Bonds issued by the state are known as general obligation bonds “California’s “full faith and credit” “The term “full faith and credit” refers to the issuer’s promise to repay the bonds with all legally available funds. Local entities, such as schools, frequently issue GO bonds that are solely repaid from the issuer’s property taxes.
How are debts in California repaid?
These bonds are guaranteed by an issuer’s general revenues, which include taxes. They do not, however, have a specific tax pledged to repay them, unlike dedicated tax GOs. Instead, bondholders are compensated from general revenues, which, if insufficient to satisfy debt service, force the issuer to raise taxes.
What are the interest rates on California bonds?
However, there are several bond funds that invest in these high-quality California bonds and provide substantially greater yieldsup to 5.4 percent! And don’t forget, it’s all tax-free. If you invest $100,000 in any of these funds, you’ll receive $450 in tax-free income each month.
High-yielding closed-end funds (CEFs) are your best bets, with some of the greatest annualized returns available.
On the negative, because muni-bond CEFs are becoming more popular among retail investors, many of them are becoming overbought and riskier by the day.
Take, for example, the PIMCO CA Municipal Income III Fund (PZC), which I wrote about a month and a half ago, highlighting that its price drop was unavoidable due to its excessively high premium to its net asset value (NAV, or the value of its underlying assets).
That kind of price drop isn’t what you want in an asset like a municipal bond, which is supposed to be safe.
Fortunately, there are eight funds on the market that provide more stable income and higher returns than this one.
While PZC has delivered an annual return of 4.4 percent while paying a 4.9 percent dividend over the last decade, there are some funds that have delivered better returns and pay similar or even higher dividends:
So, how come these funds outperform PZC, and why aren’t investors opting for them instead of PIMCO?
To appreciate why PIMCO’s California bond funds (PZC is only one of many the company offers) are a lousy deal, you must first understand PIMCO.
PIMCO stands for Pacific Investment Management Company and was founded by UCLA alum Bill Gross in Newport Beach, California. The firm has grown to manage roughly $1 trillion in assets for investors over the last few decades.
PIMCO has undertaken an intensive marketing campaign throughout California, which is one of the main reasons for this. Because of their convenient headquarters in Newport Beach and their relationships with California’s ultra-wealthy, PIMCO has an easy market in which to offer its products in its home state. This also means that its funds are frequently overbought and provide little additional value.
Meanwhile, other management businesses have similar or superior long-term success in their funds, but they can’t compete with PIMCO when it comes to marketing to investors because they’re not situated in California.
As a result, these funds are frequently undervalued in comparison to their true asset worth. If you bought PIMCO’s PZC, for example, you’d have to pay $1.10 for $1.00 of assets, whereas the Eaton Vance CA Municipal Income Fund (CEV) costs just $0.89!
What’s the bottom line? There are a slew of muni-bond CEFs out there that promise you tax-free income and high gains.
What is the procedure for repaying state bonds?
Rather, they are repaid through a specific revenue stream, which is frequently created by the projects they fund, such as bridge tolls, parking garage fees, or water contract payments. Normally, no voter approval is required for these bonds.
How do municipal bonds in California work?
Municipal bonds are worth considering if your primary investing goal is to protect capital while receiving a tax-free income stream. Municipal bonds (also known as munis) are debt obligations issued by government agencies. When you purchase a municipal bond, you are essentially lending money to the issuer in exchange for a specified number of interest payments over a set period of time. When the bond reaches its maturity date at the end of that time, you will receive the whole amount of your initial investment back.
What is the purpose of hospital bonds?
- A hospital revenue bond is a type of municipal bond that is secured by the revenue that hospitals earn in the course of their normal operations and is used to fund the building of new facilities or modifications to existing hospitals.
- Hospital revenue bonds have a higher default risk than other municipal bonds since they are unable to earn money through taxes like other municipal bonds.
- The income from a hospital revenue bond may be tax-free on a state, local, and federal level.
GO BONDS: HOW DO THEY WORK?
A general obligation (GO) bond is guaranteed by the issuing government’s promise to repay bondholders using all available resources, including tax revenues. Pledges made at the local government level may include a promise to collect property taxes to pay the bondholders’ obligations.
