General Obligation Bond (GO)

What is a GO bond?

A general obligation (GO) bond is a municipal bond backed by the issuing government’s credit and taxing power rather than by revenue from a specific project. Repayment is secured by the issuer’s pledge to use available resources—including the ability to levy taxes—to meet debt service. GO bonds typically fund public projects such as roads, parks, bridges, and public facilities.

Key takeaways

• GO bonds are secured by the issuer’s full faith, credit, and taxing authority, not by project-specific revenue or physical collateral.
• They are often viewed as lower-risk municipal bonds because governments can raise taxes or reallocate budgeted resources to repay bondholders.
• GO pledges generally fall into two categories: limited-tax and unlimited-tax, which differ by how much the issuer can raise taxes to cover debt.
• GO bonds are commonly used to finance general public infrastructure and municipal needs.

How GO bonds work

When a municipality issues a GO bond, it promises to repay principal and interest using any lawful source of revenue. Property taxes are a common repayment source; credit agencies often view property-tax-backed pledges favorably because property tax collection has strong legal and administrative support. If revenues fall short, the issuer may raise tax rates or use other available budgetary resources to meet debt obligations, subject to legal constraints.

Types of GO pledges

• Limited-tax GO pledge: The issuer may raise property taxes or use designated revenue to cover debt service, but tax increases are capped by statute or local law. The cap limits how much the issuer can increase taxes to meet bond obligations.
• Unlimited-tax GO pledge: The issuer has broader authority to raise property taxes as needed to repay debt, potentially without the same statutory cap. In many jurisdictions, exercising unlimited-tax authority requires voter approval or other legal steps.

GO bonds vs. revenue bonds

• Backing: GO bonds rely on the issuer’s taxing power and general credit; revenue bonds are repaid from a specific project’s revenues (e.g., tolls, utility fees).
• Risk profile: GO bonds are typically seen as safer because the issuer can draw on multiple revenue sources; revenue bonds can be riskier if project revenues are uncertain.
• Use cases: GO bonds fund general public works that benefit the community as a whole; revenue bonds fund self-supporting projects expected to generate dedicated income.

Credit and investor considerations

• Credit ratings for GO bonds tend to be higher when the issuer has stable tax bases, strong financial management, and legal ability to raise taxes.
• Investors should review the issuer’s fiscal health, tax base diversity, outstanding debt levels, and any legal limits on taxation.
• Consider whether a GO pledge is limited or unlimited, and whether tax increases require voter approval—these factors affect repayment flexibility and risk.

Conclusion

General obligation bonds are a primary tool for municipal financing, offering repayment backed by an issuer’s taxing authority and overall credit. Understanding whether a pledge is limited or unlimited, and how it compares to revenue bonds, is essential for evaluating risk and suitability for investment.