State and Local Governments

What Is Debt?

Individuals and businesses lend their accumulated savings to borrowers. In exchange, borrowers give lenders a debt instrument. These debt instruments, typically called bonds, represent a promise by borrowers to pay interest income to lenders on the principal (the amount of money borrowed) until the principal is repaid to the lenders. When a municipal (state or local) government issues bonds, the principal (or proceeds) is typically used to finance the construction of capital facilities, but may also be used for cash management purposes when revenue collections do not match spending needs during the fiscal year.