Pre-Refunded Bonds: A Quick Lesson


All seven of Aquila Group of Funds’ Single-State Municipal Bond Funds, which focus on high credit quality and providing a high level of double tax-exempt income, hold Pre-Refunded Municipal Bonds. These bond issues – when backed by US Treasury Securities – are considered to be the highest-quality, and often provide higher current income than new municipal bond issues during periods of declining interest rates.

What is a pre-refunded municipal bond?

Just like home owners, in declining interest rate environments, municipalities often take the opportunity to refinance their outstanding debt – but it’s not as simple as taking out an additional loan to pay off what is due. Bond issuers are obligated to pay interest to bond holders for a specific amount of time – to maturity or a call date. Interest rates may drop to an attractive level years before the call date or maturity – and this may present the opportunity for a bond issue to become pre-refunded.

Here is how it works:

  • Bond X is issued in 2010 to fund new roads at a 5.5% interest rate with a 30-year maturity in which the issuer is permitted to pre-pay or “call” in 2020.
  • Interest rates drop in 2014 to 3.0% – 6 years prior to the first call date for Bond X.
  • The issuer of Bond X issues Bond Y in 2014 at a 3% interest rate.
  • The proceeds from the sale of Bond Y are invested in a combination of securities and cash, in this case US Treasury securities, which are held in an escrow account administered by a trustee with a 2020 maturity corresponding to the call date of Bond X.
  • Now Bond X is backed by Moody’s/Fitch Aaa/AAA rated US Treasury securities and is a pre-refunded bond issue.
  • In some cases pre-refunded bonds are defeased, which means that the bonds have gone from being an obligation of the issuer to an obligation supported by securities held in the escrow fund, or in this case by US Treasury securities. After defeasance, the bonds are no longer considered an obligation of the issuer.

What are the benefits of pre-refunded bonds?

Two attractive aspects of pre-refunded bonds are their high quality and coupon payment. Most pre-refunded issues that are backed by US Treasury Securities carry the Moody’s and Fitch Aaa/AAA rating, while also maintaining the coupon payment from the original issuance. In our example above, Bond X, if backed by US Treasury securities, would have the AAA credit rating and a 5.5% coupon, compared to new municipal bonds being issued with 3.0% coupons.

Many municipal bond mutual funds hold pre-refunded issues not only for their credit quality and coupon, but for their duration and liquidity. They are typically the most liquid segment of the municipal bond market. Considering that pre-refunded issues are escrowed to their call date, they have short to intermediate maturities and may have less price fluctuation than bonds with longer maturities. While past performance does not guarantee future results, pre-refunded bonds have been known to retain value relative to the Treasury, stock and bond markets during periods of volatility.
Read more “Pre-Refunded Bonds: A Quick Lesson”


Estimated capital gains as of October 31, 2017


UPDATED:  The funds listed below may pay a capital gain distribution in December, 2017.  The amount reflected represents an estimate, per share, as of the date indicated.     Printable Version



Aquila Three Peaks Opportunity Growth Fund1                           $0.39                    $2.25

Aquila Three Peaks High Income Fund1                             $0.00                    $0.01

Aquila Tax-Free Trust of Arizona2                                       $0.00                    $0.02

Aquila Churchill Tax-Free Fund of Kentucky2                      $0.00                    $0.01

1 The total amount of the capital gain above cannot be reduced by any losses taken in November, 2017.

Represents undistributed gains from fiscal year 2017 which must be distributed in 2017 and which cannot be reduced.

Aquila Three Peaks Opportunity Growth Fund:  In the event that capital gains distributions are declared, the fund is anticipated to have a record date of November 30, 2017, an ex-date of December 1, 2017, a payable date of December 1, 2017, and a reinvestment date of December 1, 2017.

All Other Funds:  In the event that capital gains distributions are declared, the funds are anticipated to have a record date of December 27, 2017, an ex-date of December 28, 2017, a payable date of December 28, 2017, and a reinvestment date of December 28, 2017.

