What is Bond Bank?

A bond bank is an independent state-created entity that consolidates local bond issues into a single pool to offer better financing options for state or municipal projects.

Key Takeaways

  • A bond bank is an independent entity, created by the state, that consolidates local bond issues into a single pool to offer better financing options for state or municipal projects.
  • Bond banks serve as necessary go-betweens, allowing states to finance infrastructure through massive bond issues, which greatly lowers issuance costs.
  • The consolidation of the varying investment grade fixed-income securities that is done by the bond bank has the intended effect of lowering the overall risk of that pooled offering to the investor.

Understanding Bond Bank

Bond banks may be created through legislation, though they are separate and distinct from the state government itself. They have independent boards and commissioners. A state's bond bank credit rating differs from the state's credit rating. For example, Moody's Investors Service assigns one credit rating to the Maine Municipal Bond Bank (MMBB) and a different credit to the state of Maine itself.  The higher credit rating for MMBB helps it gain access to better interest rates, which lowers borrowing costs for the state of Maine.

However, some states have credit ratings that are on par with their bond bank. In these cases, bond banks may not get a better rate than the state would on its own. Still, bond banks help state governments by consolidating the borrowing process, making it more streamlined and easier for the state to acquire financing.

Bond banks usually make at least two annual bond issuances and most will be tax-exempt. The consolidation of the various investment grade fixed-income securities that is done by the bond bank has the intended effect of lowering the overall risk of that pooled offering to the investor.

The money generated from bond bank issues goes to the state or municipality, which uses the money to fund public projects such as schools, hospitals, and drinking water infrastructure. Bond banks serve as necessary go-betweens, allowing states to finance infrastructure through massive bond issues, rather than piecemeal through smaller issues controlled directly by the state government, which greatly lowers issuance costs. Additionally, pooling debt gives the bond bank offering a higher credit rating that results in better interest rates for the borrower.

Maine Bond Bank

The oldest bond bank in the U.S. is the Maine Municipal Bond Bank, created in 1971 by the state's legislature. The bond bank is an independent agency, though its commissioners are appointed by the governor. The bond bank issues bonds for projects such as the Transcap Bond Program, which helps fund the Maine Department of Transportation; and the Drinking Water SRF Program, which helps the state to maintain clean drinking water supplies for its citizens. Investors who wish to purchase these bonds can do so through designated brokers listed with the bond bank.

Not all states have bond banks. The Tax Reform Act of 1986 tightened rules to prevent states and municipalities from issuing large amounts of tax-exempt bonds to subsidize private business. This meant that bond banks in operation before 1986 could build up resources via borrowing before the restrictions came into effect. Bond banks created after the act faced more stringent limits, making it harder for them to build up a base from which to grow.