Warren Buffett, billionaire chairman of Berkshire Hathaway, Inc., has continued to express concerns about the number of municipal bankruptcies happening around the nation. In testimony before the U.S. Financial Crisis Inquiry Commission in June 2010, Buffett predicted a “terrible problem” for municipal bonds in coming years. A portion of that prediction came true on June 28 with Stockton, California becoming the largest city ever to declare bankruptcy.
While the number of municipal issuers defaulting on their bonds has fallen since 2010 according to Municipal Market Advisors, Buffett thinks that the “stigma” of bankruptcy as a deterrent is much less when sizable municipalities like Stockton, CA, thumb their nose at creditors. The stress on cities and municipalities has been strained by rising costs and dropping tax revenues. This stress has become even more acute considering that many cities and municipalities are facing serious shortfalls in funding pension obligations and declare bankruptcy when payments cannot be made.
Buffett’s company, Berkshire Hathaway, still carries a municipal portfolio of $3 billion. It is down from $3.6 billion in 2010 and represents about 9% of their portfolio according to a regulatory filing.
Nevertheless, Buffet’s warnings need to be seriously heeded by investors and more care needs to be exercised in making a decision to buy municipal bonds. The days of assuming that a municipal bond investment must be okay by its very nature are gone.