Estimates are subject to change depending on market conditions, board approvals, and other circumstances.  This report is the result of estimates and is based on information available as of October 31, 2017.  The amount and character of distributions will be finalized on the record dates.

Although the funds listed below could pay capital gains distributions in December, 2017, at this time, a capital gain distribution is not anticipated.

Aquila Tax-Free Fund of Colorado

Hawaiian Tax-Free Trust

Aquila Narragansett Tax-Free Income Fund (RI)

Aquila Tax-Free Trust of Oregon

Aquila Tax-Free Fund For Utah

Shares of the Funds may only be sold by offering the Funds’ Prospectus. Before investing in a 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, and when you call 800-437-1020 or visit www.aquilafunds.com.


Annual Shareholder Meeting November 9th


Aquila Tax-Free Trust of Arizona

Shareholders of Aquila Tax-Free Trust of Arizona and financial professionals are invited to attend the Annual Shareholder Meeting scheduled at 9:30 a.m. on November 9, 2017.  The meeting will take place at the JW Marriott Scottsdale, Camelback Inn Resort & Spa located at 5402 E. Lincoln Drive in Scottsdale.

An additional outreach meeting will take place at 10:00 a.m. on November 8, 2017 at the Union Hills Golf & Country Club in the Main Dining Room, located at 9860 Lindgren Avenue in Sun City.

Breakfast will be served prior to both meetings.

John Lucking, former Aquila Tax-Free Trust of Arizona Independent Trustee and Chair, and President of Econ-Linc, an economic consulting firm in Phoenix, will be speaking about the Arizona and national economy. Read more “Annual Shareholder Meeting November 9th”


Annual Shareholder Meeting October 12th


Aquila Tax-Free Fund For Utah

Shareholders of Aquila Tax-Free Fund For Utah and financial professionals are invited to attend the Annual Shareholder Meeting scheduled at 8:30 a.m. on October 12, 2017.  The meeting will take place at the Sheraton Salt Lake City Hotel in the Bryce Canyons Ballroom.  The Sheraton Salt Lake City Hotel is located at 150 West 500 South in Salt Lake City.  This is a new venue for the Annual Shareholder Meeting, and a buffet breakfast will be served prior to the meeting.

Utah State Senator and former Aquila Tax-Free Fund For Utah Trustee, Lyle Hillyard, will be speaking about the Utah economy. Read more “Annual Shareholder Meeting October 12th”


Harvey, Irma and the Muni Market


With two hurricanes recently making landfall in southern states, only eleven days apart and inflicting what may be as much as $230 billion in damages, the potential impact to municipal credits is on investors’ minds. While both hurricanes made landfall in areas with booming economies and population growth, history tells us that the fiscal strength of the affected municipalities and the rapid relief efforts are likely to limit negative impacts on municipal bonds.

Hurricane Harvey hit Houston as a category 4 storm on August 25th and stayed over the area for several days dropping as much as 50 inches of rain in Harris County, which includes the city of Houston, and surrounding areas. Houston is the nation’s fifth largest municipal economy and Harris County is home to over four million people. Read more “Harvey, Irma and the Muni Market”


Consumer resources related to Equifax data breach


Following are resources which may be valuable to consumers concerned about the recent Equifax data breach.

Federal Trade Commission

Free credit freezes from Equifax, Lisa Weintraub Schifferle, Attorney, FTC, Division of Consumer & Business Education

Fraud alert or credit freeze – which is right for you?, Lisa Weintraub Schifferle, Attorney, FTC, Division of Consumer and Business Education

The Equifax Data Breach: What to Do, Seena Gressin , Attorney, Division of Consumer & Business Education, FTC

To report identity theft and get a recovery plan, visit Federal Trade Commission IdentityTheft.gov

State Attorneys General

Arizona Attorney General Mark Brnovich,

AG Brnovich Launches Investigation into Equifax Data Breach Calls for Equifax to Disable Fee-based Monitoring Services Link

