TOP WEBSITES FOR INCOME INVESTORS (KIPLINGERS)

KIPLINGER'S | March 2016

9 Top Free Sites for Income Investors

Five years ago, Kiplinger’s turned to longtime investment writer and in-house income guru Jeff Kosnett to launch a newsletter designed to steer income-starved readers to the best investments for dependable, spendable income. Today, Kiplinger’s Investing for Income continues to attract a growing army of satisfied readers.

How does Jeff uncover opportunities for his subscribers month after month? Of course, he spends a lot of time interviewing money managers and mutual fund masterminds, as well as the men and women who actually run real estate investment trusts (REITs) and master limited partnerships (MLPs). And he mines the Internet, searching for great ideas and studying the raw data to identify broad trends and profitable prospects. We asked Jeff to share with Kiplinger.com readers his favorite free sources for reasoned discussion and hard-to-find financial data. Bookmarking these sites will be a valuable step toward making you a more successful investor.

 

Closed-End Fund Center

Web address: www.cefa.com

Key data: Discounts and premiums to net asset value

Best for: Sorting and screening 629 closed-end funds

The keys to understanding any closed-end fund are data about current and historic discounts and premiums to net asset value, distribution rates, whether and how much the fund borrows (leverage), and total return on net asset value. This site offers all of that and more, plus the tools to sort and screen more than 30 varieties of funds in too many ways to count.

Kosnett Comment: CEFA’s tables show each fund’s distribution yield next to its income yield. The two won’t match, but they should be fairly close. If the income figure is low but the distribution is high, the fund is selling assets or issuing new shares to maintain the illusion of a fat yield. It could be headed for a distribution cut.

Eaton Vance Monthly Market Monitor

Web address: www.eatonvance.com

Key data: The numbers on all aspects of income investments

Best for: Total returns and average duration of bonds

This fund company’s site is loaded with free stuff. The best is the monthly monitor (accessible in the site’s Institutional Investors section): 40-plus pages of charts and tables about all aspects of stocks, bonds, bank-loan funds, commodities, industry sectors and more. All this — including total returns and average duration of more than 20 kinds of bonds — is nicely laid out on single pages.

Kosnett Comment: The page called “fixed income spread analysis” uses simple bar charts to show the current and past yield advantage of various categories, such as junk bonds or preferred stocks, over Treasuries. When the spread is unusually narrow, there’s more risk. When it’s wide, it’s usually a good time to invest.

FRED

Web address: www.stlouisfed.org

Key data: 382,000 statistical series from 82 sources

Best for: Financial data, graphs and charts from the government and everywhere else

If you want to see a trend in, say, inflation, growth, interest rates or stock-market returns for just about any period, you’ll find it here. This takes the place of any almanac, encyclopedia or reference book — and it’s updated daily. FRED is the acronym for Federal Reserve Economic Data and is the brainchild of the Federal Reserve Bank of St. Louis.

Kosnett Comment: You may go weeks or months without using this, and then you’ll refer to it several times in one sitting. It’s comforting to know that someone has gone to the effort of assembling all this info in one place.

SEE ALSO: 7 Promising Dividend Stocks Yielding 5% or More

FRED

Investing in Bonds

Web address: www.investinginbonds.com

Key data: Real-time market data on bond trading action and prices

Best for: Owners (or potential owners) of individual corporate and municipal bonds and anyone else who wants to see how bonds are priced and what they are yielding at any given time

Kosnett Comment:The Securities Industry and Financial Markets Association (SIFMA), the bond dealers’ trade association, runs the site and has a news feed as well. Some of the commentaries, though, are dated.

Robert W. Baird & Company

Web address: www.rwbaird.com

Key data: Relative yields of municipals and Treasuries

Best for: Analysis of taxable and tax-free bond markets

The managers of Baird Core Plus Bond fund and other excellent no-load income funds publish a combination of basics with just enough financial-market-speak to keep the pros happy with their Capital Markets Perspective. The insights live at Baird’s corporate site (address above) not the Baird Funds' consumer site. Offerings include both tax-free bond and taxable-bond commentaries. A recent subject is the tight supply of new bonds, which keeps prices high and yields low. There is also a colorful market commentary called, ahem, The Bull and Baird Blog.

Kosnett Comment: Baird’s municipal bond letter illustrates such basics as the ratio of tax-free bond yields to Treasury yields and the equivalent yield you need to earn on a taxable investment to net the same after-tax income.

Pimco

Web address: www.pimco.com

Key data: Outlooks and forecasts from the fixed-income behemoth (with $1.43 trillion under management) formerly known as the Pacific Investment Management Company

Best for: Investors who like to see commentaries and explanatory articles that put the market’s gyrations in perspective. For example, an article called “Emerging Markets Trying to Turn the Corner” makes the case for some, but not all, investments in those countries. The Pimco blog about the issues of the day is well-presented and with graphics.

Kosnett Comment: The departure of Bill Gross from Pimco changed this site from his soapbox to more of a team effort.

EMMA

Web address: www.emma.msrb.org

Key data: Muni bond trading details

Best for: Screening the tax-free bond universe for top yields

Electronic Municipal Market Access, from the Municipal Securities Rulemaking Board, shows every municipal bond trade, plus key background information about thousands of issuers. If you own tax-exempts, you can see a price graph for each bond based on months of trades, just as you can chart a stock or a fund. You can also screen the tax-free bond universe in detail. For example, when you search for all AA-rated Arizona water and sewer bonds due between 2024 and 2029, up pop the yields and other particulars.

Kosnett Comment: EMMA is easier to navigate if you know your bond’s CUSIP number.

REIT.com

Web address: www.reit.com

Key data: Historical returns and other performance information for real estate trusts going back to their invention in the 1960s.

Best for: Avid real estate investment trust fans and anyone who wants to see new offerings and news tidbits about the industry and its members. The site is run by the National Association of Real Estate Investment Trusts (NAREIT).

Kosnett Comment: It would be good if NAREIT would link to a resource that provides up to the minute data on the individual REITs’ net asset values and prices to book value. You need a brokerage link to that kind of research.

TCW

Web address: www.tcw.com

Key data: Monthly updates by sector, such as the High Yield and Mortgage Market updates. Find it all under Insights from TCW, a global asset management firm.

Best for: Bond fund investors, especially if you dabble in risky or unusual areas like junk bonds, mortgages and bank loans. There are also excellent forecasts and commentaries from the portfolio managers and analysts.

