A special revenue bond is a government-issued bond that pays investors using income from a specific public project, not from general taxes.
Understanding Special Revenue Bonds in Plain English
A special revenue bond is a type of bond issued by a government or public authority to raise money for a specific project that serves the public. What makes it “special” is how it gets paid back.
Instead of being repaid from general taxes, a special revenue bond is paid using revenue generated by the project itself. That revenue might come from fees, tolls, service charges, or other dedicated income sources linked directly to the project.
In simple terms, the project helps pay for itself.
Why Governments Use Special Revenue Bonds
Large public projects can be expensive. Things like water systems, public transit, airports, or parking facilities often require major upfront funding.
Special revenue bonds allow governments to:
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Finance important public projects
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Avoid raising taxes
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Match repayment to project income
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Shift financial responsibility to users of the service
This approach can be more efficient and fair, especially when a project directly benefits certain users.
Common Projects Funded by Special Revenue Bonds
Special revenue bonds are usually tied to projects that generate steady income.
Examples include:
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Toll roads and bridges
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Airports and seaports
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Water and sewer systems
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Public parking garages
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Public power or utility systems
For instance, a city might issue a special revenue bond to build a new toll bridge. Drivers who use the bridge pay tolls, and those tolls are used to repay bondholders.
A Simple Real-Life Example
Imagine a city wants to upgrade its water treatment plant. Instead of funding it through general taxes, the city issues special revenue bonds.
Here’s how it works:
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Investors buy the bonds
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The city builds or upgrades the plant
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Residents pay water usage fees
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Those fees are used to pay interest and principal on the bonds
If the water system performs well and generates enough revenue, bondholders are paid as promised.
How Special Revenue Bonds Differ from Other Municipal Bonds
It’s easy to confuse special revenue bonds with other municipal bonds, but there are important differences.
General Obligation Bonds
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Backed by the full taxing power of the government
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Repaid through taxes
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Generally considered very safe
Municipal Obligation Bonds
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May use a mix of funding sources
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Can include tax-backed payments
Special Revenue Bonds
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Repaid only from specific project revenue
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Not payable from general tax sources
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Risk depends on project performance
Because repayment depends on project income, special revenue bonds carry different risks than tax-backed bonds.
Risks and Benefits for Investors
Special revenue bonds can be attractive to investors, but they come with trade-offs.
Benefits include:
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Often higher interest than general obligation bonds
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Tied to essential public services
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Predictable revenue in well-managed projects
Risks include:
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Revenue may fall if usage drops
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Economic downturns can affect income
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Project-specific risks
Investors need to understand the project and its revenue source before investing.
Why Special Revenue Bonds Matter to the Public
Special revenue bonds help governments build and maintain essential infrastructure without putting pressure on general budgets.
They:
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Support long-term public development
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Keep taxes more stable
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Encourage responsible project planning
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Align costs with actual users
This structure can benefit both governments and citizens when managed carefully.
Legal and Financial Structure
Legally, a special revenue bond creates a payment obligation that is separate from municipal obligation bonds. The bond agreement clearly defines which revenue sources can be used and limits repayment to those sources.
This clarity protects both investors and taxpayers.
Final Thoughts
A special revenue bond is a powerful financing tool used by governments to fund important public projects. By relying on project-generated revenue rather than general taxes, it creates a focused and transparent repayment structure.
While not risk-free, special revenue bonds play a key role in building infrastructure that communities rely on every day—roads, water systems, airports, and more. Understanding how they work helps investors and citizens better appreciate how public projects are funded.
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