Issuing Bonds: What Municipal Governments Need to Know

Municipal governments, whether townships, cities, villages, or counties, are frequently tasked with delivering essential infrastructure and public services while maintaining fiscal responsibility.   

One important financing tool is the issuance of bonds. When used strategically, bonding enables municipalities to invest in long-term capital projects that enhance the community. However, bonding also creates long-term obligations that require careful analysis, planning, and public engagement.  

Benefits of Issuing Bonds  

1. Immediate Capital for Major Projects 

Bonds provide upfront funding for critical projects such as roads, utility systems, public safety facilities, or government buildings. Instead of deferring improvements for years, municipalities can address pressing needs promptly and efficiently.  

2. Distributes Costs Over Time 

Spreading repayment over 10 to 30 years allows multiple generations to share in the cost of projects they will use and benefit from. This long-term structure supports equity in funding and helps avoid sudden tax or rate increases.  

3. Preserves General Fund and Operational Stability 

Bonding separates capital financing from daily operating budgets. This allows municipalities to maintain essential services and financial reserves while investing in long-term infrastructure without diverting operational funds.  

4. Potential for Lower Interest Rates 

Tax-exempt municipal bonds can be a cost-effective borrowing option, especially for municipalities with strong credit ratings. A well-structured bond issue can lower total borrowing costs, making it an efficient tool for financing.  

Challenges and Considerations of Issuing Bonds 

1. Long-Term Financial Commitment 

Bonds create an obligation to repay both principal and interest over time. These future liabilities must be factored into the overall debt strategy and financial planning to avoid overextending the municipality’s resources. 

2. Added Borrowing Costs

Issuing bonds involves more than the principal; it includes interest and costs such as legal, underwriting, and administrative fees. These need to be accounted for in project budgeting and long-term financial analysis. 

3. Public Communication and Approval

For general obligation bonds, many municipalities are required to seek voter approval. Success depends on a transparent and well-communicated plan that builds public understanding of the project, its necessity, and its financial implications. 

4. Credit Impact and Borrowing Capacity

Significant or poorly managed borrowing can affect a municipality’s credit rating and limit its ability to borrow affordably in the future. A sound debt management policy is essential to safeguard long-term financial health.  

Key Factors in the Bonding Process  

Define Project Scope and Urgency  

Municipal governments should clearly identify the project purpose: Is it road reconstruction, water infrastructure, a new public works facility, or fleet replacement? Bonding should be used for capital projects that deliver long-term community value. Consider whether the project is urgent or could become more costly if delayed.  

Choose the Right Bond Type  

Municipalities commonly use:  

• General Obligation (GO) Bonds: Backed by the full faith and credit of the municipality, these often require voter approval.  
• Revenue Bonds: Repaid from specific revenue sources such as utility or service fees, they typically do not require a public vote.  

Understanding the legal and financial distinctions between bond types is crucial to selecting the appropriate funding method.  

Assess Financial Capacity  

Before issuing bonds, municipalities must review current debt levels, revenue streams, credit ratings, and statutory debt limits. Financial advisors or bond counsel can help determine whether additional debt is appropriate and sustainable.  

Calculate Total Cost of Borrowing  

Officials should examine the full cost of repayment over the life of the bond, including interest and issuance fees, to ensure long-term affordability. Comparing bonding with other financing options can guide cost-effective decision-making.  

Engage the Community  

If public approval is required, or even if it isn’t, transparency builds trust. Inform residents how the funds will be used, the potential tax or rate impacts, and the community benefits. Tools like FAQs, public meetings, and communications campaigns can help answer questions and encourage informed support.  

Monitor Timing and Market Conditions  

Interest rates, inflation, and construction costs can significantly impact borrowing decisions. Municipal governments should collaborate with advisors to assess current market conditions and determine the optimal timing for bond issuance.  

Final Thoughts on Issuing Bonds 

Bonding can be a powerful and responsible way for municipalities to invest in the future, but only when paired with thoughtful planning, robust financial oversight, and strong community engagement.  

From administrators and finance directors to elected boards and public works departments, the decision to bond should reflect a shared commitment to fiscal stewardship and strategic growth. When managed well, bonding enables municipalities to meet today’s needs while laying the groundwork for a stronger, more resilient community tomorrow. To learn more, and get expert advice, contact the Maner government team at maner@manercpa.com.