Chapter 14- Municipal Bond Basics Flashcards
Municipal Bonds are issued by…
State and local government entities (schools, towns, cities, counties, authorities and the state)
Three types: General obligation (GOs), Revenue, and Notes
General obligation (GOs) Bonds
AKA Full Faith and Credit Bonds
Backed by taxes and the taxing authority of the municipality
Issued for facilities that will benefit the public (schools, parks, city hall, etc)
Must first be put on a ballot and vote on by the public
Statutory debt limits
Revenue Bonds
Primarily backed by user charges (tolls bridges airport fees). can also be backed by lease payments, licensing fees (hunting fishing etc) and special taxes (ie. cigarettes, and liquor taxes)
Backed by protective covenant
There needs to be a flow of funds provision
No voter approval needed
Must have a feasibility study completed to determine self-stability
Not statutory debt limit
Municipal Notes
Short term maturities
Used for interim or temporary financing
Most common are TANs, RANs, TRANs, and BANs
Tax anticipation note
Revenue Anticipation note
Tax and revenue anticipation note
Bond Anticipation Note
General Obligation vs. Revenue bond risk level
GO bond is safer since they are backed by taxes and not users charges (both are safe investments GO is just safer)
Municipal Bonds are at most risk from
Legislative risk. If legislators removed tax exempt status of municipal bonds there would be a large impact
Benefits of Municipal Bonds
Interest is exempt from federal income taxes
Interest may be exempt from state and local taxes
Principal and interest payments are fixed
Wide rage of issuers and maturities
Geographic diversification
State and Local GO income
State is typically through sales taxes and income tax
Local is typically through property taxes
Real Estate has two values
Market and assessed values
taxed on assessed value on mills ($0.001)
Limited Tax Bonds
AKA Limited Tax General Obligation Bonds
GOs Bonds that put a statutory limit on the tax rate that may be levied
These bonds require voter approval like all GOs
GO Credit Analysis look at the following to consider a GO bond
Outstanding Debt
Per-Capita Debt
Debt to Value Ratio
Debt to Property Value Ratio
Character of Economy
Tax Collection Records
Property Valuation
Tax Rates
Unfunded Liabilities
Operation Deficits
Attitude of municipality towards debt
Population demographics
Budget Practices
Important when evaluating different municipality bonds
For obligation bonds - debt to value ratio is important
Budgetary practices are also important
for revenue bonds - debt servicing coverage is important
Feasibility studies, covenants and competing facilities are also important
Direct debt vs overlapping debt
Direct debt is debt for which the municipality is solely responsible
Overlapping debt is debt for which more than one municipality is responsible for. Always at the local level and always supported by taxes
Never have overlapping debt at the state level, only local level
Revenue Bonds have become increasingly popular in recent years because…
Does not require a vote
does not count towards constitutional or statutory limit on debt
not payable thru taxes and will not increase taxes at a later date and time
Double barrel bonds
When a bond is back by revenues as well as the full faith and credit of the municipality it is called a double barrel bond
safer then revenue bonds
Indenture aka
Bond indenture or Trust indenture
Describes the rights and duties of the municipality as well as the trustee
The trustee represents the bond holder
Includes the reserve fund needs and the rate schedule
prepared by the bond council not the underwriter or syndicate
Protective Covenants
Maintenance Covenants - Require the facility is kept in good working order
Debt Service / Rate - Requires the issuer to charge a fee that is sufficient to meet all financial requirements plus a margin of safety (10% or higher)
Insurance - Insurance must be maintained on the facility. this will be included with a catastrophic call covenant in case there is a major insurance claim and the project is condemned.
Financial report covenant
consulting covenant
Anti discrimination covenant
Additional Bond Covenant - Closed end means they can not issue additional bonds
Open end means they can issue additional bonds
Gross Revenue flow of funds order
Services bond principal and interest first
Then services maintenance of the facility
Not a good structure
Net revenue Pledge bond flow of funds
O- operations and maintainence fund
B - bond service account for pricipal and interest
D - Debt Service reserve or sinking fund
R - Reserve maintenance fund for Renewal and Replacement (irregular maintenance)
S - Surplus fund for excess revenues
OBs are DR.S
Credit Worthiness of a Revenue Bond
Purpose for which they are issued
competing facilities
coverage ratio
rate covenant
Funded (or Capitalized) Interest
Additional capital used from the issuance of the bond in order to pay interest t the bond holders during the construction of the facility before it is generating revenue to pay them itself
New Housing Authority bonds and Public Housing Authority bonds (PHAs) are the
bonds issued to local housing authority (low income of subsidized housing)
Interest and principal is paid from rents collected (primary revenue)
Backed by Public Housing administration, which is a department of HUD. This makes them the only muni bond backed by the US government
Safest form of revenue bond
Special Assessment Bonds
principal and interest is payable from an assessment on the benefitted property
Special Tax Bonds
Paid for from taxes paid from excise (luxury) taxes levied on purchases of certain products like alcohol and tobacco
A new tax was put on cigarettes to pay for the construction of a new cancer research hospital
