4.3 Revenue Bonds
Revenue bonds are self-supporting debt obligations. Because taxpayers are not obligated to cover shortfalls, credit risk is tied directly to facility usage and the strength of the trust indenture covenants.
Key FINRA Exam Takeaways
- Backed solely by user fees and revenues generated by the funded facility (toll roads, bridges, airports, hospitals).
- NOT subject to statutory debt limits and do NOT require voter referendums.
- Requires an independent Feasibility Study before issuance.
- Trust Indenture covenants protect bondholders (rate covenant, insurance covenant, maintenance covenant).
- Flow of Funds: Net Revenue Pledge pays Operating & Maintenance (O&M) FIRST; Gross Revenue Pledge pays Debt Service FIRST.
Flow of Funds: Net vs. Gross Revenue Pledge
Net Revenue Pledge (most common): All project revenues enter the revenue fund. Operation & Maintenance (O&M) expenses are paid FIRST to keep the facility running. Remaining 'net revenues' pay debt service. Gross Revenue Pledge: Debt service is paid FIRST before any maintenance costs.
Trust Indenture Protective Covenants
Rate Covenant (promise to maintain user fees high enough to cover debt service and operations), Maintenance Covenant, Catastrophe / Insurance Covenant, and Additional Bonds Test (ABT, sets financial hurdles before issuing parity debt).
| Priority | Net Revenue Pledge (Standard) | Gross Revenue Pledge |
|---|---|---|
| 1st Priority | Operation & Maintenance (O&M) Fund | Debt Service Fund (Principal & Interest) |
| 2nd Priority | Debt Service Fund (Principal & Interest) | Operation & Maintenance (O&M) Fund |
| 3rd Priority | Debt Service Reserve Fund | Debt Service Reserve Fund |
| 4th Priority | Renewal & Replacement / Surplus Fund | Renewal & Replacement / Surplus Fund |
Under a municipal revenue bond trust indenture with a Net Revenue Pledge, which fund receives priority payment first from gross revenues?