Two score and seven years ago I accepted President Lincoln’s challenge at Gettysburg to be “dedicated to the great task … and take increased devotion to [the] cause … that government of the people, by the people, for the people shall not perish from this earth.”

Writing 30 years earlier, Alexis de Tocqueville, wrote his observation of the United States published in 1835 – Democracy in America, that “A nation may establish a free government, but without municipal institutions it cannot have the spirit of liberty,” expressing his admiration of the U.S. system of local governments with their advantages of independence and authority. Local governments continue today to encourage this spirit of liberty.

Uniquely American

The Bond Market Association has noted that one way this happens is through the municipal bond markets, from which state and local governments borrow money for capital projects.

The ability of the estimated 90,000 state and local governments to borrow to determine their own capital needs is fundamental to the American system of government. Benefits of the municipal bond markets become obvious simply by looking across the border into Mexico, a country which historically and only until recently did not have a system of municipal borrowing, to observe its public infrastructure.

Historically, all of its public debt was federal. One reporter has noted, however, “Before 2000, the Mexican federal government was responsible for handling much of the infrastructure needs of the country. However, with the sale in December 2000 by the Mexican city of Aguascalientes worth 90 million pesos – about $9 million U.S. – Mexican cities have begun to adopt the financing mechanism that was embraced over 100 years ago by their American neighbors.”

Types and Uses of Municipal Bonds

Municipal bonds are sold, simply, as a promise by a state or local government to repay to the purchaser the principal amount of the bond, plus interest. They are issued pursuant to express state and local laws which impose restrictions on the size, financial structure and source of repayment of the debt.

When issued on the full faith, credit and taxing power they are called general obligation bonds. But when issued payable from a specific of source of revenues they are called revenue bonds.

They have been used to finance various types of public (and private) projects, such as streets, roads, highways, bridges, parks, libraries, convention/civic centers, airports, ports, surface transit, electric power generating and transmission facilities, water and sewer facilities, hospital, health care and assisted living facilities, nursing homes, housing for low/moderate income families, elementary and secondary schools, higher-education buildings, research laboratories and dormitories.

Historical Role of Bond Counsel

The municipal bond market is composed of thousands of professionals throughout the United States with diverse skills needed to raise money in the capital markets. However, every municipal bond is accompanied by an opinion of an independent counsel referred to as bond counsel whose role it is to deliver an opinion on the validity and tax exempt status of the bonds, but whose role has changed over the years.

The practice of submitting municipal bonds to Bond Counsel for an opinion arose out of the widespread defaults which occurred largely on bonds issued in the late 1800s to induce railway companies to locate rail lines near a city in anticipation of economic benefits.

Initially, these bonds were purchased by the investors on the strength of the opinion of the cities’ regular counsel regarding their validity. Many of the railroads failed or never materialized leaving the communities solely obligated on the debt, resulting in widespread defaults by many states and localities.

The courts determined that many of the bonds had been illegally issued and were therefore invalid and unenforceable, and the opinions of regular counsel became unreliable. Such findings of invalidity resulted in substantial losses to investors creating an uncertainty in the public bond markets.

It thereafter became the practice, in response to investor concerns, for the investors to obtain an opinion regarding validity of the bonds from lawyers whose expertise, objectivity, professional standing and independence from the governmental borrower made their opinions acceptable to bond underwriters through whom the bonds were sold to investors.

A bond issue accompanied by an opinion of recognized bond counsel could be more readily sold and use of bond counsel became well established by 1900 and has since remained a standard practice.

Modern Function of Bond Counsel

Today, because of the complexities of the market, the role of Bond Counsel has changed over time in response those needs. It has expanded to include many more tasks such as drafting transaction documents, rendering informal advice about the legality of varying financial structures, participating in the preparation of disclosure documents and providing opinions on the tax-exempt status of the bonds and their exemption from securities registration.

In short, the municipal bond markets have facilitated the development of the finest public infrastructure on earth. In the process, governed totally by federal, state and local laws, it is only one living example of “government of the people, by the people, for the people”.