What Is a Bond Bank?
A bond bank is an entity that consolidates bond issues for a state or other type of municipality. Bond banks usually make at least two circulations per year. At each issue, investors purchase these bonds as fixed-income securities that pose a very low risk for the investor. Most issues are tax-exempt, though there are exceptions to this.
The money generated from the sale of these bonds goes to the state or municipality to fund public projects such as schools, drinking water maintenance, and hospitals. Bond banks serve as necessary middle-men, allowing states to finance infrastructure through massive bond issues, rather than piecemeal through smaller issues controlled directly by the state government.
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. Their credit is also rated separately from the states.
For example, the Maine Municipal Bond Bank (MMBB) has a different Moody’s credit rating than does the state of Maine itself. This better credit rating helps the MMBB have access to better interest rates, which helps keep the cost of borrowing money down for the state of Maine.
Since bond banks usually have excellent credit, one of their main benefits is the ability to lend at lower interest rates. However, some states have credit ratings that are just as good as that of their bond bank. In these cases, the 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 simple for the state to acquire financing.
Maine Bond Bank as an Example
The oldest bond bank in the U.S. is the Maine Municipal Bond Bank (MMBB), created in 1971. The bond bank is an independent agency, through its commissioners are appointed by Maine’s governor. The bond bank issues bonds for specific projects. These include the Transcap Bond Program, which helps fund the Maine Department of Transportation, and the Drinking Water SRF Program, which allows the state to maintain clean drinking water for its citizens. Investors who wish to purchase these bonds can do so through designated brokerages, listed with the bond bank.
Not all states have bond banks. The tax act passed in 1986 created new restrictions on tax-exempt lending. This 1986 tax act meant that bond banks, in operation before 1986, could build up their resources through borrowing before the enactment of the restrictions. Bond banks created after this act faced more stringent limits, making it harder for them to build up a base from which to grow.