Revenue Bond

How It Works

Revenue bonds are issued by enterprise funds or special authorities and are repaid solely from a defined revenue stream (water and sewer user fees, electric rates, toll revenue, airport landing fees, sales tax increments, hotel tax receipts). Revenue bonds carry interest rates typically 25-100 basis points higher than comparable GO bonds because they are backed only by a specific revenue source, not the city's full taxing power. If the revenue source underperforms relative to feasibility study projections, bondholders have no legal claim on other city funds, a "non-recourse" structure. Revenue bond covenants typically require the city to maintain rates sufficient to generate at least 1.20x to 1.50x annual debt service coverage (net revenues divided by debt service), with rating agencies rewarding higher coverage ratios. Revenue bonds are common for water and wastewater systems, airports (such as LAX's $2+ billion in outstanding revenue bonds), convention centers (where the Jefferson County, Alabama sewer system revenue bond debacle led to an $3.1 billion bankruptcy in 2011 and criminal convictions), and parking facilities. Under IRC Section 103, revenue bond interest is tax-exempt for bonds issued for governmental purposes, but "private activity bonds" that benefit private parties face additional restrictions including the Alternative Minimum Tax (AMT) in some cases. Revenue bonds typically do not require voter approval because they are not backed by the taxing power. Puerto Rico's June 2016 PROMESA restructuring included revenue bonds that experienced significant haircuts. Revenue bond issuance outside the debt limit calculation can obscure true debt burden and is flagged in the CitySpend 20% debt weighting.

Related Terms

• General Obligation Bond (GO Bond), A municipal bond backed by the full faith, credit, and taxing power of the city, meaning the city pledges to raise taxes if necessary to repay bondholders.
• Municipal Bond, A debt security issued by a city, county, state, or other government entity to finance capital expenditures. Interest income is generally exempt from federal income tax.
• Enterprise Fund, A self-supporting government fund that operates like a business, charging user fees to cover costs for services like water, sewer, electric, or transit.