Municipal Bond Funds

05/30/2019

Oregon Scores Well in Volcker Budget Report

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Timothy Iltz is Co-Portfolio Manager of Aquila Tax-Free Trust of Oregon
Vice President and Municipal Bond Analyst, Kirkpatrick Pettis Capital Management

 

The Volcker Alliance, a think tank headed by former Federal Reserve Chairman Paul Volcker, recently released its report, Truth and Integrity in State Budgeting: Preventing the Next Fiscal Crisis. The report covers fiscal years 2016 through 2018 and measures all 50 states in five key budgeting areas: budget forecasting, budget maneuvers, legacy costs, reserve funds, and budget transparency. Each state was given a grade between A and D- for each category and the grades reflect each state’s three-year average for the critical budgeting areas. The report ranked Oregon as one of the top states for managing legacy costs, a measure that evaluates how well states are funding promises made to public employees, including pension funding and health care.

Over the past three years, Oregon has earned an A average for its ability to manage post-employment benefit (OPEB) funding and pension liabilities. The Volcker Alliance reports that Oregon has a public employee pension funded ratio of 83% for 2018, placing the state in the top 6 plans in the nation. Oregon also earned an A average for budget maneuvers, which evaluates whether the state used one-time revenues, borrowings, asset sales, and other measures to achieve short-term budgetary balance. Budget forecasting was the only area where Oregon fell short, with an overall grade of C, which was partially due to the fact that the state does not use consensus revenue forecasts. However, Oregon was noted for its use of multi-year revenue forecasts and revenue growth projections.

In managing the Aquila Tax-Free Trust of Oregon, we maintain a close watch on Oregon’s economy, budget and liabilities, and we are pleased with the results of the Volcker Alliance’s assessment of Oregon’s fiscal health.

05/24/2019

Oregon Local Bond Measure Election Analysis

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By Timothy Iltz, Co-Portfolio Manager Aquila Tax-Free Trust of Oregon

Vice President and Municipal Bond Analyst, Kirkpatrick Pettis Capital Management

 

Earlier this week, Oregon residents approved almost $180 million of general obligation bonds, substantially less than the $940 million approved last May.  Although results have yet to be certified, and therefore are still preliminary, the bonds approved by this election are in high demand as investors seek high quality tax-exempt investment alternatives.  There are four scheduled election dates in Oregon each year: the 2nd Tuesday in March; the 3rd Tuesday in May; the 3rd Tuesday in September; and the 1st Tuesday after the first Monday in November.  In November 2008, Oregon voters approved Ballot Measure 56, which repealed a law requiring more than 50% of a county’s registered voters to vote in bond measure elections held in May and November.  As a result, the May election has become an important election to follow for new bond measures.

By election measure, 75% of the bond issues were approved; however, 72% of the total requested par amount was approved by voters.  Oregon typically sees more ballot measures during general elections, which are held in November of even-numbered years.  Accordingly, the current election falls flat versus the 2018 November general election, which approved a healthy $1.4 billion of new supply.

Source: Kirkpatrick Pettis Capital Management and various Oregon County Clerks.

 

Source: Kirkpatrick Pettis Capital Management and various Oregon County Clerks.

Election results were lower than last year for several reasons.  The primary reason is the large election-dominating measures have already passed.  In November, Metro passed its $650 million housing bond issue, Eugene School District passed its $319 million general obligation bond, last May Salem-Keizer School District passed a $619 million bond, Corvallis School District passed a $199 million bond.  By comparison, the largest measure presented to voters this week was the $82 million bond for Central Point School District (Jackson County School District No. 6).  Furthermore, unlike previous elections the Portland metropolitan area was relatively unrepresented, except for the Lake Oswego parks bond.

However, what this election did see was a variety of measures that are often more difficult to pass, such as the Lake Oswego bonds for parks and recreation.  Projects like this are often viewed by voters as less important than schools or essential services, such as water and sewer, and are therefore often rejected by voters in favor of more essential projects.  Although Lake Oswego’s bonds are passing, Redmond presented a similar issue to voters, which was only able to capture 45% of votes.  Santiam School District has never successfully passed a general obligation bond measure and last asked voters for a bond in 2008 when it requested $14.5 million, which voters rejected by 61%.  This election saw Santiam School District passing by 52%.

