Investing in municipal bonds offers tax-free income

Yuma residents learned how to earn tax-free income during a presentation by representatives from the Tax-Free Trust of Arizona at the Yuma Civic and Convention Center on Wednesday.

Nearly 20 people attended an informational session given by Al Stockman, senior vice president of Tax-Free Trust of Arizona, and Todd Curtis, fund manager for Banc One Investment Advisors Corp. The presentation was sponsored by Yuma Community Bank.

Tax-Free Trust of Arizona, started in 1986, is a mutual fund created especially for Arizona residents. It allows people to earnmonthly income that is exempt from both state and federal income taxes because the trust only invests in municipal bond obligations of Arizona issuers, such as schools, highways, hospitals and water and sewer facilities.

For example, the largest holding in the portfolio is the Salt River Project. Others include the Bullhead City Parkway Improvement District, Arizona Board of Regents, Northern Arizona University System and Yuma Regional Medical Center.

"All the loans are to public municipal entities in Arizona," Stockman said. "And because of that, and this is (the) most important thing, the income you get every month can be deducted from state and federal income taxes."

During the presentation, Curtis and Stockman provided a brief overview on how the trust works and who should consider this type of investment.

Through his position as fund manager for the mutual funds, Curtis watches market risk, inflation trends, unemployment figures and economic growth.

Since Curtis lives in Phoenix, he said he has a good feeling of what is a financially-sound investment for residents. This conservative manager looks for bonds that have a 5 percent coupon return. Ninety percent of the funds are rated an A or better.

"I don't take a lot of risks with the portfolio," he said. "Like you, I like to sleep at night."

Curtis pointed out that this type of investing is considered the second safest sector in the financial market.

These are important points to consider when Curtis started talking about low interest rates hurting dividends on municipal bonds.

As interest rates reached a 45-year low in June 2003, the municipal bond market didn't create a lot of return for stockholders. Until the economy improves, interest rates will not go higher, Curtis explained.

"We do have economic growth, but the problem is the thing we have seen in the last two months - job growth," he said. "It's better, but it's nothing like what we need to replace the manufacturing jobs we have lost since 2000. But I don't think that's going to change."

Curtis said the 24 million unemployed people in China is the largest factor.

"I've got to believe that they are going to zap a lot more of the manufacturing jobs," he said. "I don't think that will curtail economic growth, but it is going to keep a cap on our labor costs ... hold down inflation, which in turn is going to keep our interest rate scenario fairly steady from where we are now."

This is why Curtis' conservative selection of investments is so important. Stockholders don't need to worry about risk. In 18 years, Curtis hasn't had any failed bonds.

"I've owned none that went broke," he said. "I've owned two that eventually went broke, but I sold before they did."

This is an important point.

But not everyone can make money with this, Stockman pointed out.

People who are interested in this type of investing should start by looking at which tax bracket they are in. They need to be in the 25 percent tax bracket to make this worthwhile, Stockman said.

The minimum investment is $1,000, but that amount isn't enough to make this worth- while.

"With a rate of 3.8 percent, you would only get $38 a year and divide that into 12 months and I don't know how that is going to help someone," Stockman said.

But if someone invested $100,000, the person would receive about $300 a month in tax-free income.

"For a grandmother that wants to spend that money on the grandkids or a grandfather that wants to play golf, it's nice," Stockman said.

With the convenience of this type of mutual fund, 55 percent of the stockholders reinvest their monthly dividend back into the trust. Plus, with 7,000 stockholders, it seems that people can't lose with these mutual funds.

But Curtis warned that this type of investing isn't for everyone and isn't risk free.

"You don't want to have all of your money in this," he said. "But it's good for diversity."

Those with questions about the Tax-Free Trust of Arizona should contact Jeff Byrd at Yuma Community Bank at 782-7000.

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Michelle Kann can be reached at mkann@yumasun.com or 539-6855.