The sudden bankruptcy of Orange County, Calif., - one of the wealthiest counties in the nation - is bringing renewed debate about the need for more disclosure within the less-regulated world of municipal bonds.
Although municipal bonds are extremely popular because of their tax-exempt status, individual investors and even professional analysts often can't get up-to-date information on the financial and operating status of many muni-bond issuers.
"At the governmental level the disclosure can be so poor that one has no way of knowing what's going on," said John Bachmann, managing principal of Edward D. Jones & Co.
In the Orange County case, a highly leveraged county investment fund lost $1.5 billion this year because its manager gambled heavily on long-term investments, believing interest rates would continue to decline and make those securities more valuable. The fund borrowed short-term money to make those investments, some of which were in riskier and more exotic derivatives, which magnified the losses even further.
The enormous size of the losses caught investors, bond holders and even credit-rating agencies by surprise.
With 50,000 muni-bond issuers out there, tracking their financial health is no easy task. State governments, cities, counties, school districts and other public authorities regularly issue all kinds of bonds - a record $335 billion in 1993 alone.
"What happened in Orange County we are going to see happen all across the country," cautioned Missouri State Treasurer Bob Holden. Holden said, however, that he had not heard of any problems in Missouri.
A study last year by the National Association of State Auditors, Comptrollers and Treasurers found that periodic reports, official statements and other public documents are available from the 20 percent of municipal issuers who come to market most often.
The other 80 percent of muni-bond issuers who come to market less often provide "substantially less continuing information," the group found.
On the positive side, the first group represents most of the muni bonds issued by dollar volume. On the negative side, the issuers that provide less information tend to be in health care, housing, industrial development and other sectors where the greatest number of defaults have occurred.
"We monitor bonds we sell and do get financial information now, but we have to beg," said Vicki Westall, a municipal-bond analyst and principal at Jones.
After much debate within …