A general obligation bond is a common type of municipal bond in the United States that is secured by a state or local government's pledge to use legally available resources, including tax revenues, to repay bond holders.
Most general obligation pledges at the local government level include a pledge to levy a property tax to meet debt service requirements, in which case holders of general obligation bonds have a right to compel the borrowing government to levy that tax to satisfy the local government's obligation. Because property owners are usually reluctant to risk losing their holding due to unpaid property tax bills, credit rating agencies often consider a general obligation pledge to have very strong credit quality and frequently assign them investment grade ratings. If local property owners do not pay their property taxes on time in any given year, a government entity is required to increase its property tax rate by as much as is legally allowable in a following year to make up for any delinquencies. In the interim between the taxpayer delinquency and the higher property tax rate in the following year, the general obligation pledge requires the local government to pay debt service coming due with its available resources.
Types of General Obligation pledges
State law generally sets the conditions under which a local government can issue general obligation debt, including the type of security available.
All things being equal, credit rating agencies and investors can consider an unlimited property tax pledge to be materially stronger than a limited-tax pledge. This perception in turn can potentially allow a local government to borrow at a lower interest rate, saving its taxpayers' money over the life of the bonds. This advantage notwithstanding, many states, such as California under Proposition 13, do not allow local governments to issue unlimited-tax general obligation debt without a public vote.