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Economy puts municipal bonds, projects in a bind

Governments and schools are delaying their plans or paying higher interest rates to attract investors.

October 17, 2008|Kim Murphy | Times Staff Writer

REDMOND, ORE. — As flocks of disenchanted Californians streamed across the border in the last decade, drawn by central Oregon's crystal-clear skies, ski slopes, small-town charm and affordable homes, Redmond has been hastily assembling portable classrooms and scrambling to build another high school.

Voters here are notoriously testy about new taxes, though, and it wasn't until May that they approved a $110-million bond issue to build a high school on the south side of town, along with an elementary school.

The district was about to sell the bonds to pay for the project Sept. 24, when the market for municipal bonds all but disappeared. Amid the global financial meltdown, the market for school bonds suddenly looked like the Monday after a bad garage sale: plenty of merchandise left, no buyers.

No buyers? For years, cities, counties and school districts have counted on the comfortable predictability of municipal bonds, whose tax-free earnings and bedrock safety rooted in local government treasuries made them attractive for cautious investors. They have been the equivalent of $400-billion-a-year, low-interest Visa cards for governments looking to build airports, courthouses, schools and industrial parks. States such as California routinely issue revenue anticipation notes to keep their coffers full before tax receipts come in.

But as Redmond School District officials and other government bodies have learned over the last few weeks, trying to sell bonds these days -- with escalating interest rates and investors wary of commitment -- is an enterprise restricted to the bold, the rich or the desperate.

St. Louis has had to postpone selling bonds for airport improvements; Morgan County, Ala., is putting off plans for a new industrial park; and Broward County, Fla., is likely to delay the sale of $170 million in bonds for sewer and water line renewals. A new rental car facility at the Port of Seattle has also been put on hold.

"I've been in my position for 12 years, and I've never seen anything like it," said Kent County, Mich., Treasurer Kenneth D. Parrish, who is also president of the National Assn. of County Collectors, Treasurers and Finance Officers.

'It's not over'

California succeeded this week in selling $5 billion in short-term notes to keep the government afloat in cash, after weeks of alarm that the state would run out of money by the end of the month. But the state is paying higher-than-normal interest rates, and though investor demand was unexpectedly high, compared with the bidding wastelands of the last few weeks, analysts said it was too early to celebrate.

"It's certainly good that California was able to get this done, but it's not over. The market is still quite tied up in the credit liquidity crunch," said Maud Daudon, chief executive of Seattle-Northwest Securities Corp., which markets municipal bonds for governments.

Kent County last month refinanced bonds for drainage walls on the Grand River and was stuck with a nearly overnight hike in interest rates that could cost the county $750,000 over 10 years. On what was to have been a routine package of delinquent tax anticipation notes, the county saw its interest rate jump from 2.5% to 10%.

In Vancouver, Wash., a $115-million bond package issued in 2004 to build a not-for-profit hospital addition also got caught in the escalation this year. Its rate when it came up for scheduled revaluation rose from about 2.5% last year to 5%.

"What happened was the market just froze up for these securities. No one was interested in them," said David Willie, chief financial officer at the hospital, Southwest Washington Medical Center.

Municipal Market Advisors, a Massachusetts-based bond research and analysis firm, estimated that $10 billion in planned bond financing was delayed during the last two weeks of September, with the total over the last year now reaching $100 billion in postponed projects.

Those cities and counties forced to go to market now -- usually because of construction deadlines or contract penalties for delay -- may be facing an increase of 25% in overall interest rates on bonds with a 10-year maturity compared with a month ago, said Municipal Market CEO Thomas G. Doe.

"People can get to market," Doe said. "It's just a shockingly high number."

Municipal bonds have normally been attractive for those willing to commit to a long-term maturity because their potential for tax savings substantially increases the effective earnings to investors.

Over the last five years, Wall Street financiers also discovered a way to package the long-term bonds into structured investment vehicles, similar to how subprime mortgages had been packaged, that allowed money market funds to buy them and turn them over relatively quickly, earning speedier returns.

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