Munis offer no safe harbor

It has been an accepted fact for ages: Municipal bonds are a safe, secure, and conservative investment, a good foundation for anyone’s portfolio.

As the stock market roiled over the past few years, many investors pulled their money out of the market and stashed it in muni bonds for the time being. After all, the bonds are attractive because of the federal tax exemption and the fact that Standard and Poor’s says of the nearly 55,000 municipal bonds issued in the last 25 years, only 47 have defaulted. Moody’s, going back to 1970, pegs the number at 71, both just fractions of the overall $3.7 trillion muni market, especially when looking at the corporate default rate, which is as high as 40 percent over the same period.

But the New York Federal Reserve Bank is crushing that perception. The bank released a study it says shows the municipal bond default rate is nearly 40 times what S&P and Moody’s report. And with the uncertainty of the economy and potential budget cuts, especially should Mitt Romney and his slash-spending sidekick Paul Ryan win in November, investors may rethink sailing their boat into the muni safe harbor. The GOP plan for cutting spending includes closing the tax exemption for municipal bonds, a proposal that conservative outlets such as the Wall Street Journal think is a good idea, both to increase revenues and tamp down the urge by governments to borrow more than they can afford.

The wide disparity in the muni default numbers has to do with ratings. S&P and Moody’s only look at rated bonds, while the Fed study points out that many bond issuances by the public sector are not rated. According to the Fed database, going back to 1958, some 2,527 municipal bonds have gone into default, the largest portion – 28 percent – being industrial development bonds.

The Fed says general obligation bonds are still strong, mostly because of the ability of state or local governments to levy taxes to assure the full faith and credit of the bond. The recent defaults on general obligations bonds by Jefferson County in Alabama; Harrisburg, Pennsylvania; and Stockton, California, are the rare exceptions, they say, though they do shine a flashing yellow caution light for investors.

But revenue bonds for airports, toll roads, schools, ballparks, and such, are dependent on revenue streams that are fluid and they count for the vast majority of muni defaults. The New York Fed did not offer a detailed list of where and what bonds have defaulted so it’s hard to tell if any were from Massachusetts.

Why does this matter to anyone but big-time investors and banks? Because the Fed’s numbers show that nearly three-fourths of municipal bonds are held by households. Individuals account for just over half of muni investors, and mutual funds — where most people have their 401(k)s – account for another 25 percent of the market.

If the default rates increase and/or the tax exemption disappears, it will have a huge effect on small investors. The safe harbor is beginning to get a little choppy.

                                                                                                                                    –JACK SULLIVAN

BEACON HILL

Attorney General Martha Coakley sues a group that said it was fundraising for veterans, but allegedly only donated 9 percent of the take.

MUNICIPAL MATTERS

The Civil Service Commission upheld the firing of a Quincy DPW worker who claimed he took a city-owned pump as a “practical joke.”

The New Bedford City Council overrode Mayor Jon Mitchell’s veto of a 44 percent salary increase for councilors.

An 11-year-old girl was grazed by a bullet as she slept in her family’s Lawrence apartment, the Eagle Tribune reports.

Somerville tees up a $90 million urban renewal project around Union Square.

CASINOS

The state’s new Gaming Commission took a tour of the Raynham dog track though they insisted it was in their role as the new overseers of racing rather than because of owner George Carney’s desire for a slot permit.

A potential casino developer in Springfield is concerned about Mayor Domenic Sarno’s plan to choose one casino proposal to put before voters, the Springfield Republican reports.

ELECTION 2012

Paul Ryan, one of the most vocal opponents the 2009 federal stimulus bill, repeatedly denied in recent years ever seeking funds from the program for his district, but admitted yesterday that he had in fact sent letters to federal agencies seeking millions of dollars for projects in
Wisconsin. The New York Times rips Ryan for cozying up to Sheldon Adelson.

Globe op-ed contributor Joshua Green offers three cheers for a harsh and nasty presidential campaign. Mitt Romney insists he paid at least a 13 percent income tax rate rate over the past decade, but Harry Reid still wants to see the paperwork that proves it. The Times notes the work of Romney’s transition team.

Speaking of nasty campaigns, US Rep. William Keating and Bristol District Attorney Sam Sutter, his Democratic primary opponent for the new 9th Congressional District, squared off in a feisty debate on WATD last night, though showing little difference on issues.

This is a public service announcement: Today is the last day to register for next month’s state primary.

Democrats running to replace Barney Frank in the Fourth Congressional District met for a debate on NECN last night, WBUR reports.

Slate checks in on David Cicilline’s tough reelection fight in Rhode Island. Skip down to the end, where Buddy Cianci opines on Cicilline’s poll numbers.

BUSINESS/ECONOMY

The owner of the Worcester Tornadoes is in court today to defend against allegations that the Can-Am baseball team owes a sports apparel company over $20,000.

A federal appeals court rules a biotech firm can patent human genes.

EDUCATION

David McCullough Jr., the Wellesley High School teacher whose “you’re not special” commencement address became a global YouTube sensation, has inked a deal with HarperCollins to write a book expanding on the themes of his speech.

Boston Mayor Tom Menino is asking a state fact-finder to step in and help resolve an impasse in contract negotiations with the Boston Teachers Union.  

HEALTH CARE

A surprising finding from a Boston cancer researcher, whose work may have opened the door to a male birth control pill, reports the Globe.

TRANSPORTATION

Cab drivers are livid over the new Uber livery system that lets people call a luxury car service with a mobile app.

Amtrak ridership in the Northeast corridor soars, at the expense of air travel: The train now owns 54 percent of Boston-to-New York travel, and 75 percent of New York-to-Washington trips.

ENERGY/ENVIRONMENT

North Shore public safety officials are seeing more calls from people who have bats trapped in their homes, the Salem News reports. August is typically the month that young bats learn to fly and accidentally enter dwellings.

The Wall Street Journal notes changes to Massachusetts biomass plant regulations.

CRIMINAL JUSTICE

Boston Police Commissioner Ed Davis says Sunday’s murder of three young women in Dorchester was “most likely gang related.” The Herald spotlights the spread of small gangs in the city, and fires up old tensions between Davis and Suffolk DA Dan Conley.  Former mayor Ray Flynn has a column in the Herald spread, and engages in quite a bit of revisionist history over how and when Boston quelled the rampant gang violence of the 1990s (it happened a couple of years after Flynn decamped for the Vatican).

Brockton police arrested 20 prostitutes and their johns during a sweep of a residential neighborhood last week but residents say the streetwalkers and their would-be customers are already returning. But, what the heck, here’s a list with the names and towns of those arrested last week. We’ll try shaming them.

SPORTS

Greater Boston brings in retired sportscaster Bob Lobel and former attorney general Scott Harshbarger to explore how the Red Sox took the fun out of dysfunctional with this woebegone season. We don’t think Harshbarger’s presence means there could be criminal charges but most fans would support them.