The document provides an overview of municipal bonds, including different types of municipal debt like general obligation bonds, revenue bonds, and short-term borrowings. It discusses where to find key bond documents through the Electronic Municipal Market Access (EMMA) website. It also covers important bond math concepts like yield, coupon, and debt service calculations. Benchmarks like Municipal Market Data curves are presented as a way to evaluate borrowing costs in context. Finally, several databases for finding municipal bond data are listed.

1. MUNICIPAL BONDS 101
Cezary Podkul | @Cezary
6/6/2015 1IRE 2015 | Philadelphia

2. Link to Class Materials
• Everything you need is in Dropbox:
2
bit.ly/1ElBGNR
6/6/2015 IRE 2015 | Philadelphia

3. Roadmap
• What we hope to learn today:
1. Muni Bonds: Why Do We Care?
2. Taxonomy: Types Of Muni Debt
3. Bond Docs: Say Hello To EMMA
4. Bond Math: How Much Do We Owe?
5. Benchmarks: View It In Context
6. Databases: Where To Get stuff
36/6/2015 IRE 2015 | Philadelphia

4. Muni Bonds:
Why Do We Care?
Part 1
46/6/2015 IRE 2015 | Philadelphia

5. Why Do We Care?
• Governments borrow to build our
essential infrastructure through
the $3.6 trillion muni bond market:
– Schools, universities
– Government buildings
– Water and sewer systems
– Roads, bridges, highways
. . . and much more
56/6/2015 IRE 2015 | Philadelphia

6. Why Do We Care?
• It is also how they get in trouble:
6
- Detroit Free Press, April 5, 1993
- Chicago Tribune, Nov. 1, 2013
- The Bond Buyer, Feb. 12, 2014
- ProPublica, Aug. 7, 2014
- Boston Herald, June 10, 2012
- BenefitsPro Feb. 12, 2015 - USA Today, Dec. 3, 2013
- Wall Street Journal, Jan. 26, 2010
- Voice of San Diego, Aug. 6, 2012
6/6/2015 IRE 2015 | Philadelphia

7. Taxonomy:
Types Of Muni Debt
Part 2
76/6/2015 IRE 2015 | Philadelphia

8. Types Of Muni Debt
• Government bonds come in
three major flavors:
–General obligation debt
–Revenue-backed bonds
–Short-term borrowings
• And indirect ways to borrow:
–“Moral obligation bonds”
–Bond guarantees
86/6/2015 IRE 2015 | Philadelphia

9. Types Of Muni Debt
General obligation bonds
• Debt backed by the taxing
power of the governments
that issue them – aka
“full faith and credit”
• Obligation to raise taxes
to make up any shortfall
• Lower risk, lower interest
rates
96/6/2015 IRE 2015 | Philadelphia

10. Types Of Muni Debt
Revenue-backed bonds
• Debt backed by a specific
revenue source, like tolls
from a toll road
• No obligation to raise
taxes to make up any
shortfall – “non-
recourse”
• Higher risk, higher
interest rate
106/6/2015 IRE 2015 | Philadelphia

11. Types Of Muni Debt
Short-term borrowings
• Cash management tool:
bridges gap between when
government needs cash
and when it receives it
• Known as “tax and
revenue anticipation
notes” or TRANs
• Typically due in less than
one year, pay short-term
interest rates
• General obligations
116/6/2015 IRE 2015 | Philadelphia

12. Types Of Muni Debt
“Moral obligation bonds”
• Issuer has authority to
ask the government to
make appropriation to
cover debt service in case
of a shortfall
• Government has a “moral
obligation” to honor the
request
• Not a legal obligation
126/6/2015 IRE 2015 | Philadelphia

13. Types Of Muni Debt
“Moral obligation bonds”
–Surprise! You now owe millions of dollars:
–The advice? Pay up:
• “ … the state will be better off honoring its
moral obligation” – State’s financial advisor, SJ Advisors LLC
13
- Report on Rhode Island’s Moral Obligation Bonds on the 38 Studios Bonds , May 8, 2014
6/6/2015 IRE 2015 | Philadelphia

