If the debt is in the form of a bond, the bond owners have a legal claim on all the general income of the jurisdiction if a default occurs. The municipality pledges its tax revenues unconditionally to pay the interest and principal on the debt as it matures. General obligation (GO) debt is secured by the full faith and credit of the local government issuing the debt.There are three distinct types of debt that can be issued by local government: Federal law establishes rules about the tax status of government securities and the process for issuing and disclosing debt obligations. The amount of debt a government may incur is limited by the Washington State Constitution, individual state statutes, and whether the debt is being repaid with tax or nontax revenue sources. Short-term debt can be used to cover a temporary cash flow deficit or provide for an interim method of financing until long-term borrowing has been secured. By spreading out the debt payments over many years, local governments can also smooth out their expenses and create a more predictable cash flow. Issuing debt increases the total cost of the asset through the payment of interest, but it also allows local governments to acquire or build capital assets sooner by borrowing up front for assets that they could not otherwise fund from existing cash resources.
Long-term debt is a commonly used means of financing large capital assets such as infrastructure, buildings, and large pieces of equipment. These various mechanisms for borrowing are either long-term or short-term, and they can be repaid through tax revenues, user fees, or special assessments. Local government can borrow money in a number of different ways.
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