The 5 Biggest Muni Bond Defaults

This list, compiled by Moody’s Investors Service, ranks defaults according to the amount of bonds affected. It includes only issues that had ratings when the bonds were first sold.

1. Jefferson County, Ala. Court-mandated capital improvements to a regional sewer system proved the final straw, pushing highly indebted Jefferson County over the edge. The county’s sewer revenue bonds went into default in April 2008; the general obligation bonds followed in September. Jefferson County filed for bankruptcy protection in 2011. Resolution is pending.

2. Washington Public Power Supply System. Bonds issued by the Washington state power supplier to finance a nuclear power plant defaulted in August 1983, when cost overruns and redesigns, as well as declining demand due to conservation, led to abandoning the project. Bondholders recovered about 40% of their principal and interest about a decade later.

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3. Las Vegas Monorail Corp. The transit operator, an offshoot of a Nevada agency, defaulted on its bonds in January 2010 because of mechanical problems and lack of ridership. Subsequently, Ambac, which had insured the bonds, filed for bankruptcy because of huge losses it sustained insuring mortgage securities. Resolution is pending, but monorail bondholders are likely to face big losses.

4. Stockton, Cal. A building spree cut short by the 2008–09 recession and the sluggish recovery that followed sent the city’s finances into a tailspin. The city defaulted on a number of bond issues in February and filed for bankruptcy reorganization in June. Resolution is pending. Some of the bonds are backed by insurance, but the city wants bondholders to shoulder some of the uninsured losses.

5. Harrisburg, Pa. Pennsylvania's capital fell into technical default in 2009 after it failed to honor payment guarantees made to investors in a troubled incinerator project. Investors have not lost principal or interest, thanks to a combination of bond insurance and payouts from reserve funds. But the city may file for bankruptcy reorganization later this year.

Kathy Kristof is a contributing editor to Kiplinger’s Personal Finance and author of the book Investing 101. Follow her on Twitter. Or email her at practicalinvesting@kiplinger.com.

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