Municipal Bond Forum
Is general obligation debt the most secure?
Q
I’ve always been under the impression that general fund obligations are a city’s most secure debt. But in your article, “Most Stockton Bondholders Unaffected by Bankruptcy”, you say the city will continue to pay enterprise bonds backed by water and sewer revenues and debt secured by special assessments and special taxes. I’m confused; which bonds are more secure?
A
James A. Klotz responds:
Under Chapter 9 of the bankruptcy code, enterprise and other self- supporting debt (like water and sewer, or tax allocation bonds) are considered “special revenue” bonds since they are secured by an identifiable, dedicated source of revenues outside of the general fund. As such, bankruptcy courts usually allow such bonds to be paid despite the bankrupt condition of the city or county government. This is the case since general taxes or other general fund resources are not required for repayment.
Under Chapter 9, general obligation and other general fund-backed debt is considered unsecured, and is subject to the plan of adjustment developed by the debtor and the court. Bondholders secured by general fund revenues must compete in bankruptcy court with other general fund creditors.
Of the thousands of units of local government in this country, few communities have ever declared bankruptcy. For the rest, general obligation debt is normally viewed as having the broadest pledge a city/county can offer.
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