Muni Market Needs Local Newsrooms


The “watch dogs” keeping an eye on local politics are disappearing and that is resulting in higher borrowing costs for small issuers. A recent study entitled “Financing Dies in Darkness? The Impact of Newspaper Closures on Public Finance” details the costs associated with issuing debt in small towns that have lost their local newspaper.

Many small town newspapers are closing due to a decline in subscribers and local advertising. Traditionally, these papers invested time and resources in following local governments, and dedicated print space to keeping citizens well-informed regarding the activities of city officials, while holding those officials accountable for their decisions. A Pew Research report indicated that a 27% drop in newspaper subscribers from 2003 to 2014 resulted in a 35% drop in State House reporters. These reporters had been gathering information on local governments and reporting their findings. There is concern that a reduction in, or lack of, reporting may lead to increased government waste, less effective schools, and an increase in incidents of corruption. When local governments are not held accountable for their decisions, investors in the debt issued by these governments are likely to require a higher rate of interest to offset the perceived risks.

There are many examples around the country that highlight the value of political reporting by local newspapers – here are a few that we find interesting. A city in Utah decided to construct a new City Hall, and the construction plans included demolishing a school building and closing a portion of a main road. When the local newspaper reported on the decision, the city’s residents opposed the decisions made by local leaders. After months of pressure, city officials decided to rescind the decision to build the new City Hall. Read more “Muni Market Needs Local Newsrooms”


PERS Liabilities and Local Management of Aquila Tax-Free Trust of Oregon Highlighted by Oregon Business


Tim Iltz

Aquila Tax-Free Trust of Oregon Co-Portfolio Manager and Credit Analyst, Tim Iltz, recently shared his insights on Oregon’s Public Employees Retirement System (PERS) in an article published by Oregon Business, How PERS Liabilities Vary Wildly Across State. Tim’s knowledge of how PERS funding liabilities affect Oregon’s state and local governments illustrates the value of a local management presence, and the ongoing credit analysis provided by Aquila Group of Funds.

Although the PERS system is underfunded, many Oregon local governments have managed to develop budgeting practices and financial management policies specifically addressing this concern. The local management team of Aquila Tax-Free Trust of Oregon consistently monitors all credits in the portfolio.

When researching municipal bond issuers and PERS employers with significant unfunded pension liabilities, credit analysis and due diligence can put pension liabilities into context to determine the potential extent to which PERS funding may be impaired; a situation which varies from employer to employer. Pension concerns and the complexities and nuances of PERS funding heighten the importance of local credit analysis and selective portfolio management.


Seasonality in the Municipal Bond Market


Summertime typically finds municipal bond investors spending more time away from home – and potentially discovering that some of the individual municipal bonds they hold have converted to cash.

In the municipal bond market, summer has come to be known as the season for redemptions, since the months of June through August have a higher proportion of maturity dates and call dates than any other period of the year. During the upcoming summer season, the available supply of municipal bonds may decline significantly. This year, we expect to see maturing outstanding municipal bonds exceed new issue supply by roughly $80 billion; double the $40 billion average of the past few years.

This estimate is being based on forecasts indicating that more than $146 billion in outstanding bonds will either reach their final maturity date or be called on an optional call date. The difference between the volume of new issues and redemptions is often referred to as “net new issuance”. This year, net new issuance of negative $80 billion will leave investors challenged to replace their tax-exempt holdings and maintain their double-tax free income streams. This situation may be particularly problematic in states where the income tax rates are high, creating high demand for in-state municipal bonds.

For example, the State of Arizona is forecast to experience nearly $5 billion in redemptions, making it the 8th highest state in the nation for redemptions during this period – even though it normally ranks near the middle of the 50 states for overall issuance. (Source: Bloomberg)
Read more “Seasonality in the Municipal Bond Market”


Double Tax Exempt Income Can Make a Difference


The advantage of earning income that is exempt from both federal and state income tax can make a meaningful difference to investors.

Barron’s recently reported* on the benefit of double tax-exempt income, particularly under the new tax legislation passed in late 2017.  The same article also provides a simple calculation for determining what is known as the taxable equivalent yield, or TEY.  Calculating the taxable equivalent yield enables an investor to compare the yield on a taxable bond to the yield on a bond producing income that is exempt from both federal and state income tax.  (*Subscription may be needed.)

To see how beneficial double tax-exempt income can be to you, see the illustrations on this site for each of the states in which we manage a state municipal bond fund:   Arizona, Colorado, Hawaii, Kentucky, Oregon, Rhode Island and Utah.  Each illustration shows what a taxable investment would have to yield to match a tax-free investment which is exempt from federal and state income tax.


