State and local governments issue bonds to finance important projects to meet social goals. Bonds provide financial flexibility. They offer governments the option of financing a project over a period of years, thereby avoiding the need for a large, upfront lump sum of money from the general fund. In addition, their tax-exempt status allows state and local governments to borrow at reasonable interest rates for projects that potentially benefit communities. At the same time, bonds can be risky, since there must be a revenue source to make payments over the life of the bond and since repaying the bond once it comes due must take precedence over all other expenses of state and local governments. Repayment of the bond will often require raising taxes.
ISSUANCE OF BONDS: Policy
Criteria for evaluating bond financing
When considering bond financing, state and local policymakers should:
- exercise caution and 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;
- consider whether the intended social goal is worth the potential for higher tax burdens on certain citizens or in certain communities since bond costs will be passed onto taxpayers in the form of higher future taxes; and
- ensure that the bond payments are supported by a sufficient revenue stream and are assigned a credit rating that suggests the issuer will be able to pay it back on time and in full.