Dirty bonds?

Economic Musings has posted an excellent piece on “community development district” [CDD] bonds. CDD bonds, commonly called “dirt bonds,” were widely used to fund housing development infrastructure during the real-estate bubble. Needless to say, many have been hit hard due to the collapse of the housing market. Economic Musings outlines the legal and structural details of these bonds and then questions whether high-yield muni bond funds are accurately valuing the securities in their portfolio:

Lost in the implosion of the securitized markets sits an overlooked yet just as opaque remnant of the housing crisis – CDD or “Dirt Bonds”. Save for the rare fixed income aficionado, this segment is still to this day unknown. In general, a CDD is a local, special purpose government authorized by the state as an alternative method for managing and financing infrastructure required to support community development. In most cases, the community development is water, sewer, and drainage infrastructure to raw undeveloped lots. The CDD then levies assessments on the property.

These taxes and assessments pay the construction, operation and maintenance costs of the district and are set annually by the governing board of the district. The taxes and assessments are in addition to county and other local governmental taxes and assessments and all other taxes and assessment provided for by law.

Muniland revenue flows

Natalie Cohen of Wells Fargo Securities issued a research piece yesterday called “Small Issuer Focus.” There is a lot of good analysis in the piece, notably this very succinct sketch of muniland revenue challenges:

The “double whammy” of budget reductions and constrained local revenues could, in our opinion, make the coming year stressful at the local level. However, we note that the return of revenues at the state level should take some of the pressure off cuts to local government next year and afterward, particularly for schools, which are considered a high public service priority.