Furthermore, a significant marketing point for several of the schools issues was the Oregon School Capital Improvement Matching program, which is a grant program offered by the Oregon Department of Education, supporting communities that pass general obligation bonds for school improvements.  An example from this election is Elkton School District, which asked voters to approve a $3 million bond, which if approved, will be matched by an additional $3 million from the State.  Measures such as this present a good value to property taxpayers, since half of the project is funded by the matching grant.  Elkton’s measure is currently passing, with 62% of votes approving the measure.

Overall, this election will provide a significant source of additional supply to the bond market and many of these issues may become portfolio holdings.  The year has been off to a slow start, and while this election will help alleviate some of the supply concerns, we expect that issuance will be lower this year than last year.

05/22/2019

Municipal Market Complexity and New Issue Investing

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One of the challenges municipal bond investors face when navigating the municipal bond market on their own, is accessing bonds in the new issue market. The advent of retail order periods for some larger issues has improved retail access. However, both the inherent structure of new municipal bond issues, and the origination process itself, create challenges for retail investors hoping to place small orders for new issues.

Compared to new issues in the corporate bond market, new issues in the municipal bond market are much smaller, and the quantities of bonds available in each maturity can be very limited. This is because municipal bond issues are more akin to a long-term “loan” with a mortgage amortization structure. Each maturity in a municipal bond issue, in essence, is similar to the principal portion of an annual mortgage payment. Much like a loan, the annual debt service (principal and interest payments) is designed to be somewhat consistent over time, as with a home loan or car loan. The result is that municipal bond issues are comprised primarily of a series of consecutive “serial” maturities, in addition to, potentially 1 to 3 longer “term” maturities.
Read more “Municipal Market Complexity and New Issue Investing” ›

04/11/2019

Are You Free of Your Tax Bill for the Year?

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Tax return form with pen and calculator

Tax Day is next week and as you send in your 2018 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 2019, Tax Freedom Day falls on April 16th. So, the average taxpayer will spend 106 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 22 days; until May 8th, to reach Tax Freedom Day.

The Foundation figures that Americans will spend more on taxes in 2019 than on food, clothing and housing combined.

Take a look at our full report, Have you paid your taxes yet?, which includes the Tax Freedom Day® for each of the seven states where we manage a single state municipal bond fund. Check out the entire 2019 Tax Freedom Day® report to see where Tax Freedom Day® falls for all 50 states. Read more “Are You Free of Your Tax Bill for the Year?” ›

04/10/2019

2019 Aquila Tax-Free Fund of Colorado Annual Shareholder Meeting in Denver

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Shareholders of Aquila Tax-Free Fund of Colorado are cordially invited to attend their 32nd annual shareholder meeting Thursday, May 16, 2019 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.

Attendees will have the opportunity to visit with Fund Executives, Trustees, the Portfolio Manager and hear from our guest speaker, Dr. Angie Paccione, Executive Director of the Colorado Department of Higher Education. Dr. Paccione was appointed as Executive Director and unanimously confirmed by the Senate Education Committee in January, 2019. She has more than 20 years of experience in secondary and postsecondary education, has co-authored two books on leadership, and was elected to two terms in the Colorado House of Representatives, where she served as the house majority caucus chair. Dr. Paccione will speak about the Colorado Department of Higher Education’s goals and accomplishments.

We look forward to seeing you on May 16th.

04/04/2019

We recognize retiring Trustee, Edmund P. Jensen

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Edmund P. Jensen retired from the board of Aquila Tax-Free Trust of Oregon, effective March 31, 2019, after having served as Trustee since 2003.

His fellow Trustees, the Aquila Group of Funds and the staff of Aquila Investment Management LLC have benefited greatly from his personal integrity, considerable experience and valuable business insight, and we recognize and appreciate Mr. Jensen’s judgment, perseverance and skill throughout his long service as an independent Trustee.

