Someone explain GOVERNMENT BONDS?

[H Roark]

Alright I'm sure this election cycle we're all going to be voting on at least one state initiative which utilizes government bonds. In CA about 10 out of 12 propositions use government bonds. The proponents of these props usually say that there is NO TAX money used to pay for these bonds, while the opponents say the inverse. Who is right?

My understanding is that bonds differ from taxes in that the projects completed under bonds use private loans from citizens like you or me to fund them, while the person doing the lending gets to collect some modest interest.

Where does the money come from to pay back these loans if the project itself does not generate revenue?
Are there any restrictions as to who can purchase bonds? I never once heard about where you can purchase these bonds.
What if no one purchases bonds? There are millions of dollars worth of outstanding bonds yet to be sold in CA.
Any of our the RPF members here hold government bonds? Whats your experience with them? Are they a good investment?

 

[Cowlesy]

These are called municipal or agency bonds.

Your local city government can issue a bond usually at fairly low interest rates underwritten typically by investment or commercial banks and syndicated out to several investors who buy the bonds because they're backed up by a government. Investors like purchasing municipal bonds because their income is typically tax-free (you support the gov by buying gov bonds, you get a pass on having to pay taxes on the income).

Typically municipalities can borrow at low rates because most cities don't have revenue dry up to zero, as there is generally a steady flow of tax revenue (though I argue against Munis specifically for this reason as a lot of tax revenue will go away with property tax losses due to foreclosures).

And like most government bonds, when the principal comes due, the government typically "rolls" the debt and issues a new bond for the same or larger face value which lets them continue on paying interest to finance their projects. Of course if you had a wildly successful venture and could just retire the bond and not issue more, that would be much better. Unfortunately most governments once they see they can continually just roll debt, do so.

You will see more and more municipalities default and go bankrupt as the crisis continues. In fact, we've already seen several municipalities in California (and I believe one in Alabama) default on their bonds.

 

[HOLLYWOOD]

Chapter 9 Municipality Bankruptcies: This special for government entities... no liquidations of assets like for you & me.

Notable Municipal Chapter 9 Bankruptcies:

* Orange County, California, 1994, due to investment losses.
* Desert Hot Springs, California, 2001, due to losing a lawsuit.
* Millport, Alabama, 2005, due to loss of sales tax revenues after factory closing.
* Moffett, Oklahoma, 2007, due to loss of ability to issue traffic tickets.
* Gould, Arkansas, 2008, due to spending money withheld to pay employee income taxes.
* Vallejo, California, 2008, due to inability to pay pension obligations.


http://en.wikipedia.org/wiki/Chapter_9,_Title_11,_United_States_Code

Hospital District Chapter 9 Bankruptcies:

(A Hospital District is a governmental entity with taxing authority that owns and operates medical facilities.)

* The Valley Health Systems district, California
* West Contra Costa Healthcare District, California


California is notorious for Floating Bonds for everything and doing the creative "REFINANCING".

My personal opinion on California BONDS: VOTE NO

It's another expense that the TAXPAYERS/RESIDENCES have to pay back in an indirect way through; Surcharges, New; City/Municipal/County/State Taxes and/or Fees, Sales Tax, State Income Tax, Property Taxes, Short/long term Insurances premiums increases.

they gotten quite creative... look for the deduction on your Paycheck, Utility Bills, Property taxes/fees, Communciations Taxes/Fees, Administrative processing fees, etc on & on.

Simple, VOTE NO on Borrowing unless you have done extensively deep research.

 

[surf]

muni bonds are supposed to go to a specific project - i.e buying swingsets for a park, building new sports arenas for billionaire owners, airports, roads, etc.

if you're Bob Citron, the infamous former Orange County, CA treasurer, you (or Merrill Lynch in his case) market these bonds as if they are to build new parks and schools when in fact these bonds were sold to drum-up funds to pay off other poor investment decisions.

the revenues to pay off the interest on these bonds is usually tied to a tax-stream of some kind. W/sports arenas the revenue is usually tied to some type of visitor tax. If you have ever visited Arizona and stayed in a hotel or rented a car you have paid for the new baseball stadium, new football stadium, new basketball arena(s), etc. Visitor tax receipts are a simple way to market these bonds to local residents.

In Seattle the revenues from hotel and rental car (and restaurants) have been used to fund two new stadiums, and with some of these set to expire and the Sonics threatening to leave for Oklahoma City, the argument was that "we" should simply extend these taxes and pay for a new arena for the Sonics.

 

[Fox McCloud]

from what I gather, any and all government bonds are ultimately backed by the guarantee of tax-payers. I could be wrong, however.

 

[Zippyjuan]

Bonds are a way to borrow. But like all borrowing, they eventually need to be paid back- including interest- which means taxpayers do finance the project. The difference it that they are paid for over time instead of all at once.

 

[Truth Warrior]

http://en.wikipedia.org/wiki/Government_bonds

 

[CMoore]

These are called municipal or agency bonds.

You will see more and more municipalities default and go bankrupt as the crisis continues. In fact, we've already seen several municipalities in California (and I believe one in Alabama) default on their bonds.

Jefferson County, Alabama is trying to avoid filing Chapter 9. If they do, it will be the largest municipal bankruptcy in history. They got into this fix by using interest rate swaps to try to get lower interest rates on bonds issued to pay for sewer improvements. It worked until the current crisis. The County Commission is populated by people who did not understand how risky the investments were and it blew up on them. Right now, the bondholders are forebearing while they try to work something out.

 

[Fox McCloud]

Jefferson County, Alabama is trying to avoid filing Chapter 9. If they do, it will be the largest municipal bankruptcy in history. They got into this fix by using interest rate swaps to try to get lower interest rates on bonds issued to pay for sewer improvements. It worked until the current crisis. The County Commission is populated by people who did not understand how risky the investments were and it blew up on them. Right now, the bondholders are forebearing while they try to work something out.

out of curiosity, are treasury bills also backed by taxpayer money? People purchase them at a discount rate from their face value, then they 'mature' after so many days, and you can pocket the difference.

 

[angelatc]

out of curiosity, are treasury bills also backed by taxpayer money? People purchase them at a discount rate from their face value, then they 'mature' after so many days, and you can pocket the difference.

Well, yeah! The government doesn't have other sources of revenue, really.

Edit - I know there are fees and tariffs and such, but the government doesn't sell or prodice anything to generate revenue.

 

[Fox McCloud]

I've always tried to reconcile some government spending on defense, but I've never been able to fully reconcile it with my ideology; I view taxation as theft, but I have no idea how government could fund a defense-based military and budget without taxation.

Granted, if the government ONLY raised taxes for defense and the courts, our tax rate would be so low most everyone wouldn't notice (I'd guess it'd be around a 1-10% loss of income, total, and that's it), and I'd consider that "tolerable", but still, I've always wondered.

anyone know the fine details of how treasury bills work?