14. Types Of Muni Debt
“Moral obligation bonds”
–What happens if the government doesn’t
honor the obligation? Swift punishment:
14
- The Bond Buyer, Feb. 12, 2014
- The Bond Buyer, Jan. 14, 2014
- The Bond Buyer, Dec. 13, 2013
6/6/2015 IRE 2015 | Philadelphia

15. Types Of Muni Debt
Bond guarantees
• Government promises to
make good on the debt by
whatever means necessary
to make sure bondholders
get repaid in full
• Lowers the risk for the
bondholders, taxpayers on
the hook to if anything
goes wrong
156/6/2015 IRE 2015 | Philadelphia

16. Types Of Muni Debt
16
Bond guarantees
–The legalese leaves little to imagination:
“Under the City Bond Guaranty, the City has
unconditionally guaranteed, for the benefit of the
registered owners of the 2003 Bonds, the full and
prompt payment of principal and interest on the
2003 Bonds when due according to the terms of the
City Bond Guaranty, for which obligation the City
has pledged its full faith, credit and taxing power.”
- The Harrisburg Authority, Series 2003 Bonds Official Statement
6/6/2015 IRE 2015 | Philadelphia

17. Types Of Muni Debt
Bond guarantees
–Easy way to end up in bankruptcy court:
17
- Bloomberg News, Oct. 12, 2011
6/6/2015 IRE 2015 | Philadelphia

18. Bond Docs:
Say Hello To EMMA
Part 3
18
Best bond website ever
6/6/2015 IRE 2015 | Philadelphia

19. Say Hello To EMMA
• What is EMMA?
– Electronic Municipal Market Access
• Since 2009, the official repository
for muni bond offering documents
and continuing disclosures
• Run by the Municipal Securities
Rulemaking Board (MSRB)
196/6/2015 IRE 2015 | Philadelphia

20. Say Hello To EMMA
• What’s in EMMA?
– Data on more than 1.2 million muni bonds:
• Official statements; ongoing financial
disclosures; advance refunding documents;
event notices, voluntary disclosures, and more
– Real-time trade data for nearly every
municipal bond bought and sold
– Political contribution disclosures (here)
– Documents, documents, more documents
206/6/2015 IRE 2015 | Philadelphia

21. Say Hello To EMMA
• What’s not in EMMA?
– No bulk download of data about bond deals
– You will need a third-party data vendor for
this, like Thomson Reuters SDC:
21
- Thomson Reuters SDC
6/6/2015 IRE 2015 | Philadelphia

22. Say Hello To EMMA
22
- EMMA
6/6/2015 IRE 2015 | Philadelphia

23. Say Hello To EMMA
• What’s an “official statement”?
–It’s these documents I keep linking to all
over the place in this presentation!
–Think of them as the prospectus for the
bond issue: they’re supposed to tell
investors all the key things they need to
know before buying the bonds
–This is your starting point for
understanding the debt
236/6/2015 IRE 2015 | Philadelphia

24. Say Hello To EMMA
• Tips for reading official statements
– First two to four pages always contain all the key
numbers – amounts sold, when they’re due,
interest rates, CUSIPs, key terms and conditions
• Some bonds will also contain a “summary” official
statement, which is good to skim also
– Other things you should look for:
• “Sources and Uses” table – ALWAYS read this
• Security and sources of payment for bonds
• Subordination and payment priority
• Optional redemption features
246/6/2015 IRE 2015 | Philadelphia

25. Types Of Muni Debt
What exactly is a ‘bond issue’?
• Bonds issues are chunks of
debt sold together
• An issue can have many
different tranches with
different characteristics
• Each tranche can have
multiple bonds, each with
its own CUSIP
25
Issue
Tranche
Bond
(CUSIP)
6/6/2015 IRE 2015 | Philadelphia

