Accounting Conservatism

finance a la shmoop. what are general obligation, revenue and double-barreled

bonds? well they're all flavors of muni bonds and they refer to how the promise

to pay is backed up by the city issuing the bonds, you know to raise money. ever [ ice cream flavors in a case]

been to a town hall meeting? well they usually have lots of retired people

attending and lousy coffee a lot of blue hair rinses and dentures or something

like that, and yet municipalities are the backbone infrastructure of our country

they build parks and buildings and sewers and garbage collection systems

and so on. in other words the things that make us go or you know deal with us [garbage truck and bathroom pictured]

after we go. boiling it down there are really only two flavors of muni bonds-

general obligation bonds these things a municipal bond where interest payments

and principle repayment are back with will pay the creditor the issuing

municipality, and revenue bonds to whom belong on the pleasures of

revenue from the amount borrowed that. all right well the state or local issuer

assures repayment through Full Faith and Credit, but there's a huge difference [bond pictured]

between these two types of bonds .let's think about how this works on a national

level with Treasuries. Full Faith and Credit means that the US government

unconditionally promises to pay all interest in principle even if it has to

run the process 24 by 7 to print enough money to do so. so that's at the federal

level for Treasuries. like t bonds t-bills T notes that kind of stuff.

municipalities work different though because they're just local. they can't [t-bonds, bills and notes on a table]

print money like you have any Los Angeles dollars handy with you? yeah

they'll make a nice fire someday. ok so think about Munis as a little bit

different here. all right. so let's think about general obligation bonds. these are

general obligations of the city to pay interest in principal from taxes that

the issuer can levy on its citizens, that's its local taxes on its local

citizens, and they get a piece of income tax property tax sales tax sin tax you [check out scanner adds taxes]

know cigarettes and booze. if there's a way to extract a tithe a municipality

well they actually might try. breathing tacks what do you think? well

The Full Faith and Credit is the issuer's unconditional promise to pay

the interest and the principal unless you know they can't generate enough tax

revenue to do so or even go bankrupt. and in fact that bizarro land phenomenon is

starting to happen more and more as cities go bankrupt all over the country [map of US- bankrupt cities marked]

or at least they're starting to. anyway since general obligation bonds are

backed by The Full Faith and Credit of the city , those responsible for the full

faith in such credit must approve their issuance, and who might those be?

well the citizens of the locality that's issuing them, that would be you. you

people you live there you have to approve the issuance of a general

obligation bond because it affects you. okay so that means your whole city sits

behind a general obligation. in a revenue bond things are different. revenue bonds [city shown with networking lines showing connections]

are more risky because they're backed up only by the revenues of a given project.

right they don't offer Full Faith and Credit comfort .payment on these bonds

comes only from the revenue generated from what the bonds were used to create.

bonds to build a toll bridge are a good example here. the issuer can estimate

fairly accurately the revenue that will be generated from the tolls you know

based on how much traffic and five bucks every time you drive across the bridge,

and then it's up to the investor to decide if that revenue will be

sufficient to service the debt on the bond .okay got that ? so that's a revenue [woman frowns, man smiles]

bond riskier then a general obligation bonds. it's backed up by only one thing. the

bridge fails well you're out of luck. okay moving. on a hybrid mutt formed from both

of these concepts is a double-barreled bond ,which is backed by both taxes and

revenues .think of a County Beach that charges admission. got it? so it's gonna

have a general obligation of the coastline and everything around it but

generally speaking paying back the interest is supposed to come from [coastline pictured]

charging you that 20 bucks it takes to park there all day, and you come back to

a hot car that burns your well nevermind. all right so quite a trio here: general

obligation bonds pretty safe backed by the whole city revenue bonds backed by a

one thing like that toll bridge double-barreled bonds that are

kind of backed by both. yeah. so they're quite a trio. but if they're the Destiny's [bonds listed from safest to riskiest]

Child of muni bonds. well which one is queen bee?