Financial Issues - Think Biblically about your finances.

Fri, 5/29/2015

More States Issuing Municipal Bonds


. . . but the bonds have taken on a new look.



This year promises to be another banner year for municipal bond issues. We went many years with few municipal bonds being issued. They became harder and harder to get . . . but now they are becoming a bit more attainable if you are interested in tax-free income.


However, there is a problem. In the past, local governments sold municipal bonds to fund projects like bridges, schools, hospitals, sewage treatment, and water plants. In other words, there were hard assets backing the sale of the bonds. Not anymore.


Most municipal bonds being issued seem to be just refinancing the current debt of these states at cheaper levels. The municipal bonds being issued this year are 60 percent above the same period last year according to data from Securities Industry and Financial Markets Association (SIFMA). But SIFMA's information also makes it clear that capital has fallen 4 percent compared with last year, whereas year-to-date financing volume is up 122 percent. Most of the bonds being issued this year have been used primarily to finance debt. Buying a municipal bond these days offers the same tax benefit as before, but there is no asset backing it up. The only thing backing it up is more debt from a particular state or a municipality within the state.


States are jumping on the opportunity to refinance their debt. You could say, "Yes, but the underlying debt involved is still in a hard asset." That would be true except for this: the refinance often includes a higher value (based on what they say isappreciation) of the underlying asset than when it was issued.


Are you wondering why we are not seeing road construction and potholes being fixed and new highways being completed? Simply because the states have no money. They have so much debt to pay off that they cannot afford to issue bonds that will finance projects worthwhile for the people of that state. If they sold bonds for those needed projects, along with issuing bonds to finance their debt, they would probably fail to get both financed. They have to pick one or the other . . . and their priority is to help finance current debt-not paying off debt but restructuring it while creating a bit more debt on the asset they originally financed.  


Yes, municipal bonds still offer the great tax benefits, but remember . . . they are not the same kind of municipal bonds being sold just five years ago.  


Financial Issues with Dan Celia

Fri, 5/29/2015
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