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General Obligation Bonds

Reference Number: MTAS-130
Reviewed Date: 12/12/2022

The city council adopts an initial bond resolution stating:

  • The maximum dollar amount of bonds to be issued;
  • The project for which the bonds are to be issued;
  • The maximum interest rate the bonds will be allowed to bear; and
  • A statement of revenues to be used to pay the bonds. T.C.A. § 9-21-205.

The resolution may be adopted at a regular or a special meeting with only a simple majority vote. It takes effect immediately upon adoption and is not subject to veto. T.C.A. § 9-21-108.

The city publishes the resolution with a notice advising the community that if 10 percent of the registered voters present a petition calling for a referendum within 20 days from the publication of the initial resolution, an election will be held to authorize the bonds. T.C.A. § 9-21-206. If a petition is presented to force a referendum, the bonds may not be issued unless a majority of registered voters approve the issue. However, there is one exception: If three-fourths of the governing body votes that an emergency requires issuing general obligation bonds for water or sewer purposes, then a petition may not force a referendum. T.C.A. § 9-21-207.

The city council may act on its own to hold an election to determine if the voters want to issue general obligation bonds for a project. T.C.A. § 9-21-208. The code establishes procedures for holding bond elections. If an issue is not approved by the voters, then the city must wait at least three months before raising the proposition again. T.C.A. §§ 9-21-209–212.

In the process for the bond sale, the city prepares an official statement, which serves as a sales brochure for the debt issue and which normally is prepared with a financial adviser’s help. The city decides whether it wants to pay one of the national rating agencies, such as Moody’s, Standard & Poor’s or Fitch's to issue a rating for the bonds and whether it wants to purchase bond insurance to further assure lenders that their money will be repaid.

The city adopts a final bond resolution authorizing the sale and a tax resolution affirming that annual taxes will be levied to pay bond principal and interest. T.C.A. § 9-21-215. To assure potential lenders that all legal requirements have been met, cities employ lawyers who specialize in bond issues (bond counsel) to prepare resolutions and other legal documents associated with the issue.

The city advertises the bond issue five days before the sale date either in a financial newspaper having national circulation or by electronic communication system generally available to the financial community. If the bond issue is for $5 million or less, the sale may advertise as provided above or in a newspaper having general circulation in the municipality. T.C.A. § 9-21-203.

General obligation bonds are sold by competitive bid (T.C.A. § 9-21-203). Bonds may be issued for up to 40 years, but the length of the issue may not "exceed the reasonably expected economic life of the project being financed". T.C.A. § 9-21-213(a). General obligation bonds must be sold for at least 98 percent of the face value of the indebtedness, known as "par". T.C.A. § 9-21-202.