Definition
A Revenue Anticipation Note (RAN) is a form of short-term debt issued by municipal governments to meet immediate financial obligations, backed by expected future revenue streams, commonly from taxes such as property taxes or sales taxes. The purpose of issuing a RAN is to provide liquidity to the municipality which is awaiting revenue collection. Interest earned on a RAN is usually exempt from federal income tax, providing a tax-advantaged investment for holders.
Examples
-
City of San Francisco: Suppose the City of San Francisco issues a RAN in anticipation of its upcoming property tax receipts. The RAN will provide the city with immediate funds necessary for operations or specific projects. Once the property taxes are collected, the city repays the issued debt.
-
School District Funding: A local school district may issue a RAN to cover immediate expenses related to educational programs, expecting to repay this debt through anticipated state funding or local tax revenues expected at a later date in the fiscal year.
Frequently Asked Questions (FAQs)
What is the primary purpose of a Revenue Anticipation Note?
The primary purpose of a RAN is to provide a municipal entity with immediate funds to cover short-term financial obligations by borrowing against anticipated future revenues from sources like sales taxes or property taxes.
How long is the typical duration of a Revenue Anticipation Note?
RANs are typically short-term instruments with maturities ranging from a few months to a year.
Are the interest earnings from RANs taxable?
Interest earned on RANs is generally exempt from federal income tax, and may also be exempt from state and local taxes, depending on local government regulations.
What differentiates a RAN from other types of municipal notes?
An essential difference is that RANs are specifically backed by anticipated revenue collections, such as from sales taxes, whereas other municipal notes like Tax Anticipation Notes (TANs) are backed by expected tax revenues and Bond Anticipation Notes (BANs) are backed by future bond issuance.
Tax Anticipation Note (TAN)
A short-term security issued by a municipal entity and repaid with anticipated future tax receipts.
Bond Anticipation Note (BAN)
A municipal short-term debt instrument issued in anticipation of future longer-term bond issuance.
Grant Anticipation Note (GAN)
A short-term note issued by municipalities, repaid with anticipated federal or state grant monies.
Online Resources
Suggested Books for Further Studies
- “Municipal Finance: A Handbook for Local Government Practitioners” by Charles S. Coe
- “Handbook of Municipal Bonds” edited by Sylvan G. Feldstein and Frank J. Fabozzi
- “Public Finance and Public Policy” by Jonathan Gruber
- “The Law of Municipal Finance” by Thomas S. Byrnes
Fundamentals of Revenue Anticipation Note (RAN): Public Finance Basics Quiz
### What does a Revenue Anticipation Note (RAN) rely on for repayment?
- [ ] The federal government
- [x] Anticipated future revenues such as sales taxes
- [ ] Donations from private citizens
- [ ] State grant earnings
> **Explanation:** A RAN is repaid using anticipated future revenue streams such as sales taxes once those revenues are collected.
### What is one characteristic of the interest income from a RAN?
- [ ] It is taxable.
- [x] It is typically tax-exempt at the federal level.
- [ ] It requires an annual filing for tax exemption.
- [ ] It is always higher than other notes.
> **Explanation:** Interest earned on RANs is typically tax-exempt at the federal level, providing an advantage to investors.
### How is the duration of a RAN best described?
- [ ] Long-term, spanning several years
- [x] Short-term, usually a few months to a year
- [ ] Mid-term, about two years
- [ ] Indefinite, based on project needs
> **Explanation:** RANs are short-term debt instruments, generally issued for a period ranging from a few months to a maximum of one year.
### Which type of governmental entity commonly issues RANs?
- [ ] International organizations
- [ ] Federal government
- [x] Municipal governments
- [ ] Private corporations
> **Explanation:** RANs are typically issued by municipal governments to cover short-term funding needs.
### How does a RAN differ from a Bond Anticipation Note (BAN)?
- [ ] RANs are long-term while BANs are short-term.
- [ ] Both are backed by general revenue.
- [ ] RANs are for private funding needs.
- [x] RANs are backed by anticipated revenues and BANs by future bond issuance.
> **Explanation:** RANs are backed by anticipated revenues such as sales taxes, while BANs are secured against proceeding longer-term bond issuance.
### Can RANs be issued by school districts?
- [x] Yes
- [ ] No
- [ ] Only by state governments
- [ ] Only private schools
> **Explanation:** School districts can issue RANs to cover funding gaps, using anticipated future revenues like state funding to repay the debt.
### What type of expenses might a city cover with a RAN issuance?
- [x] Immediate operational expenses
- [ ] Personal expenditures of city officials
- [ ] Overseas investments
- [ ] Civic contests and prizes
> **Explanation:** Cities use RANs to cover immediate operational expenses, compensating for delays in revenue collection for vital services.
### What should investors consider when buying a RAN?
- [x] The tax-exempt status of the interest income
- [ ] Inapplicable local voting trends
- [ ] Annual rainfall in the issuing city
- [ ] Historical artifact discoveries
> **Explanation:** Investors are often interested in the tax-exempt status of the interest income, which makes RANs attractive for their tax advantages.
### How does issuance of RAN help municipalities?
- [ ] It permanently solves financial problems.
- [x] It provides short-term liquidity.
- [ ] It eliminates the need for future taxes.
- [ ] It suspends all current debts.
> **Explanation:** Issuing a RAN provides municipalities with short-term liquidity to manage immediate financial obligations while awaiting revenue collection.
### Why might the interest rate on a RAN be lower compared to other notes?
- [x] Due to its tax-exempt status
- [ ] Because they represent higher risk
- [ ] Because investors mistrust municipalities
- [ ] Due to less attractive terms
> **Explanation:** The interest rate on a RAN might be lower because the interest earned is tax-exempt, which increases the after-tax yield for investors.
Thank you for exploring the concept of Revenue Anticipation Notes (RANs) with us. Continue to expand your knowledge in public finance for a successful financial journey!
