Toll Revenue Bond: Meaning, Components, Examples

What Is a Toll Revenue Bond?

The term toll revenue bond refers to a municipal bond that makes principal and coupon payments from toll revenues. Capital from bondholders is used to construct projects, and money generated from them—toll road revenue—is used to pay them back. These bonds are a subcategory of highway and transportation bonds, which are among the majority of the market's investment grade bonds. Despite this fact, (toll) revenue municipal bonds aren't nearly as popular as general obligation (GO) bonds.

Understanding a Toll Revenue Bond

A toll revenue bond is a type of municipal security that is normally used to fund the construction of a public project, such as a bridge, a tunnel, or an expressway. It can also fund planned infrastructure renewal projects, such as rest stops and parks along toll roads. Bondholders are promised their principal along with interest by a certain maturity date. Revenues from tolls paid by users of the public project pay back the bondholders.

Toll revenue bonds are typically issued by state transportation agencies or turnpike commissions. Toll revenue bonds (and revenue municipal bonds, in general) differ from general obligation bonds, which draw proceeds from multiple tax sources. Since toll revenue bonds rely on a single stream of income, they have more risk and they pay more interest than similar GO bonds.

Investors should be aware that these bonds are heavily dependent on the associated revenue, as the name implies. They are not backed by the issuing government or its revenue stream (usually taxes). This means if the revenue drops (however unlikely that may be)—that is, if tolls are eliminated or can no longer be collected—issuers cannot pay their bondholders.

As noted above, these bonds provide funding for new toll roads and to improve existing roads. Another reason municipalities issue toll revenue bonds is to allow governments to diversify liabilities and avoid self-imposed limits on state or county debt.

Special Considerations

Toll revenue bonds are a subcategory of highway and transportation bonds. This group comprises a larger category of debt securities called municipal revenue bonds, which make up the majority of all outstanding investment-grade bonds.

Maturity dates differ for toll revenue bonds from traditional bonds. These bonds tend to mature after 20 or 30 years, with many featuring staggered maturity dates. As such, they are generally considered to be serial bonds. With a serial bond, part of the outstanding debt matures at certain dates until the bond is fully matured by the end date. Bond issuers typically issue toll revenue bonds in $5,000 units.

Toll Revenue Bonds vs. General Obligation (GO) Bonds

Not all bonds are created equally. As noted above, revenue bonds, including toll revenue bonds, come with greater risk because they're not backed by the full faith and credit of the issuing government entity. If the revenue stream dries up, the issuer can't pay its creditors the principal and/or interest. These bonds aren't really that popular among investors, even though nearly two-thirds of the bonds on the market are revenue bonds.

General obligation bonds, on the other hand, are among the most common in investor portfolios. People who hold these bonds are guaranteed repayment, as the government has the power to tax its citizens to raise revenue.

Money raised from the sale of bonds, though, regardless of the type, can be used to provide funding for different projects, such as infrastructure. Those that are issued by government entities, whether local, state, or federal, are normally exempt from income taxes at the federal level.

Advantages and Disadvantages of Toll Revenue Bonds

Bonds provide investors with a safe and secure form of investment, especially when combined with a variety of different securities, such as stocks, exchange-traded funds (ETFs), mutual funds, and cash accounts, among others.

Investors can use toll revenue bonds specifically to diversify their fixed-income holdings. Many municipal-bond mutual funds, for example, sprinkle in toll revenue bonds that offer good risk versus reward.

Many target toll revenue bonds in states with healthy balance sheets and favorable economic trends, as this relates to a transportation authority’s ability to make principal payments over the long term.

Criticism of Toll Revenue Bonds

Some taxpayers see toll revenue bonds as an inefficient funding means, however. The Pennsylvania Turnpike, the nation’s first superhighway, which first ran from Irwin to Carlisle, provides a case study in turnpike debt.

The Pennsylvania Turnpike originally planned to retire all its debt in 1954, once it repaid bonds used for construction. However, the Turnpike continues to collect tolls to this day. In 2021, it cost about $112 for a passenger motorist for a one-way trip along the Turnpike’s entire span, if motorists paid in cash.

The state's turnpike system added a few additional roads. But one reason for the continued fees along the main span, critics argue, is that the Pennsylvania Turnpike Commission, and the white-collar jobs it created, would cease to exist if the debt was ever fully paid. A book called When the Levee Breaks: The Patronage Crisis at the Pennsylvania Turnpike, the General Assembly & the State Supreme Court, written by William Keisling, details the Pennsylvania Turnpike’s alleged history of corruption, waste, and nepotism, funded by toll revenue bonds.

The Bottom Line

A toll revenue bond is a type of municipal bond issued for the purpose of generating the costs needed to build a public project such as a bridge, tunnel or expressway. Revenue from the tolls generated by the public's use of the project are used to pay the principal and interest payments on the bond. Toll revenue bonds rely on a single income stream and are therefore more risky than general operation (GO) bonds. However, they also pay a higher interest rate than similar GO bonds.