Feature image above: Left to right: Leigh Ann Biernat, Pat Moon and Paul Phillips.
Bonds can be an effective way to secure long-term project funding for government entities, schools, health care providers and more.
Public finance can help them deliver important services with debt oftentimes paid off earlier than expected. Arkansas Money & Politics visited with a trio of central Arkansas experts in public finance — Leigh Ann Biernat, executive vice president and head of public finance at Stephens; Paul Phillips, senior managing director for capital markets at Crews & Associates; and Pat Moon, managing principal at Meridian Investment Advisors in Little Rock — about bonds, how they are rated, tax-exempt status and more.
AMP: How has public finance evolved over the years?
Biernat: Public finance has undergone significant changes over the years, primarily in two key areas: increased regulatory requirements and shifts in industry participation. The regulatory landscape governing public finance has expanded considerably. Issuers of public debt must meet continuing disclosure obligations, providing annual financial updates to investors. These updates include annual audit reports, which are crucial for investors and credit rating agencies, and financial disclosure errors. Should an issuer fail to file necessary documents by the deadline, the issuer is required to report said failure and subsequently file the missing documents.
Ensuring compliance with these requirements can be a challenge for some of our clients. Whether working with Legislative Audit or a public accounting firm, we emphasize the importance of timely audit reports, as they directly impact investor confidence and credit ratings.
Another major shift in public finance is the evolving landscape of professionals and firms in the industry. Some professionals have made a career of working for multiple firms. In addition, major financial institutions such as Citi (2024) and UBS (2023) have exited the municipal bond underwriting business, reshaping the competitive environment.
Stephens, privately owned and family-led for more than 90 years, began by trading Arkansas highway bonds in 1933 and is now led by the third generation of the Stephens family. Public officials may change with elections, but Stephens provides continuity and stability to an industry marked by transitions.
AMP: How are bonds rated?
Moon: Bonds are essential financial instruments that allow governments, municipalities and corporations to raise capital while offering investors a relatively stable return. However, not all bonds are created equal. They vary in terms of issuer, risk, return and structure. Understanding the different types of bonds and their rating systems is crucial for making informed investment decisions.
Government bonds are issued by national governments and are often considered among the safest investments. For example, U.S. Treasury bonds are backed by the full faith and credit of the U.S. government, making them a low-risk option for investors seeking stability. Treasury notes and Treasury bills (T-bills) are shorter-term government alternatives with varying maturities.
Municipal bonds are issued by states, cities and other local government entities to finance public projects such as infrastructure, schools and transportation systems. They are generally classified as either general obligation or revenue bonds. General obligation bonds are backed by the issuing municipalities’ credit and taxing power, and revenue bonds are supported by revenue generated from a specific project, such as toll roads or stadiums.
Corporate bonds are issued by companies to finance operations, acquisitions or expansion and offer varying degrees of risk depending on the financial strength of the company issuing the bonds. To help investors assess the risk associated with bonds, credit rating agencies such as Moody’s, Standard & Poor’s (S&P), and Fitch Ratings assign ratings to bonds based on the issuer’s financial health and ability to meet debt obligations.
There are generally two levels of ratings. Investment-grade bonds are issued by financially stable government organizations or corporations with higher credit ratings. Below-investment-grade or high-yield bonds are issued by companies with lower credit ratings, offering higher potential returns but carrying greater default risk.
The credit rating agencies review the financial health of the issuer and bond structure and assign a letter rating to each bond. S&P and Fitch segment ratings by AAA (Highest Quality), AA, A and BBB, which are considered investment grade. Bonds rated BB, B, CCC, CC, C and D are considered higher risk and must pay a higher interest rate, thus the term “high yield.” Moody’s has a similar rating system. The lower the rating, the higher the interest rate (coupon) that must be paid by the issuer to entice investors to encounter more uncertainty.
AMP: Will municipal bonds maintain their tax-exempt status?
Phillips: Absolutely. Tax debate in Washington, D.C., is an ongoing and continuing process. While there still appears to be general support for continuing the tax exemption for municipal bonds, as Congress looks for ways to address expiring elements of the 2017 Tax Cuts and Jobs Act, one element under the microscope is the curtailment or potential elimination of tax-exempt bonds.
While our industry has battled this threat in the past, we believe that it is important to preserve, protect and promote tax-exempt municipal bonds, including the advancement of the use of certain private-activity bonds as an economic development tool.
Tax-exempt bonds are the bedrock for the financing of public infrastructure projects such as water, sewer and electric utilities, roads, bridges, airports, police facilities, fire facilities, small manufacturing, hospitals, senior and affordable housing, and first-time farmers. Research by certain community development agencies suggests that communities could face an increase of 35 percent to 45 percent or more in increased capital costs. That’s real money in the communities that we serve.
AMP: What are the differences between U.S. treasury bonds, municipal bonds and corporate bonds?
Phillips: Each category has a distinct level of credit risk. Generally, municipal bonds have a low credit risk and are a good alternative for risk-averse investors that are also looking for the tax advantages associated with this type of investment. Since the rates in the capital markets are constantly moving, investors are subject to fluctuations in the value of their bonds, but if your plan is to hold until maturity, if there is no default, you will ultimately receive the face value of your purchase.
AMP: Talk about the role of public bonds when it comes to financing big-ticket items such as stadium projects.
Moon: Public bonds are a vital mechanism for funding large-scale projects, enabling governments to invest in essential infrastructure without immediate budget constraints. These projects — such as bridges, highways, airports, schools and sports stadiums — often require substantial up-front capital that local or state budgets can’t immediately provide. By issuing bonds, governments can raise the necessary funds while spreading the repayment over time as projects produce revenues, making large-scale investments more manageable. The use of public bonds requires careful planning to balance economic benefits, fiscal responsibility and long-term sustainability.
AMP: What public finance mechanisms are available?
Biernat: Public entities and 501(c)(3) organizations have access to various financing mechanisms to fund critical projects. The primary forms of debt issuance include publicly offered bonds and private placements, which can take the form of either bonds or bank loans. These financing tools can be structured with either fixed or variable interest rates and may be classified as taxable or tax exempt.
A key distinction is between tax-exempt and taxable bonds. Tax-exempt bonds offer investors tax-free interest income, which typically results in lower borrowing costs for issuers such as governments and nonprofit organizations. However, tax policy discussions in Washington could impact the future availability of tax-exempt bonds. With the Tax Cuts and Jobs Act of 2017 set to expire at the end of 2025, lawmakers are evaluating ways to offset revenue losses, including proposals to eliminate tax-exempt bonds altogether.
The Public Finance Network, a coalition administered by the Government Finance Officers Association, has outlined the critical role tax-exempt bonds play in financing public infrastructure. Key points include lower borrowing costs — market data shows that tax-exempt municipal bonds reduced state and local borrowing costs by 2.1 percent in 2023; infrastructure investment — state and local governments finance 90 percent of public-sector construction projects, with a 10-year issuance volume exceeding $4 trillion; and investment stability — municipal bonds provide a reliable investment, particularly for older investors, who receive nearly 60 percent of tax-exempt bond interest earned by individuals.
Given ongoing discussions in Washington, D.C., the landscape of public finance may evolve. If tax-exempt bonds are restricted or eliminated, state and local governments will face higher financing costs, potentially slowing down infrastructure investment. Advocacy groups like PFN are working to preserve these critical financing mechanisms to ensure continued support for public projects across the country.
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