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New California Municipal Bond Offering

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Buy California Bonds.com has a new municipal bond offering available to the public. General Obligation Bonds rated S&P A-. Last offer closes on September 25, 2012.

During an early order period, individual investors like you will have first pick before the large institutions get in. You won’t have to pay an upfront sales commission on the notes you purchase during this period. Buying initial offerings helps individuals reduce markup costs on Municipal bonds.

Revenue anticipation notes are fourth in line to get paid, so they are not as secure as general obligation bonds. Education is number one to get paid. General obligation bonds are number two in line behind schools, so the debt must be paid before most other payments. Payments to local governments are number three in line. Payments for income tax refunds are made after these notes are paid off.

September 25, 2012 Offering

This offer met strong investor interest allowing California to sell 13% more Bonds. The 30 year Municipal Bond yielded 3.72%. This rate is the lowest in California history. Investors liked California Muni’s because investors are nearly front of the line to get paid and California is trying to get their finances in order.

March 21, 2012 Offering

State Public Works Board Lease Revenue Bonds (Tax Exempt) were issued.

  • 1.11% for a 2 year maturity
  • 2.22% for 5yr
  • 3.83% for 10yr
  • 4.72% for 20yr municipal bond

March 1, 2012 Offering

Department of Water Resources Water System Revenue Bonds (Tax Exempt), and General obligation bonds. Rated Aa1 by Moody’s and AAA by Standard and Poor’s.

September 2011 Offering Results

The revenue anticipation notes final pricing-year-old was 0.38% for notes maturing on May 24 and 0.4% for notes maturing on June 26, 2012. Last year these notes yielded 1.5% and 1.75%. A significant drop!

Investors are worried about stock and bond markets and are willing to take his razor thin yields. California delivered an on-time budget on June 30, 2011. Standard & Poor’s these revenue anticipation notes their highest rating for the first time since 2007.

Individual Bond Municipal Bond News

March 2012 Municipal Bond and Tax Free Mutual Funds News

municipal bonds

This month saw more of news about financial market volatility. The Month’s municipal bond news included:

ETF Individual Bond Municipal Bond Mutual Fund News

November 2011 Municipal Bond and Tax Free Mutual Funds News – Property Tax Refunds, Fidelity FCSTX Report

municipal bonds

This month saw more of news about financial market volatility.  The Month’s municipal bond news included:

  • 11/04: Tax Win Inspires Copycats – WSJ.com – Affluent Lake Tahoe homeowners won a record $43 million in property tax refunds and are trying to get more. The problem was that Washoe County assessed home values using their own techniques instead of market values. Other counties around the US may be susceptible to this same tactic, significantly affecting the finances of a given county.
  • 11/04: Fidelity California Short-Intermediate Tax-Free Bond Fund (FCSTX) Semiannual Report – Municipal bonds generated solid gains for the six-months period ending August 21, 2011 mainly because of investor demand and reduced muni bond supply. Fundamentals improved and expenses were slashed in many municipalities. Even out of state investors purchased California munis. One problem area was their Puerto Rico muni bond holdings.
  • 11/10: Jefferson County, Alabama finally filed for bankruptcy. This is the largest municipal bankruptcy yet and was no surprise. Problems were due to bond issuance deals to upgrade its sewer system that soured amid widespread corruption, bribery and fraud charges that led to some 22 convictions.
  • 11/11: Smart Money’s Jack Hough thinks munis are worth a look. He is bullish due to recent strength in lite of Jeffereson Country bankruptcy and Euro zone problems, and other factors.
  • 11/11: Superdowngrades or multi-notch downgrades of muni bonds are occuring because ratings firms do not review each bond’s finances regularly.
  • 11/14: Cities are using Muni Bond money to pay for other things. Audit Investigations are going on and lawsuits are flying.
  • 11/23: Muni Bond ETFs have held there own and are slowly growing more popular.  Mutual funds still dominate the category.
  • 11/25: Harrisburg had their bankruptcy petition thrown out by the court as they violated state laws by doing so. Pennsylvania now will pursue a plan to put Harrisburg into state receivership.
  • 11/30: Jefferson Counties’ bankruptcy will test whether ‘previously safe’ revenue muni bonds will continue to get paid while in bankruptcy.
Education Individual Bond Municipal Bond

How to Select Safer Municipal Bonds

Last update July 2015
newspaper with municipal bond quotes

With over 20,000 municipal bonds in circulation, how does an investor select a municipal bond to purchase?  In our article What to Look for in a Municipal Bond , we describe some key details to look for in a municipal bond. In this article we drill down further and try to focus in on more specific attributes to look for in a safe municipal bond. This article will be updated from time to time to reflect new information we have dug up, and hopefully our readers help submit.

