Glossary of Municipal Securities Terms

FLOW OF FUNDS

The order and priority of handling, depositing and disbursing pledged revenues, as set forth in the bond contract. Generally, pledged revenues are deposited, as received, into a general collection account or revenue fund established under the bond contract for disbursement into the other accounts established under the bond contract. Such other accounts generally provide for payment of the costs of debt service, debt service reserve deposits, operation and maintenance costs, renewal and replacement and other required amounts. Described below are funds and accounts commonly used in bond contracts. Not all such funds and accounts may exist in every bond contract and other funds and accounts not described below may be created under a particular bond contract:

Bond Fund – An alternate name for the Debt Service Fund. See: FLOW OF FUNDS – Debt Service Fund.

Debt Service Fund – A fund into which the issuer makes periodic deposits to assure the timely availability of sufficient funds for the payment of debt service requirements. Typically, the amounts of the revenues to be deposited into the debt service fund and the timing of such deposits are structured to ensure a proper matching between debt service fund deposits and debt service payments becoming due. For many issues, the debt service fund may contain a separate “principal account” and “interest account” in which funds for such respective purposes are held. In addition, the debt service fund for many variable rate securities may contain a “letter of credit account,” a “swap payments account” or “reimbursement account” in which funds are held to reimburse the issuer of a liquidity facility for draws made to pay amounts owing on the securities, or payments due under a swap agreement. See: DEBT SERVICE SCHEDULE.

Debt Service Reserve Fund or Reserve FundA fund in which funds are placed to be applied to pay debt service if pledged revenues are insufficient to satisfy the debt service requirements. The debt service reserve fund may be entirely funded with bond proceeds at the time of issuance, may be funded over time through the accumulation of pledged revenues, may be funded with a surety or other type of guaranty policy (described below), or may be funded only upon the occurrence of a specified event (e.g., upon failure to comply with a covenant in the bond contract) (a “springing reserve”). Issuers may sometimes authorize the provision of a surety bond or letter of credit to satisfy the debt service reserve fund requirement in lieu of cash. If the debt service reserve fund is used in whole or part to pay debt service, the issuer usually is required to replenish the fund from the first available revenues, or in periodic repayments over a specified period of time. See: DEBT SERVICE RESERVE FUND REQUIREMENT.

Mandatory Redemption Fund A fund into which the issuer is required to make periodic deposits of funds to be used to pay the costs of calling bonds in accordance with the mandatory redemption schedule in the bond contract or to purchase bonds in the open market in satisfaction of such mandatory redemption requirement. This term is sometimes used interchangeably with the term “sinking fund.” See: FLOW OF FUNDS – Sinking Fund.

Operations and Maintenance Fund (O&M) – A fund into which funds are deposited to be used for the purpose of meeting the costs of operation and maintenance of the issuer or the financed project.

Rebate Fund – Fund into which funds are distributed to pay amounts due to the federal government from arbitrage earnings on bond proceeds and certain other funds as required under the Internal Revenue Code with respect to tax-exempt bonds or other federally tax-advantaged bonds. See: ARBITRAGE REBATE; ARBITRAGE EARNINGS.

Renewal and Replacement FundA fund into which funds are deposited to cover anticipated expenses for major repairs of the issuer’s facilities or a project whose revenues are pledged to the bonds or for repair and replacement of related equipment. Compare: FLOW OF FUNDS – Reserve Maintenance Fund.

Reserve Maintenance FundA fund into which funds are deposited to cover extraordinary maintenance or repair expenses of the issuer or a project whose revenues are pledged to the bonds. The fund is intended to protect the bondholders by ensuring against interruptions of operation of the issuer or financed project due to unavailability of funds to pay for repairs of unexpected damage or breakdown. In some cases, a single fund may serve the purposes of the Reserve Maintenance Fund and the Renewal and Replacement Fund. Compare: FLOW OF FUNDS – Renewal and Replacement Fund.

Revenue Fund A fund into which pledged revenues are initially placed and from which the funds for all other funds are drawn. See: PLEDGED REVENUES.

Sinking Fund A fund into which funds are placed to be used to redeem securities in accordance with a redemption schedule in the bond contract. This term is sometimes used interchangeably with the term “mandatory redemption fund.” See: FLOW OF FUNDS – Mandatory Redemption Fund.

Surplus FundA fund into which are funds remaining after operations and maintenance expenses, sinking fund, debt service reserve and other mandated distributions have been satisfied are deposited. In some cases, funds in this fund may be used for various specified purposes related to the bond issue or the facilities financed with proceeds of the bond issue. In other cases, such funds may be used for any lawful purposes of the issuer or for such specific unrelated purposes as provided in the bond contract.

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