The basics

We just learned about general obligation (G.O.) bonds, which support ventures that don’t create revenue. You probably guessed it, but municipal revenue bonds support projects that make revenue. If your city operates anything that makes them money, it was most likely built with funds raised by a revenue bond issue.

Toll roads, airports, stadiums, city zoos, convention centers, and water treatment plants are all examples of ventures supported by revenue bonds. Each is a part of a city’s fabric, but also obtains revenue from its operations.

If a municipality wants to fund a profitable venture with a revenue bond, it first must ensure its money-making potential. Assume your city wants to build an aquarium, which they hope people will visit and pay to get into. The aquarium will cost millions of dollars and taxpayer money won’t be available for it. To determine the earning potential for the venture, municipalities hire independent consultants to prepare feasibility studies. We’ll discuss them in detail later in this chapter, but assume for now they help the municipality determine if the project or facility will be profitable.

If the feasibility study forecasts a profitable aquarium, the city will begin planning its construction. A self-supporting revenue bond will be issued to the public, and the capital (money) raised will be used to build it. Revenues earned from the aquarium will be used to pay off the bond over time. Most revenue bonds are considered self-supporting because they do not rely on taxes to pay back borrowed funds.

Revenue bonds are not paid off with taxpayer funds, so they do not require voter approval to be issued. For the same reason, revenue bonds are not subject to debt limits either.