by John Darer
Municipal bonds are sometimes touted to plaintiffs by financial advisors and stock brokers in competition with structured settlements.
After all both are income-tax-free, right?
But the headwinds are brisk and rippling municipal bond red flags! Caution is warranted.
In the second quarter of this year, Moody’s downgraded some 300 U.S. municipal bonds issuers. This many downgrades of municipal bonds in a 90-day period represent the greatest number of downgrades in municipal bonds this decade. Some highlights: Moody’s downgraded $6.9 billion in municipal bonds associated with Detroit, Michigan, and cut the credit rating for Stockton, California. Stockton subsequently filed for bankruptcy on June 28th (Source: Financial Times, August 9, 2012
U.S. municipalities are facing declining property taxes, rising unemployment and large debt loads. Property tax collection, which is considered a main source of revenue for towns and cities declined again in the first quarter of 2012. After adjusting for inflation, property tax collections by U.S. municipalities have dropped for the past six quarters. (Source: Wall Street Journal, August 13, 2012.)
According to Michael Lombard, MBA, who writes for Profit Confidential, the majority of the municipal bonds that are issued do not carry any insurance to protect the municipal bond buyer!
Lombardi observes in a newsletter transmitted August 22, 2012, that "since the credit rating agencies such as Standard and Poor’s and Moody’s do not rate all the municipal bonds, the situation could be even direr. As a matter of fact, there were 36 times more defaults of municipal bonds reported by Federal Reserve than those reported by the credit rating agencies". He cites the August 15, 2012 Washington Post "The total market for municipal bonds is $3.7 trillion, but Standard & Poor’s tracks only $1.3 trillion worth of municipal bonds".