Colorado Attorney General Cynthia Coffman,

Equifax data breach: 5 steps to take to protect yourself

Hawaii AG Douglas Chin,

State opens investigation into Equifax breach, offers advice for Hawaii residents

Kentucky Attorney General Andy Beshear,

Beshear, 33 AGs Demand Equifax Provide Better Safeguards and Improve Consumer Services Following Massive Data Breach

Oregon Attorney General Ellen F. Rosenblum,

Equifax Data Breach: What You Need to Know

Rhode Island Attorney General Peter F. Kilmartin,

AG Kilmartin, Investigating AGs Ask Equifax to Disable Fee-Based Monitoring Services, Reimburse Fees for Security Freezes

Utah Attorney General Sean D. Reyes,

Utah Attorney General’s Office Urges Consumers to be Cautious Following the Equifax Data Breach


Hawaiian Tax-Free Trust Annual Shareholder Meeting


Shareholders of Hawaiian Tax-Free Trust are cordially invited to attend their Annual Shareholder Meeting on Thursday, September 28, 2017 at 10:00 a.m. at the Ala Moana Hotel, Hibiscus Ballroom in Honolulu. Light refreshments will be served prior to the meeting.

Those unable to attend the Honolulu meeting may be interested in attending a special Outreach informational meeting in Lihue-Kauai at 5:00 p.m. on Tuesday, September 26, 2017. That meeting will take place at the Kauai Marriott Resort, 3610 Rice Street in the Puna Ballroom. Refreshments will be served following the meeting.

Attendees at both meetings will have the opportunity to visit with Trust Executives, Trustees, the Portfolio Managers and hear renowned Hawaii economist, Paul H. Brewbaker, Ph.D., Principal of TZ Economics, a Hawai’i economics consultancy. Mr. Brewbaker’s background is in research on the Hawaii economy and financial risk analytics. He has more than 25 years of experience as an economist in Hawaii, and previously served as Chief Economist at Bank of Hawaii. Mr. Brewbaker will present an overview of the Hawaii and national economy.

Please plan to attend. We look forward to seeing you in either Honolulu or Lihue-Kauai.


Hawaii raises state income tax rates for 2018


Hawaii’s 2017 Legislative Session resulted in several changes to the State’s tax laws. The full report can be accessed here. Act 107 amends the income tax law to reduce the tax burden of lower-income taxpayers. Along with adjustments to two other programs, it will reinstate three tax brackets for the highest-income taxpayers beginning with the 2018 tax year.

The 2009 Legislature imposed new tax brackets, 9%, 10% and 11% for taxable income over certain levels, depending on filing status. These increases were repealed on December 31, 2015. Beginning with tax returns after December 31, 2017, these three rates will be reinstated as follows:

  • Taxpayers who file a joint return will pay:
    • 9.00% on taxable income over $300,000, but not over $350,000
    • 10.00% on taxable income over $350,000, but not over $400,000
    • 11.00% on taxable income over $400,000
  • Heads of a household will pay:
    • 9.00% on taxable income over $225,000, but not over $262,500
    • 10.00% on taxable income over $262,500, but not over $300,000
    • 11.00% on taxable income over $300,000
  • Unmarried individuals and married individuals who file separately will pay:
    • 9.00% on taxable income over $150,000, but not over $175,000
    • 10.00% on taxable income over $175,000, but not over $200,000
    • 11.00% on taxable income over $200,000

Individuals affected by these changes may find tax-exempt municipal bonds to be a beneficial investment. Using the current three top federal tax brackets along with the highest 2018 Hawaii state income tax rate and the Net Investment Income Tax, the chart at right illustrates what a taxable investment would have to yield to match a 2% tax-free investment in the tax brackets indicated.

The Net Investment Income tax is a 3.8% tax established by the Patient Protection and Affordable Care Act (PPACA) that applies to the lesser of (1) net investment income or (2) the excess of a taxpayer’s modified adjusted gross income (MAGI) in excess of an applicable threshold amount. For more information, please consult your professional tax advisor.