Kosnett Comment: This is some of the best perspective on individual bond-market segments and what’s driving them up or down.

Tax Free Municipal Bonds - What to Buy Now (Barrons)

Where to find good opportunities in munis

BY Jack Hough,

Barron's

Copyright © 2012 Dow Jones & Company, Inc. All Rights Reserved.

Barron's — 12/01/12

Municipal bonds are not the bargain they were two years ago, but there's still good value to be had, especially compared to U.S. Treasuries. Some do's and don'ts.

Taxes for high earners look likely to rise next year, but those who feel the urge to park money in tax-free municipal bonds should shop carefully.

Plenty of investors have had the same thought since Election Day. A popular exchange-traded fund of these bonds, iShares S&P AMT-Free Muni Bond, has gained 1.5% since then, and 5.2% year-to-date. That might sound like small potatoes, but as bond prices rise, yields fall, and a muni universe that was recently an obvious bargain is now an iffy one.
Compared with Treasury bonds, munis still look cheap—but so does nearly everything else that carries a rate of return. Triple-A general-obligation munis, backed by the taxing authority of the issuer, yield 1.74% at 10-year maturities, a bit more than the 10-year Treasury's 1.62%. Historically, muni yields have tended to be only 85% to 90% of Treasuries', with investors making up the difference in tax breaks, says Dan Heckman, a fixed-income strategist at U.S. Bank Wealth Management.

Demand for munis is dominated by retail investors who are easily scared off and slow to return. Indeed, yields got so juicy two years ago, after a prominent analyst warned of widespread defaults, that even investment funds focused on providing taxable income with corporate bonds were dipping into munis. The default crisis didn't materialize, and now munis have retuned to pre-scare levels.

The muni discount versus corporate bonds is gone, says Chun Wang, a portfolio manager at Leuthold Weeden Capital Management. Since 1979, munis have yielded a median of 1.15 times as much as corporates, once their yields are adjusted to taxable-bond equivalents based on 35% tax rates, according to Wang. As recently as the end of October the ratio was 1.25. Now, it's 1.10.

However, investors who have put off their muni shopping until now can still find good deals using a targeted approach. Here are some dos and don'ts:

Don't just create an evenly laddered muni portfolio, with bonds coming due every few years. Yields on the short issues are well below the rate of inflation, which will erode wealth over time. Instead, favor intermediate maturities where yields take relatively sharp jumps.

For example, many buyers ask their brokers for 10-year bonds; it's a nice round number. That creates a minor demand bubble there, says Matt Fabian, managing director of Municipal Market Advisors, a Concord, Mass., research service. Recently, 12-year, AAA-rated bonds yielded 2.20%, versus 1.48% for nine-year ones. Investors who buy the 12-year paper get the higher yields, plus an added benefit: As the bonds age three years, they may rise in price, so that their yields match those for nine-year issues. This "roll-down" effect works only if rates stay where they are.

Do delve into bonds rated a couple of notches below perfection. Defaults by municipalities are rare, relative to those by corporations, and the percentage of funds recovered by investors in the case of default is typically much higher. Look to A-rated bonds for good value from a risk/reward perspective, says Peter Hayes, head of the muni group at BlackRock. From 1970 through 2011, the default rate for these munis was just 0.04% over 10-year periods, versus 2.22% for comparably-rated corporate bonds, according to Moody's.

Don't buy all home-state bonds. A New Yorker who buys his state's bonds gets the federal tax break offered by most munis, plus a break on state taxes (and maybe even local ones if he lives and buys in New York City). But bonds from outside states bring the benefit of diversification.

New Yorkers can put 70% or more in home-state bonds because of high taxes, decent state finances and a deep universe of local bond issuers to diversify among. California has weaker finances, but coastal cities are doing better than inland ones, and state taxes are headed to shockingly high levels, up to 13.3%. Buyers there should also favor in-state munis. Rhode Island and Connecticut, on the other hand, have weak economies and limited muni supply, so residents should limit their in-state buying to 40% or 50% of their portfolios.

Do shop for out-of-state bonds from states that don't have income taxes, like Texas, Florida, Nevada and Washington. They lack strong local demand, leaving yields a touch plumper.

Do keep fees low, but don't assume index mutual funds offer the best deals. The bonds they track tend to stay in high demand, while active fund managers can look for higher yields among less-popular issues. Fidelity Tax-Free Bond
gets a "gold" rating from Morningstar and ranks among the top 15% of peers for 10-year performance. Fund expenses are 0.25% of assets per year—the same as for the aforementioned iShares index exchange-traded fund.


Do seek help selecting individual bonds. Thanks to falling rates and a dearth of new issues, many bonds can be called away before maturity at lower prices than they currently sell for, which can trip up the uninitiated.

Above all, don't buy munis in hopes of scoring short-term gains when taxes rise. That's already priced in. Probably the only thing that will drive a big muni rally from here is if Congress trims the tax break on muni interest, while grandfathering in existing bonds. Barring that, buyers should expect to get their bond interest and not much more.

10 Ways to Invest Tax Free (Forbes)

10 Ways to Invest Tax Free (Forbes)

William Baldwin, Forbes Staff

Taxes|2/10/2011

For the moment, taxes on portfolios are modest. The federal rate is 15% on most dividends and on long-term capital gains. Come 2013, though, the rates shoot up.

Without a law change, the maximum federal tax on interest, dividends and short-term gains will go to 44.6%. That consists of a 39.6% stated rate, the 1.2% cost of a deduction clawback and a 3.8% surtax to pay for health care. The max for long gains will be 25% (but 23% for assets held for more than five years). Add state taxes to all of these.

What’s an investor to do? Take defensive measures. Here are ten ways to pocket investment income without paying tax on it.


Set up a kiddie Roth


Did your daughter earn $4,000 last summer that she needs for college? Were you going to leave her at least $4,000 in your will? Start your bequest now. Hand her $4,000 that she can use to fund a Roth IRA. Tell her not to touch it until she is 60.

She’ll get 40 years of tax-free compounding. (At 7% a year, this would turn $4,000 into $60,000.) You’ll get money out of your estate, probably saving on state inheritance taxes.

