Key Takeaways
- Municipal bonds backed by taxing authority.
- Used to fund public projects without own revenue.
- Types include unlimited and limited tax pledges.
- Require voter approval in some cases.
What is General Obligation Bond (GO)?
A General Obligation Bond (GO) is a municipal debt security backed by the issuer’s full faith, credit, and general taxing power, commonly used to finance public capital projects like schools, roads, and parks. Unlike revenue bonds, GO bonds rely on the issuer's ability to raise taxes or generate general revenues to repay investors.
These bonds are often regarded as lower risk due to their broad backing and legal pledge to repay with taxing authority, making them attractive for conservative investors seeking stable income.
Key Characteristics
GO bonds have distinct features that differentiate them from other municipal bonds:
- Backed by Taxing Power: They are secured by the issuer’s power to levy taxes, ensuring repayment through general funds or property taxes.
- Types: Include Unlimited Tax GO bonds, Limited Tax GO bonds, and general fund GO bonds, each varying in the degree of tax authority and risk.
- Issuer: Only tax-levying entities such as cities and school districts can issue GO bonds, often requiring voter approval.
- Repayment Structure: Typically issued in serial form with staggered maturities to align with annual tax collections and maintain manageable daycount schedules.
- Risk Profile: Generally lower risk with strong credit ratings, partly due to the issuer’s broad ability to generate revenues or increase taxes.
How It Works
When a government issues a GO bond, it pledges to repay bondholders using its general taxing authority, which may include property, sales, or other local taxes. This pledge provides a strong legal guarantee, making GO bonds more secure than revenue bonds that rely on specific project income.
Issuers often structure GO bonds to comply with legal limits on taxation and debt, balancing fiscal responsibility with funding needs. Investors receive interest payments funded by tax collections, reflecting the issuer’s ability to pay taxation obligations, which supports the bond’s creditworthiness.
Examples and Use Cases
GO bonds finance a variety of non-revenue-generating public projects essential to community infrastructure and services:
- Educational Facilities: School districts use GO bonds to build and renovate classrooms and campuses.
- Transportation: Cities fund road repairs and bridge construction to improve public safety and traffic flow.
- Public Safety: Bonds finance courthouses, police stations, and fire departments.
- Airlines: While not typical issuers, companies like Delta may be involved in broader municipal bond markets indirectly through airport authorities issuing GO bonds for infrastructure improvements.
- Investment Options: Investors seeking low-risk fixed income might consider bond ETFs listed in best bond ETFs that include GO bonds in their portfolios.
Important Considerations
Investing in GO bonds requires evaluating the issuer’s fiscal health and legal taxing limits, as limited tax pledges may increase default risk compared to unlimited tax pledges. You should consider the bond’s credit rating and the municipality’s economic environment before investing.
For diversification and cost efficiency, some investors explore best low-cost index funds that include municipal bonds, helping to balance risk and returns. Always assess how the bond fits your overall portfolio and income needs.
Final Words
General Obligation Bonds rely on the issuer's taxing power, offering varying levels of security depending on tax limitations. To evaluate your investment options, compare bond types and their associated risks to align with your portfolio goals.
Frequently Asked Questions
A General Obligation Bond (GO) is a type of municipal debt security issued by government entities. It is backed by the issuer's full faith, credit, and taxing power, typically used to fund public capital projects like schools, roads, and parks.
GO bonds are secured by the issuer’s taxing authority and general revenues, whereas revenue bonds are backed only by specific project revenues like tolls or utility fees. GO bonds usually have stronger security due to their tax backing.
There are three main types: Unlimited Tax GO bonds (UTGO) with no tax rate limits, Limited Tax GO bonds (LTGO) which have capped tax rates, and General Fund GO bonds that rely on general revenues without a specific tax pledge.
Only tax-levying entities such as cities, counties, and school districts can issue GO bonds. In many cases, issuing these bonds requires voter approval to ensure public support.
GO bonds commonly finance public capital projects including construction and repair of schools, roads, bridges, parks, courthouses, and public safety facilities that do not generate their own revenue.
Serial GO bonds mature in multiple installments over time, often every few years, to align with annual tax collections. This approach helps avoid large lump-sum repayments and eases the issuer’s debt management.
LTGO bonds have tax rate limits set by law or charter, restricting the issuer’s ability to raise taxes for repayment. This limitation increases risk and typically results in higher yields compared to Unlimited Tax GO bonds.
Yes, short-term GO-related notes such as Tax Anticipation Notes (TANs) and Bond Anticipation Notes (BANs) are issued to meet immediate funding needs, repaid from anticipated revenues or future bond proceeds.
