What is a General Obligation (GO) Bond?
A general obligation (GO) bond is a municipal bond secured by the issuing jurisdiction’s credit and taxation power, not project revenue. General obligation bonds assume a municipality can repay its loan through taxation or project income. No assets stand as collateral.
Compare general obligation to revenue bonds in Munis.
General Obligation (GO) Bond Understanding
An issuing government promises to utilize all resources, including tax income, to repay holders of a general obligation (GO) bond.
Local governments may pledge to charge property taxes to pay bondholder obligations. Credit rating agencies provide high investment-grade ratings to general obligation pledges to protect property owners from unpaid property taxes due to their excellent credit characteristics. The government can legitimately raise property taxes if owners don’t pay on time. A general obligation commitment mandates the local government to pay the debt on its due date with available resources.
Local governments can use general obligation bonds to fund projects that generate income, such as roads, parks, equipment, and bridges. General obligation bonds support public-service government initiatives.
General Obligation Pledge Types
State law authorizes local governments to issue general obligation bonds. A general obligation bond might be limited- or unlimited-tax.
A limited-tax general obligation pledge suggests the issuing local government boost property taxes to cover debt servicing commitments. This rise has a legislated limit. Limited-tax general obligation pledges allow governments to meet debt commitments by using property taxes and other income streams or raising property taxes to match debt service payments.
The unlimited-tax general obligation promise is comparable to the limited-tax pledge. The main distinction is that the local government must raise property tax rates to cover up to 100% of taxpayer delinquencies. Residents must agree to raise property taxes to cover bonds.
Conclusion
- The issuer’s creditworthiness and capacity to tax its inhabitants back a general obligation, or GO, bond
- GO bonds do not pay creditors back with profits from sponsored projects like revenue bonds.
- A general obligation may have restricted or unlimited taxes.
- A municipality may raise property taxes for an unlimited general obligation to satisfy payments and obligations.