For certain investors, some fund dividends may be subject to federal and state taxes, including the Alternative Minimum Tax. Consult your professional tax advisor.

The taxable equivalent yields displayed do not take into consideration individual taxpayer limitations on deductions. 

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.

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 call 800-437-1020, or on this site


Kentucky introduces new tax legislation


The Kentucky Legislature made several tax law changes at the end of its 2018 session. House Bill 366 was passed on April 13th over the Governor’s veto and an additional bill, HB 487, became law on April 27th when Governor Bevin failed to either sign or veto the bill.

Some of the changes are retroactive to January 1, 2018 including:

  • Replace the current six-bracket individual income tax which ranges from 2% to 6% with a flat 5% tax;
  • Replace the current three-bracket corporate income tax with a 5% flat rate;
  • Remove most deductions and repeal the personal exemption credit;
  • Decrease the amount of pension income excluded from income tax to $31,110.

Other changes detailed in the 378-page bill will be effective July 1, 2018 such as, additional services in the sales tax base, increases to the cigarette tax and new tire fee. The full bill can be accessed here.

While the new 5% flat tax for individual taxpayers is a reduction from the prior top rate of 6%, many may still find tax-exempt municipal bonds to be a beneficial investment. Using the current three top federal tax brackets along with the 2018 Kentucky 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.

For more information, please consult your tax professional. A full report on taxable equivalent yields using the new tax is available here.

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.


Recent natural disasters in Hawaii not seen as a credit risk


UPDATE:  On May 30, 2018, Fitch Ratings reported that, based on their review of the impact of ongoing volcanic activity on the island of Hawaii, the state’s financial flexibility along with federal and state government support indicated that a rating change is unlikely for Hawaii’s public finance, port and airport credits.  Fitch did indicate that they expect some short-term peripheral economic effect related to tourism, which they anticipate will be mitigated by financial support from the sources mentioned.


In recent weeks S&P Global Ratings and Fitch Ratings expressed opinions on the ability of Hawaii government entities to cope with flooding, mudslides, an earthquake and a volcanic eruption, all of which have occurred since mid-April.

S&P stated that, at this point, they don’t expect the eruption of the Kilauea Volcano to significantly impact their AA-/Stable credit rating of Hawaii County.  The rating agency will continue to evaluate the situation, along with the duration and on-going impact of the eruption, which had damaged local roads, highways, power lines, and a number of residential structures as of this writing.

A Fitch Ratings analyst, Stephen Walsh, was quoted in Bond Buyer as saying “It doesn’t take away from the tragedy from an individual standpoint, but looking at the bottom line, we don’t expect it to have a financial impact on either Hawaii County or the state”.

Based on the Hawaii County fiscal 2017 audit, S&P expressed the opinion that the county maintains strong liquidity levels, along with a balance of over $5.7 million in its general fund for disaster and emergencies, and a general fund balance of approximately $25 million, which they consider strong.  In addition, there are expectations that the county will receive funding from the Federal Emergency Management Agency (FEMA) to assist with recovery efforts.

The state of Hawaii had previously received approval for millions of dollars in funding from FEMA following flash floods and mudslides on Kauai and Oahu, which occurred in mid-April.  That funding will assist Kauai County in making repairs to infrastructure and public facilities.  S&P highlighted the Kauai County general fund balance of nearly $50 million, which the agency considers to be very strong, along with liquidity of $71 million, also viewed as very strong.


S&P Downgrades Kentucky Debt


On May 18, 2018, Standard and Poor’s (S&P) Global Ratings lowered Kentucky’s issuer credit rating one notch from A+ to A, and lowered the Commonwealth’s appropriation-backed obligations to A- from A, which affects lease debt issued by the State Property and Building Commission. Additional downgrades include Kentucky’s state aid intercept programs for universities and public schools, revised to A- from A, and lease debt backed by the Administration Office of the Courts, revised from A- to BBB+. The ratings remain investment grade, and S&P’s outlook is now stable.

The downgrades were anticipated, as S&P had previously had a negative outlook for the state. Reasons cited for the downgrades were fiscal stress due to years of uneven budgetary management, weakened reserves, income levels below the national average and ongoing pension funding issues.

Moody’s Investors Service downgraded Kentucky’s issuer rating in July of 2017 to Aa3 from Aa2. Moody’s also lowered other Kentucky government entities last July, 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. Moody’s outlook is also stable.

