For a large capital project, municipalities typically will choose to issue a municipal bond (sometimes referred to as a “muni” in the market) to pay for it. Cities may use bonds as a tool for short- and long-term financing because they are generally inexpensive due to the low-risk nature of governments. They also spread the payment for the asset -- like a large infrastructure investment -- evenly with the use of it. As a result, current taxpayers do not fully fund something intended to benefit later generations.
Bonds take one of two primary forms: general obligation and revenue. A general obligation (GO) bond is backed by the full faith and credit of the issuing city, which makes it virtually riskless as the city uses tax dollars to pay interest. A revenue bond is backed by the revenue-generating ability of the project, like a parking garage, softball complex, or hospital. This way, the revenues from sales or fees associated with the project cover the debt service. Bonds are normally long-term in nature such as 20 or 30 years.
Notes are similar to bonds in that they provide a large sum of money up front at a low cost to the city, but they are normally much shorter in duration. Revenue anticipation notes (RAN), tax anticipation notes (TAN), and bond anticipation notes (BAN) all provide money in anticipation of forthcoming payment(s) from various sources. They can be used to close a budget gap, get a jump-start on projects, or fund revenue-based projects while payments are being collected.
The Kentucky League of Cities serves as the united voice of cities by supporting community innovation, effective leadership and quality governance.
