What Is a Municipal Note?

A municipal note is short-term financing a state or local government uses, often to cover revenue shortfalls. Municipal notes are secured by future anticipated revenue sources, such as tax collections or bond proceeds.

Definition and Examples of Municipal Notes

State or local governments issue debt instruments in the form of municipal notes that are typically repaid within one year. These debts are secured by expected revenue sources—commonly tax receipts, but they can also include bond proceeds, federal grant funds, or revenue generated from a public infrastructure or service. Municipal notes are often used to cover short-term needs, such as cash-flow relief or interim financing for capital projects.

• Alternate name: Muni notes

For example, a municipality note can be used to kickstart a public project. While waiting for tax receipts, it issues municipal notes to cover the startup costs. When taxes are collected at a later date, they are used to repay the municipal notes. The municipality would then obtain long-term financing to cover the ongoing costs over the duration of the project.

How Does a Municipal Note Work?

State or local governments typically issue municipal notes during periods of tight cash flow. This commonly occurs when state expenditures arise but there is not enough revenue coming in, or it is to be collected at a later date. During these sometimes-unforeseen revenue shortfalls, the government would sell debt in the form of short-term municipal notes to raise the necessary funds. 

Municipal notes are repaid with future revenue sources, such as tax receipts or bond proceeds. When the issuing agency receives that revenue, it is used to settle the outstanding municipal notes. Municipal notes are often classified by the revenue source used for repayment. Notes repaid with future taxes, for instance, are called tax anticipation notes (TANs).

Due to their shorter terms, municipal notes often finance short-term costs, such as working capital and operating expenses. Municipal notes can be used as interim financing, too. The government, for example, may rely on municipal notes to finance startup costs on a large project until long-term financing can be obtained.

Consider this recent example from California. Its local education agencies typically receive half their expected revenue from the state. When these payments are deferred, that can create cash flow problems. To guard against temporary cash-flow shortages, the California School Cash Reserve Program was created to collect tax revenue anticipation notes. This allows the education agencies to borrow the money they need and pay it back after receiving the deferred payments from the state. 

Types of Municipal Notes

Under the municipal note umbrella, there are several types of municipality-issued securities, including:

• Tax anticipation notes
• Bond anticipation notes
• Grant anticipation notes
• Revenue anticipation notes

Tax Anticipation Notes

State and local governments issue tax anticipation notes (TANs) to raise funding before tax revenue has been collected. When tax revenue is collected, it’s then used to settle the TANs. 

Local governments were allowed to issue TANs in response to the public health emergency that started in early 2020 to cover tax due-date deferrals, revenue shortfalls, and expenses related to the issuance of the TANs.

Bond Anticipation Notes

Bond anticipation notes (BANs) are to be repaid from the proceeds gained from long-term bonds. Terms are slightly longer than other types of municipality notes—sometimes up to two years. 

Grant Anticipation Notes

Grant anticipation notes (GANs) are short-term debt vehicles that are repaid with funds obtained from grant commitments by a state or federal grant agency. Transit agencies, for example, can issue GANs, which are to be repaid with future funds from Federal Transit Administration Title 49 grants.

Revenue Anticipation Notes

Revenue anticipation notes (RANs) are similar to tax anticipation notes, except the notes are repaid using revenue other than taxes. Revenue sources might include funds raised from public projects, such as stadiums, airports, subways, and bridges.

Municipal Notes vs. Municipal Bonds

What It Means for Individual Investors

Some municipal notes are tax-exempt and are issued in denominations of $5,000. Because municipal notes typically expire within one year, the principal plus interest is paid at maturity.

Investors can purchase municipal notes on either the primary or secondary market. The primary market is where new issues of bonds and notes are available. The secondary market is a network in which dealers buy and sell municipal bonds and notes before they reach maturity. As municipal notes can be sold before maturity, they are considered fairly liquid assets.