Oct. 3 (Bloomberg) -- Municipal bond investors should brace themselves for a whole bunch of defaults.

That is a departure from business as usual because default is a relatively rare occurrence in Muniland.

No more. For all of 2007, something like $300 million in municipal bonds defaulted, according to the Distressed Debt Securities newsletter of Miami Lakes, Florida. So far this year, the figure is more than five times that, and climbing.

The most high-profile default of this year may be that of Jefferson County, Alabama, which is toying with the idea of filing for bankruptcy. As week chases week, the chances of that maneuver increase.

Default is what happens when a bond issuer violates covenants, not when it misses making a debt-service payment, although the one usually follows the other pretty quickly.

That is something likely to happen more and more in the days and years ahead, as municipalities come to grips with the mountain of debt they have amassed over the past decade.

Boy, did they. During the 1980s, annual municipal-bond issuance averaged a little more than $100 billion. This doubled in the 1990s. So far this decade, states and localities have sold more than triple the amount of bonds they sold during the 1980s: $350 billion a year, if you're counting.

Backed by Revenue

They sold those bonds for all kinds of reasons -- to build new roads, schools and sewers, to maintain infrastructure, to refinance higher-cost debt, to paper over deficits in budgets and pension plans.

Most of the bonds they sold aren't backed by their taxing power, their so-called general obligation, full faith and credit. They are, instead, backed by specific revenue. Guess which kind of debt is most at risk.

Just to keep things in context, it's important to realize that voters during this decade, when asked to approve the sale of bonds and bond-financed programs, weren't shy about doing so. They were as uninhibited in their approval of bonded debt as they apparently were in incurring credit-card charges.

So far this decade, voters passed 77 percent of the bonds they were asked to consider, according to the Bond Buyer yearbook, up from the 65 percent they passed in the 1990s.

I suspect that the increase in defaults will surprise lots of investors. Remember the whole auction-rate securities mess that exploded back in February?

Auction-Rate Freeze

The lesson we learned there is that most brokers didn't quite appreciate what they were selling. They didn't realize the key role their own firms played, and that if the firms ceased backstopping auctions, the entire market would freeze up.

But there was another lesson to be learned: Many buyers implicitly trusted their brokers. They didn't pore over offering documents and prospectuses or even old news stories about the firms' 2006 settlement with the Securities and Exchange Commission for manipulating auction sales.

In the same way, I bet that most individual buyers of municipal bonds have purchased them as a generic, commodity-like product that pays tax-exempt interest. This is a big mistake in a market that is particular and specific to an insane degree.

You don't have to do a lot of advanced research to know that this will end in tears.

Consider the billions of dollars in bonds sold by municipalities over the past decade to build convention centers and their adjoining hotels, which were designed to boost local economic development and, not least, civic pride.

Some of these bonds were insured, for what that is worth today. Some were backed at least partly by the city that sold the bonds. All rely on conventioneers coming to town and spending boatloads of money.

How likely is that? Do you think American businesses are going to send their employees on a binge of convention-going in the next year or two? What happens to all this space and the billions of dollars in bonds that were used to build it?

And that's just one tiny area of the municipal market. How well do you know your municipal bonds and who is responsible for their repayment? You'd better find out.

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net

Last Updated: October 3, 2008 00:01 EDT