Municipal bonds

Municipal bonds is a “generic term” issued by the state, local, governments, aviation, world trade center, port authority, school boards, etc

·         ** Interest on these Bonds is free from Federal income tax or interest

·         Example: MDS (Miami Dade Expressway) bond interest income free of federal income tax or interest (this is a Revenue bond because it uses user fees to pay for the loan)

·         **Government borrow at a discounted interest rate

·         1986 LAW/regulation? Efforts to chip away at this subsidy. Overused and some wanted it to be more regulated.

·         Local government needs to decide if the pay as you go system or how much you go into debt with pay as you use system

·         Most county and states are in debt

·         Keep debt service over time makes it level and therefore you don’t see hikes in your taxes if there is a new bond set.

·         So then you pay interest over larger periods of time (which makes it cost more)

·         Yet says Americas are Mobile and so you should pay for it as you use the item. Average American moves 7/8 times during their life

·         Pay as you use -1% cent sales taxes to pay for jail and pay out of the pocket

1.      Huge divides-- General Obligations Debt Vs. Revenue Bonds

General Obligations Debt	Revenue Bonds
Libraries Public schools City halls Jails Must have a public referendum Life insurances companies hold lost of municipal bonds, they love to keep payments strong for their future claims	75% bonds today are RB government subsidize principal and interest, which are paid with user fees landing paying feeds for MIA tolls for roads/bridges or ports fees for docking should use discounted cash flow analysis. Mostly rated as AAA because they will have $ to pay off the loan

2.      COPS Certificate of Participation

Cities go to private banks to get the loan so they don’t have to go through a private referendum

Interest rates at the GO bonds—not high enough riskier

Why? School boards culture will not let them default/ default taint is bad so it is rare and atypical

Payback with special tax revenue/ $ coming out of general revenues

Bond for schools, super markets? EPA clean up/superfund?

Which types are okay?

3.      Tax Reform Act of 1986- when taxes are too much benefit to the private sector

1.      decreasing federal revenues

2.      fiscal debt availability too much competition for government borrowing rates where increasing

people interest rates limited and credited other types of bonds with state port tax-free

tax rates by the broadly defined tax base.

4.      Tax increment financing

Development districts—create districts to do its own improvements in community development districts, they pay taxes, not in theory don’t pay??

Subdivisions of cities to pay its own repairs, then after the “turn around” it goes back to parent/city

The city may think they are losing part of a tax rate, but with quasi-government and a concentrated effort to do economic development for a subdivision of a city

5.      Make a buck become a bond underwriter

How are they paid?

The general obligation must go to the management of funds sources and auction off

Revenue bonds are negotiated

Bids 5to10,000 or more

GO put an add in the bond bidder through a public journal

Revenue bonds most sold directly with bidders (insurance agencies)

Underwriters take 1to4 cents to everything sold. Wachovia /Merrill Lich /City Group

They accept the risk from cities and turn it into profits from reliable individual investors

6.      Municipal bond insurance --Good Stocks to have

AMBAC/ MBIA are municipal bond insurance which are good stocks to have because they are very secure with a steady stream of principal being paid back by cities. Insurance to make sure they get money in a timely manner

Cash Management

 Cash budget vs. annual budget approves with steady stream throughout the year

1. Public/private income comes in LUMPS i.e. property taxes are received for 4 months within FL and must use the monies throughout the year
2. The government does not do risky things with its investments. If they have cash sitting around, can’t invest it into the stock market
3. Cities must invest in cash risk-free investments with grade money needed to be there as soon as possible = pas as late as possible
4. Orange County, Cali treasure invested funds and the city when bankrupt. The state of Cali had to interview and take care of the debt repayment of the city.
5. Lock Box payment for bills directly deposited to make sure you capitalize on the money