Pew data: The next Californias?

Analysis |

California isn't the only state in a financial crisis bad enough to make its municipal bonds bad bets for investors.

Data from the Pew Center on the States show other states are at risk of sliding into their own versions of California's mess of unpaid bills, budget gaps and credit-rating cuts.

Individual investors own 35 percent of all municipal bonds and a lot of them live in these states. They love the bonds because the interest they receive is sheltered from federal and state taxes.

But that appeal may be outweighed by the risks the bonds could default. The default rate on municipal bonds has risen by 40 percent since the financial crisis began.

The riskiest bonds are those that fund the construction of airports or stadiums. Risk-averse investors should avoid these in favor of bonds issued by state governments.

Investors can also reduce risks with mutual funds that hold bonds from various states, such as the Franklin Federal Tax-Free Income fund.

That diversification should protect you against California-style financial earthquakes, wherever they happen next.