In Search of Municipal Bond Offering Documents

How does one determine whether a particular muni bond's interest is subject to the alternative minimum tax?

-- Roger Frisch

Roger,

Unless you're working with a broker, the answer is: with great difficulty.

Not because there's ever much doubt about whether a given muni bond's interest is subject to the AMT or not, but because municipal bond documents are not nearly as accessible as documents filed by issuers of corporate bonds or stock.

Fixed-Income Forum: Join the discussion on TSC message boards. Most corporate bond and stock filings with the Securities and Exchange Commission can be found using either Edgar Online or 10-K Wizard for no charge. But municipal bond issuers aren't regulated by the SEC, so documents pertaining to their bond issues don't go into its database.

Let's back up for a second. You're asking how to find out whether a given municipal bond's interest is subject to the alternative minimum tax. How's that? As our primer on bond investing explains in greater detail, your income can be taxed in two ways: the regular way, or the AMT way. AMT rates are lower, but fewer deductions are allowed. And while almost all municipal bonds pay income that is exempt from regular income tax, some pay income that cannot be deducted from an AMT tax bill. The two biggest categories of munis that pay AMT-subject income are airport bonds issued by airport authorities and housing bonds issued by state or local housing authorities.

If you're buying muni bonds from a broker (full-service or discount), the broker should be able to tell you in a second whether a particular bond pays AMT-subject interest. Similarly, if you're buying munis electronically from one of the few online brokers that have that capability, AMT status should be clearly disclosed.

But if you're just curious about a particular bond and you don't have a relationship with a broker with a bond desk, you're low on luck. The information exists, but getting your hands on it may be a challenge, with costs involved.

Tax Matters

Like any other issuer of debt or equity, municipal bond issuers draw up prospectuses when they sell bonds. The prospectuses, called official statements, have a section entitled "Tax Matters" that clearly spells out whether or not the bonds, in the opinion of the issuer's lawyers, are taxable in any way.

This, for example, is from the official statement of a 1998 bond issue by the Long Island Power Authority:

In the opinion of Hawkins, Delafield & Wood, New York, New York, Bond Counsel to LIPA, under existing statutes and court decisions, interest on the Tax-Exempt Offered Securities is not included in gross income for federal income tax purposes pursuant to Section 103 of the Internal Revenue Code of 1986, as amended to the date of initial issuance and delivery of the Tax-Exempt Offered Securities. Under the Code, interest on the Tax-Exempt Offered Securities is not treated as a preference item in calculating the federal alternative minimum tax that may be imposed on individuals and corporations.

This, on the other hand, is from the official statement of a 1998 bond issue by the New York City Industrial Development Agency for a British Airways terminal at John F. Kennedy International Airport:

In the opinion of Whitman Breed Abbott & Morgan, LLP, New York, New York, Bond Counsel, under existing statutes and court decisions, interest on the Series 1998 Bonds is not included in gross income for federal income tax purposes pursuant to Section 103 of the Code. Under the Code, however, such interest is treated as a preference item to be included in calculating alternative minimum taxable income for purposes of the alternative minimum tax imposed with respect to individuals and corporations.

Unfortunately, you can't just punch up Edgar Online or 10-K Wizard and call up the OS (official statement) for a muni bond issue. And even the biggest and most savvy issuers of municipal debt, while making plenty of other information about their finances and bond issuance programs available on the Web, don't yet seem to be posting their official statements, which in any case can run into the hundreds of pages.

Finding Official Statements

Fortunately, there are a few alternatives. In 1990, the SEC, which has jurisdiction over the securities firms that underwrite and trade municipal bonds, started requiring them to do business only with municipalities that prepared official statements for their bond issues. At that point, the Municipal Securities Rulemaking Board, the muni bond industry's self-regulatory organization, started requiring firms to turn over a copy of each OS.

So you can call the folks at the MSRB and ask if they have the OS for your bond. You have to know the CUSIP (which is printed on paper certificates but otherwise difficult to find out without a broker's assistance). If they have it, they'll send it to you for $15 plus shipping.

Alternatively, there are the NRMSIRs -- the Nationally Recognized Municipal Securities Information Repositories. These sprang up in the mid-1990s, when the SEC started requiring municipal underwriters to underwrite and trade bonds only from issuers that provided annual financial information and material-event notices to a repository. The SEC maintains a current list of NRMSIRs.

Official statements don't have to be filed with NRMSIRS, but in most cases the NRMSIRS have collected them anyway. These outfits do most of their business with dealers and institutional investors, but they'll sell you their documents for a fee. Muller Data charges $20 per copy, Bloomberg charges $25 and Standard & Poor's charges $32.50 plus postage. DPC Data is the only NRMSIR whose database you can search online. It charges $25 for a paper document and $20 to download a PDF file.

There's also Munistatements.com, which is not a NRMSIR but which has official statements for about 90% of muni bonds issued since 1975 available for downloading at $25 apiece, said Landon Leming, senior vice president of Thomson Prospectus, which runs the site.

Last month, Munistatements.com started making some official statements available for free in collaboration with the Bond Market Association. The association's Web site lists each day all muni bonds that traded the previous day, with all the details of each trade. For bonds on the list, Munistatements.com allows downloading of all or part of the official statement, if it has it.

Be warned: These documents have a grubby look, compared with any SEC filing you might look up. That's because they're not filed electronically, but on paper, as the MSRB requires. Then they're scanned. Need I say more?

Leming said that in response to demand from individual investors, Munistatements.com is "looking to link to other sites that reach that market."

In the meantime, for this purpose, it's probably easier to establish a relationship with a human broker whom you can call up and ask.

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