Municipal Bonds

Ever since the Department of Defense shut down George Air Force Base in 1992, the high desert town of Victorville has struggled to reinvent itself. The city encouraged massive residential and retail development. It invested in two new power plants. And it moved to transform the shuttered base into a thriving cargo airport. But those efforts have mostly backfired, creating financial headaches and scandal for the city of 115,000 residents, perched 90 miles from Los Angeles on the edge of the Mojave Desert.

Ever since the Department of Defense shut down George Air Force Base in 1992, the high desert town of Victorville has struggled to reinvent itself. The city encouraged massive residential and retail development. It invested in two new power plants. And it moved to transform the shuttered base into a thriving cargo airport. But those efforts have mostly backfired, creating financial headaches and scandal for the city of 115,000 residents, perched 90 miles from Los Angeles on the edge of the Mojave Desert.

An Internal Revenue Service ruling, vindicating a municipal bond market whistle-blower, means that the Los Angeles Metropolitan Transportation Authority and more than 100 local agencies nationwide will have to pay the federal government as much as $2.5 billion within a year or risk even more dire consequences.

The Securities and Exchange Commission charged Illinois with securities fraud, accusing the state of misleading municipal investors over pension fund obligations, the regulatory agency said Monday. An investigation determined the state failed to inform investors about the impact of problems with its pension funding schedule, the agency said. Between 2005 and 2009, Illinois sold more than $2.2 billion in municipal bonds but neglected to tell investors that pension obligations were underfunded, the agency said.

Warren Buffett may have doubts about municipal bonds, those boring tax-exempt investments that governments need to finance their operations and projects. The Wall Street Journal reported Tuesday that the famed investor's Berkshire Hathaway Inc. recently wound down a large bet on muni bonds. The decision to end credit-default swaps insuring $8.25 billion in bonds is seen as a sign "that one of the world's savviest investors has doubts about the state of municipal finances," the Journal reported.

Some of Montebello's municipal bonds have been downgraded to junk status, another blow to a city already teetering on the edge of insolvency. The interim city administrator has predicted that the general fund will run out of cash if the city does not secure a loan by the end of September. The move by Moody's, a major credit rating agency, will make it more difficult for Montebello to get a loan, experts told city officials. Moody's downgraded its rating of the city's 2000 series certificates of participation by two notches to Ba1, meaning that the general fund's long-term obligations are no longer viewed as investment grade.

In the spirit of perestroika, the Soviet Union hopes to borrow from the United States a financing technique first used in the early 1800s in New York--municipal bonds. Officials in the Soviet Union, where no bond market exists, in November signed an agreement with New York economic consultant Jeffrey Sachs to explore ways to use long-term debt to finance infrastructure, environment and housing needs.

T. Rowe Price & Associates tracks the yields of 20 California municipal bonds and the Bond Buyer index of 40 national issues. Bond Buyer 40-bond index: Friday: 5.26% California index: 5.16% Five Widely Held California Bonds: *--* Yield Yield Issue Coupon Maturity May 15 Friday Calif. general-obligation 10-yr. (generic) (generic) 4.60% 4.55% Calif. general-obligation 20-yr. (generic) (generic) 5.19 5.16 San Joaquin Toll 5.375% 1/15/29 5.32 5.23 Calif. public works lease rev. 6.00 10/1/14 4.75 4.

California Treasurer Bill Lockyer has asked the state attorney general to investigate whether conflict-of-interest laws were broken at one of the state's biggest issuers of municipal debt. Lockyer's request follows the release of a report by the State Audits Bureau that said the compensation arrangements at the California Statewide Communities Development Authority raise concerns about possible violations of the Political Reform Act. The law prohibits public officials from making, participating in or influencing decisions that affect them financially.

Warren Buffett may have doubts about municipal bonds, those boring tax-exempt investments that governments need to finance their operations and projects. The Wall Street Journal reported Tuesday that the famed investor's Berkshire Hathaway Inc. recently wound down a large bet on muni bonds. The decision to end credit-default swaps insuring $8.25 billion in bonds is seen as a sign "that one of the world's savviest investors has doubts about the state of municipal finances," the Journal reported.

The U.S. Securities and Exchange Commission wants investors to know more about bonds issued by cities, states and other entities. In a 150-page report issued Tuesday the SEC recommended a host of legal, regulatory and industry changes that would shed more light on the $3.7-million market used to finance roads and schools as well as hospitals and private development projects. Municipalities often fail to continue disclosing their financial conditions after issuing bonds to finance projects.

San Bernardino is going bankrupt. Stockton is defaulting on its debt. And other cities are grappling with similar financial strains. That wouldn't seem to be a good environment for municipal bond mutual funds, but they keep rallying anyway. The average long-term California muni fund notched a total return of 2.5% in the second quarter, according to fund trackerMorningstar Inc.Muni bonds in the state are up 6% so far this year and 13.4% over the last 12 months. Total return includes interest payments and appreciation in the value of the underlying bonds.

The declining number of U.S. smokers is proving hazardous to the health of municipal bonds backed by payments from cigarette companies under a 1998 settlement with 46 U.S. states, Moody's Investors Service said. The rating company projected that almost three-quarters of the $20.4 billion in tobacco bonds it grades will default if cigarette consumption declines 3% to 4% annually. Tobacco bonds that have a high ratio of outstanding debt to annual payments from the companies, long maturities and low cash reserves are vulnerable to lower smoking rates, Moody's said today in a report.

Let's please resist the temptation to feel smug about Stockton. California's great inland river-port city and Central Valley agricultural hub filed for Chapter 9 bankruptcy protection Wednesday after a series of bad bets and a run of bad luck. No doubt observers in other cities and states, and from various spots in the political spectrum, will be ready with pointing fingers and easy ideologically-based explanations: It was greedy public workers and their unions who brought us to this point.

A Beverly Hills financial firm and its founder pleaded guilty to federal criminal charges that they defrauded government agencies by steering investment contracts to firms that paid them kickbacks. David Rubin, 50, and his company, CDR Financial Products Inc., were accused of running sham auctions for government agencies looking to invest money raised through municipal bond offerings. The contracts were awarded to favored firms that secretly paid kickbacks to CDR, not always the firm offering the highest returns, the government alleged.

Bell's residents already pay one of the highest property tax rates in Los Angeles County despite being one of its poorest cities. Now, homeowners are discovering that their taxes are about to go up again to pay for a park that will never be built. It's one more legacy of the Robert Rizzo era, even though residents thought they had turned a page when the former city administrator was taken away in handcuffs, the last of those accused in a sweeping public corruption scandal were voted out of City Hall, and a new City Council was sworn in. The tax increase is needed to pay back $50 million in bonds issued by the city; it came as a surprise to homeowners who hadn't noticed when the former City Council quietly approved a resolution to increase the property tax rate for three consecutive years.