Please help me understand airport bonds.
April 11, 2013 5:43 PM   Subscribe

What are some great resources for the beginner, either online or in print, that will help me to understand how airport bonds work?

I'm looking for things that break down the basic concept of bonded debt, provide a basic glossary of terms, explain the various types of airport bond funding, etc.

My goal is to be able to look at an airport bond issuance and be able to really read the documents, i.e. determine what kind of bond it is, what revenue source is backing the bond, and so forth. I want to be able to swim through all that terrible jargon.
posted by kensington314 to Law & Government (4 answers total)
Wikipedia is probably a good start, with this basic explanation to get you started.

A bond is a security that binds the issuer to pay the purchaser back a certain amount of money in a certain amount of time. An IOU of sorts. They are near the top of the list of debts to be repaid should the issuer go bankrupt. The very basic idea is: do you trust the issuer to pay you back? The very basic way to figure this out is how high of an interest rate premium is being paid. If I can borrow money from a bank at 5%, I would be silly to issue bonds for 10% unless the bank won't give me the money because they think I'm a bad risk.

Municipal debt is a little different (which I assume the airport is) since it is usually backed by the taxpayers of the municipality. The idea there is that the municipality needs $800 million dollars to build an airport, but the taxpayers don't have the cash, and for some reason they can't borrow it. Maybe there is a law that says they can't take out loans. So the municipality says "we are pretty sure the airport will be making enough revenue to pay back its bonds, but to entice you, dear investor, into giving us money, we will promise to pay it back if the airport can't." Then in that case, you have to decide whether you think they will be able to do this.

From there, the documents will basically be telling you the specifics.
posted by gjc at 7:08 PM on April 11, 2013

It isn't just airports. It's common to do this for pretty much any large public works project at the state or local level. And it's common for them to have to fall back on taxpayers to pay them off.

The Kingdome was imploded in 2000, but some of its bonds are still unpaid.

Here's how it works when it is financially viable: the Astoria Bridge was financed with bonds. Once it was built, there was a toll booth on the south end, and everyone who wanted to use it had to pay a toll.

It was built in 1966. The bonds were paid off using tolls in 1993, and then the toll booth was torn down, and now it's free to cross it.
posted by Chocolate Pickle at 7:46 PM on April 11, 2013

An airport bond would be a "municipal" or "muni" bond, which really applies to any local government bond (not just cities). This is important because the Federal government, as a courtesy, does not tax interest on these bonds. This may not sound like a big deal, but it means municipal bonds have a huge advantage over any kind of commercial debt; basically they can borrow on extremely favorable terms. It also helps that local governments are extremely unlikely to go bankrupt, so they generally have fantastic credit ratings. Many people, companies, and mutual funds will only invest in muni bonds for these reasons, and there's an entire industry of brokers who specialize in them.

Fundamentally the reason muni bonds are used to finance big projects is that government accounting works completely differently from private sector accounting. If I'm a company, and I buy a $1 billion building then I record the transaction as an exchange of $1 billion in cash for $1 billion in real estate; the only thing that counts against me is depreciation on the building (it gets old and wears out) and any interest I pay to get the cash in the first place. This system is called "accrual" or "double entry" accounting. The government doesn't work like that though. All accounting is done on a "cash flow" basis; if I buy a $1 billion building, I erase $1 billion from my books immediately, and the following year it's as if nothing at all ever happened. There is no good reason for this system other than tradition. It ends up giving local governments a strong incentive to use debt to cover the cost of big projects, rather than pay with assets and depreciate over time like a corporation would.
posted by miyabo at 8:27 PM on April 11, 2013

An airport bond would be a "municipal" or "muni" bond, which really applies to any local government bond (not just cities)

Though this isn't always the case outside the US. For example airports in the UK and Spain are privately-owned. And are also funded by bonds.

The Yahoo Finance glossary might be useful. If you can get access to PLC, I'd look there as well.
posted by Infinite Jest at 6:19 AM on April 12, 2013

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