After August outflows, the municipal bond market turned bullish once again in September with four weeks in a row of bond fund inflows – and the last week more than doubling the inflows of the previous week. The month also saw a couple of true superlatives.

Biggest municipal bond fund inflow in a year 

Municipals benefited from a September flight to safety as investors abandoned stocks. Tax-exempt funds gained $1.9 billion in September, the best monthly municipal inflow since September 2010. Investors continued the $29.3 billion stock mutual fund outflow in August by withdrawing roughly $4 billion more in the first three weeks of September. 

Best municipal bond performance since April 2009

The municipal fund flow reversal was driven largely by the ongoing search for better yields. 10-year tax exempt municipals beat comparable Treasuries for five consecutive weeks – the best performance since April 2009.

Municipal meltdown prediction failing to materialize

Another contributing factor to recent municipal bond bullishness was more favorable media attention, as the apocalyptic predictions of a municipal meltdown are proving to be wildly inaccurate. Questionable math predicted hundreds of billions in municipal bond defaults this year and that has not occurred. As we mentioned in our Mid-Year Municipal Credit Update, less than $10 billion materialized as of June 30th. Actual defaults continue to be a small fraction of those erroneously foreseen. 

Regardless of the direction of fund flows or fickle media attention, we always encourage our clients to “know thy bonds” through independent credit research. Please contact your investment specialist if you have any questions on these latest market developments.

Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
September 7, 2011 


The prevailing August municipal bond market story was the threat posed by the U.S. rating downgrade. The improving state tax situation and the search for better yields also led municipal bond market news in the past month.

Wholesale municipal rating downgrades unlikely

As we wrote in our market update The Effect of a U.S. Rating Downgrade, the downgrade did not surprise us. Internally, we have discussed a possible downgrade of the U.S. and its impact on other rated municipal issuers for some time. The downgrade of the U.S. was unprecedented and as such it is impossible to predict any outcome. However, in the near term, we do not believe there will be wholesale rating downgrades of municipal issuers excepting those issues either directly secured by U.S. Treasury issues (pre-refunded and escrowed to maturity issues) or indirectly secured by government agencies (such as certain housing and student loan issues).

This latest development leads to a glaring question. How do market participants interpret credit ratings? Therein lies the bottom line we have believed for a long time – at the outer edges, municipal bond credit analysis is as much an art as it is a science. Independent municipal bond credit research matters now more than ever.

State revenues improve for sixth quarter, fastest growth in six years

State revenue collection continued to improve in the second quarter of 2011 and boosted balance sheets. The Rockefeller Institute’s report on preliminary data from 46 early reporting states shows collections from major sources up 11.4 percent in the second quarter vs. the same quarter last year – the strongest year-over-year growth since the second quarter of 2005. Tax collections have now been growing for six consecutive quarters, reversing the trend set by five quarters of declines. Revenues were still 7.8 percent lower than in the same period three years ago.

The strong, continued tax collection growth in 2011 for every state except New Hampshire indicates that the revenue situation is slowly recovering for most state governments. Alaska, North Dakota, Illinois, Nebraska and New York showed the greatest total tax growth – with Illinois up 37.7 percent overall. Most states have closed their books for fiscal year 2011 and preliminary data show 8.4 percent tax revenue growth for the nation as a whole. 

Municipal bond fund outflows signal search for better yields

A new round of outflows from municipal bond funds continued through every week of August. Unlike the municipal bond fund selloff of late 2010 driven largely by credit concerns, this new trend appears to be motivated by investors in search of better yields. As we mentioned in our Mid-Year Municipal Credit Update and other publications, municipal market yields are transitioning toward specific idiosyncratic issuer credit risk and away from the very homogenous “AAA-insured” interest rate sensitive environment.

While this may unnerve some municipal investors, it is a development that ultimately will reward those that have carefully followed our three pillars of municipal credit research. Investors willing to accept incrementally more credit risk will be compensated with a boost in yield. Additionally, investors in longer maturities will be rewarded for accepting the interest rate risk. 

Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
September 7, 2011 

For more information, please contact your Investment Specialist.

Municipal bond prices continued their upward move during May resulting in lower yields across the maturity spectrum at month end. A calmer tone to our marketplace has set in over the past two months as much of the selling hysteria earlier in the year has subsided.

