Random topic this month: municipal bonds. Usually, I try to write about something that is in the news or is currently affecting the stock market, but this month I’m going to stray a bit. When I started in this business, I worked for the investment department at US Bank, known as US Bancorp Securities. At US Bank, we not only had a municipal bond desk to sell the bonds, but also a public finance department to underwrite them. This is where my interest in the muni market was born and fostered.
Municipal bonds, or muni’s, are debt instruments that are issued by local governments (cities, counties, states, etc). This means they are borrowing money for some sort of project or expense from the investors who are buying the bonds. The issuer gets a lump sum of money and the bond holders get a semi-annual interest payment and then their face value back on a specific date. Generally speaking, the interest from municipal bonds is federally tax free. Additionally, if your state has an income tax, then muni’s from your own state are generally state income tax free also. This doesn’t matter to us here in Washington, but is very important elsewhere.
As with any other type of bond, municipals are backed by the financial strength of the issuing entity. The source of their payments generally splits muni’s into two categories: general obligation bonds and revenue bonds. General obligation bonds, or GO’s, are backed by the taxing power of the issuer. For instance, King County may issue a bond and use its property tax revenues to pay the interest and principal. The City of Seattle just voted to use property taxes to fund its $930 million transportation measure, if approved this fall. To do this they would issue out GO bonds. Revenue bonds are issued to support a specific revenue producing project. The revenues that the project generates are used to pay the interest and principal. Stadiums and toll bridges are good examples of these types of projects.
Throughout the years, municipalities have become creative in their use of municipal debt. For instance, Certificates of Participation (COP’s) can be issued out so that government agencies can purchase or lease equipment (often in smaller quantities) without issuing out long term debt. The interest and principal is secured by the lease payments. In Washington, state agencies as well as our state schools use these to purchase equipment such as computers and vehicles.
Another very popular use was the Tobacco Settlement Bonds. These were used in the early 2000’s after the major tobacco companies settled with many states and agreed to pay a certain amount every year in perpetuity. Some states, such as Washington, decided to securitize these payments in order to receive a large amount all at once. Thus, creating the Washington State Tobacco Settlement Authority, which issued out the bonds in our state that are backed by these tobacco company payments.
From the investor perspective, municipal bonds can generate attractive after tax returns on relatively safe securities. Because municipal bond interest is tax free, the higher your tax bracket the higher your after tax yield will be. For instance, a 2.5% tax free yield at a 31% tax bracket will result in a 3.62% after tax return.
Municipal bonds are an important type of security and their uses are seen every day. From schools to public housing to roads to hospitals, the effects of muni bond offerings are everywhere. However, it is important to know what you are buying. As with most types of securities, there are a large variety of muni’s to choose from and a wide range of risk profiles to consider. And, as always, the higher the risk, the higher the potential return (and vice versa). So, please consult your Financial Advisor before investing.
Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
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A Financial Advisor registered through CUSO Financial Services, L.P., Gavin has 25 years of experience as an advisor in the Puget Sound area.
“I believe every client is unique and deserving of a personalized financial plan that will help them reach their individual financial goals. Before I make any recommendations, I like to get to know my clients. By asking the right questions, and developing an honest, trusting relationship, I can really get a sense of what’s going to work best for them.”
Gavin graduated from the University of Washington with a BA in Business Administration and started his financial career with US Bank in the Investment Department. Prior to joining Verity in 2006, he spent eight years with Piper Jaffray.
So what is Gavin’s vision for his dream retirement?
“My dream retirement would be absolutely worry free: financially, emotionally, and in every aspect of life. My finances would be in order so expenses for travel, luxuries, and gifts for the kids, grandkids, and great-grandkids would be taken care of. My kids would be financially sound, so I would be confident in their prosperity. This would give me the freedom to travel and play and do whatever it is I want to do.”
When Gavin’s not working, he enjoys spending time with friends and family, watching Husky football and taking weekend trips around the Northwest.
Gavin is registered to transact securities business in the states of AZ, CA, CO, FL, HI, ID, IL, KS, MN, NV, NY, OR, UT, VA and WA.
*Non-deposit investment products and services are offered through CUSO Financial Services, LP (“CUSO Financial”) (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CUSO Financial. Verity Credit Union has contracted with CUSO Financial to make non-deposit investment products and services available to credit union members. Atria Wealth Solutions, Inc. (“Atria”) is not a broker-dealer or Registered Investment Advisor and does not provide advice. CUSO Financial is a subsidiary of Atria.
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