THE SHORT ANSWER
A municipal bond is a debt obligation of a state, local government, or its agencies or authorities. From the issuer's perspective it is a promise to repay principal and interest, typically from the issuer's general funds or a specific source of revenue. For municipal advisor purposes, SEC Rule 15Ba1-1(m)(1) counts sale proceeds, investment income and pledged funds as proceeds until they are spent on the authorized purposes.
A municipal bond, from the issuer's side of the transaction, is a debt obligation of a state or local government or of its agencies or authorities, together with the issuer's promise to repay the amount borrowed with interest, typically from the issuer's general funds or from a specific source of revenue.
Managing the money between closing and the last repayment is the other half of the arrangement, and it is where this guide turns next, beginning with the subject of investing bond proceeds.
What is a municipal bond?
A municipal bond is one of the bonds, notes, warrants, certificates of participation and other obligations that states, local governments and their agencies or authorities issue, which is how the MSRB glossary defines municipal securities.
The glossary also records the tax treatment: a prime feature of most municipal securities is that interest is generally excluded from the bondholder's gross income for federal income tax purposes, though some municipal securities are taxable, such as Build America Bonds.
By source of repayment, the MSRB glossary describes a general obligation bond as typically payable from the issuer's general funds, with most GO bonds carrying the issuer's full faith and credit and often its taxing power, and a revenue bond as payable from a specific source of revenue.
The fuller comparison of GO and revenue bonds, including when voter approval comes into play, is its own page.
A conduit financing adds a third arrangement: a governmental issuer issues bonds to finance a project used mainly by a third party, and the conduit borrower is the party liable for debt service, in the MSRB glossary's definition.
Industrial development bonds, multifamily housing revenue bonds and qualified 501(c)(3) bonds are common types, and the guide for conduit issuers takes up their reinvestment questions.
Sized across all of those forms, SIFMA reported $4.5 trillion of U.S. municipal bonds outstanding as of 2Q 2026, up 4.8% year over year, with $473.8 billion of 2026 issuance through September and trading averaging $17.2 billion a day, down 2.0% year over year.
SIFMA updates the figures monthly, so those levels are a snapshot as of their publication date rather than a constant.
How an issue moves from planning to a priced sale and closing is a process of its own, covered in the guide to the municipal bond issuance process.
Who issues municipal bonds?
States, cities, counties, school districts, water and power authorities, transit agencies and other public bodies issue municipal bonds, and the securities-law definition of who counts is drawn wider than that everyday list sounds.
SEC Rule 15Ba1-1(g) defines a municipal entity to include any state, political subdivision or municipal corporate instrumentality, along with its agencies, authorities, plans, programs and pools, and any other issuer of municipal securities.
The same rule defines an obligated person as a person committed by contract to support payment on the securities, and it excludes bond insurers, letter-of-credit and liquidity providers, persons whose financial information is not material, and the federal government.
That category matters in conduit financings, where the conduit borrower is the one liable for debt service.
Across the table, the MSRB glossary defines an underwriter as a municipal securities dealer that purchases a new issue of municipal securities from the issuer for resale in a primary offering, whether the sale is negotiated or competitive.
The full cast around an issue, from bond counsel to trustee, is covered in the guide to the financing team, and the questions raised when the underwriter also advises the issuer are covered in independent versus underwriter-led advice.
On the issuer's own side of the table, Section 15B(e)(4)(A) of the Securities Exchange Act, added by section 975 of the Dodd-Frank Act in 2010, defines a municipal advisor as a person, other than a municipal entity or its employee, who advises a municipal entity or obligated person on municipal financial products or the issuance of municipal securities, or who solicits a municipal entity.
The SEC's rule then excludes underwriters acting within the scope of an underwriting, registered investment advisers giving investment advice, registered commodity trading advisors advising on swaps, attorneys giving traditional legal advice and engineers giving engineering advice, so not everyone who discusses an issue with an issuer is a municipal advisor.
