Let's Talk Municipal Finance – An Introduction

This is the first in a series of posts discussing financing alternatives available to municipalities and certain other governmental entities, such as school, water, and sewer districts. 

Municipalities and other governmental entities throughout Maine and New Hampshire are primarily dependent on real estate tax revenues to finance their municipal projects, however, at times the cost of a certain project may require a lump sum of capital that exceeds revenues. When such a situation arises, those entities may choose to borrow money, which is then repaid over time from tax or other revenues.

For long-term financing, municipalities and other governmental entities frequently issue bonds, either on their own or through a pooled issuance, such as those with the Maine Municipal Bond Bank, the New Hampshire Municipal Bond Bank or the United States Department of Agriculture. Generally speaking, there are two types of bonds – general obligation bonds and revenue bonds. Although municipalities may issue either type of bond, they most frequently issue general obligation bonds, which are payable from the general tax revenues of the municipality. On the other hand, other governmental entities usually issue revenue bonds, which are payable only from the revenues of the specific issuer. For example, an airport that issues a revenue bond to construct a new runway may only use revenues from the airport’s operations to repay the bond, rather than the general tax revenues of the municipality where it is located.

At times, a municipality or governmental entity may not be able to wait until a long-term bond can be issued or annual tax revenues are collected. In that case, they may turn to bond anticipation notes or tax anticipation notes obtained directly through a bank, each of which serve as interim financing until funds can be raised either through a full bond offering or from tax revenues. In other cases, a municipality or governmental entity may choose to avoid debt financing altogether through the use of a municipal lease purchase agreement for new equipment, which is similar to a lease-to-own agreement.

In our next installment in this series, we will discuss the bond application and issuance process and in later installments, other forms of financing such as anticipation notes and municipal lease purchase agreements.