General Obligation & Revenue Bonds — Q&A

General obligation (G.O.) bonds and revenue bonds.

G.O. bonds fund non-self-supporting projects (schools, roads, parks) repaid with property (ad valorem) taxes — voter approval needed to raise taxes if short. Revenue bonds fund self-supporting ventures (toll roads, airports) repaid from project revenues — no voter approval and not subject to debt limits because taxpayer funds are not used.

Revenue bonds require a feasibility study by independent consultants forecasting project profitability. G.O. bond analysis focuses on economic diversity, population trends, municipal obligations, and tax collection figures.

G.O. bond defaults are very rare. Revenue bonds default at 13 times the rate of G.O. bonds — higher risk because repayment depends on project revenues, not taxing power.

Weakened by: declining population, reliance on a single industry (auto), and heavy pension obligations. Strength comes from growing/diverse population and lighter municipal obligations.

Many munis trade fewer than 50 times per year; buyers are often local/regional, not global. Liquidity risk is driven by trading audience size, not overall market size (~$4.5 trillion). Smaller municipalities have the highest liquidity risk.

Munis offer tax-free income but lower yields. Without a high tax bracket, the tax benefit does not offset the lower yield — the investor faces opportunity cost versus higher-yielding taxable alternatives.

Refinancing outstanding municipal debt before it can be called, typically when rates fall. Proceeds of new refunding bonds go into a Treasury-backed escrow (defeasance). Advance refunding = refunded bonds redeemed more than 90 days after refunding bond issuance; current refunding = within 90 days.

Very high credit ratings because escrowed U.S. Treasury securities effectively replace the municipality’s pledge as security. They also tend to carry lower yields than comparable munis.

Yes — interest generally remains federally tax-exempt after the refunding.