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Buy an MLP

Master limited partnerships that own energy assets like pipelines tend to pay pretty good dividends (in the neighborhood of 5%). Those dividends, at least initially, are largely sheltered by depreciation deductions. The quarterly cash, that is, is considered a nontaxable “return of capital.”

After a decade or two this tax shelter is exhausted, but if you die owning these shares your heirs get to start the process over with a new, higher tax basis.

Go Ugma

Use the Uniform Gift to Minors Act (a.k.a. Uniform Transfers to Minors Act) to set up a brokerage account for your son or daughter. The first $950 of annual income is free of tax; the next $950 is taxed in the kid’s low bracket.

The downside is that at age 18 Junior takes ownership and might not spend the money on college, as you intend. So fund the account modestly­—$30,000 is plenty—and concentrate the holdings on investments that (a) generate a lot of taxable income and (b) are compelling additions to the overall family portfolio. The idea is to make full use of that $1,900-a-year shelter while parting with a small amount of capital.

Here are several examples of investments that make sense in a diversified portfolio and that spew out a lot of ordinary income:

–exchange traded funds that hold a lot of Ginnie Maes and the like (MBB) or the whole bond market (BND).

–the ETF for junk bonds (JNK).

–high-yielding blue chips like Verizon, AT&T and Pfizer.

–preferred stocks.

Two cautions. (1) To avoid gift tax wrinkles, limit each year’s contribution to $26,000 per child ($13,000 if you are single). (2) Don’t set up Ugmas if you think your kid will qualify for college financial aid. Any assets in the kid’s name will be snatched by aid officers.

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Open a 529

A Section 529 plan lets you accumulate investment income tax free, provided the proceeds are used on schooling. Drawback: Sometimes stiff fees erase the income tax saving.

The account is likely to be a good idea where the costs are low (as in Utah) or there’s a break on state income tax for parents chipping money in (as in New York).

As with Ugmas, 529s are not a good idea for families likely to get tuition assistance.

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Own commercial real estate

As long as your building doesn’t have too much of a mortgage, depreciation deductions will make a good chunk of your rental income free of current income tax. There’s more on the economics of these deals here.

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Own muni bonds

Interest on the general obligations of state and local governments is free of federal income tax. In most states you also get a pass on state income tax for home-state bonds. Caution: Some states are in financial trouble. Check out the Forbes Moocher Ratio before buying.

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Give away stock profits

You put $3,000 into Netflix, wait at least a year, then give away the shares to charity when they’re worth $8,000. You get a deduction for the whole $8,000. Your $5,000 gain is never taxed.

Two other ways to shelter appreciated property from capital gain taxation: leave it in your estate, or give it to a low-bracket relative.

Bequeathed property benefits from a step-up, meaning that gains unrealized by an owner at the time of his death permanently escape income taxation.

Low bracket taxpayers (people who would be in a 25% or lower bracket if all their capital gain were taxed as ordinary income) get a free ride on long-term capital gains. But if the donee is a son or daughter 18 or younger (23 if in school), beware the kiddie tax, which applies to investment income over $1,900 a year.

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Capture losses

When the market is down, swap out of losing positions into similar but not identical ones. For example, you could exit an S&P 500 index fund and immediately buy the Vanguard Megacap Index Fund. In this fashion, you can run up a capital loss carryforward that will make future capital gains tax free. For more on loss harvesting, go here.

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Buy a safe


If your $400 investment saves you $45 a year in safe deposit box fees, you’ve got an 11% yield, tax free. The only exception on the tax side would be if you are one of those rare birds in a position to deduct miscellaneous items like the rental on a strongbox to hold your gold coins. Miscellaneous deductions are usable only to the extent they exceed 2% of your adjusted gross income; not many taxpayers get anywhere near this threshold.

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Be a cheapskate investor

Are you paying someone 1.5% a year to have your assets managed? Cut this cost in half by haggling. A dollar saved in this fashion is a dollar earned free of tax, unless you are claiming miscellaneous deductions, which is unlikely.


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This article is available online at:
http://www.forbes.com/sites/baldwin/2011/02/10/ten-ways-to-invest-tax-free/
America's Most Promising Companies

Cutting Pensions? They're Already Doing It (Sunday NY Times)

October 22, 2011
The Little State With a Big Mess
By MARY WILLIAMS WALSH
CRANSTON, R.I.

ON the night of Sept. 8, Gina M. Raimondo, a financier by trade, rolled up here with news no one wanted to hear: Rhode Island, she declared, was going broke.

Maybe not today, and maybe not tomorrow. But if current trends held, Ms. Raimondo warned, the Ocean State would soon look like Athens on the Narragansett: undersized and overextended. Its economy would wither. Jobs would vanish. The state would be hollowed out.

It is not the sort of message you might expect from Ms. Raimondo, a proud daughter of Providence, a successful venture capitalist and, not least, the current general treasurer of Rhode Island. But it is a message worth hearing. The smallest state in the union, it turns out, has a very big debt problem.

After decades of drift, denial and inaction, Rhode Island’s $14.8 billion pension system is in crisis. Ten cents of every state tax dollar now goes to retired public workers. Before long, Ms. Raimondo has been cautioning in whistle-stops here and across the state, that figure will climb perilously toward 20 cents. But the scary thing is that no one really knows. The Providence Journal recently tried to count all the municipal pension plans outside the state system and stopped at 155, conceding that it might have missed some. Even the Securities and Exchange Commission is asking questions, including the big one: Are these numbers for real?

“We’re in the fight of our lives for the future of this state,” Ms. Raimondo said in a recent interview. And if the fight is lost? “Either the pension fund runs out of money or cities go bankrupt.”

All of this might seem small in the scheme of national affairs. After all, this is Little Rhody (population: 1,052,567). But the nightmare scenario is that Ms. Raimondo has seen the future of America, and it is Rhode Island. As Wall Street fixates on the financial disaster in Greece, a fiscal wreck is playing out right here. And the odds are that it won’t be the last. Before this is over, many Americans may be forced to rethink what government means at the state and local level.

Economists have talked endlessly about a financial reckoning for the United States, of a moment in the not-so-far-away when the nation’s profligate ways catch up with it. But for Rhode Island, that moment is now. The state has moved to safeguard its bond investors, to avoid being locked out of the credit markets. Last week, the General Assembly went into special session and proposed rolling back benefits for public employees, including those who have already retired. Whether the plan will succeed is anyone’s guess.

