What Are General Obligation Bonds?

Municipal bonds are debt securities issued by states, cities, counties, and other governmental entities. These bonds allow public bodies to borrow money from investors. The funds finance large, expensive, and long-lived capital projects that benefit the public. General Obligation Bonds are a significant category within the municipal bond market.

Understanding General Obligation Bonds

General Obligation (GO) bonds are a type of municipal bond issued by governmental organizations to fund capital improvement projects. These bonds are defined by the “full faith and credit” pledge of the issuing government, meaning the issuer commits to using all available legal means to repay the debt. This pledge signifies a broad promise of repayment, not tied to specific project revenue streams. Issuers include states, cities, counties, and school districts, whose “full faith and credit” backing implies they can utilize their entire taxation and borrowing authority to service the debt.

The Security Behind General Obligation Bonds

The security for General Obligation bonds stems from the general revenues of the issuing government. A significant source of these revenues is the issuer’s taxing power, including property taxes. States and local entities also utilize sales taxes and income taxes to repay GO bonds.

Some issuers have “unlimited taxing power,” meaning they can raise taxes if necessary to meet their debt obligations. This taxing authority is a direct pledge that the government will cover the debt with its available resources. The security is not dependent on the success or revenue generation of a specific project, but rather on the overall financial health and broad taxing authority of the government.

Key Characteristics of General Obligation Bonds

GO bonds are tax-exempt. Interest earned on GO bonds is exempt from federal income tax. For residents of the issuing state, this interest is also exempt from state and local income taxes. This tax benefit makes GO bonds attractive to investors. The issuance of many GO bonds requires voter approval. This provides democratic oversight, as it involves public consent for debt repaid through general tax revenues. GO bonds commonly fund public projects that do not generate their own revenue streams, such as schools, roads, bridges, public buildings, and parks.

General Obligation Bonds Versus Revenue Bonds

General Obligation bonds and Revenue bonds are two primary types of municipal bonds, differentiated by their repayment mechanisms. GO bonds are backed by the full faith and credit and general taxing power of the issuer. Revenue bonds are repaid solely from the revenues generated by the specific project they finance. For instance, revenue bonds might fund toll roads, airports, or water systems, with repayment coming from collected tolls or utility fees. Unlike many GO bonds, Revenue bonds do not require voter approval. Their repayment relies on the specific project’s income, not general tax revenues.