Municipal Bond Forum

Although the new healthcare bill imposes a 3.8% tax on interest income, it does not appear that this will apply to interest from tax-free bonds.

Since the onset of the sub-prime crisis and subsequent recession, there seems to be no shortage of journalists anxious to identify the next financial disaster. It makes us wonder why they didn’t warn us about the last one. 

It’s always difficult to refute an argument based on a ”sky is falling” premise. The author asks, “what if the stock market falters, the economy does not return to full health, jobs remain scarce and tax revenues remain depressed.” It's reminiscent of John Maynard Keynes, who said: “ In the long run, we are all dead.”

To his credit, the author suggests such assessments might be alarmist and points out that only one state has defaulted on its general obligation bonds in the past century.
 
We have expressed our dissatisfaction for years that the financial media has given short shrift to the municipal bond market and has been overly enamored of general obligation debt. From this standpoint, there is some merit to the article.
 
We have suggested that investors diversify their portfolio and include bonds that are backed by revenue streams generated from essential services which cannot be diverted to other uses. Investors should consider these factors when making municipal bond purchases.

Obviously, these are difficult times for municipal entities as well as the economy in general. We don’t, however, think the apocalypse is upon us and we don’t advise an analysis of your investments as if it were.

A general obligation (GO) bond pledges the full faith and credit of the issurer  to repayment. That means the city will raise property taxes and use all general fund revenues at its disposal to pay its principal and interest.

A revenue bond is payable from  a specific revenue stream, such as water and sewer revenues, usually derived from the operations of a specific project. In this example, charges for water and sewer service typically support debt service before they can be used for any other purpose. Since these bonds are secured by a designated revenue source, they are called by that name.

Revenue bonds are often rated very close to a city's general obligation rating, but usually slightly below it. This reflects the narrower revenue stream available to pay the bonds. In general, for municipalities, both are considered to be important as a means to finance needed capital projects for the citizens in the issuing locality.

Revenue bonds are also issued by non-profit entities, such as hospitals, colleges, airports etc., that serve a public purpose. These financings are supported by operating or other revenues of those issuers.