GO bonds are backed by the issuer’s full faith and credit, meaning they can use the issuer’s full taxation and borrowing authority to service the debt. Most GO bond issuers have several taxes available to them to support a bond issuance; they can dedicate their general fund to repay the bonds or dedicate a specific tax to support the bonds. The latter is called a limited obligation bond. Only entities that can levy and collect taxes can issue these kinds of securities.
Depending on what the issuer is financing, GO bonds can be issued as either tax exempt, taxable, or alternative minimum tax bonds.
Because GO bonds are backed by the full taxation and borrowing authority of the issuer, the credit rating is usually strong, allowing the issuer to sell low yielding (low borrowing cost) securities. However, the rating will vary from issuer to issuer depending on the underlying circumstances of the issuer.
In some states, voters must approve a GO bond issuance. The bonds are sold either through a negotiated or competitive bid process, depending on state or local legislation, bond size and how the proceeds will be used. Issuers generally use the competitive bid method for smaller, simpler transactions to show voters they were able to sell the bonds for the best possible price in the current market. They might also be required by state or local legislation to sell GO bonds with a competitive bid method.
Example:
Some examples of the types of projects GO bond proceeds can support include, but are not limited to:
- Public school construction
- Road and highway system construction or repair
- Bridges
- Parks
- Courthouses
- Public safety facilities
What’s important here?
Issuers can sell GO bonds that are going to be paid back with revenues generated by taxes. The bond proceeds are usually used to finance capital projects that serve a public need. GO bonds can be repaid with money from an issuer’s general fund or one of the issuer’s tax sources (e.g., sales tax, gas tax).
Many issuers tap their general fund to pay GO bond periodic interest and principal payments. This fund comes from state or local taxes, such as income, sales, and excise taxes. Additionally, non-tax revenues, such as licensing and parking fees, may be used to repay GO bonds.
