Local governments and public authorities issue municipal bonds to raise money for projects

A municipal bond is a debt security issued by a state, city, county, or other local government body — or by a public authority created by that government. When you buy a municipal bond, you are lending money to that issuer, and they promise to pay you back with interest over a set period. The issuer uses the money raised from selling bonds to pay for things like roads, schools, water systems, and public buildings.

The issuer is the government entity or public authority that borrows the money. It is not the federal government, and it is not a private company. The issuer is responsible for repaying bondholders on schedule and for disclosing information about how it plans to use the money and how it will repay the debt.

Key Takeaways

  • Municipal bonds are issued by state governments, cities, counties, and special-purpose public authorities — never by the federal government or private companies.
  • General obligation bonds are backed by the issuer's taxing power, while revenue bonds are backed only by income from a specific project or service.
  • Public authorities like transit agencies, water districts, and hospital authorities can issue bonds even if they are not traditional city or county governments.
  • The issuer must file official statements and ongoing disclosures with the Municipal Securities Rulemaking Board so bondholders can track the issuer's financial health.

State governments and their agencies

States issue bonds to fund highways, universities, prisons, and other statewide infrastructure. A state may issue bonds directly through its treasury department, or it may create a separate agency to issue bonds for a specific purpose — such as a state housing finance agency or a state university system.

When a state issues a bond, it pledges its full taxing power to repay it. This type of bond is called a general obligation bond. Because states have broad authority to collect income tax, sales tax, and other revenue, general obligation bonds issued by states are considered very low-risk. The state's credit rating — assigned by agencies like Moody's, Standard & Poor's, or Fitch — reflects how likely it is to repay on time.

Cities and counties

Cities and counties issue bonds for schools, police and fire departments, libraries, parks, and local infrastructure like sewers and roads. Like states, cities and counties can issue general obligation bonds backed by their taxing power — typically property tax, sales tax, and other local revenue.

A city or county may also issue revenue bonds, which are backed not by taxes but by income from a specific project. For example, a city might issue a revenue bond to build a parking garage, and the bond is repaid from parking fees. A county might issue a revenue bond to build a hospital, repaid from patient revenue. Revenue bonds carry more risk than general obligation bonds because they depend on the project generating enough income to cover the debt.

Public authorities and special districts

States and localities often create separate public authorities to manage specific services or infrastructure. These authorities can issue their own bonds. Common examples include transit authorities (which run buses and trains), water districts (which manage drinking water and sewers), airport authorities, port authorities, and hospital authorities.

A public authority is a legal entity created by state law or local ordinance. It has its own board of directors and its own budget, separate from the city or county that created it. When a public authority issues a bond, it is the authority — not the city or county — that is responsible for repaying it. The bond is typically backed by revenue from the service the authority provides. For example, a transit authority repays bonds from fare revenue, and a water district repays bonds from water bills.

How issuers decide to issue bonds

An issuer decides to issue bonds when it needs money for a large project that will serve the public for many years — such as building a bridge, expanding a school, or upgrading a water treatment plant. Rather than paying for the entire project upfront from tax revenue, the issuer borrows money by selling bonds. Bondholders are repaid over time, often 20 to 30 years, so the cost is spread across many years and many taxpayers.

Before issuing bonds, the issuer typically must obtain approval from voters through a referendum, or from the state legislature, or from a local governing board — depending on state law and the type of bond. The issuer then hires an underwriter (usually an investment bank) to help structure the bond offering and sell it to investors. The issuer also hires a bond counsel — a law firm that confirms the bond is legally valid and that the interest is tax-exempt under federal law.

What issuers must disclose

Before selling bonds, an issuer must prepare an official statement that describes the project, explains how the bonds will be repaid, and provides financial information about the issuer. This document is filed with the Municipal Securities Rulemaking Board (MSRB), a self-regulatory organization that oversees the municipal bond market. The official statement is public and can be found on the MSRB's Electronic Municipal Market Access (EMMA) system.

After the bonds are sold, the issuer must file annual financial reports and other disclosures with the MSRB. These ongoing disclosures allow bondholders and potential buyers to track the issuer's financial health and the project's progress. If the issuer faces financial trouble or the project runs into problems, it must disclose that information so the market knows about it.

Credit ratings and issuer reputation

Before issuing bonds, most issuers request a credit rating from one or more rating agencies. The rating reflects the agency's assessment of how likely the issuer is to repay the bonds on time. Ratings range from AAA (highest quality, lowest risk) down to C or D (lowest quality, highest risk). A higher rating means investors will accept lower interest rates, so the issuer pays less to borrow.

An issuer's credit rating depends on factors like its revenue stability, the size of its debt relative to its income, the health of its economy, and its track record of repaying past bonds. A city with strong property tax revenue and low debt may receive a high rating. A city with declining revenue or high debt may receive a lower rating and have to pay higher interest rates to attract bondholders.

Frequently Asked Questions

Can a private company issue a municipal bond?

No. Municipal bonds are issued only by government entities and public authorities created by government. A private company cannot issue a municipal bond, though it may issue corporate bonds. The tax-exempt status of municipal bonds is reserved for borrowing by public entities.

What happens if a municipal bond issuer cannot repay?

If an issuer cannot repay a general obligation bond, it must use its taxing power to find the money — it cannot straightforward default. If an issuer cannot repay a revenue bond, it may default, and bondholders may lose money. Defaults are rare but do occur; Detroit, Puerto Rico, and some smaller municipalities have defaulted on bonds in recent decades.

Can I find out who issued a specific municipal bond?

Yes. The MSRB's EMMA system lists all municipal bonds and their issuers. You can search by issuer name, state, or bond type. The official statement for each bond is also available on EMMA and names the issuer and describes the project the bond will fund.

Do all municipal bonds have the same issuer type?

No. Some are issued by state governments, some by cities or counties, and some by public authorities like transit or water districts. The type of issuer affects the bond's risk and the source of repayment. A state general obligation bond is typically lower-risk than a revenue bond issued by a small public authority.