What Is a General Obligation (GO) Bond?

Municipal bonds are debt securities issued by state and local governments to raise capital for public projects and operations. Among the various types of municipal bonds, General Obligation (GO) bonds are a widely recognized form of financing.

Understanding General Obligation Bonds

General Obligation bonds are municipal bonds issued by governmental entities, such as states, counties, cities, or special districts, to finance public projects. These bonds represent a direct promise by the issuer to repay the principal and interest to bondholders. A GO bond is backed by the full faith and credit of the issuing government, signifying its unconditional pledge to meet its debt obligations.

Funds raised through GO bonds typically support initiatives that benefit the entire community, rather than generating specific revenue streams for repayment. This distinguishes them from other municipal debt instruments. The issuer’s commitment to repayment is a general obligation, meaning it is not tied to the success or revenue of a particular project. Instead, the issuer relies on its general taxing authority to ensure timely payments to investors.

Security and Repayment Mechanisms

The security of General Obligation bonds stems from the issuer’s “full faith and credit” pledge, an unconditional promise to repay the debt. This pledge is backed by the issuer’s general taxing power, allowing it to levy various taxes to generate the necessary revenue for bond repayment. Common sources of revenue for GO bond repayment include property taxes, sales taxes, and income taxes collected by the issuing government. The ability of the government to tax its residents and businesses provides a broad and stable revenue base for servicing the debt.

A key distinction within GO bonds involves the nature of the taxing power: “unlimited tax” versus “limited tax” General Obligation bonds. Unlimited tax GO bonds are secured by the issuer’s pledge to levy any amount of taxes necessary to repay the debt, without statutory limit. In contrast, limited tax GO bonds are secured by taxes that are subject to a specific statutory or constitutional limit on the rate or amount that can be levied. While still backed by the government’s taxing power, a cap on tax collection means the issuer has less flexibility to raise revenue if financial distress occurs.

Issuers and Project Funding

General Obligation bonds are issued by a wide range of governmental entities across the United States. Common issuers include state governments, counties, cities, school districts, public utility districts, and park districts. These entities rely on GO bonds to finance projects that serve the general welfare of their constituents.

The proceeds from GO bonds typically fund public infrastructure and community development projects. Examples include the construction and renovation of public schools, improvement and expansion of roads and bridges, and development of public buildings. Funds also often go towards essential services, such as upgrading water and sewer systems, or creating new public parks and recreational facilities. These investments are considered fundamental to supporting community growth and maintaining public services.

Distinction from Revenue Bonds

While both General Obligation bonds and Revenue bonds are types of municipal debt, their fundamental distinctions lie in their security and repayment mechanisms. Revenue bonds are debt instruments whose repayment is derived solely from the revenue generated by the specific project or facility they finance. For instance, a revenue bond for a toll road is repaid using tolls, or a bond for a water utility from usage fees. This means the bond’s security is directly tied to the funded enterprise’s success and cash flow.

In contrast, General Obligation bonds are secured by the full faith and credit of the issuing government and its general taxing power. Repayment of GO bonds is not contingent on the success or revenue of a particular project; instead, it relies on the broader financial capacity of the government to collect taxes from its constituents. This difference in repayment source means that GO bonds are generally considered to carry lower risk than revenue bonds because the issuer has a wider and more stable revenue base. Investors evaluating municipal bonds often consider this distinction, as it impacts the level of risk associated with their investment and the potential for repayment.