Revenue bond
Encyclopedia
A revenue bond is a special type of municipal bond
distinguished by its guarantee of repayment solely from revenue
s generated by a specified revenue-generating entity associated with the purpose of the bonds, rather than from a tax. Unlike general obligation bond
s, only the revenues specified in the legal contract between the bond holder and bond issuer are required to be used for repayment of the principal and interest of the bonds
; other revenues (notably tax
revenues) and the general credit of the issuing agency are not so encumbered. Because the pledge of security is not as great as that of general obligation bonds, revenue bonds may carry a slightly higher interest rate than G.O. bonds; however, they are usually considered the second-most secure type of municipal bonds.
Generally, any government agency or fund that is run like a business
, generating operating revenues and expenses (sometimes known as an enterprise fund), can issue revenue bonds. An agency that provides a free service, such as a school, can not do so, as their only revenue is tax dollars.
decision of Pollock v. Farmers' Loan & Trust Co.
of 1895 initiated a wave or series of innovations for the financial services
community in both tax-treatment and regulation from government
. This specific case, according to a leading investment bank's research, resulted in the "intergovernmental tax immunity doctrine," ultimately leading to "tax-free status." Municipal bonds are generally exempt from federal tax on their interest
payments (not capital gains). For taxpayers who purchase municipal bonds issued in the same state in which they reside, interest payments are generally exempt from state and local tax also. Municipal Bonds may be issued in one of two forms: (a) revenue bond, or (b) general obligation (GO) bond
. Revenue bonds may be issued by an agency, commission, or authority created by legislation in order to construct a "facility," such as a toll bridge
; turnpike
; hospital
; university dormitory; water
; sewer
, utilities
and electric districts
; or port
s. The fees, tax
es, or tolls charged for use of the facility ultimately pay off the debt
.
Governments with the power to tax also issue revenue bonds, but restrict the debt service funds to only those funds from the governmental enterprise that generates these revenues. The government itself does not pledge its own credit to pay the bonds. When a municipality assumes liability for the debt service of the income from the project is insufficient it is considered to be double-barreled. In this case however, they are more like GO bonds.
Revenue bonds are most concerned with the repayment of interest to lenders who believe in financing a given public works project such as, bridges, tunnels, sewer systems, education (i.e. committed tolls for a bridge, college dorm and/or student loans, education). In the case of education or school systems, bonds issued for colleges and universities are from the state level are generally backed by income or progressive taxes. Bonds, which are issued by towns, cities, and counties, are backed by local property (ad valorem
) regressive taxes and all other sources of revenue to the municipality. As a general rule, revenue bonds are backed by the revenue generated by the municipal facility the bond issues. A feasibility study should be conducted to compare one project's IRR (internal rate of return
, or hurdle rate) to another proposed project, as it is most important to ensure the success of the municipality. For instance, local government and port authorities can propose construction for a given neighborhood, based on projects that have been successful previously, or it can create a nonprofit authority to issue revenue bonds to build a school district, for example.
In recent legislation, the Financial Services Modernization Act of 1999
, the Municipal Securities Rulemaking Board
(Securities Act Amendments of 1975), and now FINRA (the Financial Industry Regulation Authority) as of July 30, 2007, the industry overall has consolidated not only in sheer number but by undoing previous legislation such as the Securities Act of 1933
. Municipal bonds traditionally were exempt from the filing requirements of the Glass–Steagall Act of 1933, however, like all other securities they are subject to the anti-fraud provisions of the Securities Exchange Act of 1934, and once again the newly formed FINRA.
Some examples of Revenue Bonds include:
§ IDRs and IDBs (Industrial Development Revenue Bonds)
§ Lease rental bonds
§ Special Assessment Bonds (or Special District Bonds
§ New Housing Authority Bonds
§ Moral Obligation Bonds
As a revenue bond is not backed by the full, faith, and credit of the U.S. government, it does not require voter approval. As of July 1, 1983 all municipal bonds must be registered. Two other important pieces of legislation are the Tax Reform Act of 1986 and the 39 General Regulations that govern the SRO (self-regulatory organization) of the MSRB. The MSRB, as mentioned above, governs the issuance and trade of municipal securities both general obligation and revenue bonds.
Municipal bond
A municipal bond is a bond issued by a city or other local government, or their agencies. Potential issuers of municipal bonds includes cities, counties, redevelopment agencies, special-purpose districts, school districts, public utility districts, publicly owned airports and seaports, and any...
distinguished by its guarantee of repayment solely from revenue
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
s generated by a specified revenue-generating entity associated with the purpose of the bonds, rather than from a tax. Unlike general obligation bond
General obligation bond
A general obligation bond is a common type of municipal bond in the United States that is secured by a state or local government's pledge to use legally available resources, including tax revenues, to repay bond holders....
s, only the revenues specified in the legal contract between the bond holder and bond issuer are required to be used for repayment of the principal and interest of the bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
; other revenues (notably tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
revenues) and the general credit of the issuing agency are not so encumbered. Because the pledge of security is not as great as that of general obligation bonds, revenue bonds may carry a slightly higher interest rate than G.O. bonds; however, they are usually considered the second-most secure type of municipal bonds.
