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
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
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 the securities industry, the
Securities and Exchange Commission recently issued new regulations
that seek to make better information available to the investing
public in the $1. …