By Ryan Barstad and Shane Morales

Used to pay for projects when the county or city doesn’t have the funds at hand.

Bond issued by city or government. Issuers of bond are cities, counties, airports,

redevelopment agencies, and school districts. Have to be below state level in order to issue

the bond. Used to raise funds for the city or county.

Tax-backed (less risk) PMT guaranteed by tax revenue.

Revenue Bonds (more risk) PMT backed by revenues generated from

projects.

Benefits Low default risk. Tax-exempt from federal and state income

taxes. Wide range of choices to meet investment

objectives. Marketability if investors want to sell before

maturity.

Credit risk is evaluated by commercial rating companies.

Investors can then analyze the different ratings and match them with their risk tolerance.

Interest rate risk. Tax risk. Insurance.

Most defaults happen during economic downturns and slow growth periods.

Fluctuating land values. Commodity booms and busts. Financial mismanagement. Underestimation of costs. Unrealistic projections of revenue and

growth.

1994 Robert Citron- Treasurer of Orange County.

Was in office for 24 years. Invested in REPOS, Floating Rate Notes

and Municipal Bonds. Invested in many high risk municipal

bonds.

Reasons for borrowing in high risk bonds Proposition 13 (1978)- property taxes

decreased 57%. Protected homeowners from paying too much.

Tax allocation cuts.

$7.6 billion in the investment pool of Orange County’s own money. (37%)

Borrowed $13 billion (63%) Was very profitable and growing the OC

investment pool by at least 9% annually. No one said anything due to success and

because of tight budgeting and low funds.

OC municipal bond rating= “AA” November 1994, Federal Reserve raised

interests rates from 3.25%-5%. Municipal bonds rating plummeted from “AA”-

Default bonds. (junk bonds) Couldn’t sell back bonds to Wall Street because

they were too risky.

Lost $1.64 Billion.

December 6th 1994- Citron filed for Chapter 9 Bankruptcy. Froze 185 southern California school districts.

Residents of OC’s pension was under scrutiny.

Day after: Municipal bond market fell 1 point.

Dow Jones fell 10.43%.

Sued Wall Street. Took tax funds from county agencies.

Pay back bondholders and vendors who put money in the risky securities.

June 1996- OC issued $880 million in bonds to pay off current debt on other bonds.

Bond was sold and Orange County was out of Bankruptcy in only 18 months.

AKA whoops Estimated demand of power to double in

the Northwest every ten years. Planned to build 5 nuclear power plants

to meet demand. Revenue bonds offered. Expected to repay the bonds with money

generated from the projects.

Construction delays and increased costs to meet safety standards drove the cost of the project to four times original estimates.

Demand declined due to increased energy costs, conservation, and a slowing economy.

The project was abandoned and the WPPSS faced repayment of the losses.

Supreme court voided contracts. Investors lost $2.25 B, the largest municipal

bond default in history.

Which kind of municipal bond is more risky?

Revenue bond

What is the name of the treasurer who caused the O.C. bankruptcy/default?

Robert L. Citron

What are the three types of risk associated with municipal bonds?

I.R. risk Credit risk Tax risk

Name two of the five states with the worst credit ratings.

California New York Kentucky Ohio Florida

Name one of the causes of the WPPSS default.

Over-projection of CF and demand Underestimating costs

How much did Citron borrow in his investment pool?

$13 Billion (63% of the investment pool).

What was the reason for Citron to invest in such risky securities (muni bonds)?

Proposition 13. Tax cuts.