Some advisors are not waiting for the dust to settle to find out. "I took all my clients out of munis four years ago-once muni yields on 'AAA' bonds overtook Treasury yields," says veteran advisor Bert Whitehead, president and founder of Cambridge Connection Inc. in Franklin, Mich. "The smart money managers were getting the message that munis were riskier than Treasurys, and that differential has been increasing every year."
Still, while not dismissing entirely the threat of future defaults, the overall preponderance of market opinion is that there's been an unwarranted rush to judgment on munis that isn't supported by the historical record.
For instance, despite their budget-balancing difficulties, states are not overburdened with debt, according to experts. Overall, only 5% of state and local government expenditures are dedicated to interest payments, according to the Center on Budget and Policy Priorities, a proportion nearly unchanged since the late 1970s.
Others say the prediction of future massive defaults is exaggerated. They point to increased tax receipts for states and municipalities in recent years and, ultimately, the taxing power both have to make up shortfalls. Defaults are sure to rise, they say, but only slightly from historical averages of less than 0.25% per year.
Lyle Fitterer belongs in this camp. The head of Wells Capital Management's Municipal Fixed Income Team, the investment arm of Wells Fargo & Co., which manages $25 billion in muni mutual funds, debunks any perception of massive future defaults, and sees a buying opportunity.
"If you look at historical defaults, they've actually been declining," Fitterer points out. "They peaked in 2008, and they've been coming down since.
"Are they going to look like they've looked over the last 40 years? No, they're going to be higher than they've been because we're been through a rough economic environment. But on the flip side, revenues for states are improving. Year over year, revenues at the state level have actually been up four consecutive quarters," he says. "Last quarter [the fourth quarter of 2010] they were up roughly 6.8%-6.9%."
What's more, property taxes, on average, a big driver of revenues for many local municipalities, have actually continued to climb in the face of declining housing prices, Fitterer noted. "There's a misconception that just because housing prices have gone down, it's just a matter of time before property taxes go down; that's just not the case."
Still another misconception, he says, is that problems within the muni market somehow equate with problems in the housing market.
"You have to look under the covers and say, if one credit is going to default does that mean the entire market is going to default, like the entire housing market did where you had a bunch of mortgages that were all rated 'AAA'? Our market doesn't work like that," Fitterer says. "There are issues that are totally separate and distinct from one another. There are some similarities, but for every one credit that could default, there are probably 200 credits that are not going to default or even think about defaulting."