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Q

I own a Pembroke Pines (FL) GO bond. In a small community like that, does the fact that it’s a GO vs. a revenue bond mean anything?

A

James A. Klotz responds:

A general obligation (GO) bond pledges the full faith and credit of the issurer  to repayment. That means the city will raise property taxes and use all general fund revenues at its disposal to pay its principal and interest.

A revenue bond is payable from  a specific revenue stream, such as water and sewer revenues, usually derived from the operations of a specific project. In this example, charges for water and sewer service typically support debt service before they can be used for any other purpose. Since these bonds are secured by a designated revenue source, they are called by that name.

Revenue bonds are often rated very close to a city’s general obligation rating, but usually slightly below it. This reflects the narrower revenue stream available to pay the bonds. In general, for municipalities, both are considered to be important as a means to finance needed capital projects for the citizens in the issuing locality.

Revenue bonds are also issued by non-profit entities, such as hospitals, colleges, airports etc., that serve a public purpose. These financings are supported by operating or other revenues of those issuers.