Harvey Kauffman isn't looking for excitement in his investment portfolio. So the retired La Costa septuagenarian has almost all of his savings in bonds -- including California tax-free municipal issues.
Suddenly, he's got exactly the kind of excitement he didn't want: With the state facing an unprecedented budget shortfall, Kauffman has been left to wonder whether his bonds will pay interest and principal as promised.
"I'm really concerned," he says. "Since I'm retired, I don't have any way to replace it if I lose it."
But for now, Kauffman is holding tight: "I'm believing that everything will be OK."
That faith has prevailed in the California municipal bond market despite the dire headlines of the last few weeks. There is no sign that institutional or individual investors have been bailing out of munis.
Their willingness to stay put shows in the rising or steady share prices of mutual funds that own debt of the state and its cities, counties and other municipalities. The market value of many of those portfolios rose this week even after voters rejected ballot measures that might have eased the state's fiscal crisis.
"What the market is telling us is that long-term investors believe [California] is going to figure out how to pay its debts," said John Carbone, manager of the Vanguard California Long-Term Tax-Exempt fund.
Then again, the market has been blindsided by one financial catastrophe after another over the last 18 months or so. It seems inconceivable that California won't make good on its debts, but the failures of Fannie Mae, Freddie Mac, Lehman Bros. and General Motors Corp. also were inconceivable to plenty of Americans.
Muni bond fund managers prefer to point to history: Defaults have been rare events in the modern era. Studies typically have found that the annual default rate has averaged a sliver of 1% of outstanding bonds since World War II.
Still, there have been some shocking muni busts, such as the West Virginia Turnpike in 1958 and the Washington Public Power Supply System (nicknamed Whoops) in 1983.
If we go back to the Great Depression years, the picture darkens noticeably. The average annual default rate was 1.8% of outstanding muni debt from 1929 to 1937, according to study by David Blair, a muni expert at bond fund giant Pimco in Newport Beach.
Detroit, Cleveland and government units of Buffalo, Chicago and Miami were among the high-profile defaults of the Depression years, Blair said. Among the states, Arkansas also temporarily defaulted on its debts.
