Revenue bonds

We just learned about general obligation (G.O.) bonds, which finance ventures that don’t create revenue. You probably guessed it, but municipal revenue bonds support projects that make money. Toll roads, airports, stadiums, city zoos, convention centers, and water treatment plants are examples of ventures supported by revenue bonds.

If a municipality wants to fund a venture with a revenue bond, it first must ensure it has money-making potential. Assume your city’s leaders want to build an aquarium that will cost tens of millions, and taxpayer money isn’t available. They hope the aquarium becomes a popular attraction, but there are no guarantees. The city will hire an independent consultant to prepare feasibility study to determine the aquarium’s potential profitability. The consultant’s job is to create cost projections for the proposed aquarium and forecast demand. Both will play significant factors, as losses will occur if costs are high or there’s a lack of interest in the aquarium.

The city will begin planning its construction if the feasibility study forecasts a profitable aquarium. A self-supporting revenue bond is issued to the public, and the capital (money) raised is used to build it. Revenues earned from the aquarium pay off the bond over time. We consider revenue bonds self-supporting because they don’t need money from other sources or taxes to repay borrowed funds.

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

*Some revenue bonds are paid off with special excise taxes, which are taxes on specific “vice” goods. Examples include specific taxes on sales of tobacco, alcohol, gasoline, and marijuana (where legal).