Have you ever wondered how your local government pays to get stuff done in your city?
I don’t mean regular stuff, like paying the parking meter guy, or picking up your garbage once a week. I’m talking about big purchases, like turning an old parking lot into a beautiful new park. Revamping that tired-looking public library into a fancy, modern new building that you might actually go to.
A big project to re-surface all of the old roads with potholes.
Where does all of that money come from?
If you think about it, most of us don’t have the money sitting around in our checking account to make big purchases. If we want to buy a new car or a house or a boat, most of us have to get a loan.
Does the same thing apply to our local government?
Generally, yes! Though instead of calling it a loan, a government entity calls them “bonds”. That’s right, a “bond” is just a different way of saying that a public entity took out a loan. But, instead of it being a loan from a bank in the way and you and I might get a loan, government entities borrow money from investors. In order to give the investors a “receipt” for the money they lent the public entity, the public entity gives investors a “bond”.
A bond is essentially an IOU.
As it turns out, loans to local governments to pay for public projects (public buildings, parks, etc.) are quite common. By one estimate, local government entities issued trillions of dollars in bonds in 2018.
Here’s a helpful video that explains the basics of municipal bonds.