Kentucky’s economy has been improving and employment continues to strengthen. If the expected manufacturing expansions by Amazon, Ford and Toyota come to fruition, we believe that some credit ratings may see a reversal over the next couple of years. Kentucky’s general fund revenue grew in the first quarter of 2018 by 5.3%, and the state should be in good shape to meet the balanced budget requirement for the current fiscal year ending in June. Recent economic highlights for the current fiscal year include sales and use tax revenue growth of 3.5%, an increase in the corporate income tax revenue of 5.1%, individual income taxes receipts increasing by 5.2%, and property tax revenue increasing by 3.7%.
Read more “S&P Downgrades Kentucky Debt”


Do the New Municipal Security Transaction Rules Affect You?


The Municipal Securities Rulemaking Board’s (MSRB) proposed revisions to rules G-15 and G-30 were approved by the Securities and Exchange Commission in November 2016 and became effective on May 14, 2018. The amendments add transparency to transactions involving municipal securities purchased by individual investors.

In brief, the new changes will add the following to confirmations of individual municipal security trades:

  • The total dollar amount of markup/markdown (compensation received) in price.
  • The total percentage amount of markup/markdown (i.e. a percentage of the securities prevailing market price).
  • The time of the trade along with the security identifying number (cusip number) and a reference or hyperlink to the MSRB’s official repository for information; Electronic Municipal Market Access (EMMA) which can provide trade price data.
  • This information pertains to same-day off-setting principal transactions for retail clients.

The benefit of the new rule is that investors are provided with a heightened level of fee transparency; an outcome that is in the investor’s best interest.  Prior to the revised MSRB rules, most individual municipal security transactions executed over-the-counter at a net price did not include a disclosure of fees or purchase costs. The new rules will give investors important information about the cost of purchasing individual municipal securities.

Either in addition to, or as an alternative to, purchasing individual bonds, investors seeking tax-exempt income can also take advantage of the benefits of investing in municipal bond mutual funds.  Particularly during periods when the supply of available municipal bonds is low, mutual funds, which routinely invest large dollar amounts on behalf of all fund shareholders, may have opportunities to invest in bonds that are available in the institutional market, but not available in the individual retail bond market. Due to the large dollar amounts invested by municipal bond mutual funds, they may purchase bonds at prices available to institutional investors, and thereby, enhance the trade execution on behalf of all fund shareholders.  Bond mutual funds report expenses and fees in the prospectus.

For over 30 years,  Aquila Group of Funds has sought to provide municipal bond fund investors with as high a level of double tax-exempt income as is consistent with preservation of capital. We offer single-state municipal bond funds in seven states, and our locally based portfolio managers and credit analysts have an up-close perspective on bond issuers and the economy in their states. We believe this gives them valuable insights about the economic and political climate of each state, which allows them to manage interest rate and credit risk by consistently maintaining broadly-diversified, high-quality bond portfolios of intermediate average maturity.

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 prospectuses are available on this site, from your financial adviser and when you call 800-437-1020.


2018 Aquila Tax-Free Fund of Colorado Annual Shareholder Meeting in Denver


Shareholders of Aquila Tax-Free Fund of Colorado are cordially invited to attend their 31st annual shareholder meeting Wednesday, May 16, 2018 at 2:00 p.m. at the Wellshire Event Center, Cambridge Room, 3333 S. Colorado Blvd., Denver, Colorado. Light refreshments will be served prior to the meeting.

Jason Schrock

Attendees will have the opportunity to visit with Fund Executives, Trustees, the Portfolio Manager and hear Jason Schrock, Deputy Director at the Colorado Governor’s Office of State Planning and Budgeting. The primary duty of the Office is to provide the Governor with timely and complete information and recommendations, so he can make sound public policy and budget decisions. Mr. Schrock will speak about the Colorado economy.

We look forward to seeing you on May 16th.


Are You Free of Your Tax Bill for the Year?


Tax return form with pen and calculator

Tax Day is next week and as you send in your 2017 tax forms, you might be surprised to learn that the nation will still be working to pay this year’s taxes.

Every year the Tax Foundation calculates Tax Freedom Day®, which determines the day the country has earned enough money collectively to pay its total tax bill. The calculation considers all federal, state, and local taxes and divides them by the nation’s income. For 2018, Tax Freedom Day falls on April 19th. So, the average taxpayer will spend 109 days working to pay their taxes.

In another calculation, the Tax Foundation incorporates the federal deficit. When that is included, we will have to work another 17 days; until May 6th, to reach Tax Freedom Day.

The Foundation figures that Americans will spend more on taxes in 2018 than on food, clothing and housing combined.

Read more “Are You Free of Your Tax Bill for the Year?”