How worried should we be about state and municipal debt defaults?

Not that much, according to Annie Lowery:

For the most part, municipal bonds make safe, low-risk, low-reward investments. They are not quite the equivalent of Treasury debt, which is considered basically risk-free. But historically, their rates of default come in around one-third of 1 percent, far lower than the rates for, say, corporate bonds. Thus, investors around the world own about $2.8 trillion in American municipal debt—an amount that has more than doubled in the last decade and increased about 35 percent over the course of the recession.

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What happens when a city or town or state defaults? Well, that depends on the debt. Municipalities issue two main classes of bonds. One comes with a "general obligation" pledge, meaning that the government agrees to raise taxes or take other measures to pay bondholders back. But they also issue riskier "non-GO" bonds, or revenue bonds—often to fund the construction of things like hospitals, universities, and housing complexes. It's those bonds where the defaults happen, for the most part. According to Moody's Investors Service, between 1970 and 2009, municipalities have defaulted on Moody's-rated debt only 54 times, and 51 of those defaults came from bonds to finance things like housing projects.

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The National League of Cities notes that there have been at least 72 defaults this year, down from 204 in 2009 and 162 in 2008. Considering the thousands of bonds issued in the last decade by the 50 states,19,000 cities, 4,000 counties, 15,000 school districts, and tens of thousands of individual projects—that's not too bad.

In addition, analysts say, a number of municipalities have demonstrated that they take their debt payments seriously and are willing to sell property, raise taxes, hike fees, plead with the feds and state officials, and otherwise do whatever they have to do to pay their bondholders. In the case of Harrisburg, for instance, though the city flailed in the face of its debt payments—debt payments it knew about for years—the state stepped in. "We couldn't stand by and let the city default on these bonds," Gov. Rendell said.