General obligation bonds (GO bonds) are legally backed by the full faith and credit of the issuing government. In other words, the government is obligated to use its taxing power, if necessary, to repay the debt.
Advantages
Disadvantages
General obligation bonds (GO bonds) are bonds that are legally backed by the full faith and credit of the issuing government. The government is legally obligated to use its full taxing power, if necessary, to repay the debt.
General obligation bonds ay be either self-supporting or not self-supporting. If the use of the proceeds from a bond issue provides a revenue stream that can be used for repaying the debt, then the bonds are called self-supporting.
For example, the Higher Education Coordinating Board issues general obligation bonds which are used to finance a student loan program. Since the student loans are repaid by the borrowers, there is a stream of revenue that is used to support the debt service. No general-revenue appropriation is needed. If there is no revenue stream resulting from the use of the bond proceeds, then the bonds are not self-supporting and must be financed with general revenues.
Advantages
The primary advantage to using general obligation bonds is the associated low interest costs. Since the bonds are legally backed by the full faith and credit of the issuer, they are considered very low risk for the investor; consequently, they usually sell at the lowest rates of interest. The bond issue is often less complex then other types of bonds so administrative costs are less in preparing the issue.
A final advantage to general obligation bonds arises from the necessity of receiving approval through a bond referendum. The vote confirms popular support for the project being financed.
Disadvantages
While general obligation bonds typically are the cheapest type of debt available to a government, there are drawbacks to using GO debt in certain situations. The need for a voter referendum delays the financing of the project.
If the voters do not approve the bonds, then officials must find another way to finance the project, or cancel the project outright. Furthermore, the ability to issue general obligation bonds may be constrained by legal debt limits for entities with such limits.
Texas statutory law requires that additional tax-supported debt (both GO and revenue debt) may not be authorized if the maximum annual debt service on debt payable from general revenues (including authorized but unissued bonds and lease purchase agreements greater than $250,000) exceeds five percent of the average annual general fund revenues for the previous three years.
A final disadvantage is that general obligation bonds, when paid from general tax revenues, do not necessarily equate the taxpayers benefiting from the project with the taxpayers paying for the project.
However, it can be argued that all taxpayers benefit from some types of projects, e.g. prisons, and therefore the burden for repaying the bonds for such projects is rightly distributed among all taxpayers.