General Obligation (GO) bonds are a common way for states and municipalities to finance public projects. This guide provides an overview of GO bonds, helping citizens understand how they work and how they impact their communities. This updated 2019 edition reflects the latest practices and market conditions related to these essential financial instruments.
General obligation bonds are debt instruments issued by states, counties, cities, and other public entities to fund capital projects that benefit the public. These projects can range from building schools and hospitals to improving infrastructure like roads, bridges, and water systems. GO bonds are backed by the full faith and credit of the issuer, meaning that the issuer pledges its taxing power to repay the bondholders.
Understanding the basics of GO bonds is crucial for every citizen. This knowledge empowers you to participate in local government discussions and decision-making processes related to public finance. By understanding how these bonds work, you can make informed decisions about supporting or opposing local initiatives that propose using general obligation bonds.
What are General Obligation Bonds?
General obligation bonds represent a promise by a government entity to repay borrowed money, typically over a period of several years or even decades. The funds raised from the sale of these bonds are used to finance various public works projects.
Unlike revenue bonds, which are repaid from the revenue generated by a specific project (such as tolls from a new highway), GO bonds are repaid from the general tax revenues of the issuing government. This means that the issuer is obligated to use its taxing authority to ensure that bondholders are paid, making them a relatively safe investment.
Types of Projects Funded by GO Bonds
GO bonds can fund a wide array of public projects that enhance the quality of life for residents:
- Infrastructure Improvements: Roads, bridges, water and sewer systems, public transportation.
- Educational Facilities: New schools, renovations of existing schools, libraries.
- Public Safety: Fire stations, police stations, emergency response facilities.
- Recreational Facilities: Parks, community centers, sports complexes.
- Healthcare Facilities: Public hospitals, clinics, and health centers.
Investing in these projects strengthens the local economy, creates job opportunities, and improves overall community well-being. For example, a new school can improve education outcomes, while upgraded infrastructure can attract businesses and residents.
The GO Bond Issuance Process
The process of issuing general obligation bonds typically involves several key steps:
- Project Identification: The government entity identifies a need for a capital project.
- Feasibility Study: A study is conducted to determine the project’s feasibility and potential impact.
- Bond Authorization: The government entity seeks authorization to issue bonds, often through a public referendum or vote.
- Bond Rating: Credit rating agencies (like Moody’s, Standard & Poor’s, and Fitch) assess the creditworthiness of the issuer and assign a rating to the bonds.
- Bond Sale: The bonds are offered for sale to investors, typically through an underwriter.
- Project Implementation: The funds raised from the bond sale are used to finance the project.
- Repayment: The government entity repays the bondholders over time, using tax revenues.
The Role of Citizens in GO Bond Decisions
Citizens play a crucial role in the decision-making process related to general obligation bonds. Understanding the implications of these bonds and actively participating in local government discussions are essential for ensuring responsible fiscal management.
Public Referendums and Voting
One of the most important ways citizens can influence GO bond decisions is through public referendums. Many jurisdictions require voter approval before a government entity can issue general obligation bonds. These referendums provide citizens with the opportunity to weigh in on proposed projects and decide whether they are willing to support them through increased taxes or other means.
Understanding the Impact on Taxes
GO bonds are repaid using tax revenues, so it is crucial for citizens to understand how these bonds will affect their tax bills. The impact on taxes will vary depending on the size of the bond issue, the repayment schedule, and the overall financial health of the issuing government.
Local governments should provide clear and transparent information about the projected tax impact of proposed bond issues. Citizens should scrutinize these projections and ask questions to ensure they fully understand the financial implications.
Evaluating the Proposed Projects
Before supporting a GO bond issue, citizens should carefully evaluate the proposed project and its potential benefits. Consider the following questions:
- Is the project truly necessary?
- Are there alternative ways to finance the project?
- What are the long-term benefits of the project?
- Will the project create jobs or stimulate economic growth?
- Is the project aligned with the community’s overall goals and priorities?
Understanding Bond Ratings
Bond ratings play a critical role in determining the interest rate that a government entity must pay on its bonds. Credit rating agencies assess the creditworthiness of the issuer and assign a rating based on their assessment. Higher ratings indicate a lower risk of default, which translates into lower interest rates for the issuer.
What Bond Ratings Mean
The major credit rating agencies use a letter-based system to rate bonds. Here is a brief overview of what the different ratings signify:
- AAA (or Aaa): Highest rating, indicating the lowest risk of default.
- AA (or Aa): Very high rating, indicating a very low risk of default.
- A: High rating, indicating a low risk of default.
- BBB (or Baa): Investment-grade rating, indicating a moderate risk of default.
- BB (or Ba): Non-investment-grade rating (also known as “junk bonds”), indicating a higher risk of default.
- B: Highly speculative rating, indicating a significant risk of default.
- CCC (or Caa): Extremely speculative rating, indicating a very high risk of default.
- CC (or Ca): Near default.
- C: Default imminent.
- D: Default.
How Ratings Impact Borrowing Costs
A higher bond rating allows the issuer to borrow money at a lower interest rate, saving taxpayers money over the life of the bond. Conversely, a lower bond rating results in higher borrowing costs, as investors demand a higher return to compensate for the increased risk.
Governments work hard to maintain high bond ratings by demonstrating sound financial management and a strong commitment to repaying their debts. Prudent fiscal policies, transparent budgeting, and effective debt management are all essential for maintaining a good credit rating.
Conclusion
General obligation bonds are a vital tool for financing public projects that benefit communities. As citizens, it’s important to understand how GO bonds work, how they impact our taxes, and how we can participate in the decision-making process. By becoming informed and engaged citizens, we can help ensure that these bonds are used responsibly and effectively to improve the quality of life for everyone. Being informed helps ensure financial decisions benefit the community.
