As stocks gyrate, international conflicts grow and oil prices continue to rise, jittery investors are increasingly turning to tax-free municipal bonds. They assume that, along with being an integral part of a genuinely diversified portfolio, muni bonds are safe.
But just how safe are they?
Consider that since 1970, just 0.04% of all munis tracked by Moody’s – 18, to be exact – have defaulted. Although very low, it shouldn’t be all that surprising given that more than 99% of rated municipal bonds carry investment-grade ratings from Moody’s, and more than half of rated municipal bonds are single-A and above.
Behind the numbers
Recently, a new survey cited by Bloomberg gives us a peek behind these numbers. It attests to the financial health of states, which issue tax-free bonds and provide secondary backing to local municipalities and political subdivisions.
According to the survey, in fiscal 2006, revenues exceeded original budget projections in 37 states, was on target in 10 states and below projections in only two (Oregon didn’t participate the survey).
It turns out that states are enjoying higher-than-expected tax receipts – 3.4 percent more than originally projected in fiscal 2006. This figure includes sales taxes, which were 1.3 percent higher; personal income taxes, 3.5 percent higher; and corporate income taxes, 12.6 percent above original estimates, the survey reported.
In fact, 20 states are now considering cutting taxes, according to the survey, which is taken twice yearly by the National Governors Association and National Association of State Budget Officers.
Of course, the states are not without financial challenges. However, we are pleased to pass along this survey information to our investors so they can continue to rely on a market that provides safety, diversification and, best of all, tax-free income.
