Thursday, January 27, 2011


If you're holding municipal bonds, you probably won't know of any problems until it's too late.

The Wall Street Journal commissioned a study by DPC DATA, a specialist in municipal disclosure, to expose how poor the financial reporting is for municipalities. The report shows the problem has worsened since the company's previous 2008 study. Of the 17,000 bond issues studied, more than 56% filed no financial statements in at least one year between 2005 and 2009. More than one-third skipped three or more years (up from 40% in 2008).

As Peter Schmitt, CEO of DPC DATA, puts it, "This works out to insufficient ongoing disclosure information for more than $2 trillion of the $3 trillion in outstanding bonds."

The analysts and brokers saying the municipal bond crisis is nothing to worry about probably aren't basing that opinion on fact. Hardly any financials are available. And when the public borrowers do file financial records, the documents are "often so confusing or spotty that even professionals can't make sense of them."

Here are a few examples from the WSJ article:

The Clay Gas and Utility District of Clay County, Tennessee, didn't file disclosures for 10 years, until one in November saying it didn't expect to make future payments.

Helen Kirkpatrick, a retired journalist in Chevy Chase, Maryland, spent $25,000 10 years ago on Maryland Health and Higher Education bonds. She said she checked regularly for updates online and didn't see anything amiss. But then in October, she was stunned to get a letter from a broker offering 50 cents on the dollar. The letter said the issuer could not promise to pay more in the future. She searched for information and found none and couldn't reach the issuer. Confused, she took the deal.

Chowchilla, California, defaulted on its bonds used to renovate city hall earlier this month. The city, which bills itself the "Gateway to Prosperity," had never filed documents notifying investors that a default was coming. The city's most-recent financial statement currently on file is for the fiscal year ending in June 2009.

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