When ‘no cost to taxpayers’ isn’t the whole story

Across the country, governors and mayors are embracing a familiar pitch: high-profile development projects financed with bonds that supposedly come at “no cost to taxpayers.”

This is certainly the case with huge investments in stadiums for professional sports teams, such as Kansas’ proposal to issue $1.8 billion in bonds to help finance a new domed stadium for the Chiefs, or for Washington, D.C.’s bonds for a new Commanders stadium. The former was presented to the public by Kansas Gov. Laura Kelly, who emphasized it would not cost taxpayers.

The legal structure often supports that claim. The fiscal reality can be more complicated.

So-called “no-taxpayer” bonds — frequently labeled revenue bonds, moral-obligation bonds or appropriation-backed debt — are designed to avoid a formal pledge of public repayment. Investors are told they are relying only on project revenues, not on a government’s full faith and credit.

But when projects falter, the distinction between legal obligation and political reality can narrow quickly.

Rhode Island’s failed 38 Studios deal offers a cautionary example. The bonds were framed as a “moral obligation,” not a binding guarantee. When the video game company collapsed, the state was not legally required to appropriate funds. Yet officials ultimately chose to do so, concerned about preserving the state’s reputation in credit markets.

That tension — between what governments must do and what they feel compelled to do — is central to modern public finance.

At issuance, rating agencies account for the absence of a binding pledge. Bonds backed only by project revenues or annual appropriations are typically rated lower than general obligation debt. Investors understand the additional risk.

University of Chicago municipal finance professor Justin Marlowe advises caution.  “All that changes if the bonds default or otherwise encounter financial trouble,” he wrote in an email.

When that happens, the issuing entity often has no ability to raise new revenue beyond what it was originally authorized to collect. “If it needs a few million extra dollars to get through a rough patch,” Marlowe explained, “it has nowhere to look for that revenue other than the state and the participating local governments.”

Local experience illustrates the point. More than a decade ago, Platte County, Missouri, supported bond financing for infrastructure tied to a retail development known as Zona Rosa. To avoid voter approval, the county structured the bonds as “non-binding” appropriation debt.

When revenues fell short, county officials exercised their legal right not to appropriate funds. Credit rating agencies treated the decision as a default anyway. The county’s rating was downgraded to junk status, increasing borrowing costs for unrelated priorities such as roads and emergency services. Courts later sided with the county, but the credit damage was real.

Todd Graves, who represented the county in litigation, warned at the time that the episode “has significant implications for all sorts of political subdivisions, including states.” Rating agencies, he noted, have made clear that refusing to honor a moral obligation — even if not legally required — can still affect a government’s standing in capital markets. Trustees and bondholders, have “bullied many municipalities and political subdivisions into paying when they weren’t required to, feeling they must do so to protect their credit rating.”

These episodes underscore a simple but often overlooked point: The absence of a legal guarantee does not mean the absence of risk.

Supporters of revenue-backed development bonds argue that markets already price the risk and that governments remain free to decline payment. Legally, that is correct. But markets do not operate on legal theory alone. A downgrade can raise borrowing costs across a state’s portfolio, affecting infrastructure, schools and public safety. What begins as a self-contained development project can spill into core public services.

None of this means every revenue-backed stadium, convention center or mixed-use district will fail. But when officials assure taxpayers there is “no risk,” they are speaking narrowly — about legal obligation — while understating broader fiscal exposure.

If policymakers genuinely believe taxpayers are insulated, they should be willing to say plainly what would happen in a downside scenario. Would they allow a high-profile project to default? Would they tolerate litigation, market scrutiny and potential credit consequences? Or would they step in to stabilize the deal?

Those are political judgments, not legal technicalities.

Development bonds can shift risk. They can repackage it. They can defer it. What they cannot do is make it disappear.

When voters hear that taxpayers are “not on the hook,” the more relevant question is this: If revenues fall short and markets react, who ultimately absorbs the consequences? If the answer turns on protecting a government’s credit standing, then the risk was never truly off the books — only less visible.