Transportation Bond: What It is, How It Works

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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 for public transportation.

Key Takeaways

• Transportation bonds are issued by municipal, state, regional, or federal governments to fund public transportation infrastructure.
• Transportation bonds can be general obligation (GO) bonds or revenue bonds.
• Transportation bonds may not have the earned interest tax exemption that is attractive to investors.

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 include initiatives such as the construction and improvement of highways, bridges, ports, airports, rail lines, and public transit systems. Projects in the transportation sector often require coordination across a large region, so special districts are created to meet regional transportation needs.

The structure of transportation bonds is similar to municipal bonds issued by local and state governments. Bonds issued by state and government entities generally have higher credit ratings 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 fleet of 862 rail cars over 130 miles of tracks. The district can levy property taxes and borrow funds by issuing bonds, although financing requires voter approval by citizens in the area.

Transportation bonds also fund other transportation needs like air service. The Port Authority of New York and New Jersey operates several airports and manages seaport facilities, bridges, tunnels, and bus terminals.

Transportation Bond Mechanisms

Transportation bonds are financed in several ways:

• General obligation bonds (GO) from state and local governments have backing by government income and other levied taxes.
• Revenue bonds use designated sources of revenue to pay interest and principal. These bonds may be appropriate for transportation financing because tolls and fares are often charged to use highways, bridges, and other transit facilities. However, revenue bonds have a higher interest rate due to the risk investors face if revenues fall short of projections.
• Private-public partnerships are entities where government authorities and private firms work together 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 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.