General Obligation Bond (GO Bond)

How It Works

GO bonds are the most common type of municipal debt for general government purposes and typically carry lower interest rates than revenue bonds because they are backed by the city's unlimited taxing authority (for "unlimited tax GO bonds") or by a specific tax dedicated to debt service ("limited tax GO bonds"). Under IRC Section 103, interest on GO bonds is exempt from federal income tax, and in most cases from state income tax when held by residents of the issuing state, a "double tax exemption" that allows cities to borrow at rates 100-200 basis points below comparable taxable corporate debt. GO bonds are usually issued for capital projects that benefit the entire community: schools, roads, parks, public buildings, and general infrastructure. Most states require voter approval through a referendum before a city can issue GO bonds, with some states requiring two-thirds supermajority while others require simple majority. The city's credit rating from Moody's (Aaa to C), S&P (AAA to D), and Fitch (AAA to D) directly determines the interest rate: a Aaa rating typically saves 75-150 basis points over a Baa rating over the life of a 30-year bond, translating to millions of dollars per $100 million issued. The Municipal Securities Rulemaking Board (MSRB), established under Section 15B of the Securities Exchange Act and reformed by Dodd-Frank, regulates muni bond underwriters and advisors and operates the EMMA disclosure portal. Detroit's 2013 bankruptcy imposed partial losses on unlimited-tax GO bondholders, a precedent that unsettled the muni market. GO debt per capita feeds the 20% debt burden weighting in the CitySpend Fiscal Health Score.

Related Terms

• Revenue Bond, A municipal bond repaid from a specific revenue stream (like water fees or toll road revenue) rather than the city's general taxing power.
• Municipal Bond, A debt security issued by a city, county, state, or other government entity to finance capital expenditures. Interest income is generally exempt from federal income tax.
• Debt Service, The annual cost of repaying outstanding municipal debt, including both principal payments and interest on bonds and other borrowings.
• Credit Rating (Municipal), An assessment by a rating agency (Moody's, S&P, Fitch) of a city's ability and willingness to repay its debt obligations. Higher ratings mean lower borrowing costs.