Municipal Notes
Municipal notes are short-term debt obligations, whose term may last from three months to three years, though most often, their term does not exceed a year. Like Treasury bills, they obligate the issuer to pay a specified principal by a certain date, and they sell at a discount to par in lieu of paying interest. The primary purpose of municipal notes is to meet an agency’s cash flow needs in anticipation of the taxes, fees, or other sources of revenue that fund its ongoing commitments.
Municipal notes are called anticipation notes, because they are issued in anticipation of an expected source of income that will make the periodic payments on a bond. Anticipation notes allow a project to get underway before its funding has been received.
Notes are issued by different names, depending on where the anticipated receipts are coming from, whether from taxes, grants, or fees. Like any cash advance, municipal notes are meant to smooth out cash flows until income is received. They are tax-exempt to the note holders.
For example, tax anticipation notes (TANs) are issued to finance a project’s current operations in anticipation of future tax receipts. TANs have first claim on any tax collections before they are otherwise disbursed. Revenue anticipation notes (RANs) are issued to finance the current operations of a project backed by a revenue bond in anticipation of fees from the completed project to repay the notes. Bond anticipation notes (BANs) enable work to start on a capital project before the municipality completes its issuance of a long-term bond. Rather than issue bonds before the project is finished and final costs are known and certain, a municipality may sell notes that will be retired by proceeds from the new bond issue.
Tax-exempt commercial paper is a short-term promissory note issued by states and municipalities, usually backed by a line of credit with a bank. Its