Trust Me: The Laws Of Municipal Bonds
What do different states really promise their bondholders?

As states such as California and Arizona wrestle with budget woes and the nation plows deeper into recession, the safety of even the safest investments is worth a closer look. In the (unlikely, we hope) event of a true depression, what would happen to an overburdened state’s debt obligations? Which states would have the easiest time reneging on promises to bondholders?

Many states lay out some basic bondholder protections in their constitutions. Some promise to raise property taxes if they can’t meet the principal and interest payments for a particular year; others start collecting even earlier, when their long-term reservoirs for paying the funds start running low.

Some state constitutions promise to reallocate the first tax revenues they get, while a few put bondholders second in line--still a good spot. Those that don’t mention bondholder rights in their constitutions often do offer protections in their statutes (though those are presumably easier to change in the event of a crisis than constitutional protections would be).

If your state isn’t listed here, ask the issuing agency to send you a copy of any specific constitutional protections afforded debt holders.

Certainly, the lack of constitutional protections doesn’t mean a state isn’t a trustworthy debtor. Still, in these wild times, it might be worth considering--just in case.

States with primary constitutional protections	States with almost-primary constitutional protections	States with statutory protections
NEW YORK says the state Comptroller must set apart tax revenues to pay interest and installments of principal, in the event that the sinking fund is not sufficient to do so.	CALIFORNIA puts bondholders second--only public education funding gets paid first.	NEW HAMPSHIRE can issue refunding bonds to help cover its obligation.
MINNESOTA requires the state auditor to levy a property tax to pay the bonds if the state can't meet its current obligation.	TEXAS must take the first revenues (after those used to fill other constitutional obligations) to pay bondholders.	OREGON provides no overarching rule, says the rules vary with each type of bond.
NEVADA also levies a property tax sufficient to pay its general obligation debt, unless other revenues are available.		ARIZONA bans most debt in its constitution, but statutes allow it to issue treasurer warrant notes to pay its obligations in an emergency.
MARYLAND raises a tax to pay the interest on debt, forbids the repeal of said taxes and voids them if budget appropriations will cover the principal and interest.
NEW MEXICO would raise property taxes if it needed more funds for its debt obligation.
GEORGIA requires its first revenues go toward replenishing the sinking fund in the event that the fund was insufficient.
WASHINGTON repays bonds first and put other contractual obligations, such as pension funds, after that.