There are primarily
two types of municipal bonds: General
Obligation bonds (G.O. Bonds)
and Revenue
bonds.
General Obligation
bonds are types of munis for which issuers guarantee the repayment of the bond
by any means necessary with full faith and credit. This usually means that the
issuers will use their taxation power to raise the revenue to pay back the bond
under any circumstances. If the issuer has problems paying back its issued
bonds, then that institution must raise taxes to earn the revenue needed to pay
back the bonds. The most common issuers of G.O. bonds are states, cities and
towns, and school districts that rely on the local municipalities that belong
to the school district to guarantee payment.
Revenue bonds are a
type of muni that are repaid using the revenues from the projects the bonds
helped fund. Investors need to be aware that with revenue bonds there is a
greater chance that an issuer could default on the bond. The institutions
issuing these bonds can do whatever it takes to try to raise the revenue to pay
back the bonds, but it may not always result in the revenues needed. For
example, if a transportation authority were to issue a municipal bond in order
to fund the building of a toll road, the revenue from the tolls might be used
for repayment. If the issuer were having problems with paying back the bonds it
could raise toll prices to increase revenue. However, this does not guarantee
higher revenues as drivers could switch to non-toll roads. The ability to repay
these revenue-based bonds differs among the various institutions that issue
them, so investors need to take this into consideration if they are interested
in investing in this type of bond.
Comments
When the
Dunwoody Development Authority issued bonds for developer projects, they used
Revenue Bonds and the developer is responsible for bond repayment.
When the
DeKalb School System issues bonds, they use General Obligation bonds. They can
raise taxes to pay off these bonds if they need to do so. The use of bonds in this case results in the
taxpayers paying double. Taxpayers would
be better off if School Systems would set up accrual accounts for buildings and
maintenance rather than borrowing the money though bond sales.
Norb
Leahy, Dunwoody GA Tea Party Leader
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