What's the difference between general obligation and revenue bonds?

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AcadiFi · Accepted Answer

General obligation (GO) bonds are backed by the FULL FAITH AND CREDIT of the issuer, with repayment supported by the issuer's taxing power. Unlimited-tax GOs (ULTGO) can raise property taxes without cap; limited-tax GOs (LTGO) are constrained by statutory or constitutional limits. Revenue bonds are repaid ONLY from a specific revenue stream tied to a project — water utility fees, toll road revenues, airport landing fees, hospital patient revenues, university tuition. If the project fails, bondholders have no recourse to general taxes. Credit implications: GOs are typically safer because taxing power is a diversified cash flow. Revenue bonds depend on project economics — a toll road with weak traffic can default even while the city's general fund is healthy. Example: the State of Cascadia issues both: (a) $250M ULTGO at 3.2% for school construction, repaid from statewide property taxes; (b) $400M Cascadia Turnpike revenue bonds at 4.6% repaid from toll revenues. Spread reflects specificity of revenue source and project risk. Key covenants for revenue bonds: rate covenant (usually 1.20x to 1.50x debt service coverage), additional bonds test, flow-of-funds waterfall. GOs rarely have rate covenants but carry debt limits. Historically, revenue bond defaults are much more common — especially in healthcare and industrial development.

What's the difference between general obligation and revenue bonds?

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