Don’t Let Tax-Free Wag Your Fixed Income Investments

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When you read about crap muni bonds issued by Chicago, you see why they do not belong in your portfolio. The Editors at The Wall Street Journal write (abridged):

In January Chicago shaved $310 million off this year’s deficit by issuing another $1 billion in sales-tax bonds to refinance outstanding GO bonds. Investors didn’t seem to care that the new bonds are subordinate to the previous tranche. Tax-exempt bonds maturing in 2040 yielded 2.4%, which is on par with the 30-year Treasury. We know investors are hungry for yield, but are they famished?

Chicago’s budget woes are mounting, and financial alchemists are diluting the claims of existing creditors. If the city were to renege on its $8 billion in GO debt, those bondholders would surely demand a slice of the sales-tax revenue now pledged to other creditors. This is what happened in Puerto Rico.

Amid increasing economic and fiscal duress, Puerto Rico created a shell corporation to issue debt securitized by sales-tax revenue. But years later after declaring bankruptcy, it seized the sales-tax revenue, as well as revenue pledged to creditors of its highway authority, to pay for operating expenses and public pensions.

What happens if Chicago floats more sales-tax-backed bonds but revenue is insufficient to repay all the debt? Not to worry, Kroll Bond Rating Agency explained in a recent analysis. The sales-tax corporation has promised in its bond offering statement not to become overextended. But as investors should know, borrowers under financial stress often seek to amend covenants.

Chicago’s population has declined for each of the past four years, and taxpayers are getting tapped out. On top of a $50 million increase in property taxes this year, Mayor Lori Lightfoot has imposed a new “congestion” fee on Uber and taxi rides, doubled the tax on restaurant meals, and raised a special personal property tax on computer cloud software.

Yet a recession would probably blow a gigantic hole in its budget and could cause its pension funds to run dry. Does anyone think that city politicians wouldn’t prioritize public workers over bondholders?

Investors at least demanded a handsome interest-rate premium for buying Puerto Rico’s debt. Investors in Chicago’s debt are getting junk for the same price as a U.S. Treasury. They are likely to get what they’re paying for.

When you read stories like that, and those I’ve linked to below, it’s no wonder people are fleeing Chicago and Illinois in droves looking for a better America. Don’t trust municipal bonds from places residents are fleeing in droves.

• Illinois: New Governor, Same Old Pension Pyramid Scheme
• 64 People Shot in Chicago
• Cook County Residents Forced from Their Homes
• A Risky Addition to an Otherwise Decent Dodd-Frank Reform: Part II
• High Tax Illinois Suffers Exodus
• Illinois Goes Back to the Trough
• Illinois’ Answer to Saving too Little? Borrow More and Hope
• Illinois is About to Stick its Head Deeper in the Sand

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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