American cities at risk of default and bankruptcy

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FORTUNE — Several downtrodden cities are on the verge of defaulting on their debt, putting financially encumbered states and taxpayers on the hook to pick up the tab. The National League of Cities says municipal governments will probably come up $56 billion to $83 billion short between now and 2012. That’s the tab for decades of binge spending; municipal defaults could be our collective hangover.

Municipal bonds, issued to fund public projects such as roads and public buildings, have historically been seen as one of the safest places to invest, which is why 80% of municipal bond holders are individual households and mutual fund investors, explains Jeffrey Cleveland, municipal bond analyst at Payden & Rygel Investment Management.

The average five-year cumulative default rate for investment-grade municipal bonds is less than half a percent, according to Moody’s data. That’s about one-third the amount of corporate debt defaults.

Full story: American cities at risk of default and bankruptcy – May. 28, 2010