The Debt That Doesn’t Call Itself Debt: How Cities Borrow Without a Vote

Ask a city finance director whether the municipality has taken on new debt this year, and the answer might be a careful “not exactly.” A new parking garage got built. A courthouse got renovated. A fleet of transit buses arrived. The money for all of it came from investors, gets paid back over decades with interest, and shows up on the city’s books as a long-term obligation. But because of how the deal was structured, it may never have gone before voters, never triggered a debt-limit calculation, and never been called a bond in the paperwork that matters most.

This is the world of certificates of participation, lease-revenue bonds, and their many cousins — financing tools that let state and local governments raise large sums of money for capital projects while sidestepping the constitutional and statutory limits that apply to general obligation debt. They are legal, common, and, in many jurisdictions, essential to how basic infrastructure gets built. They are also a reminder that in public finance, the label attached to a transaction can matter as much as the transaction itself.

How the Workaround Works

Most states cap how much debt a city, county, or school district can carry, often expressed as a percentage of assessed property value. Many also require voter approval, sometimes by a supermajority, before a government can issue general obligation bonds backed by its full taxing power. Those rules exist for a reason: they force elected officials to make the case to the public before committing future taxpayers to decades of repayment.

Certificates of participation route around both constraints by changing the legal form of the transaction rather than its economic substance. Instead of borrowing money directly, the government typically creates or uses a separate legal entity — a joint powers authority, a nonprofit corporation, a building authority — that constructs or acquires the asset in question and then leases it back to the government. Investors buy certificates that represent a share in the stream of lease payments, not a share in a bond backed by the government’s taxing power. Technically, the government isn’t borrowing at all. It’s renting.

The distinction sounds like semantics, and in an economic sense it largely is. The government still owes the money. The lease payments still come from the general fund or another public revenue source. The asset still gets used exactly as it would if it had been built with conventional debt. But because the obligation is structured as a lease subject to annual appropriation, rather than an unconditional pledge of the government’s full faith and credit, it often falls outside statutory debt limits and outside voter-approval requirements that apply specifically to general obligation bonds.

Why Governments Reach for It

The appeal is straightforward. Voter referenda are unpredictable, expensive to run, and can fail for reasons that have nothing to do with the merits of the project — a bad turnout year, an unrelated controversy, a ballot that’s already crowded with other measures. Statutory debt caps, meanwhile, don’t move just because a city has a genuine, time-sensitive need: a jail that’s failing inspection, a water system that’s leaking a third of its treated supply, a courthouse that no longer meets accessibility standards.

Lease-revenue financing gives elected officials and administrators a path to address those needs on a timeline they control, without depending on a ballot measure or bumping against a cap that may not reflect current infrastructure realities. It’s also often faster. A certificates-of-participation deal can typically be structured and closed by a governing body vote, sometimes in a matter of months, compared with the year-plus cycle of getting a bond measure onto a general election ballot, campaigning for it, and then going through issuance afterward.

For legitimately urgent, non-discretionary projects, this speed and flexibility can be a genuine public benefit. Nobody wants a county jail to stay non-compliant with health and safety codes for three more years because a bond measure narrowly failed.

What Gets Traded Away

The tradeoff is transparency and, to some degree, taxpayer protection. Because these instruments are technically subject to annual appropriation rather than an unconditional pledge, investors typically demand a higher interest rate to compensate for that additional risk, even though governments almost never actually decline to appropriate lease payments — doing so would tank their credit rating and access to future capital markets for years. So the risk premium gets paid, year after year, for a default scenario that essentially never materializes. That premium is a real cost, quietly layered onto every dollar borrowed this way, and it’s a cost that direct voter-approved general obligation debt usually avoids.

There’s also the matter of public visibility. General obligation bond measures come with ballot language, official statements, sample tax-impact estimates, and often organized advocacy and opposition campaigns. Certificates of participation, by contrast, typically move through routine council or board votes, covered — if at all — as a line item in a meeting agenda rather than as a standalone civic decision. Residents who would show up to vote on a new bond measure rarely show up to a finance committee meeting where a lease-revenue structure gets approved, even though the long-term financial commitment can be just as large.

Credit rating agencies and municipal finance analysts track this activity closely because it affects a government’s overall debt burden even when it doesn’t show up in the statutory debt-limit calculation. A jurisdiction that looks comfortably under its legal cap on paper can still be carrying a substantial obligation once lease-backed debt is added to the picture — a gap between the legal debt figure and the practical one that matters enormously to bondholders and, eventually, to taxpayers footing the bill through fees, rents, or general fund pressure.

What to Watch For

For residents trying to understand what their local government actually owes, the certificates-of-participation and lease-revenue category is worth asking about directly, because it often won’t appear in the same place as “debt” in a budget summary. Useful questions include: what percentage of the annual budget goes to lease payments versus traditional debt service; whether any of those obligations were structured this way specifically to avoid a public vote; and how the combined debt burden, including lease obligations, compares with peer jurisdictions. None of that makes the financing illegitimate. It does mean the full picture of what a government owes is sometimes bigger, and less visible, than the headline debt figures suggest.