which were financially successful. The successful financings of this

period far outweighed the few disappointments.

Power authorities and

districts, such as Power Authority of the State of New York, became active

Several regional compact

and financed their great revenue projects. agencies, which were created during this period issued bonds. At the same time, many nonprofit corporations were created as governmental subdivisions for the purpose of issuing revenue bonds and constructing public improve

ments.

As a result of these various developments, the mix of general

obligations and revenue bonds in the total of municipal bond offerings

has changed markedly since 1946. From 1946 to 1953, revenue bonds increased from 17 percent to 28 percent of the total offering.

Since 1953 the

proportion has remained between 30 percent and 40 percent. (See Table III-3).

Municipal Bonds

From the standpoint of the issuer, it is clear that general obligation and revenue bonds are close substitutes.

Municipalities have apparently

turned to revenue bond financing because it offers a welcome combination of primary expense to the user without a corresponding drain on the general funds or (in most cases) a charge against the debt limit. In addition, there are important legal considerations. require a vote of the electorate or an increase in the levy of ad valorem taxes. Thus, in many cases revenue bonds facilitate public borrowing.

Revenue bond financing does not

In determining which type of financial instrument to employ, municipalities must weigh the advantages of revenue bonds against their possible disadvantage

of higher net interest costs. While economic criteria are involved, the decision as to whether to utilize revenue bond financing may often be determined by political considerations alone.

Some attributes of revenue bond issues are typically different from those of general obligations. For example, revenue bonds tend to have a "call" feature built into the issuing agreement, enabling the issuer to retire or refund the bonds prior to the stated maturity. This advantage of revenue bonds may be costly as the call feature is believed to affect 2/ the interest rate at which the bonds may be offered.

The purpose of the call feature is to allow the borrower to refund outstanding debt if interest rates move lower. From the borrowers' standpoint, therefore, call provisions are most valuable on new issues during periods of unusually high interest rates. The particulars of the call vary greatly from issue to issue.

There are no comprehensive data on the frequency of the use of the call provision, either over time or by type and rating, although it is known that such features are far more common for revenue issues. A spot check of municipal bonds issued in 1964 through 1966 indicated that call provisions were much more common on revenue issues. However, there were no marked changes in the frequency with which the call provision was used with either GOs or revenue issues between 1964 and 1966.

One recent empirical study, however, failed to find that this effect was statistically significant. See A. James Heins, "The interest differential between revenue bonds and general obligations: a regression model", National Tax Journal, vol. 15, No. 4 (Dec. 1962) p. 403.

The basis for the traditional view that revenue bonds were inferior to GOs has disappeared, if it ever existed. The financial budgeting by issuers of revenue issues is generally rather sophisticated. Today it is generally customary to require an inflow of revenue sufficient to equal operating expenses, debt service, and a margin of safety. The size of the margin requirements varies with the nature of the issuer, the project, and the certainty of the flow of revenues. the establishment of a debt service reserve is customarily contained in the bond resolution and often follows immediately upon the allocation of revenues for current interest and principal payments.

Provision for

These provisions are designed to safeguard the investor and upgrade the attractiveness of revenue bonds to the investor. While the quality of revenue bond issues as measured by the rating services has steadily improved over the years, revenue issues are seldom given an "Aaa" rating. Among the ratings considered in this study--Aa, A, and Baa--the distribution of ratings of revenue issues is largely parallel to that for GOs. The

number and amount of the issues of both types of these three rating categories 3/

for 1965 and 1966 are shown in Table III-4. An examination of the amount in each type and rating category reveals a significantly smaller percentage of all revenues in the three rating groups. (See Table III-5). However, the distribution of revenue issues by rating within the three groups

is similar to that for GOs.

Not available for 1964.