What Is a General Obligation Bond?
A general obligation bond (GO bond) is a municipal bond backed solely by the credit and taxing power of the issuing jurisdiction rather than the revenue from a given project. General obligation bonds are issued with the belief that a municipality will be able to repay its debt obligation through taxation or revenue from projects. No assets are used as collateral.
A GO bond may be contrasted with a revenue bond in the context of munis.
Key Takeaways
- A general obligation, or GO, bond is a type of municipal bond that is backed entirely by the issuers creditworthiness and ability to levy taxes on its residents.
- Unlike revenue bonds, GO bonds are not backed by collateral and do not pay creditors back on the basis of income generated from funded projectes.
- The amount of taxation available by a particular GO bond may be specified as either limited or unlimited.
- In the case of an unlimited GO bond, a municipality may increase property taxes accordingly to cover its payments and obligations.
Understanding General Obligation Bonds
A general obligation (GO) bond is secured by an issuing government's pledge to use all available resources — even tax revenues — to repay holders of the bond.
At the local government level, pledges may include a pledge to levy property taxes to meet the local government's obligation on the bondholders. For example, since property owners avoid losing their stake on their respective properties because of unpaid property tax bills, credit rating agencies rate general obligation pledges with strong credit qualities and assign them high investment-grade ratings. If the property owners are not able to pay their property taxes on or before the designated due date, the government is legally allowed to increase the property tax rate to make up for any delinquencies. On the designated due date, the general obligation pledge requires the local government to cover the debt with its available resources.
General obligation bonds also serve as a way for local governments to raise funds for projects that create streams of income for things such as roads, parks, equipment, and bridges. General obligation bonds are usually used to fund government projects that will serve the public community.
Types of General Obligation Pledges
State law sets the grounds on which local governments can provide and issue general obligation bonds. A general obligation bond may either be a limited-tax general obligation pledge or an unlimited-tax general obligation pledge.
A limited-tax general obligation pledge asks the issuing local government to raise property taxes if necessary to meet existing debt service obligations. However, this increase is bound by a statutory limit. With limited-tax general obligation pledges, governments can still use a part of already-levied property taxes, use another stream of income, or raise property taxes to an amount equating to existing debt service payments to answer its debt obligations.
An unlimited-tax general obligation pledge is similar to the limited-tax pledge. The only difference is that the local government is asked to increase property tax rates to necessary levels — up to a maximum of 100% — to cover delinquencies from taxpayers. Residents must first agree to increase property taxes to the necessary amounts required for the bonds.