On behalf of the Funds, we express our sincere appreciation and gratitude for Mr. Jensen’s contributions and for his dedication to the interests of Aquila Tax-Free Trust of Oregon shareholders.

03/25/2019

Arizona’s Dynamic Healthcare Sector

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Anthony Tanner, CFA®, is the Lead Portfolio Manager of Aquila Tax-Free Trust of Arizona

Here in Arizona, the healthcare sector is a vital component of the economy and a key contributor to the state’s growth. Demographic trends, such as the aging of the population and longer life expectancies, together with advancements in treatment and technology, have made healthcare a significant growth sector in Arizona. Beyond hospital and clinical care providers, Arizona’s dynamic healthcare sector encompasses institutions such as:

• Barrow Neurological Institute, a world-renowned neurology and neurosurgery care center.
• TGen, or the Translational Genomics Research Institute, an Arizona-based, nonprofit medical research institute that conducts groundbreaking research on the genetic components of complex diseases, including cancer, neurological disorders, and infectious disease.
• The Phoenix Biomedical Campus, a 30-acre urban medical and bioscience campus in downtown Phoenix. This collaboration among University of Arizona, Arizona State University, and Northern Arizona University includes biomedical-related research, academic, and clinical facilities. It is home to the highest concentration of research scientists and complementary research professionals in the region.
• Bioscience funding leaders including the Flinn Foundation.

The expansion of the Arizona healthcare sector is also necessary in serving a population that continues to grow faster than the national average and captures a significant share of the shifting national population. The state ranked 4th in both population growth at 1.7% and absolute population increase at 122,000 in 2018. Arizona continues to attract a significant portion of those relocating, ranking 3rd for net migration. In 2019 the state is expected to see an increase in population above 100,000 for the third consecutive year.

Healthcare is an important engine of growth and employment stability in Arizona. Even during the Great Recession, employment in the healthcare sector expanded at a time when Arizona shed nearly 300,000 jobs and total employment contracted 11% (Nevada was the only state with a steeper decline in the period).

 

An advanced, diverse, and thriving healthcare industry is critical to Arizona, serving both as a magnet for attracting new residents, and providing world-class medical care to a state population that surpassed 7 million last year. Aquila Tax-Free Trust of Arizona (“ATFTA”) participates in this important economic driver through investments that support important healthcare projects. Last fall, the Fund added new holdings in this sector through two new issues sold to expand existing facilities, at a time when other parts of the country are seeing hospital systems shutter facilities as their populations stagnate or even decline.

In October, we made a new investment in the Maricopa Integrated Hospital System through a purchase of AAA-rated general obligation bonds sold through the Maricopa Special Healthcare District. In addition to providing funds for system-wide improvements to its existing county-wide facilities, $100 million of this $422 million issue is going toward the building of an extension of the Creighton University Medical School in central Phoenix. The four-year medical school is slated to open in August 2021 with 85 students; the facility will also be part of a health sciences campus with nursing and physical therapy programs. It will be a branch of the Omaha-based school and not a separately accredited medical school.
Read more “Arizona’s Dynamic Healthcare Sector” ›

03/21/2019

Understanding Interest Rate Risk in Bond Funds

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After almost a decade of extremely accommodative monetary policy from the Federal Reserve, with a zero-bound Fed Funds target rate, the Fed began increasing rates in December of 2015, and since then, rates have increased 10 times by a total of 225 basis points. Fed Chair Powell indicated after the March Federal Open Market Committee meeting that we will not see additional rate increases in 2019, but understanding interest rate risk remains an important aspect of investing in bond funds.

A common misconception of investing in bond funds is that when interest rates rise, bonds fall out of favor. While the inverse relationship between interest rates and bond prices does exist, there are many factors to consider when making a decision about current and future bond holdings – and whether to hold individual bonds or invest in a bond mutual fund.

