Key Takeaways
- Backed by government's unlimited property tax power.
- Often requires voter approval for issuance.
- Higher credit ratings, lower yields than limited tax bonds.
- Funds capital projects with strong repayment security.
What is Unlimited Tax Bond?
An unlimited tax bond is a type of general obligation municipal bond backed by the full faith, credit, and unlimited taxing power of the issuing government. This means the issuer can levy property taxes without restrictions on rate or amount to repay bondholders.
These bonds typically require voter approval and are used to finance public capital projects, offering investors strong security compared to limited tax bonds.
Key Characteristics
Unlimited tax bonds have distinct features that enhance their creditworthiness and appeal:
- Unlimited Taxing Authority: The issuer can raise ad valorem property taxes without legal limits until debt is repaid.
- Voter Approval: Often requires a supermajority vote, demonstrating public support for the bond issuance.
- Full Faith and Credit: Backed by the issuer’s pledge, similar to an uberrimae fidei contract, ensuring commitment to repay.
- Higher Credit Ratings: Due to strong security, often rated AAA or similar, reflecting low default risk.
- Used for Capital Projects: Commonly funds infrastructure, parks, and transportation improvements.
How It Works
Unlimited tax bonds function by allowing the issuer to levy property taxes at rates necessary to cover principal and interest payments. This pledge prioritizes debt service, ensuring bondholders are paid before other governmental expenses.
If property tax revenues are insufficient, the issuer can increase tax rates without statutory limits, subject to political constraints. This flexibility typically results in lower yields compared to bonds with limited tax backing.
Examples and Use Cases
Unlimited tax bonds are widely used by local governments and municipalities to fund long-term projects with voter backing.
- Washington State: Requires 60% voter approval for unlimited tax GO bonds, which finance capital improvements through property tax levies.
- Municipal Projects: Cities use these bonds to develop parks or infrastructure, leveraging taxing power to secure repayment.
- Investor Perspective: These bonds attract conservative investors seeking strong credit quality and tax-exempt income, similar in appeal to low-risk index funds.
Important Considerations
While unlimited tax bonds offer high security, political and economic factors can affect tax rate increases and debt repayment. Investors should evaluate the issuer’s fiscal health and enforcement mechanisms.
Understanding the bond’s face value and monitoring credit ratings, often supported by agencies like D&B, helps assess risk. Despite the “unlimited” taxing authority, practical limits exist, making due diligence essential before investing.
Final Words
Unlimited Tax Bonds offer strong security backed by the issuer’s taxing power, making them a reliable choice for funding public projects. To evaluate if they fit your portfolio, compare yields and credit ratings against other municipal bonds available in your market.
Frequently Asked Questions
An Unlimited Tax Bond (UTGO) is a type of municipal bond backed by the full faith, credit, and unlimited taxing power of the issuing government, allowing it to raise property taxes without limits to repay bondholders.
Unlike Limited Tax Bonds, which have capped tax rates or amounts by law, Unlimited Tax Bonds allow issuers to levy property taxes at unlimited rates or amounts to meet debt obligations, making them generally more secure and carrying higher credit ratings.
Yes, most Unlimited Tax Bonds require voter approval, often needing a supermajority such as 60% support with specific turnout requirements, to ensure public backing for the increased taxing authority.
Unlimited Tax Bonds typically fund capital projects like parks, infrastructure, and transportation improvements, but usually not equipment replacement or operational expenses.
They are considered very secure because they are backed by the issuer’s unlimited taxing power and have mechanisms to prioritize debt service, resulting in higher credit ratings and lower yields than revenue bonds or limited tax bonds.
While the legal authority allows unlimited tax increases, practical and political constraints often limit how much taxes can be raised, but the issuer has the ability to levy whatever is necessary to repay the debt.
Interest earned on most Unlimited Tax Bonds is typically exempt from federal income taxes, making them attractive to investors seeking tax advantages.
