What Is a Certificate of Participation (COP)?

A Certificate of Participation, often shortened to COP, is a municipal security that gives an investor a fractional share in the lease payments a state or local government makes on a public asset such as a school, courthouse, jail, or fleet of vehicles. Unlike a traditional municipal bond, a COP is not backed by the government’s full taxing power or a dedicated revenue stream. Your return depends on whether the government keeps budgeting for the lease payments year after year. Governments use this structure because statutory or constitutional limits often cap how much debt they can carry, and a lease is treated as a current operating expense rather than long-term borrowing.

How the Lease Structure Produces a Certificate

A COP is built around a lease, not a loan. A government that needs a facility or piece of equipment transfers legal title to a trustee, typically a commercial bank or a special-purpose entity created for the deal. The trustee then leases the asset back to the government under a master lease agreement, usually running 10 to 30 years.

The trustee slices that future stream of lease payments into equal pieces. Each piece is a Certificate of Participation. An underwriter sells the certificates to investors, and the proceeds flow back to the government to pay for building or buying the asset. As the government makes its scheduled lease payments, the trustee collects the money and passes principal and interest through to certificate holders.

The legal distinction matters: the government is making lease payments, not debt service payments. Because the obligation renews annually through the budget process, courts and bond counsel in most jurisdictions treat it as a current appropriation rather than indebtedness. That classification is what keeps COPs off the government’s debt ledger and outside the reach of debt ceilings.

Non-Appropriation Is the Defining Risk

Every COP contains a clause no traditional bondholder faces: the government can stop paying. Each year, the legislative body must affirmatively vote to include the lease payment in its budget. If it declines, the lease terminates, and the government walks away from the asset with no penalty beyond returning it. The trustee can take possession and try to sell or re-lease the asset, but certificate holders stop receiving payments and have no guarantee they’ll be made whole from any liquidation.

This is non-appropriation risk, and it is the single most important factor to evaluate before buying a COP. Actual non-appropriation events are rare in practice. A government that stops paying on a lease faces credit downgrades on all its outstanding obligations, potential withdrawal of credit enhancement on its other bonds, and lasting damage to its ability to borrow at reasonable rates. Finance officers understand these consequences, which makes non-appropriation a last resort rather than a routine budget tool.¹

When it does occur, the asset involved is typically something peripheral to the government’s core mission. In one documented case, a state briefly moved to nonappropriate on printers used to produce car-tag receipts, then quickly reversed when it realized the printers were revenue-essential. In another, a small town was forced to nonappropriate on a bulldozer lease after the mayor embezzled municipal funds.¹

How COPs Compare to General Obligation and Revenue Bonds

The comparison most investors want is between COPs and general obligation (GO) bonds issued by the same government. GO bonds are backed by the issuer’s full faith and credit, meaning the government pledges its taxing authority to repay. COPs carry no such pledge, and that gap explains most of the practical differences.

Credit quality. COPs are generally rated lower than the same issuer’s GO bonds because the repayment pledge is conditional. Rating agencies weigh how essential the financed asset is when assigning a rating; a courthouse COP is viewed more favorably than one financing a parking garage.
Yield. Because of the added non-appropriation risk, COPs typically offer slightly higher yields than comparable GO bonds from the same issuer.
Voter approval. GO bonds usually require voter authorization through a referendum. COPs do not, which is often the decisive reason a government chooses this route.²
Speed to market. Skipping the referendum lets a government respond to urgent capital needs without waiting for an election cycle.²
Debt limits. COPs allow a government to finance projects that would otherwise push it past its statutory borrowing cap, because the lease payments are classified as operating expenses rather than debt.

Revenue bonds are another common alternative. A revenue bond is repaid from a specific income stream such as water utility fees or toll receipts. COPs share the feature of lacking a general tax pledge, but they’re tied to lease payments for a specific asset rather than to an enterprise’s revenue. In rough terms, the hierarchy of security runs GO bonds first, revenue bonds second, and COPs third, with yields rising in the same order to compensate for incrementally higher risk.

