General Obligation & Revenue Bonds

Overview

• Municipal bonds are issued by states, cities, counties, and other political subdivisions. They’re one of the main ways local governments borrow money to fund public projects. Many roads, schools, and parks are built with money raised through municipal bond offerings.
• National politics often gets the most attention, but state and local decisions tend to shape day-to-day life more directly. Money raised in the municipal debt market affects local services, infrastructure, and overall quality of life.
• Municipal bonds are typically structured like other bonds. Most pay semi-annual interest to investors seeking income. The capital (money) raised through offerings is used to hire employees, expand operations, and build new facilities.

🔑 The two primary forms of municipal debt:

1. General obligation (G.O.) bonds
2. Revenue bonds

G.O. bonds vs Revenue bonds — master comparison

General obligation (G.O.) bonds

What they fund

G.O. bonds are a common type of municipal bond. They fund important projects for a city, state, or local area that don’t generate revenue. These are called non-self-supporting projects, meaning the project does not produce enough revenue to pay for itself.

Common examples include schools, roads, parks, and government buildings.

How they are repaid

When a G.O. bond is issued, the municipal government borrows from investors and repays them over time. Because the project itself doesn’t generate revenue to cover debt service, the municipality must use taxes to repay the borrowed funds. Specifically, G.O. bonds are paid off with property taxes.

🔑 The funding cycle for a new non-self-supporting project:

1. Raise money through a G.O. bond issuance
2. Use the proceeds to pay for the project
3. Use property taxes over time to repay investors

Backing

• G.O. bonds are typically not backed by a specific form of collateral. Instead, they are backed by the full faith, credit, and taxing power of the municipality.
• ⚠️ Full faith and credit bonds are generally not as safe as secured bonds, but a municipality’s taxing power is a major source of support.
• If a state or local government is short of funds needed to pay debt service on a G.O. bond, it can raise property taxes with voter approval.

What strengthens or weakens a G.O. bond

Case study — Detroit

• The city of Detroit filed for bankruptcy in 2013, which is still the largest municipal bankruptcy filing in US history.
• Contributing factors: a declining population, a single dominant industry (auto industry), and significant pension obligations.
• When a municipality’s population declines, the local government loses taxpayers. This is one reason local leaders try to attract residents and businesses: more people and businesses generally means a larger tax base.
• Detroit grew around the automobile industry. When the industry was strong, it supported jobs, wages, and a stable local economy.
• By the time of the Great Recession of 2008, conditions had changed. The economy experienced the largest financial collapse since the Great Depression in the 1920s and 1930s. During economic downturns, consumers often delay purchases of durable goods like automobiles.
• Auto sales plunged in 2008 and 2009, creating major problems for Detroit. With so much of the city tied to one industry, business closings and layoffs affected large portions of the population. Over the following years, many residents left to seek opportunities elsewhere, which further reduced the city’s tax base.

Definitions

Pensions as a municipal strain

Summary

In summary, G.O. bonds fund state and local projects that don’t generate their own revenue. Repayment depends on the municipality’s ability to collect property (ad valorem) taxes. Factors that can strengthen a G.O. bond include a larger population and a more economically diverse tax base. Factors that can weaken it include population decline, reliance on a single industry, and heavy municipal obligations such as pensions.

Revenue bonds

What they fund

Municipal revenue bonds fund projects that do generate revenue. If your city operates a facility that brings in money, it was likely built (at least in part) with funds raised through a revenue bond issue.

Examples of ventures supported by revenue bonds:

• Toll roads
• Airports
• Stadiums
• City zoos
• Convention centers
• Water treatment plants

These projects serve public needs while also generating operating revenue.

Feasibility studies

Before issuing a revenue bond, a municipality typically evaluates whether the project can realistically produce enough revenue to cover its costs.

For example, suppose a city wants to build an aquarium that will charge admission. The aquarium will cost millions of dollars, and taxpayer money won’t be available for it. To estimate the project’s earning potential, municipalities hire independent consultants to prepare feasibility studies.

If the feasibility study forecasts a profitable aquarium, the city can move forward with construction. A self-supporting revenue bond is issued to the public, and the capital raised is used to build the aquarium. Revenues earned from the aquarium are then used to pay off the bond over time.

🔑 Most revenue bonds are considered self-supporting because they do not rely on taxes to repay borrowed funds. Because of that:

• ⚠️ Revenue bonds do not require voter approval to be issued.
• ⚠️ Revenue bonds are not subject to debt limits.

Risks

Default risk

• While most municipal securities are safe from default risk, defaults can still occur.
• It’s very rare for G.O. bonds to default, but revenue bonds face higher levels of default risk.
• 🔑 Revenue bonds default at 13 times the rate of G.O. bonds.
• Even so, revenue bond defaults are still fairly rare in the broader financial markets.

Liquidity risk

• Liquidity risk is driven by the size and activity of the trading audience. If you try to sell a municipal bond issued by your city, you’re typically selling to a relatively narrow group of potential buyers — often other investors interested in that municipality or region. Municipal investors generally don’t trade with a national or global audience the way corporate and U.S. government security investors do.
• ⚠️ This liquidity risk isn’t caused by the overall size of the municipal market — the municipal market is large (~$4.5 trillion as of Q1 2026). Instead, liquidity risk is often most noticeable in smaller municipalities.
• Example: even though Wyoming’s population sounds sizable, only a fraction of residents participate in the municipal bond market. Of those who do, only some will be willing and able to trade at the moment an investor needs to sell. As a result, bonds from Wyoming — and especially from smaller cities or localities within Wyoming — can face significant liquidity risk.
• 🔑 In general, the smaller the municipality, the higher the liquidity risk.

Yield / tax-bracket risk (opportunity cost)

• Municipal bonds offer tax-free income, but that benefit comes with a tradeoff: lower yields.
• Issuers can often offer lower yields because investors don’t pay taxes on the interest.
• ⚠️ While this isn’t the most severe risk, an investor in a low tax bracket should generally avoid municipal investments. Otherwise, they may face opportunity cost if other investments could provide a higher after-tax return.

Definitions

Advance refunding

Municipal issuers sometimes refinance outstanding debt before the bonds can be called. This process is known as advance refunding.

The 90-day rule

• Because advance-refunded bonds are backed by U.S. government securities held in escrow, they often carry very high credit ratings and lower yields than comparable municipal bonds.
• Taxation: if the original bonds were tax-exempt municipal securities, the interest generally remains federally tax-exempt after the refunding.

Key points

Non-self-supporting projects

• Do not make revenue

General obligation bonds

• Fund non-self-supporting projects
• Paid off with property (ad valorem) taxes

Used to analyze G.O. bonds

• Economic diversity
• Population trends
• Municipal obligations
• Tax collection figures

Self-supporting ventures

• Make revenue to pay off borrowed funds

Revenue bonds

• Paid off with revenues from municipal ventures
• Finance self-supporting municipal ventures
• No voter approval is required
• Not subject to debt limits

Feasibility studies

• Forecast profitability of a municipal venture
• Created by independent consultants

Municipal bond risks

• Revenue bonds have a higher risk of default than G.O. bonds
• Liquidity risk
• Low yields (opportunity cost)

Advance refunding

• Refunding bonds refinance outstanding debt before it can be called
• Proceeds are placed in a Treasury-backed escrow account to pay refunded bonds
• Advance refunding = redemption after 90 days
• Current refunding = within 90 days
• Bonds become defeased, often receive higher ratings, and may be called pre-refunded or ETM bonds

Sources

Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.