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Buying bonds during Armageddon time

Dear Mr. Berko: I have a sizable amount of money ($38,000), and I want to gamble with Illinois municipal bonds, which I hear can yield up to 8 percent and more.

I know Illinois is in trouble, but is it worse than California? Why is it bad? What would you recommend? –E.P., Bethlehem, Pa.

Dear E.P.: California is a bloody mess. This Left Coast state has a deficit of $23 billion, equal to 20 percent of its budget.

But the lucky folks in Illinois really take the cupcake with a budget deficit of $15 billion, which is 41 percent of the state’s annual revenues. Most Illinois politicians are crooked as a barrel of snakes (as slippery, too) and make the Russian mafia look like a playground of grade-school children.

While that statement may, to some, seem too unkind, what other explanation can account for the state’s slaughterhouse financial condition? To mitigate some of the pain, the legislature is going to raise taxes again. This year, the personal income tax will be bumped from 3 percent to 5.3 percent, an increase of $1 will be added to the cigarette tax and the corporate tax will zoom from 4.8 percent to 10.9 percent.

Meanwhile, Illinois Speaker of the House Michael “Mad Mike” Madigan and Gov. Pat Quinn, Mad Mike’s puppet, have proposed a $15 billion revenue bond to cover the 2011 deficit. Well, some of the wallahs on the Street claim that the state could miss a few payments on its municipal bonds.

But that won’t cut the mustard or slice the pork because the state’s pension plan is underfunded by $130 billion (Northwestern University Kellogg Graduate School of Management) and still assumes an 8 percent rate of return on its expensively managed pension investments. Thanks to union lobbyists with satchels of cash, typists, clerks, secretaries and other midlevel employees can retire at 55 with 80 percent of their final four-year salaries, plus stacked-up overtime and annual cost-of-living adjustments. And some of these folks collect more than $200,000 a year.

Many observers doubt there are enough members in the legislature who are willing to restore sanity to the state’s budget. Only four other states have more municipal debt than Illinois, and the costs to insure Illinois bonds against default exceeds the cost to insure Afghanistan’s bonds.

Yet would you believe that Moody’s still gives Illinois double A and triple A rating, even though the state has the highest perceived default risk of any of the 50 states plus Puerto Rico? As a result, some long-term, 25-year Illinois municipal bonds yield more than 8 percent, and some short-term municipals — three to five years — yield 5.5 percent, and, mind you, those yields are tax-free.

So if you look into municipalbonds.com, you will find hundreds of current Illinois municipal bonds with prices and yields that will jolt the fillings from your molars. And, frankly, I think many of them will survive.

So if your risk tolerance is stratospheric, consider the Illinois Financial Authority Revenue, due 2040 yielding 8.25 percent; Cook County Refunding Series D, due November 2012, yielding 2.8 percent; Illinois State Series A of 2015, yielding 4.4 percent – even a Belleville Business District taxable municipal bond, due in 2029 with a 14.5 percent yield – and an Illinois Financial Authority Smith Village, due 2020 with a 9.5 percent yield.

If you had the courage to buy the S&P 500 issues between February and April of 2009, when Armageddon was around the corner and the gutters were flowing with blood, those purchases would be enormously profitable today. Well, it looks like it’s Armageddon time in Illinois.

So if you have a brilliant broker, vodka in your veins and can gargle with battery acid, bathe in molten lava and chew cut glass bottles, there may be some uncommon opportunities in Illinois.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com.

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