California Muni Bond Defaults Tumble

As usual, California tax-free municipal bonds were one of the safer investments during Wall Street’s tumultuous 1998--except for individuals and institutions that held nine bond issues worth $89.2 million.

That was the total amount of California deals that defaulted last year, meaning at least one principal and interest payment was missed.

However, thanks to a healthy state economy, last year’s default level was well below the total in 1997, when a record $212.1 million in bonds went belly up, according to figures compiled by the Palm Springs-based California Municipal Bond Advisor newsletter.

And to put things in perspective, $34 billion in new bonds were issued by the state and local municipalities and agencies in 1998, a record. So the $89.2 million worth of defaults is a tiny fraction of all bonds sold last year. The total is even less significant compared with the more than $140 billion in California muni bonds outstanding, as estimated by the newsletter.

“It’s a big improvement over last year,” said Zane Mann, publisher of California Municipal Bond Advisor. “There’s no question that it was the economy--that’s what’s guiding this.”

As in most of the last decade, land-based bond issues such as Mello-Roos financings, often sold to pay for infrastructure improvements to housing developments or school districts, caused most of the problems. In fact, all of the defaulted deals last year were Mello-Roos, for the first time in this decade.

The defaulted deals include the $3.2-million Placerville Public Financing Authority 1992 Revenue Bonds, Series C; the $20.6-million Hesperia Assessment District No. 91-1 (Joshua/East Main Street) Bonds; and the $10.5-million Central California Public Financing Authority (Marks-Roos) Bonds, Series 1993.

Problems in these land-based deals arise when financially troubled developers, who years ago convinced a local government agency to issue bonds to pay for streets or lights related to a housing development, can’t back the deals.

If the homes aren’t built, or don’t sell, for example, then homeowners never move in to pay assessments that then pay off the bonds. If the developer is too financially strapped to pay, and the municipality won’t step up, the bonds go into default.

Mann cautions that defaults could increase this year, because many deals he now classifies as worrisome aren’t being fixed. “The bad news is that the watch list [of troubled deals] is growing, because nothing is being solved,” Mann said. “Our concern is that the real estate boom is not working these out. When there are foreclosures [on troubled property], no one is bidding.”

Investors who want a very high degree of safety should make sure individual bonds are privately insured, or buy muni bond mutual funds, Mann said. And beware if a broker calls with an uninsured, unrated bond from a place you aren’t familiar with, he said.