Fish Around: Why Use Tax Exempt Bonds?

So the first thing everyone who wants to look into this bond rabbit hole needs to do is download the “how to” produced by Orrick, a leading bond counsel law firm.  Go here.

“Why Use Tax Exempt Bonds” is the title of Chapter two of the Orrick primer.  Orrick is trying to sell its services through this marketing document.  I’ve learned a lot by reading this paper sort of like how Kremlimologists used to read Pravda.  As much for what is left unsaid as is for what is said.  The whole document is full of unintentional insights like the following in a section titled “Unrated Bonds”:

"The evolving investor community analyzing charter school bonds is largely comprised of sophisticated institutions accustomed to conducting rigorous due diligence review of credit risk prior to making an investment decision (and may be motivated in part to advance the purposes of the charter school movement through such capital investments.)"

 I can only hope to build a community of sophisticated individuals conducting due diligence and protecting public funds from the wrong people.

Note how this works here in this one sentence.  Lots of multi-syllable words (Orrick is paid by the hour or perhaps the syllable) saying essentially that some investors are IDEOLOGICALLY INLCINED to buy charter bonds regardless of the schools inability to obtain even the (often flawed) imprimatur of a ratings agency like Moody’s or Standard and Poors.   Many charter schools get low ratings [see the UNO “just above junk” bond from 2011 per Pure’s statement.] and thus have to pay higher interest rates (which inversely results in more profits for the private entities buying their bonds) but some schools can’t even get an investment grade rating.  An important aspect of our work here will be to suss out the deals going directly to private placement (as poor as films going directly to DVD) and not intended for public float. 

REMEMBER: The investors in such tax-exempt bonds are NOT paying federal income tax and often NOT paying state income tax while getting higher returns for a ‘riskier’ investment.  Why make a philanthropic donation to build a charter facility when you can make money offering loans (buying bonds) at higher than market rates and avoid paying taxes on the capital returns?

I want to get to the bottom of these questions: Why are the sell-side finance institutions like Orrick working so hard to push more deals onto the public investor?  Is it because if there is only such demand for charter school bonds among the IDEOLOGUES (say the Walton’s family office investment advisors or US-domiciled investment vehicles for Gulenists) then such financing will be seen as transitory and experimental much like the charter schools once were viewed?   And then somehow the window for charter school tax-exempt bond deals will be closed down?