Where the role does attach, Section 15B(c)(1) of the Exchange Act deems a municipal advisor to have a fiduciary duty to any municipal entity it advises, and the MSRB's conduct rule for municipal advisors owes an obligated person client a duty of care instead.
What the role does, and how to verify a firm's registration, is covered in the guide to municipal advisors.
| Party | How the rules define it |
|---|---|
| Municipal entity | Any state, political subdivision or municipal corporate instrumentality, its agencies, authorities, plans, programs and pools, and any other issuer of municipal securities (SEC Rule 15Ba1-1(g)) |
| Obligated person | A person committed by contract to support payment on the securities; bond insurers, letter-of-credit and liquidity providers, persons whose financial information is not material, and the federal government are excluded (SEC Rule 15Ba1-1(k)) |
| Underwriter | A municipal securities dealer that purchases a new issue of municipal securities from the issuer for resale in a primary offering, by negotiation or competitive bid (MSRB glossary) |
| Municipal advisor | A person, other than a municipal entity or its employee, who advises a municipal entity or obligated person on municipal financial products or the issuance of municipal securities, or solicits a municipal entity, subject to the rule's exclusions (Securities Exchange Act §15B(e)(4)(A)) |
Why do municipal bond proceeds have to be managed?
Because the dollars themselves are defined and regulated after closing, just as the bonds are before it: federal securities rules define what counts as proceeds and when advice on investing them is municipal advisory activity, and the tax rules test the bonds under two sets of arbitrage rules.
SEC Rule 15Ba1-1(m)(1) defines proceeds of municipal securities to include sale proceeds, investment income, and pledged funds such as reserves and sinking funds held under the bond documents, and it states that when such monies are spent to carry out the authorized purposes, they cease to be proceeds.
This is the securities-law definition, written for the municipal advisor rules, and it differs from the tax definitions in Treasury Regulation §1.148-1.
The tax treatment of sinking funds and pledged reserves is a separate question, taken up in the guide to replacement proceeds.
Money deposited in escrow to pay debt service gets its own definition: Rule 15Ba1-1(h)(1) defines municipal escrow investments as proceeds of municipal securities and other municipal entity funds deposited in an escrow account to pay the principal, premium and interest on one or more issues, the dollars at the center of a refunding escrow.
Congress then tied the advisory activity to those definitions: Section 15B(e)(3) of the Exchange Act defines investment strategies to include plans or programs for investing the proceeds of municipal securities that are not municipal derivatives or guaranteed investment contracts, and the recommendation and brokerage of municipal escrow investments.
SEC Rule 15Ba1-1(b) adopts that meaning, scoped to proceeds and escrow investments rather than to everything an issuer holds, which is what brings advice on investing bond proceeds within the municipal advisor rules for advisers outside the rule's exclusions and exemptions.
How an issuer vets that advice is its own question, covered in choosing a reinvestment advisor or Bidding Agent.
On the tax side, IRS Publication 5271, which states it is not formal guidance, describes two sets of arbitrage rules the bonds are tested under, the yield restriction rules of section 148(a) and the rebate rules of section 148(f), and failing either set makes the bonds arbitrage bonds.
The arbitrage guide covers both sets in full, with its own pages on yield restriction and the rebate requirement.
What does the SEC's bid-rigging record have to do with it?
The reinvestment side of the market carries an enforcement history, and it is the reason the bidding of these investments is its own discipline on this site.
Between 2010 and 2011, the SEC brought cases against several financial institutions for rigging bids on the reinvestment of municipal bond proceeds, including the three below.