Bullish market emerges in calm after the storm

This moderating dynamic, coupled with a significantly reduced supply of new issue transactions and lower U.S. Treasury bond yields in recent weeks has resulted in a bullish municipal bond market. June reinvestment demands total a fairly significant sum, so absent a sizable sell off in Treasury bond prices, we expect non-taxable municipal bond indices to maintain much of their year-to-date gains.

State revenues improved for fifth consecutive quarter

Generally, state revenue collection year to date continues to exceed budgeted projections and fiscal situations are improved from last year. The Rockefeller Institute of Government reported that tax revenues rose by over 9% in the first quarter. This is the fifth consecutive quarter of state revenue growth. California, Michigan, Pennsylvania, New Jersey and Texas all recently reported greater than budgeted revenue collection numbers. New York approved its annual budget on March 31st before the beginning of its fiscal year starting April 1st and reduced expenditures by approximately 2.5%. This is the first time since 2006 the state has approved its budget before the start of the fiscal year and the first time since 1995 it has reduced expenditures. 

Liquidity challenges still good for some, bad for others

Market liquidity remains a challenge depending greatly on the idiosyncrasy of the specific credit up for sale. We have discussed this topic at length in earlier publications and do not expect this to change anytime soon. Its presence will continue to create problems for certain investors and opportunities for others. As always, we believe that diligent, independent credit research is the key to knowing and capitalizing on the difference.

Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
June 2, 2011 

For more information, contact your Investment Specialist.

The municipal bond market through the first three months of 2011 was particularly choppy, culminating in March with one of the most muddled trading environments we’ve experienced in quite some time. To discuss March’s performance, it’s important to examine the events that led us to this point.

As a result of a favorable price-to-yield relationship, municipal mutual funds experienced a net cash inflow of $32.2 billion during the first 10 months of 2010. This increase can be primarily attributed to lackluster returns in other asset classes where investors have historically parked cash during uncertain equity markets.

More interesting is what occurred during the next four months that drove supply and demand to such an imbalance. Net cash outflows from municipal mutual funds totaled $37.7 billion from November 2010 to February 2011. This was caused by three main events:

  • Build American Bonds program expiration. With the expiration of Build America Bonds, issuers accelerated debt issuance plans in order to receive the federal subsidy. Subsequently, this saturated the market, outpaced demand, and eroded prices.
    • New long-term issuance spiked in October to December 2010 to $122.5 billion, then plummeted to $48.2 billion between January and March 2011.
  • Media frenzy. Exacerbating supply problems was the near constant media attention.
  • Tax cut extension. Extension of tax cuts, which simultaneously reduced the need to shelter income and drove less muni-focused asset managers to seek more absolute return strategies in the equity markets given the perceived negative sentiment and risk/return imbalance in municipals.

From the demand side, investors remained bearish, given the negative media coverage, especially as budgetary deficits, pensions, and healthcare costs continued to dictate market opinions. However, the real underlying factor was that historically investors had a perceived level of protection buying a non-rated issuer as long as it was also wrapped with bond insurance, thereby negating the need for in-depth credit research. Considering the near extinction of highly rated bond insurers, many investors are reluctant to buy lesser known, smaller name issuers over more prominent ones. This dynamic exposes the true imbalance exhibited in March – investment decisions were not being made based on quality.

This paradigm was also observed through significant pricing variability in which price discovery for short end, highly-rated issuers was relatively accurate, while longer maturities of lesser known names (regardless of rating), generated fewer and wider spread bids.

This convergence of factors can be seen in the average monthly price, which fell from $100.77 in June 2010 all the way to $92.08 in January 2011, with corresponding yield-to-maturity of 5.14% to 5.75%, respectively.

Justin Formas, CAIA
Director, Credit Research
April 11, 2011

For more information, contact your Investment Specialist.

Municipal bond yields ended the month at higher levels than where they began the month, resulting in a negative monthly total return number for most portfolios. This decline in portfolio value was more pronounced on higher duration portfolios and bond funds as you would expect.

The higher municipal bond yields resulted from:

  • The continuing sell-off in the U.S. Treasury bond market 
  • Massive redemptions of municipal bond funds 
  • General apprehension of municipal credits

The continuing unease that currently pervades the municipal marketplace was fueled in part by Congressional discussions on the merits of introducing legislation that allows states to file for bankruptcy. New issue volume declined significantly and this factor prevented prices from falling further and, in fact, contributed to a rebound in bond prices over the final 7 to 10 days of the month. The run up in bond prices at the end of the month, however, was not enough to offset the earlier losses.

