For those involved in California legislation, you might have heard about “G.O. bonds” and “revenue bonds.” What is the difference between the two types of bond measures? First, G.O. stands for general obligation.
Second, California’s Department of Finance (DOF) defines bond fund as those used to account for the receipt and disbursement of non-self-liquidating bond proceeds. These funds do not account for the debt retirement because the liability created by the sale of bonds is not a liability of bond funds.
In addition, DOF explains that, depending on the provisions of the bond act, either the General Fund or a fund pays the principal and interest on the general obligation bonds. The proceeds and debt of bonds related to self-liquidating bonds are included in non-governmental cost funds.
Broadly defined, a revenue bond is a type of municipal bond that is repaid by the operating revenues of the public entity. Revenue bonds are primarily utilized by government entities to subsidize infrastructure projects. As a result, the financial obligation is primarily guaranteed by those operating revenues. Assets (e.g., the project) are used as collateral for the bond (loan).
On the other hand, a general obligation bond (GO bond) is a municipal or state bond measure that is backed by the good faith and credit of the issuing state or local entity. It is also based upon the taxing authority of the issuing governmental entity, rather than from the revenues from a project, which is a revenue bond. GO bonds are premised on the debt obligation being repaid through taxation or other revenues of the government entity. Assets are not used as collateral.
So, a GO bond is a type of state or municipal bond that is backed entirely by the issuing state or local government entity and its credit and ability to levy sufficient taxes on the jurisdiction’s residents to repay the loan. Whereas revenue bonds are backed by collateral and repay its creditors with the income generated by the funded project(s), a GO bond issuance is not backed by collateral and it does not repay creditors on the project’s income stream. Instead, the GO bond is secured by the government’s pledge to use its revenues to repay its bond holders.