Nuveen: Florida Closed-End Muni Funds Roll Into National Funds (NIO, NPM, NEA)

Nuveen has been the largest player in single-state municipal bond closed-end and open-end bond funds for years and years.  If you look in Barron’s each week under closed-end mutual funds data to find premium/discount data or yield data on closed-end funds, you will see scores and scores of Nuveen single-state municipal bond funds in there.  But today came the announcement that four of these funds that are tied to the state of Florida have completed their mergers into national bond funds.  While this has been a developing situation in recent weeks, this could have implications for other such single-state municipal bond funds which investors seek for tax-free income.

The Nuveen Insured Florida Premium Income Municipal Fund (former ticker-NFL) was merged into the Nuveen Insured Municipal Opportunity Fund, Inc. (NYSE: NIO).

The Nuveen Florida Investment Quality Municipal Fund (former ticker-NQF) and the Nuveen Florida Quality Income Municipal Fund (former ticker-NUF) was merged into Nuveen Premium Income Municipal Fund 2, Inc. (NYSE: NPM).

The Nuveen Insured Florida Tax-Free Advantage Municipal Fund (former ticker-NWF) was merged into Nuveen Insured Tax-Free Advantage Municipal Fund (NYSE: NEA).

Where this gets interesting is that Florida has the same issue as many other states.  A depressed property market, which has led to a decrease in collected tax revenues, which has led to lower revenues for municipal tax districts.  Single state taxation on income derived from municipal bonds, which are tax-free at the federal level, also differ from state to state.  In states where no state income tax exists, investors can generally purchase any municipal bond (i.e. closed-end fund) and not pay federal income tax on the coupon income.  But many states in the U.S. that do have state income taxes only treat the income from municipal bonds issued within the same state as being eligible for a tax-free status at the state income tax level.

Some single-state investors would have to pay interest on the income from closed end muni-bond funds if they were rolled into national municipal bond funds.  That still leaves the exemption from Federal income tax, but might not shield the owner from income at the state or local level where income tax is levied.  Every state is different on this and it may not have an impact if this were to occur in all of the states, but Nuveen has many more single-state closed-end municipal bond funds.

Again, this has been an ongoing process that has just now formally closed.  But income investors who own other single-state municipal bond funds seeking tax-free income will want to watch to see if this develops further.

JON C. OGG
OCTOBER 19, 2009