Municipal Debt Flashcards
A debt obligation issued by a municipality for the benefit of a corporate user is a:
Industrial Development Debt - These are issued by municipalities to build facilities that are leased to corporate users. These types of revenue bonds use lease payments made by the corporate lessee (or building tenant) are the source of funds to pay the debt service on the issue of bonds.
How are GO bonds backed?
BY the full faith, credit, and taxing power of the issuer (a municipality) Ad valorem taxes, fines collected for paying taxes late, assessment of additional taxes, and fees collected are all sources of income backing GO issues.
Certificate of Participation
Pldged by a lease of revenues, more popular than GO bond issuance in most states because they are easier to issue than GO bonds.
Issued by a state entity where lease revenues are pledged to back the issue. The lease payments are received from a project like a university dorm, prison, transit system or municipal office building.
NOT subject to statutory debt limits, have a lower credit rating than GO bonds of the same issuer because there is more credit risk.
What typed of bonds are issued by Corporations?
Corporation issue income bonds or adjustment bonds in times of corporate distress. These bonds obligate the issuer to pay ONLY if the issuer has sufficient income.
What type of bonds are issued by Municipalities?
Municipalities issue REVENUE bonds, which pledge the revenues of a facility to pay for the debt service on the issue generated
What are GAN’s used for?
Issued by municipalities to pull forward and get immediate use of federal grant money expected to be received in upcoming months. These are used for mass transit, energy conservation, and pollution control improvements.
If a municipality is at it’s debt limit and wants to sell additional bonds Voter approval is required to sell:
Limited tax GO bonds, and unlimited tax GO bonds.
Voter approval is needed to sell GO bonds (non-self supporting debt) regardless of the taxing power backing the bonds.
What is a variable rate demand note?
A long term issue that gives the holder the right to PUT the bond to the issuer on preset dates. It’s long term because there is no stated maturity, the interest rate is reset weekly at the interest payment date to an indexed rate for the next week - this means the interest rate will vary. The interest rate varies as market prices move so there is little to no Market risk.
Market Value never goes below par, and they have a yield which never rises above the stated rate.
What is the mill rate based on?
ASSESSED valuation - one mill is .001
Who performs the feasibility study in connection with a new municipal revenue bond?
An independent consulting firm. The feasibility study is a projection of building costs, expected revenues, and expenses
Constitutional Debt limits pertain to what type of issue?
GO BONDS. Municipalities impose debt ceilings on the dollar amount of bonds that can be issued and backed by ad valorem taxing power (GO BONDS) to raise this limit requires public referendum.
*Debt limits do not apply to self supporting debt such as revenue, industrial revenue bonds, or moral obligations.
Issuers of Federal Tax Exempt Commercial Paper include
Municipal governments ONLY. Corporate and US gov’t debt is subject to federal income tax; muni’s are exempt from federal.
What is a General Obligation Issue?
Issued from a municipality to finance work on a non revenue generating facility such as a school. This is a non self supporting debt.
What is contained in a municipal bond resolution
- The issuer’s duties to the bondholders
- The nature of the obligation
- Any restrictive covenants to which the issuer must adhere
Are pension plan suitable to hold municipal bonds?
NO! Pension plans are tax qualified and earning are tax deferred so there is no benefit to investing in muni’s. They would use Corporate or U.S. gov’t issues instead.
