Transportation Bond: What It is, How It Works

What Is a Transportation Bond?

A transportation bond is a fixed-income security issued by a municipality, state government, or special regional district to fund infrastructure needs related to public transportation.

Understanding Transportation Bonds

Transportation bonds are fixed-rate bonds issued by local, regional, state, and federal government agencies to fund projects in the transportation sector. These can include initiatives such as the construction and improvement of highways, bridges, ports, airports, rail lines, and public transit systems. Although jurisdictions can issue bonds, the transportation sector is unique in that projects may need to span across a vast region, such as a large metropolitan area. In these cases, special districts are often created to coordinate regional transportation needs.

The structure of transportation bonds is like many municipal bonds, which are issued by local governments, and those issued by state governments. Bonds for states and government entities generally carry a higher credit rating than those issued by smaller cities and towns.

For example, the Bay Area Rapid Transit District (BART) was formed in 1957 to provide rail transit in five counties in the San Francisco Bay area. It operates a growing fleet of 862 rail cars over 130 miles of tracks. The district has the authority to levy property taxes and borrow funds by issuing bonds, although such financing requires voter approval by citizens in the area.

Other transportation needs such as air service receive funding through transportation bonds issued by local, state, or special districts formed for that purpose. The Port Authority of New York and New Jersey, for example, operates several airports in addition to managing seaport facilities, bridges, tunnels, and bus terminals.

Transportation Bond Mechanisms

The financing of transportation bonds happens in several ways:

• General obligation bonds (GO) from state and local governments have backing by the government’s income tax, sales tax, and other levied taxes.
• Revenue bonds are structured so that designated sources of revenues are used to pay interest and principal. Because specific tolls and fares are often charged to use highways, bridges, and other transit facilities, these bonds may be appropriate for transportation financing. In general, however, revenue bonds require a higher interest rate because of the risk investors face if revenues fall short of projections.
• Private-public partnerships are entities where government authorities and private firms work together to create a new body to fund specific initiatives.

For example, management of the Elizabeth River Tunnels Project is by both a private company, Elizabeth River Crossings OpCo, LLC, and the Virginia Department of Transportation. Revenue bonds have been issued to help finance this project, which funds toll roads and tunnels near Portsmouth, Virginia.

Another private-public partnership is the Eagle P3 FasTracks project to build or extend commuter rail lines in the Denver, Colorado, area. Denver Transit Partners, a consortium of several private companies, and the Regional Transportation District (RTD) have partnered on this project, funded in part by transportation bonds.

Although traditional municipal bonds have long been attractive to investors due to the earned interest being tax-exempt, transportation bonds may not have this exemption. In some cases, interest may be exempt from state taxes, but not from federal taxes. In other cases, even bonds issued by private entities in cooperation with public bodies may offer tax-exempt status from federal taxes.