General Obligation bonds no longer as safe as Revenue bonds.

For those of us who invest in Municipal bonds the bankruptcy in Detroit brings the point home that I have been making for years that GO's or not as safe as Revenue Bonds anymore.  For years the opposite was true.  There is no longer such a thing as the "full faith and credit" of any government institution since activist courts and even the President of the United States have now completely overturned the rule of law that held that bond holders had first call on any assets of a government that defaults. 

GO's backed by school buildings, water and sewer lines, fire department buildings, and such were solid real estate that could in the past be taken back by bond holders if a government defaulted on bond payments.  But when Obama changed the rules in 2008 by allowing bond holders for GM to take a full loss in their lawful first in line for payback when a company defaults the world was turned upside down for bond holders.   In several city bankruptcies of late union pension holders again were moved in front of bondholders in municipal bankruptcies thereby making the law meaningless. Detroit I fully expect will continue this practice of bondholders losing full principal. 

The concept now is that bondholders are a bunch of rich bond funds or rich bondholders who screwed over governments with their buying of bonds and need to lose their money in bankruptcies. In almost all cases bondholders tend to be middle class individuals or people just holding bond funds in their retirement assets.   Thereby the idea that only rich people hold bonds is untrue. 

Revenue bonds backed by airport, hospital, or power agency revenue in my opinion or now a better bet on municipal finances than General Obligation bonds since they depend on a revenue stream from an asset that can raise rates to cover the cost of operating.  There is also the lack of worry regarding bankruptcy since these entities tend to have separate governing boards and little pressure from pension obligations.  

The municipal world has changed and those who do not take this into account when buying municipals could pay the price down the line.  Municipals still make a good case for investing in individual bonds since the principal is guaranteed for the most part and the interest remains triple tax free if bought in your state of residence.  Higher tax rates make bonds that can now be bought at par for 4.5% or better look good when comparing other income alternatives.   

Lastly when considering municipal bonds take into account not only the tax free interest, but also how they lower income level on your annual tax return effects the taxation of other income you might have.  The lack of reportable income from municipal interest can keep one from going over the 15% federal tax bracket keeping other dividend income from taxation for example.