U.S. State Bond Debt

How do bond measures on the ballot affect State costs?

It’s U.S. election season and the S&P just sold-off (graph above) so I thought I would give an overview of State Bonds. If approved by voters, State bond measures on the ballot delineate the structure of the bond. Forecasted out, this will affect the State’s future budget.

What are Bonds?

Bonds are a means by which government and firms borrow money from the public. The State sells bonds to investors to receive an “up front” cash infusion for projects. Investors are then repaid over time. Interest and payment structure are expressed in the language of the bond.

Why are bonds issued?

The main reason is for infrastructure, however the language of the bond must be scrutinized for “special interest” projects that are not revealed as the main purpose of the bond. Most administrations will not fork over funding for large projects, but they will “kick the can” down to future generations to pay for with their taxes

What are the main types of bonds?

The State generally issues two types of bonds: General Obligation & Revenue bonds. The main difference is the structure of each bond. General Obligation bonds are paid out of the State General Fund –the main operating account for that respective state’s administration. The General Fund is mainly funded with sales tax and income tax revenue (this may differ from state to state in the United States). As far as Revenue Bonds are concerned, the main is that they are not usually voted on by the voters of that state.

What about bond financing?

Over the next few decades the State pays off the bond with tax revenue from future generations. Ever wonder why your taxes do not ever go down? You just might be paying off a bond that helped a certain government official get elected 20 years ago.

Lastly, U.S. Treasuries and U.S. State bonds are all denominated in USD. The initial financing as well as the interest payments (pmt) are both paid in USD. Generally, as demand for bond financing (risk-off) increases so does demand for USD. Conversion occurs out of local foreign currency into USD to buy the bond, as well as conversion out of USD back into local currency after the coupon pmt (or principal) is released –unless it sits in a eurodollar account.