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Bonds

For a large capital project, municipalities typically will choose to issue a municipal bond (sometimes referred to as a “muni” in the market) in order to pay for it.  Bonds are a good tool for short- and long-term financing as they are generally inexpensive due to the low-risk nature of governments.  They are also an attractive option as they spread the payment for the asset evenly with the use of it, so that taxpayers are not unduly burdened up-front for something intended to benefit later generations.

Bonds take one of two forms: general obligation and revenue.  A general obligation (GO) bond is backed by the full faith and credit of the issuing city, and is therefore 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.  Bonds are normally long-term in nature.

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 a sum of money in anticipation of forthcoming payment 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.

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