Average Annual Number of Muni Defaults Since the 1930s: 10

By Christopher Krug and Karl Cates | August 13, 2012
  • What's Happening

    What's Happening

    The recent bankruptcy of three California cities may suggest a trend that muni bondholders could find unsettling. In July, San Bernardino, near Los Angeles, became the latest to file for bankruptcy. During the prior two weeks, Stockton and Mammoth Lakes did the same. Add to those Harrisburg, Pennsylvania, and Jefferson County, Alabama. Warren Buffett recently told Bloomberg that municipal bankruptcies are set to rise as there is now less stigma attached to seeking protection. In 2010, Buffett predicted a "terrible problem" for municipal bonds in coming years, something he still believes.

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  • Why It Matters

    Why It Matters

    If Buffett is right, muni bonds could be in trouble. The data, however, suggest otherwise. A spokesman for the treasurer of California noted in an interview with Bloomberg News that only 3 among 482 California municipalities are bankrupt -- and the rest, by most appearances, seem healthy. Also, most municipalities got into trouble because of one-off issues. In Harrisburg it was an incinerator project gone bad. In Jefferson it was a sewer deal tied to financial derivatives. Historically, local-government bankruptcies are rare: In the U.S. there have been roughly 600 since the 1930s, or fewer than 10 per year.

    Graphic by Charlos Gary/Bloomberg

  • What It Means for Your Portfolio

    What It Means for Your Portfolio

    It is likely the trickle of municipal bankruptcies will carry on as the U.S. continues its weak recovery. Even so, the data suggest that most investors view municipal bond issues as solid -- their returns have beaten both corporate bonds and Treasuries since the start of 2011. Besides that, states are starting to push back against struggling municipalities, blocking municipal bankruptcy filings and requiring spending cuts and tax increases instead -- moves that should lead to greater economic health.

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