Central Falls, a small city north of Providence, didn’t wait for news from the Statehouse. In August, the city filed for bankruptcy rather than keep its pension promises to its retired firefighters and police officers.

Illinois, California, Connecticut, Oklahoma, Michigan — the list of stretched states runs on. In Pennsylvania, the capital city, Harrisburg, filed for bankruptcy earlier this month to avoid having to use prized assets to pay off Wall Street creditors. In New Jersey, Gov. Chris Christie wants to roll back benefits, too.

In most places, as in Rhode Island, the big issue is pensions. By conventional measures, state and local pensions nationwide now face a combined shortfall of about $3 trillion. Officials argue that, by their accounting, the total is far less. But with pensions, hope often triumphs over experience. Until this year, Rhode Island calculated its pension numbers by assuming that its various funds would post an average annual return on their investments of 8.25 percent; the real number for the last decade is about 2.4 percent. A phrase that gets thrown around here, à la Rick Perry describing Social Security, is “Ponzi scheme.”

That evening in September, Ms. Raimondo walked into the Cranston Portuguese Club to face yet another angry audience. People like Paul L. Valletta Jr., the head of Local 1363 of the firefighters union.

“I want to get the biggest travesty out of the way here,” Mr. Valletta boomed from the back of the hall. “You’re going after the retirees! In this economic time, how could you possibly take a pension away?”

Someone else in the audience said Rhode Island was reneging on a moral obligation.

Ms. Raimondo, 40, stood her ground. Rhode Island, she said, had a choice: it could pay for schoolbooks, roadwork, care for the elderly and so on, or it could keep every promise to its retirees.

“I would ask you, is it morally right to do nothing, and not provide services to the state’s most vulnerable citizens?” she asked the crowd. “Yes, sir, I think this is moral.”

FOR many Americans, the Ocean State conjures images of Newport mansions and Narragansett chic. The overall reality is more prosaic. Rhode Island today is a place where the roads and bridges rank among the worst in the nation and where jobs are particularly hard to find. Unemployment rose faster during the 2008-9 recession than in any other state. The official jobless rate is now 10.6 percent, versus the national average of 9.1 percent.

The textile mills and jewelry manufacturers that once employed thousands here have dwindled away. The big employers today are in health care and education, both of which rely heavily on government spending that has been drying up.

Many states and cities can credibly say their pension plans are viable, even when those plans are not fully funded. That is because state retirement funds, like Social Security, pay out benefits bit by bit, over many years.

But unlike, say, California, with its large, diverse economy, Rhode Island is so small that there is little margin for error. Leaving the state, to escape its taxes, is almost as easy as moving to the other side of town. Efforts to balance the state budget by shrinking the public work force have left Rhode Island with a problem like the one that plagues General Motors: the state has more public-sector retirees than public-sector workers.

More ominous still, in each of the last 10 years, the state pension fund paid more money to retirees than the fund collected from state employees and taxpayers combined. The fund is shrinking, even though the benefits coming due are growing.

For all the pain here, one important constituency — Wall Street — seems satisfied enough. To reassure its bond investors, Rhode Island passed a special law this year giving them first dibs on tax revenue. In other words, bondholders will be paid, whatever happens. Ms. Raimondo has at times been accused of selling out ordinary Rhode Islanders to Wall Street interests, but she says hard choices must be made.

Ms. Raimondo remembers better times in Rhode Island. She grew up in a suburb of Providence, rode public buses to public schools and played in public parks. Her grandfather, who arrived from Italy, studied English in the evenings at the Providence Public Library. (That library system lost its financing from the city in 2009, closed branches and shortened its hours. These days, it is seldom open after 6 p.m.)

But Ms. Raimondo also learned early on about economic forces at work in her state. When she was in sixth grade, the Bulova watch factory, where her father worked, shut its doors. He was forced to retire early, on a sharply reduced pension; he then juggled part-time jobs.

“You can’t let people think that something’s going to be there if it’s not,” Ms. Raimondo said in an interview in her office in the pillared Statehouse, atop a hill in Providence. No one should be blindsided, she said. If pensions are in trouble, it’s better to deliver the news and give people time to make other plans.

BY any standard, Ms. Raimondo is a high achiever. She graduated from Harvard, collected a law degree from Yale and attended Oxford as a Rhodes scholar. After a stint in New York in the venture capital business, she helped found Rhode Island’s first venture capital firm, Point Judith Capital.

Then, in 2009, with zero political experience, she ran for the state office of treasurer. Although she is a Democrat in a heavily Democratic state, she stood out because she refused to promise that state jobs and pension benefits would be protected no matter what. She won by a landslide, receiving more votes than any other candidate for any state office. Her long-term ambitions, in politics, business or both, are the subject of speculation in Providence.

No sooner had she been sworn in than the S.E.C. called. She learned that the commission was investigating the finances of various cities and states, including Rhode Island, to determine whether bond investors were receiving truthful information. At the heart of the S.E.C. inquiry were pension funds.

Ms. Raimondo said she wasn’t entirely surprised. When she disclosed the investigation, she said: “For months, Rhode Island has been listed among several states with precarious finances. This challenging position is, in part, due to our significant and growing unfunded pension liability.” Her first priority, she vowed, would be to ensure that the numbers were right.

Others made similar pledges before. Rhode Island has been trying to fix its pension system for years; it has announced four “reform” plans since 2005, each of which has claimed to reduce costs for the state and cities. It has raised minimum retirement ages, slowed accrual rates, capped cost-of-living adjustments — but always for the youngest or least senior public workers. Retirees, and workers poised to retire, were spared, even though the numbers clearly showed that reducing payments to retirees was the only sure way to fix things quickly.

In recent months Ms. Raimondo has crisscrossed the state in an attempt to sell a different remedy, one in which everyone takes a hit. Yes, it would hurt. But at least the state would avoid having to come up with yet another plan in a year or two. The defined-benefit structure, very popular with public employees, could survive. Still, the battle lines are clear. Eight public workers’ unions have already sued, saying the pension changes of 2009 and 2010 were illegal.

On a September evening out in North Scituate, at the historic Old Congregational Church, Ms. Raimondo told a crowd about what had happened in Vallejo, Calif. That city filed for bankruptcy in 2009 and, after grueling negotiations, left pensions intact but drastically cut bus service, police patrols and other government functions, along with the pay of the city workers who provide all those services.

