Social media makes a mockery of high profile people who lie and cheat. So why do investors let politicians get away with lying, skirting the truth and spending money the state or city doesn’t have? Certainly, adding to the mountain of unfunded pension and health care liabilities fits this category of untruths.
If you feel anywhere as angry as I do about the mile high pension promises given to public employees—without a snowball’s chance of ever being paid—then do something. The current worst offenders are Illinois, Chicago and New Jersey.
Add to this, that courts time and again favor the claims of pensioners over the legal rights of municipal bondholders. Now we have the worst case scenario that few in Muniland ever anticipated. This especially goes for Detroit’s General Obligation bonds.
So the system has run amok. Detroit General Obligation bondholders received only 74 cents on the dollar in bankruptcy reparations. Limited GO bondholders recovered even less from the city’s bankruptcy—just 34 cents on the dollar.
I believe that Detroit will become the template for future municipal bankruptcies and restructurings. The call to action for these floundering entities will be, “Screw the bondholders.”
It is a relatively easy in concept to stop this abuse of investors—just refuse to purchase these bond issues. After all, the yields on Illinois, Chicago, Puerto Rico and New Jersey municipal bonds don’t even reflect the obscene risk they pose to investors.
Oh sure, the municipal bond fund managers say these issues are money good. They’re just protecting the book of business that fattens their bond fund yield and their own wallets.
So become a refusenick. Don’t own municipal credits whose financials, credit worthiness and unfunded liabilities continue to erode. The yield and headline risk are not worth it. Investors own municipal bonds to preserve their wealth, not to earn an above market return. That’s what growth stocks are for.
Adapt a new muni investment strategy: Own good quality revenue bonds instead of General Obligation bonds. Accept only issues like large airport revenue bonds, senior liens only. Buy rapid transit system bonds in cities whose population is dependent on that transportation system. San Francisco’s Bay Area Rapid Transit (BART) is one example. Buy Texas Permanent School Fund bonds. These bonds have a pristine guarantee. Buy water and sewer bonds in upscale areas whose foreclosures barely exist and in areas not suffering from drought.
There’s a big universe in the $3.7 trillion municipal bond space. Surely you can find any number of bonds that satisfy your investment needs. So, be a refusenick when it comes to owning Illinois, Chicago, Puerto Rico, and New Jersey municipal bonds.
Marilyn Cohen is president of Envision Capital Management, a Los Angeles fixed-income money manager.