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DNX Focus | Bond, not James Bond: A look at the municipal bond and how some RP LGUs have used it to finance their housing projects

Part 1: A brief background and overview

BACOLOD CITY, Negros Occidental, Philippines – “Bond, James Bond” is a recognizable phrase from the Hollywood super spy movie here but talk about a different kind of bond, the municipal bond and some might go crazy over what exactly it is.

Blame it on incoming Mayor Albee Benitez whose different tack on financing his ambitious mass housing project has sent tongues wagging and critics, well, criticizing even if his behind has yet to touch the City Mayor’s chair.

Some basics.

The municipal bond concept is not new as it dates back 200 years ago in the United States with the city of New York having been recorded as the first to issue a general obligation bond to build a canal, Visual Capitalist reports on its website.

The bond, also known as a “muni” or short for “municipal,” is essentially government borrowing money or incurring debts to pay for its projects or while waiting for revenues to arrive.

The Tax Policy Center, a think tank based in the United States, said “State and local governments issue bonds to pay for large, expensive, and long-lived capital projects, such as roads, bridges, airports, schools, hospitals, water treatment facilities, power plants, courthouses, and other public buildings.”

The Center added states and localities in the US sometimes pay for their investments but borrowing” allows them to spread the costs across multiple generations. Future project users bear some of the cost through higher taxes or tolls, fares, and other charges that help service the debts.”

It also said that in the US, as of 2019,” state and local governments had $3.85 trillion in debt outstanding (figure 1). About 98 percent of this debt was long term or with a maturity of 13 months or longer, while the remaining 2 percent was short term. As in most years, roughly 40 percent of municipal debt was issued by states and 60 percent by local governments.”

Image from taxpolicycenter.org.
Image from taxpolicycenter.org.

It is interesting to note that in the US, most of these state and local bonds are held by household’s followed by” mutual funds (which also represent household investors)… Banks and life insurance companies used to be more prominent municipal bond holders until the Tax Reform Act of 1986 and subsequent litigation limited the advantages of doing so.”

The Inter-American Development Bank describes bonds as “quite popular” in the US with about 44,000 subnational entities, including states and municipalities, take part in the municipal bond market.

It also noted a decline since the financial crisis of 2007-2008 but bond issuance “still averaged a high of US$337 billion between 2011 and 2014.”

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