Municipal Bond Indentures: Net Revenue Pledge vs. Gross Revenue Pledge
In a municipal revenue bond trust indenture featuring a 'Net Revenue Pledge,' what is the mandatory priority for disbursing facility revenues from the revenue fund?
Under a NET Revenue Pledge, facility Operation & Maintenance (O&M) expenses are paid FIRST from revenues, and Debt Service is paid SECOND from remaining net revenues.
Complete Analysis & Legal Rationale
The flow of funds in a revenue bond indenture defines the sequence in which gross revenues are allocated: (1) In a Net Revenue Pledge (the most common structure), Operations & Maintenance (O&M) expenses are paid first so the facility remains functional and revenue-generating, followed by debt service (bond interest and principal), then debt service reserves, and finally renewal/replacement funds; (2) In a Gross Revenue Pledge, debt service is paid first before operating expenses.
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:
Under a NET Revenue Pledge, facility Operation & Maintenance (O&M) expenses are paid FIRST from revenues, and Debt Service is paid SECOND from remaining net revenues.
Fails to adhere to municipal bond rules regarding B.
Fails to adhere to municipal bond rules regarding C.
Fails to adhere to municipal bond rules regarding D.
Official Standard: The flow of funds in a revenue bond indenture defines the sequence in which gross revenues are allocated: (1) In a Net Revenue Pledge (the most common