Cities and townships can issue bonds to borrow for projects they want to undertake, such as a new sewer treatment plant or a new school. However, in all states except Hawaii, cities, townships, and states cannot borrow money to finance operating deficits the way the federal government does. They must have balanced budgets every year.
Investors in municipal bonds get a break from the IRS; interest on municipal bonds is tax free (federally, but often not on state income tax). Bond issuers can then pay a lower interest rate. For example, if the municipality anticipated paying 8% on their bonds, and the average federal income tax rate is 25%, the tax-free yield that is equivalent would be .08 X .75 or 6%. This is an approximation, of course, because the final yield is determined in the municipal bond market and depends on current interest rates and the credit worthiness of the issuer.