Overview of Government Finance Law

Behind every new school, bridge, or public transit system is a carefully structured public finance plan. Public finance shapes how governmental entities raise, manage, and spend the money that keeps communities running. From revenue generation through taxes to funding public projects and infrastructure with municipal bonds, every dollar must be handled within a complex web of legal requirements.

Experienced legal counsel is essential in ensuring tax-exempt status, complying with securities law and investor protections, and adhering to government budgeting rules. As funding needs grow, public-private partnerships (P3s) and other creative solutions are becoming more common, making it more important than ever to understand how government finance law works.

What Is Government Finance Law?

Government finance law regulates how public sector entities raise, distribute, manage, and report public funds. This is typically done through taxation, bond issuance, expenditures, and public contracting.

Government operations must follow the law just like private citizens and privately owned businesses. This includes adopting how state, county, and local governments adopt annual budgets, spend money, and submit to financial oversight.

• Debt management and bond law control bond issuance, debt limits, and types of financing structures.
• Securities law and disclosure rules define how municipal securities are regulated under the SEC, MSRB, and related obligations.
• Procurement and contract law govern the processes and transparency requirements for public purchasing, bidding, and vendor selection.
• Tax law permits the collection of property, sales, and income taxes and while providing constraints like rate caps and exemptions.
• Administrative law outlines the rules for government operations like open meetings, FOIA, decision-making, and financial statements, as well as mandates supporting transparency and accountability.

State and federal governments owe a duty to the American people to be transparent in government accounting. This ensures government accountability of agencies and public officials and fosters trust among American citizens.

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Sources of Public Funding: Taxes and Bonds

Taxes and municipal bonds are the primary financial sources for governments to provide public services and maintain infrastructure.

Federal, state, and local governments collect several types of taxes. Property taxes on real estate owners are often the largest revenue generator for local and state governments. These tax payments often fund public safety and schools. Sales taxes are also a common revenue stream.

In the U.S., 41 states impose income taxes on individuals and businesses. Nine states generate income from other sources. For example, Florida relies on tourism taxes like rental taxes, a rental car surcharge, and a tourism development tax. Texas residents pay some of the highest property taxes in the country, and Tennessee residents and visitors pay one of the highest sales tax rates. Alaska charges steep tax rates on oil and gas companies operating in the state.

States and local governments also sometimes create special taxes or one-time assessments that are for a specific purpose, such as infrastructure upgrades.

Limits and Exceptions of Taxes

Taxes are not an endless money source for governments. There are constitutional and legal limits to how taxes are imposed. Many states also create exceptions that citizens can qualify for and be exempt from paying. This is common with property taxes, where homestead, senior, and nonprofit exemptions exist.

Municipal Bonds

A municipal bond is a type of investment banking tool. Investors or financial institutions lend a government entity money. The government agrees to pay back the loan value plus interest on a pre-agreed-upon date. Bond issuance provides upfront money for infrastructure, schools, utilities, and other public needs. This helps governments take on larger projects by spreading out costs over the long term.

There are two types of bonds that governments use. A general obligation bond is backed by the full faith, credit, and taxing authority of the issuing entity. Repayment is guaranteed through future tax revenues. Revenue bonds are backed by income generated from specific projects, like tolls and utilities. This type of bond is a higher risk than general obligation bonds, but often yields more. Interest from municipal bonds is often exempt from federal income tax, making it an attractive investment option.

The Process of Issuing Municipal Bonds

The first step in issuing a municipal bond is to evaluate funding requirements and align those with capital plans and debt capacity. The state legislature or city council will typically need to approve.

Decision makers may employ professionals as advisers. This could include a bond counsel, municipal adviser, underwriter, or credit rating agency. The next phase is to determine the details of the municipal bond. This includes bond type (GO vs. revenue), term, interest rates (fixed/variable), callable features, and credit enhancements.

Tax-exempt status will also need to be addressed during the structuring process to ensure IRS compliance. As with any financial service, the bond’s credit rating must be established. The credit score influences interest rates and investor appeal. A sale via competitive bidding or a negotiated offering takes place. Underwriters will then distribute the official statement and attract investors.

Legal Aspects of Public Budgeting and Spending

The public budget process follows legally defined steps that ensure accountability and transparency for governments collecting and allocating taxpayer dollars. The budget cycle typically:

• Begins with planning, revenue forecasting, and departmental requests
• Moves to executive proposal and legislative review
• Ends with adoption, execution, financial reporting, and year-end auditing

Each stage is governed by statutes that dictate timing, public disclosure, and fiscal controls. Many jurisdictions also enforce balanced-budget requirements, meaning governments must adjust midyear if revenues fall short.

An appropriation authorizes public spending for specific purposes and within set timeframes. Governments cannot spend funds without legal authority, and violations like overspending can trigger penalties.

“Earmarking” adds further constraints by dedicating certain revenue streams to defined uses, such as highway fuel taxes or lottery proceeds for education. Similarly, restrictions exist on fund transfers and reprogramming. Moving money across accounts often requires legislative approval, repayment terms, or compliance with bond covenants and grant conditions. Reserve funds or “rainy day” accounts also come with rules limiting when and how they may be used.

These restrictions are in place as a matter of public policy to promote responsible financial management and ensure liabilities are paid.

Key Issues in Public Finance Today

Public finance does not stand still. Aging infrastructure, limited revenues, and growing demands for accountability are testing governments. The traditional funding models are no longer sufficient on their own, while tax laws continue to evolve and investors seek more robust disclosures. At the same time, public-private partnerships are emerging as a practical, if complex, solution for large-scale projects. Together, these forces create four key issues every public finance professional must navigate: infrastructure shortfalls, tax policy shifts, transparency obligations, and the rise of P3s.

Complying With Federal and State Finance Regulations

Legal compliance by governments protects the validity of public financing, preserves investor confidence, and shields issuers from costly penalties. The IRS monitors tax-exempt bond requirements at the federal level, while the SEC and Municipal Securities Rulemaking Board enforce securities law compliance.

At the state level, constitutional debt limits and statutory borrowing restrictions determine how much governments can borrow and under what conditions. There can also be restrictions on local government finance at the municipality or city level.

Transparency rules add another layer, requiring disclosures that investors, lenders, and the public rely on to evaluate risk and governance. Failure in any of these areas can mean more than penalties. It can undermine the enforceability of a financing or expose issuing financial institutions to lawsuits. For this reason, legal counsel plays a vital role in guiding issuers through the IRS and SEC frameworks, state-level debt restrictions, and the ongoing obligations of public reporting. This ensures fiscal policy and risk management are taken seriously.

The Role of a Government Finance Attorney

Public entities rely on government finance attorneys to do more than draft documents. A government finance attorney is at the center of every public financing, shaping transactions and protecting issuers against risk.

In practice, this means structuring financings, drafting and delivering legal opinions, ensuring ongoing compliance with tax, securities, and budgeting laws, and representing entities in audits or litigation. Counsel also advises on public-private partnerships, where questions of procurement authority, contract structure, and financial covenants are particularly complex. What makes this role essential is navigating a legal landscape that spans tax regulations, securities disclosure, municipal codes, procurement procedures, and ethical standards, all of which converge in public-sector finance.

Whether you’re planning a major public works initiative or navigating annual budget appropriations, working with a government finance lawyer can make the difference between a smooth process and serious legal challenges.