Municipal Revenue Bond: Financing Public Projects

A Municipal Revenue Bond is a bond issued by a municipality to finance public works such as bridges, tunnels, or sewer systems, and is supported directly by the revenues generated from these projects.

A Municipal Revenue Bond is a type of municipal bond used to finance income-producing public projects such as toll bridges, tunnels, water treatment facilities, or sewer systems. These bonds are repaid through the revenue generated by the particular projects they finance.

Characteristics and Types of Municipal Revenue Bonds

Features

• Repayment Structure: Unlike general obligation bonds, which are supported by the full taxing power of the issuing municipality, revenue bonds are repaid from the income produced by the specific project.
• Security: These bonds are secured by the revenue generated from the specific project or service, making the revenue stream critical for bondholders.
• Interest Rates: Generally, municipal revenue bonds offer higher interest rates compared to general obligation bonds, reflecting the higher risk associated with the reliance on project revenues.

Types

• Utility Revenue Bonds: Issued to fund infrastructure for utilities like water, electricity, and sewer systems.
• Transportation Revenue Bonds: Issued for projects like toll roads, bridges, and tunnels.
• Healthcare Revenue Bonds: Issued to finance healthcare facilities such as hospitals.
• Higher Education Revenue Bonds: Issued for projects related to universities and colleges, such as dormitories or research facilities.

Historic Context and Evolution

The use of revenue bonds dates back to the early 19th century, when they were first used to fund municipal projects in the United States. Over time, the concept has expanded as municipalities sought different financing means for essential public works without tapping into general taxation.

Milestones

• 1933: U.S. federal government begins widely endorsing use of revenue bonds during the Great Depression for infrastructure projects.
• 1966: Revenue bonds gain popularity during the construction boom post-World War II, especially in suburban areas.

Examples and Case Studies

Success Stories

• Golden Gate Bridge, California: Funded in part by revenue bonds, leveraged the toll revenue for repayment.
• New York City Water Authority: Utilized revenue bonds to fund extensive water and sewer system upgrades, ensuring repayment through service charges.

Comparisons

Municipal Revenue Bonds vs General Obligation Bonds

• Backing: General Obligation Bonds are supported by the credit and taxing power of the issuing jurisdiction, while revenue bonds are supported by project revenues.
• Risk: Revenue bonds generally carry higher risk due to dependence on project success and revenues.
• Interest Rates: Reflecting their higher risk, revenue bonds typically offer higher interest rates compared to general obligation bonds.

FAQs

What happens if the project does not generate enough revenue?

If the project financed by a revenue bond doesn’t generate sufficient revenue, the bondholders might not receive full repayment. This risk is why revenue bonds generally have higher interest rates.

Can individuals invest in municipal revenue bonds?

Yes, individuals can purchase municipal revenue bonds, often through brokers. These bonds can provide tax-free income depending on the investor’s tax situation and the bond’s tax status.

Are revenue bonds safer than corporate bonds?

Municipal revenue bonds typically carry less risk than lower-rated corporate bonds due to the public utility nature of the underlying projects, although they are not as secure as general obligation bonds.

Related Terms

• General Obligation Bond: A bond issued by a municipality that is secured by the issuing jurisdiction’s tax power.
• Tax-Exempt Bond: A bond whose interest payments are not subject to federal income tax.

References

1. Smith, B. J. (2005). Public Finance and Municipal Bonds. New York: Financial Press.
2. Johnson, K. L. (2018). Understanding Municipal Bonds. Chicago: Economic Publishers.

Summary

Municipal Revenue Bonds play a crucial role in financing public infrastructure projects by leveraging the revenue generated from the projects themselves for repayment. This form of financing facilitates large-scale investments in critical services without burdening the general taxpayer. Though carrying higher risks than general obligation bonds, they offer attractiveness through often higher interest rates and specific project focus. These bonds are significant mechanisms in public finance, reflecting the blend of risk, reward, and public service.