Bonds can reduce heavy annual tax burdens

It’s important to understand why municipalities leverage municipal bonds. As stated above, it is a common and effective strategy for municipalities to finance necessary projects and services without imposing significant
immediate tax burdens on residents. Here are some the benefits:

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• Access to Capital: Municipal bonds allow municipalities to raise large amounts of capital that can be invested in infrastructure and essential services. This upfront funding can be crucial for timely improvements and development. Municipalities often issue bond anticipation notes (BANs) as a way to finance projects in the short term. BANs are short-term interest-bearing securities that municipalities issue in anticipation of a future long-term bond issue. They provide immediate funding for projects while allowing the municipality to defer the issuance of longer-term bonds. Once the long-term bonds are issued, the proceeds are used to pay off the BANs. 

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• Spreading the Cost: By using bonds, the cost of long-term projects is spread out over time. This equity approach ensures that those who benefit from the improvements help pay for them over time. In other words, if you don’t issue debt and install pay as you go to make borough improvements, you would drastically raise taxes immediately for projects, many of which benefit generations of residents over a long time (e.g., Senior Community Center, roads, water treatment, emergency services, etc.) 

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• Low-Interest Rates: Municipal bonds typically have lower interest rates compared to other forms of borrowing. This makes them a cost-effective way to finance public projects. 

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• Tax Advantages: Interest earned on many municipal bonds is exempt from federal income taxes and, in some cases, state and local taxes as well. This tax advantage makes them attractive to investors, thereby reducing the interest costs for the issuing municipalities.

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• Credit Ratings and Fiscal Responsibility: Municipalities need to maintain good credit ratings to issue bonds at favorable rates. This encourages fiscal responsibility.