money than is needed. If a project goes over budget or over time, there will be less of an emergency situation.

Three - There are different types of municipal bonds to sell.

Between general obligation bonds and revenue bonds, municipalities have many different ways of raising money that can be backed by revenues that the city can rely on.

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