Wealth Finance

Salute the general

Not all muni bonds are created equal when it comes to requiring repayment to investors. “General obligation” bonds are often the safest, analysts say, because even if the issuing government gets into financial trouble, it often cuts expenses or raises taxes to pay back the debt.

When water flows, cash flows. Many otherwise skeptical advisers say that bonds backed by water or sewer fees in an already developed part of a town are usually safe. “People will bitch and moan about an increase in sewer rates, but it’s not like they’re going to stop paying their bills,” says Carolyn Walder, a planner in Alexandria, Va.

Don’t bet on a local boom

Some of the most hazardous bonds are the ones that can meet their payments only if the issuer sees a lot of economic growth. Over the past year, dozens of muni bonds issued in Florida have defaulted because the housing developments they were supposed to finance were never finished. “Debt predicated on growth is inherently risky, whether the issuer is a utility, school district or city,” says David Alter, head of municipal bond research at Goldman Sachs Asset Management.

Do a regular checkup

In the past, many investors treated muni bonds as a set-it-and-forget-it investment. That should change, says Phil Condon, manager
of several municipal bond funds for DWS Investments. Advisers suggest you check up on an individual bond every few months; if a given bond starts running into financial trouble, it may be worth selling, even at a loss.

Make time for the business section

CNBC usually doesn’t give updates on the finances of a muni bond project. But the types of problems that might affect those bonds could show up in the local newspaper. Investors in the $70 million Loft-Right dormitory complex in Chicago, for instance, could have learned about the project’s troubles from the Chicago Sun-Times in 2007—well before it defaulted on its bonds.

Do a drive-by

Paul Baumbach, a financial adviser in Newark, Del., was curious about the municipal bonds of a charter school a few blocks from his house. So he visited the school and discovered that the enrollment waiting list was exceptionally long, a sign that there would be a steady stream of students—and revenue. He bought the bonds a year ago for his clients, and they’ve increased in value nearly 10 percent.

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