Is it possible to lose money in a bond?
- Bonds are generally advertised as being less risky than stocks, which they are for the most part, but that doesn’t mean you can’t lose money if you purchase them.
- When interest rates rise, the issuer experiences a negative credit event, or market liquidity dries up, bond prices fall.
- Bond gains can also be eroded by inflation, taxes, and regulatory changes.
- Bond mutual funds can help diversify a portfolio, but they have their own set of risks, costs, and issues.
Is it wise to invest in California bonds?
- Municipal bond interest is tax-free in the United States, however there may be state or local taxes, or both.
- Be aware that if you receive Social Security, your bond interest will be recognized as income when determining your Social Security taxable amount. This could result in you owing more money.
- Municipal bond interest rates are often lower than corporate bond interest rates. You must decide which deal offers the best genuine return.
- On the bright side, compared to practically any other investment, highly-rated municipal bonds are often relatively safe. The default rate is quite low.
- Interest rate risk exists with any bond. You’ll be stuck with a bad performer if your money is locked up for 10 or 20 years and interest rates climb.
Do voters have to approve GO bonds?
Hundreds of statewide proposals have been approved by voters since 1974, including more than 100 measures to approve bond financing for various projects, mainly public infrastructure projects.
What Is Bond Financing and How Does It Work? Bond financing is a long-term borrowing method used by the government to raise funds for a variety of objectives. This money is raised by the state selling bonds to investors. In exchange, it commits to repay the money, plus interest, over a set period of time.
What Are Bonds and Why Do They Exist? Roads, educational facilities, jails, parks, water projects, and office buildings have all traditionally been funded by bonds issued by the state (that is, public infrastructure-related projects). Bonds have also been utilized to assist in the financing of certain private infrastructure projects, such as housing. The fact that these facilities deliver services over a long period of time is one of the key reasons for issuing bonds. As a result, it is reasonable for current and future taxpayers to contribute to their funding. Furthermore, the high cash expenses of many projects can make them impossible to pay for all at once.
In addition to issuing bonds to pay for infrastructure, the state has also sold them to cover serious budget gaps, as approved by voters in Proposition 57 of 2004.
However, Proposition 58, passed in 2004, restricts the state’s ability to sell bonds in the future to assist balance its budget.
What Kinds of Bonds Does the Government Issue? To fund projects, the state sells three types of bonds. These are the following:
- Bonds with a general obligation. The majority of these are repaid straight from the state’s General Fund, which is primarily funded by tax receipts. Some, on the other hand, are funded entirely by defined revenue sources, with the General Fund solely serving as a safety net in the event that revenues fall short. (The Cal-Vet program, for example, issues bonds to give house loans to veterans that are repaid with the veterans’ mortgage payments.) The state’s general taxing power guarantees the repayment of general obligation bonds, which must be approved by the people.
- Lease-Revenue Bonds are a type of lease-revenue bond. State entities that use the facilities the bonds support pay off the bonds through leasing payments (mostly financed from the General Fund). These bonds are not subject to voter approval and are not backed by the state’s normal taxing authority. As a result, their interest expenses are slightly greater than those of general obligation bonds.
- Revenue Bonds in the Old Way. These fund capital projects as well, although they are not backed by the General Fund. Rather, they are repaid from a set of revenues created by the projects they fund, such as bridge tolls. These bonds aren’t backed by the state’s general taxing power, and they don’t need voter approval.
What Are Bond Financing’s Direct Costs? The state makes annual principal and interest payments until each individual bond is paid off once it is sold. The annual cost of repaying bonds is mostly determined by the interest rate and the length of time the bonds must be repaid. Investors in each individual bond are normally paid back with level installments over a 30-year period by the state (similar to payments homeowners would make in most 30-year fixed-rate mortgages). If a bond has a 5% interest rate, paying it off with level payments over 30 years will cost close to $2 for each dollar borrowed$1 for repaying the amount borrowed and near to $1 for interest. This expenditure, on the other hand, is spread out over a 30-year period. As a result, after correcting for inflation, the cost is significantly lowerroughly $1.40 for every $1 borrowed.
See here for election results for general obligation bond authority propositions on the ballot since 1986.