Tax-backed debt obligations are the debt instruments issued by counties, states, cities, towns, special districts and school districts. These are secured by some form of tax revenue and are classified into three types. They are as follows:
General Obligation Debt: General Obligation Debt is a municipal security secured by the taxing and borrowing power of the municipality issuing it. In fact, they are backed by the credit and taxing power of the issuing jurisdiction rather than the revenue it receives from a given project in hand. This is the feature, which influences the investor to invest in these securities.
In addition to above back up, certain identified fees, grants and special charges also secure some of the general obligation securities. These are the amounts, which provide additional revenue to the State outside the purview of the general fund. Due to this dual nature of the revenue sources, these securities are also known as double-barreled in security.
Appropriation-Backed Obligations: Appropriation-Backed Obligations are securities issued by agencies or authorities of several States to meet their entity obligations. These securities are backed up with the appropriation of funds from the State general tax revenue. The state legislature should approve this appropriation of funds from the state's general tax revenue. However, the state's obligation is not binding. When a debt obligation is backed by such non-binding pledge of tax revenue, it is known as moral obligation bonds. The moral obligation pledge helps in enhancing the creditworthiness of the issuer. Lease-backed debt is another type of appropriation-backed obligation.
Debt Obligations Supported by Public Credit Enhancement Programs: A moral obligation is a form of credit enhancement provided by the state. This obligation of the state is neither legally enforceable nor legally binding. However, the public credit enhancements can be made legally enforceable if the state or a federal agency guarantees the issue or when there is an obligation to automatically withhold and deploy state aid to pay any defaulted debt service by the issuing entity.