26. Say Hello To EMMA
• A word about CUSIPs:
–Eight digit identifier for specific securities
–The six digit CUSIP is your best friend:
26
682745 3T 9
Uniquely
identifies
the issuer of
the security
Uniquely
identifies
the security
Check digit
(ignore)
6/6/2015 IRE 2015 | Philadelphia

27. Say Hello To EMMA
27
• Advice: Use documents to back
check any third-party data
6/6/2015 IRE 2015 | Philadelphia

28. Say Hello To EMMA
• Where do I learn more?
–Introductory guide for investors:
• “Getting to Know EMMA”
–MSRB education center:
• “Understanding the Municipal Market”
–MSRB video tutorials on EMMA:
• “Educational Videos”
–MSRB glossary for muni market terms:
• “Glossary of Municipal Securities Terms”
286/6/2015 IRE 2015 | Philadelphia

29. Bond Math:
How Much Do We Owe?
Part 4
296/6/2015 IRE 2015 | Philadelphia

30. How Much Do We Owe?
• The two equations you need to
know for most bond math:
30
Yield =
Coupon =
Interest
Rate
x
Principal
Amount
Coupon
Cost basis
6/6/2015 IRE 2015 | Philadelphia

31. How Much Do We Owe?
• Open the “Bond_Math_Examples”
Excel file in Dropbox for a demo:
–Use this California GO bond issue:
• CUSIP: 13063A7D0
–Enter in the inputs values to calculate the
coupon, initial yield and market yield
–Use data from official statement and the
latest trade available on EMMA
316/6/2015 IRE 2015 | Philadelphia

32. How Much Do We Owe?
• There are two ways bonds repay
interest to bondholders:
–Current interest bonds
–Capital appreciation bonds
(aka “zero coupon bonds”)
326/6/2015 IRE 2015 | Philadelphia

33. How Much Do We Owe?
Current interest bonds
• Bonds that make periodic
cash interest payments to
bondholders over the life
of the bonds
• The interest rate sets the
coupon, or how much
investors get each period
• This is how most bonds
are sold in muni market
336/6/2015 IRE 2015 | Philadelphia

34. How Much Do We Owe?
Current interest bonds
–Calculate the annual debt service for the
California GO bond we looked at before:
• CUSIP: 13063A7D0
–Hint 1: Look at the official statement, pay
close attention to first two pages!
–Hint 2: Check the official statement for
sinking fund payments
346/6/2015 IRE 2015 | Philadelphia

35. How Much Do We Owe?
Current interest bonds
• Here is what the debt service looks like:
356/6/2015 IRE 2015 | Philadelphia

36. How Much Do We Owe?
Capital appreciation bonds
• Capital appreciation bonds do
not pay annual cash interest
• Instead, interest grows on the
original principal and
accumulating balance until it
comes due, often decades in the
future
• Can easily turn small sums
borrowed into hundreds of
millions, or even billions owed
• Get the cash now, let future
generations worry about paying
it back
366/6/2015 IRE 2015 | Philadelphia

37. Capital appreciation bonds
• The power of compound interest – take
Ohio’s tobacco CABs as an example:
– Series 2007B: $191.3m borrowed, $3.2bn due
at maturity in 2047.
• Interest accrues at 7.25% interest rate
– Series 2007C: $128.2m borrowed, $3.4bn due
at maturity in 2052.
• Interest accrues at 7.5% interest rate
37
How Much Do We Owe?
6/6/2015 IRE 2015 | Philadelphia

38. Capital appreciation bonds
38
• Ohio’s Series 2007B debt burden over time
How Much Do We Owe?
6/6/2015 IRE 2015 | Philadelphia

39. Capital appreciation bonds
39
• Ohio’s Series 2007C debt burden over time
How Much Do We Owe?
6/6/2015 IRE 2015 | Philadelphia

