Revenue Bond Flow of Funds: Net Revenue vs. Gross Revenue Pledge
Under a NET REVENUE pledge in a municipal revenue bond trust indenture, in what order are project revenues allocated?
In a Net Revenue Pledge, Operations & Maintenance (O&M) expenses are paid FIRST to keep the facility running. Remaining 'net' revenues flow to the Debt Service fund to pay bondholders.
Complete Analysis & Legal Rationale
In a Gross Revenue Pledge, Debt Service is paid first before operating expenses. However, the majority of municipal revenue bonds utilize a Net Revenue pledge because a facility that cannot afford maintenance will quickly cease generating revenues.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Net revenue pledge pays O&M first to sustain operations, then debt service.
Debt service first is a GROSS revenue pledge.
Surplus and reserve maintenance are junior accounts at the bottom of the flow.
City general fund only receives residual funds after all bond reserves are satisfied.
Official Standard: Standard flow of funds priority disclosures.