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Municipal Bonds Can Default

I’ve written about buying municipal and state bonds [3] in the past but I’ve never actually done it. When reviewing Maryland bonds, the rates just didn’t seem high enough for me (I’d looked at investing directly with the state through one of their partners and at buying bonds out in the market) so I never did it.

While I never thought about municipal bonds defaulting, I knew that it was a possibility. Certificates of deposit are backed by FDIC insurance. Treasury bonds are backed by the Federal government. If the Feds defaulted, I’d have bigger problems than losing what little I invested in those two vehicles. With municipal bonds, backed by states and counties, the default risk is very real.

Just last week, commissioners in Jefferson County in Alabama voted 4-1 to default on $3.14 billion [4] in municipal bonds. The bonds were to fund a sewer renovation and commissions had approved a plan, back in September, that would avoid this that included $1.1 billion in concessions and a sewer rate increase of up to 8.2% over the first three years. Creditors wouldn’t agree to those concessions, the county legislature couldn’t pass a bill, and so now it appears the county will default.

While this particular default made headlines because of its size, the article goes on to discuss other defaults. Jefferson County is just the 11th this year and beat the previous record set by Orange County, California in 1994. In that default, there were $2.2 billion in debt outstanding.