| Case | Date | The SEC's charges and findings | Payments |
|---|---|---|---|
| Banc of America Securities | Dec. 7, 2010 | The SEC found BAS won bids on 88 affected reinvestment instruments, including GICs, repurchase agreements and forward purchase agreements, through "last looks" and "set-ups", with undisclosed gratuitous payments and kickbacks to bidding agents | More than $36 million to the SEC and $101 million to other federal and state authorities |
| UBS Financial Services | May 4, 2011 | The SEC said UBS rigged at least 100 municipal bond reinvestment transactions in 36 states over 2000 to 2004, winning bids as a provider while also rigging bids for other providers as a bidding agent, and routed undisclosed payments to bidding agents through interest rate swaps | $47.2 million to the SEC, $113 million in parallel cases, $160 million in total |
| J.P. Morgan Securities | July 7, 2011 | The SEC said JPMS improperly won at least 93 rigged transactions in 31 states over 1997 to 2005 by entering into secret arrangements with bidding agents for an illegal "last look" at competitors' bids | About $51.2 million to the SEC and $177 million to other authorities, $228 million in total |
Each case was settled without admitting or denying the SEC's findings, which is standard SEC practice, so the conduct descriptions above are the SEC's.
The instruments at issue in the BAS case were guaranteed investment contracts, repurchase agreements and forward purchase agreements, the products described in the guide to what bond proceeds can be invested in.
How those products are bid now, from bid specifications through certifications, is covered in the guide to competitively bidding bond-proceeds investments, and the independent role of the Bidding Agent is its own page.
Where does an issuer go from the definition to its own proceeds?
From the definition the practical path runs fund by fund: the guide to bond funds walks through construction funds, debt service reserve funds, capitalized interest funds, debt service funds and a refunding escrow, each with its own purposes and rules.
mGIC is an independent, SEC-registered municipal advisor and Bidding Agent that helps issuers structure, competitively bid and close investments of bond proceeds, and it is paid by the winning provider rather than by the issuer.
An issuer who wants an independent look at its own reinvestment plans, or at a fund it already holds, can request a no-obligation reinvestment review.
Which definitions apply to a particular issue, and what a planned investment must satisfy, are determinations for the issuer's bond counsel and tax counsel.
Frequently asked questions
Are all municipal bonds tax-exempt?
No. The MSRB glossary notes that a prime feature of most municipal securities is interest generally excluded from the bondholder's gross income for federal income tax purposes, but some municipal securities are taxable, such as Build America Bonds.
How large is the municipal bond market?
SIFMA reported $4.5 trillion of U.S. municipal bonds outstanding as of 2Q 2026, up 4.8% year over year, and $473.8 billion of 2026 issuance through September. SIFMA updates the figures monthly, so the as-of date matters.
What is the difference between a general obligation bond and a revenue bond?
The MSRB glossary describes a GO bond as typically payable from the issuer's general funds, with most GO bonds carrying the issuer's full faith and credit and often its taxing power, and a revenue bond as payable from a specific source of revenue.
Who buys a new issue from the issuer?
An underwriter. The MSRB glossary defines an underwriter as a municipal securities dealer that purchases a new issue of municipal securities from the issuer for resale in a primary offering, whether through negotiation or by competitive bid.
What counts as proceeds of municipal securities under the SEC's municipal advisor rules?
SEC Rule 15Ba1-1(m)(1) includes sale proceeds, investment income, and pledged funds such as reserves and sinking funds held under the bond documents. The monies cease to be proceeds when spent to carry out the authorized purposes.
Sources
- MSRB Glossary of Municipal Securities Terms (2013)
- SIFMA, US Municipal Bonds Statistics
- SEC Press Release 2010-239, SEC Charges Banc of America Securities with Fraudulently Rigging Bids on Reinvestment of Municipal Bond Proceeds
- SEC Press Release 2011-105, SEC Charges UBS Financial Services with Fraudulently Rigging at Least 100 Municipal Bond Reinvestment Transactions
- SEC Press Release 2011-143, SEC Charges J.P. Morgan Securities with Fraudulent Bidding Practices Involving Investment of Municipal Bond Proceeds
- 15 U.S. Code § 78o-4, Securities Exchange Act Section 15B
- 17 CFR 240.15Ba1-1, SEC Municipal Advisor Rules (eCFR)
- IRS Publication 5271, Yield Restriction and Rebate Requirements (Rev. 9-2019)
This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.
