In a revenue bond, which fund has priority when funds are disbursed from the reserve fund, the operation and maintenance fund or the debt service reserve fund?

What will be an ideal response?

For a revenue bond, the revenue of the enterprise is pledged to service the debt of the issue. The details of how revenue received by the enterprise will be disbursed are set forth in the trust indenture. Typically, the flow of funds for a revenue bond is as follows. First, all revenues from the enterprise are put into a revenue fund. It is from the revenue fund that disbursements for expenses are made to the following funds with priority given to those listed first: operation and maintenance fund, sinking fund, debt service reserve fund, renewal and replacement fund, reserve maintenance fund, and surplus fund. Thus, the operation and maintenance fund has priority over the debt service reserve fund. More details are supplied below.

Operations of the enterprise have priority over the servicing of the issue's debt, and cash needed to operate the enterprise is deposited from the revenue fund into the operation and maintenance fund. The pledge of revenue to the bondholders is a net revenue pledge; net meaning after operation expenses, so cash required servicing the debt is deposited next in the sinking fund. Disbursements are then made to bondholders as specified in the trust indenture. Any remaining cash is then distributed to the reserve funds. The purpose of the debt service reserve fund is to accumulate cash to cover any shortfall of future revenue to service the issue's debt. The specific amount that must be deposited is stated in the trust indenture. The function of the renewal and replacement fund is to accumulate cash for regularly scheduled major repairs and equipment replacement. The function of the reserve maintenance fund is to accumulate cash for extraordinary maintenance or replacement costs that might arise. Finally, if any cash remains after disbursement for operations, debt servicing, and reserves, it is deposited in the surplus fund. The issuer can use the cash in this fund in any way it deems appropriate.