This is typically used to provide permanent financing for major capital improvements, construction, and acquisition of capital facilities. As a general rule, long-term debt should not be used to fund current expenditures. It is important that the term of the bond issued be at least equal to the life of the asset being financed.
There are several categories of long-term bonds:
General obligation bond (GO)indicates that the security standing behind the bond is the total credibility and unrestricted resource of the government unit or other not-for-profit agency. The bond is said to be issued with the full faith and credit of source of funds. In a governmental unit, the general tax revenue provides the ultimate source of funds.
Revenue bondsare obligations issued to finance a revenue-generating project or enterprise. Both the principal and interest of revenue bonds are required to be paid exclusively from the generated earnings. The massive growth in revenue bonds has come about as a way of reducing dependence on general obligation bonds. It has had the effect of shifting the burden away from taxpayers to users, avoiding referendums and imposed debt ceilings. Typical uses of the revenue bond include financing of sewer and water systems, airports, toll roads, hospitals, parking facilities, and industrial developments.
Industrial bondsare issued by governments to construct facilities for a private corporation that makes lease payments to the government to service those bonds. Such bonds may be general obligation bonds, combination bonds, or revenue bonds. The state legislature enacts enabling legislation to permit local governments, typically municipalities, to finance the acquisition or construction of industrial facilities. The major purpose of these bonds is to encourage local economic development efforts. Originally industrial bonds were used almost entirely toattract, expand, or retain industrial facilities in a community. The uses of industrial bonds have expanded in recent years to include financing of span facilities/stadiums, hospitals, transportation, pollution control, and industrial parks.