We have entered an era where educated bond pickers will do well, while those who blindly purchase municipal bonds, may counter issues. Obviously we would like to purchase of a municipal bond that is reasonably priced and provides the decent yield given this maturity date. Here are some specific attributes to look for in a municipal bond.

Fiscally stronger states: Arkansas, California (Avoid Central Valley), Delaware, Georgia, Maryland, North Carolina, South Carolina, Oregon, New Mexico, Minnesota, Texas, Tennessee, Virginia, and Utah are stronger than most of the other states.

Weak states include Rhode Island, Illinois, Michigan, New Jersey, New York, Nevada, and Pennsylvania. Puerto Rico is often listed as a state to avoid. An easy way to determine if state is weak is to look at its municipal bond spreads over a 10 year AAA municipal bond index. The wider the spread, probably the weaker the state. See this WSJ article for a map showing strong to weak states.

A recent analysis of states showing ones with the highest debt to GDP ratio in 2009 listed Connecticut, Hawaii, Maine, Alaska, and Oregon.

Essential Service Municipal Bonds

Obviously we should avoid general obligation bonds of these weaker states. Local projects within states need to be scrutinized carefully to ensure that essential services are backing these municipal bonds. Beware of water and other services requiring multiple agreements between different providers, these interconnections can lead to uncertainty and other problems. Is just a handful of customers paying for the services? Newly developed communities may have essential services that are much weaker than established communities. Weaker states and projects have to pay higher interest rates to attract investors, so try to avoid the temptation of chasing yield. We want to definitely diversify geographically. Only buy senior debt of essential services, as they have a better chance to be paid should problems arise.

47% of municipal bonds at the end of 2010 were tax secured, 13% are utility, 11% are US government, 9% for transportation, 9% are in healthcare, 5% or higher education, 3% are corporate backed, 1% our project finance, and the balance were Other.

14% of municipal bonds were state general obligation bonds, 10% were local general obligation bonds, 11% were insured bonds, and 9% were pre-refunded municipal bonds. 12% were transportation revenue bonds, 9% for special tax bonds, 7% were hospital bonds, 7% were water and sewer bonds, 6% were education, 5% were electric utilities, 4% were for leasing, with the balance in housing and resource recovery.

Be sure to read our article Analyzing Municipal bond Defaults

Also Avoid:

  • Pension Obligation Bonds

Seasonality

And increase supply in municipal bonds typically occurs from March to June, while a slowdown in the issuance occurs usually from December through January.

Attributes to avoid

Tobacco bonds because smoking rates are falling, possibly causing revenue assumptions not to be met, making default possible in the future.

PIK bonds, interest rate swaps, sub debt, bonds financed by property taxes, bonds financing assisted-living, and unrated municipal bonds.

If you buy mutual funds, avoid ones with low average credit quality, too long a duration, and ones that use leverage.

Attributes to look for

General obligation bonds of fiscally strong states, essential service bonds, pre-refunded bonds Backed by or escrowed by US Treasuries. Make sure they are escrowed with US Treasurys, not Fannie Maes, not Freddie Macs, not Guaranteed Investment Contracts–GICS. You can verify this by entering the bonds CUSIP number on MSRB.org

Insurance is no longer that important as less than 10% of bonds are now insured. There are no longer any AAA rated insurers to back municipal bonds like there were in the past. So the key is to look at the underlying rating of the bond, while ignoring insurance.

Look for bonds with high ratings from S&P, Moody’s, or Fitch. Most people define AAA or AA rated bonds to be the best bet. At the end of 2010, 20% of municipal bonds are rated AAA, 47% are AA, 25% are A, 6% are BBB, and 2% are below investment grade. Avoid unrated bonds and lower quality bonds.

