Types of securities issued by municipalities

written by: Lona Matheson; article published: year 2006, month 08;



In: Categories » Legal and finance » Taxes » Types of securities issued by municipalities

Municipal securities (or simply munis) aredebt obligations issued by state governments, local governments and entitiescreated by local governments.

There are both tax-exempt AND taxable municipal securities,where "tax-exempt" means that interest on a municipal security isexempt from federal income taxation. Capital gains are still subject to federalincome taxation. Whether interest income on a municipal security is tax-exemptat the state and local levels depends on the specific tax laws in each state.

Different from Treasury securities, municipal securities have creditrisk.

There are basically two types:

  • Tax-backed debt obligations are instruments issued by states, countries, special district, cities, towns and school districts that are secured by some form of tax revenue. There are three types of tax-backed debt:
    • General Obligation Debt (GO): these securities are backed by the issuer's unlimited taxing power, andits full faith and credit. However, there is a statutory limit on the taxrates that the issuer can levy to repay the debt. Certain GOs are securednot only by the issuer's general taxing powers but also by certainidentified fees, grants and special charges. Such bonds are known asdouble-barreled in security.
    • Appropriation-Backed Obligations: in addition to being backed by the issuer's revenue, these securities arealso backed by a non-binding appropriation of funds from the state'sgeneral tax revenue. Since the state's pledge is not binding, thesesecurities are also called moral obligation bonds. The purpose is toenhance the credit worthiness of the issuing entity.
    • Debt Obligations Supported by Public Credit EnhancementPrograms: there are two common forms ofcredit enhancements which are legally binding: a guarantee by the stateor a federal agency, or an obligation of the state to withhold and usestate aid to pay the issuer's unpaid debt.
  • Revenue bonds are issued for enterprise financings that are secured by the revenues generated by the completed projects themselves, or for general public-purpose financings in which the issuers pledge to the bondholders the tax and revenue resources that were previously part of the general fund. They include utility revenue bonds, transportation revenue bonds, housing revenue bonds, higher education revenue bonds, health care revenue bonds, sports complex and convention center revenue bonds, seaport revenue bonds and industrial revenue bonds. Different from a tax-backed debt, the issuer of a revenue bond has the obligation to repay the debt only if the underlying project generates sufficient revenue. If not, the issuer does not have to make additional payment.

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