Double-barreled Bond

The Calderwood Regional Sewer District issues bonds that are payable first from the net revenues of the sewer system and, if those revenues prove insufficient, from the unlimited ad valorem taxing power of Calderwood County. This security is best described as:

1. A.A pure revenue bond, because sewer system revenues are the first source of payment.Incorrect. A pure revenue bond has ONLY the project revenue stream behind it. Here a general government has pledged its taxing power as a second source.
2. B.A double-barreled bond.Correct. Two legally binding sources of payment - project revenues plus the county's unlimited ad valorem taxing power - is the definition of a double-barreled bond, and it is generally analyzed as a general obligation credit.
3. C.An industrial development revenue bond backed by a corporate lessee.Incorrect. An industrial development bond is repaid by a private corporate lessee, not by a public sewer system's revenues and a county tax pledge.
4. D.A moral obligation bond, because the county's support is discretionary.Incorrect. In a moral obligation structure the legislature MAY appropriate funds but is not required to. Here the ad valorem tax pledge is legally binding.

Why: A bond with two distinct and legally enforceable sources of payment - a project revenue stream plus the full faith, credit and taxing power of a general purpose government - is a double-barreled bond. Because the taxing pledge is a genuine backstop rather than a courtesy, these bonds are generally analyzed and rated as general obligation credits and usually carry lower yields than a comparable pure revenue bond.

Kettleborough Township issues bonds to finance a sewer expansion. The bonds are payable first from sewer system user charges; if those revenues fall short, the township full faith, credit and taxing power stands behind them. This structure is known as a:

1. A.double-barreled bondCorrect. Two pledges - project revenues plus the full faith, credit and taxing power of the municipality - define a double-barreled bond.
2. B.special assessment bondIncorrect. A special assessment bond is repaid only by charges levied on the specific properties benefited by the improvement, with no general tax pledge.
3. C.moral obligation bondIncorrect. A moral obligation bond relies on a legislature discretionary willingness to appropriate; there is no legal duty to pay, unlike the enforceable tax pledge here.
4. D.industrial development revenue bondIncorrect. An IDR bond is issued by a municipality but repaid by lease payments from a private corporate user, whose credit - not the municipality tax base - supports the bond.

Why: A double-barreled bond has two sources of repayment: a specific revenue stream and, behind it, the general taxing power of a municipality. Because the general obligation pledge backstops the revenue pledge, these bonds are analyzed and rated largely as general obligations. Contrast a plain revenue bond, where holders may look only to project revenues, and a moral obligation bond, where a legislature may but is not legally required to appropriate funds to cure a shortfall.