Bonds issued by state and local governments to finance transportation projects or other public works are known as municipal or public bonds. Interest income from public bonds is exempt from federal income taxes and often exempted from taxation by state and local governments. State and local governments issue several types of bonds.
• General Obligation Bonds-These public bonds are issued for projects that do not generate revenue, such as office buildings. The state or local jurisdiction that issues general obligation bonds backs them with the full faith and credit of the jurisdiction. Investors who purchase a general obligation bond have the security that a jurisdiction can raise property taxes or other taxes to repay the bonds.
• Anticipation Notes-Anticipation notes are public securities issued when money is expected from a specific source. States can issue anticipation notes that can be paid off with future bond issues (bond anticipation notes-BANs) or through future tax revenue (tax anticipation notes-TANs). States also can use two federal tools-grant anticipation revenue vehicles (GARVEES) and transit grant anticipation notes (GANS)-to issue bonds for highway and transit projects that can be repaid with future aid grants from the federal government.
Some states have passed anticipation note bonding laws that tap funds from unique sources. Arizona, for example, established an innovative program that allows local communities to issue anticipation notes for transportation projects that are repayable with funds established by the Arizona Regional Area Road Fund (RARF) law.35 The state RARF statute created special funds for transportation projects that were supported with transportation excise taxes. A state statute allows local counties to authorize and issue bonds that are payable solely with excise tax money that is accumulated in the RARF.
• Revenue Bonds-Revenue bonds are public bonds issued to finance projects that generate revenue, such as toll roads or bridges or fares collected from transit projects. The revenue from the project is used to make principal and interest payments to bond holders. Revenue bonds can be risky for investors because future toll or fare revenues are never certain. As a consequence, revenue bonds often have higher yields than bonds that are secured with taxes or other sources.
• Limited and Special Tax Bonds-Limited and special tax bonds are paid through proceeds from a special tax. Unlike a general obligation bond, where a state or local government can raise taxes indefinitely to repay the loan, limited or special tax bonds are tied to a particular tax levied for an express purpose. Often, voter approval may be required for the tax.
• Hybrid Bonds-Hybrid bonds include bonds with characteristics of both revenue and general obligation bonds. For example, the bond can be backed by both anticipated future revenues and by the full faith and credit of the issuing state.36
• Certificates of Participation (COPs)-COPs are state-issued, tax-exempt bonds that are secured with revenue from leases on equipment or facilities. Under this arrangement, a state public entity purchases equipment that it then leases to a local transit agency or other transportation department. The state entity concurrently issues bonds that match the lease term and secures the bonds with proceeds from the lease. These bonds often are used for transit projects that involve capital investments such as train cars, buses and other equipment. However, COPs also can be used to finance highway investments such as toll booths; electronic fare collection systems; truck size, weight and credentialing systems; and ITS technologies.
The advantage of COPs is that they allow states to finance capital projects but avoid restrictions on long-term debt. Many state constitutions and statutes require voter approval for certain long-term bonds. The COPS arrangement allows many states to avoid such restrictions.
• Private Bonds-Private companies can sell bonds to raise money to pay for transportation investments. However, interest paid on bonds sold by private entities is usually taxable, making private bonds a less attractive source of revenue for transportation projects. SAFETEA-LU changed the law to create private activity bonds that are more appealing for transportation projects.
• Private Activity Bonds-To provide the opportunity for new sources of investment capital to finance the U.S. transportation infrastructure system, SAFETEA - LU expands bonding authority for private activity bonds by adding highway facilities and surface freight transfer facilities to the list of other activities eligible for tax-exempt facility bonds. Qualified projects, which must already be receiving federal assistance, include surface transportation projects eligible under Title 23, international bridge or tunnel projects for which an international entity authorized under federal or state law is responsible, and facilities for the transfer of freight from truck to rail or rail to truck (including any temporary storage facilities related to the transfers). These bonds are not subject to the general annual volume cap for private activity bonds for state agencies and other issuers, but are subject to a separate national cap of $15 billion.