Municipal BondsSlide 2What Is a “Muni”?Original FunctionAdditional FunctionRead My Lips…No TaxesTypes of “Munis”GO BondsGO Bonds (continued)Slide 10Revenue Bonds“Double Barrel” BondsAppropriate UsesAppropriate Uses (cont.)Investment RiskBond RatingsBonds For the WealthyTax vs. no TaxTax vs. no Tax -cont.Slide 20Is It Fair That the Wealthy Benefit the Most?Municipal BondsMunicipal BondsA Brief ExplanationBy Rob FrenchA Brief ExplanationBy Rob French“Public goods are those which are in everybody’s interest to have, but in no one’s interest to provide.” -The Economist, April 23rd “Public goods are those which are in everybody’s interest to have, but in no one’s interest to provide.” -The Economist, April 23rdWhat Is a “Muni”?What Is a “Muni”?•Municipal bonds are instruments of debt issued by civic entities such as states, cities, and counties that are used by the local or state government to temporarily fund short-term operating expenses, permanently fund long-term capital expenditures, and fund specific projects.•Municipal bonds are instruments of debt issued by civic entities such as states, cities, and counties that are used by the local or state government to temporarily fund short-term operating expenses, permanently fund long-term capital expenditures, and fund specific projects.Original FunctionOriginal Function•Historically used to finance services, projects, and infrastructures that benefit the public directly.–Schools–Bridges–Roads–Sewer–Water facilities–Fire districts–Airports–Port authorities•Historically used to finance services, projects, and infrastructures that benefit the public directly.–Schools–Bridges–Roads–Sewer–Water facilities–Fire districts–Airports–Port authoritiesAdditional FunctionAdditional Function•Tax-exempt securities are frequently used for non-traditional purposes that primarily benefit non-governmental organizations and individuals.–Commercial and industrial businesses–Residential home mortgages–Housing developments–Hospitals–Convention centers–Sports stadiums–Industrial pollution abatement programs. •Tax-exempt securities are frequently used for non-traditional purposes that primarily benefit non-governmental organizations and individuals.–Commercial and industrial businesses–Residential home mortgages–Housing developments–Hospitals–Convention centers–Sports stadiums–Industrial pollution abatement programs.Read My Lips…No TaxesRead My Lips…No Taxes•Although the tax reform act of 1996 created classes of bonds that are subject to federal income tax, most municipal bonds are still TAX FREE!•Although the tax reform act of 1996 created classes of bonds that are subject to federal income tax, most municipal bonds are still TAX FREE!Types of “Munis”Types of “Munis”•Although there are many types, municipal bonds are generally classified according to the source from which the issuer intends to reimburse bond payments.–GO bonds–Revenue bonds–“Double Barrel” bonds•Although there are many types, municipal bonds are generally classified according to the source from which the issuer intends to reimburse bond payments.–GO bonds–Revenue bonds–“Double Barrel” bondsGO BondsGO Bonds•General Obligation bonds or “GO bonds” are unsecured bonds that are backed by the "the full faith and credit" of the local or state government that issued the bond.•General Obligation bonds or “GO bonds” are unsecured bonds that are backed by the "the full faith and credit" of the local or state government that issued the bond.GO Bonds (continued)GO Bonds (continued)•The issuer can employ any means available to guarantee payments.–Sell property–Raise taxes•The issuer can employ any means available to guarantee payments.–Sell property–Raise taxesGO Bonds (continued)GO Bonds (continued)•Projects funded by GO bonds generally do not produce revenue.–Building or remodeling of schools–Roads (not toll roads)–Bridges•Projects funded by GO bonds generally do not produce revenue.–Building or remodeling of schools–Roads (not toll roads)–BridgesRevenue BondsRevenue Bonds•Repaid by the money the project earns from tolls, fees, bills, tickets, or other services.–Housing developments–Hospitals–Convention centers–Sports stadiums•Repaid by the money the project earns from tolls, fees, bills, tickets, or other services.–Housing developments–Hospitals–Convention centers–Sports stadiums“Double Barrel” Bonds“Double Barrel” Bonds•Municipal bonds that are both general obligation bonds and revenue bonds.–Drinking water–Wastewater treatment–Toll roads•Municipal bonds that are both general obligation bonds and revenue bonds.–Drinking water–Wastewater treatment–Toll roadsAppropriate UsesAppropriate Uses•The state of Oregon relies on specific factors to justify issuing debt.–To distribute the expenses for a project to the individuals that will benefit from the project over its useful life rather than requiring today’s taxpayers to pay for future use.–In times of inflation, future reimbursement of the debt is assisted by the fact that the money used to repay the debt at maturity will not be as valuable.•The state of Oregon relies on specific factors to justify issuing debt.–To distribute the expenses for a project to the individuals that will benefit from the project over its useful life rather than requiring today’s taxpayers to pay for future use.–In times of inflation, future reimbursement of the debt is assisted by the fact that the money used to repay the debt at maturity will not be as valuable.Appropriate Uses (cont.)Appropriate Uses (cont.)•The state of Oregon relies on specific factors to justify issuing debt.–To help purchase needed equipment or improve a facility to become more liquid. –With extra available cash, general fund revenues can be used for operating expenses and other less expensive needs.•The state of Oregon relies on specific factors to justify issuing debt.–To help purchase needed equipment or improve a facility to become more liquid. –With extra available cash, general fund revenues can be used for operating expenses and other less expensive needs.Investment RiskInvestment Risk•Typically considered to be safe, as it is unlikely that the government will declare bankruptcy.•Some recent exceptions include Washington State and