The market remains volatile in the New Year. Liquidity is generally thin and sporadic – depending greatly on the specific issue out for bid, the almost daily rumors out of Washington D.C. and apocalyptic predictions about municipal bonds. Expect more of the same until we have some clarity on possible legislation affecting the marketplace. These factors make the municipal bond market attractive for income oriented portfolios, but challenging for total return investors. 

Bankrupt Vallejo, California continued its march towards solvency and filed a restructuring plan with the court overseeing its Chapter 9 proceedings. It is a complicated plan without question, and certain creditors will have to absorb different percentages of haircuts on their claims. Municipal debt holders, however, are treated favorably per the plan and that is a significant development in our view.

Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
February 2,2011

For more information, contact your Investment Specialist.


It’s important to frame the developments in the broader financial markets over the last six to twelve months before discussing the municipal market’s continued ability to absorb issuer-specific credit events. Roughly a year ago, the United States’ triple-A credit rating was downgraded by Standard & Poor’s. This triggered one of the most pronounced and initially counterintuitive flights to quality in years. The Treasury rally continued to gain steam as the European debt crisis dominated market concerns.

To put these events into perspective, 10-year Treasuries were yielding between 260 and 270 basis points (bps) in early August 2011. During the first week of August 2012, yields had fallen roughly 100 bps. Municipal bond yields have followed suit, despite supply being up 65% year-over-year, albeit two-thirds of which were issued for refunding purposes.

Positive municipal market indicators 

Today, municipal bond yields are also at near historic lows. The Thomson MMD scale shows 10-year triple-A bonds yielding 166 bps, down 97 bps from a year ago. Even more telling is the muni-treasury ratio. A year ago the 10 year muni-treasury ratio was approximately 96%. Last week that figure jumped to the 113% range – suggesting municipal bonds are an attractive allocation compared to Treasuries. Furthermore, broader market indicators show how well the municipal market is able to compartmentalize headline risk related to municipalities experiencing financial distress.

Low historic municipal defaults

Municipal Market Advisors (MMA) is an independent municipal research firm that produces market commentary. Recently the firm began reporting a weekly default trends article. In their July release, they reported that “par affected by first time defaults this year is just 0.02% (est. $750 million) of the outstanding municipal market; for the cumulative amount of par affected by first time defaults since 2010, just 0.28% (est. $10.36 billion) of the outstanding market.” As of July 31st, the report showed a total of 42 issuers experiencing first time payment defaults versus 68 and 83, over the same period in 2011 and 2010, respectively. The most fascinating statistic the report presents is that nearly 40% of the Chapter 9 bankruptcy filings since 2007 have occurred in California (8) and Nebraska (11).

Political will metric now critical

In last year’s mid-year credit review, we highlighted the cost of credit default swaps on 10-year bonds of three states: California, Illinois, and New York. We pointed out that when a state or municipality shows a willingness to raise taxes or curb spending, the market responds and insurance against a possible default becomes less expensive. The same can be said when a state or municipality shows an unwillingness to make responsible decisions. The cost of insurance on a 10-year State of California bond was roughly 180 bps in August 2011. On August 6th, 2012, the cost was 240 bps. Similarly, insurance on a 10-year State of Illinois bond cost just less than 200 bps in August 2011, but 282 bps in August 2012.

Willingness to honor financial obligations is perhaps the latest development in municipal credit. Historically, most distressed municipalities suffered from projects gone awry. Certainly there are examples of those types of issuers today, but more and more the municipal market is faced with issuers damaged from the compounding effects of poor financial management. Long before certain administrations contemplated their willingness to pay bondholders, they demonstrated an unwillingness to restore structural balance to operations and sensibly approach labor negotiations. The ex post nature of the evidence is what makes incorporating “willingness to pay” into municipal market analysis such a considerable challenge. The concept itself is intangible, can change as quickly as administrations change, and frequently requires investors to predict whether elected officials will opt for fiduciary responsibility or short term self-preservation. The solution for bondholders, even in light of attractive buying opportunities, is to remain highly selective and continue thorough due diligence practices.

Renewed debt ceiling debate looms 

In the near term, or until economic conditions for municipal governments improve, expect pockets of distressed municipalities to take their chances in bankruptcy court or with some form of state fiscal oversight committee, where applicable. Moreover, there are two events to watch closely as it pertains to municipal credit quality – the mandatory spending cuts at the federal level and revisiting of the US debt ceiling. Interestingly, the dialogue and fiscal conditions surrounding both events exemplifies the struggles occurring at the state and local government level. Governments have bills to pay and services to provide, but have limited resources to do so. The outcome of those events will undoubtedly impact the bottom line for taxpayers and municipal governments alike.

