Updated: Feb 9, 2018
In 1812 the first municipal bonds were issued by the City of New York in order to help finance the gateway across the Appalachians which would cement it as the greatest hub for east-west commerce in the still young United States. Since that first borrowing 206 years ago, the US Public Finance industry evolved from a novel concept into a bedrock of the development of the nation’s infrastructure.
Through a rapidly growing and evolving nation, new laws, legal interpretations, and economic booms and busts, a nascent industry steadily evolved to support the infrastructure needs of a vast and expanding nation. As with the rest of the securities industry, municipal borrowing experienced growing pains of many sorts and continued to evolve to protect against graft, corruption, and speculative bubbles across the 19th century and became a target for regulatory enforcement and legal changes in the 1930’s as the Great Depression roiled all capital markets. But one unique thing has separated the municipal bond market from other fixed income alternatives - their tax-exempt status.
From the earliest legal challenges, the Federal tax exemption has withstood the test of time and since the implementation of a Federal Income Tax in 1913, the tax-exemption of interest on state and local bonds has been codified in law. The reason for this exclusion since the earliest challenges (1819) was legal precedent that questioned the constitutionality of taxing the borrowing power of state and local governments. This has allowed the municipal bond market to have a unique and valuable role in the market to both investors and citizens. Investors seeking tax-exempt interest earnings have had few other options to invest large asset pools while this attractive investment option has given governments access to a readily available capital pool to invest in infrastructure that benefits citizens at a lower cost than the taxable market would allow.
Significant changes came again in the early 1980s, when Congress passed several laws in succession that curtailed the favorable tax treatment of municipal bonds. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) required states and localities to issue their bonds in registered form in order for the bonds to be tax-exempt. Then the Tax Reform Act of 1986 created several restrictions on arbitrage bonds (where a municipality reinvests the proceeds of tax-exempt bonds in other investments with higher yields) and private-activity bonds (where a municipality issues bonds to fund privately owned, used, or operated projects).
An Evolving Market
Since that time, the market has continued to grow and evolve and now exceeds $3.8 trillion in size with over 50,000 governments and agencies borrowing money directly from the capital markets. Despite this robust ecosystem, the market has only steadily evolved and has not experienced the technological transformations experienced in other aspects of the capital markets. This slow change in the sector can be attributed to a variety of factors but in large part is due to the relative obscurity of the market which rarely has gotten attention from the larger public except when it impacts their taxes. As a result, the US Public Finance industry is rife with inefficiency. It serves taxpayers, investors and regulators sufficiently but has not kept up with the transformation of the financial services industry and the broader modern economy. The entire industry is in dramatic need of unifying solutions that can address the needs of all participants in seamless ways that create efficiency, transparency, and insights.
With the innovative beginning of the public finance industry in mind, Aquorn embarked on the creation of a specialized ecosystem that provides public finance professionals with ready access to the key aspects of debt and debt-related information in the ways they need it, while offering unique insights to the public agencies responsible for funding the vast majority of infrastructure in the United States.
As we move into the future, the opportunity shape the future is in the hands of the pioneers and visionaries. That spirit has to be supported with solid financial planning, transparency, and engagement. We endeavor to empower the next generation with the tools they need to succeed.
Our Mission Access to public markets and strong oversight of bond related duties and obligations are key to supporting strong local governments. We believe in being a trusted partner to create a better future through more transparent, efficient and effective municipal debt and capital access and administration.