There is a long history of municipal bond financing, and its development began in the late 19th century. In the aftermath of a large wave of defaults in the early 20th century, bond counsel was introduced to help investors feel confident about their investments. Originally, bond counsels were seen as a protection for less-informed buyers. Eventually, a few broker-dealers began to specialize in municipal finance. In 1880, N.W. Harris & Co. opened its Chicago office, and other firms followed in the late 1880s. A decade later, Salomon Brothers & Hutzler opened its New York office.
Tax revenue municipal bonds
Tax-exempt municipal bonds can be an attractive investment option for investors in tax-sensitive areas. These bonds are tax-free in most cases, although their coupon payments are subject to federal taxes. One exception to this is a bond issued to fund a state pension plan obligation. Tax-exempt municipal bonds are typically more expensive than corporate bonds, and investors in lower-tax states might do better buying corporate bonds instead.
Taxable issuance has increased across sectors and security types, and new money has been a driving force in recent months. In the second quarter of 2019, taxable issuance accounted for nearly $3 billion, representing 14% of the total municipal supply. This increase was driven by large refunding transactions, new money transactions, and issuers taking advantage of advance refunding opportunities. In addition, taxable issuance by states increased by over 60%, which is a record high.
The government also issued bonds for private investors. While they may be tax-exempt, many tax-exempt issuances still benefit from state and local tax exemptions. This makes them important economic policy tools. These bonds also provide lower interest rates than their taxable counterparts. This makes them an attractive investment option for many public organizations.
Municipal bonds can support many public goods projects. By exempting interest payments, tax-exempt municipal bonds provide an indirect federal subsidy to issuers. While most academic papers and popular news coverage focus on local subsidies for professional sports stadiums, this research shows that the federal government also has a role to play in financing such projects.
The tax-exempt status of municipal bonds allows issuers to sell them at lower interest rates. This is because the federal tax rate for tax-exempt bonds is approximately nine percent lower than for those who own taxable bonds. The lower tax rate on tax-exempt municipal bonds is a significant incentive for investors.
Some municipalities have benefited from the practice of taxable advance refundings for years. However, these methods have historically been used only by larger and highly rated municipalities. This is because the high costs of borrowing accompanied taxable municipal bonds has prevented their use by small municipalities.
General obligation bonds
Municipal bonds are a form of debt financing, issued by local governments and other governmental entities. They are issued to fund a variety of projects and may offer a low rate of interest. They also tend to be tax-efficient and can offer a high degree of security. Municipal bonds come in two general types: general obligation and revenue bonds. Revenue bonds are supported by a portion of the ongoing tax revenues generated by the issuer. General obligation bonds are not backed by specific project revenue, but are instead issued by governmental agencies as a way to raise money for a large project. Some GO bonds are backed by dedicated property taxes, while others are payable from general funds.
Municipal bonds have a long history. They have weathered almost every economic storm and have provided much needed capital during deep U.S. recessions. Although there have been some problems along the way, the market has served the interests of both communities and issuers in the past century. Municipal bond financing remains an excellent option for municipal governments looking to raise funds for their projects.
Municipal bonds are also good for capital investments. The interest they pay are often tax-free, and the issuer may even be able to avoid paying taxes on the interest that they earn. These bonds can also help fund essential infrastructure in a community. There are two main types of municipal bonds: revenue bonds and general obligation bonds. Both types of municipal bonds are considered low-risk investments.
In the early 19th century, the municipal bond market experienced a boom that would shape economic policy for the rest of the century. Between 1835 and 1838, the market was worth more than $108 million. Then, the speculative bubble burst. In 1837, the first state to default was Alabama. This course of events demonstrated the importance of investing in public finance.
The tax-exempt status of municipal bonds was up for debate during the development of the Tax Cuts and Jobs Act in 2017. Luckily, the final version of the tax reform legislation preserved the tax-exemption status of municipal bonds, but did remove advance refunding as well. This cut saved federal dollars and helped to pay for other costs in the package. But it eliminated flexibility for communities.
Michigan State University’s century bond
Michigan State University plans to issue 500 million in century bonds early next year to strengthen its financial stability and meet its long-term strategic goals. The bonds, which have a 100-year maturity, would provide the university with a low-interest source of funding and more flexibility to use the proceeds. The bonds will also provide a guaranteed return for investors. The university says it will use the proceeds for capital investments, research programs and health care initiatives.
The bond’s issuance will benefit from historically low interest rates. It also will diversify the repayment schedule and create an investment fund at lower rates than the university currently pays for capital. The university hopes to be in the market during the first quarter of 2022. This new bond financing will help the university continue to attract new faculty and projects.
While the interest rate on these bonds is relatively low, investors are still monitoring the debt markets to ensure that the money goes to the intended purposes. Schools often use century bonds to improve their facilities. They have the advantage of being issued at a low rate for decades and are easily purchased by insurance companies.
Aside from teaching at Michigan State University, Schimmel also has extensive experience in municipal finance. He has served on several boards and committees and is a frequent speaker on the topic. He has written several articles and advised state and local officials on how to market municipal bond issues. His work has led to him being recognized as an expert in Michigan municipal debt issues. In addition, he is active in arts, public policy, and philanthropy.
Michigan’s 2020 sustainability bond
The University of Michigan has entered the bond market with its first issue of a century bond, a bond that is structured to be repaid in 100 years instead of 30 years. This maturity allows the university to invest a small amount today, and compound interest will grow the investment over the years. Moreover, the university has become the first university in the country to issue a green bond, which must be used for green capital projects.
The University of Michigan is planning to issue $1 billion of bonds to fund future construction and renovation projects. The Board of Regents unanimously approved the resolution on Feb. 17 that authorizes the university to issue up to $2 billion in general revenue bonds, giving it more flexibility to respond to market conditions. As interest rates are rising in the U.S., most economists anticipate the Federal Reserve to raise its benchmark interest rate multiple times in the coming years.
In 1982, the State of Michigan was facing budgetary problems and most banks refused to help. In response, a group of seven Japanese banks, led by Bill Koch, agreed to guarantee the state’s short-term borrowing in order to keep workers from going hungry. Another project Koch helped finance was a $237 million hospital at the University of Michigan. That was the largest bond issue in Michigan’s history.
The process for issuing a municipal bond can be complicated, so a good issuer counsel can save the municipality money and time. These professionals can also help the municipality get the best deal possible. They can also provide valuable guidance and advice on a project’s financial and sustainability risks.
In order to raise money through a bond, a municipality must provide regular financial information to investors in the secondary market. In return, the issuer must certify that it is able to pay back the money from bond proceeds. These disclosure materials are required to be accurate and non-misleading. Furthermore, the issuer must ensure that the funds in a municipal bond escrow account are sufficient to repay the bonds on the payment date.
