Municipal Bond - History

History

Historically municipal debt predates corporate debt by several centuries: the early Renaissance Italian city-states borrowed money from major banking families. Borrowing by American cities dates to the nineteenth century; records of U.S. municipal bonds indicate use around the early 1800s. Officially the first recorded municipal bond, a general obligation bond was issued by the City of New York for a canal in 1812. During the 1840s, many U.S. cities were in debt; roughly by 1843 cities had about 25 million in outstanding debt. In the pursuing decades rapid urban development demonstrated a correspondingly explosive growth in municipal debt. The debt was used to finance both urban improvements and a growing system of free public education.

Years after the civil war, significant local debt was issued to build railroads. Railroads were private corporations and these bonds were very similar to today's industrial revenue bonds. Construction costs in 1873 for one of the largest transcontinental railroads, the northern pacific closed down access to new capital.

The largest bank of the country, which was owned by the same investor as by Northern Pacific, collapsed. Smaller firms followed suit as well as the stock market. The 1873 panic and years of depression that followed put an abrupt but temporary halt to the rapid growth of municipal debt.

Responding to widespread defaults that jolted the municipal bond market of the day, new state statutes were passed that restricted the issuance of local debt. Several states wrote these restrictions into their constitutions. Railroad bonds and their legality were widely challenged; this gave rise to the market-wide demand that an opinion of qualified bond counsel accompany each new issue.

The U.S. economy began to move forward once again, municipal debt continued its momentum, this maintained well into the early part of the twentieth century. Regrettably the great depression of the 1930s halted growth, although defaults were not as severe as in the 1870s. Outstanding municipal debt then fell during World War II. Many American resources were devoted to the military. Prewar municipal debt burst into a new period of rapid growth for an ever-increasing variety of uses. After World War II, state and local debt was $145 per capita. In 1998, according to the U.S. census, state debt was $1,791 per capita. Local per capita debt in 1996, the most current Census data available, was $2,704. Federal debt was $20,374 per capita at the end of 1998.

In addition to the 50 states and their local governments (including cities, counties, villages and school districts), the District of Columbia and U.S. territories and possessions (American Samoa, the commonwealth of Puerto Rico, Guam, the Northern Mariana Islands, and the U.S. virgin Islands) can and do issue municipal bonds. Another important category of municipal bond issuers includes authorities and special districts, which have grown in number and variety in recent years.

The two most prominent early authorities were the Port of New York Authority, formed in 1921 and renamed Port Authority of New York and New Jersey in 1972, and the Triborough Bridge Authority (now the Triborough Bridge and Tunnel Authority), formed in 1933. The debt issues of these two authorities are exempt from federal, state and local governments taxes.