If 2009 is going to be like 2008, another record year for municipal bond defaults, what do you have to worry about?

If individual investors learned anything about the municipal bond market this year, it was this: read the offering documents that accompany the bond issue and know what you own.

This was the hard lesson of the auction-rate securities collapse of February, when dealers stopped supporting the auctions and investors were left with assets they could see but not touch.

Or at least I hope that was the lesson investors learned. The lesson I learned after the auction fiasco and the smashup of the bond insurers was that there are a lot of investors out there who really don't have a clue about what they own.

Maybe now they do. Maybe now they have the official statements to their municipal bond issues in hand and have pored over the details of the security for the bonds and the risk factors.

So now I'll ask again: What do you have to worry about?

If you're worried about default, I'd start with the bonds issued to build golf courses and tourist attractions, nursing homes and housing developments out in the desert; those bonds sold by Harvard and other top colleges and universities, not so much.

Fatter Yields

Default isn't something we worry about very much in the municipal bond market. For decades now, salesmen have feasted on the phrase, "The default rate on municipal bonds is less than 1 percent." And that's true.

It's true because there are so many bonds sold every year backed by taxes or essential-purpose revenue streams (think water and sewer fees). They hardly ever default.

Yet within this market lurk some dangers. They were pointed out by Fitch Ratings in a landmark default study done almost a decade ago and updated in June 2003.

That study found the cumulative default rate on traditional municipal bonds was less than 0.25 percent. It also found that the default rate on industrial development bonds, which municipalities sell on behalf of corporations, was almost 15 percent. On non-hospital-related health care, which usually means nursing homes, the default rate was just over 17 percent.

Do you own bonds like that? They invariably carried fatter yields than those available on the better sort of municipal bond. Of course, yields on tax-exempt bonds have been so low since the beginning of this century — between June 2000 and June 2008, high-grade munis averaged 4.75 percent — you may not have noticed. A tax-free yield of 5.5 percent or so wouldn't have been a red flag.

Weak Economy

Fitch also looked at whether a decline in gross domestic product meant anything for default rates. It found that there was a correlation between a slowing economy and rising defaults, especially in industrial-development and housing bonds.

To review: the bonds most likely to default in a recession are those issued on behalf of corporations (particularly those involved in manufacturing), for nursing homes and — I add these from years of reporting on them — for golf courses, tourist attractions, and new housing developments.

Fitch in 2003 observed that the recovery rates on municipal bonds were higher than those on corporate bonds. I will add that resolving defaults and recovering as much of your money as possible takes years.

The `Institution'

The "on behalf of" feature in some municipal bonds can be confusing. Most people, even many investors, probably think of municipal bonds as being sold and repaid by municipalities rather than by entities such as manufacturing concerns.

This isn't necessarily a bad thing. Consider the $39.7 million in revenue bonds sold by the Massachusetts Health and Educational Facilities Authority in March 2006.

Right on the cover of the official statement it says that "the bonds shall not be deemed to constitute a debt or liability of the Commonwealth of Massachusetts or any political subdivision thereof," all in capital letters.

Instead, the bonds are a general obligation of the "Institution." In this case, the institution is Williams College, which accepted 18.5 percent of freshmen applicants in 2007, as noted approvingly by Moody's Investors Service. Moody's rates Williams Aa1, which is just below its top rating of Aaa, and also noted that "net tuition per student is high at $23,812 in fiscal year 2007."

I don't think the holders of the Williams bonds are worrying too much about default.