The devastating wildfires in Colorado—particularly, the Marshall Fire that roared through the Town of Superior, City of Louisville, and unincorporated Boulder County—destroyed close to 1,000 homes, retail complexes, and other structures. Aquila extends heartfelt thoughts and well-wishes to our colleagues, clients, partners, and everyone affected by the fires. We are thankful to report that as of this writing, Aquila Tax-Free Fund of Colorado has no direct exposure to issuers that were impacted.
How Colorado Helps Protect Bondholders
A concern for local governments that rely on property tax revenues is a reduction in tax base as the result of a natural disaster. In response to the Fourmile Fire in Boulder County in 2011, Colorado House Bill 11-1042 was passed. And in 2014, Colorado House Bill 14-1001 was also passed, thereby authorizing the State to reimburse counties for any property tax liabilities on real or personal property destroyed by natural causes. The State reimburses a county for any remaining tax liability from January 1 to the date of destruction, and for two subsequent years, if the assessor determines there is evidence that the owner intends to rebuild or relocate a residence on the land. The property owner’s only tax liability is for the land. The State’s reimbursement of property tax revenues grants security to bondholders for any bonds that are secured by property taxes.
Local governments that rely upon sales tax revenues for the majority of their revenue could also be affected by a natural disaster destroying a shopping center or other sales tax producing entity. Sales tax revenues could significantly decrease due to businesses closures. However, sales tax revenue bonds are typically secured by a reserve fund, and some are also covered by bond insurance. Reserve funds are a relatively common feature of municipal securities and provide significant comfort to investors when faced with potential unexpected revenue interruptions.
Prioritizing Credit Quality and Risk Management
In managing Aquila Tax-Free Fund of Colorado, we prioritize credit quality and place value on bond covenants, which incorporate protection into bond structures to support bond issuers, and grant security to bondholders. Security selection and sector exposure decisions are also determined as a result of our proprietary credit reports, which facilitates a more quantifiable determination of the types of risks they we view as acceptable versus those without protection.
How long it takes to rebuild, and how far each local economy contracts, are unknowns for local governments. Each local government will typically find ways to reduce expenses if revenues decline significantly. Reserve funds should allow some municipalities to weather the storm better than others, and federal assistance is often used to assist while these communities rebuild. The Fund’s locally-based portfolio management team will continue to monitor effects on the local market and economy. Aquila’s actively managed approach enables the Fund to swiftly react as needed and seek to identify investment opportunities as they arise.
Mutual fund investing involves risk; loss of principal is possible. Investments in bonds may decline in value due to rising interest rates, a real or perceived decline in credit quality of the issuer, borrower, counterparty, or collateral, adverse tax or legislative changes, court decisions, market or economic conditions. Fund performance could be more volatile than that of funds with greater geographic diversification.
The Fund seeks to provide as high a level of income exempt from state and federal income tax as is consistent with capital preservation. For certain investors, some dividends may be subject to federal and state taxes, including the Alternative Minimum Tax. Consult a tax professional.
Information regarding holdings is subject to change and is not necessarily representative of the entire portfolio. It is for informational purposes only and not intended to represent a solicitation to buy or sell any particular security.
Before investing in the Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. The prospectus is available from your financial advisor, when you click here or call 800-437-1020.