Tax-Free Municipal Bonds & Investing in Our Neighborhoods

The city of New York needed to build a canal in 1812. It borrowed enough money for construction and guaranteed the return of investors’ original principal with the full backing of the city’s taxing authority. That is how the General Obligation Municipal Bond was born.

For anyone willing to lend money to these important projects, the Federal Government allows all bond interest income to be collected tax-free to investors.

“There are two rules of investing: #1 Preserve Principal. #2 When in doubt see rule #1.” -- Warren Buffet

Institutions like banks and insurance companies have always bought a lot of Tax-Free Municipal Bonds for a lot of easy to understand reasons. Families like yours and ours can find the exact same risk-free bonds to pay us all of that tax-free interest income.

So, why is this simplest ingredient on our investment planning menu almost always a brand-new concept for the families we serve?

Ask ten of your neighbors if they would prefer to pay fewer taxes, and at least nine of them will not hesitate to say “YES!” Then, ask how many of them own their own guaranteed Tax-Free Municipal Bond in their own personal account. Pause for the bewildered looks.

In our three decades building investment plans with data from analyzing account statements from new clients, less than one in ten owned one of these bonds that have been around 208 years. Never in our careers have we seen such astounding contradiction, or one so easy to solve!

“There are two systems of taxation in our country -- one for the informed and one for the uninformed.” -- Anonymous

To Solve a Mystery … Follow the Money

Not far from that canal in New York lives the reason that a simple Tax-Free Municipal Bond became one of the best kept secrets hiding in plain sight all around most investors, every day.

Wall Street makes more money from confusing products like “fixed income” funds, whose complexity and expenses often make these inventions anything but fixed. And, just wait until inflation returns one day to short-circuit some of these products chasing yield and overlooking the risks to get it.

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Some things do not need new inventions or fixing. The simple Tax-Free Municipal Bond has stood the test of more than two centuries of time for good reasons.

“Simplicity is the ultimate sophistication.” -- Leonardo Da Vinci

School Bonds & Informed Simplicity

Here is an example near and dear to our hearts in Houston, Texas. The Spring Branch Independent School District (SBISD) borrowed $597 million in 2007 to rebuild its elementary schools. Full disclosure -- we are investors in the bonds, taxpayers in the neighborhoods, and have kids attending the schools. We are triple-dippers and wonderfully biased!

When we worked on Wall Street, we were not allowed by legal and compliance departments to disclose to our clients what we invested in personally. That was not okay with us. So, we escaped. (You can too!) The simple truth should never be a conflict of interest.

The SBISD bond paved the way for 14 schools to be built. Additionally, hundreds of major renovations were made throughout the district, safety and security were added, new fuel-efficient buses were introduced, and thousands of laptops and mobile devices were given to teachers and students.

We are not on any School Board and take zero credit for the amazing results. But, we are investors and we are their neighbors.

The 12th school built from this bond, Valley Oaks Elementary, is directly across the street from our building.

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“It feels like a corner of heaven. It’s beyond my wildest dreams. I’ve taught for 27 years, but never in a new building or with so many new things. This new school feels like a gift to me, a great gift! I wouldn’t change one single thing. It’s beautiful.” -- Marcia Looper (former SBISD Teacher of the Year)

Built to Last the Test of Time

There was only one change from that original SBISD bond deal in 2007. Exceptional management of the budget for the schools, along with efficiently-planned buildings was met with an economy shaken by Wall Street’s Credit Crisis the next few years.

That combination led to projects being finished on-time but under budget. So, the only surprise was that an entire extra school could be built as a result!

Tax-Free Municipal School Bonds have stood the test of time for great reasons.

A postscript to this story is that we love investing in our neighborhoods in any way possible. Here is the dive bar that we demolished across the street from that new elementary school.

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Here is the building that we constructed in its place -- where our clients call home now.

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It helps to see clearly and understand exactly what you own, as you build your own investment plan that needs to stand the test of time and every market cycle. Let us know if we can help you.

We also invite you to subscribe to our email newsletter (sign-up form below) to receive more investment planning information and to help answer questions you may have. We are here to help you on your journey to Financial Freedom!