2.4.3 Funds and Accounts; Flow of Funds

The bond documents generally provide for the establishment of various funds and accounts to hold monies related to the debt. Funds and accounts may be held by the public agency or the trustee or sometimes by another party. Funds and accounts may include the following:

Project fund. A project fund holds debt proceeds before expenditure. This can be held by the public agency or the trustee and can include a separate account for payment of issuance costs.
Revenue funds. This fund captures and retains the revenues to be used for the payment of the debt, subject to use for permitted purposes.
Debt service funds. These including interest, principal, and redemption accounts, held by the trustee or paying agent pending application to pay debt service.
Reserve funds. Reserve funds are held by the trustee to provide security for the timely payment of debt service.

Bond documents may also provide for a flow of funds establishing the priority of the allocation of revenues. This is essential if other uses are allowed, such as the payment of operation and maintenance expenses, or if different types of debt are payable at different levels of priority (e.g., “senior lien” debt and “subordinate” debt). Flow of funds provisions are also important in project financings, where funds must be prioritized between debt service retirement and project maintenance, and in asset backed debt providing for the application of principal recoveries and other “excess revenues” to the prepayment of debt.