“That’s not what we want for Rhode Island,” Ms. Raimondo said. “That’s not the future we want for our children.”

Others in the crowd had their own stories. Several retired teachers said they had played by the rules and sent a part of every paycheck to the pension fund, as required by law. One man demanded pension cuts for state troopers and judges. A woman said her aged father would be unable to buy medicine if the state stopped adjusting his pension for inflation.

“I feel your anger,” Ms. Raimondo told the crowd. “In many ways, I’m angry myself. Many of the shenanigans that went on in past years were just wrong.”

In some ways, the central question is not only what the government owes to pensioners but what citizens owe to one another. From the pews of the church, Cindy Gould, a fourth-grade teacher, said that under the current system, she had 11 years to go until retirement. Under Ms. Raimondo’s plan, she might have to work longer. But, Ms. Gould, 54, said she was willing to do so if that meant the elderly would get the medical care they need.

Since the last recession hit, states and cities around the country have embarked on pension changes, often following the Rhode Island pattern. Benefits for state employees who have not yet been hired are usually the first to be cut. Then come changes for those now on the payroll, often in the form of higher mandatory contributions.

Retirees have mostly been off-limits, until now. In many instances, laws or legal precedent shield them. In the corporate sphere, they are supposed to bear losses only in bankruptcy. But those rules do not apply to states, which may not declare bankruptcy in any case. If a government homes in on retirees, a lawsuit is sure to follow, and the resolution will take years. But Ms. Raimondo says Rhode Island doesn’t have years. This isn’t a question of politics or law, she says, but of simple math. To get the numbers right, Ms. Raimondo quickly assembled a panel of experts that included academics, mayors and union officials. The goal was to figure out what a public pension should be and what Rhode Island could afford. Inflation protection every year, for people who in some cases retired in their 40s, started coming into focus.

Analysts also took a close look at the projected long-term investment return for the pension system: 8.25 percent. Everything rested on hitting that target, but the state’s actuary said there was less than a 30 percent chance that would happen over the next 20 years. The board voted to lower the assumption to 7.5 percent. (Given the recent run in the financial markets, even that figure may seem optimistic.)

As a result of that change, the state’s pension shortfall instantly rose to $9 billion from $7 billion. The unions said Ms. Raimondo had manufactured a crisis.

She denied it. “This is about the truth,” she said, “and about doing the right thing.”

Then, as if on cue, Central Falls declared bankruptcy. The city’s pension fund wasn’t just underfunded. It was completely out of money. A receiver for the city sought court permission to reduce by as much as half the base pensions of retired police officers and firefighters.

Suddenly the pension crisis wasn’t an abstraction any more. The unthinkable had happened, and the odds were that it would happen again unless the state acted quickly.

Other mayors began stepping forward and warning that their communities were on the brink, too. Here in Cranston, Mayor Allan W. Fung said that unless things changed, he would have to eliminate trash collection, services to the elderly and recreation programs for children, as well as reduce the size of the police force and fire department.

Over in Woonsocket, John W. Ward, the president of the City Council, said that all summer parks programs had been eliminated and that teachers were working with larger classes than their contracts allowed. Half of Woonsocket’s streetlights were out because the city couldn’t afford to replace them. His son, daughter-in-law and granddaughter had moved to another state.

“To allow the pension system to remain largely unchanged will make it impossible for Woonsocket, and every other urban community, to survive,” Mr. Ward said.

AT the Portuguese Club in Cranston, José M. Berto raised his hand. At 62, he told Ms. Raimondo, he was on the cusp of retirement.

“We’re looking at a Ponzi scheme that would make Bernie Madoff look like a Boy Scout,” said Mr. Berto, a supply officer for the state.

He asked if Rhode Island’s pension problem was the worst in the nation.

Ms. Raimondo said it was.

“I don’t like her message,” Mr. Berto said after the session. “But she has been honest, forthcoming. We’re in trouble. We’re just in so much trouble.”

The Best and the Worst States for Muni Bonds (Barrons)

Barron's Cover | MONDAY, AUGUST 29, 2011
Good, Bad and Ugly
By JONATHAN R. LAING There's hope for states that accept structural change, but pain for those that won't. Are you listening, Illinois and California?



For most states, fiscal 2012 is shaping up as a brutal year. They've already had to close a collective gap of more than $100 billion between their projected revenues and previously budgeted expenses, mostly due to anemic sales taxes and personal and corporate-income levies. And all this comes after three years of large budget shortfalls, during which most of the low-hanging fruit in expenses had been plucked and rainy-day funds and other reserves had been plundered.

Likewise, just about all of the $165 billion in federal stimulus money that had helped to close state budget gaps since the 2008-09 financial crisis has been spent. Thus, the cuts for fiscal 2012, which for most states began last month, promise to be particularly painful, leading to employee layoffs and reduced human-services spending on programs such as Medicaid.

Education will bear the brunt, as states are forced to trim their funding to public universities and K-through-12 school districts. The latter, particularly in low-income areas, will especially suffer from the lagged effect of the housing bust on a falling property-tax take.

Yet there's hope amid the gloom for many of the states, and for the $1.5 trillion state municipal-bond market. Tax revenue has begun to rise again, after falling cataclysmically for five straight quarters during the Great Recession.

In fact, state-tax revenue in fiscal 2011's first quarter was up 9.3%, on average, over the year-earlier figure, reports the respected Nelson A. Rockefeller Institute of Government at the State University of New York at Albany. This was the fifth straight quarterly improvement. To be sure, the revenue picture could darken if the U.S. economy double-dips. (The numbers in each category in the tables accompanying this article generally are based on the most recent and comprehensive data available, and so their dates don't all coincide. However, they do paint a good picture of each state's relative position against the others.)

And since the 2010 elections, new governors, mostly Republican, have come to the fore, unbeholden to the public-employee unions that have used political muscle to win cushy contracts and fat retiree pension and health benefits. The roster of new-breed, social-Darwinist figures includes the likes of Scott Walker of Wisconsin, John Kasich of Ohio, Rick Scott of Florida and Chris Christie of New Jersey, all following the successful path of two-term Indiana Gov. Mitch Daniels. Even prominent Democrat and New York Governor Andrew Cuomo, scion of a family steeped in Franklin Roosevelt's New Deal, has pushed state unions to accept contracts with a three-year wage freeze and five unpaid furlough days in the current fiscal year.

