Borrowing by American cities dates to the nineteenth century, and records of U.S. municipal bonds indicate use around the early 1800s.
The 1873 panic and years of depression that followed put an abrupt but temporary halt to the rapid growth of municipal debt.
[4] Responding to widespread defaults that jolted the municipal bond market of the day, new state statutes were passed that restricted the issuance of local debt.
When the U.S. economy began to move forward once again, municipal debt continued its momentum, which was maintained well into the early part of the twentieth century.
[5] Leading up to World War II, many American resources were devoted to the military, and prewar municipal debt burst into a new period of rapid growth for an ever-increasing variety of uses.
Today, in addition to the 50 states and their local governments (including cities, counties, villages and school districts), the District of Columbia and U.S. territories and possessions (American Samoa, the Commonwealth of Puerto Rico, Guam, the Northern Mariana Islands, and the U.S. Virgin Islands) can and do issue municipal bonds.
Another important category of municipal bond issuers which includes authorities and special districts has also grown in number and variety in recent years.
Frequently, bonds under a proposal are issued in series over a period of time, in order to allow contractors a steady stream of work and the jurisdiction to not be overwhelmed in managing too many projects at once.
[14] Internal Revenue Code section 103(a) is the statutory provision that excludes interest on municipal bonds from federal income tax.
[27][28][29] Over the last decade, technology solutions have been applied to make the market more responsive to investors, more financially transparent and ultimately easier for issuers and buyers.
The emergence of small denomination municipal bonds makes the muni market more accessible to middle-income buyers.
[30] Default risk is a measure of the possibility that the issuer will fail to make all interest and principal payments, on time and in full.
[32] This may be due in part to the fact that some municipals are backed by state and local government power to tax, or revenue from public utilities.
However, sharp drops in property valuations (as in the 2009 mortgage crisis) can strain state and local finances, potentially creating municipal defaults.
Harrisburg, PA, when faced with falling revenues, skipped several bond payments on a municipal waste to energy incinerator.
[33] Default risk to the investor can be greatly reduced through municipal bond insurance, which promises to pay interest and principal if the issuer does not do so.
For that reason, investors use the concept of taxable equivalent yield to compare municipal and corporate or Treasury bonds.
The Tax Reform Act of 1986 greatly reduced private activities that may be financed with tax-exempt bond proceeds.