A revenue bond is a special type of

municipal bond A municipal bond, commonly known as a muni, is a bond issued by state or local governments, or entities they create such as authorities and special districts. In the United States, interest income received by holders of municipal bonds is often ...

distinguished by its guarantee of repayment solely from

revenue In accounting, revenue is the total amount of income generated by the sale of product (business), goods and services related to the primary operations of a business. Commercial revenue may also be referred to as sales or as turnover. Some compan ...

s generated by a specified revenue-generating entity associated with the purpose of the bonds, rather than from a tax. Unlike general obligation bonds, 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 A tax is a mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax co ...

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: *

Water Water is an inorganic compound with the chemical formula . It is a transparent, tasteless, odorless, and Color of water, nearly colorless chemical substance. It is the main constituent of Earth's hydrosphere and the fluids of all known liv ...

and Wastewater (Sewer)

utilities A public utility company (usually just utility) is an organization that maintains the infrastructure for a public service (often also providing a service using that infrastructure). Public utilities are subject to forms of public control and r ...

Toll road A toll road, also known as a turnpike or tollway, is a public or private road for which a fee (or ''Toll (fee), toll'') is assessed for passage. It is a form of road pricing typically implemented to help recoup the costs of road construction and ...

s and bridges (see toll revenue bond) *

Airport An airport is an aerodrome with extended facilities, mostly for commercial Aviation, air transport. They usually consist of a landing area, which comprises an aerially accessible open space including at least one operationally active surf ...

seaport A port is a maritime facility comprising one or more wharves or loading areas, where ships load and discharge cargo and passengers. Although usually situated on a sea coast or estuary, ports can also be found far inland, such as Hamburg, Manc ...

s, and other transportation hubs *

Power plant A power station, also referred to as a power plant and sometimes generating station or generating plant, is an industrial facility for the electricity generation, generation of electric power. Power stations are generally connected to an electr ...

s and electrical generation facilities *

Prison A prison, also known as a jail, gaol, penitentiary, detention center, correction center, correctional facility, or remand center, is a facility where Prisoner, people are Imprisonment, imprisoned under the authority of the State (polity), state ...

s Generally, any government agency or fund that is run like a

business Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for ...

, 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 Court In most legal jurisdictions, a supreme court, also known as a court of last resort, apex court, high (or final) court of appeal, and court of final appeal, is the highest court within the hierarchy of courts. Broadly speaking, the decisions of ...

decision of '' Pollock v. Farmers' Loan & Trust Co.'' of 1895 initiated a wave or series of innovations for the

financial services Financial services are service (economics), economic services tied to finance provided by financial institutions. Financial services encompass a broad range of tertiary sector of the economy, service sector activities, especially as concerns finan ...

community in both tax-treatment and regulation from

government A government is the system or group of people governing an organized community, generally a State (polity), state. In the case of its broad associative definition, government normally consists of legislature, executive (government), execu ...

. This specific case, according to a leading investment bank's research, resulted in the "intergovernmental tax immunity doctrine," ultimately leading to "tax-free status." The interest on municipal bonds is generally excludable from gross income for federal income tax purposes (however, capital gains or accruing market discount are not tax exempt); for these purposes, accruing original issue discount is also treated as "interest" which is excludable from gross income for federal income tax purposes. Some municipal bonds are called "specified private activity bonds" and are preference items under the alternative minimum tax. Additionally, corporate taxpayers may need to include interest on otherwise tax exempt municipal bonds in a calculation base for purposes of the alternative minimum tax and other special taxes. 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. States generally tax interest on municipal bonds issued in other states. There is considerable variability by state, however. For example, in Maryland there is also a specific exemption of capital gain on Maryland-issued municipal bonds. In contrast, Minnesota does not provide for an exemption. The differential treatment of different state's interest was considered in the case Kentucky v. Davis, 553 U.S. 328 (2008). 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 A hospital is a healthcare institution providing patient treatment with specialized Medical Science, health science and auxiliary healthcare staff and medical equipment. The best-known type of hospital is the general hospital, which typically ...

; university dormitory;

water Water is an inorganic compound with the chemical formula . It is a transparent, tasteless, odorless, and Color of water, nearly colorless chemical substance. It is the main constituent of Earth's hydrosphere and the fluids of all known liv ...

; sewer,

and electric districts; or

port A port is a maritime facility comprising one or more wharves or loading areas, where ships load and discharge cargo and passengers. Although usually situated on a sea coast or estuary, ports can also be found far inland, such as Hamburg, Manch ...

s. The fees,

es, or tolls charged for use of the facility ultimately pay off the

debt Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...

. Many 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 issuing government does not pledge its own credit to pay the bonds. When a municipality assumes liability for the debt service, if the income from the project is insufficient, it is considered to be double-barreled. In this case however, they are more like GO bonds, except that, for bankruptcy and security purposes, they have the benefit of the additional security provided by the pledged revenues. An example of double-barreled bonds is water and sewer revenue bonds issued on behalf of a water and sewer enterprise system. Revenue bonds are most often issued to finance a revenue-generating public works project such as, bridges, tunnels, sewer systems, education (e.g. college dorms and/or student loans). In the case of education or school systems, bonds issued for colleges and universities are generally backed by income or other

progressive tax A progressive tax is a tax in which the tax rate increases as the taxable amount increases. The term ''progressive'' refers to the way the tax rate progresses from low to high, with the result that a taxpayer's average tax rate is less than the ...

es. General obligation bonds may be backed by a variety of credits depending on the state and local law; those credits include taxes on local property (

ad valorem An ''ad valorem'' tax (Latin for "according to value") is a tax whose amount is based on the value of a transaction or of a property. It is typically imposed at the time of a transaction, as in the case of a sales tax or value-added tax (VAT). A ...

), regressive taxes and/or all other sources of revenue to the municipality. As a general rule, revenue bonds are backed by the revenue generated by the municipal facility funded by the bond issue. A feasibility study should be conducted to compare one project's IRR (

internal rate of return Internal rate of return (IRR) is a method of calculating an investment's rate of return. The term ''internal'' refers to the fact that the calculation excludes external factors, such as the risk-free rate, inflation, the cost of capital, or fin ...

, 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 Acts Amendments of 1975), and now FINRA (the

Financial Industry Regulatory Authority The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) that regulates member brokerage firms and exchange markets. FINRA is the successor to the National Associati ...

) 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 The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress on May 27, 1933, during the Great Depression and afte ...

. 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) or, after the passage of the

Tax Reform Act of 1986 The Tax Reform Act of 1986 (TRA) was passed by the 99th United States Congress and signed into law by President Ronald Reagan on October 22, 1986. The Tax Reform Act of 1986 was the top domestic priority of President Reagan's second term. The ...

, PABs (Private Activity Bonds) § Lease rental bonds § Special Assessment Bonds (or Special District Bonds or, in California, Mello-Roos Bonds) § Housing Authority Bonds As a revenue bond is not backed by the full faith and credit of the issuing 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.

References

* Barron's Financial Guides, John Downes and Jordan Eliot Goodman 1995 * How the Bond Market Works, Robert Zipf 2002 * Bonds: The Unbeaten Path to Secure Investment Growth, Hildy Richelson and Stan Richelson, 2007 * Securities and Training Corporation, July 3, 2006 {{DEFAULTSORT:Revenue Bond Bonds (finance)

Purpose

Law in the United States

See also

References