The financial adviser to Jefferson County, Alabama suggests that "'long-term, fixed-rate debt on everything'" is the way to go for at least one Municipal Bond issuer. Michael B. Marois, "Alabama, California Failures Expose Muni 'Dark Side' (Update 2)" (Bloomberg.com, Thursday, March 20, 2008). This is a comment on auction-rate Bonds in particular. Even one auction-rate Bond that astronomically increases in interest can be a financial disaster in itself. Particularly to the County, State, or other Local Government entity that issues Bonds under conditions which include resetting the interest rate dependent in part on auctions. When there is no auction because there is no borrower, that is a recipe for financial disaster. That also describes the current state of auction-rate Bonds: The rate is too great because there is no auction in the rate. The scope of the problem across the United States is a different story. Auction-rate Bonds are a recent addition to the money-investing and money-making landscape, having been invented in 1984. Further, auction-rate Bonds are only about 6% of the Municipal "debt market," which reportedly is a market with $2.6 Trillion of total debt. (That figure would be a lot of zeros to post here, something like $2,600,000,000,000.00.)
The 10 Minute Test on Municipal Bond Financing.
The Treasurer of Washington State did not authorize a single auction-rate Bond in that State. Michael Murphy says in the linked Bloomberg article that he did not believe that bankers would give him the straight skinny:
"They get paid if they convince me to do something whether it's in my best interest or not, and that's something a lot of the government folks have a hard time getting their arms around. If it takes more than 10 minutes to explain it, I don't want to buy it."
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