The basics

We just learned about general obligation (G.O.) bonds, which support ventures that don’t create revenue. Municipal revenue bonds are used for the other kind of project: one that generates its own income. If your city operates a facility that brings in money, it was likely built with funds raised through 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 part of a city’s infrastructure, and each can generate revenue from its operations.

If a municipality wants to fund a revenue-producing venture with a revenue bond, it first needs to evaluate the project’s ability to generate enough income. Suppose your city wants to build an aquarium that it expects people will visit and pay admission to enter. The aquarium will cost millions of dollars, and taxpayer money won’t be available for it. To estimate the venture’s earning potential, municipalities hire independent consultants to prepare feasibility studies. We’ll discuss them in detail later in this chapter, but for now, treat them as reports that help the municipality determine whether the project or facility is likely to be profitable.

If the feasibility study forecasts a profitable aquarium, the city can move forward with planning and construction. A self-supporting revenue bond is issued to the public, and the capital (money) raised is used to build the aquarium. Over time, the aquarium’s revenues are used to pay principal and interest on the bond. Most revenue bonds are considered self-supporting because they don’t rely on taxes to repay borrowed funds.

Because revenue bonds aren’t paid off with taxpayer funds, they don’t require voter approval to be issued. For the same reason, revenue bonds aren’t subject to debt limits either.