Moody’s Downgrades Kentucky Debt


On July 20, 2017, Moody’s Investors Service (Moody’s) downgraded the Commonwealth of Kentucky’s issuer rating to Aa3 from Aa2. Simultaneously, other Kentucky government entities were also downgraded, including Kentucky’s general fund appropriation lease revenue bonds to A1 from Aa3, Kentucky’s agency fund appropriation lease-revenue bonds to A2 from A1, the Kentucky Public University Intercept Program to A1 from Aa3, the Kentucky School District Enhancement Program to A1 from Aa3, and the Kentucky Turnpike Authority to Aa3 from Aa2. Reasons cited for the downgrades were the large unfunded pension liability, high fixed government costs and revenue underperformance. Moody’s credit outlook for the state remains stable.

The downgrades have been expected for some time as Kentucky continues to battle one of the largest unfunded pension burdens in the U.S. The state experienced positive revenue growth of 5.3% in fiscal year 2015, but saw a decline of 3.7% in fiscal year 2016, followed by a decline of 1.3% in fiscal year 2017. Despite the credit rating downgrade, the Kentucky Turnpike Authority exceeded revenue projections for the recent fiscal year.

Kentucky’s economy is considered stable and employment continues to strengthen. If the expected manufacturing expansions by Amazon, Ford and Toyota come to fruition, we believe that the credit ratings may see a reversal over the next couple of years. Moody’s mentioned in their report that the State’s current administration has demonstrated a willingness to cut expenditures and balance the budget. As of June 30, Kentucky’s available liquid resources remained at $4 billion, a level that has been maintained over the past four years, and the general fund had a $239 million balance.

The portfolio managers and credit analysts of Aquila Churchill Tax-Free Fund of Kentucky will continue to monitor all credits in the portfolio. The only impact we see to the portfolio at this time is a downward shift in the quality breakdown directly related the downgrades. Kentucky debt pricing has stabilized in the secondary market due to the lack of new issuance, which was down 38% year-over-year at the end of the second quarter. For the most recent quarter-end performance, holdings and manager commentary please see the Fund page on this web site.

Before investing in a Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. The prospectus is available on this site, from your financial adviser and when you call 800-437-1020.


Tax Reform 2017 – what does it mean for tax-exempt investments?


While the current tax reform proposal by the White House lacks details, the outline released does include several items meaningful to the individual tax payer:

  • Reduction of the current seven tax brackets to three: 10%, 25% and 35%. However, the proposal does not indicate the levels of income for each bracket.
  • Deductions would change: the standard deduction would be nearly doubled to $24,000. Itemized deductions would be capped at $100,000 for single filers and $200,000 for married couples filing jointly. Tax breaks for charitable giving, mortgage interest and retirement savings would remain, however, the administration would like to eliminate the deduction for state and local taxes (SALT), which is one of the largest federal tax expenditures.
  • The administration would also like to end the Alternative Minimum Tax (AMT) and eliminate the 3.8% Net Income Investment Tax (NIIT) which applies to investment income of taxpayers with a modified adjust gross income (MAGI) of more than $200,000 for single filers and $250,000 for married couples filing jointly. This would bring the capital gains rate down for high earners from 23.8% to 20%

The proposal is still in its initial stages and will likely have many changes prior to enactment. There are questions as to whether the proposal could influence the municipal bond market and the value of tax-free investing. The following charts display the current federal tax brackets and the initially proposed tax brackets using a hypothetical taxable investment yielding 3% to illustrate Taxable Equivalent Yields.


The benefit of tax-exempt income remains, even at the proposed tax rates, although it is reduced slightly by the lower tax brackets. Tax-exempt income continues to provide a significant incentive to consider municipal bonds as an alternative to taxable income investments, particularly for the higher income taxpayer.

*Current taxable equivalent yields are based on 2017 federal tax rates and do not include the 3.8% NIIT where applicable.

These are hypothetical illustrations and do not represent an actual investment, interest rate or return on any investment.