Municipal Bond Forum

My county wants to issue $60 million in bonds for capital improvements to our school system. Many question the advisability of using bonds vs. some other form of ad valorem tax or use of a lottery or sales tax. I think alternatives to the bond issue might, in the long run, be more expensive and less suitable to the intended purpose. The bond issue seems to be advantageous in that it obtains the money up front and is, in effect, a sunset law that expires on the maturity date. As we all know, taxes go on forever, even after the original purpose has ceased to exist. Further, the cost to the taxpayer will be less with a bond issue than with any other means of obtaining funding. Assuming a 30-year issue with a base interest rate of 4.5%, the county would need to raise about $2.7 million annually for interest payments and create a sinking fund of under $2 million to cover payments at or before maturity. These funds could likely be obtained by some form of property transfer tax, so future residents would be assuming a fair share of the school expense burden. Am I off the wall? Is there a better way to raise this money? If bonds are the way to go, what interest rate and term should be expected?

D.C.

As a trustee of a non-profit organization and without financial background, I am frequently confused at the discussions about the $30 million portfolio. Are there any rules that would point to carelessness? Twenty years ago, I was told that if bonds are called on a regular basis, it indicates a lack of attention because we should be selling them before they are called. What should I look for to determine if our broker’s buy/sell recommendations are maximizing his commissions? If, for instance, we are investing $150,000, would it be better to buy one bond or three $50,000 bonds? I understand diversity is an issue, but are commissions and fees based on the total dollar amount or the number of bonds purchased?

P.H., Ohio

Too bad for them as rates have been steadily rising!

J., New York

I am unable to determine how I can purchase municipal bonds during the “initial offering period” when the purchase fees are paid to the initial seller. It appears that the brokers are now buying up the bonds for their own accounts and then selling them back to their clients at an additional fee. I consider this double dipping and taking unfair advantage of their clients! How do I prevent this? What system and procedure is necessary?

F.P., Arizona