Ballot measures

October 21, 2004 8:27 PM

Election season special. Just to make sure I'm not missing anything: when a ballot measure says it will "issue $30 million in bonds" to pay for a highway or school retrofit, that means "go into debt" or "borrow the money," right?

Secondarily, let's say such a measure passes - what's to stop a legislature from canceling it thereafter, in order to balance a state/federal/municipal budget? Is that bond money somehow "separate" from the general fund?
posted by scarabic to law & government (7 comments total)

The assertion in the first paragraph is correct.

Often, bonds have indentures that assure investors (bond buyers) that the bond money will be used for a specific purpose.

I do not know the answer to your last question.
posted by Kwantsar at 8:42 PM on October 21, 2004

I believe bonds (at the state and local level) have a specific time frame to be paid back in.
posted by drezdn at 9:16 PM on October 21, 2004

If Bonds are not paid back, the city/state's creidt rating will suffer drasticly. This means the next time they want to issue a bond, there will be fewer investors willing to take a chance and loan them any money, which drives up the interest rate.

See also: junk bonds.
posted by falconred at 9:24 PM on October 21, 2004

How do they pay back the bonds?

And why can't ballot measures simply list the general fund as their financial support? Or at least be put into the consideration for the general budget?
posted by scarabic at 11:41 PM on October 21, 2004

How do they pay back the bonds?

Basically, it's a loan. You get all the money up front, then pay it back from revenues over some period of time. Bond issues will come with some plan for paying off the bonds, usually a tax increase. In rare cases this will be use fees or other revenues associated with whatever the bonds are for (e.g. if bonds are issued to build a new convention center, they may be paid back out of the revenues it generates).

And why can't ballot measures simply list the general fund as their financial support?

Not secure enough. Bondholders want to be high on the list, ahead of other creditors, if there are financial troubles.
posted by kindall at 11:47 PM on October 21, 2004

scarabic: Sometimes the general fund is the financial support. Munis chiefly come in two stripes, General Obligation and Revenue bonds. A GO bond is supported by the general taxing power of the entity, and is almost always rated as well or better than a revenue bond, which is supported only by the revenues generated by the project for which the bond is issued. Municipalities could, theoretically, I think, dip into their general fund to make payments on a Revenue bond, but the indenture and covenants do not require them to do so. Most of this is moot, since many munis are insured by the likes of FGIC (a former GE subsidiary) and AMBAC. FWIW, I have seen uninsured revenue bonds (hospitals and casinos, especially) wind up selling for fifty to sixty cents on the dollar. Most muni houses and ratings agencies will punish a poorly collateralized bond.

While parts of this book may be over your head, it is the resource to read if you wish to learn more. Furthermore, I'd be shocked if it weren't available at your local library.
posted by Kwantsar at 12:51 AM on October 22, 2004

great responses - thanks!
posted by scarabic at 11:02 AM on October 22, 2004