Justin Formas, CAIA
Director of Credit Research
Bernardi Securities, Inc.
August 13, 2012

There have been three municipalities that have either filed or have voted to approve filing bankruptcy in California in the past year: Stockton, Mammoth Lakes and most recently, San Bernardino. Stockton and San Bernardino went bankrupt due to the “usual” circumstances, they overspent or over-promised services and benefits to their citizens and employees (current & retired) and when the economy slowed, they could not adjust in time. Mammoth Lakes’ filing was due to a $43 million judgement ruling against the city awarded to a developer.

We suspect these filings will not be the last and we remain very wary of California credits. But let’s put things into perspective by viewing the three bankruptcy filings within context of the entire California municipal bond market. There are 58 counties in California, there are 478 cities and towns, 72 college districts, 977 school districts = 1,585 municipalities; Add to that the numerous park districts, community redevelopment districts, fire protection districts, library districts, water utilities, sewer utilities, electric utilities, etc. and you see that 3 bankruptcy filings out of 2000+ municipal entities is about 1/10th of 1-percent, which is not far off from the historical norm.

Could the three become many as municipalities seek an “easy” solution to their problems? According to a recent article from CNN-Money, Chris Hoene, research director at the National League of Cities was quoted as saying, “Most cities are either passing through or over the worst of the economic downturn and should start recovering in the near future. Sales taxes, for instance, are recovering in most locales”. The bankruptcies are “a sign of short-term strife,” he said. “But it’s also a sign they’ve hit bottom.”

While most of the previous comments are specific to California, here are some figures about the improving health of State revenues in general: According to Rockefeller Institute research and Census Bureau data, State tax revenues grew by 3.6 percent in the fourth quarter of 2011, marking the eighth consecutive quarter that states reported growth in collections. The Rockefeller report goes on to state, “Overall state tax revenues are now above peak levels that came several months into the Great Recession. In the fourth quarter of 2011, total state revenues were 3.0 and 7.4 percent higher than during the same quarters of 2007 and 2008, respectively.”

We hope that you find this information to be helpful and as always, if you have any questions, please contact your Bernardi Securities Investment Specialist.


Jeffrey D. Irish
Vice President

Justin Formas, CAIA
Director of Municipal Bond Credit Research

Score one for bondholders. 

A federal judge ruled in June that Jefferson County, Alabama could not reduce debt payments while in bankruptcy in order to spend more of the system’s net operating revenues on its aging sewage system. 

County’s Orwellian claim at odds with municipal market

In its losing argument, the county claimed future capital expenditures were, in fact, “necessary operating expenses” and it was entitled to hold back significant portions of its net operating income for these operating expenses rather than apply them to current debt service payments as called for in the bond indenture. The county’s claim is at odds with most municipal bond lawyers’, investors’ and market participants’ understanding of the law and contrary to decades of historical precedence.

The federal judge ruled: “operating expenses as determined under the indenture do not include (1) a reserve for depreciation, amortization, or future expenditures, or (2) an estimate for professional fees and expenses.” In other words, the Judge ruled any available income after covering the system’s current operating expenses (i.e. salaries, electric bill, etc.) must be applied to debt service payments. That is how the indenture (bond contract) reads – this is not a complex issue.

From the outset, the county’s claim seemed to be Orwellian in nature with an Alabama twist. It was nonsensical – an attempt to redefine basic words, terms and concepts municipal bond market participants have relied on for decades. Fortunately, it was thwarted by the decision of U.S. Bankruptcy Court Judge Thomas B. Bennett and, temporarily, returns a modicum of sanity to the ongoing financial and political fiasco that has engulfed Alabama municipal finance for the last several years. We are hopeful officials in Jefferson County, Alabama will take note of the Court’s decision and begin to deal with their problem in a responsible manner.

We applaud Judge Bennett for his decision relying on Orwellian newspeak to write, “the judge’s decision prevented an ungood (bad) situation from becoming double plus bad (worse)” . 