40. How Much Do We Owe?
Capital appreciation bonds
• What officials are saying:
• New Jersey’s way of undoing a CAB deal:
• “Behind New Jersey’s Tobacco Bond Bailout, A
Hedge Fund’s $100 Million Payday”
40
“CABs are – for good reason – known as a distinctly
horrible means of public finance. They are bad
policy. Everybody knew it then, everybody knows it
now. But that's the situation that we've inherited.”
- Andrew Sidamon-Eristoff, New Jersey State Treasurer, April 1, 2014
6/6/2015 IRE 2015 | Philadelphia

41. How Much Do We Owe?
• When do investors get repaid?
– Bondholders don’t always have to wait until
maturity to get their money back
– Issuers typically reserve right to “call” the
bonds ahead of their final maturity
• Repay bondholders today at a specified price,
usually above or below par value
– Beneficial to issuers – like having ability to
refinance mortgage when interest rates fall:
• http://www.sec.gov/answers/callablebonds.htm
416/6/2015 IRE 2015 | Philadelphia

42. How Much Do We Owe?
• What exactly is ‘par value’?
– Generally speaking, it’s the amount due at
maturity – i.e. when principal is due
• Sois‘parvalue’ same as principal?
– Not always.
• Capital appreciation bonds are sold at a
discount to par value and earn interest
(“accrete”) until they grow into the par amount
• Current interest bonds are typically sold at par
value, so principal and par will be the same
426/6/2015 IRE 2015 | Philadelphia

43. Benchmarks:
View It In Context
Part 5
436/6/2015 IRE 2015 | Philadelphia

44. View It In Context
• The importance of benchmarking
– How much interest is more than the norm? Well,
it depends:
• What time horizon are we talking about?
• How creditworthy is the issuer?
– So what you need are:
• The term (“tenor”) of the bonds you’re looking at
• The credit ratings (“AAA”, “BBB+” etc.) of the issuer
– These allow you to make an apples-to-apples
comparison against a benchmark borrowing rate
446/6/2015 IRE 2015 | Philadelphia

45. View It In Context
• What benchmark should I use?
– MMD curves are a good one
• What are they?
– Generic yield curves that represent
borrowing costs for issuers based on tenor
and credit quality
• What do they look like?
– Open up the Excel file “MMDCurves” in the
Dropbox folder
456/6/2015 IRE 2015 | Philadelphia

46. View It In Context
• How does it work?
– Simple example: How much more does it cost you
to borrow if you’re Illinois vs. Texas:
466/6/2015 IRE 2015 | Philadelphia

47. View It In Context
• What does this look like in print?
– Here is an example of how I used MMD curves
to benchmark borrowing costs in one story:
47
“Buried in Appendix G of the 416-page bond prospectus was
the amount due at maturity: $6.8 billion, including $593
million for Niagara's bonds. The hefty payoff was made
possible by interest rates that ranged from 6 to 7.85 percent
for the riskiest CABs, due in 2060. The top rate was nearly
double that for long-term, taxpayer-backed municipal debt
at the time, according to Thomson Reuters data.”
- ProPublica, “How One New York County Fell Into the Tobacco Debt Trap,” Oct. 23, 2014
6/6/2015 IRE 2015 | Philadelphia

48. Databases:
Where To Get Stuff
Part 6
486/6/2015 IRE 2015 | Philadelphia

49. Where To Get Stuff
• Useful sources for muni bond data:
49
What You Want Where to Get it Website
Bond documents EMMA www.emma.msrb.org
Bond ownership
data
Lipper, Morningstar
(mostly mutual funds)
www.lipperweb.com
www.morningstar.com
Bond issuance
data
Thomson Reuters
(SDC Platinum)
www.thomsonreuters.com
Bond reference
prices
S&P Capital IQ
(J.J. Kenny)
www.capitaliq.com
Issuance calendar Ipreo www.ipreo.com
Bond ratings S&P, Moody’s, Fitch Available upon request
Yield curves TM3 www.tm3.com
6/6/2015 IRE 2015 | Philadelphia

50. Questions?
50
cezary.podkul@propublica.org
@Cezary
6/6/2015 IRE 2015 | Philadelphia