Question

Describe the following debt arrangements common to state and local governments and indicate if the debt is short-term or long-term:

1. Demand Bonds

2. Revenue Bonds

3. Conduit Debt

4. Bond anticipation Notes

5. Tax Anticipation Notes

Answer 1

1.Demand Bonds

Demand bonds are long-term debt issuances with demand ("put") provisions that require the issuer to repurchase the bonds upon notice from the bondholder at a price equal to the principal plus accrued interest. To assure its ability to redeem the bonds, issuers of demand bonds frequently enter into short-term standby liquidity agreements and long-term "take out" agreements. This Interpretation provides that demand bonds should be reported by state and local governmental entities as general long-term debt, or excluded from current liabilities of proprietary funds, provided the issuer has entered into a valid financing agreement to convert bonds that have been "put" but cannot be resold into some other form of long-term obligation. In the absence of such an agreement, demand bonds should be classified as fund liabilities, or as current liabilities of proprietary funds. Note disclosure of the details of demand bond arrangements is also required

2.Revenue Bonds

A revenue bond is a municipal bond supported by the revenue from a specific project, such as a toll bridge, highway or local stadium. Revenue bonds are municipal bonds that finance income-producing projects and are secured by a specified revenue source. Typically, revenue bonds can be issued by any government agency or fund that is managed in the manner of a business, such as entities having both operating revenues and expenses.

3.Conduit Debt

To fund major projects, large entities -- generally governments or government agencies -- often market bonds designed to help finance a project that's controlled by someone else and benefits the community. That’s known as conduit debt, and it’s usually found when a government wants to fund major projects without taking on excessive risk. If this debt takes the form of a municipal bond, voters generally have to approve the measure.

Conduit debts can benefit both the issuing agency and the recipient. If a municipal agency issues the bond, it may qualify for a tax-exempt status that the outside investor ordinarily could not get on its own. This makes the issue more attractive to investors who want to minimize their tax burden, and it can be a cheaper way for the borrower to secure financing when compared to seeking private dollars. For the issuing agency, this helps bring a project to fruition without leaving it liable for repaying the funds; the recipient of the bond takes on that obligation. On the other hand, the issuer doesn't own the asset once it's built. If conduit debt is used to build a new baseball stadium and the team sells the naming rights, the government has no claim on those funds.

4.Bond Anticipation Notes

A Bond Anticipation Note (BAN) is a short-term interest-bearing security issued in advance of a larger, future bond issue. Bond anticipation notes are smaller short-term bonds that are issued by corporations and governments, such as local municipalities, wishing to generate funds for upcoming projects.
5.Tax Anticipation Notes

Tax anticipation notes are notes issued by states or municipalities to finance current operations before tax revenues are received in the United States.^[1] When the issuer collects the taxes, the proceeds are then used to retire debt. The interest income is exempt from federal income tax for the recipient—a treatment similar to that for interest income from municipal bonds. Tax anticipation notes are short term notes, issued at a discount, with a maturity period usually less than a year or a stated future date. Tax anticipation notes are used by municipalities to bridge funding gaps.

In the U.S. state of California, Revenue Anticipation Notes (RANS) are issued and paid back within a fiscal year, while Revenue Anticipation Warrants (RAWS) are issued on a fiscal year and paid back the following fiscal year.^[2]