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Jefferson County, Alabama’s November decision to file for bankruptcy could have sent the municipal bond market into a frenzy.
But just as the muni market fended off dire predictions of spiraling defaults during the height of the credit crisis, tax-exempt bond issuers have continued to hold their own through a recessionand tepid recovery.
Only three municipal bond issuers (out of a universe of about 50,000) have defaulted in 2011, according to ratings agency Standard & Poor’s. While reduced tax revenues put pressure on state and local government to meet their obligations, municipal bankruptcy is rarely an option for legal, financial, and practical reasons.
Debt service on municipal bonds tends to be one of the top spending priorities in state budgets, most of which must be balanced annually. Municipal interest and principal payments are not that onerous, representing less than 10 percent of total government spending in all but three states in 2010 by S&P’s count. Plus, the mere threat of not honoring their debt commitments could cause municipalities to lose the trust of investors, cutting off a vital funding source.
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