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From the 19th Century to the Present: How Have Municipal Bonds Shaped Our Urban Development?
Municipal bonds, often called "muni", are bonds issued by state or local governments or entities they create, such as agencies and special districts. In the United States, interest income earned from holding municipal bonds is often, but not always, exempt from federal and state income taxes. While the overall municipal debt market is small relative to the corporate market, municipal bonds still play a vital role in urban development.
Municipal debt predates corporate debt, with Italian city-states borrowing from large banking families as early as centuries before the Renaissance.
The history of borrowing in American cities dates back to the 19th century, with the first formal municipal bond (such as the Public Obligation Bond issued by New York City for the canal) issued in 1812. As cities grew rapidly, municipal debt grew explosively. Funds from these debts were used to improve urban infrastructure and establish public education systems. After the Civil War years, large amounts of debt were issued to build railroads. These bonds were very similar in nature to today's industrial revenue bonds, and their issuance fueled the city's daily operations and infrastructure.
However, the economic panic of 1873 temporarily halted the growth of municipal debt. At that time, most cities were facing debt defaults, and the government passed new regulations to limit the issuance of local debt in an attempt to rebuild investor trust. Large municipal debt markets were gradually rebuilt over the following decades.
Municipal debt continued to grow to a certain extent in the early 20th century and gradually became an important source of funds for urban development today.
As the market rebuilt, municipal bond issuance was not limited to the 50 U.S. states but also expanded to Washington, D.C., and other U.S. territories. In addition to state and local governments, there are a number of newly formed agencies and special districts involved in the issuance of municipal bonds, such as the Port Authority of New York and the Triborough Bridge Authority. The characteristics of these agency debts, which are exempt from the tax burden of local, state and federal governments, have attracted the attention of a large number of investors.
The main types of municipal bonds include public obligation bonds and revenue bonds. The principal and interest of the former are guaranteed by the entire creditworthiness of the issuer, while the source of repayment of the latter is a specific future revenue stream, such as that generated by public utilities such as water services. This financing method allows cities to obtain the necessary funds for infrastructure to cope with the needs of a growing population.
The municipal bond issuance process usually requires some public participation and sometimes voter approval.
Overall, the participation of legal advisors and financial advisors is very important in the issuance process of municipal bonds. They ensure that the issuance process is compliant and the interests of participants are protected. For the general public, in the early stages of a bond issuance, their participation is often seen as a necessary step.
However, municipal bonds were once relatively illiquid compared to other financial instruments. The geographical diversity of investors keeps transaction volumes low in this market. The development of technology has changed this, and the market has become more transparent and responsive. The emergence of small-denomination municipal bonds has made it easier for middle-class investors to participate.
Although municipal bonds generally have lower interest rates than comparable corporate bonds, their security of repayment attracts many investors.
In addition, the default risk of municipal bonds is lower than that of corporate bonds because it is guaranteed by the tax capacity of state and local governments or the revenue of public utilities. However, sudden asset declines during market emergencies, such as the 2009 mortgage crisis, can adversely affect state and local financial conditions.
In summary, municipal bonds play an important role in shaping urban development, allowing local municipalities to raise the necessary funds to cope with the growth of infrastructure needs. However, how can we use municipal bonds to continue to promote the healthy development of cities in the future?
