Issuers such as municipalities can issue general obligation bonds (GO bonds) that are supported by a limited revenue source, such as gas taxes only. These types of bonds are known as limited tax GO bonds (LTGOs). This means that the bonds supported by the limited source can only use that source to repay the bonds and the issuer can not use other monies from the general fund. Since GO bonds are backed by the issuer’s full faith and credit, if the issuer does not have enough revenues to support the bonds, it can increase the taxes to repay the bonds.
However, many municipalities and school districts are limited as to how many LTGOs they can sell, as they may be capped by how much they can impose on properties to generate revenue.
From a credit rating perspective, LTGOs are considered riskier than general fund based GO bonds so they typically offer a higher return to investors in comparison.
Example:
An issuer wants to improve the roads in their constituency. To fund the improvements, the issuer sells a bond issue and repays the principal and interest by dedicating 2% of all gas taxes received. This is an example of a limited tax general obligation bond issuance.
What’s important here?
Limited tax bonds are still guaranteed by the municipal government’s full faith and credit, but their revenue sources are constrained by what the issuer has dedicated to make the payments.
