Revenue bonds are bonds that finance projects in which principal and interest payments to the bondholder are paid from the revenue generated by those projects. Issuers of revenue bonds may be municipal governments, government agencies, or public authorities.
Public authorities are government-created corporations formed to promote the public interest by financing the construction and operation of public facilities (such as the New York City Housing Authority or the Chicago Transit Authority), and they are governed independently of government oversight. Revenue bonds finance airports, mass transit systems, roads and bridges, libraries, and hospitals.
Since these projects only serve those in the community who use the services, users of these services are asked to pay for them, as opposed to the general taxpayer. Income is raised from concessions, tolls, or user fees and put into a revenue fund. The project’s expenses are paid first out of the fund, with the remaining money going to bondholders. Revenue might also be generated by rental or lease payments. A state may create a nonprofit authority to build a school and then lease the facility to a local government.
Revenue bonds may be issued when voter approval for general obligation bonds cannot be attained. Or revenue bonds may be used to finance projects when statutory or constitutional debt limitations prevent a municipality from issuing GO bonds. Because bond payments are contingent on a project’s success and have little access to tax revenues, revenue bonds are riskier and require higher yields than GO bonds to entice buyers.
General Obligation Bonds
Revenue Bonds
Backed by taxes of the municipality
Backed by user charges, lease payments, and special taxes
