Municipal finance is at a crossroad. If the national economy does not rebound quickly enough to refill the coffers of government, municipal finance may be headed for a rather significant restructuring, which could involve a modern-day version of the urban reform movement. The economic quagmire currently facing the nation has already had a negative impact on nearly all categories of tax-exempt bonds. Without a radical and immediate national political solution, the prospect of further downside at least through the mid-1990s seems assured given slow economic growth, the federal deficit, and the public's resistance to tax and fee increases.

While the trend-line for municipal credit quality is negative, defaults, at least among governmental issues, are rare. The future incidence of defaults remains difficult to predict due in no small part to the uncertain influence of politics. Nevertheless, a look back at the 1980s challenges the long-held view that tax-exempt bonds rarely default. It is noteworthy that Bond Investors Association default statistics indicate that there have been over $16 billion in actual or technical defaults among all municipal bonds issued since 1980. While these statistics are heavily concentrated in issues secured by private activity entities, the days of considering municipals risk-free are surely gone in the minds of most municipal market observers.

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