… Wait, the Obligation to Repay is “Moral” and Not “General”?
tax-exempt bond issued by a municipality or a state financial intermediary and backed by the moral obligation pledge of a state government. (State financial intermediaries are organized by states to pool local debt issues into single bond issues, which can be used to tap larger investment markets.) Under a moral obligation pledge, a state government indicates its intent to appropriate funds in the future if the primary obligor , the municipality or intermediary, defaults. The state’s obligation to honor the pledge is moral rather than legal because future legislatures cannot be legally obligated to appropriate the funds required.
tax-exempt bond issued by a municipality or state financing authority, secured by revenues from the project financed, plus a nonbinding pledge by the state legislature. In the event that project revenues are insufficient to meet debt service payments, the legislature is authorized to step in and appropriate funds in the future to cover principal and interest payments to bondholders. The state’s commitment to service the bonds is moral, rather than contractual, as legislatures have no legal obligation to do so if the original obligor defaults.
Okay, so what would it look like if there were a default on a moral obligation bond issued by Rhode Island? A request for repayment would be made of the state. The request would get forwarded to the General Assembly then in session for a vote on the necessary appropriation. Assuming matching bills made their way out of committee (a potentially significant stumbling point right there) and on to both floors, a majority of legislators would have to vote in favor. Further, they would most likely have to do so in the face of a budget deficit, thereby requiring the identification of a revenue stream (*cough*raisetaxes*cough*) to fund the repayment. Legislators would be acutely aware as the bill came up for a vote that an explanation to their constituency of their vote and the purpose of the … er, revenue stream would need to follow in due course.
Under these circumstances, how likely is it that a repayment appropriation would pass?
Speaking for myself, if it had been clear from the beginning that these were not general obligation bonds, I wouldn’t have gotten nearly as worked up. Presumably, however, it wouldn’t help with bond sales if the state had issued a statement saying, “Hey, don’t worry about it; taxpayers have no legal obligation to repay the bondholders in the event of a default.”