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Principles of Finance: Unit 5, Lifecycle: The How and Why of Muni Bonds 6 Views


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Description:

The how and why of Muni Bonds.

Language:
English Language

Transcript

00:00

principles of finance a la shmoop lifecycle the how and why of muni bonds

00:07

will ever be into a town hall meeting and they usually have lots of retired [town hall meeting full of old people]

00:11

people attending their lousy coffee a lot of blue hair rinses and dentures

00:15

yeah don't trip on those and yet municipalities are the backbone [Uncle Sam seen as a skeleton]

00:19

infrastructure of our country they build the parks and buildings and sewers and

00:24

garbage collection thingies and so on you know the things that make us go or

00:28

deal with us after we you know go well some examples of muni bonds here we go [public toilets]

00:33

new york city needs improvements to its subway system so it is bonds to pay for [people getting onto subway train]

00:38

him the local NBA squad wants a new arena or it's moving to Vancouver or [basketball court]

00:43

Seattle or wherever the home city desperately wants to keep him there so

00:47

it issues muni bonds to build those overpaid pituitary freaks a new home

00:52

all right well crime capital USA wants more cops on the streets crime capital

00:56

has to pay for those additional heroes wages training new squad cars yeah they

01:01

all require big bucks solution issue bonds uni bonds all right well there are

01:06

really only two flavours immune Yvonne's general obligation bonds and revenue

01:10

bonds well the state or local issuer assures repayment through quote Full

01:15

Faith and Credit unquote but there is a huge difference between them with

01:19

Treasuries Full Faith and Credit means that the US government unconditionally [picture of government building]

01:24

promises to pay all interest and principal even if it has to run the

01:29

presses 24/7 to print enough money to do so Geo's or general obligation bonds on [money getting printed]

01:34

the other hand pay interest and principal from taxes that the issuer can

01:38

levy on its local citizens income tax property tax sales tax sin tax

01:43

cigarettes and booze or examples of these if there's a way to extract a

01:47

tithe a municipality might actually try it well The Full Faith and Credit is the [money collected during town hall meeting]

01:51

issuer's unconditional promise to pay unless some you know they can't generate

01:55

enough tax revenue to do so then Full Faith and Credit fades to pay you messed

02:01

up you trusted us aren't any animal house fans out there yeah that's great

02:05

one all right well revenue bonds do not offer any Full Faith and Credit comfort [writing on white board]

02:09

payment on these bonds comes from the revenue generated from what the bond

02:13

were used to create bonds to build a toll bridge or good example here the

02:17

issuer can estimate fairly accurately the revenue that will be generated from

02:21

the tolls and then it's up to the investors to decide if that revenue will [hand passes briefcase full of money]

02:25

be sufficient to service the debt a hybrid mut formed from both of these

02:29

concepts is a double-barreled bond which is backed by both taxes and revenues

02:34

think of a County Beach that charges admission and/or parking one other type [people leaving county beach]

02:39

of Muni is an industrial revenue bond this is where the municipality issues

02:43

debt to pay for something that's ostensibly for private use like you know

02:47

a new sports stadium well the issuer gets a piece of the revenue generated [ariel view of sports stadium]

02:50

from that stadium and uses it to pay off the bonds and usually there's a whole

02:54

lot of horse trading in the stadium has to hire a whole bunch of union workers

02:58

at full price to get the muni bond to be supported by the masses in fact many

03:02

concepts in the land of Muni derive in analogous fashion to those in the

03:06

corporate world so if this section feels a bit deja vu well it's no accident

03:10

shall we dive in deeper oh yes we should okay so general obligation bonds again

03:15

think Full Faith and Credit the city pledges to pay no matter what and that

03:20

what can mean that the city itself goes bankrupt and in fact that bizarro land

03:25

phenomenon is starting to happen more and more around the country general [map of USA]

03:28

obligation bonds are usually used for general things like sewage treatment

03:33

plants infrastructure maintenance cops firemen and you know like well the main

03:38

thread linking these is that their activities that don't themselves [web of string linking these activities]

03:41

generate revenue then the city pays off the bonds from its general flow of

03:46

revenues like fishing licenses and parking tickets income and property

03:50

taxes medicinal marijuana franchise license fees and and so on well since

03:54

geo bonds are backed by The Full Faith and Credit those responsible for the

03:58

full faith in such credit must approve their issuance and who might these

04:02

people be yes the citizens of the locality issuing them yeah that would be [time lapse of people in public places]

