Municipal notes and special-type bonds

Short-term notes, and bonds with unusual backing

A municipal note is a short-term obligation to repay principal on a set date, with interest. Notes usually mature in a year or less, and most are repaid from a defined source of money the issuer expects to receive. The note is named after that money. A tax anticipation note (TAN) waits for tax receipts, such as property taxes due at a set time of year. A revenue anticipation note (RAN) waits for other revenues. A tax and revenue anticipation note (TRAN) waits for both.

A bond anticipation note (BAN) is different. It is usually issued for a capital project, such as a school or a bridge, and it is repaid from the proceeds of long-term bonds the issuer sells later. Think of it as a bridge loan. If a question names the money a note is waiting for, it has told you which note it is.

Some long-term bonds have backing with its own name. A special tax bond is secured by one or more designated taxes other than property taxes, such as a sales, fuel or cigarette tax. One named tax is a narrower promise than the issuer’s general taxing power. A double-barreled bond has two sources: a defined revenue source, such as water charges, and the full faith and credit or taxing power of the issuer behind it.

A moral obligation bond has a primary source of security plus a weaker promise. If that source falls short, the shortfall goes into the budget recommendation to the governing body, such as a state legislature. The legislature may appropriate the money, but it is not legally obligated to. Read moral as the opposite of legal: it is a promise to ask, not a promise to pay. In every case, follow the pledge, not the issuer’s name.

Exam terms

Tax anticipation note (TAN)

Short-term note repaid from tax receipts the issuer expects to collect.

Revenue anticipation note (RAN)

Short-term note repaid from other revenues the issuer expects to receive.

Bond anticipation note (BAN)

Short-term note, usually for a capital project, repaid from a later long-term bond sale.

Special tax bond

A bond secured by one or more designated taxes other than property taxes.

Double-barreled bond

A bond backed by a revenue source and by the issuer’s full faith and credit or taxing power.

Moral obligation bond

A bond whose backup is a non-binding promise to put any shortfall in the budget request.

Worked example

Fenmore County has three debts outstanding: notes due in April, to be repaid from property taxes; notes paying for the design of a new hospital wing, to be repaid when 30-year bonds are sold next year; and road bonds backed only by a local fuel tax.

1. The April notes wait for property taxes, so they are tax anticipation notes.
2. The hospital notes wait for a bond sale, so they are bond anticipation notes. Their planned source of repayment is the later bond issue, not this year’s taxes.
3. The road bonds rest on one designated tax that is not a property tax, so they are special tax bonds, not general obligation bonds.
4. If fuel tax receipts fall, the road bondholders look to the fuel tax. The county’s general taxing power was not pledged to them.
5. None of these labels settles the tax question. Municipal interest is generally exempt from federal income tax only if the issue meets the federal tax rules, as the previous lesson showed.

Check yourself

Try a question, then read the explanation to review the rule.

Same rule, new context

Related practice

• Issuer type and repayment sourcePractice this