Purpose
Revenue bonds may be issued to construct or expand upon various revenue-generating entities, including:- WaterWater industryThe water industry provides drinking water and wastewater services to residential, commercial, and industrial sectors of the economy. The water industry includes manufacturers and suppliers of bottled water...
and Wastewater (Sewer)Sewage treatmentSewage treatment, or domestic wastewater treatment, is the process of removing contaminants from wastewater and household sewage, both runoff and domestic. It includes physical, chemical, and biological processes to remove physical, chemical and biological contaminants...
utilitiesPublic utilityA public utility is an organization that maintains the infrastructure for a public service . Public utilities are subject to forms of public control and regulation ranging from local community-based groups to state-wide government monopolies... - Toll roadToll roadA toll road is a privately or publicly built road for which a driver pays a toll for use. Structures for which tolls are charged include toll bridges and toll tunnels. Non-toll roads are financed using other sources of revenue, most typically fuel tax or general tax funds...
s and bridges (see toll revenue bondToll revenue bondA toll revenue bond is a financial promissory note usually issued to generate funds for the construction and/or operation of a public accommodation such as an expressway, bridge, or tunnel...
) - AirportAirportAn airport is a location where aircraft such as fixed-wing aircraft, helicopters, and blimps take off and land. Aircraft may be stored or maintained at an airport...
s, seaports, and other transportation hubs - Power plants and electrical generation facilities
- PrisonPrisonA prison is a place in which people are physically confined and, usually, deprived of a range of personal freedoms. Imprisonment or incarceration is a legal penalty that may be imposed by the state for the commission of a crime...
s
Generally, any government agency or fund that is run like a business
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
, generating operating revenues and expenses (sometimes known as an enterprise fund), can issue revenue bonds. An agency that provides a free service, such as a school, can not do so, as their only revenue is tax dollars.
Law in the United States
The Supreme CourtSupreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
decision of Pollock v. Farmers' Loan & Trust Co.
Pollock v. Farmers' Loan & Trust Co.
Pollock v. Farmers' Loan & Trust Company, , aff'd on reh'g, , with a ruling of 5–4, was a landmark case in which the Supreme Court of the United States ruled that the unapportioned income taxes on interest, dividends and rents imposed by the Income Tax Act of 1894 were, in effect, direct taxes, and...
of 1895 initiated a wave or series of innovations for the financial services
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
community in both tax-treatment and regulation from government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
. This specific case, according to a leading investment bank's research, resulted in the "intergovernmental tax immunity doctrine," ultimately leading to "tax-free status." Municipal bonds are generally exempt from federal tax on their interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
payments (not capital gains). For taxpayers who purchase municipal bonds issued in the same state in which they reside, interest payments are generally exempt from state and local tax also. Municipal Bonds may be issued in one of two forms: (a) revenue bond, or (b) general obligation (GO) bond
General obligation bond
A general obligation bond is a common type of municipal bond in the United States that is secured by a state or local government's pledge to use legally available resources, including tax revenues, to repay bond holders....
. Revenue bonds may be issued by an agency, commission, or authority created by legislation in order to construct a "facility," such as a toll bridge
Toll bridge
A toll bridge is a bridge over which traffic may pass upon payment of a toll, or fee.- History :The practice of collecting tolls on bridges probably harks back to the days of ferry crossings where people paid a fee to be ferried across stretches of water. As boats became impractical to carry large...
; turnpike
Toll road
A toll road is a privately or publicly built road for which a driver pays a toll for use. Structures for which tolls are charged include toll bridges and toll tunnels. Non-toll roads are financed using other sources of revenue, most typically fuel tax or general tax funds...
; hospital
Hospital
A hospital is a health care institution providing patient treatment by specialized staff and equipment. Hospitals often, but not always, provide for inpatient care or longer-term patient stays....
; university dormitory; water
Water industry
The water industry provides drinking water and wastewater services to residential, commercial, and industrial sectors of the economy. The water industry includes manufacturers and suppliers of bottled water...
; sewer
Sewage treatment
Sewage treatment, or domestic wastewater treatment, is the process of removing contaminants from wastewater and household sewage, both runoff and domestic. It includes physical, chemical, and biological processes to remove physical, chemical and biological contaminants...