04:07

you most geo bonds get paid out of property

04:10

taxes the $5 word for which is ad valorem

04:16

during the Reagan era California passed Proposition 13 which set out the manner [president signing papers]

04:21

in which taxes would be levied on the proletariat specifically prop 13 did

04:26

away with all the old real estate tax systems and charged a simple real estate

04:30

tax equal to 1.25 percent of the purchase price of the home plus a kicker

04:35

for inflation each year well California experienced one of the great real estate

04:38

booms in history from the early 1980s until the crash of 2008 nine during that

04:44

era real estate compounded in value at something like 15% a year depending on [ariel view of suburbia]

04:48

where you lived in Silicon Valley was a whole lot more than that and Gilroy it

04:52

was a whole lot less if the inflation kicker only went up a modest amount

04:55

maybe two to three percent a year because that was our nation's inflation

04:59

so considered a little old lady who bought her mansion in 1981 for 250 grand [happy old lady in front of house]

05:04

which was worth four million dollars in

05:07

well her initial taxes were one point two five percent of 250 grand per year

05:12

or 31 hundred bucks and change each year those taxes went up maybe a hundred

05:16

bucks so that by 2007 she was paying five grand a year in taxes on a four

05:22

million dollar mansion the effective tax rate then is just a little over 0.1% and [numbers of white board]

05:28

you can imagine how little realtors love this it makes the cost of moving

05:32

exorbitant because the new purchaser pays taxes based on the much higher

05:37

purchase price of their new home and is that fair that the little old lady is

05:41

paying such low taxes maybe maybe she should maybe she shouldn't well other

05:45

states use different systems a common taxman plan is called Miyage or think

05:51

thousands that is in a Miyage system there's simply a standard percentage tax [writing on white board]

05:56

rate applied to whatever the assessed value of a home comes out to be so you

06:01

can imagine that the business of being a home Assessor that is a very popular one [long line of people]

06:05

in those kind of states hi Texas we're looking at you and the most popular

06:09

Assessors are likely those who give the lowest assessed values and the slowest

06:15

tax rates on those kinds of homes and yes if you're wincing there is in fact

06:19

room for tons of corruption here well for most

06:22

cities real estate taxes alone aren't enough to cover their corn nut you know [pie chart]

06:25

their operating expenses consequently most cities offer limited tax bonds

06:30

which are issued when other sources of tax hikes can't be done

06:33

well these bonds often cover up grades to school districts and police and fire

06:37

you know the whole nine yards in California recently interesting

06:41

conflicts arose out of the Union pension liability which the city owed to its

06:46

local police force it was a big number well a common game in the negotiations

06:50

between unions and politicians revolved around retirement economics police could [union and politician playing monopoly]

06:54

retire after 30 years of service and collect a pension for the rest of their

06:58

lives the deal didn't seem bad when the average cough lived to be l62 but then

07:03

cops got organic and shunned the whole donut thing and 82

07:08

became the new 62 compounding problems police received as their pension 85% of

07:13

whatever their total compensation came to on average in the previous three

07:17

years that they worked so in those three years cops put in massive overtime often

07:23

working the equivalent of double shifts for three years and as a result salaries [cops working on the streets]

07:27

or at least groves take-home amounts skyrocketed

07:29

well they then took 85% of that figure and promptly retired hey wouldn't you

07:35

now add to this liability to all of us taxpayers the pension obligations and a

07:40

bunch of other costs like health insurance and it created a crisis we're

07:43

in cities explained that they simply could not afford a police force anymore

07:47

or at least not the one they had so instead of pointing to the bloated deals

07:52

that were cut by lousy politicians with unions who negotiated beautifully on

07:56

their own behalf cities asked their constituent taxpayers to be allowed to

08:01

raise taxes when the vote was emphatically no many cities were forced

08:05

to fire their entire police and fire forces and outsource them or hire a

08:10

service which could negotiate much more intelligently with in market pricing of

08:14

course the des moines amateur police and firefighting unit isn't exactly top [mannequins dressed as cops and fire fighter]

08:19

notch talent but you know they do their best alright well that's the how and the

08:23

why of muni bonds

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