Duration

A bond fund’s duration, specifically modified duration, is an indicator of how sensitive the net asset value is to a change in interest rates. Duration provides investors with another aspect of comparison between bonds with different maturities and coupon rates. Simply stated, for every 1% change in interest rates, positive or negative, the price of a bond fund will inversely decline or increase by its modified duration. For example, if a fund’s modified duration is 5 years, the net asset value could be expected to rise 5% for every 1% decline in interest rates, and fall by 5% for every 1% increase in interest rates. Bond funds with longer average maturities and lower average coupons have a longer duration, and therefore generally experience a higher degree of price fluctuation, while bond funds with shorter average maturities and higher average coupons have a shorter duration and generally experience a lesser degree of price fluctuation.

Price Returns and Total Returns

The good news is that performance of bond funds is not solely tied to the incremental changes in interest rates. Bond fund total returns are generated from two sources; interest payments on bonds (paid as fund distributions) and changes in bond prices. While interest rates rise, active portfolio managers have opportunities to purchase bonds at higher yields, and over time, a portfolio’s income may off-set a decline in the value of individual bonds, mitigating the impact of that decline on a Fund’s total return.

Since its inception in 1980, approximately 98.7% of the Bloomberg Barclays Municipal Bond Index total return has been generated by income.

 

Active Bond Fund Management

Periods of rising rates can be challenging for investors who purchase individual bonds or funds aligned with a bond index. Active bond fund managers have the ability to take strategic steps in an effort to mitigate, to some degree, the impact of market volatility. With the ability to actively manage fund holdings over time, these managers may implement a number of strategies in order to adjust fund holdings based on market expectations. Fund holdings may be altered by quality rating in an effort to manage credit risk – a risk which may increase along with rising rates. Holdings may also be altered by maturity date and coupon, thereby adjusting portfolio duration, or the sensitivity of the portfolio to movements in rates. Reducing portfolio duration would reduce sensitivity to a change in rates.
Read more “Understanding Interest Rate Risk in Bond Funds” ›

03/07/2019

Aquila Tax-Free Trust of Oregon Annual Shareholder Meeting in Portland

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Shareholders of Aquila Tax-Free Trust of Oregon are cordially invited to attend their annual shareholder meeting Wednesday, April 24th, 2019 at 11:00 a.m. at the Oregon Convention Center, Meeting Rooms F150-151, 777 NE Martin Luther King Jr. Blvd., Portland, Oregon. Light refreshments will be served prior to the meeting and parking will be validated at the end of the meeting.

John Mitchell

John Mitchell

Attendees will have the opportunity to visit with Fund Executives, Trustees, the Portfolio Manager and hear renowned Oregon economist and Trustee, John Mitchell, speak about the Oregon and national economy. Mr. Mitchell is principal of M & H Economic Consultants of Portland. He is a past chairman of the Oregon Council of Economic Advisors, and former chief economist of U.S. Bancorp.

Please plan to attend. We look forward to seeing you on April 24th.

02/25/2019

Early tax returns are demonstrating the importance of tax-exempt income

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Many Americans are anxious to find out what the Tax Cuts and Jobs Act of 2017 (TCJA) means for their 2018 filings, and early returns being filed now are giving us some clues. It appears that quite a few taxpayers will either be getting smaller refunds than last year, or may even be owing the government more money than they had in the past.

There were some very visible changes to tax law with the TCJA of 2017. One was the standard deduction increase which is now $12,000 for single filers, and $24,000 for married filing jointly – up from $6,350 and $12,700, respectively. While this may seem like a boon for most taxpayers who can now take almost double the standard deduction available in the previous year, the benefit has been dampened by another more visible tax law change – the State and Local Tax deduction limit, commonly referred to as the “SALT” deduction. The $10,000 cap on SALT deductions may not seem like a big deal at first, but the Personal Property Tax deduction – property taxes paid on homes, cars, boats, etc. – is no longer unlimited. This hits high-tax states such as New York, California, and Connecticut, among others, particularly hard. Taxpayers in these states may have been accustomed to deducting as much as two to three times the current cap for their property taxes alone. The SALT cap potentially puts many more families close to the standard deduction, where it may no longer make sense for them to itemize their taxes. Read more “Early tax returns are demonstrating the importance of tax-exempt income” ›