Premium bonds are preferred. These are bonds that trade at a level above par or 100. If you purchase a discount bond, you have to pay income tax on the discount amount. With premium bonds you’ll get greater income, less volatility, but you will have to pay more in the beginning.

Those taxpayers affected by AMT should look for municipal bonds that are not subject to the AMT tax.

Kicker Municipal Bonds

As interest rates have fallen, investors seek to gain more yield. They are turning to a type of investment known as kicker bonds or cushion bonds.

  • Kicker bonds can be called sooner and unexpectedly
  • They sell at a premium
  • Income can be double that of regular municipal bonds
  • There is the potential for extra reward down the road
  • They accounted for almost 63% of the Municipal Bond Index in 2012, up from 30% in 2011
  • Downside occurs if the bond is paid back early
  • If they are not called early, you keep earning the high interest rate

Additional Related Municipal Bond Educational Articles:

What are municipal bonds?
How to Research Municipal Bonds
The Risks of Owning Municipal Bonds
How to Buy And Sell Municipal Bonds
Municipal Bond Mutual funds – Municipal Bond Managed Accounts
What Are Closed-end Municipal Bond Funds?

What are Municipal Bond Exchange Traded Funds or ETFs
How to Make a Municipal Bond Ladder
How to Select Municipal Bonds
Municipal Bond Trading Example
How to Perform Active Municipal Bond Management
Municipal Bond Books and Educational Resources

Education Individual Bond Municipal Bond Regulatory

Why Municipal Bonds are Bad Investments

San Francisco, Golden gate Park, windmill

Municipal Bonds Today.com is dedicated to helping investors demystified the municipal bond market place, so what better than to have an article describing reasons why municipal bonds are a bad investment.  We need to understand the dark side of municipal bond investing to realize areas we need to avoid.

Revenue Challenge

Revenue from sales tax, income tax, and property taxes are falling, so municipalities are encountering hard times and may default more often than the past. Towns and cities often rely on one fourth of their revenue from property taxes. One third of their revenue typically comes from state aid, according to the Congressional Budget Office. The credit crisis, unemployment, foreclosures, and the like are impacting the ability to meet obligations. Many local governments have major financial problems, and need to work out their problems without borrowing more money. Analyst Meredith Whitney explains the situation in this video. Stimulus funds run out in June 2011, so a day of reckoning is close at hand.

States have increasingly relied on issuing new debt to pay their bills, rather than increasing taxes or cutting spending.

Tobacco Issues

Tobacco bonds are backed by payments made to the state government by tobacco companies. These statements are based on projected cigarette sales. The problem is that cigarette consumption keeps dropping, making the original projections way out of whack. This leads to fears that defaults could occur.

Failed projects leads to bond Defaults

Revenue bonds on projects with an ample amount of risk are failing. Key examples of failed projects include Wisconsin‘s steam plants, Las Vegas monorail, and non-hospital healthcare facilities. If you go back and look at the Official Documents, you can see that there projections a.k.a. guesses were way off, and bond insurance has amounted to little insurance.

Underfunded Pension Liability

There are many states with massively underfunded pensions. These long-term liabilities are usually not on the balance sheet and hidden away from most investors. It is estimated that $11 trillion is the amount nationwide that is underfunded. But, 84% of state pensions were funded, in aggregate. This is a serious long-term issue that needs to get addressed. Official Statement‘s need to get beefed-up to acknowledge these liabilities. Municipalities have to raise taxes, increase retirement age, and cut services to bridge the pension liability gap. At least this liability is not a near term causer of default risk.

Additionally some states have underfunded Unemployment Funds.

No AAA Rated Insurers

Municipal bond insurance used to be incredibly important, but now that there are no more AAA-Rated insurance companies, fewer than 10% of bonds get insured. Credit ratings of the underlying security are much more important now.

City/State Budget Gaps

Many large states and cities are running huge budget gaps. Expenditures far exceed revenues, something that doesn’t work very long. $350 billion is the projected gap for 2010 and 2011. Illinois has a 42% gap, while California has a 22% gap. Something needs to be done to stop the hemorrhaging. The health of local governments usually lags the national economy by a year or two.

Desperate Municipalities Selling Assets

To plug huge deficits, municipalities are starting to sell off physical assets like real estate. Many cities are exploring selling buildings and then leasing them back. The key is to make sure that the lease service funds have been appropriated, or else a bigger hole will emerge for them.

