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Sunday, February 03, 2008

Uh Oh! Indio! Is the Sub-Prime Mess Affecting Muni Bonds?

A few years ago, I bought a few municipal bonds that were issued by various smaller cities in California, such as Fillmore and Tracy. All the bonds had an interest rate of over 5%, and all were purchased at slightly above par. They all have maturities of 18 to 25 years. Because the bond issues were so small, no ratings were obtained from any of the rating agencies.

The bonds have pretty much held their value; however, the Indio, California Community Facilities District Terra-Lago Area bond has dropped in price from over 100 to 85.8, almost a 15% drop.

Indio is a smaller city located in the Southern California desert area of Riverside County, with a population of about 72,000. It has been one of the ten fastest growing cities in California. I've been hearing stories of huge real estate developments being built in that area, and thousands of houses going unsold.

This bond is backed by what is known as Mello-Roos taxes, which are taxes that came about through the Community Facilities District Act in 1982 to fund community facilities such as streets, water, sewage, electricity, infrastructure, schools, and parks. Mello-Roos taxes are used to get around the Proposition 13 restrictions limiting the increase of property taxes.

So without enough people to pay those taxes, it could severly limit the district's ability to cover the debt service on the bonds. Which means that even muni bonds are not immune from sub-prime.

By Fred Fuld at Stockerblog.com

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