What Is a Certificate of Participation (COP)?

A Certificate of Participation, or COP, is a municipal security that gives you a fractional share of the lease payments a state or local government makes on a public asset such as a school, courthouse, jail, or fleet of equipment. You get regular interest and principal payments as long as the government keeps appropriating money for the lease each year. Unlike a general obligation bond, a COP is not backed by the government’s taxing power, and the payment stream depends on an annual budget vote rather than a binding debt pledge. Governments use this structure because a lease sidesteps constitutional or statutory limits on how much debt they can carry and generally does not require voter approval.

How the Lease Structure Works

A COP is built around a lease, not a loan. The government transfers legal title to the asset to a trustee, often a commercial bank or a special-purpose entity created for the deal. The trustee leases the asset back to the government under a master lease that lays out a payment schedule, typically 10 to 30 years.

The trustee slices that future stream of lease payments into small, equal pieces. Each piece is a Certificate of Participation. An underwriter sells the certificates to investors, and the proceeds go to the government to build or buy 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 that makes the whole structure work: 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 long-term indebtedness. That is what keeps COPs off the government’s debt ledger and outside the reach of debt ceilings.

Non-Appropriation Risk

Every COP contains a clause no traditional bondholder has to think about: the government can stop paying. Each year the legislative body must affirmatively vote to include the lease payment in its budget. If it doesn’t, the lease terminates and the government returns the asset with no further penalty. The trustee takes possession and can sell or re-lease the property, but certificate holders stop receiving payments and have no guarantee they’ll be made whole from the proceeds.

This is non-appropriation risk, and it is the single most important factor to weigh before buying. In practice, actual non-appropriation events are rare. A government that walks away from a lease faces credit downgrades on its other obligations, possible loss of credit enhancement, and lasting damage to its ability to borrow at reasonable rates. Finance officers understand those consequences, which makes non-appropriation a last resort rather than a routine tool.¹ When it does happen, it usually involves an asset that isn’t central to the government’s core mission.

Why Essentiality Matters

Not every COP carries the same real-world risk. The biggest variable is how essential the financed asset is to daily operations. Rating agencies explicitly weigh this. A certificate financing a county jail or main administrative building is treated as far safer than one financing surplus office space or a parking garage, because a government cannot realistically vacate a facility it needs to function.²

Essential-use COPs behave in practice almost like GO bonds from the same issuer, because the political and operational cost of walking away is so high. Nonessential-asset COPs sit further out on the risk curve, and they are the first place a government under budget pressure will look for savings.

How COPs Compare to GO and Revenue Bonds

The comparison most investors want is between a COP and a general obligation bond from the same government. A GO bond is backed by full faith and credit, meaning the government pledges its taxing authority. A COP carries no such pledge, and that gap explains most of the practical differences.

Credit ratings on COPs are generally lower than on the same issuer’s GO bonds, because the repayment pledge is conditional. Agencies factor in how essential the asset is when they assign the rating.
Yields are typically a little higher than on comparable GO bonds from the same issuer, compensating for non-appropriation risk.
GO bonds usually require voter authorization through a referendum. COPs do not, which is often the decisive reason a government picks this structure.³
Skipping the referendum also means faster issuance, letting governments respond to urgent capital needs without waiting for an election.³
Lease payments are treated as operating expenses, so COPs can fund projects that would otherwise push the government past its statutory borrowing cap.

Revenue bonds are the other common alternative. A revenue bond is repaid from a specific income stream, like water fees or toll receipts. COPs share the feature of no general taxing pledge, but they’re tied to lease payments on a specific asset rather than to an enterprise’s revenue. Roughly speaking, GO bonds sit at the top of the security ladder, revenue bonds in the middle, and COPs below both, with yields moving up in the same order.

Tax Treatment

Interest 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 broadly construes “bonds” to include certificates of participation, notes, installment sales, and other government financial obligations, which brings COPs within the tax 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 tax break can make COPs attractive on an after-tax basis versus taxable corporate bonds of similar credit quality, even when the stated yield looks 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 asset is used primarily by private entities, interest may become taxable or subject to the Alternative Minimum Tax. The official statement for the issue will spell out whether the certificates qualify as tax-exempt and whether AMT applies.

Disclosure and Where to Research an Issuer

COPs are municipal securities, so they sit under the same regulatory framework as the rest of the municipal bond market, overseen by the SEC and the Municipal Securities Rulemaking Board.

Before certificates can be sold, the issuer must prepare an official statement that functions like a prospectus. It describes the asset being financed, the lease terms, the non-appropriation clause, credit ratings, and the government’s financial condition. The underwriter can’t sell the certificates without it.³

After issuance, most issuers are bound by a continuing disclosure agreement under SEC Rule 15c2-12. That means annual financial reporting and prompt notice of material events, including payment delinquencies, rating changes, and modifications to the rights of security holders. Event notices must be filed within ten business days.⁶

All of those filings are posted to the MSRB’s Electronic Municipal Market Access (EMMA) website, the official public repository for municipal securities information. You can search EMMA for free to pull an issuer’s financial statements, event notices, and offering documents before you buy or while you hold.⁷

What to Check Before Buying

Due diligence for a COP is different from what you’d do for a plain GO bond. Focus on:

Essentiality of the financed asset. A courthouse or water treatment plant is much harder to walk away from than a warehouse.
The issuer’s financial health. Look at general fund balance, revenue trends, and existing debt load. A well-managed government with healthy reserves is unlikely to nonappropriate even in a downturn.
The COP’s own credit rating and how it compares to the issuer’s GO rating. The gap tells you how seriously the rating agency takes non-appropriation risk on that particular deal.
The non-appropriation clause itself in the official statement. Some are more protective than others, and the language on what happens to the asset upon termination matters.
The issuer’s continuing disclosure record on EMMA. Missed filing deadlines are a warning sign about overall fiscal management.

COPs occupy a specific niche. They pay slightly more than GO bonds from the same issuer, carry the usual municipal tax advantages, and finance real public infrastructure. The trade-off is a payment stream that depends on annual budget politics rather than a binding legal obligation. For investors who understand that dynamic and pick 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
DebtBook. Certificates of Participation: Similar to General Obligation Bonds, but Different
3
Investopedia. Certificate of Participation (COP): Lease Financing Explained
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
eCFR. 17 CFR 240.15c2-12 – Municipal Securities Disclosure
7
Municipal Securities Rulemaking Board. Continuing Disclosure