By Ryan Barstad and Shane Morales

 Used to pay for projects when the county or city doesn’t have the funds at hand.  Bond issued by city or government.  Issuers of bond are cities, counties, airports, redevelopment agencies, and school districts.  Have to be below state level in order to issue the bond.  Used to raise funds for the city or county.

 Tax-backed (less risk)  PMT guaranteed by tax revenue.  Revenue Bonds (more risk)  PMT backed by revenues generated from projects.

 Benefits  Low default risk.  Tax-exempt from federal and state income taxes.  Wide range of choices to meet investment objectives.  Marketability if investors want to sell before maturity.

 Credit risk is evaluated by commercial rating companies.  Investors can then analyze the different ratings and match them with their risk tolerance.  Interest rate risk.  Tax risk.  Insurance.

 Most defaults happen during economic downturns and slow growth periods.  Fluctuating land values.  Commodity booms and busts.  Financial mismanagement.  Underestimation of costs.  Unrealistic projections of revenue and growth.

 1994 Robert Citron- Treasurer of Orange County.  Was in office for 24 years.  Invested in REPOS, Floating Rate Notes and Municipal Bonds.  Invested in many high risk municipal bonds.

 Reasons for borrowing in high risk bonds  Proposition 13 (1978)- property taxes decreased 57%. Protected homeowners from paying too much.  Tax allocation cuts.

 $7.6 billion in the investment pool of Orange County’s own money. (37%)  Borrowed $13 billion (63%)  Was very profitable and growing the OC investment pool by at least 9% annually.  No one said anything due to success and because of tight budgeting and low funds.

 OC municipal bond rating= “AA”  November 1994, Federal Reserve raised interests rates from 3.25%-5%.  Municipal bonds rating plummeted from “AA”- Default bonds. (junk bonds)  Couldn’t sell back bonds to Wall Street because they were too risky.  Lost $1.64 Billion.

 December 6 th Citron filed for Chapter 9 Bankruptcy.  Froze 185 southern California school districts.  Residents of OC’s pension was under scrutiny.  Day after: Municipal bond market fell 1 point.  Dow Jones fell 10.43%.

 Sued Wall Street.  Took tax funds from county agencies.  Pay back bondholders and vendors who put money in the risky securities.  June OC issued $880 million in bonds to pay off current debt on other bonds.  Bond was sold and Orange County was out of Bankruptcy in only 18 months.

 AKA whoops  Estimated demand of power to double in the Northwest every ten years.  Planned to build 5 nuclear power plants to meet demand.  Revenue bonds offered.  Expected to repay the bonds with money generated from the projects.

 Construction delays and increased costs to meet safety standards drove the cost of the project to four times original estimates.  Demand declined due to increased energy costs, conservation, and a slowing economy.  The project was abandoned and the WPPSS faced repayment of the losses.  Supreme court voided contracts.  Investors lost $2.25 B, the largest municipal bond default in history.

 Which kind of municipal bond is more risky?

 Revenue bond

 What is the name of the treasurer who caused the O.C. bankruptcy/default?

 Robert L. Citron

 What are the three types of risk associated with municipal bonds?

 I.R. risk  Credit risk  Tax risk

 Name two of the five states with the worst credit ratings.

 California  New York  Kentucky  Ohio  Florida

 Name one of the causes of the WPPSS default.

 Over-projection of CF and demand  Underestimating costs

 How much did Citron borrow in his investment pool?

 $13 Billion (63% of the investment pool).

 What was the reason for Citron to invest in such risky securities (muni bonds)?

 Proposition 13. Tax cuts.