Types of Municipal Bonds

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.

http://www.municipalbonds.com/education/the-basics-of-municipal-bonds/

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