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10 Things to know about Municipal Debt
Covering Municipal Debt Offerings
Municipal Bond
Debt issued by a state, city, political subdivision, or territory.
Revenue Bonds
This bond is meant to pay for the construction of revenue generating facility such as hospitals, stadiums and bridges or roadways. They’re known as self-supporting because the money generated funds the payment of interest and principal and not ad valorem(Property) taxes.
The revenue comes from usage of property like user fees or leases. Funding sources can be something along the lines of excise fees which are taxes on items like fuel, tobacco, or gas.
Industrial Development Bond
This is a type of revenue bond - the interest and principal payments are backed by the rents paid and the guarantee of the company that will be occupying the property.
The bond is not backed by the full faith and credit or ad valorem taxes of the municipality. So if the corporation defaults the bondholders cannot claim any assets to satisfy the debt.
This is often used to construct facilities for use by companies.
Taxation
Muni Bonds are not taxable by the Federal Government, and are sometimes not taxed by the State you live in. This can depend on which State you live in and whether you are a resident of that State.
Due to this federal tax exemption municipal bonds are not suitable for use in a tax qualified retirement account. Think about it, if you aren’t paying federal taxes on it there is no point to locking the money up in a tax deferred plan. Muni’s also have lower interest rates because of this tax-free feature.
Special Assessment Bond
Is used to pay for projects where taxes are only levied on those that will receive benefit from it.
