General Obligation (GO) Bonds Detailed FAQ
Q: What is a general obligation bond?
General obligation bonds, which are also referred to as GOs, are municipal bonds which provide a way for state and local governments to raise money for projects that may not generate a revenue stream directly. Examples of the types of projects funded by general obligation bonds are the construction of public schools and highway systems.
They are called “general obligation” bonds because they are not backed by a specific revenue producing project or asset. Instead, they are backed by the “full faith and credit” of the issuer. In simple terms that means the bonds are backed by the state or local government’s ability to tax, and to raise taxes if necessary, in order to pay bondholders. For states, this power comes in the form of state income taxes and/or a sales tax. For local governments, it normally comes in the form of property taxes.
Q: What is the impact on my property taxes?
The bonds would be repaid through a modest property tax increase. For a household with a $140,000 home and a $15,000 car, the property tax would average an additional $8 each year, rising to an $160 average additional payment in year 20. This is an average, so in some years the increase would be higher, in other years it would be lower. The amount is based on passage of all three questions.
$100,000 PERSONAL PROPERTY
Again, the taxpayer impact examples are averages. In some years, the annual increase will be higher, especially in the beginning. In some years, the impact will be lower, especially in the middle and ending years of the program. The chart below shows the average taxpayer impact as a graph. This is a new and simpler version of the graph that first appeared back in December. We’ve taken out information regarding increases to existing property taxes, as they were related to the proposed one-percent sales tax renewal which is no longer on the April ballot.
Q: What does full faith and credit mean?
General obligation bonds are secured by the full faith and credit, and taxing power of the municipality. This means that a court can compel the municipality to increase property taxes if needed to repay the bonds. The owner of a general obligation bond may look for repayment to all legally available sources of revenue that the municipality is entitled to receive.
Q: Where does the City get its authority for general obligation bonds?
Missouri municipalities are authorized to issue general obligation bonds pursuant to Article VI, Section 26(b), (c), (d) and (e) of the Missouri Constitution and Sections 95.115 to 95.130, RSMo. In addition, general obligation bonds cannot be issued unless specifically authorized by voters.
Q: Why do cities use general obligation bonds to pay for public infrastructure?
Municipalities may issue general obligation bonds for any municipal purpose authorized by charter or Missouri law. General obligation bonds are secured by the full faith, credit and taxing power of the municipality, which should result in the lowest possible interest rates for financing a capital project. This is the primary advantage to borrowing money by issuing general obligation bonds. Another advantage is generally lower costs of issuing general obligation bonds, when compared to most other methods of financing capital projects. This is because the legal structure for the issuance of general obligation bonds is less complex than most other financing methods.
Q: Why does the City need to borrow funds to pay for public infrastructure? Why not use cash or existing taxes?
Cities borrow funds to pay for infrastructure with a long useful life, rather than using current cash, for a variety of reasons. In the case of public assets like a bridge paying for it over time provides “intergenerational equity.” In other words, the current generation does not pay the entire bill for a bridge with a 50-year useful life; rather, users pay their share over time. The use of borrowing also allows cities to use their other resources to pay for vital services including public safety. Finally, in the case of general obligation bonds, property owners are asked to pay for the improvements with property taxes as property values throughout the city will benefit from the additional public investment.
Q: What are the voter‐approval requirements?
Super‐Majority Approval. Cities may only issue general obligation bonds after obtaining approval of four‐sevenths or two‐thirds (depending on the date the election is held) of the qualified voters of the municipality voting on the question. The below table shows the available election dates and the supermajority approval required for approving of general obligation bond questions on each date:
Election Date (1st Tuesday after the 1st Monday)
Voter Approval Requirements for General Obligation Bonds
- February 2/3rds‐majority in all years
- April 4/7ths‐majority in all years
- June 2/3rds‐majority in all years
- 4/7ths‐majority in even‐numbered years
- 2/3rds‐majority in odd‐numbered years
- 4/7ths‐majority in even‐numbered years
- 2/3rds‐majority in odd‐numbered years
Section 115.123, RSMo, provides for bond elections to be held on days other than those shown above in special circumstances. Section 115.652, RSMo, allows for elections to be conducted by mail under certain conditions.
Q: How long can a general obligation bond be outstanding?
