We just learned about general obligation (G.O.) bonds, which finance projects that don’t generate their own revenue. In contrast, municipal revenue bonds fund projects that are expected to bring in money. Toll roads, airports, stadiums, city zoos, convention centers, and water treatment plants are common examples.
Before a municipality funds a project with a revenue bond, it needs a reasonable basis for believing the project can generate enough revenue to repay the debt. Suppose your city wants to build an aquarium that will cost tens of millions of dollars, and taxpayer funds aren’t available. The aquarium might become a popular attraction, but that outcome isn’t guaranteed.
To evaluate the project, the city hires an independent consultant to prepare a feasibility study. This study estimates the aquarium’s costs and forecasts demand (how many people are likely to visit and pay). Both factors matter: the project can lose money if costs are too high or if demand is too low.
If the feasibility study projects that the aquarium will be profitable, the city can move forward with construction. It issues a self-supporting revenue bond to the public, and the capital (money) raised is used to build the aquarium. Over time, the aquarium’s revenues are used to pay interest and principal on the bond. These bonds are considered self-supporting because they don’t rely on taxes or other outside funding sources for repayment.
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).
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