Posts Tagged ‘bonds’

On the Poor Timing of the ACC.

5. January 2011

It’s really a sad thing that we still have to be talking about this, but there are still people in Frisco and the surrounding communities that believe that the ACC is a valid use of increasingly scarce municipal funds. In addition to the multitudes of other reasons why it’s a bad idea, I’ve found a new one.

Municipal bonds (muni bonds or munis hereafter) used to be a rather predictable market. They were always considered a safe bet, almost as safe as treasuries, because the municipalities had the power to raise taxes to get money to pay for the bonds of necessary. The bonds would pay a slightly lower yield than Treasurys, but it was okay, because the income was tax exempt.

Recently, however, a flood of munis has hit the market. Perceived risk has increased, driving muni yields up. For instance, today, the 30-year muni rate is 4.9%. The 30-year Treasury rate is 4.25%. This goes against everything that is ever taught in a class about bonds. The perceived risk of the two securities are almost exactly the same, but their tax-exempt status makes munis more attractive, drives up demand and drives down yields.

However, there has been a series of uncertainties in the continuation of the tax-exempt status of the muni bond and the municipalities’ ability to pay, driving yields up. Which is great if you’re an investor. Not so great if you’re the borrower. The President’s deficit reduction panel came out with a plan that called for the removal of the tax-exemption of the muni bond, throwing expectations off and ridding the market of stability.

Because of the increase in interest rates, it is a bad time to sell the bonds for the ACC. It’s simply more expensive to finance any project, but it is especially outrageous to attempt to justify selling these bonds at these rates for an unnecessary project like the ACC.

Obviously, it is just as expensive to finance the ACC as it is to finance a project like Fire Station 7. However, as most members of the Frisco City Council and the fire chief expressed last night, that is a necessary project. It is crucial for keeping the city’s ISO rating at a 1, which affects the homeowner’s insurance rates for everyone in the city, aside from the obvious benefits of faster emergency response times. Additionally, that project may not require the sale of bonds, making it all the better a choice for the City of Frisco’s funds.

The ACC is becoming more and more expensive to build, a trend which shows no signs of stopping. It’s time for even the staunchest of AC supporters to rethink their position.

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