, utilities
Public utility
A public utility is an organization that maintains the infrastructure for a public service . Public utilities are subject to forms of public control and regulation ranging from local community-based groups to state-wide government monopolies...
and electric districts
Electric utility
An electric utility is a company that engages in the generation, transmission, and distribution of electricity for sale generally in a regulated market. The electrical utility industry is a major provider of energy in most countries. It is indispensable to factories, commercial establishments,...
; or port
Port
A port is a location on a coast or shore containing one or more harbors where ships can dock and transfer people or cargo to or from land....
s. The fees, tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es, or tolls charged for use of the facility ultimately pay off the debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
.
Governments with the power to tax also issue revenue bonds, but restrict the debt service funds to only those funds from the governmental enterprise that generates these revenues. The government itself does not pledge its own credit to pay the bonds. When a municipality assumes liability for the debt service of the income from the project is insufficient it is considered to be double-barreled. In this case however, they are more like GO bonds.
Revenue bonds are most concerned with the repayment of interest to lenders who believe in financing a given public works project such as, bridges, tunnels, sewer systems, education (i.e. committed tolls for a bridge, college dorm and/or student loans, education). In the case of education or school systems, bonds issued for colleges and universities are from the state level are generally backed by income or progressive taxes. Bonds, which are issued by towns, cities, and counties, are backed by local property (ad valorem
Ad valorem tax
An ad valorem tax is a tax based on the value of real estate or personal property. It is more common than a specific duty, a tax based on the quantity of an item, such as cents per kilogram, regardless of price....
) regressive taxes and all other sources of revenue to the municipality. As a general rule, revenue bonds are backed by the revenue generated by the municipal facility the bond issues. A feasibility study should be conducted to compare one project's IRR (internal rate of return
Internal rate of return
The internal rate of return is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return or the rate of return . In the context of savings and loans the IRR is also called the effective interest rate...
, or hurdle rate) to another proposed project, as it is most important to ensure the success of the municipality. For instance, local government and port authorities can propose construction for a given neighborhood, based on projects that have been successful previously, or it can create a nonprofit authority to issue revenue bonds to build a school district, for example.
In recent legislation, the Financial Services Modernization Act of 1999
Gramm-Leach-Bliley Act
The Gramm–Leach–Bliley Act , also known as the Financial Services Modernization Act of 1999, is an act of the 106th United States Congress...
, the Municipal Securities Rulemaking Board
Municipal Securities Rulemaking Board
The Municipal Securities Rulemaking Board, often referred to as the MSRB, writes investor protection rules and other rules regulating broker-dealers and banks in the United States municipal securities market, including tax-exempt and taxable municipal bonds, municipal notes, and other securities...
(Securities Act Amendments of 1975), and now FINRA (the Financial Industry Regulation Authority) as of July 30, 2007, the industry overall has consolidated not only in sheer number but by undoing previous legislation such as the Securities Act of 1933
Securities Act of 1933
Congress enacted the Securities Act of 1933 , in the aftermath of the stock market crash of 1929 and during the ensuing Great Depression...
. Municipal bonds traditionally were exempt from the filing requirements of the Glass–Steagall Act of 1933, however, like all other securities they are subject to the anti-fraud provisions of the Securities Exchange Act of 1934, and once again the newly formed FINRA.
Some examples of Revenue Bonds include:
§ IDRs and IDBs (Industrial Development Revenue Bonds)
§ Lease rental bonds
§ Special Assessment Bonds (or Special District Bonds
§ New Housing Authority Bonds
§ Moral Obligation Bonds
As a revenue bond is not backed by the full, faith, and credit of the U.S. government, it does not require voter approval. As of July 1, 1983 all municipal bonds must be registered. Two other important pieces of legislation are the Tax Reform Act of 1986 and the 39 General Regulations that govern the SRO (self-regulatory organization) of the MSRB. The MSRB, as mentioned above, governs the issuance and trade of municipal securities both general obligation and revenue bonds.
See also
- Municipal BondsMunicipal bondA municipal bond is a bond issued by a city or other local government, or their agencies. Potential issuers of municipal bonds includes cities, counties, redevelopment agencies, special-purpose districts, school districts, public utility districts, publicly owned airports and seaports, and any...
- General Obligation BondsGeneral obligation bondA general obligation bond is a common type of municipal bond in the United States that is secured by a state or local government's pledge to use legally available resources, including tax revenues, to repay bond holders....
- Build America BondsBuild America BondsBuild America Bonds are taxable municipal bonds that carry special tax credits and federal subsidies for either the bond issuer or the bondholder. Build America Bonds were created under Section 1531 of Title I of Division B of the American Recovery and Reinvestment Act that U.S. President Barack...