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.


The Tax Cuts and Jobs Act has been Beneficial for Colorado


The Tax Cuts and Jobs Act (TCJA) has been positive for the supply and demand dynamic in the Colorado municipal bond market. TCJA eliminated tax-exempt advanced refunding, which has resulted in lower municipal bond issuance this year. The new law also limits state and local tax deductions to $10,000, which we expect will increase municipal bond demand from investors. Advanced refunding issues accounted for 18% to 29% of municipal bond supply from 2012-2017. The TCJA was the largest overhaul of the US tax code since 1986, and reduces individual and corporate income tax rates, which will affect most states by eliminating or reducing exemptions and deductions that were available prior to its passage. Individual and corporate income tax revenues in Colorado will increase by an estimated $196 to $340 million a year as a result.

The passage of TCJA is also expected to increase Colorado’s general fund by an estimated $309.3 million in fiscal year 2017-18, $207.3 million in fiscal year 2018-19 and $326.3 million in fiscal year 2019-20, according to the Colorado Office of State Planning and Budgeting’s December 2017 forecast. The substantial growth in fiscal year 2017-18 is a one-time increase, as investors postponed capital gain sales and corporations deferred tax liabilities in anticipation of federal tax law changes.

While TCJA is a positive for the state, Colorado’s Public Employees’ Retirement Association’s (PERA) unfunded liability is still a concern that we are monitoring. Senate Bill 18-200 was passed in the Colorado Legislature on May 9, 2018, to make modifications to PERA to reduce its unfunded liability. The TCJA is expected to provide consumers with more disposable income and will continue to expand Colorado’s economy at lower levels due to higher costs of living, tight labor markets and inflationary pressures as interest rates increase.


Oregon Local Bond Measure Election Analysis


Earlier this week, Oregon residents approved over $940 million of general obligation bonds across the State, which was historically strong. Although results have yet to be certified, and therefore still preliminary, bonds approved by this election far outweigh the $852 million approved at the previous Oregon November special election in 2017. 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, approximately 59% of the bond issues were approved; however, 80% 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 2016 November general election, which approved a staggering $1.76 billion of new supply.

Election results were dominated by Salem-Keizer School District’s $620 million issue, which is estimated to cost taxpayers $1.24/$1,000 of assessed value. Overall, 90% of the total par-amount approved at the election was for school districts making capital improvements to existing facilities and constructing new facilities to accommodate enrollment growth. Furthermore, a significant marketing point for several of the school bond issues was the Oregon School Capital Improvement Matching program, which is a grant program, offered by the Oregon Department of Education for the support of communities that pass general obligation bonds for school improvements.

Some elections were closer than others. Nestucca Valley School District’s general obligation bond was last reported as being favored by only 21 votes. If approved, the bond measure would fund the construction and renovation of school facilities. Also, tax-rate and the overall par amount requested did not seem to weigh into voter decisions as much as demographics and geography. For example, both measures in Douglas County failed. The election also approved a wide variety of projects ranging from park and recreation facilities and road improvements to addressing overcrowding and safety in schools.

Overall, this election will provide a significant source of additional supply to the Oregon bond market. 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.


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.