Anticipation notes

If a municipality needs funding for short-term purposes, they typically issue notes. Notes range in maturity between 3 months and 3 years.

A municipality can issue anticipation notes if they want to utilize funds before they’ve been collected. There are a few different versions, but they all have the same theme. Municipalities borrow money for a short period of time, spend that money, and use taxes, revenues, or capital (money) received in the future to pay back borrowed funds. Let’s discuss the specific types of anticipation notes.

Tax anticipation notes (TANs) allow the municipality to spend money on a public project, and pay back borrowed funds with future tax collections. Assume your city wants to renovate a local public park but doesn’t have the necessary funds now. If tax collections are coming in a few months, they can issue a TAN. By doing so, the city borrows money for a short amount of time and does the renovations. A few months later, they’ll use tax collections to pay back the borrowed funds. This is sometimes called “smoothing out” cash flow as it allows municipalities to utilize taxes throughout the year.

The same idea applies to revenue anticipation notes (RANs), but funds are used for revenue-related projects. Assume your city owns a zoo and wants to expand it. They can issue a RAN to fund the expansion. Once completed, they’ll use future revenue collections from the zoo to pay off the debt. RANs are another example of a municipality smoothing out its cash flow.

Tax and revenue anticipation notes (TRANs) are a combination of TANs and RANs. If a municipality wants to spend money on multiple projects but only wants to issue one form of debt, TRANs can do it. Once the money is spent, the municipality will use future tax and revenue collections to pay back the borrowed funds.

Bond anticipation notes (BANs) are issued prior to a long-term bond issuance. Assume your city is planning to build a new high school by issuing a G.O. bond. They may issue a BAN prior to the bond issue to pay for architect blueprints and land surveys. When the bond is issued in the future, they’ll use a portion of the bond proceeds to pay off the smaller BAN.

Grant anticipation notes (GANs) are issued when a federal grant is expected. The federal government can issue a grant to a municipality, which essentially is free federal government money. Assume your city is given a grant to grow and improve its public transportation system. Prior to receiving the grant, the city can issue a GAN to pay for up-front research costs on how to best utilize their grant money. Grants are often provided for projects that the federal government views as beneficial (like environmentally friendly projects).