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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.

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Presentation on theme: "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."— Presentation transcript:

1 By Ryan Barstad and Shane Morales

2  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.

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

4  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.

5  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.

6  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.

7  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.

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

9  $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.

10  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.

11  December 6 th 1994- 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%.

12  Sued Wall Street.  Took tax funds from county agencies.  Pay back bondholders and vendors who put money in the risky securities.  June 1996- 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.

13  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.

14  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.

15  Which kind of municipal bond is more risky?

16  Revenue bond

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

18  Robert L. Citron

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

20  I.R. risk  Credit risk  Tax risk

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

22  California  New York  Kentucky  Ohio  Florida

23  Name one of the causes of the WPPSS default.

24  Over-projection of CF and demand  Underestimating costs

25  How much did Citron borrow in his investment pool?

26  $13 Billion (63% of the investment pool).

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

28  Proposition 13. Tax cuts.


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