For decades Americans have believed municipal bonds to be one of the safest, most secure investments. That’s because they’re backed by city, county and state governments with a very low chance of going bankrupt.

But this premise hasn’t held up in recent years due to a declining economy and massive increases in borrowing and spending.

San Bernardino and Stockton, California both filed for Chapter 9 bankruptcy protection in 2012. And Jefferson County, Alabama filed for bankruptcy in November 2011 with $4.2 billion of debt. This filing was primarily due to corrupt financing of sewer system debt that went bad when the real estate market collapsed in 2008.

Large metropolitan cities managed to avoid the Chapter 9 bullet until last year. That’s when Detroit was forced to file for bankruptcy protection in July 2013, with over $18 billion in long-term debt.

Although more widespread attention being given to muni-bonds has been recent, concern about the quality of municipal debt isn’t a recent phenomenon.

Financial analyst Meredith Whitney went on the record by making a bold statement in a December 2010 interview on 60 Minutes. She said there could be “50 to 100 sizable defaults or more…” in the following 12 months. Here’s the video:

Whitney was attacked by Wall Street apologists in the financial media because she was off on the timing and number of defaults in 2011. However, Whitney was correct to be concerned because of the lack of current and accurate financial information on these governmental entities.

On March 4, Moody’s Investor Service downgraded the city of Chicago’s $8.3 billion in debt from A3 to Baa1, just three levels above junk status. This makes Chicago the second lowest-rated major American city, only ahead of already-bankrupt Detroit.

Unlike the federal government, cities, counties and states don’t have the Federal Reserve to create new money out of thin air and bail them out. Several other major American cities are also on the brink of bankruptcy according to this article:

The cities include:

  • Washington, D.C.
  • New York City
  • Honolulu
  • San Jose
  • San Francisco
  • San Diego
  • Los Angeles

With a sluggish economy and an expensive new healthcare law (Obamacare), it’s doubtful the financial condition of these or most other cities will improve anytime soon.

If you are considering investing in municipal bonds, look at the financial condition of the issuing city, state or county. Then make sure you weigh the risks along with the potential financial rewards.