Municipal Bond Forum

Payments by the tobacco companies to the states do continue in perpetuity. However, it is not clear whether bonds, upon final maturity, would still continue to pay if there was a shortfall in prior years. Discussions with Standard & Poor's and review of certain tobacco bond transactions suggest this possibility. 

Many transactions do not specify whether the issuer's responsibility to pay past-due principal and interest would be honored once the final maturity date of the transaction has been reached. Some transactions do provide for this situation (e.g. Rhode Island), but many do not. S&P has consulted legal counsel on this issue and has yet to receive a definitive answer.

Some investors, to their detriment, attempt to predict the direction of interest rates and time their investment decisions accordingly. With the Fed’s announcement that interest rates would be kept extremely low through at least 2015, the guesswork for those trying to time the market has been effectively removed from the equation.
 
Trying to predict the market has been a futile and costly exercise, as evidenced by the disappointed investors who’ve parked funds in short-term money market instruments, waiting for interest rates to rise. Our philosophy has always been to “go long”; that is, buy long-term munis to maximize tax-free income. It’s worked for generations of investors who have profited handsomely while sleeping soundly at night. But for those holdouts still trying to read the market tea leaves, the Fed’s actions should, at least, release them from the burden of trying to be market prognosticators.

Rather than eliminating tax exemption, President Obama's proposal would cap the value of the tax exemption at 28%. This was included in the administration's American Jobs Act, unveiled in September 2011.
 
We have not seen anything from the Romney camp endangering tax-free interest. Although Gov. Romney has discussed limiting tax deductions, municipal bonds are not considered tax deductions as they are purchased with after-tax dollars.
 
Regardless of who comes out on top on Election Day, any attempt to tamper with muni bond tax-exemption creates more problems than it cures. It would raise borrowing costs for already-strapped state and local governments, discourage capital investment and cost jobs. Ironically, public improvements would then require the federal government to subsidize municipalities, completely defeating what it is trying to accomplish.