Investors may have heard of tax credit bonds from the Stimulus Act, also known as the American Recovery and Reinvestment Act of 2009 (ARRA). Instead of interest, tax credit bond investors receive tax credits that they can use to offset their tax liabilities.
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As the states grapple with daunting budgetary deficits, they are increasingly focused on reducing expenditures. One of the fastest growing budget items is in the area of corrections. State prison population nationwide has exploded over the past three decades and now totals 1.4 million inmates. The annual cost of incarceration for states exceeded $50 billion in 2008, consuming on average 7.2% of state general fund expenditures.
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Nearly ten years ago, the Moody's credit rating agency announced that it was in the process of revising their credit rating standards in an effort to adopt uniform standards for all types of debt - municipal, corporate, asset-backed, sovereign - based on measures of expected loss and default risk.
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State and local governments are currently grappling with a myriad of budgetary and fiscal problems. Concerns over the growing costs of funding their long-term financial commitments to public employees have taken center stage. Government promises at all levels to fund retirement costs have become a huge issue today, especially since the Great Recession has decimated government finances and taxpayers' ability to support them.
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There is a $75 billion and growing sector of the market that deserves the attention of accounts exempt from taxation. Judging from the wide spreads on the debt, too many of these investors - particularly high net worth individuals and their IRAs - have yet to take advantage of the extra yield offered by the sector without additional credit risk.
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The recent upswing in municipal bond defaults is almost entirely attributable to land-secured bonds; victims of the housing crisis.
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