The governors want the unions to contribute more to their pension funds and health plans to ensure the systems' soundness. Controversially, Walker and Kasich even have tried to convince the unions to surrender or reduce their collective-bargaining rights. Moreover, many states are creating new tiers of public employees provided with much less munificent pension and health-care plans. Retirement ages are being boosted, automatic cost-of-living adjustments to pensions are being eliminated, pension vesting periods are being increased and shenanigans like income-spiking at the end of careers to fatten benefits are being banned. Such moves will do much to ameliorate a long-term pension and retiree health-benefit funding gap that The Pew Center on the States puts at $1.26 trillion.

At the same time, some states, including New York, are trying to cap and slow property-tax hikes. And while such governors as Walker, Christie and Scott are putting the axe to spending, they're also cutting taxes on corporations and the wealthy, with the aim of boosting employment and investment. Wisconsin even scaled back its earned-income tax credit for 152,000 working families ($518 for a family of five), to partially defray the cost of tax cuts for big earners. Trickle-up economics is in vogue in these states.

The process has been messy and, sometimes, noisy; witness the union demonstrations at the capitol building in Madison, Wis., in February. Yet the municipal-bond market has rallied sharply since late last year, when banking seer Meredith Whitney set off a panic by predicting that there would be as many as 100 major muni-bond defaults in calendar year 2011, totaling $100 billion or more, because of state and local financial problems. Through Aug. 12, a recent Bank of America Merrill Lynch report notes that defaults have been modest this year, at $757.8 million, or just 0.026% of total outstanding municipal debt. And most of the troubled issuers have been small ones that depend on revenue from special-assessment districts, housing developments and hospital complexes, not general tax revenues.

To Howard Cure, director of municipal research at Evercore Wealth Management in New York, it's "inconceivable" that any state will default on its general-obligation debt. According to Cure, the only risk that investors run in state debt, beyond the risk that could arise if interest rates jump, would come from credit downgrades or a change in market perceptions of a state's financial prospects, which could quickly push down prices of existing state bonds.

To help investors, the tables Barron's has compiled show how all 50 states rank, based on seven key financial and economic variables. The data were compiled by Janney Capital Markets and Evercore. The states are sorted by their Standard &Poor's credit ratings to make comparisons easier.

Our first statistic shows the amount of federal spending each state receives as a percentage of the state's gross domestic product. The source can be: defense or nondefense work; procurement contracts; grants; and salaries and wages paid to state residents by Uncle Sam. This reading is particularly timely, in that federal outlays face cuts for years to come, due to growing budget-deficit stringency.


Here, a couple of triple-A names -- Virginia and Maryland -- stick out. Federal spending accounts for 29.8% of Virginia's economy and 28.5% of Maryland's, far above the 19.7% that's the average in the U.S. Just think of all the federal employees who live in Arlington or Bethesda but work in Washington, or of the hordes who labor in the vast office parks outside the Beltway, filled with government consultants and federal contractors. The credit-rating firm Moody's has both states on "negative outlook" in the wake of the national-debt anxiety.

Medicaid as a percentage of total state spending is another key indicator. Nationally, the program, which provides health care for the poor, accounts for 21% of all state spending -- and will loom much larger if the Obama health reforms are upheld by the courts and fold in millions of currently uninsured into Medicaid, for which the federal government picks up about half the tab. Already, however, like Pac-Man, the program has ferociously eaten away at state financial resources due tomedical-cost inflation and rising enrollment.

Here, comparisons are difficult, because some states, like California (22%) and Illinois (33%), offer a far more extensive range of services than, say, Texas (8%). The Lone Star state also benefits because some members of its large Hispanic population are reluctant to sign up for government programs due to citizenship issues.

States with large urban underclasses also tend to have higher Medicaid rolls. That has swelled their spending -- New York's by 28%, Pennsylvania's by 28% and, of course, Illinois' (above). Not surprisingly, to curb the rise in Medicaid costs, states like New York are considering moving away from their current fee-for-service payment systems to managed care.

Tax-collection growth is where the rubber meets the road for most states. Many of the stars in this respect are benefiting from rising prices for oil, food and minerals. North Dakota had a 46% jump in first-quarter fiscal 2011 collections, boosted by exploitation of the gas- and oil-rich Bakken shale shelf. Alaska, with its tax take up by 16.7%, likewise benefited from higher oil prices.

Even some Rust Belt states -- Michigan (up 20.9%) and Ohio (up 22%) were helped, in part, by improved manufacturing. But, tax increases were the biggest factor in the improved revenue numbers. Illinois (up 13.7%) raised personal income and corporate levies at the beginning of calendar-year 2011. California, on the other hand, saw a package of emergency tax increases expire at the end of fiscal 2010, and thus realized a paltry 5.7% rise in tax receipts in fiscal 2011's first quarter, and there's little reason to believe that the situation has improved. So the no-longer-so-Golden State could face additional budget shortfalls in the current fiscal year.


Overall, however, tax-supported state debt as a percentage of state gross national product has hardly reached alarming levels. Even states like Connecticut and Hawaii, whose debt exceeds 10% of their gross domestic products, aren't basket cases. Both centralize more functions that local governments do elsewhere, so the figures are a bit deceiving.

The same doesn't hold true for the chronic underfunding problems of state public-employee pension plans. The public-employee pension funding gap accounts for around $660 billion of the aforementioned $1.26 trillion retiree-benefits shortfall tabulated by Pew. And unlike retiree health care, pension benefits are harder to fix.

Particularly shaky are states like Illinois, with only 51% of its pension obligations funded, and California, with 81%. Their dysfunctional state governments, allied with public-employee unions, are seemingly incapable of making needed reforms. Several times in recent years, Illinois has floated bond issues to make its pension contributions, only to find that it paid more in interest on them than it made on its investments.

The last two factors in our tables are the percentage of mortgages in foreclosure or seriously delinquent -- meaning 90 days in arrears -- as of fiscal 2011's first quarter, and the state's unemployment rate.

Florida, Nevada, Arizona and California still have big mortgage problems, stemming from the faux housing boom of the George W. Bush years. That encouraged local governments to wildly expand, using soaring property-tax revenue, and individuals to spend more, by taking out home-equity loans. When the boom ended, the spending did, too, and joblessness soared. Based on June numbers, the states with the worst jobless rates were Florida (10.6%), and Michigan and South Carolina (both 10.5%).

