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 reasonable interest rates. At the same time, bonds can be risky. There must be a revenue source to make payments over the life of the bond. And repaying the bond once it comes due must take precedence over all other expenses of state and local governments. Repayment of the bond often requires raising taxes.
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 the bond payments are supported by a sufficient revenue stream; 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.