What Is a Toll Revenue Bond?

A toll revenue bond is a type of municipal bond whose principal and coupon are repaid from the toll revenues collected from the public project that was built by the funds generated by that issue.

Key Takeaways

  • Toll revenue bonds are municipal bonds that use toll revenues that the bond funded in order to repay the principal and coupon of the issue.
  • Since toll revenue bonds rely on a single income stream, which means more risk, they pay a higher interest rate than similar general operation (GO) bonds.
  • Toll revenue bonds typically mature in 20 to 30 years and are issued in $5,000 units with staggered maturity dates.

Understanding a Toll Revenue Bond

A toll revenue bond is a type of municipal security used to fund the construction of a public project, such as a bridge, a tunnel, or an expressway. Revenues from tolls paid by users of the public project pay the principal and interest payments on the bond.

Typically, toll revenue bonds are issued by state transportation agencies or turnpike commissions. As with all revenue bonds, toll revenue bonds differ from general obligation bonds (GO), 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.

Many toll revenue bonds mature in 20 to 30 years and are issued in $5,000 units, and most have staggered maturity dates. For this reason, these toll revenue bonds are a type of serial bond.

Toll revenue bonds help with funding for new toll roads and for improving existing roads. One reason municipalities use toll revenue bonds is that they allow governments to diversify liabilities and avoid self-imposed limits on state or county debt. Not all funding from toll revenue bonds goes toward concrete and asphalt. It can also fund planned infrastructure renewal projects, such as rest stops and parks that abut toll roads.

Advantages and Disadvantages of Toll Revenue Bonds

Investors use toll revenue bonds 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.

Case Study: The Pennsylvania Turnpike

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; and in 2020, it cost $53.50 for a passenger motorist for a one-way trip along the Turnpike’s entire span, if motorists paid in cash.

Indeed, the Pennsylvania Turnpike system added a few additional roads in recent decades. However, one reason for the continued fees along the Turnpike’s 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.