Essentiality Drives Real Risk

Not all COPs carry the same level of non-appropriation risk, and the biggest variable is how essential the financed asset is to the government’s daily operations. Rating agencies explicitly weigh this. A certificate financing a county jail or main administrative building is considered far safer than one financing surplus office space, because a government cannot realistically walk away from a building it needs to function.³

Essential-use COPs behave almost like GO bonds in practice because the political cost of vacating a critical facility is severe enough that appropriation is effectively guaranteed even in a downturn. Nonessential assets, on the other hand, are the first place a government will look when it needs to cut.

Tax Treatment

Interest earned on COPs is generally exempt from federal income tax. The Internal Revenue Code excludes interest on obligations of a state or political subdivision from gross income.⁴ The IRS reads the term “bonds” broadly to cover certificates of participation, notes, installment sales, and other forms of government financial obligations, bringing COPs within the exclusion.⁵

Interest may also be exempt from state and local income taxes if you live in the same state as the issuer, though this varies. The combined federal and state advantage can make COPs attractive on an after-tax basis compared to taxable corporate bonds of similar credit quality, even when the stated yield is lower.

One caveat. Like other municipal obligations, COPs financing certain projects must satisfy the private activity bond tests under the Internal Revenue Code to keep their tax-exempt status.⁴ If the financed asset is used primarily by private entities rather than the public, the interest may become taxable or subject to the Alternative Minimum Tax. The official statement for any COP issuance will disclose whether the certificates qualify as tax-exempt and whether AMT applies.

What to Check Before You Buy

Analyzing a COP is different from analyzing a standard GO bond. The things that matter most:

Essentiality of the asset. A government office building or water treatment plant is much harder to walk away from than a warehouse or a nonessential piece of equipment.
The issuer’s financial health. Review the general fund balance, revenue trends, and existing debt load. A well-managed government with healthy reserves is unlikely to nonappropriate even in a downturn.
Credit rating. Check whether the COP carries its own rating and how it compares to the issuer’s GO rating. The gap between the two tells you how seriously the agency takes the non-appropriation risk on that particular deal.
The non-appropriation clause itself. Read it in the official statement. Some clauses are more protective of investors than others, and the language about what happens to the asset on termination matters.
Disclosure history. Continuing disclosure filings are posted on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) website, which is the official public repository for municipal securities information. You can search it for free to review annual financial statements, event notices, and offering documents. Issuers who routinely miss filing deadlines are a warning sign.⁶

Dealers who sell or recommend COPs must comply with MSRB Rule G-17, which requires fair dealing and prohibits deceptive or dishonest practices in municipal securities transactions.⁷ Continuing disclosure obligations for most COPs flow from SEC Rule 15c2-12, which requires annual financial reporting and prompt notice of material events, including payment delinquencies and rating changes, within ten business days.⁸

COPs occupy a specific niche in the municipal market. They offer slightly higher yields than GO bonds from the same issuer, carry genuine tax advantages, and fund real public infrastructure. The trade-off is a conditional payment stream that depends on annual budget politics rather than a binding legal obligation. For investors who understand that dynamic and choose their issuers carefully, COPs can be a reasonable piece of a tax-sensitive fixed-income portfolio.

1
Equipment Leasing & Finance Foundation. Municipal Leasing and the Risk of Nonappropriation
2
Investopedia. Certificate of Participation (COP): Lease Financing Explained
3
DebtBook. Certificates of Participation: Similar to General Obligation Bonds, but Different
4
Office of the Law Revision Counsel. 26 U.S. Code 103 – Interest on State and Local Bonds
5
Internal Revenue Service. Tax Exempt Bond Financing Part One
6
Municipal Securities Rulemaking Board. Continuing Disclosure
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Municipal Securities Rulemaking Board. Rule G-17: Conduct of Municipal Securities and Municipal Advisory Activities
8
eCFR. 17 CFR 240.15c2-12 – Municipal Securities Disclosure