In sum, our tables should provide some clues for muni-bond investors puzzling out where to invest. But the most important factor isn't listed -- a state's willingness to embrace structural change. In that regard, Illinois and California bring up the rear.

.E-mail: editors@barrons.com

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

Best bargains in Muni Bonds Now (Barrons)

How to Play the Panic in Muni Bonds
By RANDALL W. FORSYTH

For several months, panicked investors have been pulling cash from muni-bond funds. For investors of means, that presents an opportunity to lock in high tax-free yields for a decade or more.

Since mid-November, panicked sellers have yanked about $26 billion from muni-bond funds, disrupting a usually orderly market. For investors of means, that presents an opportunity to lock in high tax-free yields for a decade or more.

Doing so, however, takes more care than buying a muni exchange-traded fund or closed-end fund.

The undeniable crisis in public finances has moved from the political background to the top of the news in recent months. The demonstrations by Wisconsin public employees protesting the governor's drastic measures to close the state's budget deficit are only the most dramatic examples of the fiscal pressures being felt all across the nation.

But the budget problems in states and localities are not nearly as dire as those of the sovereign debtors in Europe, though you might not know that from the coverage in the popular media. Most notably, analyst Meredith Whitney predicted an imminent day of reckoning for state and local governments in a December interview with CBS News' 60 Minutes. "You could see 50 sizable defaults," she asserted. "Fifty to 100 sizable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."


Last week, a consulting firm formed by "Dr. Doom," Nouriel Roubini, chimed in with a similar forecast of $100 billion of defaults, which had no discernible impact on the muni market.

Whitney's unsupported prediction of default -- vastly in excess of that seen in the Great Depression of the 1930s -- helped push muni prices down about 10% for long-term bonds. Her assertions have been met with a deluge of criticism from muni-bond professionals, as well as in the pages of Barron's and on Barrons.com. Yet many pricing anomalies persist. Investors willing to buy individual bonds and hold them to maturity can get yields as high as 5% on highly rated paper. That's equivalent to a taxable yield of nearly 7.7%.

The bonds themselves provide the assurance of repayment of principal at maturity, which provides a measure of confidence even as their prices may fluctuate. Mutual funds, whether equity or fixed-income, are worth only what they fetch that day; there is no assurance that they will recoup their losses and return the original investment.

Among the securities to look for are bonds backed by clearly defined sources of money, including thruways, water and sewer systems and state lottery revenues.

Profiting from Panic
Other factors also conspired to make for a perfect storm for municipal bonds. The Treasury market -- which determines the broad trend in other bond markets, including munis -- also has been under pressure until recently as yields rose on increasing fears over inflation and investors' preference for risk assets. In addition, the end of the Build America Bond program on Dec. 31, which provided a federal subsidy to states and localities issuing taxable bonds, added to pressures. The BABs program meant less issuance of traditional tax-exempt securities, which had bolstered their prices and kept a lid on their yields. The sunset of BABs at the end of 2010 lifted that lid. The BABs program also was important in broadening the municipal market to institutional and global investors not interested in income free from U.S. income tax, the main lure for American individual investors.

The carnage is particularly visible in the iShares S&P National AMT-Free Municipal Bond exchange-traded fund, a quick and easy proxy for the muni market. It shed more than 10% in value from its peak in August to its trough in January and still trades 6.4% below its high.

In the process, extraordinary values have emerged as yields on tax-exempt municipals rose to equal or even exceed those of taxable Treasury or corporate bonds. Taking in munis' tax advantage, high-quality tax-exempt bonds exceeded the after-tax yields on junk bonds. Around the muni market's nadir in January, tax-free yields on investment-grade California general-obligation bonds were higher than the yields on lower-quality, fully taxable bonds of Mexico or even Colombia.

While that portion of the investing public who take their investment cues from TV were stampeding out of munis, savvy and sophisticated investors were going the other way. And even as a backlash against the doomsayers for their unsupported predictions of multibillion-dollar defaults increased, they dismissed their critics as peddlers of munis merely defending their turf.

Other disinterested and distinguished observers have pointed out how undervalued munis are.

MKM Partners' chief economist and strategist, Michael Darda, who made a perfectly timed call to buy deeply depressed but high-quality corporate bonds at the depths of the 2008 financial crisis, called valuations on munis "increasingly compelling" with higher prospective after-tax returns than medium-grade corporate bonds or equities.

David Rosenberg, chief strategist at Gluskin Sheff, one of Canada's top wealth-management firms, adds that only single-B junk corporates provide the same after-tax yield as investment-grade munis. "I can't think of a security that is going to provide a U.S.-based investor a 7% annual return for the next decade with such little risk attached -- not equities, not corporates, not commodities. I still think this is the biggest opportunity out there in the investing world today and the most glaring price anomaly."

As the pace of fund liquidations has slowed to about $1 billion a week from $4 billion at the worst of the exodus in January, the muni market has begun to recover, with the iShares muni ETF up about 5% from its mid-January trough. In addition, issuers of municipal bonds deferred new offerings amid an inhospitable market.

Despite the undeniable value that munis represent, the dilemma remains for investors. As the news coverage of the budget battle raging in Madison, Wis., dramatically shows, state and municipal finances never have been under such stress.

But, as Clifford D. Corso, chief executive and chief investment officer of Cutwater Asset Management, points out, debt service makes up a small part of the expenses for states and localities -- in contrast to the sovereign debtors of Europe, for which interest and principal payments place a huge burden on their budgets.

The impact of the budget cuts being played out in state capitals and city halls across America will fall on public schools and the poor, as Howard Cure, director of municipal research at Evercore Wealth Management, a New York firm that manages separate accounts for high-net-worth individuals and families, ruefully observes.


Moreover, muni pros agree that states and localities have powerful incentives not to default in order to maintain their access to the capital markets. That is a direct contrast to the mortgage market, to whose parlous condition the municipal market has been compared, not entirely aptly. Borrowers whose mortgage balances are greater than their homes' values have engaged in what's euphemistically called "strategic defaults."

Yet the pressures on municipal finances are "episodic, not systemic," Cure adds. In other words, not every city is in the same dire straits as Harrisburg, Pennsylvania's capital, which averted default through by an advance from the state.

