Glossary of Municipal Securities Terms

CONTRACT CLAUSE

Federal and state constitutional provisions prohibiting state governments from enacting any law that impairs the obligation of an existing contract. The issue of contract impairment can arise with respect to municipal securities when action is taken or proposed that has the effect of reducing revenues pledged for payment of the securities or otherwise altering the security for their payment. Such action may be invalid as an unconstitutional impairment of the bondholders’ contract with the issuer or obligor, unless the bond contract permits amendments of the security provisions or substitution of security.

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