Municipal bond

A municipal bond (often shortened to muni) is a debt instrument issued by state and local governments, or publicly owned corporations under the authority of such, generally to borrow money for new or renovated infrastructure.

The term is not used to describe borrowings by the Federal government.

Municipal bonds, for the most part, are exempt from federal income tax, and often from state income tax (if purchased by a resident of the state in which the bonds were issued).

Types of bonds

There are two general types of municipal bonds: general obligation and revenue.

A general obligation bond is guaranteed by the taxing power and authority of the issuer, which can be unlimited or limited depending on the jurisdiction. These are the most common types of bonds and are primarily funded by a property tax assessment. An example use for these bonds is to expand a jail.

A revenue bond is guaranteed only by expected revenues; as such, the possibility of default is greater. An example use for these bonds is an airport authority issuing them to renovate a passenger terminal; the facility charges (and other revenue from concessions, parking, etc.) are pledged to pay the bonds. Another common use is to fund water and sewer infrastructure; the bonds are paid for by customer charges.

Issuance

For most bonds, voter approval is required. Some jurisdictions allow some bonds (or notes) to be issued without approval for minor projects (such as to repave the City Hall parking lot), for emergencies (such as to replace a failing HVAC system in the county jail), or to cover items needed prior to a major project beginning (architect, engineering, and legal services, and long-lead items). In any event, public notice and hearing is required so that people may speak for or against the proposal.

If approved, rarely are all the bonds issued at once. Most proposals cover many major projects planned over several years, as the sheer availability of labor and materials would make it impossible for all the projects to be done at one time. Instead, bonds are issued in series (so as to minimize the debt level). Also, proceeds not needed immediately are invested to earn interest, thus lowering the total amount needed.