Not your father’s muni

Innovative and municipal bonds are not often used in the same sentence, but that isn’t stopping local governments from finding new ways to pay for infrastructure needs. For example, Ohio and Fifth Third Securities recently announced a $30 million bond, which differs from other municipal bonds because it will be sold at par with no commissions, fees or premiums added above the face value. Instead, broker fees are in the price. In addition, the bond will be offered for a week, instead of only a few hours, and will be more accessible to small investors through a network of broker-dealers, as opposed to being purchased on secondary markets, which add still more fees.

In another example of creative financing, Sioux Falls, S.D., Mayor Dave Munson has recommended a bond using a derivative — which is more commonly used in the private sector — to change the way his city is paying Lewis & Clark Rural Water System to deliver treated aquifer water by 2012. The city already has been paying Lewis & Clark $1.2 million quarterly and will pay $1.5 million per quarter next year. If the bond is approved, the city instead would only pay the interest, about $400,000, in 2007.

Apparently, innovative municipal bonds are becoming more common. For the past five years, The Bond Buyer, a daily newspaper covering the $2.3 trillion municipal finance industry, has recognized the nation’s most innovative municipal-bond issuers for its Deal of the Year awards. This year’s 10 finalists, all of which financed public infrastructure projects, include:

• The New York City Industrial Development Agency, which received a unique IRS ruling so it could use cheaper tax-exempt financing to construct two Major League Baseball stadiums while limiting the cost to taxpayers.

• The Texas Transportation Commission for state highway fund first-tier revenue bonds, the structure of which allows the state to raise $3 billion in financing through triple-A bonds.

• Clayton, N.M., for a complex revenue bond for a jail project crucial to the community’s economic future.

• The Fairfax County, Va., Economic Development Authority for financing that jump-started the transformation of a historic prison into a community arts center.

Even traditional municipal bonds have become a favorite among investors in the past several years, outperforming many taxable funds, which may explain why money is flowing into them. In the first six months of 2006, investors poured in $5.9 billion for municipal bonds vs. $2.2 billion the previous year, according to the Boston-based Financial Research Corp. The average yield is 4 percent and can reach as high as 6.15 percent, depending on the tax bracket of the bondholder.

Without even considering the growing sophistication of municipal bonds, some investment firms see an even brighter future for them, especially as baby boomers retire and seek stable investments. Municipal bonds may not be sexy ways to invest, but as they age, baby boomers likely will find stability more thrilling.
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