Substandard Disclosure

There have been several cases of lawsuits against local governments claiming that the government misled investors when making a bond offering. New Jersey and San Diego, in 2010, got sued for failing to fully disclose their pension liability. The SEC is investigating the area and will hopefully add more disclosure requirements to municipal bonds. A municipal bond unit was set up by the SEC in 2010 tasked with ensuring that information was disclosed to bondholders in a timely fashion.

In the middle of 2012, the SEC asked Congress for the authority to fix the problems with municipalities who issue bonds but don’t keep the public up to date on their financial situation. They would like to allow intermediaries to sue the municipality when disclosures are breached.

Audited financial statements could be wrong. Municipal auditors engage in peer review process, something that was used during Enron’s era. Accounting standards differ in need to be standardized. Random Federal Audits in 2007 no problems relating to internal controls in many municipalities.

Investors must wait a year or more to see updated financial statements for cities, states, and others. By that time the financial condition may have changed drastically. A recent study showed that 56% of bond issues from 2005 through 2009 filed no financial statements in any given year. This means that more than $2 trillion of the $3 trillion in outstanding municipal bonds had insufficient ongoing disclosure.  There some instances where municipal bond investors have gotten little or no disclosure prior to a default.

Conduit Financing

Conduit Financing is where private or nonprofits use the municipal bond market for funding. The public issuer gets fees for helping the firm do it, but incurs no legal or financial liability. These are typically unrated municipal bonds that make up approximately 30% of the marketplace, but produce 35% of municipal bond defaults. Another Problem Is That the Government loses out of tax revenue.

Letters of credit

Does the state or local government have a letter of credit with a bank? When does it expire, how likely is it to be renewed by the bank. If a bank failed to renew letters of credit, then the municipal bond would need to be refinanced, causing problems.

Adjustable Rate debt

Some cities and towns in 2011 have been affected by the Greek debt crisis. They took part in municipal bond deals backed by Dexia, a Belgian French bank with large exposure to  Greek government debt. The bank had previously offered cheap financing by agreeing to backstop their municipal bonds, but the bank is now forced to increase the interest rate the cities pay, causing substantial problems.

Interest Rate Swaps

Does the state or local government have any interest rate swap agreements that they set up to try to limit interest rate risk? It is possible that interest rates will move against the swaps, causing possible problems.

Poor Regulatory Framework

The SEC can pursue violations of security law, regulate underwriters, and regulate sellers of municipal bonds. It can require them to demand financial disclosure from issuers. It cannot do this today to issuers directly. The Tower Amendment, adopted in 1975, forbids the SEC from requiring states or local governments to file information with it. This amendment arose to prevent Federal government from impinging on state sovereignty. Considering any major problem in the municipal bond market would eventually fall on the Federal government anyway, this law is out of date. The SEC can only go after broker dealers that commit fraud. Clearly the SEC’s power needs to be extended.

Bond Rating Agencies

Moody’s, the rating agency, has 120 people analyzing 29,000 issuers. Clearly they only can do so much work every day. The issuers need far more scrutiny on a continual basis. Also recall how many failing securities had AAA ratings right before the credit crisis.

Doomsday scenario

A default by a state or major municipality could have unforeseen effects to the credit markets.  It is possible that the ripple effect could cause another credit crisis.

Federal Reserve bailout

Keep in mind that the Federal Reserve is limited by law to only buying certain kinds of very short term Muni debt with maturities no more than six months, so bailouts are limited. They could possibly use emergency powers to buy longer maturity municipal bonds,  if there is enough political will.

State Bankruptcies

Currently, states cannot file for chapter 9 bankruptcy, making it difficult for states to terminate costly contracts, restructure bond debt, and to redo expensive Cadillac pension benefits promised to state workers. Some cities and counties can file for bankruptcy although 26 states prevented. Keep in mind that when municipalities file for bankruptcy, only elements like interest payments can see some relief, making it not a foolproof way to solve larger problems.

Related Municipal Bond articles:

Analyzing Municipal Bond Defaults

Are we in a bond bubble?

Municipal Bonds are Bad Investments

Municipal Bonds Are a Good Investment