The greater risk in municipal bonds, most market professionals agree, is the same as for all fixed-income securities -- higher yields resulting from a more ebullient economy, rising inflation or both, which would be expected to lead to further losses. That has them taking some tacks that may appear counterintuitive.

Ken Woods, who heads Asset Preservation Advisors in Atlanta, which specializes in fixed-income management for high-net-worth individuals, is targeting a slightly longer duration for his clients' portfolios, which are concentrated in the intermediate-maturity range.

But for lengthening duration -- in a structure called a barbell -- he is concentrating on the very shortest maturities, under two years, and relatively longer ones out to eight-to-12 years. In the process, he's avoiding the middle of the range, which would be hurt the most by an increase in short-term interest rates by the Federal Reserve.

Corso of Cutwater Asset Management is taking the same barbell approach, concentrating on the short end and the long end of the market and avoiding intermediates. That is a strategy to deal with the extreme steepness of the muni yield curve -- the much greater yields paid on the longest maturities relative to shorter ones, which are anchored by the Fed's targeting of the overnight federal-funds rate near zero.


THIS ISN'T EUROPE
Headlines blare news of state and local budget woes, but many munis promise handsome returns. Especially appealing: bonds issued by agencies facing only modest retiree benefit costs.


Sample Portfolio
Maturity S&P Moody's Book Yield*

Texas A&M University 5/15/2012 AA+ Aaa 0.57%
San Antonio TX Elec & Gas 2/1/2014 AA Aa1 1.38
State of Pennsylvania GO 2/1/2014 AA Aa1 1.22
State of South Carolina GO 3/1/2016 AA+ Aaa 1.81
State of Utah GO 7/1/2016 AAA Aaa 1.85
Sutter Health - California 8/15/2016 AA- Aa3 3.37
Salt River Arizona Power Authority 1/1/2018 AA Aa1 2.53
State of Virginia GO 6/1/2019 AAA Aaa 2.54
Ascension Health - Michigan 11/15/2019 AA Aa1 3.87
State of Delaware GO 3/1/2020 AAA Aaa 2.75
State of Maryland GO 3/1/2021 AAA Aaa 2.90
Water/Sewer District of Southern California 3/1/2022 AAA Aaa 3.50
State of Texas GO 4/1/2023 AA+ Aaa 3.49
Massachusetts Institute of Technology 7/1/2023 AAA Aaa 3.42
State of North Carolina GO 5/1/2024 AAA Aaa 3.53
NYC Transitional Finance Authority 2/1/2025 AAA Aa1 4.17
Massachusetts Bay Transit Authority 7/1/2026 AAA Aa1 4.17
NYC Water/Sewer Authority 6/15/2028 AA+ Aa2 4.42
Charlotte NC Water/Sewer 7/1/2030 AAA Aaa 4.23.
Harvard University, Mass. 12/15/2031 AAA Aaa 4.27
Tallahassee, Fla. Health Facilities 12/1/2030 NA Baa1 6.43%
Halifax Hospital Medical Center, Fla. 6/1/20206 A- BBB+ 5.70
Northampton City, Pa., Hospital Authority 8/15/2024 BBB+ A3 5.58
Michigan Hosp. Fin. Auth. (Ford Health) 11/15/2039 A A1 6.28
Iowa Higher Ed. Ln. Auth. (Grinnell Col.) 12/1/2020 AAA Aaa 3.12
State of Washington GO 1/12/2020 AA+ Aa1 3.00
Illinois Fin Auth. (Swedish Covenant Hosp.) 8/15/2029 BBB+ A- 5.81
Denver City & Co Sch Dist. Colo 12/1/2021 AA- Aa2 3.30
*As of 03/02 Sources: Cutwater Asset Management & Asset Preservation Advisors
.
The muni yield curve's steepness parallels that of the Treasury market out to 10 years, but it becomes even more extreme for lengthier maturities. Two-year triple-A munis yield about the same as the two-year T-note -- as of March 3, around 0.72%. At 10 years, the muni yields 3.20% vs. 3.52% for the Treasury. But in 30 years, the muni yields 4.72% vs. 4.60% for the Treasury. For a taxpayer in what for now is the top federal tax bracket of 35%, the top-grade muni yields the equivalent of 7.26%, the same as better-grade corporate junk.

If, or when, the steepness of the muni yield curve corrects, with short- and intermediate-term yields likely moving higher, those on the short end of the barbell will be trading as near-cash equivalents and will be able to be redeployed at higher returns.

Historically, the long end typically doesn't move much in those circumstances, so the investor picks up significant yield with little price movement. In the less likely event the curve flattens from the long end, the lengthier maturities would rally.

Woods also is emphasizing medium-grade (triple-B and single-A) bonds to a greater extent since going down the quality scale provides greater-than-usual pickups in yield. But he does that for only some 15%-20% of portfolios, with 80%-85% in double-A or triple-A bonds instead of his usual 85%-90% in top grades.

Another emphasis is on longer-term, high-coupon callable bonds. For instance, instead of buying a bond maturing in eight or 10 years, Woods might buy a bond due in 18 years but callable in eight years with a high enough coupon to ensure it is called. These so-called kicker bonds provide a higher yield and lower volatility than comparable non-callable bonds. That's in part because they trade at a significant premium to par, and individuals not steeped in the arcane math of bonds are loath to pay above par.

Cure of Evercore emphasizes bonds outside the battlegrounds of budget deficits and future pension and retiree health-care benefits. While the news focus is on states and cities, there are thousands of bonds that are issued by various agencies. These securities have structures with clearly defined sources of money, either dedicated tax payments or revenues from the projects they finance.

In New York, Cure explains, personal-income-tax payments are dedicated to payment of bonds of the Housing Finance Agency, the Dormitory Authority and Thruway Authority. In Florida, there are bonds secured by state lottery revenues, which have to cover debt service three times.

Revenue bonds to finance essential services such as water and sewer systems also have the virtue of being relatively immune to vagaries in the economy, which affect income and sales-tax revenues. In addition, localities which depend on real-estate levies have been depressed by the drop in house prices.

Meanwhile, those authorities also have relatively few employees and lower future retirement liabilities than, say, school districts.

And just think of the satisfaction you'd get paying the toll on George Washington Bridge if you owned bonds of the Port Authority of New York and New Jersey, which operates the Hudson River crossing.

.E-mail: editors@barrons.com

Copyright 2010 Dow Jones & Company, Inc. All Rights Reserved
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