Follow the leader – Stockton files 

Stockton, California filed for Chapter 9 bankruptcy protection in June becoming the largest U.S. city to seek court protection from its creditors. The current year budget (July 1st) defaults on approximately $10 million in bond payments and $11 million in employee pay and benefits. Salaries and benefits for employees coupled with retiree benefit costs account for approximately 70% of its general fund. Additionally, two bond issues for non-essential, non-traditional public purposes (ice hockey arena and waterfront development projects) increased its outstanding debt approximately $200 million. The city stated its largest unsecured creditor is the California Public Employees’ Retirement System. Debt holders represent the second largest creditor group and mostly, but not universally, enjoy a secured creditor status. 

Let the newspeak, California style, begin.

Three pillars of municipal credit research stand

How do we react to and interpret the evolving events in Jefferson County, Alabama and Stockton, California? How do these events affect our clients’ managed bond portfolios even though none own any Stockton, California or Jefferson County, Alabama bonds?

The first thought that comes to mind is that there will be more situations similar to Stockton and Jefferson County so diligence remains primary.

Secondly, we remind our readers of a municipal bond market truism we believe and have recited many times over many years – municipal finance is mostly a local phenomenon. 

Stockton and Jefferson County face serious financial problems – greatly of their own making – resulting from a series of very bad decisions over many years. That was apparent to anyone paying attention to details years ago. Now, each one of these communities will spend years struggling to right itself financially so that it can progress and prosper in the years ahead. The future success or failure each will experience will depend greatly on decisions made locally and at the state level in the months ahead as these communities move through the Chapter 9 process.

As an example, the Rhode Island state legislature enacted legislation clearly stating the long recognized, priority interest of SECURED BONDHOLDERS in any Chapter 9 filings occurring in its state. This action positively impacts and lowers borrowing costs for local governments across Rhode Island and serves to encourage investors to invest capital in Rhode Island.

California and Alabama, to date, have not taken similar actions. Will they? Until we see some clarity, we remain wary of credits in these states. These will be interesting case studies to follow.

Thirdly, not all communities have behaved like Stockton and Jefferson County – and most, we would argue, have behaved more rationally and responsibly. There are hundreds of well-run municipal governments. There are hundreds of desirable, solid credit public purpose municipal bonds available to investors.

We know this because when we review a municipal issue to determine if it is credit worthy we seek the three pillars of municipal credit research:

1. Essential and public service deal purpose

2. Strong deal structure

3. Solid underlying credit quality metrics

Understand the presence of all three elements does not necessarily guarantee deal solvency, but it is a very good start in our experience. The three elements work in tandem. Weaker underlying credit quality demands heightened deal purpose and deal structure, in our view. 

The municipal bond market is highly diverse. This is one of its greatest strengths. As tragic as the Stockton and Jefferson County stories are, they do not represent the prevailing market narrative. The market’s diversity creates challenges and complications at times. And this creates opportunities for knowledgeable investors.

Please call us if you have any questions or would like a portfolio review.

I wish you and your family a happy and safe Fourth of July holiday.

Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
July 2, 2012 


Renewed questions as to the health of the European Economic Union coupled with news of slowing growth in China, India and here at home sparked a strong rally in the Treasury market this past month. 

Treasuries rally more pronounced 

While this may read like the same “Treasuries rally” market commentary from March or April, the May market move was more pronounced. Treasuries of all maturities were either sold at auction or were traded at record low yields during May. The 10-year Treasury note, for instance, hit a record low 1.45% during the closing days of the month—down from 1.94% on May 1st. That’s an impressive 49 basis point move from an already low level.

Municipal bond yields moved only slightly 

Municipal bond yields moved lower as well during the month, but were less affected. AAA rated, 10-year municipal bonds started May at 1.88% and ended at 1.80%. That relatively small drop-off in yield came despite continued strong demand and rather weak issuance.

Don’t fight the Fed

The Federal Reserve has been actively purchasing longer dated Treasury notes and bonds as part of Operation Twist. This program is set to wind down in June. There is speculation that absent Fed purchases, there are few buyers willing to step in to buy Treasuries at such low yields. Further analysis seems to reveal that these fears may be misplaced. 

At the May 17th auction for instance, Treasury sold $13 billion in 10-year inflation protected securities, or TIPS – and the Fed accounted for only 14% of the orders. Demand for Treasury securities has been very strong with orders covering more than three times total debt sold at several auctions held during the month.

Granted, the “fear trade” could weaken, but it looks improbable yields will spike anytime soon. If rates do spike, the Fed could step back in to drive yields back down. The current mantra of many – “Don’t fight the Fed” – continues to prevail.

Please contact your Investment Specialist if you have any questions on these latest market moves.

