A municipal bond is a loan to a state or local government in exchange for interest payments.

Cities use municipal bonds to raise capital to fund large, expensive and long-lived public projects like infrastructure improvements (roads, bridges, schools), public services, and other essential community needs, as these bonds allow them to access significant amounts of money by essentially taking out a loan from investors, which is often made more attractive by the tax-exempt interest payments on the bond. 

Municipal bonds are also known as munis.

Munis can generally be classified into two camps – general obligation bonds and revenue bonds. General obligation, or GO, bonds are backed by the general revenue of the issuing municipality, while revenue bonds are supported by a specific revenue source, such as income from a toll road or sewer system.

Texas state law generally requires our local governments to seek voters’ approval before issuing debt that will be repaid from tax revenues.

Bond debt can be compared to a home mortgage that is repaid over time, while Operations & Maintenance expenses are like the daily household expenditures that are paid for immediately, such as groceries. Like buying a house, major capital improvement projects, such as park or library improvements, have a long useful life, so their cost is spread out over many years and paid for by current and future citizens who use them. The debt is typically financed over a 20-year period.

When voters approve bond propositions, the City does not issue all of the debt immediately. Instead, debt issuances are spread out over several years according to the annual spending needs of the bond program. By monitoring the annual spending needs and not issuing all the debt at one time, the City can keep the debt service tax rate more stable from year to year.