ABSTRACT
This chapter focuses on a general descriptive overview of the dynamics, processes, and uses of a capital market that in 1980 lent state and local governments nearly $80 billion, and presents sets of relationships between government and market. State governments and local governments, whether they be municipalities, counties, special districts, or statutory authorities, borrow funds for three major purposes: to build public and quasi-public facilities, to lend the borrowed funds to various institutions in the private sector, and to cover cash flow problems. Municipal bonds, by contrast, are backed by the taxing power of the borrower or by revenue expected from a specific project or service. Municipal notes and bonds are bought and sold in what is called the municipal bond market. The market generally acts as a de facto “outer boundary” for political choices made by city officials about service levels, tax rates, and economic development.