In accordance with Section 26(f) of the Missouri Constitution and Section 95.135 RSMo, the final maturity of an issue of general obligation bonds must not be later than 20 years from the date of their issuance. Refunding bonds may extend the final maturity of the refunded bonds, as long as it does not exceed 20 years from the date of issuance of the refunding bonds. (Extending the maturity of the bonds through a refunding is generally limited by the requirement that the refunding must result in debt service savings. The longer the maturity, the more interest is paid.)
Q: How will the City make its annual bond payments?
Section 26(f) of the Missouri Constitution and Section 95.135 RSMo require that, before issuing general obligation bonds, a municipality must provide for the levy of an annual property tax that will be sufficient to pay the principal and interest on the bonds. To satisfy this requirement, the ability to levy the tax will be included in the ordinance authorizing the issuance of the bonds. The municipality may use other revenue sources (such as sales tax proceeds) to pay debt service on the bonds, in which case the property tax levy may be unnecessary and the municipality may choose not to collect the tax in a particular year.
Q: If an investor buys the City’s general obligation bonds and the City fails to pay them, can the investor take possession of privately owned property within the City in order to get paid?
The security for the bonds is the City’s ability to tax real and personal property, not the property itself. Bondholders have no direct connection to property owners and do not have the right or authority to seize property in lieu of general obligation bond payments. In the extreme unlikely event the City did not make its debt payment from property taxes collected, the City could use other legally available funds of the City to make the payment. If the City were to default on the bonds, it would ruin the City’s credit rating. The City has no known history of defaulting on bonds.
Q: What happens if I can’t pay my property tax because of the additional property tax increase imposed by the City?
The City’s real and personal property taxes are billed and collected as part of a consolidated property tax bill by the county collectors in Cass, Clay, Jackson and Platte counties. In the event a property owner elects to either not pay their property tax bill or to not pay it in full, the owner may be subject to additional penalties and fees and ultimately their property may be “sold on the courthouse steps” or as prescribed by the particular county to recoup the tax which was not paid.
Q: If the City is granted $800 of general obligation bond authority can it sell all of the bonds at once?
The City’s current plan is to sell on average $40 million of bonds each year for the next 20 years. While it is technically and legally possible to sell the bonds in any pattern, several practical issues make that infeasible including impacts to the City’s credit rating, property tax rates, and the ability to spend funds in accordance with IRS guidelines, which require proceeds from bonds issued on a tax-exempt basis to be spent within a short time frame.
Q: What happens to property tax rates used to pay general obligation debt payment if interest rates skyrocket?
Like a home mortgage, general obligation bond payments include both a principal and interest component. Each time the City sells a series of general obligation bonds an interest rate is determined at the time of sale and applied to that bond issue’s principal payments for the 20-year term.
A good thing about general obligation bonds is that they are typically the highest rated credit of a well-managed City. In the case of Kansas City, its general obligation bond credit ratings are AA/Aa2 from Standard and Poor’s and Moody’s, respectively. The City’s general obligation bonds may also be sold as exempt from both state and federal taxes. Good credit ratings and tax exemption means investors are willing to receive the lowest possible interest rates when purchasing general obligation bonds. Tax exempt interest rates for general obligation bonds have been at or near historic lows in recent years. During the last 20 years, the average interest rate for an AA-rated general obligation bond with a 20-year term has been 4.37%.
Q: Can the City use general obligation bond proceeds for purposes other than public infrastructure including the airport or an expanded streetcar?
The state constitution and the proposed ballot language (Ordinance No. 160877 – Questions 1, 2 and 3) define the permissible uses for the $800 million of general obligation bond proceeds. Additionally, the City Council has outlined more specific uses in companion Resolution No. 160951, which specifically mentions the exclusion of the airport and streetcar projects both of which have their own independent funding mechanisms.
Q: Can the City use the property taxes raised to pay principal and interest on general obligation bonds for purposes other than making debt payments?
State statutes stipulate property taxes raised from a debt levy may only be used to make debt payments and the property tax rate be calculated each year to only provide the amount necessary to equal the required payments.
Q: Didn’t City residents recently vote to create a street maintenance fund?
Yes. In 2012, voters approved a change in city sales taxes that eliminated some taxes while designating that a portion of the earnings tax revenue would be allocated to resurfacing streets. This fund is projected to generate approximately $17 million to repave streets in the upcoming fiscal year. The infrastructure bonds would reconstruct streets from the dirt up, rather than just repave.
Source for selected answers: Missouri Municipal Finance Guide – Prepared by Gilmore & Bell, P.C., April 2012