Jeffrey D. Irish
Vice President
Bernardi Securities, Inc.
June 6, 2012 


Leap Year means 29 days in February 2012, so there is an extra day of bond news this month.

New issue supply remained modest, demand strong

The new issue supply of municipal bonds remained fairly modest in February and investor demand remained strong during the month. Prices in the U.S. Treasury bond market held up during the month and, as a result, January’s low bond yields continued into February. 

Minimal Greek debacle yield impact amid continued refinancing

Greece’s “non-default” default had minimal impact on domestic bond yields – as did certain threatened and real municipal bond issuer bankruptcies. Many municipalities continue to reduce their costs by refinancing debt at a pace not seen in several years to take advantage of borrowing rates at 40-year lows. Issuers have refinanced more than $16 billion of debt through the first two months of the year. Generally, most U.S. states operating budget constraints continue to ease with several notable exceptions. 

Slightly higher bond yields not expected to climb much in near team

The January jobs report, released in the early part of the month, was stronger than many expected signaling some needed good news for the economy. The positive employment numbers put a little pressure on bond prices forcing bond yields a little higher by the end of the month. This positive development aside for income investors, we do not expect to see significantly higher bond yields in the near term.

Stockton would be largest U.S. city to file for bankruptcy

The City Council of Stockton, California voted last Tuesday to enter mediation with its creditors. It hopes to renegotiate with its creditors in order to avoid filing for bankruptcy. If it files, it will be the largest U.S. city to file for bankruptcy. The City Manager, Mr. Bob Deis, recently noted the city faces a $20 million deficit in the upcoming fiscal year and an unfunded $450 million retiree health care liability. These benefits were greatly expanded in the 1990s around the same time bonded debt levels increased tied to economic expansion projects.

Jefferson County charting new territory for investors and issuers

Jefferson County filed a cross appeal notice that it may challenge the bankruptcy judge’s January ruling that allows sewer revenues to be used for debt service. A total of eight parties are now challenging portions of Judge Bennett’s rulings. Nothing is certain as it relates to Jefferson County, Alabama other than it will be in the news for many months to come and that it is charting new territory for investors and issuers. Bond investors need to watch this one closely to see if debt-holder interests are respected by the courts.

Credit positive developments across the country in February

There were several notable credit positive developments during the month:

  • Detroit – Detroit, Michigan and unions representing firefighters struck an agreement helping the city close its deficit. Municipal employee unions agreed to a number of concessions including a 10% pay cut and health care and pension benefit reductions.
  • California – The State of California’s ratings outlook was revised to “positive” from “stable” by Standard & Poor’s ratings service; the state benefitted immediately from this upgrade when it priced an issue and took orders at a 2.70% yield for 10 years.
  • Dekalb County – DeKalb County, Georgia returned to the credit market and borrowed for 10 months at 0.22%. This is very positive development for the county given last year’s “super downgrade” of its unlimited tax general obligation bonds. Since the downgrade, the county has improved its finances, clarified its financial picture and improved transparency of its financial reporting. The lesson for issuers here – keep finances in order, report clearly and promptly and investors will eagerly lend funds.
  • San Diego/New York – San Diego, California mayor and New York Governor Cuomo each launched pension reform initiatives.
  • Michigan – Michigan passed a new law featuring an enhanced intercept structure creating an extra layer of security for bondholders. This enhanced structural feature will increase investor confidence and should lower borrowing costs for many Michigan school districts.

Obama’s 2013 budget seeks to limit municipal bond tax exemption

Lastly in the February news department, President Obama’s 2013 budget released mid-month calls to cap the tax-exempt interest deduction at 28%. The proposed budget also seeks to revive the mothballed Build America bond program. The Administration estimates the tax-exempt interest cap will reduce the deficit by $584 billion over the next 10 years.

In our view – presented in our recently published white paper, Tax-Exempt Municipal Bonds: The Case for an Efficient, Low-Cost, Job-Creating Tax Expenditure, based on thorough analysis – the magnitude of budget savings is grossly overstated by the Administration’s proposed budget.

The deduction cap idea has little support in Congress at this point. That said, the threat of retroactive taxation to is very troubling to us. We will continue to follow the developing municipal bond tax exemption story very closely and publish our views on a regular basis.

If you do not already receive them, please consider subscribing to our email updates to stay in the loop. And as always, contact your Investment Specialist if you have any questions or concerns.

Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
March 7, 2012