12 Bonds and Millages
Cynthia B. Faulhaber and Thomas D. Colis
Commentary
Introduction
Public libraries, like cities, counties, and other municipal corporations, may borrow money and issue bonds to reflect the borrowing. But each public library is limited in how it issues bonds and how much interest to pay by its state laws. For purposes of this chapter, we are using Michigan law as an example. Any public librarian must learn the rules applicable to the state and public library where they work or plan to work. For example, in Florida, municipal bonds require validation of their purpose by court order. Chapter 25, Florida Statutes (Bond Validation) 75.01 et seq. In Michigan, public purpose is solely determined by the local unit of government.
Most public libraries are funded from a variety of sources ranging from property taxes to grants and donations to state aid. For many libraries, property taxes make up the bulk of the revenues used to operate the library. Property taxes (also known as “ad valorem taxes”) are expressed as “millages” against the value of real and personal property. In addition, many libraries have the authority to issue debt to finance various capital improvements. That debt often comes in the form of issuing “bonds.” Bonds are simply a promise to pay the holder of the bond. They are similar to a loan in that principal and interest are repaid on the bonds over a period of time at a stated interest rate. But in many states, the form of the borrowing is important and one has to look to state law to determine which form is appropriate.
As bond counsel for over 20 years, learning as we worked with experienced partners and less experienced municipalities, we seldom thought about how many laws have an impact on the issuance of bonds – federal case law, state case law, state statutes, state regulations, federal tax law, federal securities law, federal regulations, and practices throughout the country. Bond counsel could joke among themselves, but never with other lawyers – not even bail bond lawyers (a totally different practice with criminals and bail promises).
Historical Treatment of Municipal Bonds
In the 1800s, in the absence of legal constraints, municipalities incurred substantial debts for the questionable public function of financing railroad companies that subsequently failed, leaving taxpayers in fiscal straits. For example, a community issued its bonds to assist a railroad in extending its line from a slightly bigger community to its neighbor, hoping that, if they built it, people would come and settle there. Unfortunately, the choice often failed – no one came. Or, in contrast, a railroad began laying tracks through an area just annexed by a city, only to be denied access by the city. But the city’s power to annex was not in existence, so the railroad won and the owners of houses built where the railroad was going lost their property, and the city lost their tax revenues.
The few taxable properties remaining in the city w