Background
State and local governments issue bonds to finance important projects that meet social goals and benefit communities. Bonds are attractive because they provide financial flexibility. They offer governments the option of financing a project over a period of years. This avoids the need for a large, upfront lump sum of money from the general fund. In addition, the tax-exempt status of bonds allows state and local governments to borrow at preferred interest rates. At the same time, bonds are inherently risky. Borrowing jurisdictions must repay investors back with interest. Bond payments take precedence over other expenses of state and local governments. Borrowing jurisdictions must maintain taxes over the bond's lifetime at a level sufficient to make the payments.
ISSUANCE OF BONDS: Policy
ISSUANCE OF BONDS: Policy
Bond financing criteria
When considering bond financing, state and local policymakers should:
- ensure that repaying the bond will not cause a financial strain on the state or local government budget;
- consider who will benefit from the project, including older residents, those with lower incomes, and multicultural communities;
- evaluate whether the intended social goal is worth the potential for higher tax burdens on certain citizens or in certain communities;
- ensure that a sufficient revenue stream supports the bond payments; and
- ensure that the bonds can secure a credit rating that suggests the issuer will be able to pay it back on time and in full.
Tax increment financing (TIF)
TIF projects should only be used when evidence shows that:
- the private sector is unlikely to invest in the designated area without government investment,
- the project's failure would not put at risk the locality's ability to provide critical government services, and
- current residents will benefit from the investment over the long term.
Policymakers and researchers should track, study, and report on TIF projects. TIF projects that use bonds should comply with a bond financing criteria policy.