Legal Definitions - full-faith-and-credit bond

A full-faith-and-credit bond is a type of government bond that is backed by the full taxing power and revenue-generating ability of the issuing government entity. This means the government pledges its strongest possible commitment to repay the debt, using all available resources, including its power to levy taxes, to ensure bondholders are paid. It represents the highest level of security for investors because the government is obligated to use all its general revenues, without limitation, to meet its repayment obligations.

Here are some examples to illustrate this concept:

• State Infrastructure Project: Imagine a state government decides to fund a major upgrade to its statewide public transportation system, including new rail lines and bus routes. To raise the necessary capital, the state issues full-faith-and-credit bonds. Investors purchase these bonds because they are confident that the state will use its broad taxing powers—such as income taxes, sales taxes, and fuel taxes—to generate sufficient revenue to make all principal and interest payments on the bonds. This strong commitment makes the bonds attractive to investors seeking a secure return.

• City Public Safety Initiative: A large city needs to modernize its police and fire departments, including purchasing new equipment and upgrading facilities. The city council approves the issuance of full-faith-and-credit bonds to finance these improvements. The city assures bondholders that it will use its general revenue streams, primarily property taxes, sales taxes, and other municipal fees, to repay the debt. This pledge means the city is legally bound to prioritize these bond payments, even if it requires adjusting other budget allocations or raising taxes within its legal limits.

• County School Construction: A growing county requires several new schools to accommodate its increasing student population. To fund the construction, the county government issues full-faith-and-credit bonds. When investors buy these bonds, they are relying on the county's promise to repay the debt using its general revenues, which largely come from property taxes collected from residents and businesses within the county. The "full faith and credit" pledge signifies that the county will leverage its entire financial capacity and taxing authority to ensure the bondholders receive their payments as scheduled.