What Is a Government Bond? A bond is an IOU. A government sells its promissory note (IOU) to an investor, promising to pay interest and 100% of the principal on specific “maturity dates.”
How Does It Work? A government wants money it does not have to carry out a new project, so…
Step 1: A government offers its promissory notes (IOUs) for sale to the public with repayment terms.
Step 2: The investors (bondholders) buy the promissory notes, thus lending money to the government.
Step 3: Government uses the borrowed money to pay for a public or private project, such as a road, ED**, etc.
Step 4: The government repays principal plus interest to the bondholder pursuant to the bond terms.
Step 5: Money to repay the bond (IOU) comes from the project’s revenue (RB) or tax increases, etc (GOB).
Step 6: If the government does not repay 100% of the original principal and accrued interest, it is in default.
What If the Government has Insufficient Funds on the Maturity Date?
Revenue Bonds (RB): Payment depends solely on the pledged revenues. Bondholders accept the risk, often for higher interest rates.
General Obligation Bonds (GOB): The government can raise taxes, cut spending, refinance, or default. Default harms the government’s credit rating and exposes the government to legal repercussions. ***
Current Arkansas Law (guardrails Issue 3 removes):
The Arkansas Constitution currently restricts government borrowing and from lending its credit, as follows:
- Article 16, § 1 prohibits the state and local governments from lending their credit for any purpose (limited exceptions currently exist).
- Article 12, § 5 generally bars cities, counties, and municipal corporations from becoming stockholders in, appropriating money for, or lending credit to private corporations, associations, or individuals (limited exceptions currently exist).
- Local debt has constitutional limits related to total assessed property value (10% for counties and 20% for municipalities – Amendment 62).
- The state can issue general obligation bonds, but these require statewide voter approval (Amendment 20).
Bottom Line: Under current Arkansas Law, RBs are most common. GOBs are available in limited circumstances with voter approval. If Issue 3 passes, historical Constitutional guardrails on government borrowing money as well as lending its credit (tax dollars) to private companies will be removed.
