The Readily Identifiable Riskiest Municipal Securities: Due Diligence Does Make a Difference

It is important to place risks associated with municipal securities issues in an appropriately directed context. Significant proportions of municipal securities—those supported by unlimited tax general obligation credits or by the revenue credits of well-established traditional government enterprises—are safe. Very few of those securities will default, even if their issuers experience significant financial distress. Municipal securities issues dependent, directly or indirectly, primarily (or significantly) upon the performance of private parties or upon revenues of start-up or rapidly expanding governmental enterprises, however, present far more serious risks. These readily identifiable segments of the municipal securities market are deserving of a much higher level of special attention, including attention to feasibility studies, financial projections, appraisals, and other expert work products associated with those financings. The benefits of careful attention to due diligence can be demonstrated by contrasts between default experiences in land-based financings in Florida and California.