Analyzing General Obligation Bonds

There are two main factors that are critical in analyzing the general wealth of a community that backs interest and principal payments on General Obligation Bonds: 1) Quantitative analysis, and 2) Qualitative analysis. Quantitative analysis, includes factors such as property values, per capita income, retail sales per capita, diversity of the local community, concentration of taxpayers, general fund and so on. Qualitative analysis, includes factors such as property value trends, population trends, community’s attitude toward taxation and so on. Both methods of analyzing a tax-paying city, county or district can shed light on the security of payments from a particular GO issuer. In order to protect taxpayers from excessive taxes, statutory debt limits are set to control the amount of debt a municipality can issue. For example, a municipality could limit its debt underwriting to a certain percentage of the overall taxable property value within its city limits. The official statement discloses the total outstanding debt, including newly issued debt, as a percentage of the constitutional debt limit. A state constitution or city charter can also limit the purposes for which a city may issue debt. A city can have provisions on issuing bonds for capital improvements requiring that bonds must mature together with the expected lifetime use of the improvements. This provision, protects a city from owing money on a facility that has disintegrated. Real property taxes are the primary source of income for counties, school districts, and cities. However, cities have additional sources of income including: fines, license fees, sales taxes, hotel taxes, city income taxes, utility taxes, assessment taxes, and personal property taxes. Ad valorem taxes are property taxes based on a property’s assessed valuation, which is a percentage of the estimated property’s market value. This percentage is established separately by each state or county, and it varies by each community. The market value of each property is determined by the county assessor. A county assessor establishes assessed valuation prices based on recent sale prices of similar properties, income streams, replacement costs and other methods of estimating value. It is ad valorem, because the real property tax is based on the property’s value, or per value tax. The tax is a lien on the property; hence, if delinquent the municipality has the authority to seize the property. GO bonds with the power to tax and seize a property, are deemed safer than revenue bonds of the same issuer; and therefore, are issued with lower interest rates.