Municipal Bond FAQs
What are general obligation bonds?
General obligation bonds are a method of borrowing money by states and local governments, similar to a mortgage, to raise funds for public projects. The City borrows from the bondholders and pledges to pay it back with interest over a predetermined number of years. They are unique in that they are backed by the full faith and credit of the issuing government, meaning that the government commits its full taxing authority to paying bondholders. These bonds give cities a tool for raising funds for major capital projects that will not provide direct sources of revenue such as roads and bridges, parks and equipment. They are typically used to fund projects that will serve the entire community. General obligation bonds allow a city to spread substantial costs out over a longer period of time. The amount of tax increase needed to pay for such projects on a pay-as-you-go basis would be prohibitive.
Why issue bonds?
General obligation bonds are the cheapest and most cost-effective way to borrow money for major projects.
How will the city pay back the holders of general obligation bonds?
The primary reason municipal general obligation bonds are low-risk investments is because they are backed by the credit of the city issuing them. This means cities can use funds raised from various sources, including taxes. This bond issuance for the Successor Agency formerly known as the Community Redevelopment Agency, however, will be paid back with the annual receipt of tax increments, not through any other city revenue sources.
What other capital fund raising alternatives exist to issuing bonds and how do they compare/contrast to bonds?
There really are no alternatives to raising capital other than bonds or other types of borrowing such as a note, which is pursuant to a bank loan. Actually a bond is just a financial obligation and can be structured in any way that a bank or lender desires.
How will this bond issuance for the Successor Agency formerly known as the Community Redevelopment Agency be different from one for the City of Compton?
The Successor Agency formerly known as the Community Redevelopment Agency will have specific guidelines and structures set in place to carefully manage the bond finances over the life of the issuance. All development projects will be through the Agency and adhere to strict protocols, which will be structured to implement the overall growth plan and vision of the City of Compton.
Why do people buy municipal bonds?
Tax-free interest. The primary reason people buy municipal bonds is that the interest received from municipal bonds is tax-free with regard to U.S. federal income tax. Additionally, if the bonds are issued in your state of residence, the interest is tax-free of your state’s income taxes as well as in most U.S. states.
How are municipal bonds bought and sold?
Municipal bonds are not traded on an exchange or through a centralized market. Bonds are traded in an over-the-counter market between dealers. For individual investors, there are also bond dealers and bond brokerages specialize in selling and trading municipal bonds.
For a PDF copy of this document please download the following document:
Tax Allocation Bond FAQ (575 KB)
Agency Bond Projects (186 KB)